UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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) (Zip Code)
Registrant's telephone number, including area code 810-987-2200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 Par Value
--------------------------
(Title of Class)
$2.3125, Series A, Convertible
Cumulative Preferred Stock
------------------------------
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock (Common Stock, $1 Par Value)
held by non-affiliates is computed at $199,749,331 based on 10,306,983 shares
held by non--affiliates as of February 24, 1995 at the average of the bid and
ask prices on the closest trading date for such stock of $19.00 and $19.75,
respectively, as quoted on the National Association of Securities Dealers
Automated Quotation National Market System (NASDAQ/NMS) (which prices may not
represent actual transactions).
Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of February 24, 1995: 11,336,000 shares of Common Stock, $1 Par
Value.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to Registrant's April 18, 1995 Annual Meeting of
Shareholders are incorporated by reference herein in response to Part III.
T A B L E O F C O N T E N T S
PAGE
CONTENTS NUMBER
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 8
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . 9
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 41
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . 42
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
-i-
GLOSSARY
Bcf . . . . . . . . . . A measure of natural gas volumes equivalent to one
billion cubic feet
Degree Day . . . . . . . A measure of coldness computed by the number of
degrees the average daily temperature falls below
65 degrees Fahrenheit
DRIP . . . . . . . . . . Dividend Reinvestment and Common Stock Purchase Plan
FASB . . . . . . . . . . Financial Accounting Standards Board
FERC . . . . . . . . . . Federal Energy Regulatory Commission
Mcf . . . . . . . . . . A measure of natural gas volumes equivalent to one
thousand cubic feet
MMcf . . . . . . . . . . A measure of natural gas volumes equivalent to one
million cubic feet
MPSC . . . . . . . . . . Michigan Public Service Commission
NGV . . . . . . . . . . Natural gas vehicle
Normal Degree Days . . . An average of degree days over the last 10 years
NYMEX . . . . . . . . . New York Mercantile Exchange
SFAS . . . . . . . . . . Statement of Financial Accounting Standards
-ii-
PART I
ITEM 1. BUSINESS
THE COMPANY
Southeastern Michigan Gas Enterprises, Inc. (the Company) was formed as a
holding company in 1977 and has four direct subsidiaries. The Company provides
professional and technical services to the consolidated group in the areas of
finance, accounting, tax, risk management, legal, human resources, and
information systems. The Company and its subsidiaries employ approximately 540
persons throughout the state of Michigan.
Southeastern Michigan Gas Company (Southeastern), Battle Creek Gas Company
(Battle Creek) and Michigan Gas Company (Michigan Gas) (collectively, the
utility subsidiaries) purchase, distribute and transport natural gas to 220,000
customers in twenty-three counties in the lower and upper peninsulas of
Michigan. These operations generate approximately 90% of consolidated income.
Set forth in the table below is sales and transportation information for the
past three years:
1994 1993 1992
-------------- -------------- --------------
(Dollars in thousands)
Gas sales revenue:
Residential.................. $121,066 62% $122,216 61% $110,173 62%
Commercial................... 59,413 30 61,379 31 53,770 30
Industrial................... 15,481 8 16,049 8 14,953 8
-------- --- -------- --- -------- ---
Total gas sales revenue.... $195,960 100% $199,644 100% $178,896 100%
======== === ======== === ======== ===
Gas transportation revenue..... $ 11,999 $ 11,968 $ 11,918
======== ======== ========
Throughput volumes (MMcf):
Gas sales volumes:
Residential.................. 23,437 59% 23,302 59% 22,352 59%
Commercial................... 12,469 32 12,608 32 11,890 32
Industrial................... 3,464 9 3,500 9 3,513 9
------ --- ------ --- ------ ---
Total gas sales volumes.... 39,370 100% 39,410 100% 37,755 100%
====== === ====== === ====== ===
Gas transportation volumes..... 21,293 19,073 22,147
====== ====== ======
Residential and commercial gas sales customers use natural gas primarily
for space heating purposes. Consequently, weather has a significant impact on
sales to these customers. For the same reason, the Company's operations are
seasonal with most gas sales revenue being earned in the first and fourth
quarters.
In the industrial markets, the utility subsidiaries principally provide
natural gas transportation service. Many larger volume users purchase their
own gas supply and rely on the utilities for transportation service. In
-1-
addition to transportation, the utilities also provide natural gas storage,
backup supply and balancing services. Industrial sales and transportation
revenues are primarily dependent upon the comparative cost of alternate fuels,
economic conditions and government policies.
Other utility operations include the sale of natural gas-fired equipment,
including heating units, home appliances and NGV equipment. In addition to
sales, the utilities offer financing, installation, service and repair options.
Southeastern and Michigan Gas are subject to the jurisdiction of the MPSC
as to various phases of their operations including rates, accounting, service
standards and the issuance of securities. Battle Creek is subject to the
jurisdiction of the MPSC as to various phases of its operations including
accounting, service standards and issuance of securities, but not as to rates.
Battle Creek's rates are subject to the jurisdiction of the City Commissioners
of Battle Creek, Michigan.
SEMCO Energy Services, Inc. (SEMCO) is a diversified company with
operations and investments in many segments of the natural gas industry.
SEMCO's principal operating activity is natural gas marketing. SEMCO markets
gas to approximately 150 customers located in several states. Its customers
include industrial, commercial and municipal natural gas users, natural gas
distribution companies and other marketers.
SEMCO purchases and markets natural gas to customers on a month-to-month
basis and under long-term agreements. SEMCO also arranges for transportation
of gas supplies to the customers' premises, offers storage capacity, contract
administration and a variety of risk management services.
SEMCO's activities also include operations and interests in natural gas
transmission and gathering systems and an underground gas storage system.
SEMCO, through its subsidiaries Southeastern Development Company and
Southeastern Financial Services, Inc., also manages the leasing of motor
vehicles and data processing equipment to companies in the consolidated group
and oversees the real estate operations of the Company. SEMCO has no plans to
expand its real estate operations.
Set forth below are SEMCO's gas marketing revenues, cost of gas marketed,
volumes, average number of customers and earnings (loss) from equity
investments for the past three years:
1994 1993 1992
---- ---- ----
(Dollars in thousands)
Natural gas marketing operations:
Gas marketing revenues............ $158,284 $70,991 $54,595
Cost of gas marketed.............. 153,973 67,474 52,347
-------- ------- -------
Gross margin.................... $ 4,311 $ 3,517 $ 2,248
======== ======= =======
Gas volumes marketed (MMcf)....... 78,082 31,501 29,637
Average number of customers....... 137 156 161
Earnings (loss) from equity
investments....................... $ (437) $ (23) $ 478
-2-
SEMCO's gas marketing margins and volumes are sensitive to the comparative
costs of alternate fuels, seasonal patterns and competition within the gas
marketing industry. With the implementation of FERC Order 636, the gas
marketing industry is facing increased competition, but is also pursuing
increased opportunities. See "Management's Discussion and Analysis" for
further discussion relating to Order 636.
Gas Supply. The service territories of the utility subsidiaries are
served by four major interstate pipelines: Panhandle Eastern Pipe Line
Company, Northern Natural Gas Company, Great Lakes Gas Transmission Company and
ANR Pipeline Company.
During 1994, the utility subsidiaries purchased 70% of their natural gas
volumes from firm suppliers and 28% from the spot market. Nearly 40% of the
firm supply volumes were purchased under fixed-price contracts, while the other
60% were purchased under contracts indexed to the spot market. Less than 2% of
1994 gas purchases were from interstate pipelines and intrastate suppliers.
Natural gas purchases are transported to the utility subsidiaries' systems
under various firm and interruptible transportation arrangements with
interstate and intrastate transmission companies.
The utility subsidiaries utilize on-system and leased storage capacity of
approximately 40% of annual gas sales volumes to reduce their reliance on the
interstate pipelines for peak day needs and allow for the purchase of natural
gas at lower prices.
The utility subsidiaries own underground storage facilities with a working
capacity of 5.0 Bcf. In addition, they lease 6.5 Bcf of storage from Eaton
Rapids Gas Storage System and 4.0 Bcf from non-affiliates. SEMCO Gas Storage
Company (an affiliated company) is a 50% owner of Eaton Rapids Gas Storage
System.
SEMCO obtains its gas supply from various production sources, primarily
located in Louisiana, Oklahoma and Michigan. SEMCO generally contracts for gas
supply on a monthly basis, however, it does enter into some long-term gas
purchasing arrangements. See Note 6 of "Notes to the Consolidated Financial
Statements" for a description of SEMCO's hedging activities as they relate to
SEMCO's gas supply strategy.
New Business. Since 1987 the utility subsidiaries have added
approximately 5,000 gas sales customers per year. Customer additions have been
primarily residential and commercial.
Clean air legislation and resultant pressures on industry and electric
utilities to reduce emissions from their plants continue to support interest in
natural gas as an industrial fuel. The use of natural gas as a primary vehicle
fuel is also receiving serious attention for the same environmental reasons.
-3-
Rates and Regulation. Management continually reviews the adequacy of the
utility subsidiaries' rates. It is management's intention to file requests for
rate increases whenever it is deemed necessary and appropriate. There have
been no general rate filings by Southeastern since 1983 or Michigan Gas since
1990. Battle Creek last placed new rates into effect in 1991.
In 1992, the MPSC issued a generic order addressing the accounting for the
cost of postretirement benefits other than pensions. Pursuant to this order,
the utility subsidiaries plan to file rate cases before 1996 in order to
recover certain expenses related to this change in accounting treatment. Any
relief granted will be based on all elements of cost of service. See Note 7 of
"Notes to the Consolidated Financial Statements" for further discussion.
Competition. Natural gas competes with other forms of energy available to
customers, primarily on the basis of rates. These competitive forms of energy
include electricity, coal, propane and fuel oils. Changes in the availability
or price of natural gas or other forms of energy, as well as business
conditions, conservation, legislation, regulations, capability to convert to
alternate fuels and other factors may affect the demand for natural gas in
areas served by the Company's subsidiaries.
The Company's subsidiaries sell natural gas to and transport natural gas
for several large customers who have the ability to use alternate fuels.
SEMCO's natural gas marketing operations compete with other marketing
firms on the basis of price, the ability to arrange suitable transportation to
the customer's premises and the ability to provide related services such as
pipeline nominations and balancing.
FERC Order 636 has increased competition in the natural gas industry as
pipelines unbundled their services and instead offer separate service for gas
transportation, storage and gathering. See "Management's Discussion and
Analysis" for a further discussion of Order 636.
ITEM 2. PROPERTIES
The properties of the Company consist of the Common Stock of Southeastern,
Michigan Gas, Battle Creek, SEMCO, and leasehold improvements and office
equipment.
SOUTHEASTERN MICHIGAN GAS COMPANY
Southeastern owns gas supply systems which, on December 31, 1994, included
approximately 112 miles of transmission pipelines and 1,798 miles of
distribution pipelines. The pipelines are located in southeastern Michigan
(centered in and around the City of Port Huron) and south-central Michigan
(centered in and around the City of Albion).
-4-
Southeastern's distribution system and service lines are, for the most
part, located on or under public streets, alleys, highways, and other public
places, or on private property not owned by Southeastern with permission or
consent, except to an inconsequential extent, of the individual owners. The
distribution system and service lines located on or under public streets,
alleys, highways, and other public places were all installed under valid rights
and consents granted by appropriate local authorities.
Southeastern's underground storage system consists of six salt caverns and
a depleted gas field, located in St. Clair County, Michigan, together with
measuring, compressor and transmission facilities. The aggregate working
capacity of the system is approximately 3.4 Bcf, with a capacity to deliver
85 MMcf on a peak day.
Southeastern also owns meters and service lines, gas regulating and
metering stations, garages, warehouses and other buildings necessary and useful
in conducting its business. Southeastern leases its computer and
transportation equipment.
BATTLE CREEK GAS COMPANY
Battle Creek owns gas supply systems which, on December 31, 1994, included
approximately 27 miles of transmission pipelines and 624 miles of distribution
pipelines. The pipelines are located in southwestern Michigan (centered in and
around the City of Battle Creek, Michigan).
Battle Creek's distribution system and service lines are, for the most
part, located on or under public streets, alleys, highways, and other public
places, or on private property not owned by Battle Creek with permission or
consent, except to an inconsequential extent, of the individual owners. The
distribution system and service lines located on or under public streets,
alleys, highways, and other public places were all installed under valid rights
and consents granted by appropriate local authorities.
Battle Creek owns and operates underground gas storage facilities in a
depleted salt cavern and two depleted gas fields. The aggregate working
capacity of the storage system is approximately 1.6 Bcf.
Battle Creek also owns meters and service lines, gas regulating and
metering stations, garages, warehouses and other buildings necessary and useful
in conducting its business. Battle Creek leases its computer and
transportation equipment.
MICHIGAN GAS COMPANY
Michigan Gas owns gas supply systems located in the southwest portion of
Michigan's lower peninsula and the central and western areas of Michigan's
upper peninsula. The systems include 2,019 miles of distribution pipeline,
meters, service lines, gas regulating and metering stations, garages,
warehouses, and other buildings necessary and useful in conducting its
business. Michigan Gas leases its computer equipment, transportation
equipment, and certain buildings.
-5-
Michigan Gas's distribution system and service lines are for the most
part, located on or under public streets, alleys, highways, and other public
places, or on private property not owned by Michigan Gas with permission or
consent, except to an inconsequential extent, of individual owners. The
distribution system and service lines located on or under public streets,
alleys, highways, and other public places were all installed under valid rights
and consents granted by appropriate local authorities.
SEMCO ENERGY SERVICES, INC.
The principal properties of SEMCO and its affiliates include interests and
operations in natural gas transmission and gathering systems and an underground
gas storage system.
Set forth in the following table are the equity investments of SEMCO and
its affiliates, the total non-current asset balance of each entity, and SEMCO's
ownership percentage and equity investment at December 31, 1994:
Total SEMCO's SEMCO's
Non-current Percent Equity
Assets Ownership Investment
----------- --------- ----------
(Dollars in thousands)
NOARK Pipeline System................. $100,662 32% $3,168
NOARK Gas Services, L.P............... 91 40 (45)
Eaton Rapids Gas Storage System....... 27,624 50 4,717
Nimrod Natural Gas Corporation........ 4,209 11 409
Nimrod Limited Partnership............ 1,486 29 347
Michigan Intrastate Pipeline System... 5,754 50 736
Michigan Intrastate Lateral System.... 704 50 422
-------- ------
$140,530 $9,754
======== ======
SEMCO Arkansas Pipeline Company (a wholly-owned subsidiary of SEMCO) is a
32% general partner in the NOARK Pipeline System. The partnership operates a
302-mile pipeline crossing northern Arkansas which completed its first year of
service in 1993. The pipeline provides area producers access to interstate and
intrastate pipelines. See Note 8 of the "Notes to the Consolidated Financial
Statements" for a discussion of commitments made relating to this project.
SEMCO Gas Storage Company (a wholly-owned subsidiary of SEMCO) owns a 50%
equity interest in the Eaton Rapids Gas Storage System. This system, located
near Eaton Rapids, Michigan, became operational in March 1990 and consists of
approximately 12.8 Bcf of underground storage capacity. Of the total, 12 Bcf
is leased under long-term contracts and 7.3 Bcf is leased by the Company's
subsidiaries.
SEMCO Pipeline Company (SEMCO Pipeline) (a wholly-owned subsidiary of
SEMCO) is an 11% owner of Nimrod Natural Gas Corporation (Nimrod) of Tulsa,
Oklahoma. Nimrod engages in the installation or purchase and operation of
natural gas gathering systems. These systems purchase, collect and re-sell
wellhead natural gas delivering it to major transportation pipelines for
redelivery to customers.
-6-
SEMCO Pipeline also owns 50% of the Michigan Intrastate Pipeline System
and the Michigan Intrastate Lateral System partnerships. The sole purpose of
these partnerships is to hold a 10% ownership of the Saginaw Bay Pipeline
Project, a 126-mile pipeline from Michigan's Saginaw Bay area to processing
plants in Kalkaska, Michigan.
The following table sets forth the operations wholly or partially owned by
SEMCO and its affiliates, the total net property of the project, and SEMCO's
ownership percentage and net property at December 31, 1994:
Total SEMCO's SEMCO's
Net Percent Net
Property Ownership Property
-------- --------- --------
(Dollars in thousands)
Litchfield Lateral...................... $11,373 33% $ 3,753
Greenwood Pipeline...................... 7,166 100 7,166
Iosco-Reno System....................... 4,170 40 1,668
Eaton Rapids Pipeline................... 1,299 100 1,299
Production Gathering Systems and
Oil and Gas Properties................ 267 100 267
------- -------
$24,275 $14,153
======= =======
SEMCO Pipeline is a 33% owner in the Litchfield Lateral, a 31-mile
pipeline located in southwest Michigan. The line, which is leased entirely to
ANR Pipeline Company, links the Eaton Rapids Gas Storage System with interstate
pipeline supplies. The Litchfield Lateral began operations in February 1993.
In 1991, SEMCO Pipeline constructed an 18-mile pipeline to serve Detroit
Edison's Greenwood power plant located in Michigan's thumb area. SEMCO
Pipeline and Detroit Edison have entered into an agreement whereby Detroit
Edison has contracted for the entire capacity of the line of 240 MMcf per day.
SEMCO Pipeline is a 40% owner of the Iosco County Pipeline and Reno Gas
Processing Plant (Iosco-Reno System), which was placed in service in March
1992. The Iosco-Reno System gathers and processes wet gas in the Au Gres and
Santiago fields located in mid-Michigan for delivery to the processing plant
and ultimate delivery to the gas markets.
SEMCO Pipeline completed the 7.1-mile Eaton Rapids Pipeline in 1990,
providing direct delivery of gas from the Eaton Rapids Gas Storage System to
Battle Creek and Southeastern's Albion division.
Other properties of SEMCO consist of vehicles and data processing
equipment primarily leased to affiliates, real property and related
improvements held for resale, office properties leased to affiliates and third
parties, and its equity investment in the Dunn/SECO cogeneration venture.
These other properties total $4.9 million or 2.1% of consolidated utility plant
and other property, net.
-7-
ITEM 3. LEGAL PROCEEDINGS
Refer to Note 8 of "Notes to the Consolidated Financial Statements" for
information regarding a lawsuit involving several parties including the NOARK
Pipeline System and SEMCO Arkansas Pipeline Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-8-
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
COMMON STOCK DATA
The common stock of the Company is traded on The Nasdaq Stock Market under
the symbol "SMGS." The table below shows high and low closing bid prices of
the Company's common stock in the over-the-counter market as reported by the
Detroit Free Press and quoted on NASDAQ/NMS, adjusted to reflect the 5% stock
dividends in May 1994 and 1993. These quotations reflect dealer prices,
without brokerage commission, and may not necessarily represent actual
transactions.
Quarters
------------------------------------------
1st 2nd 3rd 4th
------ ------ ------ ------
1994
High 21 18 1/4 19 18 3/4
Low 17 1/8 17 1/8 18 1/4 17 3/4
1993
High 18 1/8 20 1/4 22 3/8 23 5/8
Low 16 1/2 18 1/8 19 20 1/4
See the cover page for a recent stock price and the number of shares
outstanding.
See "Selected Financial Data" below for the number of shareholders at year
end for the past five years.
DIVIDENDS
See Notes 4 and 10 of "Notes to the Consolidated Financial Statements" and
"Selected Financial Data."
-9-
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, 1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(thousands of dollars, except per share amounts)
Income Statement Data
Operating Revenue.................... $372,430 $288,963 $251,526 $231,522 $228,339
-------- -------- -------- -------- --------
Operating Expenses
Cost of Gas Sold.................... $135,669 $139,051 $121,643 $111,005 $110,705
Cost of Gas Marketed................ 153,973 67,474 52,347 46,237 47,703
Operations.......................... 31,055 30,243 29,426 29,614 30,178
Maintenance......................... 4,503 4,253 4,164 3,811 3,971
Depreciation........................ 11,549 12,468 12,344 12,138 10,729
Income Taxes........................ 5,204 5,598 3,899 3,360 1,951
Taxes Other Than Income Taxes....... 8,186 8,446 7,729 7,193 6,798
-------- -------- -------- -------- --------
$350,139 $267,533 $231,552 $213,358 $212,035
-------- -------- -------- -------- --------
Operating Income..................... $ 22,291 $ 21,430 $ 19,974 $ 18,164 $ 16,304
Other Income (Expense), Net.......... (1,328)<F4> (136)<F4> (339)<F4> 570 1,270
-------- -------- -------- -------- --------
Income Before Interest............... $ 20,963 $ 21,294 $ 19,635 $ 18,734 $ 17,574
Interest............................. 10,775 11,534 11,126 11,233 11,345
Dividends on Preferred Stock
of Subsidiary....................... 178 178 178 178 178
-------- -------- -------- -------- --------
Net Income........................... $ 10,010 $ 9,582 $ 8,331 $ 7,323 $ 6,051
Dividends on Convertible
Preferred Stock..................... 18 19 21 22 24
-------- -------- -------- -------- --------
Net Income Available for
Common Stock........................ $ 9,992 $ 9,563 $ 8,310 $ 7,301 $ 6,027
Common Dividends..................... 8,656 7,419 6,875 6,385 5,940
-------- -------- -------- -------- --------
Earnings Reinvested in the Business.. $ 1,336 $ 2,144 $ 1,435 $ 916 $ 87
======== ======== ======== ======== ========
Common Stock Data
Average Shares Outstanding(000)<F1>.. 11,057 10,000 9,736 9,489 9,265
Earnings Per Share<F1>............... $ .90 <F4> $ .96 <F4> $ .85 <F4> $ .77 $ .65
Dividends Paid Per Share<F1>......... $ .78 $ .74 $ .71 $ .67 $ .64
Dividend Payout Ratio................ 86.6% 77.6% 82.7% 87.5% 98.6%
Book Value Per Share<F1><F2>......... $ 9.54 $ 8.43 $ 7.84 $ 7.37 $ 7.00
Market Value Per Share<F1><F2><F3>... $ 18.00 $ 20.95 $ 17.24 $ 13.18 $ 11.53
Number of Common Shareholders........ 8,149 7,261 6,892 6,594 6,369
Price To Earnings Ratio<F2><F3>...... 20.0 21.9 20.2 17.1 17.7
Balance Sheet Data<F2>
Total Assets......................... $371,698 $348,813 $319,548 $294,933 $278,018
======== ======== ======== ======== ========
Capitalization
Long-Term Debt<F5>.................. $104,910 $117,022 $102,728 $ 95,656 $ 99,040
Preferred Stock..................... 3,288 3,290 3,320 3,332 3,350
Common Equity....................... 107,379 85,657 77,353 70,758 65,608
-------- -------- -------- -------- --------
$215,577 $205,969 $183,401 $169,746 $167,998
======== ======== ======== ======== ========
Financial Ratios
Capitalization
Long-Term Debt<F5>.................. 48.7% 56.8% 56.0% 56.4% 59.0%
Preferred Stock..................... 1.5% 1.6% 1.8% 2.0% 2.0%
Common Equity....................... 49.8% 41.6% 42.2% 41.6% 39.0%
-------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Return on Average Common Equity....... 9.5% 11.6% 11.1% 10.6% 9.4%
======== ======== ======== ======== ========
<FN>
<F1>
Adjusted to give effect to 5 percent stock dividends in May 1994, 1993, 1992, 1991 and 1990.
<F2>
Year end.
<F3>
Based on NASDAQ closing bid price.
<F4>
Includes $1,286 (net of tax) or $.12 per share, $177 (net of tax) or $.01 per share and $901 (net of tax)
or $.10 per share in 1994, 1993 and 1992, respectively, attributable to an extraordinary item-loss on
early extinguishment of debt.
<F5>
Includes current maturities.
</FN>
-10-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Income
Net income available for common stock before extraordinary item was
$11.3 million ($1.02 per share) for the year ended December 31, 1994. This
represented an increase of $1.6 million over the $9.7 million ($.97 per share)
net income available for common stock before extraordinary item for the year
ended December 31, 1993.
The Company recorded extraordinary charges for 1994 and 1993 of
$1.3 million ($.12 per share) and $177,000 ($.01 per share), respectively, for
the early extinguishment of debt.
The increase in net income before extraordinary items primarily reflects
improved results from the Company's natural gas marketing operations, the
interest savings generated by the Company's refinancing of certain higher rate
debt and lower depletion charges in 1994 related to the Company's remaining oil
and gas operations. These earnings were partially offset by an increase in the
loss from the investment in the NOARK Pipeline System and a decrease in total
gross margin generated by the Company's natural gas distribution operations.
The change in per share amounts also reflects the impact of the sale of 747,500
new common shares in January 1994 and the sale of 307,000 shares through the
DRIP.
For 1993, net income available for common before extraordinary item
increased $529,000 from $9.2 million ($.95 per share) in 1992 to $9.7 million
($.97 per share). The improvement in net income before extraordinary item was
primarily due to increased earnings from the Company's natural gas distribution
operations. Colder weather and customer additions resulted in a 4.4% increase
in natural gas volumes sold.
Earnings from natural gas marketing, gas transmission and gas gathering
operations also increased in 1993 compared to 1992. Natural gas volumes
marketed increased 6.3% over 1992 levels along with higher per unit marketing
margins. In addition, gas transmission and gathering projects, other than
NOARK, placed in service during recent years realized throughput closer to
capacity. These earnings offset a loss in 1993 from the Company's investment
in the NOARK Pipeline System, which began operations in September 1992, and
higher charges related to the Company's remaining oil and gas exploration and
production operations.
Operating Revenues and Gross Margin
Natural Gas Distribution. The Company's natural gas distribution business
involves the operations of Southeastern, Battle Creek and Michigan Gas. These
companies generate revenue mainly through the sale and transportation of
natural gas. The following table compares sales and transportation information
for the last three years:
1994 1993 1992
-------- -------- --------
(in thousands of dollars)
Revenues
Gas sales revenues:
Residential............................ $121,066 $122,216 $110,173
Commercial............................. 59,413 61,379 53,770
Industrial............................. 15,481 16,049 14,953
-------- -------- --------
Total gas sales revenue.............. $195,960 $199,644 $178,896
Cost of gas sold....................... 135,669 139,051 121,643
-------- -------- --------
Gross margin......................... $ 60,291 $ 60,593 $ 57,253
Gas transportation revenue............... 11,999 11,968 11,918
-------- -------- --------
Total sales margin and
transportation revenue............. $ 72,290 $ 72,561 $ 69,171
======== ======== ========
-11-
1994 1993 1992
------ ------ ------
(in MMcf)
Throughput volumes
Gas sales volumes:
Residential............................ 23,437 23,302 22,352
Commercial............................. 12,469 12,608 11,890
Industrial............................. 3,464 3,500 3,513
------ ------ ------
Total gas sales volumes.............. 39,370 39,410 37,755
Gas transportation volumes............... 21,293 19,073 22,147
------ ------ ------
Total throughput..................... 60,663 58,483 59,902
====== ====== ======
Degree Days
Actual................................. 6,861 7,053 6,882
Percent of normal...................... 102.4% 105.0% 102.2%
Average number of gas sales customers.... 216,082 210,522 204,839
Natural gas sales volumes and gross margin from gas sales decreased
40 MMcf and $302,000, respectively, for 1994 compared to 1993. The addition of
an average of 5,560 new gas sales customers in 1994, a 2.6% increase, helped
reduce the impact of warmer temperatures on natural gas usage by the
weather-sensitive residential and commercial customers. Temperatures during
1994 were 2.7% warmer than 1993 and 2.4% colder than normal.
For 1993, compared to 1992, gas sales volumes and margin increased
1,655 MMcf and $3.3 million, respectively. Temperatures during 1993 were 2.5%
colder than 1992 and 5% colder than normal. In addition, the average number of
gas sales customers increased by 5,683 in 1993 compared to 1992, an increase of
2.8%.
Transportation volumes increased 2,220 MMcf in 1994 from 1993 while
transportation revenues increased slightly. The increase in volumes relative
to revenues reflects the pressure of competition on transportation margins and
the impact of additional volumes transported by certain lower margin customers,
including coal-displacement customers, in 1994 compared to 1993.
Coal-displacement volumes are sensitive to natural gas prices relative to coal
and are priced at lower margins.
For 1993 compared to 1992, transportation volumes decreased 3,074 MMcf
while revenues increased slightly. Due to the relative prices of coal and
natural gas during 1993, the Company did not benefit from any coal-displacement
volumes. In 1992, however, the Company transported significant
coal-displacement transportation volumes.
Natural Gas Marketing. Total marketing margin increased to $4.3 million
in 1994, or 23%, from $3.5 million in 1993. Volumes marketed increased to
78,082 MMcf in 1994, or 148%, from 31,501 MMcf in 1993. The increase in gas
marketing volumes in 1994 compared to 1993 is primarily attributable to the
1993 implementation of the FERC Order 636 (Order 636). With 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. The decrease in per unit marketing margins in 1994 compared to 1993
is due to the expiration of several high-margin contracts which were
outstanding in 1993 and increased competition fostered by Order 636.
-12-
For 1993 compared to 1992, total marketing margin increased $1.3 million
from $2.2 million while volumes marketed increased 1,864 MMcf from 29,637
MMcf. Generally, the price of alternate fuels, seasonal patterns and
competition in the industry contribute to the fluctuation in margins per
unit of gas marketed and the volumes marketed. In addition, the increased
volumes reflected SEMCO's emphasis on an expanded level of marketing-related
services coincident with Order 636 and an increase in marketing staff.
While marketing volumes and total margin have substantially increased in
recent years, 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.
Other Operating Revenues. Other operating revenues consist principally of
the revenues generated by natural gas transmission and gathering activities,
miscellaneous utility operations and a natural gas cogeneration project. Also
included in other operating revenues are revenues generated by oil and gas
exploration and production, equipment leasing and real estate development.
Other operating revenues totalled $6.2 million, $6.4 million and
$6.1 million in 1994, 1993 and 1992, respectively. The change in other
operating revenues reflects increases resulting from SEMCO's interest in the
operations of various natural gas transmission and gathering projects placed in
service in recent years and decreases resulting from the Company's declining
involvement in equipment leasing, real estate development and oil and gas
activities since 1991.
Operating Expenses and Income Deductions
Operations expense increased $812,000, or 2.7%, in 1994 compared to 1993.
Of the increase, $437,000 resulted from additional retiree medical expenses in
1994. Pursuant to an MPSC Order, Southeastern and Michigan Gas were required
to use savings generated by property tax reductions in the State of Michigan to
offset an equal amount of the retiree medical regulatory asset. As a result,
Southeastern and Michigan Gas expensed $437,000 of the retiree medical
regulatory asset in 1994. The remaining increase reflects expenses associated
with payroll and employee benefits, principally pension and medical.
For 1993 compared to 1992, operations expense increased $817,000, or
2.8%. This increase resulted primarily from operating costs for distribution
and underground gas storage systems and expenses associated with additional
customers.
Maintenance expense increased $250,000, or 5.8%, in 1994 compared to
1993. This increase is primarily attributable to repairs necessitated by
extremely cold temperatures in the first quarter of 1994.
Depreciation expense decreased by $919,000, or 7.3%, in 1994 compared to
1993. The overall decrease results from lower depletion costs in 1994 than
1993 and the reduction in depreciation expense caused by the decline in
non-affiliate equipment leasing activities. Partially offsetting the decrease
in depreciation resulting from these items was an increase in depreciation
expense associated with the growth in utility plant.
-13-
Depreciation expense increased $124,000, or 1.0%, in 1993 compared to
1992. The increase over 1992 reflects depreciation expense associated with
growth in utility plant and other property and depletion associated with the
Company's remaining oil and gas properties, partially offset by reductions in
depreciation expense resulting from the reduction of property leased to
non-affiliates.
Income taxes decreased $394,000 in 1994 compared to 1993 and increased
$1.7 million in 1993 compared to 1992. These amounts reflect the year-to-year
increase in pretax income and a higher annual expense in 1993 resulting from
the cumulative effect of the increase in the statutory tax rate from 34% to 35%
and adjustments to prior years' taxes provided.
Taxes other than income taxes were $8.2 million, $8.4 million and
$7.7 million for 1994, 1993 and 1992, respectively. Taxes other than income
taxes consist primarily of property taxes. The year-to-year change in property
taxes reflects growth in the Company's gas distribution, transmission and
gathering plant, offset by property tax reductions in the State of Michigan in
1994. The savings generated by the 1994 property tax reductions were used to
offset an equal amount of retiree medical costs pursuant to an MPSC Order
affecting Southeastern and Michigan Gas, as discussed above.
Interest on long-term debt decreased $821,000 in 1994 compared to 1993.
This decrease results from the Company's refinancing activities during 1994 as
discussed below. Other interest expense, consisting primarily of interest on
short-term borrowings, increased slightly in 1994 over 1993 and increased
$365,000, or 26%, in 1993 compared to 1992. The average balance in short-term
borrowings was $31.4 million in 1994, $42.3 million in 1993 and $22.3 million
in 1992 at weighted average interest rates of 5.2%, 4.1% and 4.5%,
respectively. The decrease in average borrowings in 1994 compared to 1993
results from the refinancing of the permanent portion of short-term debt with
common equity in January 1994 and a temporary excess cash position due to the
timing of refinancing certain long-term debt issues, offset by an increase in
working capital requirements associated with the growth in natural gas
marketing. The increased level of borrowings from 1992 to 1993 substantially
results from the accumulation of permanent capital needs generated by capital
expenditure programs.
Other Income (Loss), Net
Other income (loss), net, consists primarily of income from SEMCO's equity
investments but also includes miscellaneous nonoperating income and expense
items, net of tax. Other income (loss), net, was ($42,000), $41,000 and
$562,000 in 1994, 1993, and 1992, respectively.
Specific items reflected in the year-to-year changes are losses from the
investment in the NOARK Pipeline System of $1.2 million, $834,000 and $233,000
in 1994, 1993 and 1992, respectively. Partially offsetting the impact of this
item on other income, net, were year-to-year improvements in the overall
earnings from the Company's investment in storage and gathering activities.
NOARK was placed in service in September 1992 and has an operating
capacity of 141,000 Mcf a day. Through a subsidiary, the Company holds a 32%
general partnership interest in the $103 million pipeline.
-14-
NOARK has been operating below capacity and generating losses since it was
placed in service. The pipeline experienced significant cost overruns during
construction which resulted in higher financing costs than expected.
Competition from two interstate pipelines in the Arkansas region has required
NOARK to discount its transportation charges to attract volumes to the
pipeline. Additionally, in December 1993, a major shipper of firm volumes on
the NOARK Pipeline System, Vesta Energy Corporation (Vesta), initiated legal
action against several defendants, including NOARK. Effective January 1, 1994,
Vesta discontinued shipments of gas pursuant to its contract and ceased payment
of the firm demand fee. See Note 8 of Notes to the Consolidated Financial
Statements for further discussion of the recent legal actions involving NOARK
and the Company's guarantees related to the pipeline's financing.
During 1994, NOARK had firm contracts averaging 51,000 Mcf a day at a
demand fee equal to approximately 19.3 cents per Mcf. From January through May
1994, 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. Actual gas volumes transported by the pipeline during 1994 averaged
nearly 82,000 Mcf a day, or 58% of capacity, at both firm and interruptible
rates.
During 1993, NOARK had firm contracts averaging 73,000 Mcf a day at the
19.3 cent demand fee. Actual gas volumes transported by the pipeline during
1993 averaged nearly 79,000 Mcf a day, or 56% of capacity, at both firm and
interruptible rates.
Liquidity And Capital Resources
Cash Flows. The Company's net cash provided from operating activities
totalled $28.3 million in 1994, $12.1 million in 1993 and $3.2 million in
1992. The change in operating cash flows is significantly influenced by
changes in the level and cost of gas in underground storage, accounts
receivable and accrued revenue, gas cost recoveries and accounts payable.
The changes in these accounts are largely the result of the timing of
receipts and payments.
The Company uses significant amounts of short-term borrowings to finance
natural gas purchases for storage during the non-heating season to sell during
the heating season. The Company owns and leases natural gas storage facilities
with available capacity approximating 40% of annual gas sales. Generally gas
is stored during the months of April through October and withdrawn for sale
from November through March. The carrying amount of natural gas stored
underground peaked at $45.9 million, $45.7 million and $42.1 million in October
1994, 1993 and 1992, respectively.
In 1994, net cash used by financing activities was $5.6 million while in
1993 and 1992, net cash from financing activities totalled $12.0 million and
$26.3 million, respectively. During 1994, the Company received $20.4 million
through the January 1994 sale of 747,500 shares of common stock and the
additional sales of common stock through the DRIP. The Company also received
$80.0 million through the June 1994 issuance of $55.0 million, 8.00% Senior
Notes and $25.0 million, 8.32% Senior Notes. The proceeds of these financings
were used principally to redeem the following long-term debt instruments (in
thousands of dollars):
-15-
10.0% debentures due 2007 $21,169
10.0% debentures due 2008 12,528
Variable rate term loan due 1997 20,000
9.8% debentures due 2014 28,720
First mortgage bonds of Southeastern Michigan Gas Company 9,645
-------
$92,062
=======
Expensing of the portion of the call premiums and unamortized debt
expense associated with the Company's non-regulated operations resulted in a
$1.3 million ($.12 per share) extraordinary charge to income in 1994 and
$177,000 ($.01 per share) in 1993. In connection with the redemption of
debentures, Southeastern and Michigan Gas received approval from the MPSC in
June 1994 to redeem corresponding long-term debt owed to the Company and to
redeem Southeastern's first mortgage bonds by issuing $23.0 million and
$31.0 million, respectively, of long-term debt securities to the Company.
During 1994, funds were also used for the payment of dividends and for the
reduction of short-term borrowings.
During 1993, $20.0 million in funds was provided through a term loan,
due May 31, 1997, and $5.9 million in funds was provided from the DRIP. During
1993, funds were used for the payment of dividends and to repay certain
portions of long-term and short-term debt. In addition to funds provided from
the DRIP and short-term lines of credit in 1992, the Company issued
$25.0 million of 8-5/8% debentures due in 2017. Funds in 1992 were used for
the payment of dividends and to redeem $14.9 million in 11-1/2% debentures
originally due 2000 at 105% of face value. This redemption resulted in an
extraordinary charge to income of $901,000 ($.10 per share) in 1992.
The following table identifies capital expenditures for the last three
years:
Capital Expenditures 1994 1993 1992
-------------------- ------- ------- -------
(in thousands of dollars)
Natural gas distribution.................. $20,353 $19,238 $19,937
Gas transmission, gathering and storage... 835 1,218 9,192
Other..................................... 616 513 457
------- ------- -------
$21,804 $20,969 $29,586
======= ======= =======
Capital expenditures by the Company's natural gas distribution companies
amounted to $20.4 million in 1994. In addition to normal plant repair and
replacement expenditures of $9.3 million, $11.1 million was spent for new
customer additions. Of the $19.2 million spent by the distribution companies
in 1993, $11.8 million was for new customer additions. The remainder was
primarily for normal repair and replacement projects. In 1992, the
distribution companies spent $14.3 million for new customer additions and the
remainder primarily on normal repair and replacement of distribution
properties.
Capital expenditures for gas transmission, gathering and storage in 1994
principally reflect a contribution of $640,000 to NOARK for the final payment
of construction retainage.
-16-
For 1993, capital expenditures for operations other than natural gas
distribution were principally to complete the Litchfield Lateral pipeline. Of
the transmission, gathering and storage capital expenditures in 1992,
$5.1 million was spent on SEMCO's investment in the NOARK Pipeline System.
Another $2.6 million was spent toward completion of the Litchfield Lateral
project and $1.1 million toward the Iosco/Reno gas gathering and processing
facility.
Future Capital Expenditures and Liquidity
1995 Capital Expenditures. For 1995, the Company plans to spend
$24.8 million on capital additions. Of this amount, $19.9 million is planned
for natural gas distribution operations, with $13.8 million targeted for new
customer additions.
Future Financing. Funds needed for the Company's 1995 capital expenditure
program and dividend payments will be provided primarily through internally
generated funds and utilization of short-term lines of credit. At year end
1994, the Company had short-term credit facilities totalling $89.9 million.
Dividends reinvested by shareholders in the DRIP have reduced the level of
funds required for dividend payments. In 1994, of the total dividends on
common shares of $8.7 million, $3.2 million were reinvested. This portion of
dividends, along with optional cash payments of $2.6 million, resulted in
306,908 new shares issued to existing shareholders in 1994. As a result, the
DRIP has been a major factor in strengthening the Company's equity position.
In addition, the Company further strengthened its equity position with the
issuance of 747,500 shares of common stock in January 1994.
At this time, the Company does not expect to require additional common
equity funding during the next few years. As a result, the Company amended its
DRIP in January 1995 to allow for the purchase of common shares on the open
market in addition to allowing the use of newly issued shares to meet plan
requirements. Except to the extent that purchase of shares on the open market
becomes difficult, it is expected that newly issued shares will not be sold
under the plan. The optional cash payment feature was also amended to reduce
the maximum allowed from $100,000 a year to $5,000 a month.
During 1995, the Company expects to make contributions to the NOARK
Pipeline System in connection with its guarantees of the pipeline's debt. See
Note 8 of Notes to the Consolidated Financial Statements for a discussion of
the Company's guarantees related to the NOARK Pipeline System's financing and
legal actions involving NOARK.
Commodity Hedging. The Company's natural gas marketing subsidiary, SEMCO,
has entered into various long-term sales commitments which may extend up to 24
months into the future. SEMCO maintains a hedging program with the objective
of preserving the anticipated margin on these sales commitments. The hedges
are designed to ensure that the impact of natural gas price fluctuations on the
fair value of long-term sales commitments will be offset by the impact of such
price fluctuations on the fair value of the hedging instrument. The most
frequently used hedging instruments are natural gas futures and options
although SEMCO may also enter into natural gas swap agreements, contract to
purchase natural gas from producers for future delivery or inject gas into
storage for later withdrawal.
-17-
Critical to the success of the hedging program is the performance by both
the other party to the hedge and the marketing customer buying gas under the
long-term sales commitment. SEMCO performs extensive credit reviews on new and
existing marketing customers and only enters into hedging transactions with
reputable dealers, primarily on the NYMEX, or directly with reliable suppliers.
At December 31, 1994 and 1993, SEMCO had recorded net deferred losses from
its hedging program of approximately $4.6 million and $2.4 million,
respectively. At the same time, SEMCO had similar amounts of unrecorded gains
pursuant to the underlying long-term sales commitments.
See Note 6 of Notes to the Consolidated Financial Statements for further
information regarding the types, underlying notional volumes, and fair values
of SEMCO's hedges at December 31, 1994 and December 31, 1993.
Other Areas
Adoption of New Accounting Standards. In the first quarter of 1993, the
Company adopted two new standards issued by the FASB. SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106) requires
the accrual method of accounting for postretirement benefits. SFAS 109,
"Accounting for Income Taxes" (SFAS 109) requires measurement and restatement
of deferred tax assets and liabilities based upon the estimated future tax
effects of temporary differences and carryforwards. Although the adoption of
these standards did not have a material impact on the Company's results of
operations, adoption of SFAS 106 by the utility subsidiaries has significant
regulatory ratemaking implications.
Pursuant to a generic order issued by the MPSC, the Company is recording a
liability and a corresponding regulatory asset for the utilities' portion of
SFAS 106 costs. The generic order provides for recovery of this regulatory
asset provided a utility files a general rate case prior to 1996 and
demonstrates the need for a rate increase to compensate for this additional
cost. Every aspect of the business of a utility is open to scrutiny when its
rates are redetermined. The outcome of future rate cases cannot be predicted.
See Note 7 and Note 3 of the Notes to the Consolidated Financial
Statements for further discussion of SFAS 106 and SFAS 109.
Impact of Inflation
The cost of gas sold by the three distribution companies is recovered from
natural gas distribution customers on a current basis. Although inflation has
steadied in recent years, increases in other utility operating costs are
recovered through the regulatory process of filing a rate case, and therefore
may adversely affect the results of operations in inflationary periods due to
the time lag involved in this process. The Company attempts to minimize the
impact of inflation by controlling costs, increasing productivity and filing
rate cases on a timely basis.
It is likely the utilities will be filing rate cases before January 1996
in conjunction with the adoption of SFAS 106. See Note 7 of the Notes to the
Consolidated Financial Statements.
-18-
Industry Trends
Competition. The market prices of alternate sources of energy such as
coal and #6 fuel oil compete directly with the price the utilities charge for
industrial sales and transportation of gas. The prices of alternate fuels
similarly affect the volumes and margins of the natural gas marketing
operations of the Company. In addition, continued deregulation of the natural
gas industry has further increased the sources of competition. See "Federal
Regulation" discussion below.
To lessen the impact of prices on fuel choice by industrial customers, the
Company offers additional services, such as gas storage and balancing.
However, the competition among fuels is expected to continue to affect volumes
sold, transported and marketed and the associated margins.
Federal Regulation. Interstate pipelines were required to comply with
FERC Order 636 by the 1993-1994 heating season. Order 636, intended to
increase competition within the gas industry, requires pipelines to unbundle
their services and instead offer separate service for gas transportation,
storage and gathering.
Competition. As a result of this restructuring of the interstate pipeline
service, natural gas distribution companies have the ability to select and pay
for only those pipeline services they require. In addition, Order 636 allows
customers on natural gas distribution systems to purchase the same level of
unbundled service directly from the interstate pipelines. Under such
circumstances, natural gas distribution companies generally provide
transportation services to those customers.
It is expected that the availability of unbundled pipeline services to
customers will result in continued pressure on gas distribution companies to
offer similar unbundled services in order to compete with the pipelines. This
competition has resulted in pressure to reduce natural gas transportation
margins. Currently, the utility subsidiaries are providing transportation
services principally to large industrial customers.
In addition to pressure on the transportation margins of the utility
subsidiaries, Order 636 is impacting the natural gas marketing operations of
SEMCO. Access to unbundled pipeline services is expected to attract new
competitors to the marketing industry and present opportunities for marketers
to offer expanded services to their customers.
Gas Supply. Order 636 has the effect of shifting the risk of securing
reliable gas supply and managing pipeline capacity from the interstate
pipelines to local gas distribution companies. As a result, the utility
subsidiaries face more complex gas supply procurement issues.
The Company's utility subsidiaries are served by four interstate
pipelines: Panhandle Eastern Pipe Line Company, ANR Pipeline Company, Great
Lakes Gas Transmission Company and Northern Natural Gas Company. These
pipelines received authority from the FERC to substantially implement their
restructuring plans effective November 1, 1993. In conjunction with these
plans, the FERC has given interstate pipelines authority to directly bill
customers for certain transition costs resulting from the restructuring. As
former purchasers of bundled interstate pipeline service, the utility
subsidiaries are responsible for some of these transition costs.
To date, the utility subsidiaries have been billed approximately
$3.2 million in Order 636 transition costs. At this time, no further
direct-billed transition costs are anticipated. As with previously
FERC-mandated billings, Order 636 transition costs are recoverable from
ratepayers through gas cost recovery mechanisms.
-19-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1994 1993 1992
-------- -------- --------
(in thousands of dollars,
except per share amounts)
Operating Revenue
Gas sales............................. $195,960 $199,644 $178,896
Gas marketing......................... 158,284 70,991 54,595
Transportation........................ 11,999 11,968 11,918
Other operations...................... 6,187 6,360 6,117
-------- -------- --------
$372,430 $288,963 $251,526
-------- -------- --------
Operating Expenses
Cost of gas sold...................... $135,669 $139,051 $121,643
Cost of gas marketed.................. 153,973 67,474 52,347
Operations............................ 31,055 30,243 29,426
Maintenance........................... 4,503 4,253 4,164
Depreciation.......................... 11,549 12,468 12,344
Income taxes.......................... 5,204 5,598 3,899
Taxes other than income taxes......... 8,186 8,446 7,729
-------- -------- --------
$350,139 $267,533 $231,552
-------- -------- --------
Operating Income........................ $ 22,291 $ 21,430 $ 19,974
Other Income (Loss), Net................ (42) 41 562
-------- -------- --------
Income Before Income Deductions......... $ 22,249 $ 21,471 $ 20,536
-------- -------- --------
Income Deductions
Interest on long-term debt............ $ 8,605 $ 9,426 $ 9,385
Other interest........................ 1,788 1,771 1,406
Amortization of debt expense.......... 382 337 335
Dividends of preferred stock
of subsidiary....................... 178 178 178
-------- -------- --------
$ 10,953 $ 11,712 $ 11,304
-------- -------- --------
Net Income Available For Common Stock
Before Preferred Dividends
and Extraordinary Item................ $ 11,296 $ 9,759 $ 9,232
Dividends on convertible
preferred stock..................... 18 19 21
-------- -------- --------
Net Income Available For Common Stock
Before Extraordinary Item............. $ 11,278 $ 9,740 $ 9,211
Extraordinary Item--Loss on early
extinguishment of debt, net of
income taxes of $692, $96 and $464.... 1,286 177 901
-------- -------- --------
Net Income Available For Common Stock... $ 9,992 $ 9,563 $ 8,310
======== ======== ========
Earnings Per Share of Common Stock
Before Extraordinary Item............. $ 1.02 $ .97 $ .95
======== ======== ========
Earnings Per Share of Common Stock...... $ .90 $ .96 $ .85
======== ======== ========
Cash Dividends Per Share of
Common Stock.......................... $ .78 $ .74 $ .71
======== ======== ========
Average Number of Common Shares
Outstanding........................... 11,056,513 9,999,622 9,736,369
========== ========= =========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-20-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994 1993 1992
--------- --------- ---------
(in thousands of dollars)
Cash Flows From Operating Activities
Cash received from customers.............. $ 375,536 $ 278,621 $ 250,213
Cash paid for payrolls and to suppliers... (325,671) (243,923) (221,075)
Interest paid............................. (11,104) (11,244) (10,442)
Income taxes paid......................... (3,379) (6,175) (4,300)
Taxes other than income taxes paid........ (7,966) (8,541) (7,741)
Other cash receipts and payments, net..... 846 3,370 (3,406)
--------- --------- ---------
Net Cash From Operating Activities....... $ 28,262 $ 12,108 $ 3,249
--------- --------- ---------
Cash Flows From Investing Activities
Natural gas distribution
property additions....................... $ (20,353) $ (19,238) $ (19,937)
Investments in other natural gas
related property......................... (33) (2,530) (5,283)
Other property additions.................. (1,418) (513) (3,054)
Property retirement costs, net
of proceeds.............................. (313) (301) 95
Advances to equity investees.............. (906) -- --
--------- --------- ---------
Net Cash From Investing Activities....... $ (23,023) $ (22,582) $ (28,179)
--------- --------- ---------
Cash Flows From Financing Activities
Issuance of common stock.................. $ 20,384 $ 5,889 $ 3,898
Net change in notes payable to banks...... (2,342) (758) 21,400
Issuance of long-term debt................ 80,000 20,000 25,000
Repayment of long-term debt............... (94,783) (5,521) (16,908)
Payment of dividends...................... (8,852) (7,616) (7,074)
--------- --------- ---------
Net Cash From Financing Activities....... $ (5,593) $ 11,994 $ 26,316
--------- --------- ---------
Net Increase (Decrease) in Cash
and Temporary Cash Investments.......... $ (354) $ 1,520 $ 1,386
Cash and Temporary Cash Investments
Beginning of year......................... 2,965 1,445 59
--------- --------- ---------
End of year............................... $ 2,611 $ 2,965 $ 1,445
========= ========= =========
Reconciliation of Net Income to Net Cash
From Operating Activities
Net income available for common stock..... $ 9,992 $ 9,563 $ 8,310
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation............................ 11,549 12,468 12,344
Extraordinary item...................... 1,286 177 901
Deferred taxes and investment tax
credits................................ (838) 873 269
Equity (income) loss, net of
distributions.......................... 834 1,218 374
Receivables............................. (4,703) 853 (155)
Accrued revenue......................... (2,021) (1,143) (821)
Materials and supplies and gas in
underground storage.................... (5,432) (1,023) (7,865)
Gas charges, recoverable from customers. 7,767 (11,122) (2,963)
Other current assets.................... (2,154) (3,430) (1,381)
Accounts payable........................ 6,192 4,082 (3,099)
Customer advances and amounts payable
to customers........................... 1,711 1,332 708
Accrued taxes........................... 1,156 (3,362) 823
Other, net.............................. 2,923 1,622 (4,196)
--------- --------- ---------
Net Cash From Operating Activities..... $ 28,262 $ 12,108 $ 3,249
========= ========= =========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-21-
CONSOLIDATED BALANCE SHEETS
At December 31, 1994 1993
-------- --------
(in thousands of dollars)
ASSETS
Utility Plant
Plant in service, at cost.......................... $287,214 $271,789
Less--Accumulated depreciation..................... 76,674 70,629
-------- --------
$210,540 $201,160
Construction work in progress...................... 200 782
-------- --------
$210,740 $201,942
-------- --------
Other Property, Net.................................. $ 16,015 $ 16,357
-------- --------
Current Assets
Cash and temporary cash investments, at cost....... $ 2,611 $ 2,965
Receivables, less allowances of $889 and $1,355.... 22,807 18,104
Accrued revenue.................................... 33,299 31,278
Materials and supplies, at average cost............ 3,352 2,894
Gas in underground storage......................... 36,120 31,146
Gas charges, recoverable from customers............ 8,203 15,970
Accumulated deferred income taxes.................. 2,471 --
Other.............................................. 12,016 9,862
-------- --------
$120,879 $112,219
-------- --------
Deferred Charges and Other
Unamortized debt expense........................... $ 6,150 $ 5,840
Deferred gas charges, recoverable from customers... 798 1,474
Advances to equity investees....................... 906 --
Other.............................................. 16,210 10,981
-------- --------
$ 24,064 $ 18,295
-------- --------
$371,698 $348,813
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity................................ $107,379 $ 85,657
Cumulative convertible preferred stock equity...... 188 190
Cumulative preferred stock of subsidiary........... 3,100 3,100
Long-term debt..................................... 104,910 97,884
-------- --------
$215,577 $186,831
-------- --------
Current Liabilities
Notes payable to banks............................. $ 50,000 $ 52,342
Current maturities of long-term debt............... -- 19,138
Accounts payable................................... 36,245 30,053
Customer advance payments.......................... 8,736 6,804
Accrued taxes...................................... 726 262
Accrued interest................................... 1,145 1,855
Amounts payable to customers....................... 115 1,089
Accumulated deferred income taxes.................. -- 201
Other.............................................. 7,723 6,571
-------- --------
$104,690 $118,315
-------- --------
Deferred Credits
Accumulated deferred income taxes.................. $ 18,722 $ 16,629
Unamortized investment tax credit.................. 3,325 3,584
Customer advances for construction................. 8,559 7,806
Other.............................................. 20,825 15,648
-------- --------
$ 51,431 $ 43,667
-------- --------
$371,698 $348,813
======== ========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-22-
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1994 1993
-------- --------
(in thousands of dollars)
Common Stock Equity
Common stock, par value $1 per share--authorized
20,000,000 shares; 11,260,584 and 9,680,376
shares outstanding.............................. $ 11,261 $ 9,680
Capital surplus................................... 81,091 62,286
Retained earnings................................. 15,027 13,691
-------- --------
$107,379 $ 85,657
-------- --------
Cumulative Convertible Preferred Stock
Convertible preferred stock, par value $1 per
share--authorized 500,000 shares issuable in
series; 7,505 and 7,605 shares outstanding...... $ 8 $ 8
Capital surplus................................... 180 182
-------- --------
$ 188 $ 190
-------- --------
Cumulative Preferred Stock of Subsidiary
$100 par value (callable at option of Subsidiary)
6% series A--15,000 shares authorized and
outstanding................................... $ 1,500 $ 1,500
5 1/2% series B--10,000 shares authorized and
outstanding................................... 1,000 1,000
5 1/2% series C--5,000 shares authorized;
4,000 shares outstanding...................... 400 400
5 1/2% series D--2,000 shares authorized and
outstanding................................... 200 200
-------- --------
$ 3,100 $ 3,100
-------- --------
Long-Term Debt
Southeastern Michigan Gas Enterprises, Inc.
8.00% notes due 2004............................ $ 55,000 $ --
8.32% notes due 2024............................ 25,000 --
8.625% debentures due 2017...................... 24,910 24,960
Variable rate term loan due 1997 (4.088% at
12/31/93)..................................... -- 20,000
10.0% debentures due 2007....................... -- 21,169
10.0% debentures due 2008....................... -- 12,528
9.8% debentures due 2014........................ -- 28,720
Southeastern Michigan Gas Company
First mortgage bonds-
9.5% series due 1995.......................... -- 3,500
8.25% series due 1997......................... -- 3,500
10.75% series due 2000........................ -- 1,225
9.25% series due 2002......................... -- 1,420
-------- --------
$104,910 $117,022
Less--Current maturities.......................... -- 19,138
-------- --------
$104,910 $ 97,884
-------- --------
$215,577 $186,831
======== ========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-23-
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
Years Ended December 31, 1994 1993 1992
------- ------- -------
(in thousands of dollars)
Common Stock
Beginning of year........................... $ 9,680 $ 8,952 $ 8,295
5% stock dividends May 1994, May 1993
and May 1992............................ 525 449 417
Issuance of common stock.................. 748 -- --
Issuance of common stock through dividend
reinvestment plan and other............. 308 279 240
------- ------- -------
End of year................................. $11,261 $ 9,680 $ 8,952
======= ======= =======
Common Stock Capital Surplus
Beginning of year........................... $62,286 $57,039 $53,786
5% stock dividends May 1994, May 1993
and May 1992............................ (543) (471) (432)
Issuance of common stock.................. 13,881 -- --
Issuance of common stock through dividend
reinvestment plan and other............. 5,467 5,718 3,685
------- ------- -------
End of year................................. $81,091 $62,286 $57,039
======= ======= =======
Retained Earnings
Beginning of year........................... $13,691 $11,547 $ 9,882
Net income available for common stock..... 9,992 9,563 8,310
Cash dividends on common stock............ (8,656) (7,419) (6,875)
Tax benefit from dividends paid to ESOT... -- -- 230
------- ------- -------
End of year................................. $15,027 $13,691 $11,547
======= ======= =======
Unearned Compensation--ESOT
Beginning of year........................... $ -- $ (185) $(1,205)
Compensation earned....................... -- 185 1,020
------- ------- -------
End of year................................. $ -- $ -- $ (185)
======= ======= =======
Cumulative Convertible Preferred Stock
Beginning of year........................... $ 8 $ 9 $ 9
Conversion of preferred stock............. -- (1) --
------- ------- -------
End of year................................. $ 8 $ 8 $ 9
======= ======= =======
Cumulative Convertible Preferred Stock
Capital Surplus
Beginning of year........................... $ 182 $ 211 $ 223
Conversion of preferred stock............. (2) (29) (12)
------- ------- -------
End of year................................. $ 180 $ 182 $ 211
======= ======= =======
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-24-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Southeastern, Battle Creek, Michigan Gas and SEMCO. Investments in
unconsolidated companies at least 20% owned, but not greater than 50% owned,
are reported using the equity method of accounting. All significant
intercompany transactions have been eliminated in consolidation. Certain
previously reported amounts have been reclassified to conform with 1994
presentations. These reclassifications had no effect on net income.
Rate Regulation. The Company accounts for the effects of regulation under
SFAS 71, "Accounting for the Effects of Certain Types of Regulation." As a
result, the actions of regulators affect when revenues, expenses, assets and
liabilities are recognized.
The rates of the utility subsidiaries, Southeastern, Battle Creek and
Michigan Gas, are subject in certain respects to the requirements of state and
local regulatory bodies. The MPSC authorizes the rates charged to customers by
Southeastern and Michigan Gas. Battle Creek's rates are subject to the
jurisdiction of the City Commission of Battle Creek, Michigan.
Utility Plant, Other Property and Depreciation. Utility plant in service
is recorded at cost. The utility subsidiaries provide for depreciation on a
straight-line basis over the estimated useful lives of the related property.
Included in other property are the nonutility fixed assets of the Company
and its subsidiaries, reduced by the related accumulated depreciation.
Generally, these assets are recorded at cost and depreciated on a straight-line
basis over their estimated useful lives.
The ratio of depreciation to the average balance of property approximated
4.1%, 4.3% and 4.6% for the years 1994, 1993 and 1992, respectively.
Certain investments in unconsolidated companies recorded using the equity
method are also reported as other property. See Note 9 for further discussion.
Receivables, Gas Sales, Transportation and Marketing Revenues. Customer
receivables, gas sales and transportation revenues arise from the operations of
the utility subsidiaries. These subsidiaries deliver natural gas to a broadly
diversified base of residential, commercial and industrial customers located
within the state of Michigan. Marketing revenues and receivables arise from
SEMCO's marketing operations. SEMCO markets natural gas to industrial
customers, gas distribution utilities, and other gas marketers located in
several states.
Revenue Recognition. Southeastern, Michigan Gas and Battle Creek bill
monthly on a cycle basis and follow the industry practice of recognizing
accrued revenue for gas services rendered to their customers but not billed at
month end. SEMCO recognizes marketing revenues, and any related hedging gains
or losses, in the same period natural gas is delivered to customers. See Note
6 for further discussion about SEMCO's hedging activities.
Gas in Underground Storage. Gas in underground storage for Southeastern
and Michigan Gas is reported at average cost. Battle Creek's gas inventory is
stated at last-in, first-out cost. At December 31, 1994 and 1993, the balance
in this account approximates the replacement value of the gas in storage.
SEMCO reports gas in storage at the lower of cost or market.
-25-
In general, commodity costs and variable transportation costs are
capitalized as gas in underground storage. Fixed costs, primarily pipeline
demand charges and storage charges, are expensed as incurred through cost of
gas.
Cost of Gas. The utility subsidiaries have gas cost recovery mechanisms
which allow for the adjustment of rates charged to customers in response to
increases and decreases in the cost of gas purchased. As permitted by the
regulatory jurisdiction, increases or decreases in the cost of gas purchased
are subsequently recovered from or refunded to customers.
Income Taxes. Deferred income taxes are recorded for differences between
the book and tax basis of certain assets and liabilities. Income tax expense
includes Federal taxes currently payable and deferred income tax expenses
resulting from adjustments to deferred income tax assets and liabilities.
Investment tax credits (ITC) utilized in prior years for income tax purposes
are deferred for financial accounting purposes and are amortized through
credits to the income tax provision over the lives of the related property.
The Company and its subsidiaries file a consolidated Federal income tax
return. Income taxes are allocated to each subsidiary based on its
separate taxable income.
Statement of Cash Flows. For purposes of the consolidated statement of
cash flows, the Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash and temporary cash
investments.
Non-cash investing and financing activities for the years 1994, 1993 and
1992 are as follows (in thousands of dollars):
1994 1993 1992
---- ---- ------
Conversion of debt to equity................ $ -- $185 $1,020
Capital additions accrued................... -- -- $1,312
2. REGULATORY MATTERS
MPSC Orders. In June 1994, pursuant to the MPSC securities orders U-10509
and U-10510, Southeastern and 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 owed to the Company
and, in Southeastern's case, was also used to redeem all of its remaining first
mortgage bonds.
In December 1992, the MPSC issued Order U-10040 addressing the change in
accounting for the cost of retiree medical benefits. Pursuant to this order,
the utility subsidiaries plan to file generic rate cases before 1996 in order
to recover certain expenses related to this change in accounting treatment.
Any relief granted will be based on all elements of cost of service. Refer to
Note 7 for further discussion regarding retiree medical benefits.
In June 1994, the MPSC issued Orders U-10617 and U-10618 to Michigan Gas
and Southeastern, respectively. These orders require the companies to offset
deferred retiree medical costs with certain reductions in Michigan state
property taxes until the MPSC issues a final order in a rate case filed
pursuant to Order U-10040. In accordance with U-10617 and U-10618, Michigan
Gas and Southeastern have reduced deferred retiree medical costs for $269,000
and $168,000, respectively.
-26-
In February 1993, the MPSC issued Opinion and Order U-10083 addressing the
provisions of the MPSC Uniform System of Accounts for electric and gas
utilities related to deferred income tax accounting. Refer to Note 3 for
deferred income tax accounting discussion.
Take-or-Pay. The take-or-pay liabilities of the utility subsidiaries
arose pursuant to FERC actions involving deregulation of the natural gas
industry. These costs are substantially recoverable from ratepayers. At
December 31, 1994 and 1993, the Company's remaining take-or-pay liabilities
totaled $351,000 and $1,475,000, respectively. The Company does not anticipate
additional take-or-pay assessments.
Order 636 Transition Costs. In 1992, the FERC issued Order 636 requiring
interstate pipelines to unbundle their services to most customers and instead
offer separate services for gas supply, gathering, transportation and storage.
Pursuant to the implementation of Order 636 in 1993, the FERC authorized the
interstate pipelines to directly bill certain transition costs to former sales
service customers. As a result, the Company incurred and recorded liabilities
of $2,014,000 at December 31, 1993. In 1994, the Company incurred and recorded
$1,223,000 of additional liabilities and, at December 31, 1994, had $1,904,000
of recorded liabilities remaining. The Company does not anticipate any
significant additional direct billings related to Order 636 transition costs.
As with take-or-pay costs, Order 636 costs are substantially recoverable from
ratepayers.
3. INCOME TAXES
SFAS No. 109. In January 1993, the Company prospectively adopted SFAS
109, "Accounting For Income Taxes." Previously, the Company accounted for
income taxes under Accounting Principles Board Opinion No. 11.
SFAS 109 requires an annual measurement of deferred tax assets and
deferred tax liabilities based upon the estimated future tax effects of
temporary differences and carryforwards. In general, the total deferred tax
expense or benefit for the year equals the difference between the beginning and
end of year balances in deferred tax assets and liabilities.
In February 1993, the MPSC issued Opinion and Order U-10083 addressing
deferred income tax accounting for electric and gas utilities under its
jurisdiction. The order granted electric and gas utilities regulated by the
MPSC general authorization to use deferred tax accounting and to use specific
accounts to comply with SFAS 109. The order also confirmed continued recovery
of regulatory assets and refunding of regulatory liabilities arising from
deferred tax accounting through current ratemaking practices.
Upon adoption, the initial application of SFAS 109 was determined by
recomputing the balance sheet deferred tax amounts as of January 1, 1993 using
currently enacted tax rates. The most significant adjustments were related to
the Company's regulated operations and, since these adjustments are expected to
be recovered from or refunded to customers in future rates, were offset on the
balance sheet by regulatory assets and regulatory liabilities. As a result,
the adoption of SFAS 109 had no material impact on the results of operations.
SFAS 109 requires that deferred tax assets and deferred tax liabilities be
adjusted for changes in tax rates. During 1993, the Company adjusted these
items for a one percent increase in the enacted rate. There was no material
impact to operations resulting from this adjustment.
At December 31, 1994 and December 31, 1993 there was no valuation
allowance recorded against deferred tax assets.
-27-
Provision for Income Taxes. The components of the provision for income
taxes are as follows (in thousands of dollars):
1994 1993 1992
------ ------ ------
Federal
Currently payable......................... $5,849 $4,879 $4,580
Deferred to future periods................ (1,031) 1,064 (673)
Investment tax credits.................... (259) (267) (267)
------ ------ ------
Total income taxes.......................... $4,559 $5,676 $3,640
Less amounts included in:
Other income.............................. 47 174 205
Extraordinary item........................ (692) (96) (464)
------ ------ ------
Amount included in operating expenses....... $5,204 $5,598 $3,899
====== ====== ======
Reconciliation of Statutory Rate to Effective Rate. A reconciliation of
the difference between the Company's provision for income taxes and income
taxes computed at the statutory rate follows (in thousands of dollars):
1994 1993 1992
------- ------- -------
Net income available for common stock....... $ 9,992 $ 9,563 $ 8,310
Add back:
Preferred dividends....................... 196 197 199
Income taxes.............................. 4,559 5,676 3,640
------- ------- -------
Pre-tax income.............................. $14,747 $15,436 $12,149
======= ======= =======
Computed federal income taxes............... $ 5,161 $ 5,403 $ 4,131
Depreciation................................ (184) (108) (151)
Amortization of deferred ITC................ (259) (267) (267)
Amortization of non-deductible amounts
resulting from acquisitions............... 216 216 205
Rate differential on other deferred items... (2) (49) (22)
Other....................................... (373) 481 (256)
------- ------- -------
Total income taxes.......................... $ 4,559 $ 5,676 $ 3,640
======= ======= =======
Deferred Taxes. The principal components of the Company's deferred tax
assets (liabilities) were as follows (in thousands of dollars):
1994 1993
-------- --------
Property............................................... $(18,198) $(18,120)
Employee benefit obligation (including retiree
medical)............................................. 3,488 1,840
Retiree medical benefit regulatory assets.............. (3,200) (1,705)
Gas in storage......................................... 1,867 100
ITC.................................................... 1,605 2,284
Debt premium........................................... (1,432) (299)
Gas cost underrecovery................................. (1,163) --
Accrued vacation....................................... 372 340
Reserve for uncollectible accounts..................... 283 451
Deferred compensation.................................. 257 296
FERC Order 636 regulatory assets....................... (238) (705)
Take-or-pay regulatory assets.......................... (115) (580)
Hedging transactions (net)............................. 60 (674)
Other.................................................. 163 (58)
-------- --------
Total deferred taxes................................. $(16,251) $(16,830)
======== ========
Gross deferred tax liabilities......................... $(32,806) $(30,220)
Gross deferred tax assets.............................. 16,555 13,390
-------- --------
$(16,251) $(16,830)
======== ========
-28-
Deferred Tax Expense. In 1992, deferred tax expense resulted from timing
differences in the recognition of revenue and expense for tax and financial
reporting purposes. The sources of these timing differences were as follows
(in thousands of dollars):
1992
-----
Accelerated depreciation........................................ $ 828
Property taxes assessed......................................... (328)
Equity investments.............................................. 811
Oil and gas..................................................... (210)
Amortization of migration of storage gas inventories............ (39)
Amortization of loss on bond redemption......................... (51)
Deferred gas costs.............................................. (274)
Customer contributions.......................................... (913)
Other........................................................... (497)
-----
Total deferred tax expense.................................... $(673)
=====
4. CAPITALIZATION
Common Stock Equity. The Company issued five percent stock dividends in
May 1994, May 1993 and May 1992. Earnings per share of common stock, cash
dividends per share of common stock and average number of common shares
outstanding have been restated to reflect the stock dividends.
Pursuant to its DRIP, the Company issued 307,000 shares of common stock in
1994, 247,000 shares in 1993, and 238,000 shares in 1992. In January 1995, the
Company amended its DRIP to allow the Company to acquire common shares on the
open market to meet the dividend reinvestment and optional payment requirements
of the DRIP. Except to the extent that purchase of shares on the open market
becomes difficult, the Company does not expect to issue new shares under the
plan.
In January 1994, the Company issued 747,500 shares of common stock
pursuant to a shelf registration. Net proceeds of approximately $14,629,000
were used to reduce notes payable to banks incurred to finance the Company's
ongoing capital expenditure program and for general corporate purposes.
The Company has short-term credit arrangements and long-term debt
indentures which contain, among other restrictions, limits on the payment of
dividends beyond certain levels of retained earnings. Under the most
restrictive of these covenants, all of the Company's retained earnings of
$15,027,000 was available for the payment of dividends on any class of stock at
December 31, 1994.
Cumulative Convertible Preferred Stock. At December 31, 1994 and 1993,
7,505 and 7,605 shares of the Company's $2.3125 cumulative convertible
preferred shares were outstanding and each share was convertible at the option
of the holder to 4.11 shares of common stock. At December 31, 1994, 30,846
shares of common stock are reserved for issuance upon conversion to holders of
the convertible preferred stock. In 1994, 1993 and 1992, preferred shares
totalling 100, 1,186 and 500 were converted into 411, 4,873 and 2,055 shares of
the Company's common stock, respectively.
-29-
Cumulative Preferred Stock of Subsidiary. The cumulative preferred stock
of Southeastern is callable at Southeastern's option at $105 per share.
Payment of dividends on Southeastern's preferred stock is fully guaranteed by
the Company.
Long-Term Debt. In 1994, the Company recorded an extraordinary charge of
$1,286,000, net of tax, for the early extinguishment of its 9.8% debentures due
2014. In 1993, the Company also recorded an extraordinary charge of $177,000,
net of tax, for the planned redemption of its 10% debentures, due 2007 and
2008, which occurred in February 1994. The Company completed the refinancing
of its higher cost debt in 1994 by retiring the variable rate term loan due
1997 and all of Southeastern's outstanding first mortgage bonds. These
redemptions were funded through the private placement of $55,000,000 of 10-year
notes at 8.00% and $25,000,000 of 30-year notes at 8.32%.
There are no annual maturities or sinking fund requirements for the
Company's existing debt over the next five years.
5. SHORT-TERM BORROWINGS
The Company maintains unsecured lines of credit at two banks. Interest on
all such lines are at variable rates, which do not exceed the banks' prime
lending rates. These arrangements are set to expire during 1995 and the
Company expects they will be renegotiated at comparable terms.
Information regarding these borrowings for each of the last three years is
as follows (in thousands of dollars):
1994 1993 1992
------- ------- -------
Notes payable balance at year end........... $50,000 $52,342 $53,100
Unused lines of credit at year end.......... 39,900 17,658 18,400
Average interest rate at year end........... 6.6% 4.2% 4.4%
Maximum borrowings at any month-end......... $55,842 $63,450 $53,100
Average borrowings.......................... 31,392 42,347 22,285
Weighted average cost of borrowing.......... 5.2% 4.1% 4.5%
6. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Financial Instruments. The following methods and assumptions were used to
estimate the fair value of each significant class of financial instruments:
Cash, temporary cash investments, trade payables and receivables, notes
payable to banks, and variable rate long-term debt. The carrying amount
approximates fair value.
Long-term debt. The fair values of the Company's fixed-rate long-term
debt are estimated based on quoted market prices for the same or similar issues
or where no market quotes are available, based on discounted future cash flows
using current interest rates at which similar loans would be made to borrowers
with similar credit ratings and remaining maturities.
The estimated fair values of the Company's long-term debt as of
December 31, 1994 and 1993 are as follows (in thousands of dollars):
1994 1993
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- --------
Long-term debt..................... $104,910 $99,313 $117,022 $121,250
-30-
Hedging Activities. SEMCO enters into sales commitments which may extend
up to 24 months into the future. Because of the volatility of natural gas
prices, there are significant market risks associated with these commitments.
To manage these risks, SEMCO maintains a hedging program. The primary
objective of SEMCO's hedging program is to attempt to eliminate the effect of
price fluctuations in the natural gas spot market on their extended sales
commitments.
SEMCO uses several mechanisms to hedge against this market risk. The most
frequently used hedges are natural gas futures and options. SEMCO may also
enter into natural gas swap agreements, contract to purchase natural gas from
producers for future delivery or inject gas into storage for later withdrawal.
Gains and losses on these transactions, accounted for as hedges, are included
in revenues in the same period natural gas is delivered to customers pursuant
to the underlying marketing contracts.
The carrying cost of futures and options contracts are included with
related margin deposits in other current assets. The following summarizes the
estimated fair value, determined based on market quotes, at December 31, 1994
and December 31, 1993 of SEMCO's futures contracts, options contracts and
contract deposits (in thousands of dollars):
1994 1993
------ ------
Futures Contracts
Notional amount (MMcf)...................... 8,730 8,200
Carrying cost............................... $5,353 $3,076
Unrealized gain (loss)...................... (2,863) (2,142)
------ ------
Estimated Fair Value........................ $2,490 $ 934
====== ======
Options Contracts
Notional amount (MMcf)...................... 1,810 2,600
Carrying cost............................... $ 504 $ 380
Deferred premium costs...................... (412) (245)
------ ------
Estimated Fair Value........................ $ 92 $ 135
====== ======
Contract Deposits (cost approximates
fair value)................................. $1,000 $2,000
====== ======
As of December 31, 1994, SEMCO also had outstanding natural gas swap
agreements covering a notional amount of 16,663,000 Mcf. The estimated
unrealized loss of these agreements, determined by market quotes, was
$123,000 at December 31, 1994. There were no swap agreements outstanding in
1993.
SEMCO also hedges certain of its sales commitments with gas held in
storage. At December 31, 1994, SEMCO held approximately 3,053,000 Mcf in
storage with a net carrying value of $6,666,000, which approximates fair
value. SEMCO has deferred losses associated with this gas of $1,207,000,
which is also recorded in other current assets. SEMCO did not hold any
significant amounts of gas-in-storage at December 31, 1993.
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans. The Company has non-contributory, defined benefit pension
plans, covering substantially all employees. Pension plan benefits are
generally based upon years of service and compensation during the final years
-31-
of employment. The Company's funding policy is to contribute amounts annually
to the plans based upon actuarial and economic assumptions designed to achieve
adequate funding of projected benefit obligations. The Company contributes at
least the minimum required by the Employee Retirement Income Security Act of
1974, as amended.
At December 31, 1994, plan assets consisted of 44.1% equity investments,
17.1% guaranteed income insurance contracts, 28.3% fixed income securities and
10.5% cash equivalents. The Company's pension expense was $2,261,000,
$1,728,000 and $1,821,000 in the years 1994, 1993 and 1992, respectively.
Combined net periodic pension cost for the Company's defined benefit plans
consists of the following components (in thousands of dollars):
1994 1993 1992
------- ------- -------
Service cost................................ $ 1,700 $ 1,442 $ 1,387
Interest cost on projected benefit
obligation................................ 3,246 2,983 2,861
Actual return on assets..................... 287 (2,562) (2,191)
Amortization of prior service costs......... 471 482 482
Amortization of unrecognized net gain....... (8) (313) (357)
Amortization of transition obligation....... 79 79 79
Asset loss deferred......................... (3,514) (383) (440)
------- ------- -------
Net periodic pension cost................... $ 2,261 $ 1,728 $ 1,821
======= ======= =======
The following table sets forth the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets as of December 31, 1994
and 1993 (in thousands of dollars):
1994 1993
------- -------
Actuarial present value of benefit obligations:
Vested benefit obligation............................. $30,744 $32,807
Non-vested benefit obligation......................... 1,748 1,299
------- -------
Accumulated benefit obligation.......................... $32,492 $34,106
======= =======
Projected benefit obligation............................ $42,068 $45,632
Plan assets at fair value............................... 35,816 36,685
------- -------
Projected benefit obligation in excess of plan assets... $ 6,252 $ 8,947
Unrecognized net gain................................... 3,464 294
Unrecognized prior service cost......................... (5,048) (5,519)
Unrecognized net transition obligation at December 31... (664) (744)
------- -------
Pension liability recognized in the consolidated
balance sheet......................................... $ 4,004 $ 2,978
======= =======
Significant pension plan assumptions are as follows:
1994 1993 1992
----- ----- -----
Plan discount rates............................... 8.25% 7.25% 8.00%
Expected long-term rate of return on assets....... 9.00% 9.00% 9.00%
Rates of increase in future compensation levels... 5.00% 5.00% 5.00%
-32-
Other Postretirement Benefits. In addition to providing pension benefits,
the Company provides certain medical and prescription drug benefits to
qualified retired employees, their spouses and covered dependents. To qualify,
a retiree must have started employment before January 1, 1992 and have had at
least ten years of service. Retirees with less than 30 years of service are
required to contribute from 5% to 50% of the Company's coverage cost, with the
percentage depending on the retiree's age and years of service. Employees
hired after January 1, 1992 are not eligible for these benefits under the
current plan.
In December 1990, the FASB issued SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The new standard requires the
Company to change its method of accounting for the cost of retiree medical
benefits that are provided to retirees from a pay-as-you-go (cash) method to a
full accrual method. Accrual of such costs is required during the years that
the employee renders service to the Company until the date of full
eligibility. The Company adopted SFAS 106 effective January 1, 1993.
In December 1992, the MPSC issued a generic order addressing the adoption
of SFAS 106 by utilities under their jurisdiction. The order allows Michigan
utilities to adopt SFAS 106 for accounting and ratemaking purposes, subject to
a final order in a general rate case filed before 1996. The generic order
requires external funding for amounts recovered in rates. The Company plans to
file general rate cases in accordance with the order during 1995. Any rate
relief granted will be based on all elements of cost of service, including this
obligation.
The combined net periodic retiree medical costs consisted of (in thousands
of dollars):
1994 1993
------ ------
Service cost....................................... $1,621 $1,546
Interest cost...................................... 2,825 2,943
Actual return on assets............................ 42 (255)
Net amortization and deferral...................... 1,238 1,611
------ ------
Net periodic retiree medical cost.................. $5,726 $5,845
====== ======
In 1994 and 1993, the Company expensed net retiree medical costs of
$951,000 and $841,000, respectively, consisting of total costs incurred under
the pay-as-you-go method plus additional SFAS 106 costs recorded by the
non-utility subsidiaries. In 1994, the Company also expensed $437,000 of SFAS
106 costs pursuant to certain MPSC orders regarding the reduction in Michigan
state property taxes. See Note 2 for further discussion of these MPSC orders.
The Company recorded regulatory assets related to the utility subsidiaries'
SFAS 106 costs of $4,338,000 and $4,425,000 in 1994 and 1993, respectively.
The Company funds retiree medical benefits on a discretionary basis
through an Internal Revenue Code Section 401(h) account. In 1993 and 1992, the
Company made cash contributions to the 401(h) account of $579,000 and $314,000,
respectively. No contributions were made to the 401(h) account in 1994.
-33-
The funded status of the retiree medical benefit plans is reconciled with
the liability recorded at December 31, 1994 and December 31, 1993 as follows
(in thousands of dollars):
1994 1993
-------- --------
Actuarial present value of estimated benefits:
Retirees.......................................... $ 12,605 $ 13,843
Fully eligible active............................. 8,822 8,131
Other active...................................... 19,851 20,407
-------- --------
Accumulated retiree medical obligation.............. $ 41,278 $ 42,381
Plan assets at fair value........................... 4,396 4,438
-------- --------
Projected retiree medical obligation in excess of
plan assets....................................... $ 36,882 $ 37,943
Unrecognized net obligation at transition........... (30,237) (31,917)
Unrecognized net (gain) loss........................ 2,919 (1,448)
-------- --------
Recorded liability.................................. $ 9,564 $ 4,578
======== ========
Significant plan assumptions are as follows:
1994 1993
----- -----
Plan discount rate.................................. 8.25% 7.25%
Expected long-term rate of return on assets......... 9.00% 9.00%
The 1994 costs were developed based on the substantive health care plan in
effect at January 1, 1994. As of December 31, 1994, the actuary assumed that
retiree medical cost increases would be 11.5% in 1994, 11.1% in 1995, and
decrease uniformly to 6.8% in 2005 and thereafter and that prescription drug
cost increases would be 15.2% in 1994, 14.5% in 1995, and decrease uniformly to
6.8% in 2005 and thereafter. The health care cost trend rate assumption
significantly affects the amounts reported. For example, a one percentage
point increase in each year would increase the accumulated retiree medical
obligation as of December 31, 1994 by $7,950,000 and the aggregate of the
service and interest cost components of net periodic retiree medical costs for
1994 by $1,001,000.
Employee Stock Ownership Trust. The Company has an employee stock
ownership trust (ESOT) which covers substantially all employees. Under the
provisions of this trust, the Company may contribute an annual amount at its
discretion for the benefit of eligible employees. The contribution, if any,
may be made in cash or in common shares of the Company. For the years 1994,
1993 and 1992, the Company's contributions were $600,000, $600,000 and
$400,000, respectively.
In December 1988, the trust borrowed $4,000,000 under a term loan to
purchase 274,348 shares of the Company's common stock. In accordance with
applicable accounting rules, the Company recorded the ESOT indebtedness in
long-term debt on its balance sheet with an offsetting charge to common stock
equity captioned "Unearned compensation-ESOT." The amount of dividends on ESOT
shares used by the trust to pay debt service in 1993 and 1992 were $185,000 and
$675,000, respectively. Interest expense incurred by the trust in those years
was $5,000 and $45,000, respectively. The ESOT term loan was paid in full in
1993.
-34-
8. COMMITMENTS AND CONTINGENCIES
Construction Program. The Company's plans for expansion and improvement
of its distribution and transmission system, as well as other operations, are
under a process of continuing review. Aggregate capital expenditures for all
segments of the Company's operations for 1995 are projected at $24,780,000.
Certain commitments have been made in connection with these expenditures.
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 $89,400,000 of debt
used to finance the pipeline. Of the total debt, $59,850,000 is outstanding
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 is pursuant to a $30,000,000 multibank revolving line of credit
which currently matures April 26, 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 December 31, 1994, NOARK had $29,550,000
outstanding under the agreement with interest payments at a variable interest
rate.
NOARK has been operating below capacity and generating losses since it was
placed in service. The pipeline experienced significant cost overruns during
construction which resulted in higher financing costs than expected.
Competition from two interstate pipelines in the Arkansas region has required
NOARK to discount its transportation charges to attract volumes to the
pipeline. In addition, on January 1, 1994, a major shipper of firm volumes on
the NOARK system discontinued shipments of gas under its contract and ceased
payment of the firm demand fee pursuant to legal action.
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 firm transportation contract
with NOARK.
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.
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. In January 1995, Vesta filed a counterclaim and
third party complaint in the Federal District Court for the Western District of
Arkansas against twelve defendants, including NOARK and SEMCO Arkansas Pipeline
-35-
Company. Vesta seeks both punitive and actual damages each in excess of
$1,000,000 and seeks to be excused from performance under its contracts with
certain defendants, including NOARK. Vesta alleges it was fraudulently induced
into such contracts and also seeks relief pursuant to federal and state
antitrust statutes and other state laws. The Company does not expect that the
January 1995 action by Vesta against SEMCO Arkansas Pipeline Company will have
a significant negative impact on the Company's results of operation.
As these circumstances continue, NOARK's operating cash flows will be
insufficient to meet debt service requirements. Principally subject to
ultimate resolution of the above legal actions, the Company estimates a net
cash outflow in the range of $1,500,000 to $2,000,000 during 1995 related to
its investment in NOARK and the guarantee. The Company contributed $906,000 to
NOARK pursuant to the guarantee in October 1994 and $760,000 in January 1995.
The NOARK partners are currently investigating several options available
to NOARK. Management continues to believe that no write-down of its investment
in NOARK is appropriate at this time. Therefore, no provision for any loss has
been made in the accompanying financial statements.
9. INVESTMENTS IN AFFILIATES
The equity method of accounting is used for interests the Company holds in
affiliates 20% to 50% owned or in which the Company has significant influence
over operations. These affiliate companies are generally involved in natural
gas transmission, storage, or associated operations. The Company provides
income taxes on its share of undistributed earnings of these subsidiaries at
the time the earnings are included in consolidated income. Refer to Note 8 for
a discussion of the Company's significant guarantees of affiliate debt.
At December 31, 1994, the Company held the following interests in these
affiliates:
Percent
Ownership
---------
Eaton Rapids Gas Storage System.................................. 50%
Michigan Intrastate Lateral System............................... 50
Michigan Intrastate Pipeline System.............................. 50
Nimrod Natural Gas Corporation................................... 11
Nimrod Limited Partnership....................................... 29
NOARK Gas Services, L.P.......................................... 40
NOARK Pipeline System, L.P....................................... 32
-36-
Summarized combined financial information for the Company's investments in
affiliate companies for the years ended December 31, 1994, 1993 and 1992 is as
follows (in thousands of dollars):
1994 1993 1992
-------- -------- --------
Net sales................................... $ 20,152 $ 19,717 $ 19,199
Operating income............................ $ 8,334 $ 8,105 $ 5,337
Net income (loss)........................... $ 329 $ (1,284) $ 1,108
======== ======== ========
The Company's share of net income (loss).... $ (20) $ (51) $ 601
======== ======== ========
Current assets.............................. $ 9,320 $ 5,636 $ 9,467
Non-current assets.......................... 140,530 144,961 138,442
-------- -------- --------
Total assets................................ $149,850 $150,597 $147,909
======== ======== ========
Current liabilities......................... $ 12,505 $ 16,748 $ 13,129
Non-current liabilities..................... 113,902 108,259 106,660
Equity...................................... 23,443 25,590 28,120
-------- -------- --------
Total liabilities and equity................ $149,850 $150,597 $147,909
======== ======== ========
The Company's equity investment............. $ 9,754 $ 8,902 $ 9,999
======== ======== ========
The Company's share of undistributed
earnings (losses)......................... $ (903) $ (151) $ 1,067
======== ======== ========
10. QUARTERLY FINANCIAL INFORMATION (Unaudited)
In the opinion of the Company, the following quarterly information
includes all adjustments necessary for a fair statement of the results of
operations for such periods. Earnings and dividends per share of common stock
are calculated based upon the weighted average number of shares outstanding
during each quarter. Due to the seasonal nature of the Company's gas
distribution business, the results of operations reported on a quarterly basis
show substantial variations.
-37-
The following amounts are shown in thousands of dollars, except per share
amounts:
Quarters First Second Third Fourth
-------- -------- ------- ------- --------
1994
Operating revenue................... $134,788 $75,953 $60,453 $101,236
Operating income.................... 12,107 2,715 514 6,955
Net income (loss) available for
common stock before
extraordinary item................ 9,505 513 (2,556) 3,816
Extraordinary item.................. -- (1,286) -- --
-------- ------- ------- -------
Net income (loss) available for
common stock...................... 9,505 (773) (2,556) 3,816
Earnings (loss) per share of
common stock before
extraordinary item<F1><F2>........ .84 .05 (.23) .34
Earnings (loss) per share of
common stock<F1><F2>.............. .84 (.07) (.23) .34
Cash dividends per share of
common stock<F1>.................. .19 .19 .20 .20
1993
Operating revenue................... $ 99,155 $53,011 $40,451 $96,346
Operating income.................... 11,592 2,518 340 6,980
Net income (loss) available for
common stock before
extraordinary item................ 7,861 (165) (2,433) 4,477
Extraordinary item.................. -- -- -- (177)
-------- ------- ------- -------
Net income (loss) available for
common stock...................... 7,861 (165) (2,433) 4,300
Earnings (loss) per share of
common stock before
extraordinary item<F1><F2>........ .78 (.02) (.24) .44
Earnings (loss) per share of
common stock<F1><F2>.............. .78 (.02) (.24) .43
Cash dividends per share of
common stock<F1>.................. .18 .18 .19 .19
<FN>
<F1>
Adjusted for five percent stock dividends in May 1994 and May 1993.
<F2>
Total for each year may not equal annual earnings per share due to
changes in shares outstanding.
</FN>
-38-
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Southeastern Michigan Gas Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC. (a Michigan
corporation) and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, changes in stockholders' investment and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements and the schedules referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southeastern
Michigan Gas Enterprises, Inc. and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Notes 3 and 7 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting for
income taxes and other postretirement benefits.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in item 14(a)2 are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 8, 1995.
-39-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-40-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions "Information About Directors
and Executive Officers" and "Other Executive Officers" in Registrant's
definitive Proxy Statement (filed pursuant to Regulation 14A) with respect to
Registrant's April 18, 1995 Annual Meeting of Shareholders is incorporated by
reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions "Compensation Committee
Interlocks and Insider Participation" and "Compensation of Directors and
Executive Officers" in Registrant's definitive Proxy Statement (filed pursuant
to Regulation 14A) with respect to Registrant's April 18, 1995 Annual Meeting
of Shareholders is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Stock Outstanding, Voting
Rights and Votes Required" in the Registrant's definitive Proxy Statement
(filed pursuant to Regulation 14A) with respect to Registrant's April 18, 1995
Annual Meeting of Shareholders, is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Business
Relationships of Directors" in the Registrant's definitive Proxy Statement
(filed pursuant to Regulation 14A) with respect to Registrant's April 18, 1995
Annual Meeting to Shareholders, is incorporated by reference herein.
-41-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements. The following financial
statements are included in Part II, item 8 above.
Pages in 10-K
-------------
Consolidated Statements of Income for the years
ended December 31, 1994, 1993 and 1992 20
Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993 and 1992 21
Consolidated Balance Sheets as of
December 31, 1994 and 1993 22
Consolidated Statements of Capitalization as
of December 31, 1994 and 1993 23
Consolidated Statements of Changes in
Stockholders' Investment for the years
ended December 31, 1994, 1993 and 1992 24
Notes to the Consolidated Financial Statements 25-38
Report of Independent Public Accountants 39
(a) 2. Financial Statement Schedules.
The following additional data should be read in conjunction with the
Consolidated Financial Statements in Part II, item 8 above.
Schedules not included herein have been omitted because they are not
applicable or the required information is shown in such financial
statements or notes thereto.
Schedule
Number Pages in 10-K
-------- -------------
I Condensed Financial Information of
Southeastern Michigan Gas Company 46
II Consolidated Valuation and Qualifying
Accounts for the years ended
December 31, 1994, 1993 and 1992 50
-42-
(a) 3. Exhibits, including those incorporated by reference
Filed
--------------------
Exhibit By
No. Description Herewith Reference
------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3 Articles of Incorporation and Bylaws
3(a) 1--Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
(Enterprises), as restated
July 11, 1989.(a) x
2--Certificate of amendment to Article III of
the Articles of Incorporation dated
May 16, 1990.(b) x
3(b) Bylaws of Enterprises--last revised
March 1, 1995. x
4(a) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(e) x
4(b) Note Agreement dated June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(g) x
9 Voting Trust Agreement. NA NA
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(c) x
10(b) Group A Employment Contract.(f) x
10(c) Short-Term Incentive Plan.(f) x
10(d) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only).(h) x
11 Statement re computation of per share earnings. NA NA
12 Statements re computation of ratios.(d) x
13 Annual report to shareholders. NA NA
16 Letter re change in certifying accountant. NA NA
18 Letter re change in accounting principles. NA NA
21 Subsidiaries of the Registrant. x
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. x
24 Power of Attorney. x
27 Financial Data Schedule. x
28 Information from reports furnished to state
insurance regulatory authorities. NA NA
99 Proxy Statement dated March 21, 1995.(i) x
-43-
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Form 10-K for 1989, dated March 29, 1990,
File No. 0-8503.
(b) Filed with Enterprises' Form 10-K for 1990, dated March 28, 1991,
File No. 0-8503.
(c) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(d) Filed with Enterprises' Form 10-K for 1991, dated March 27, 1992,
File No. 0-8503.
(e) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(f) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(g) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(h) Filed with Enterprises' Form 10-Q for the quarter ended September 30,
1994, File No. 0-8503.
(i) Filed March 20, 1995, pursuant to Rule 14a-6 of the Exchange Act,
File No. 0-8503.
ITEM 14. (Continued)
(b) No reports on Form 8-K have been filed during the quarter ended
December 31, 1994.
(c) The Exhibits, if any, filed herewith are identified on the Exhibit Index.
(d) The financial statement schedules filed are listed under Item 14.(a).2.
above.
-44-
SIGNATURES
Pursuant to the requirements of Section 13 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.
Date: March 28, 1995 By Ward N. Kirby
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Ward N. Kirby President March 28, 1995
(Director and Principal
Executive Officer)
Robert F. Caldwell Executive Vice President March 28, 1995
(Director)
Marcia M. Chmielewski Vice President, Treasurer and March 28, 1995
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Frank G. Andreoni* Director March 28, 1994
Daniel A. Burkhardt* Director March 28, 1994
John T. Ferris* Director March 28, 1994
Michael O. Frazer* Director March 28, 1994
Harvey I. Klein* Director March 28, 1994
William March* Director March 28, 1994
Edith A. Stotler* Director March 28, 1994
Robert J. Thomson* Director March 28, 1994
John W. Wirtz* Director March 28, 1994
*By Ward N. Kirby March 28, 1994
Attorney-in-fact
-45-
SCHEDULE I
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
STATEMENT OF INCOME
Years ended December 31,
---------------------------------
1994 1993 1992
------- ------- -------
(Thousands of Dollars)
OPERATING REVENUE
Gas sales $74,151 $72,486 $65,585
Transportation 3,057 3,125 2,809
Other operations 490 380 361
------- ------- -------
77,698 75,991 68,755
------- ------- -------
OPERATING EXPENSES
Cost of gas sold 47,240 46,297 40,990
Operations 11,642 11,406 11,329
Maintenance 2,227 2,019 1,808
Depreciation 3,869 3,690 3,460
Income taxes 2,019 2,071 1,690
Taxes other than income taxes 3,538 3,488 3,217
------- ------- -------
70,535 68,971 62,494
------- ------- -------
OPERATING INCOME 7,163 7,020 6,261
OTHER INCOME, NET 203 179 207
------- ------- -------
INCOME BEFORE INCOME DEDUCTIONS 7,366 7,199 6,468
------- ------- -------
INCOME DEDUCTIONS
Interest on long-term debt 1,853 1,676 1,703
Other interest 516 614 524
Amortization of debt expense 169 145 145
------- ------- -------
2,538 2,435 2,372
------- ------- -------
NET INCOME 4,828 4,764 4,096
Dividends on preferred stock 178 178 178
------- ------- -------
NET INCOME AFTER DIVIDENDS
ON PREFERRED STOCK $ 4,650 $ 4,586 $ 3,918
======= ======= =======
-46-
SCHEDULE I
(cont.)
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
BALANCE SHEET
A S S E T S
-----------
December 31,
------------------------
1994 1993
-------- --------
(Thousands of Dollars)
UTILITY PLANT
Plant in service, at original cost $131,794 $124,533
Less - Accumulated depreciation 52,526 49,340
-------- --------
79,268 75,193
Construction work in progress 110 780
-------- --------
79,378 75,973
-------- --------
OTHER PROPERTY 491 378
-------- --------
CURRENT ASSETS
Cash and temporary cash investments, at cost 715 100
Receivables
Affiliates 199 85
Nonaffiliates, less reserves of $177 and $116 7,841 8,652
Accrued utility revenue 4,472 6,209
Material and supplies, at average cost 1,719 1,581
Gas in underground storage, at average cost 8,774 11,333
Property taxes assessed and prepayments 1,548 1,819
Accumulated deferred income taxes 1,000 --
Other current assets 137 1,210
-------- --------
26,405 30,989
-------- --------
DEFERRED CHARGES
Unamortized debt expense 1,912 1,057
Deferred gas charges, recoverable from customers -- 145
Other 7,853 5,981
-------- --------
9,765 7,183
-------- --------
$116,039 $114,523
======== ========
-47-
SCHEDULE I
(cont.)
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
BALANCE SHEET
CAPITALIZATION AND LIABILITIES
December 31,
------------------------
1994 1993
-------- --------
(Thousands of Dollars)
CAPITALIZATION
Common stock equity $ 39,592 $ 38,942
Cumulative preferred stock 3,100 3,100
Long-term debt 23,000 17,333
Capital lease obligations 649 323
-------- --------
66,341 59,698
-------- --------
CURRENT LIABILITIES
Note payable to Enterprises 12,670 19,940
Current maturities of long-term debt -- 165
Current maturities of capital lease obligations -- 330
Accounts payable
Affiliates 2,001 2,468
Nonaffiliates 4,567 5,537
Customer advance payments 3,985 3,037
Accrued taxes 911 319
Accrued interest -- 278
Amounts payable to customers 107 5
Accumulated deferred income taxes -- 227
Other 2,557 2,145
-------- --------
26,798 34,451
-------- --------
COMMITMENTS AND CONTINGENCIES
DEFERRED CREDITS
Accumulated deferred income taxes 4,086 4,040
Unamortized investment tax credits 2,195 2,363
Customer advances for construction 5,954 5,650
Other 10,665 8,321
-------- --------
22,900 20,374
-------- --------
$116,039 $114,523
======== ========
-48-
SCHEDULE I
(cont.)
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
STATEMENT OF CASH FLOWS
Years ended December 31,
---------------------------------
1994 1993 1992
-------- -------- --------
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITY
Cash received from customers $ 81,263 $ 76,261 $ 66,933
Cash paid for payrolls and to suppliers (59,478) (61,665) (58,070)
Interest paid (2,647) (2,363) (2,198)
Income taxes paid (3,069) (5,711) (1,781)
Taxes other than income taxes paid (3,272) (3,540) (3,256)
Other cash receipts and payments, net 11 1,921 (978)
-------- -------- --------
NET CASH FROM OPERATING ACTIVITY 12,808 4,903 650
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITY
Capital expenditures (6,371) (6,413) (7,248)
Proceeds from sale of property
and equipment 128 107 --
-------- -------- --------
NET CASH FROM INVESTING ACTIVITY (6,243) (6,306) (7,248)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITY
Change in notes payable to Enterprises (7,270) 5,575 11,550
Issuance of long-term debt 23,000 -- --
Repayment of long-term debt (17,502) (29) (1,149)
Payment of dividends (4,178) (4,078) (3,778)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITY (5,950) 1,468 6,623
-------- -------- --------
NET INCREASE IN CASH AND
TEMPORARY CASH INVESTMENTS 615 65 25
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Year 100 35 10
-------- -------- --------
End of Year $ 715 $ 100 $ 35
======== ======== ========
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITY
Net income available for common stock $ 4,650 $ 4,586 $ 3,918
Adjustments to reconcile net income to
net cash from operating activity
Depreciation 3,869 4,163 3,827
Deferred taxes and ITC (1,349) (2,971) (459)
Accounts receivable 697 1,318 (2,140)
Accrued utility revenue 1,737 (798) (13)
Materials and supplies and gas in
underground storage 2,421 (803) (2,537)
Property taxes assessed and
prepayments 271 2,268 (355)
Accounts payable (1,438) 704 (79)
Amounts payable to customers 102 (230) (1,095)
Other, net 1,848 (3,334) (417)
-------- -------- --------
NET CASH FROM OPERATING ACTIVITY $ 12,808 $ 4,903 $ 650
======== ======== ========
-49-
SCHEDULE II
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
Additions Deductions
--------- From Reserve
Balance Provision for Purpose of Balance
Beginning Charged Which the Reserve End
Description of Period to Income Was Provided of Period
------------------------------------------------------- --------- --------- ----------------- ---------
FOR THE YEAR ENDED DECEMBER 31, 1994
------------------------------------
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
Uncollectible accounts $1,355 $ 899 $1,365 $ 889
====== ====== ====== ======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET -
Oil and gas leasehold reserve $1,102 $ -0- $ 401 $ 701
====== ====== ====== ======
Real estate land cost reserve $1,100 $ -0- $ -0- $1,100
====== ====== ====== ======
FOR THE YEAR ENDED DECEMBER 31, 1993
------------------------------------
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
Uncollectible accounts $1,008 $ 939 $ 592 $1,355
====== ====== ====== ======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET -
Oil and gas leasehold reserve $1,405 $ 250 $ 553 $1,102
====== ====== ====== ======
Real estate land cost reserve $ 800 $ 300 $ -0- $1,100
====== ====== ====== ======
FOR THE YEAR ENDED DECEMBER 31, 1992
------------------------------------
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
Uncollectible accounts $ 992 $1,045 $1,029 $1,008
====== ====== ====== ======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET -
Oil and gas leasehold reserve $ 685 $ 720 $ -0- $1,405
====== ====== ====== ======
Real estate land cost reserve $ 800 $ -0- $ -0- $ 800
====== ====== ====== ======
-50-
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
Exhibit Index
Form 10-K
1994
Filed
--------------------
Exhibit By
No. Description Herewith Reference
------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3 Articles of Incorporation and Bylaws
3(a) 1--Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
(Enterprises), as restated
July 11, 1989.(a) x
2--Certificate of amendment to Article III of
the Articles of Incorporation dated
May 16, 1990.(b) x
3(b) Bylaws of Enterprises--last revised
March 1, 1995. x
4(a) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(e) x
4(b) Note Agreement dated June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(g) x
9 Voting Trust Agreement. NA NA
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(c) x
10(b) Group A Employment Contract.(f) x
10(c) Short-Term Incentive Plan.(f) x
10(d) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only).(h) x
11 Statement re computation of per share earnings. NA NA
12 Statements re computation of ratios.(d) x
13 Annual report to shareholders. NA NA
16 Letter re change in certifying accountant. NA NA
18 Letter re change in accounting principles. NA NA
21 Subsidiaries of the Registrant. x
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. x
24 Power of Attorney. x
27 Financial Data Schedule. x
28 Information from reports furnished to state
insurance regulatory authorities. NA NA
99 Proxy Statement dated March 21, 1995.(i) x
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Form 10-K for 1989, dated March 29, 1990,
File No. 0-8503.
(b) Filed with Enterprises' Form 10-K for 1990, dated March 28, 1991,
File No. 0-8503.
(c) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(d) Filed with Enterprises' Form 10-K for 1991, dated March 27, 1992,
File No. 0-8503.
(e) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(f) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(g) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(h) Filed with Enterprises' Form 10-Q for the quarter ended September 30,
1994, File No. 0-8503.
(i) Filed March 20, 1995, pursuant to Rule 14a-6 of the Exchange Act,
File No. 0-8503.