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, 1997
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
SEMCO Energy, Inc.
(formerly 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, 1997, is
12,368,135.
INDEX TO FORM 10-Q
------------------
For Quarter Ended March 31, 1997
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars Except Per Share Amounts)
Three Twelve
Months Ended Months Ended
March 31, March 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
OPERATING REVENUE
Gas sales $ 89,795 $ 87,963 $221,203 $202,703
Gas marketing 157,756 83,463 385,677 174,137
Transportation 3,952 3,518 12,792 12,423
Other operations 1,232 1,184 4,565 5,098
-------- -------- -------- --------
$252,735 $176,128 $624,237 $394,361
-------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $ 64,276 $ 61,525 $153,886 $135,718
Cost of gas marketed 152,492 81,774 376,113 170,153
Operations and maintenance 12,681 11,068 42,282 37,996
Depreciation 3,112 2,863 11,566 11,912
Income taxes 5,082 4,795 6,658 6,961
Taxes other than income taxes 2,351 2,244 8,755 7,995
-------- -------- -------- --------
$239,994 $164,269 $599,260 $370,735
-------- -------- -------- --------
OPERATING INCOME $ 12,741 $ 11,859 $ 24,977 $ 23,626
Write-down of NOARK investment,
net of income taxes of $11,308 -- -- (21,000) --
OTHER INCOME (LOSS), NET 79 (274) (460) (243)
-------- -------- -------- --------
INCOME BEFORE INCOME DEDUCTIONS $ 12,820 $ 11,585 $ 3,517 $ 23,383
-------- -------- -------- --------
INCOME DEDUCTIONS
Interest on long-term debt $ 2,129 $ 2,128 $ 8,515 $ 8,517
Other interest 961 572 2,555 1,625
Amortization of debt expense 93 94 372 430
Dividends on preferred stock 48 49 193 195
-------- -------- -------- --------
$ 3,231 $ 2,843 $ 11,635 $ 10,767
-------- -------- -------- --------
NET INCOME (LOSS) $ 9,589 $ 8,742 $ (8,118) $ 12,616
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE $ .74 $ .67 $ (.62) $ .97
======== ======== ======== ========
CASH DIVIDENDS PER SHARE $ .19 $ .18 $ .75 $ .72
======== ======== ======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 13,021 13,014 13,019 13,028
======== ======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-3-
SEMCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
A S S E T S
(Unaudited) (Unaudited)
March 31, December 31, March 31,
1997 1996 1996
-------- -------- --------
(Thousands of Dollars)
UTILITY PLANT
Plant in service, at cost $345,156 $342,778 $319,845
Less - Accumulated depreciation 98,099 96,391 90,558
-------- -------- --------
$247,057 $246,387 $229,287
OTHER PROPERTY, net 9,582 9,585 11,091
-------- -------- --------
$256,639 $255,972 $240,378
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash investments,
at cost $ 8,006 $ 10,232 $ 4,100
Receivables, less allowances of
$1,291 at March 31, 1997, $1,247
at December 31, 1996 and $883
at March 31, 1996 47,929 43,585 52,779
Accrued revenue 47,671 76,549 47,352
Materials and supplies, at average cost 2,799 3,025 3,548
Gas in underground storage 5,314 33,596 4,735
Gas charges, recoverable from customers 10,586 13,791 5,131
Accumulated deferred income taxes 363 364 2,346
Other 5,837 10,040 3,375
-------- -------- --------
$128,505 $191,182 $123,366
-------- -------- --------
DEFERRED CHARGES
Unamortized debt expense $ 5,235 $ 5,328 $ 5,620
Deferred gas charges, recoverable
from customers 203 290 552
Advances to equity investees 5,910 5,062 4,218
Other 21,277 20,445 19,567
-------- -------- --------
$ 32,625 $ 31,125 $ 29,957
-------- -------- --------
$417,769 $478,279 $393,701
======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-4-
SEMCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
(Unaudited) (Unaudited)
March 31, December 31, March 31,
1997 1996 1996
-------- -------- --------
(Thousands of Dollars)
COMMON STOCK EQUITY
Common stock-par value $1 per share,
20,000,000 shares authorized;
12,390,303, 12,400,331 and
11,806,066 shares outstanding $ 12,390 $ 12,400 $ 11,806
Capital surplus 79,299 79,489 80,035
Retained earnings (deficit) 5,645 (1,507) 23,514
-------- -------- --------
$ 97,334 $ 90,382 $115,355
-------- -------- --------
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 162 162 165
-------- -------- --------
$ 169 $ 169 $ 172
-------- -------- --------
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 $106,041 $106,468 $105,819
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 61,400 $ 91,100 $ 42,500
Current portion of long-term debt
and capital leases 1,561 1,644 1,569
Accounts payable 49,746 91,360 52,617
Customer advance payments 1,893 5,612 1,596
Accrued taxes 6,014 243 6,742
Accrued interest 2,706 1,272 2,649
Other 6,939 6,998 5,319
-------- -------- --------
$130,259 $198,229 $112,992
-------- -------- --------
DEFERRED CREDITS
Reserve for equity investment $ 32,942 $ 32,942 $ --
Accumulated deferred income taxes 10,365 10,113 19,274
Unamortized investment tax credit 2,718 2,782 2,982
Customer advances for construction 8,483 8,621 9,251
Other 26,358 25,473 24,756
-------- -------- --------
$ 80,866 $ 79,931 $ 56,263
-------- -------- --------
$417,769 $478,279 $393,701
======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-5-
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Three Months Ended Twelve Months Ended
March 31, March 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $276,058 $142,595 $621,785 $339,807
Cash paid for payrolls and to suppliers (238,264) (121,573) (574,465) (302,748)
Interest paid (1,655) (1,266) (10,932) (10,259)
Income taxes paid -- -- (3,275) (4,169)
Taxes other than income taxes paid (980) (285) (8,892) (7,624)
Other cash receipts and payments, net 259 1,405 1,753 1,100
-------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 35,418 $ 20,876 $ 25,974 $ 16,107
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $ (4,295) $ (4,931) $(29,533) $(28,290)
Other property additions (102) (107) (335) (744)
Property retirement costs, net of proceeds (14) 145 706 843
Proceeds from sale and leaseback of capital assets -- -- -- 3,737
Advances to equity investees (848) -- (1,692) (2,552)
-------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $ (5,259) $ (4,893) $(30,854) $(27,006)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 1,273 $ 1,360 $ 5,045 $ 5,512
Repurchase of common stock (see note 3) (1,473) (1,902) (5,200) (6,931)
Net change in notes payable to banks (29,700) (9,200) 18,900 23,300
Repayment of long-term debt -- -- (15) (1,290)
Payment of dividends (2,485) (2,405) (9,944) (9,523)
-------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $(32,385) $(12,147) $ 8,786 $ 11,068
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS $ (2,226) $ 3,836 $ 3,906 $ 169
-------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Period $ 10,232 $ 264 $ 4,100 $ 3,931
-------- -------- -------- --------
End of Period $ 8,006 $ 4,100 $ 8,006 $ 4,100
======== ======== ======== ========
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITIES
Net income (loss) $ 9,589 $ 8,742 $ (8,118) $ 12,616
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation 3,112 2,863 11,566 11,912
Write-down of NOARK investment, net -- -- 21,000 --
Deferred taxes and investment tax credits 189 30 4,117 476
Equity (income) loss, net of distributions 18 1,746 2,012 2,320
Receivables (4,344) (20,459) 4,850 (25,047)
Accrued revenue 28,878 (8,498) (319) (23,939)
Materials and supplies and gas in underground storage 28,508 15,169 170 2,843
Gas charges, recoverable from customers 3,205 723 (5,455) (1,550)
Other current assets 4,203 2,452 (3,088) 4,517
Accounts payable (41,614) 14,599 (2,871) 34,720
Customer advances and amounts payable to customers (3,857) (4,925) (471) (3,576)
Accrued taxes 5,771 6,038 (728) 2,449
Other, net 1,760 2,396 3,309 (1,634)
-------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 35,418 $ 20,876 $ 25,974 $ 16,107
======== ======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-6-
SEMCO ENERGY, 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 SEMCO Energy, Inc.'s (the
Company's), formerly Southeastern Michigan Gas Enterprises, Inc.'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 1996 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.
Earnings Per Share. In February 1997 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" ("SFAS 128"). In general, this statement requires replacement of
Primary EPS, which the company currently uses to calculate EPS, with Basic
EPS. Basic EPS is computed by dividing reported earnings available to
common share holders by weighted average shares outstanding. No dilution
for any potentially dilutive securities is included in the Basic EPS
calculation. Due to the fact that the Compan-y- has an immaterial amount
of dilutive securities, calculation of Basic EPS under the new standard
will not differ from the Company's current calculation.
Fully diluted EPS, now referred to as diluted EPS, is still required.
SFAS 128 is effective for financial statements for periods ending after
December 15, 1997. As of March 31, 1996, the Company did not have a
material amount of dilutive securities which would require the disclosure of
fully diluted EPS. Therefore, this statement does not have any impact on the
Company's current earnings per share calculation.
Stock-Based Compensation. In October 1995 the FASB issued SFAS 123,
"Accounting for Stock-Based Compensation." In general, SFAS 123 recommends
that all stock-based compensation given to employees in exchange for their
services be expensed based on the fair value of the stock instrument.
Companies may choose to continue accounting for these transactions under
previously existing accounting standards, however those companies must
disclose, in a footnote, net income and earnings per share as if SFAS 123
accounting had been applied.
-7-
As of March 31, 1997, the Company did not have any material stock-based
compensation plans in effect. At the the Company's 1997 annual meeting in
April, however, shareholders approved a Long-Term Incentive Plan providing for
stock-based awards to key management personnel and directors. Awards would
take the form of one or more of the following: stock options, restricted
stock, stock appreciation rights, performance units and other stock incentives
deemed appropriate. Up to 500,000 shares of the Company's common stock would
be available for this plan.
(2) CAPITALIZATION
Common Stock Equity
- -------------------
On April 15, 1997, 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 5. 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 1997 and 1996.
In February 1997, the Company paid a quarterly cash dividend of $.20 per
share to its common shareholders. Of the total cash dividend of $2,437,000,
$863,000 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
$410,000, resulted in 64,138 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 1997, the Company
purchased 74,166 shares for $1,473,000.
(3) COMMITMENTS AND CONTINGENCIES
SEMCO Arkansas Pipeline Company, a wholly-owned subsidiary of SEMCO Energy
Ventures, Inc. (Energy Ventures), has a 32% interest in a partnership which
operates the NOARK Pipeline System. NOARK is a 302-mile intrastate natural gas
pipeline, originating in northwest Arkansas and extending northeast across the
state.
The Company, SEMCO Arkansas Pipeline Company and Energy Ventures have
guaranteed 40% of the principal and interest payments on approximately
$80,912,500 of debt used to finance the pipeline. Of the total debt,
$52,762,500 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, 1997,
NOARK had $28,150,000 outstanding under the agreement with interest payments at
a variable interest rate.
-8-
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.
In December 1995, NOARK received $6,000,000 in settlement of litigation
between Vesta Energy Company and the NOARK partners. Vesta paid the settlement
in consideration of termination of a firm transportation agreement with NOARK,
including all related contracts, and release from all obligations related to
the NOARK Pipeline System.
NOARK used the Vesta settlement to temporarily reduce outstanding
borrowings on its revolving line of credit. Therefore, the Company was not
required to make another contribution to NOARK until October 1996, when the
Company contributed $844,000. In January and April 1997, the Company
contributed an additional $848,000 and $816,000, respectively, and estimates
its required contributions to NOARK for the balance of 1997 to approximate
$1,600,000.
In December 1996, the Company recorded a one-time non-cash after-tax
charge against earnings of $21,000,000 on its investment and participation as a
general partner in NOARK. On a pre-tax basis, the charge against earnings
represents a significant portion of the Company's current investment, including
loan guarantees, in NOARK. The Company recorded this write-down due to its
inability to recover the carrying amount of its investment in NOARK, including
the loan guarantees. The Company recognized a loss in value of its NOARK
investment due to recurring losses generated by NOARK and NOARK's continued
inability to meet principal and interest payments on the partnership debt.
The Company's short-term credit arrangements, note agreements and
long-term debt indentures contain restrictive covenants requiring certain
levels of earnings and the maintenance of certain financial ratios. Because of
the NOARK write-down, the Company would have been in violation of certain of
these covenants, however the Company has received waivers or amendments for all
affected covenants.
The Company will continue to explore opportunities to improve the project,
but the write-down is expected to eliminate the need for significant NOARK
operating losses being recorded in the Company's future income statements and
will not affect the Company's cash or stock dividend.
The Company will continue to try to sell its interest in NOARK.
-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 for the quarter ended March 31, 1997 was $9,589,000 ($.74 per
share) compared to $8,742,000 ($.67 per share) for the quarter ended March 31,
1996.
For the twelve months ended March 31, 1997, the Company recorded a net
loss of $8,118,000 ($.62 per share), which includes the December 1996
$21,000,000 after-tax write-down of the Company's investment in the NOARK
Pipeline System (NOARK). Excluding the NOARK write-down, the Company's net
income was $12,882,000 ($.99 per share). This compares to net income of
$12,616,000 ($.97 per share) for the twelve months ended March 31, 1996.
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, 1997 and 1996 are not necessarily
indicative of results for a full year.
See Note 3 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-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Three Months Ended Twelve Months Ended
March 31, March 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- ------- -------- --------
(in thousands of dollars)
Operating Revenue
Gas Sales
Residential $ 57,063 $55,319 $140,388 $127,256
Commercial 27,614 26,576 66,547 60,305
Industrial 5,118 6,068 14,268 15,142
-------- ------- -------- --------
$ 89,795 $87,963 $221,203 $202,703
Cost of Gas Sold 64,276 61,525 153,886 135,718
-------- ------- -------- --------
Gross Margin $ 25,519 $26,438 $ 67,317 $ 66,985
======== ======= ======== ========
Gas Marketing $157,756 $83,463 $385,677 $174,137
Cost of Gas Marketed 152,492 81,774 376,113 170,153
-------- ------- -------- --------
$ 5,264 $ 1,689 $ 9,564 $ 3,984
======== ======= ======== ========
Transportation Revenue $ 3,952 $ 3,518 $ 12,792 $ 12,423
======== ======= ======== ========
Other $ 1,232 $ 1,184 $ 4,565 $ 5,098
======== ======= ======== ========
(in millions of cubic feet)
Gas Volumes
Gas Sales
Residential 11,489 12,096 26,096 26,369
Commercial 5,886 6,103 13,453 13,487
Industrial 1,149 1,544 2,990 3,588
-------- ------- -------- --------
18,524 19,743 42,539 43,444
======== ======= ======== ========
Gas Marketing 54,245 30,274 153,399 85,609
======== ======= ======== ========
Gas Transported 6,270 5,947 20,855 22,311
======== ======= ======== ========
Degree Days - Actual 3,168 3,546 6,721 7,457
- Percent of Normal 96% 108% 99% 110%
Gas Sales Customers-Average 235,515 227,558 230,790 223,887
QUARTER RESULTS
Gross margin on gas sales from the Company's gas utility operations
decreased by $919,000 (3.5%) as gas volumes sold for the three month period
ended March 31, 1997 decreased 6% from the same period in 1996. Volumes
decreased, despite the addition of over 7,900 customers (3.5%), primarily due
to 11% warmer temperatures.
-11-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
SEMCO Energy Services, Inc. (Energy Service), a wholly owned subsidiary of
the Company, posted increased gas marketing revenue of $74,293,000 (89%) on
increased volumes totaling 23,971,000 thousand cubic feet (Mcf) (79%). This
resulted in an increase in gas marketing margin of $1,721,000, net of gas
marketer incentive compensation. The improved performance of the Company's
marketing operations are attributable to the new Northeast and Mid-Atlantic
marketing offices opened in late 1995 and late 1996, respectively, and the
Midwest office, which was expanded to include the Chicago and Wisconsin markets
in late 1995.
Operations and maintenance expense increased by $1,613,000 (15%) in the
first quarter compared to a year ago due primarily to a $1,854,000 increase in
gas marketer incentive compensation.
Depreciation and taxes other than income taxes increased by $249,000 (9%)
and $107,000 (5%), respectively, due primarily to utility plant additions. The
increase in income taxes is due to higher pre-tax earnings.
Other income (loss), net, improved to income of $79,000 in the first
quarter of 1997 from a loss of $274,000 in the first quarter of 1996. This
improvement highlights the impact of the Company's December 1996 write-down of
its investment in the NOARK Pipeline System. Due to the write-down, the
Company did not record any loss for NOARK in the first quarter of 1997. In the
first quarter of 1996, the Company recorded a loss of $426,000 on its
investment in NOARK.
Other interest increased $389,000 (68%), over the prior year, due to
higher borrowings on the Company's lines of credit. The increased borrowings
were primarily for utility plant additions and increased working capital to
support the higher marketing activity.
The Company utilizes its short-term lines, along with operating cash
flows, to finance its growth in utility plant. When appropriate, the Company
will refinance its short-term lines with long-term debt, common stock or other
long-term financing instruments. In 1997, the Company expects to refinance a
portion of its $61,400,000 outstanding short-term credit facilities.
TWELVE-MONTH RESULTS
Gas sales margin generated by the Company's utilities increased $332,000
(.5%) for the twelve month period ended March 31, 1997, compared to the same
period a year earlier. Ten percent warmer weather offset most of the impact of
adding over 6,900 gas sales customers.
Transportation volumes decreased by 1,456,000 MMcf (7%) while
transportation revenue declined by $369,000 (3%). The decrease in volumes was
primarily due to less transportation for customers who have alternative fuel
sources--primarily coal. During the twelve months ended March 31, 1997,
"coal-displacement" transportation volumes were significantly lower than the
prior twelve-month period. Transportation revenues declined at only 3%,
despite the larger volume decline, because coal-displacement volumes generally
contribute a lower revenue per unit.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Gas marketing revenues and volumes increased $211,540,000 (121%) and
67,790,000 Mcf (79%), respectively, from the prior period, generating a
$2,307,000 increase in marketing margin, net of gas marketer incentive
compensation. The twelve-month comparison of marketing activities highlights
the increased volumes from Energy Services' establishment of new marketing
offices in late-1995 and 1996.
Operations and maintenance increased $4,286,000 (11%) in the current
period compared to the same period a year ago. Higher gas marketer incentive
compensation ($3,273,000) was the primary reason for the increase. In
addition, a December 1995 change in the classification of the Company's vehicle
fleet from depreciation to operations expense and higher benefit costs,
including pension and retiree medical, also contributed to the increase.
The December 1995 change in the classification of the Company's vehicle
fleet, offset partially by the impact of utility plant additions, was also the
primary reason why depreciation decreased by $346,000 (2.9%) between the
twelve-month periods.
Other income (loss), net, decreased from a loss of $243,000 for the twelve
months ended March 31, 1996 to a loss of $460,000 in the same period ending
March 31, 1997. 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 $1,276,000 for the
twelve-month period ended March 31, 1997 compared to $1,870,000 for the same
period ended March 31, 1996.
Other interest increased by $930,000 (6%) due to higher average borrowings
on short-term lines. The higher borrowings were used primarily to support
utility plant additions.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the three and twelve month periods
ended March 31, 1997, as compared to the same periods last year, increased
$14,542,000 and $9,867,000, 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 $25,000,000 for capital
items during the remainder of 1997. These estimated amounts will primarily
relate to customer additions and system replacement in the gas distribution
operations.
See Note 3 for a discussion of contributions to the NOARK Pipeline System
pursuant to the Company's guarantees of the pipeline's debt.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Financing activities used $32,385,000 in funds during the first quarter of
1997, primarily to reduce notes payable to banks.
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, although the Company does expect to issue long-term financing
during 1997 to pay-down some of its short-term lines.
At March 31, 1997, the Company had $38,500,000 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.
-14-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
The Company has short-term credit arrangements, note agreements and
long-term debt indentures which contain restrictive financial covenants
including, among others, limits on the payment of dividends beyond certain
levels. Because of the NOARK write-down in December 1996, the Company would
not have been in compliance with certain of these covenants. However, the
Company has received waivers or amendments with respect to the affected credit
arrangements and expects no deviation from its historical dividend payment
record in 1997.
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 18 for the Exhibit Index.)
--Articles of Incorporation of SEMCO Energy, Inc. (formerly
Southeastern Michigan Gas Enterprises, Inc.), as restated
July 11, 1989.
--Certificate of Amendment to Article III of the Articles of
Incorporation dated May 16, 1990.
--Certificate of Amendment to Articles I, III and VI of the Articles
of Incorporation dated April 16, 1997.
--Bylaws--last revised March 1, 1995.
--Trust Indenture dated April 1, 1992, with 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.
--Rights Agreement dated as of April 15, 1997 with Continental Stock
Transfer & Trust Company, as Rights Agent.
--Guaranty Agreement dated October 10, 1991, relating to financing of
NOARK.
--Short-Term Incentive Plan.
--Deferred Compensation and Phantom Stock Purchase Agreement (for
outside directors only).
--Supplemental Retirement Plan for Certain Officers.
--1997 Long-Term Incentive Plan.
--Stock Option Certificate and Agreement dated October 10, 1996 with
William L. Johnson.
--Stock Option Certificate and Agreement dated February 26, 1997 with
William L. Johnson.
-15-
PART II - OTHER INFORMATION - (Continued)
Item 6. Exhibits and Reports on Form 8-K - (Continued).
(a) List of Exhibits - (Continued)
--Employment Agreement dated October 10, 1996, with William L.
Johnson.
--Change of Control Employment Agreement dated October 10, 1996, with
William L. Johnson.
--Proxy Statement dated March 7, 1997.
(b) Reports on Form 8-K.
On February 18, 1997, the Company filed Form 8-K to report on the
write-down of the Company's investment in the NOARK asset, adoption of a
shareholder rights plan, adoption of a long-term incentive plan and approval of
a change in the name of the Company.
Preference Stock
- ----------------
In January 1997, the Board of Directors adopted a shareholder rights plan
("the Plan"). At the Company's Annual Meeting of Shareholders in April 1997,
shareholders approved 3,000,000 shares of a new class of Preference Stock,
2,000,000 shares of which is reserved under the Plan for sale to common
shareholders at a 50% discount to its value pursuant to the Plan. Common
shareholders will be able to purchase the Preference Stock under limited
conditions involving an attempt to take over the Company by means deemed by the
Board of Directors to be coercive or unfair. Under such circumstances, the
person or group trying to take over the Company do not have the right to
purchase Preference Stock even if they are common shareholders. The purpose of
the Plan is to preserve for the Company's shareholders the long-term value of
the Company in the event of a potential takeover which appears to the Board to
be coercive or unfair. At the present time the Company knows of no attempt or
plan by anyone to take over the Company. The other 1,000,000 authorized shares
can be used for other corporate purposes as deemed appropriate by the Board of
Directors of the Company.
The information appearing under the caption "Proposal To Create Preference
Stock" in the Company's definitive proxy statement (filed pursuant to
Regulation 14A) with respect to Registrant's April 15, 1997 Annual Meeting of
Shareholders is incorporated by reference herein.
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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.
SEMCO ENERGY, INC.
(Registrant)
Dated: May 15, 1997
By: /s/Robert F. Caldwell
-------------------------------------
Robert F. Caldwell
Executive Vice President and
Principal Accounting and Financial
Officer
-17-
EXHIBIT INDEX
Form 10-Q
First Quarter 1997
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- -------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3.(i).1 Articles of Incorporation of SEMCO Energy, Inc.
(formerly Southeastern Michigan Gas
Enterprises, Inc.), 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.(i).3 Certificate of Amendment to Articles I,
III and VI of the Articles of Incorporation
dated April 16, 1997. x
3.(ii) Bylaws--last revised March 1, 1995.(g) x
4.1 Trust Indenture dated April 1, 1992, with
NBD Bank, N.A. as Trustee.(b) x
4.2 Note Agreement dated as of June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(d) x
4.3 Rights Agreement dated as of April 15, 1997
with Continental Stock Transfer & Trust Company,
as Rights Agent.(k) x
10 Material Contracts.
10.1 Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(a) x
10.2 Short-Term Incentive Plan.(c) x
10.3 Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only).(h) x
10.4 Supplemental Retirement Plan for Certain
Officers.(i) x
10.5 1997 Long-Term Incentive Plan.(k) x
10.6 Stock Option Certificate and Agreement
dated October 10, 1996 with
William L. Johnson.(l) x
10.7 Stock Option Certificate and Agreement
dated February 26, 1997 with
William L. Johnson.(l) x
10.8 Employment Agreement dated October 10, 1996,
with William L. Johnson. x
10.9 Change of Control Employment Agreement dated
October 10, 1996, with William L. Johnson. 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
-18-
EXHIBIT INDEX
(Continued)
Form 10-Q
First Quarter 1997
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- -------- ----------- -------- ---------
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
99.1 Proxy Statement dated March 7, 1997.(j) x
Key to Exhibits Incorporated by Reference
(a) Filed with SEMCO Energy, Inc.'s (formerly Southeastern Michigan Gas
Enterprises, Inc.'s) Registration Statement, Form S-2, No. 33-46413,
filed March 16, 1992.
(b) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended March
31, 1992, File No. 0-8503.
(c) Filed with SEMCO Energy, Inc.'s Form 10-K for 1992, dated March 30,
1993, File No. 0-8503.
(d) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
June 30, 1994, File No. 0-8503.
(e) Filed with SEMCO Energy, Inc.'s Form 10-K for 1989, dated March 29,
1990, File No. 0-8503.
(f) Filed with SEMCO Energy, Inc.'s Form 10-K for 1990, dated March 28,
1991, File No. 0-8503.
(g) Filed with SEMCO Energy, Inc.'s Form 10-K for 1994, dated March 28,
1995, File No. 0-8503.
(h) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
September 30, 1994, File No. 0-8503.
(i) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
March 31, 1996, File No. 0-8503.
(j) Filed March 6, 1997, pursuant to Rule 14a-6 of the Exchange Act, File
No. 0-8503.
(k) Filed as part of SEMCO Energy, Inc.'s 1997 Proxy Statement, dated
March 7, 1997, File No. 0-8503.
(l) Filed with SEMCO Energy, Inc.'s Form 10-K for 1996, dated March 27,
1997, File No. 0-8503.
-19-