UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period from to
------------- ------------
Commission file number 0-8503
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2144267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 Water Street, Port Huron, Michigan 48060
(Address of principal executive offices)
810-987-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock outstanding as of April 30, 1996, is
11,794,695.
INDEX TO FORM 10-Q
------------------
For Quarter Ended March 31, 1996
Page
Number
------
COVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 15
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars Except Per Share Amounts)
Three Twelve
Months Ended Months Ended
March 31, March 31,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
OPERATING REVENUE
Gas sales $ 87,963 $ 69,284 $202,703 $176,190
Gas marketing 83,463 42,722 174,137 160,288
Transportation 3,518 3,543 12,423 12,160
Other operations 1,184 1,756 5,098 6,309
-------- -------- -------- --------
$176,128 $117,305 $394,361 $354,947
-------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $ 61,525 $ 46,426 $135,718 $118,128
Cost of gas marketed 81,774 41,708 170,153 156,041
Operations 10,155 8,248 33,787 31,581
Maintenance 913 1,041 4,209 4,478
Depreciation 2,863 2,986 11,912 11,615
Income taxes 4,795 4,022 6,961 4,198
Taxes other than income taxes 2,244 2,215 7,995 8,061
-------- -------- -------- --------
$164,269 $106,646 $370,735 $334,102
-------- -------- -------- --------
OPERATING INCOME $ 11,859 $ 10,659 $ 23,626 $ 20,845
OTHER INCOME (LOSS), NET (274) (210) (243) (423)
-------- -------- -------- --------
INCOME BEFORE INCOME DEDUCTIONS $ 11,585 $ 10,449 $ 23,383 $ 20,422
-------- -------- -------- --------
INCOME DEDUCTIONS
Interest on long-term debt $ 2,128 $ 2,157 $ 8,517 $ 8,592
Other interest 572 674 1,625 1,991
Amortization of debt expense 94 112 430 413
Dividends on preferred stock of subsidiary 45 45 178 178
-------- -------- -------- --------
$ 2,839 $ 2,988 $ 10,750 $ 11,174
-------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK BEFORE PREFERRED
STOCK DIVIDENDS AND EXTRAORDINARY ITEM $ 8,746 $ 7,461 $ 12,633 $ 9,248
Dividends on convertible preferred stock 4 4 17 18
-------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK
BEFORE EXTRAORDINARY ITEM $ 8,742 $ 7,457 $ 12,616 $ 9,230
EXTRAORDINARY ITEM-Loss on early extinguishment of debt,
net of income taxes of $692 - - - 1,286
-------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK $ 8,742 $ 7,457 $ 12,616 $ 7,944
======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK BEFORE EXTRAORDINARY ITEM $ .71 $ .60 $ 1.02 $ .75
======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK $ .71 $ .60 $ 1.02 $ .64
======== ======== ======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .19 $ .18 $ .75 $ .72
======== ======== ======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 12,394 12,455 12,408 12,333
======== ======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-3-
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
A S S E T S
(Unaudited) (Unaudited)
March 31, December 31, March 31,
1996 1995 1995
-------- -------- --------
(Thousands of Dollars)
UTILITY PLANT
Plant in service, at cost $319,845 $314,602 $290,141
Less - Accumulated depreciation 90,558 87,308 79,435
-------- -------- --------
$229,287 $227,294 $210,706
OTHER PROPERTY, net 11,091 12,883 15,390
-------- -------- --------
$240,378 $240,177 $226,096
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash investments,
at cost $ 4,100 $ 264 $ 3,931
Receivables, less allowances of
$883 at March 31, 1996, $729
at December 31, 1995 and $1,061
at March 31, 1995 52,779 32,320 27,732
Accrued revenue 47,352 38,854 23,413
Materials and supplies, at average cost 3,548 3,280 3,587
Gas in underground storage 4,735 20,172 10,739
Gas charges, recoverable from customers 5,131 5,854 3,581
Accumulated deferred income taxes 2,346 2,249 2,558
Other 3,375 5,827 7,892
-------- -------- --------
$123,366 $108,820 $ 83,433
-------- -------- --------
DEFERRED CHARGES
Unamortized debt expense $ 5,620 $ 5,702 $ 6,038
Deferred gas charges, recoverable
from customers 552 615 729
Advances to equity investees 4,218 4,218 1,666
Other 19,567 18,991 16,922
-------- -------- --------
$ 29,957 $ 29,526 $ 25,355
-------- -------- --------
$393,701 $378,523 $334,884
======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-4-
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
(Unaudited) (Unaudited)
March 31, December 31, March 31,
1996 1995 1995
-------- -------- --------
(Thousands of Dollars)
COMMON STOCK EQUITY
Common stock-par value $1 per share,
20,000,000 shares authorized;
11,806,066, 11,837,075 and
11,310,943 shares outstanding $ 11,806 $ 11,837 $ 11,311
Capital surplus 80,035 80,546 81,935
Retained earnings 23,514 17,128 20,226
-------- -------- --------
$115,355 $109,511 $113,472
-------- -------- --------
CUMULATIVE CONVERTIBLE PREFERRED STOCK
Convertible preferred stock - par value
$1 per share; authorized 500,000
shares issuable in series; each
convertible to 4.11 common shares $ 7 $ 7 $ 7
Capital surplus 165 165 178
-------- -------- --------
$ 172 $ 172 $ 185
-------- -------- --------
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY
$100 par value (redemption price
$105 per share); authorized
50,000 shares issuable in series;
31,000 shares outstanding $ 3,100 $ 3,100 $ 3,100
-------- -------- --------
LONG-TERM DEBT INCLUDING CAPITAL LEASES $105,819 $105,858 $104,878
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 42,500 $ 51,700 $ 19,200
Current portion of long-term debt
and capital leases 1,569 1,467 -
Accounts payable 52,617 38,018 21,097
Customer advance payments 1,596 5,764 5,141
Accrued taxes 6,742 704 4,293
Accrued interest 2,649 1,135 2,686
Amounts payable to customers - 682 922
Other 5,319 4,851 7,906
-------- -------- --------
$112,992 $104,321 $ 61,245
-------- -------- --------
DEFERRED CREDITS
Accumulated deferred income taxes $ 19,274 $ 19,080 $ 18,742
Unamortized investment tax credit 2,982 3,049 3,250
Customer advances for construction 9,251 9,326 8,360
Other 24,756 24,106 21,652
-------- -------- --------
$ 56,263 $ 55,561 $ 52,004
-------- -------- --------
$393,701 $378,523 $334,884
======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-5-
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Three Months Ended Twelve Months Ended
March 31, March 31,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $142,595 $123,495 $339,807 $382,545
Cash paid for payrolls and to suppliers (121,573) (83,265) (302,748) (325,796)
Interest paid (1,266) (1,290) (10,259) (9,097)
Income taxes paid -- (1,401) (4,169) (4,780)
Taxes other than income taxes paid (285) (656) (7,624) (7,826)
Other cash receipts and payments, net 1,405 479 1,100 925
-------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 20,876 $ 37,362 $ 16,107 $ 35,971
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $ (4,931) $ (2,900) $(28,290) $(20,705)
Investment in other natural gas related prop. -- -- -- (1)
Other property additions (107) (76) (744) (804)
Property retirement costs, net of proceeds 145 (58) 843 (349)
Proceeds from sale and leaseback of capital assets -- -- 3,737 --
Advances to equity investees -- (760) (2,552) (1,666)
-------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $ (4,893) $ (3,794) $(27,006) $(23,525)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 1,360 $ 1,860 $ 5,512 $ 5,920
Repurchase of common stock (see note 3) (1,902) (969) (6,931) (969)
Net change in notes payable to banks (9,200) (30,800) 23,300 (25,150)
Issuance of long-term debt -- -- -- 80,000
Repayment of long-term debt -- (32) (1,290) (61,028)
Payment of dividends (2,405) (2,307) (9,523) (9,022)
-------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $(12,147) $(32,248) $ 11,068 $(10,249)
-------- -------- -------- --------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS $ 3,836 $ 1,320 $ 169 $ 2,197
-------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Period $ 264 $ 2,611 $ 3,931 $ 1,734
-------- -------- -------- --------
End of Period $ 4,100 $ 3,931 $ 4,100 $ 3,931
======== ======== ======== ========
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITIES
Net income available for common stock $ 8,742 $ 7,457 $ 12,616 $ 7,944
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 2,863 2,986 11,912 11,615
Extraordinary Item -- -- -- 1,286
Deferred taxes and investment tax credits 30 (142) 476 (1,493)
Equity (income) loss, net of distributions 1,746 416 2,320 1,291
Receivables (20,459) (4,925) (25,047) 3,315
Accrued revenue (8,498) 9,886 (23,939) 13,276
Materials and supplies and gas in underground storage 15,169 25,146 2,843 (2,735)
Gas charges, recoverable from customers 723 4,622 (1,550) 7,896
Other current assets 2,452 4,124 4,517 1,004
Accounts payable 14,599 (15,148) 34,720 (16,912)
Customer advances and amounts payable to customers (4,925) (2,987) (3,576) 2,958
Accrued taxes 6,038 3,567 2,449 (1,087)
Other, net 2,396 2,360 (1,634) 7,613
-------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 20,876 $ 37,362 $ 16,107 $ 35,971
======== ======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-6-
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES
Under the rules and regulations of the Securities and Exchange Commission
for Form 10-Q Quarterly Reports, certain footnotes and other financial
statement information normally included in Southeastern Michigan Gas
Enterprises, Inc.'s (the Company's) year-end financial statements have been
condensed or omitted in the accompanying unaudited financial statements. These
financial statements prepared by the Company should be read in conjunction with
the financial statements and notes thereto included in the Company's 1995
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The information in the accompanying financial statements reflects, in the
opinion of the Company's management, all adjustments (which include only normal
recurring adjustments) necessary for a fair statement of the information shown,
subject to year-end and other adjustments, as later information may require.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
In general, this statement requires that long-lived assets held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The need for an impairment loss is evaluated by comparing the
carrying cost of the asset to the future cash flows (undiscounted and without
interest charges) expected from the use and eventual disposition of the asset.
Measurement of the impairment loss is based on the fair value of the asset. In
addition, SFAS 121 imposes stricter criteria for the recognition of regulatory
assets by requiring that such assets be probable of future recovery at each
balance sheet date.
The Company's adoption of this standard on January 1, 1996 did not have a
material impact on the financial position or results of operations of the
Company.
(2) REGULATORY MATTERS
At March 31, 1996, the Company had $918,000 of remaining direct-billed
liabilities related to Federal Energy Regulatory Commission (FERC) Order 636
(Order 636). These costs are substantially recoverable from ratepayers. The
Company does not anticipate any significant additional direct billings.
-7-
(3) CAPITALIZATION
Common Stock Equity
- -------------------
On April 16, 1996, the Company's Board of Directors declared a regular
quarterly cash dividend on common stock of $.20 per share. In addition, the
Board declared a 5% common stock dividend. Both dividends are payable on
May 15 to shareholders of record on May 3. Earnings per common share, cash
dividends per common share and weighted average number of shares outstanding
give retroactive effect for all periods presented to the 5% stock dividends in
May 1996 and 1995.
In February 1996, the Company paid a quarterly cash dividend of $.20 per
share to its common shareholders. Of the total cash dividend of $2,356,000,
$834,000 was reinvested by shareholders into common stock through participation
in the Dividend Reinvestment and Common Stock Purchase Plan (DRIP). This
portion of the quarterly dividend and shareholders' optional cash payments of
$526,000, resulted in 74,506 new shares issued to existing shareholders during
the quarter pursuant to the DRIP.
The Company purchases shares of its own common stock in the open market
for reissuance pursuant to the DRIP. In the first quarter of 1996, the Company
purchased 105,515 shares for $1,902,000.
(4) COMMITMENTS AND CONTINGENCIES
SEMCO Arkansas Pipeline Company, a wholly-owned subsidiary of SEMCO Energy
Services, Inc. (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 $80,762,000 of debt
used to finance the pipeline. Of the total debt, $55,913,000 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, 1998. 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 March 31, 1996, NOARK had $24,850,000
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. Operating cash flows have been insufficient to meet
principal and interest payments on the debt. The Company contributed $906,000
to NOARK in October 1994, $760,000 in January 1995, $800,000 in April 1995,
$880,000 in July 1995 and $872,000 in October 1995, in connection with its
guarantee. The Company did not make any contributions to NOARK in the first
quarter, but estimates that required contributions for 1996 will be in the
range of $1,000,000 to $1,500,000.
-8-
The NOARK partners are currently investigating options available to NOARK.
Periodic evaluations of the recoverability of this asset are made by
management. Management believes that no write-down of its investment in NOARK
is appropriate at this time based on its most recent evaluation. Therefore, no
write-down provision has been made in the accompanying financial statements.
-9-
PART I - FINANCIAL INFORMATION - (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net income available for common stock for the quarter ended March 31, 1996
was $8,742,000 ($.71 per share) compared to $7,457,000 ($.60 per share) for the
quarter ended March 31, 1995.
Net income available for common stock for the twelve months ended
March 31, 1996 was $12,616,000 ($1.02 per share). This compares to $9,230,000
($.75 per share) net income available for common stock before extraordinary
item recorded for the twelve months ended March 31, 1995. The Company
recognized an extraordinary charge to income in the twelve months ended
March 31, 1995 of $1,286,000 ($.11 per share) for the early extinguishment of
debt.
Since the Company's primary business of natural gas distribution depends
upon the winter months for the majority of its operating revenue, a substantial
portion of the annual results of operations is earned during the first quarter
of the year. Therefore, the Company's results of operations for the
three-month periods ended March 31, 1996 and 1995 are not necessarily
indicative of results for a full year.
See Note 4 in the notes to the consolidated financial statements for a
discussion of commitments and contingencies.
A comparison of quarterly and twelve-month-to-date revenues, margins and
system throughput follows on the next page.
-10-
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- ---------------------
1996 1995 1996 1995
------- ------- -------- --------
(in thousands of dollars)
Operating Revenue
Gas Sales
Residential $55,319 $43,306 $127,256 $108,817
Commercial 26,576 21,033 60,305 53,265
Industrial 6,068 4,945 15,142 14,108
------- ------- -------- --------
$87,963 $69,284 $202,703 $176,190
Cost of Gas Sold 61,525 46,426 135,718 118,128
------- ------- -------- --------
Gross Margin $26,438 $22,858 $ 66,985 $ 58,062
======= ======= ======== ========
Gas Marketing $83,463 $42,722 $174,137 $160,288
Cost of Gas Marketed 81,774 41,708 170,153 156,041
------- ------- -------- --------
$ 1,689 $ 1,014 $ 3,984 $ 4,247
======= ======= ======== ========
Transportation Revenue $ 3,518 $ 3,543 $ 12,423 $ 12,160
======= ======= ======== ========
Other $ 1,184 $ 1,756 $ 5,098 $ 6,309
======= ======= ======== ========
(in millions of cubic feet)
Gas Volumes
Gas Sales
Residential 12,096 10,403 26,369 22,104
Commercial 6,103 5,354 13,487 11,782
Industrial 1,544 1,329 3,588 3,257
------- ------- -------- --------
19,743 17,086 43,444 37,143
======= ======= ======== ========
Gas Marketing 30,274 27,169 85,609 89,685
======= ======= ======== ========
Gas Transported 5,947 7,485 22,311 22,793
======= ======= ======== ========
Degree Days - Actual 3,546 3,247 7,457 6,394
- Percent of Normal 108% 100% 110% 95%
Gas Sales Customers-Average 227,558 221,221 223,887 217,523
QUARTER RESULTS
Gross margin on gas sales increased by $3,580,000 as gas volumes sold for
the three month period ended March 31, 1996 increased 16% from the same period
in 1995. The increase in gas volumes sold was primarily due to colder weather.
Temperatures during the first quarter of 1996 were 8% colder than normal while
temperatures in the first quarter of 1995 were normal. Also contributing to
the increase in gas sales margin was the addition of over 6,300 gas sales
customers and the impact of the December 1995 Battle Creek Gas Company (Battle
Creek) rate increase.
-11-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Natural gas marketing margin for the first quarter of 1996 increased by
$675,000 (67%) over the same period in 1995 while volumes increased by 11%.
The increase in margin was attributable to the impact of colder-than-normal
temperatures in the first quarter of 1996 on demand for natural gas and new
business generated through contracts with independent marketers.
Gas marketing volumes and margins are subject to significant competitive
factors. In addition to fluctuations caused by the price of alternative fuels
and seasonal patterns, competition within the natural gas marketing industry
continues to increase.
Transportation revenues during the quarter decreased $25,000 (1%) compared
to the same period in 1995 while volumes decreased 21%. The decrease in
volumes was primarily due to the decrease of coal-displacement volumes.
Coal-displacement transportation volumes are sensitive to natural gas prices
relative to coal and generally contribute a lower margin.
Operations and maintenance expense increased by $1,779,000 (19%) in the
first quarter compared to a year ago. Several items contributed to this
increase.
In December 1995, the Company sold its fleet and leased back the vehicles.
As a result, the Company recorded depreciation expense for its fleet in 1995
and operations expense for the leased fleet in 1996.
Also in December 1995, Battle Creek received authorization to increase its
rates to recover retiree medical costs. Consequently, these costs are being
included in operations expense in 1996.
Also contributing to higher first quarter operations and maintenance
expenses in 1996 were expenses associated with the independent marketing
contracts, severance expenses incurred in the first quarter of 1996 and
slightly higher employee compensation and benefit expenses. These additional
increases were partially offset by the Company not experiencing any significant
restructuring charges in 1996 compared to the restructuring charges recorded in
the first quarter of 1995.
Depreciation expense for the first three months of 1996 decreased by
$123,000 compared to the first quarter of 1995. The impact of the December
1995 sale and leaseback of the Company's vehicle fleet, as discussed above,
more than offset the increase in depreciation from capital additions.
For the three months ended March 31, 1996, income taxes increased $773,000
over the same period in 1995 due primarily to higher pre-tax earnings.
Other income (loss), net, reflects the after-tax loss from the Company's
investment in NOARK of $426,000 for the first quarter of 1996 compared with a
loss of $395,000 for the first quarter of 1995.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
TWELVE-MONTH RESULTS
Gas sales margin increased $8,923,000 (15%) for the twelve month period
ended March 31, 1996, compared to the same period a year earlier. The increase
was principally due to weather. In the period ending March 31, 1996,
temperatures were 10% colder than normal while temperatures in the prior period
were 5% warmer than normal. In addition, gas sales margin was positively
impacted by the Battle Creek rate increase and the addition of over 6,300 gas
sales customers.
Gas marketing volumes and margins decreased by 4,076 million cubic feet
(5%) and $263,000 (6%), respectively, from the prior period. The twelve-month
comparison of marketing activities highlights the impact of competition in the
natural gas marketing industry which has intensified over the past two years.
Operations and maintenance expense increased by $1,937,000 (21%) in the
current period compared to the same period a year ago. Contributing to the
increase between periods was the change in classification of vehicle expenses,
the expensing of Battle Creek retiree medical costs starting in December 1995
and higher severance, marketing, compensation and benefits expenses.
Depreciation expense increased $297,000 from the $11,615,000 expensed in
the twelve-months ended March 31, 1995. The increase results from higher
depreciation due to capital expenditures offset by the impact of the sale of
the Company's vehicle fleet.
Other income (loss), net, increased from a loss of $423,000 for the twelve
months ended March 31, 1995 to a loss of $243,000 in the same period ending
March 31, 1996. The twelve-month results for 1996 include a non-recurring gain
of $1,251,000, net of tax, on the settlement of the lawsuit involving NOARK.
Excluding this gain, the loss from NOARK, net of tax, was $1,870,000 for the
twelve-month period ended March 31, 1996 compared to $1,439,000 for the same
period ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the three and twelve month periods
ended March 31, 1996, as compared to the same periods last year, decreased
$16,486,000 and $19,864,000, respectively. The changes in operating cash flows
between the periods is primarily due to the timing of cash receipts and cash
payments and its effect on working capital.
The Company anticipates spending approximately $19,000,000 for capital
items during the remainder of 1996. These estimated amounts will primarily
relate to customer additions and system replacement in the gas distribution
operations.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
See Note 4 for a discussion of contributions to the NOARK Pipeline System
pursuant to the Company's guarantees of the pipeline's debt.
Financing activities used $12,147,000 in funds during the first quarter of
1996, primarily to reduce notes payable to banks. Changes in financing cash
flows between the three and twelve month periods ended March 31, 1996 and 1995
primarily highlight the Company's implementation of common stock repurchasing
in January 1995 for resale through the DRIP, increased dividend payments, and
the timing of the Company's debt refinancing in 1994.
FUTURE FINANCING SOURCES
The remainder of the Company's operating cash flow needs, as well as
dividend payments and capital expenditures for the balance of 1996, is expected
to be generated primarily through operating activities and short-term
borrowings.
At March 31, 1996, the Company had $47,400,000 in unused lines of credit.
Cash inflows from a reduction in receivables from heating season sales will
also provide the Company with funds during the second quarter of the year.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
Retained earnings were available for payment of dividends on
preferred and common stock at March 31, 1996, as follows:
Total Retained Earnings - $23,514,000
Amount Available for Payment of Dividends - $23,514,000
Item 3. Not applicable.
Item 4. Not applicable.
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits - (See page 17 for the Exhibit Index.)
--Articles of Incorporation of Southeastern Michigan Gas
Enterprises, Inc. (Enterprises), as restated July 11, 1989.
--Certificate of Amendment to Article III of the Articles of
Incorporation dated May 16, 1990.
--Bylaws of Enterprises--last revised March 1, 1995.
--Trust Indenture dated April 1, 1992, between Enterprises and
NBD Bank, N.A. as Trustee.
--Note Agreement dated as of June 1, 1994, relating to issuance of
$80,000,000 of long-term debt.
--Guaranty Agreement dated October 10, 1991, relating to financing of
NOARK.
--Group A Employment Contract.
--Short-Term Incentive Plan.
--Deferred Compensation and Phantom Stock Purchase Agreement (for
outside directors only).
--Supplemental Retirement Plan for Certain Officers.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the first quarter of 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
(Registrant)
Dated: May 15, 1996
By: Marcia M. Chmielewski, Vice President and
Principal Accounting and Financial
Officer
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EXHIBIT INDEX
Form 10-Q
First Quarter 1996
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- ------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3(a) 1--Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
(Enterprises), as restated
July 11, 1989.(e) x
2--Certificate of Amendment to Article III
of the Articles of Incorporation dated
May 16, 1990.(f) x
3(b) Bylaws of Enterprises--last revised
March 1, 1995.(g) x
4(a) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(b) x
4(b) Note Agreement dated as of June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(d) x
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(a) x
10(b) Group A Employment Contract.(c) x
10(c) Short-Term Incentive Plan.(c) x
10(d) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only).(h) x
10(e) Supplemental Retirement Plan for Certain
Officers. x
11 Statement re computation of per share earnings. NA NA
15 Letter re unaudited interim financial
information. NA NA
18 Letter re change in accounting principle. NA NA
19 Report furnished to security holders. NA NA
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. NA NA
24 Power of Attorney. NA NA
27 Financial Data Schedule. x
99 Additional exhibits. NA NA
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(b) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(c) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(d) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(e) Filed with Enterprises' Form 10-K for 1989, dated March 29, 1990,
File No. 0-8503.
(f) Filed with Enterprises' Form 10-K for 1990, dated March 28, 1991,
File No. 0-8503.
(g) Filed with Enterprises' Form 10-K for 1994, dated March 28, 1995,
File No. 0-8503.
(h) Filed with Enterprises' Form 10-Q for the quarter ended September 30,
1994, File No. 0-8503.
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