UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1996, is
12,391,334.
INDEX TO FORM 10-Q
------------------
For Quarter Ended September 30, 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 . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-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 Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------- ------------------- -------------------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- -------- -------- -------- --------
OPERATING REVENUE
Gas sales $23,656 $23,618 $150,243 $126,425 $207,842 $176,842
Gas marketing 63,852 23,200 187,191 93,902 226,685 140,052
Transportation 2,471 2,540 8,810 8,998 12,260 12,266
Other operations 1,103 1,249 3,356 4,328 4,698 5,729
------- ------- -------- -------- -------- --------
$91,082 $50,607 $349,600 $233,653 $451,485 $334,889
------- ------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $15,114 $15,326 $102,479 $ 83,256 $139,842 $117,339
Cost of gas marketed 62,707 22,390 183,676 91,263 222,500 136,194
Operations 8,987 7,958 27,805 23,946 35,739 31,927
Maintenance 763 1,254 2,627 3,324 3,640 4,516
Depreciation 2,833 3,004 8,493 8,965 11,563 11,799
Income taxes (1,685) (1,338) 3,233 3,092 6,329 4,597
Taxes other than income taxes 2,329 2,006 6,698 6,181 8,483 7,935
------- ------- -------- -------- -------- --------
$91,048 $50,600 $335,011 $220,027 $428,096 $314,307
------- ------- -------- -------- -------- --------
OPERATING INCOME $ 34 $ 7 $ 14,589 $ 13,626 $ 23,389 $ 20,582
OTHER INCOME (LOSS), NET (162) (113) (481) (560) (100) (679)
------- ------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME DEDUCTIONS $ (128) $ (106) $ 14,108 $ 13,066 $ 23,289 $ 19,903
------- ------- -------- -------- -------- --------
INCOME DEDUCTIONS
Interest on long-term debt $ 2,128 $ 2,129 $ 6,385 $ 6,419 $ 8,512 $ 8,576
Other interest 456 292 1,320 1,101 1,945 1,803
Amortization of debt expense 93 112 280 336 392 448
Dividends on preferred stock of subsidiary 44 44 133 133 179 178
------- ------- -------- -------- -------- --------
$ 2,721 $ 2,577 $ 8,118 $ 7,989 $ 11,028 $ 11,005
------- ------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK BEFORE
PREFERRED STOCK DIVIDENDS $(2,849) $(2,683) $ 5,990 $ 5,077 $ 12,261 $ 8,898
Dividends on convertible preferred stock 4 5 12 13 16 18
------- ------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $(2,853) $(2,688) $ 5,978 $ 5,064 $ 12,245 $ 8,880
======= ======= ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ (.23) $ (.22) $ .48 $ .41 $ .99 $ .72
======= ======= ======== ======== ======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .20 $ .19 $ .58 $ .55 $ .77 $ .73
======= ======= ======== ======== ======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 12,400 12,391 12,394 12,429 12,398 12,414
======= ======= ======== ======== ======== ========
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)
September 30, December 31, September 30,
1996 1995 1995
-------- -------- --------
(Thousands of Dollars)
UTILITY PLANT
Plant in service, at cost $332,805 $314,602 $300,200
Less - Accumulated depreciation 96,622 87,308 84,613
-------- -------- --------
$236,183 $227,294 $215,587
OTHER PROPERTY, net 9,391 12,883 14,266
-------- -------- --------
$245,574 $240,177 $229,853
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash investments,
at cost $ 3,660 $ 264 $ 2,785
Receivables, less allowances of
$649 at September 30, 1996, $729
at December 31, 1995 and $930
at September 30, 1995 18,436 32,320 7,947
Accrued revenue 28,819 38,854 13,630
Materials and supplies, at
average cost 3,515 3,280 4,123
Gas in underground storage 34,043 20,172 29,893
Gas charges, recoverable from
customers 14,496 5,854 9,746
Accumulated deferred income taxes 2,111 2,249 2,455
Other 6,035 5,827 7,458
-------- -------- --------
$111,115 $108,820 $ 78,037
-------- -------- --------
DEFERRED CHARGES
Unamortized debt expense $ 5,422 $ 5,702 $ 5,813
Deferred gas charges, recoverable
from customers 368 615 547
Advances to equity investees 4,218 4,218 3,346
Other 21,129 18,991 18,854
-------- -------- --------
$ 31,137 $ 29,526 $ 28,560
-------- -------- --------
$387,826 $378,523 $336,450
======== ======== ========
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)
September 30, December 31, September 30,
1996 1995 1995
-------- -------- --------
(Thousands of Dollars)
COMMON STOCK EQUITY
Common stock-par value $1 per share,
20,000,000 shares authorized;
12,415,690, 11,837,075 and
11,805,551 shares outstanding $ 12,416 $ 11,837 $ 11,806
Capital surplus 79,766 80,546 82,846
Retained earnings 15,915 17,128 10,418
-------- -------- --------
$108,097 $109,511 $105,070
-------- -------- --------
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 162 165 172
-------- -------- --------
$ 169 $ 172 $ 179
-------- -------- --------
$108,266 $109,683 $105,249
-------- -------- --------
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 $106,629 $105,858 $103,588
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 51,700 $ 51,700 $ 37,850
Current portion of long-term debt
and capital leases 1,451 1,467 -
Accounts payable 41,254 38,018 15,554
Customer advance payments 6,287 5,764 5,538
Accrued taxes 2,216 704 1,288
Accrued interest 2,698 1,135 2,666
Amounts payable to customers - 682 -
Other 5,848 4,851 6,218
-------- -------- --------
$111,454 $104,321 $ 69,114
-------- -------- --------
DEFERRED CREDITS
Accumulated deferred income taxes $ 20,914 $ 19,080 $ 19,160
Unamortized investment tax credit 2,849 3,049 3,116
Customer advances for construction 8,725 9,326 8,664
Other 25,889 24,106 24,459
-------- -------- --------
$ 58,377 $ 55,561 $ 55,399
-------- -------- --------
$387,826 $378,523 $336,450
======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-5-
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------- ------------------- -------------------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 81,099 $ 52,843 $363,059 $263,319 $420,447 $343,431
Cash paid for payrolls and to suppliers (93,560) (63,997) (324,383) (210,989) (377,834) (281,946)
Interest paid (864) (781) (6,142) (5,998) (10,427) (9,867)
Income taxes paid (750) (786) (3,275) (5,172) (3,673) (5,551)
Taxes other than income taxes paid (3,582) (3,257) (4,336) (4,644) (7,687) (7,934)
Other cash receipts and payments, net 1,399 736 2,813 1,874 1,113 1,212
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $(16,258) $(15,242) $ 27,736 $ 38,390 $ 21,939 $ 39,345
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $ (7,096) $ (6,103) $(17,119) $(13,975) $(29,403) $(21,456)
Other property additions (57) (90) (250) (501) (462) (1,210)
Property retirement costs, net of proceeds 502 (147) 584 (300) 1,524 (462)
Proceeds from sale and leaseback of capital assets - - - - 3,737 -
Advances to equity investees - (880) - (2,440) (872) (3,346)
-------- -------- -------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $ (6,651) $ (7,220) $(16,785) $(17,216) $(25,476) $(26,474)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 1,321 $ 1,253 $ 3,916 $ 4,320 $ 5,608 $ 5,691
Repurchase of common stock (see note 2) (698) (1,308) (4,120) (4,829) (5,289) (4,829)
Net change in notes payable to banks 22,700 25,300 - (12,150) 13,850 400
Repayment of long-term debt - - (15) (1,322) (15) (4,028)
Payment of dividends (2,524) (2,406) (7,336) (7,019) (9,742) (9,308)
-------- -------- -------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $ 20,799 $ 22,839 $ (7,555) $(21,000) $ 4,412 $(12,074)
-------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS $ (2,110) $ 377 $ 3,396 $ 174 $ 875 $ 797
-------- -------- -------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Period $ 5,770 $ 2,408 $ 264 $ 2,611 $ 2,785 $ 1,988
-------- -------- -------- -------- -------- --------
End of Period $ 3,660 $ 2,785 $ 3,660 $ 2,785 $ 3,660 $ 2,785
======== ======== ======== ======== ======== ========
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES
Net income available for common stock $ (2,853) $ (2,688) $ 5,978 $ 5,064 $ 12,245 $ 8,880
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 2,833 3,004 8,493 8,965 11,563 11,799
Deferred taxes and investment tax credits 1,662 255 1,772 245 1,831 (743)
Equity (income) loss, net of distributions 1,414 593 3,241 1,397 2,834 1,701
Receivables 2,540 6,053 13,884 14,860 (10,489) 4,088
Accrued revenue (11,263) (150) 10,035 19,669 (15,189) 3,204
Materials and supplies and gas in underground storage (17,560) (12,492) (14,106) 3,947 (5,233) 11,686
Gas charges, recoverable from customers (5,096) (6,089) (8,642) (1,543) (4,750) 1,804
Other current assets (3,494) (1,712) (208) 4,558 1,423 2,631
Accounts payable 12,055 (4,056) 3,236 (19,182) 27,391 (9,146)
Customer advances and amounts payable to customers 4,401 1,789 (760) (3,208) 810 (1,988)
Accrued taxes (3,013) (870) 1,512 562 928 (210)
Other, net 2,116 1,121 3,301 3,056 (1,425) 5,639
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $(16,258) $(15,242) $ 27,736 $ 38,390 $ 21,939 $ 39,345
======== ======== ======== ======== ======== ========
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) CAPITALIZATION
Common Stock Equity
- -------------------
On October 10, 1996, the Company's Board of Directors declared a regular
quarterly cash dividend on common stock of $.20 per share payable on
November 15 to shareholders of record on November 5.
-7-
In August 1996, the Company paid a quarterly cash dividend of $.20 per
share to its common shareholders. Of the total cash dividend of $2,476,000,
$1,004,000 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 $317,000, resulted in 78,801 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 third quarter of 1996, the Company
purchased 39,848 shares for $698,000.
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.
(3) 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 $83,288,000 of debt
used to finance the pipeline. Of the total debt, $54,338,000 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 September 30, 1996, NOARK had $28,950,000
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,
second or third quarters of 1996 primarily due to the $6 million cash
settlement NOARK received from Vesta in December 1995, but contributed $844,000
in October 1996.
During the past several months, the NOARK partners have actively
investigated several options that might be available to improve the operating
performance of NOARK. During the same period, management of the Company has
intensified its efforts to evaluate the recoverability of its investment in
-8-
NOARK. Such efforts have included a detailed analysis of whether the operating
results of NOARK can be improved within an acceptable time frame. Such efforts
also have included preliminary discussions regarding the possible sale of
SEMCO's interest in the NOARK pipeline system. At this time the outcome of
these efforts remains unclear, and management believes that it must continue to
evaluate all viable options related to its interest in NOARK. As part of its
evaluation, management will continue to consider whether it is appropriate to
record a valuation reserve due to the recurring losses generated by NOARK since
it was placed in service or to reflect a possible sale of SEMCO's interest in
NOARK at less than book value. Should a reserve be recorded, it could have a
material impact on the Company's current earnings. Management believes a
valuation reserve would not impact the Company's ability to pay its cash and
stock dividends. Pending resolution of the matters described above and a final
decision by the Company's board of directors, no write-down provision has yet
been made in the accompanying financial statements. Management intends to
complete its review of the options available to the Company in the near future
such that a recommendation can be submitted to the board of directors.
-9-
PART I - FINANCIAL INFORMATION - (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net loss for the quarter ended September 30, 1996 was $2,853,000, or
$.23 per share, compared to a net loss of $2,688,000, or $.22 per share, for
the quarter ended September 30, 1995.
Net income was $5,978,000, or $.48 per share, and $5,064,000, or $.41 per
share, for the nine months ended September 30, 1996 and September 30, 1995,
respectively.
For the twelve months ended September 30, 1996 and 1995, net income was
$12,245,000, or $.99 per share, and $8,880,000, or $.72 per share,
respectively.
A net loss for the third quarter is normal because the Company's primary
business of natural gas distribution is dependent upon the winter heating
months for the majority of its annual operating revenues.
See Note 3 in the Notes to the Consolidated Financial Statements for a
discussion of commitments and contingencies.
A comparison of quarterly, year-to-date and twelve-month-to-date revenues,
margins and system throughput follows on the next page.
-10-
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------- ------------------- -------------------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- -------- -------- -------- --------
(in thousands of dollars)
Operating Revenue
Gas Sales
Residential $14,545 $14,584 $ 94,349 $ 78,972 $130,619 $109,841
Commercial 6,707 6,694 44,741 37,583 61,921 53,196
Industrial 2,404 2,340 11,153 9,870 15,302 13,805
------- ------- -------- -------- -------- --------
$23,656 $23,618 $150,243 $126,425 $207,842 $176,842
Cost of Gas Sold 15,114 15,326 102,479 83,256 139,842 117,339
------- ------- -------- -------- -------- --------
Gross Margin $ 8,542 $ 8,292 $ 47,764 $ 43,169 $ 68,000 $ 59,503
======= ======= ======== ======== ======== ========
Gas Marketing $63,852 $23,200 $187,191 $ 93,902 $226,685 $140,052
Cost of Gas Marketed 62,707 22,390 183,676 91,263 222,500 136,194
------- ------- -------- -------- -------- --------
Gross Margin $ 1,145 $ 810 $ 3,515 $ 2,639 $ 4,185 $ 3,858
======= ======= ======== ======== ======== ========
Transportation $ 2,471 $ 2,540 $ 8,810 $ 8,998 $ 12,260 $ 12,266
======= ======= ======== ======== ======== ========
Other $ 1,103 $ 1,249 $ 3,356 $ 4,328 $ 4,698 $ 5,729
======= ======= ======== ======== ======== ========
(in millions of cubic feet)
Gas Volumes
Gas Sales
Residential 1,744 1,684 18,093 16,015 26,754 22,586
Commercial 978 922 9,320 8,331 13,727 11,985
Industrial 394 378 2,484 2,279 3,578 3,270
------- ------- -------- -------- -------- --------
3,116 2,984 29,897 26,625 44,059 37,841
======= ======= ======== ======== ======== ========
Gas Marketing 31,706 16,500 83,201 61,553 104,152 87,237
======= ======= ======== ======== ======== ========
Gas Transported 4,120 4,952 14,741 17,896 20,694 24,191
======= ======= ======== ======== ======== ========
Degree Days - Actual 166 230 4,695 4,529 7,324 6,604
- Percent of Normal 70% 106% 106% 103% 107% 97%
Gas Sales Customers - Average 227,680 221,491 227,583 221,531 226,898 220,740
QUARTER RESULTS
Gross margin on gas sales increased by $250,000 (3%) as gas volumes sold
for the three month period ended September 30, 1996 increased 4% from the same
period in 1995. Volumes increased primarily due to the addition of over 6,100
gas sales customers.
Gas marketing revenue increased by $40,652,000 (175%) as volumes increased
by 15,206,000 thousand cubic feet (Mcf) (92%). Gas marketing volumes increased
significantly due to new business generated by the Northeast and Midwest
marketing units of SEMCO Energy Services, Inc. (SEMCO). SEMCO is a
wholly-owned subsidiary of the Company.
-11-
A significant share of the increased marketing volumes in the third
quarter of 1996 are wholesale sales to gas utilities and other gas marketers as
opposed to retail sales to end-users. Wholesale marketing margins generally
contribute less than half the margin of retail sales. These large increases in
revenues and volumes increased gas marketing margin by $335,000 (41%).
The Northeast marketing unit of SEMCO was established in New York in
October 1995 and covers a number of northeastern states. The Midwest unit was
expanded from offices in Battle Creek, Michigan (west Michigan markets) and
Port Huron, Michigan (midwest and Ontario markets) by adding a Chicago office
(Chicago and Wisconsin markets) in November 1995.
SEMCO recently announced the opening of two additional marketing offices
in Charleston, West Virginia and Louisville, Kentucky that serve markets in
Maryland, Virginia and Washington, D.C. These mid-Atlantic offices further
SEMCO's development of sales channels that deliver a full complement of
wholesale and retail-oriented products and services.
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.
Other income (loss), net, reflects the after-tax loss from the Company's
investment in the NOARK Pipeline System (NOARK) of $442,000 for the three
months ended September 30, 1996. This compares to a loss from NOARK of
$421,000 for the same period in 1995.
YEAR-TO-DATE RESULTS
Colder weather in 1996, and the addition of over 6,000 gas sales
customers, resulted in increased gas sales margin of $4,595,000 (11%) on an
increase of 12% in gas volumes sold. Temperatures during the first nine
months of 1996 were 6% colder than normal, while temperatures in the first nine
months of 1995 were 3% colder than normal. Also contributing to the increase
was the impact of the December 1995 Battle Creek Gas Company (Battle Creek)
rate increase.
Gas marketing revenue increased $93,289,000 (99%) for the first nine
months of 1996 over the same period in 1995, as volumes increased by 21,648,000
Mcf (35%). Gas marketing margin also increased by $876,000 (33%) during these
periods--only slightly less than the percentage increase in volumes. The
increased volumes were due to new marketing business generated by SEMCO's
marketing offices. While a significant portion of this increased volume is
lower-margin wholesale volumes, average per-unit margins did not decline
significantly between the periods because of high-margin sales generated in the
first quarter of 1996.
-12-
Partially offsetting the improved sales and marketing margins between
these periods was an increase in operations and maintenance expense of
$3,162,000 (12%). These higher expenses were primarily due to costs associated
with SEMCO's new marketing units, slightly higher employee compensation and
benefits expenses, severance costs incurred in 1996 and the effect of the sale
and leaseback of the Company's vehicle fleet in December 1995. The Company
recorded depreciation expense for its fleet in 1995, and operations expense for
the leased fleet in 1996. In addition, Battle Creek was authorized to recover
its retiree medical costs effective with the December 1995 rate increase.
Consequently, these costs are being included in operations expense in 1996.
The $472,000 decrease in depreciation expense from the nine months ended
September 30, 1995 to the same period in 1996 highlights the impact of the
change in classification of vehicle expenses partially offset by increased
depreciation from capital additions.
Other income (loss), net, includes after-tax losses from NOARK of
$1,248,000 and $1,244,000 for the nine months ended September 30, 1996 and
1995, respectively.
TWELVE-MONTH RESULTS
Gas sales margin increased $8,497,000 (14%) for the twelve month period
ended September 30, 1996, compared to the same period a year earlier. Eleven
percent colder weather and the addition of over 6,100 gas sales customers
contributed to the increase.
Gas marketing revenues and volumes increased $86,633,000 (62%) and
16,915,000 Mcf (19%), respectively, from the prior period, generating a
$327,000 (8%) increase in marketing margin. The twelve-month comparison of
marketing activities highlights the increased volumes from SEMCO's
establishment of new marketing offices in late-1995 and the impact of increased
lower-margin wholesale volumes on per-unit margins.
Operations and maintenance expense increased by $2,936,000 (8%) 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 and higher severance and
marketing expenses.
Other income (loss), net, improved from a loss of $679,000 for the twelve
months ended September 30, 1995 to a loss of $100,000 in the same period ending
September 30, 1996. The twelve-month results for 1996 include a non-recurring
gain of $1,251,000, net of tax, on the settlement of a lawsuit involving NOARK.
Excluding this gain, the loss from NOARK, net of tax, was $1,843,000 for the
twelve-month period ended September 30, 1996 compared to $1,670,000 for the
same period ended September 30, 1995.
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Other Third Quarter Notes
- -------------------------
Transportation volumes decreased in each of the three, nine, and
twelve-month periods ending September 30, 1996, compared to respective periods
a year earlier. The decrease was primarily due to decreased volumes from gas
transportation customers who have alternative fuel sources--primarily coal.
During 1996, "coal-displacement" transportation volumes were significantly
lower than the prior year. Transportation revenues declined only slightly,
despite the larger volume declines, because coal-displacement volumes generally
contribute a lower margin per unit.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the three, nine and twelve month
periods ended September 30, 1996, as compared to the same periods last year,
decreased $1,016,000, $10,654,000 and $17,406,000, 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 $5,314,000 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.
See Note 3 of the Notes to the Consolidated Financial Statements for a
discussion of contributions to the NOARK Pipeline System pursuant to the
Company's guarantees of the pipeline's debt.
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 September 30, 1996, the Company had $38,200,000 in unused lines
of credit.
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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 September 30, 1996, as follows:
Total Retained Earnings - $15,915,000
Amount Available for Payment of Dividends - $15,915,000
Item 3. Not applicable.
Item 4. Not applicable.
Item 5. Not applicable.
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Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits - (See Exhibit Index.)
3(i)(1) --Articles of Incorporation of Southeastern Michigan Gas
Enterprises, Inc. ("Enterprises"), as restated
July 11, 1989.
3(i)(2) --Certificate of Amendment to Article III of the Articles
of Incorporation dated May 16, 1990.
3(ii) --Bylaws of Enterprises--last revised March 1, 1995.
4(i) --Trust Indenture dated April 1, 1992, between Enterprises
and NBD Bank, N.A. as Trustee.
4(ii) --Note Agreement dated as of June 1, 1994, relating to
issuance of $80,000,000 of long-term debt.
10(i) --Guaranty Agreement dated October 10, 1991, relating to
financing of NOARK.
10(ii) --Group A Employment Contract.
10(iii) --Short-Term Incentive Plan.
10(iv) --Deferred Compensation and Phantom Stock Purchase
Agreement (for outside directors only).
10(v) --Supplemental Retirement Plan for Certain Officers.
10(vi) --Separation Agreement and Release dated January 18, 1996
between Ward Kirby and Enterprises.
10(vii) --Consulting Agreement dated January 17, 1996 between Ward
Kirby and Enterprises.
27 --Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the third 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: November 14, 1996
By: Robert F. Caldwell
Executive Vice President and Principal
Accounting and Financial Officer
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EXHIBIT INDEX
Form 10-Q
Third Quarter 1996
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- ------- ----------- -------- ---------
3(i)(1) Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
("Enterprises"), as restated
July 11, 1989.(e) x
3(i)(2) Certificate of Amendment to Article III
of the Articles of Incorporation dated
May 16, 1990.(f) x
3(ii) Bylaws of Enterprises--last revised
March 1, 1995.(g) x
4(i) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(b) x
4(ii) Note Agreement dated as of June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(d) x
10(i) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(a) x
10(ii) Group A Employment Contract.(c) x
10(iii) Short-Term Incentive Plan.(c) x
10(iv) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only).(h) x
10(v) Supplemental Retirement Plan for Certain
Officers.(i) x
10(vi) Separation Agreement and Release dated
January 18, 1996 between Ward Kirby and
Enterprises.(j) x
10(vii) Consulting Agreement dated January 17, 1996
between Ward Kirby and Enterprises.(j) x
27 Financial Data Schedule. x
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.
(i) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1996, File No. O-8503.
(j) Filed with Enterprises' Form 10-Q/A for the quarter ended March 31,
1996, File No. O-8503.
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