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, 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 October 31, 1997, is
13,088,562.
INDEX TO FORM 10-Q
------------------
For Quarter Ended September 30, 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 . . . . . . . . . . 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
-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 Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ------------------- -------------------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
-------- ------- -------- -------- -------- --------
OPERATING REVENUE
Gas sales $ 24,053 $23,656 $150,237 $150,243 $219,365 $207,842
Gas marketing 91,380 63,852 330,079 187,191 454,272 226,685
Transportation 2,654 2,471 9,643 8,810 13,191 12,260
Other operations 5,761 1,103 8,105 3,356 9,266 4,698
-------- ------- -------- -------- -------- --------
$123,848 $91,082 $498,064 $349,600 $696,094 $451,485
-------- ------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $ 16,036 $15,114 $103,306 $102,479 $151,962 $139,842
Cost of gas marketed 90,175 62,707 322,610 183,676 444,329 222,500
Operations and maintenance 13,711 9,750 36,551 30,432 46,788 39,379
Depreciation 3,346 2,833 9,568 8,493 12,392 11,563
Income taxes (1,789) (1,685) 3,328 3,233 6,466 6,329
Taxes other than income taxes 2,274 2,329 6,867 6,698 8,817 8,483
-------- ------- -------- -------- -------- --------
$123,753 $91,048 $482,230 $335,011 $670,754 $428,096
-------- ------- -------- -------- -------- --------
OPERATING INCOME $ 95 $ 34 $ 15,834 $ 14,589 $ 25,340 $ 23,389
Write-down of NOARK investment,
net of income taxes of $11,308 -- -- -- -- (21,000) --
OTHER INCOME (LOSS), NET (31) (162) 15 (481) (317) (100)
-------- ------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME DEDUCTIONS $ 64 $ (128) $ 15,849 $ 14,108 $ 4,023 $ 23,289
-------- ------- -------- -------- -------- --------
INCOME DEDUCTIONS
Interest on long-term debt $ 2,129 $ 2,128 $ 6,385 $ 6,385 $ 8,514 $ 8,512
Other interest 938 456 2,469 1,320 3,315 1,945
Amortization of debt expense 97 93 287 280 380 392
Dividends on preferred stock 48 48 145 145 194 195
-------- ------- -------- -------- -------- --------
$ 3,212 $ 2,725 $ 9,286 $ 8,130 $ 12,403 $ 11,044
-------- ------- -------- -------- -------- --------
NET INCOME (LOSS) $ (3,148) $(2,853) $ 6,563 $ 5,978 $ (8,380) $ 12,245
======== ======= ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE $ (.24) $ (.22) $ .50 $ .46 $ (.64) $ .94
======== ======= ======== ======== ======== ========
CASH DIVIDENDS PER SHARE $ .20 $ .19 $ .58 $ .55 $ .77 $ .73
======== ======= ======== ======== ======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 13,053 13,020 13,026 13,013 13,026 13,018
======== ======= ======== ======== ======== ========
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)
September 30, December 31, September 30,
1997 1996 1996
-------- -------- --------
(Thousands of Dollars)
UTILITY PLANT
Plant in service, at cost $357,586 $342,778 $332,805
Less - Accumulated depreciation 102,325 96,391 96,622
-------- -------- --------
$255,261 $246,387 $236,183
OTHER PROPERTY, net 18,563 9,585 9,391
-------- -------- --------
$273,824 $255,972 $245,574
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash investments,
at cost $ 6,417 $ 10,232 $ 3,660
Receivables, less allowances of
$590 at September 30, 1997, $1,247
at December 31, 1996 and $649
at September 30, 1996 17,988 43,585 18,436
Accrued revenue 42,989 76,549 28,819
Materials and supplies, at
average cost 3,089 3,025 3,515
Gas in underground storage 48,348 33,596 34,043
Gas charges, recoverable from
customers 17,960 13,791 14,496
Accumulated deferred income taxes 283 364 2,111
Other 6,579 10,040 6,035
-------- -------- --------
$143,653 $191,182 $111,115
-------- -------- --------
DEFERRED CHARGES
Unamortized debt expense $ 5,173 $ 5,328 $ 5,422
Deferred gas charges, recoverable
from customers 29 290 368
Advances to equity investees 7,546 5,062 4,218
Other 24,817 20,445 21,129
-------- -------- --------
$ 37,565 $ 31,125 $ 31,137
-------- -------- --------
$455,042 $478,279 $387,826
======== ======== ========
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)
September 30, December 31, September 30,
1997 1996 1996
-------- -------- --------
(Thousands of Dollars)
COMMON STOCK EQUITY
Common stock-par value $1 per share,
20,000,000 shares authorized;
13,078,442, 12,400,331 and
12,415,690 shares outstanding $ 13,078 $ 12,400 $ 12,416
Capital surplus 79,921 79,489 79,766
Retained earnings (deficit) (2,540) (1,507) 15,915
-------- -------- --------
$ 90,459 $ 90,382 $108,097
-------- -------- --------
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 162 162 162
-------- -------- --------
$ 169 $ 169 $ 169
-------- -------- --------
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 $103,548 $106,468 $106,629
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 98,900 $ 91,100 $ 51,700
Current portion of long-term debt
and capital leases -- 1,644 1,451
Accounts payable 63,717 91,360 41,254
Customer advance payments 7,207 5,612 6,287
Accrued taxes 1,118 243 2,216
Accrued interest 2,808 1,272 2,698
Other 6,804 6,998 5,848
-------- -------- --------
$180,554 $198,229 $111,454
-------- -------- --------
DEFERRED CREDITS
Reserve for equity investment $ 32,942 $ 32,942 $ --
Accumulated deferred income taxes 10,607 10,113 20,914
Unamortized investment tax credit 2,581 2,782 2,849
Customer advances for construction 7,801 8,621 8,725
Other 23,281 25,473 25,889
-------- -------- --------
$ 77,212 $ 79,931 $ 58,377
-------- -------- --------
$455,042 $478,279 $387,826
======== ======== ========
The notes to the consolidated financial statements are an integral part of
these statements.
-5-
SEMCO ENERGY, 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 7 1 9 9 6 1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $117,784 $ 81,099 $556,899 $363,059 $682,162 $420,447
Cash paid for payrolls and to suppliers (134,108) (93,560) (505,320) (324,383) (638,711) (377,834)
Interest paid (1,288) (864) (7,316) (6,142) (11,717) (10,427)
Income taxes paid (100) (750) (3,100) (3,275) (3,100) (3,673)
Taxes other than income taxes paid (3,282) (3,582) (5,382) (4,336) (9,243) (7,687)
Other cash receipts and payments, net 152 1,399 393 2,813 479 1,113
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $(20,842) $(16,258) $ 36,174 $ 27,736 $ 19,870 $ 21,939
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $ (8,551) $ (7,096) $(23,116) $(17,119) $(36,166) $(29,403)
Other property additions (621) (57) (767) (250) (857) (462)
Property retirement costs, net of proceeds (1) 502 200 584 481 1,524
Purchase of Sub-Surface, net of cash acquired (14,966) -- (14,966) -- (14,966) --
Proceeds from sale and leaseback of capital assets -- -- -- -- -- 3,737
Advances to equity investees (820) -- (2,484) -- (3,328) (872)
-------- -------- -------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $(24,959) $ (6,651) $(41,133) $(16,785) $(54,836) $(25,476)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 1,384 $ 1,321 $ 4,092 $ 3,916 $ 5,308 $ 5,608
Repurchase of common stock (282) (698) (2,982) (4,120) (4,491) (5,289)
Net change in notes payable to banks 48,200 22,700 7,800 -- 47,200 13,850
Repayment of long-term debt -- -- (25) (15) (25) (15)
Payment of dividends (2,670) (2,524) (7,741) (7,336) (10,269) (9,742)
-------- -------- -------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $ 46,632 $ 20,799 $ 1,144 $ (7,555) $ 37,723 $ 4,412
-------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS $ 831 $ (2,110) $ (3,815) $ 3,396 $ 2,757 $ 875
-------- -------- -------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Period $ 5,586 $ 5,770 $ 10,232 $ 264 $ 3,660 $ 2,785
-------- -------- -------- -------- -------- --------
End of Period $ 6,417 $ 3,660 $ 6,417 $ 3,660 $ 6,417 $ 3,660
======== ======== ======== ======== ======== ========
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITIES
Net income (loss) $ (3,148) $ (2,853) $ 6,563 $ 5,978 $ (8,380) $ 12,245
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation 3,346 2,833 9,568 8,493 12,392 11,563
Write-down of NOARK investment, net -- -- -- -- 21,000 --
Deferred taxes and investment tax credits (1) 1,662 374 1,772 2,560 1,831
Equity (income) loss, net of distributions 107 1,414 39 3,241 538 2,834
Receivables 8,612 2,540 29,973 13,884 4,824 (10,489)
Accrued revenue (11,918) (11,263) 33,560 10,035 (14,170) (15,189)
Materials and supplies and gas in underground storage (25,711) (17,560) (14,816) (14,106) (13,879) (5,233)
Gas charges, recoverable from customers (7,202) (5,096) (4,169) (8,642) (3,464) (4,750)
Other current assets (2,232) (3,494) 4,547 (208) (84) 1,423
Accounts payable 13,603 12,055 (32,403) 3,236 17,703 27,391
Customer advances and amounts payable to customers 5,377 4,401 838 (760) 59 810
Accrued taxes (2,582) (3,013) 875 1,512 (1,098) 928
Other, net 907 2,116 1,225 3,301 1,869 (1,425)
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $(20,842) $(16,258) $ 36,174 $ 27,736 $ 19,870 $ 21,939
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES
- ------------------------
Business acquisition, net of cash acquired
Working capital, other than cash acquired $ (421) $ -- $ (421) $ -- $ (421) $ --
Plant and equipment 9,355 -- 9,355 -- 9,355 --
Purchase price in excess of the net assets acquired 6,032 -- 6,032 -- 6,032 --
-------- -------- -------- -------- -------- --------
Net cash used to acquire Sub-Surface $ 14,966 $ -- $ 14,966 $ -- $ 14,966 $ --
======== ======== ======== ======== ======== ========
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"), which is effective for financial statements for periods
ending after December 15, 1997. 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, it is anticipated that the calculation of Basic EPS under
the new standard will not significantly differ from the Company's current
calculation.
Fully diluted EPS, which will now be referred to as diluted EPS, is still
required.
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. The
Company has chosen to continue accounting for these transactions under
previously existing accounting standards as allowed under SFAS 123. However,
if compensation expense under SFAS 123 is materially different, net income and
earnings per share must be disclosed as if SFAS 123 accounting had been
applied. As of September 30, 1997, the fair value of the Company's stock-based
compensation is not material, and no disclosures have been made.
-7-
(2) MERGERS AND ACQUISITIONS
On August 13, 1997, SEMCO Energy Construction Co. (SEMCO Construction), a
subsidiary of SEMCO Energy Ventures, Inc., purchased the assets and business of
Sub-Surface Construction Co. (Sub-Surface) for $15,400,000 in cash plus the
assumption of certain liabilities. Sub-Surface is involved primarily in the
construction of underground gas distribution pipelines, service lines and
associated facilities, primarily in Michigan. In addition, SEMCO Construction
entered into several non-compete agreements with prior employees of Sub-Surface
totaling $1,000,000 ranging from two to five years.
For financial statement purposes, the acquisition was accounted for as a
purchase and, accordingly, results of operations are included in the
consolidated financial statements since the date of acquisition.
(3) RATE CASE APPROVAL
On October 29, 1997 the Michigan Public Service Commission (MPSC) approved
the merger of rate structures, gas recovery clauses, tariffs, and rules and
regulations for the Company's MPSC-regulated divisions. Previously, these
divisions operated as Michigan Gas Company and Southeastern Michigan Gas
Company.
Also on October 29, 1997 the MPSC granted a rate increase, to the combined
divisions, of approximately $400,000 which includes recovery of costs
related to a change in accounting for retiree medical benefits. The MPSC
also approved incentive regulation, in which profits generated in excess of
the authorized rate of return will be shared with the ratepayer, and the
aggregation of commercial and industrial customers for gas purchasing
decisions.
(4) CAPITALIZATION
Common Stock Equity
- -------------------
On October 9, 1997, 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 at the close of business on November 5.
In August 1997, the Company paid a quarterly cash dividend of $.20 per
share to its common shareholders. Of the total cash dividend of $2,622,000,
$903,000 was reinvested by shareholders into common stock through participation
in the Direct Stock Purchase and Dividend Reinvestment Plan (the DRIP). During
the quarter, the Company issued 77,499 shares of stock for funds invested
through the DRIP. The total funds invested by shareholders in the third
quarter was $1,384,000.
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 1997 and 1996.
-8-
Long-Term Debt
- --------------
On October 17, 1997, the Company issued $30,000,000 of 6.83% Senior Notes
due 2002 and $30,000,000 of 7.20% Senior Notes due 2007 through private
placement. The proceeds of the offering were used to pay down short-term debt.
(5) 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
$79,138,000 of debt used to finance the pipeline. Of the total debt,
$51,000,000 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,
1997, NOARK had $27,950,000 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 1994 and $3,312,000 in 1995.
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. The Company has contributed an additional
$2,484,000 during the nine months ended September 30, 1997 and estimates its
required contributions to NOARK for the balance of 1997 to be $800,000.
-9-
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.
-10-
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, 1997 was $3,148,000 ($.24 per
share) compared to $2,853,000 ($.22 per share) for the quarter ended
September 30, 1996.
Net income was $6,563,000 ($.50 per share) and $5,978,000 ($.46 per share)
for the nine months ended September 30, 1997 and September 30, 1996,
respectively.
For the twelve months ended September 30, 1997, the Company recorded a net
loss of $8,380,000 ($.64 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 $12,620,000 ($.97 per share). This compares to net income of
$12,245,000 ($.94 per share) for the twelve months ended September 30, 1996.
The Company's business is primarily seasonal in nature resulting in
greater earnings during the winter months. The results of operations for the
three and nine-month periods ended September 30, 1997, are not necessarily
indicative of the results to be expected for the full year.
See Note 5 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.
-11-
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------- ------------------- -------------------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- -------- -------- -------- --------
(in thousands of dollars)
Operating Revenue
Gas Sales
Residential $15,378 $14,545 $ 95,706 $ 94,349 $140,001 $130,619
Commercial 7,192 6,707 45,681 44,741 66,449 61,921
Industrial 1,483 2,404 8,850 11,153 12,915 15,302
------- ------- -------- -------- -------- --------
$24,053 $23,656 $150,237 $150,243 $219,365 $207,842
Cost of Gas Sold 16,036 15,114 103,306 102,479 151,962 139,842
------- ------- -------- -------- -------- --------
Gross Margin $ 8,017 $ 8,542 $ 46,931 $ 47,764 $ 67,403 $ 68,000
======= ======= ======== ======== ======== ========
Gas Marketing $91,380 $63,852 $330,079 $187,191 $454,272 $226,685
Cost of Gas Marketed 90,175 62,707 322,610 183,676 444,329 222,500
------- ------- -------- -------- -------- --------
$ 1,205 $ 1,145 $ 7,469 $ 3,515 $ 9,943 $ 4,185
======= ======= ======== ======== ======== ========
Transportation Revenue $ 2,654 $ 2,471 $ 9,643 $ 8,810 $ 13,191 $ 12,260
======= ======= ======== ======== ======== ========
Other $ 5,761 $ 1,103 $ 8,105 $ 3,356 $ 9,266 $ 4,698
======= ======= ======== ======== ======== ========
(in millions of cubic feet)
Gas Volumes
Gas Sales
Residential 1,705 1,744 17,709 18,093 26,318 26,754
Commercial 949 978 9,200 9,320 13,551 13,727
Industrial 200 394 1,836 2,484 2,737 3,578
------- ------- -------- -------- -------- --------
2,854 3,116 28,745 29,897 42,606 44,059
======= ======= ======== ======== ======== ========
Gas Marketing 41,436 31,706 135,552 83,201 181,779 104,152
======= ======= ======== ======== ======== ========
Gas Transported 4,390 4,120 15,570 14,741 21,361 20,694
======= ======= ======== ======== ======== ========
Degree Days - Actual 192 168 4,436 4,695 6,840 7,324
- Percent of Normal 89% 74% 100% 106% 100% 107%
Gas Sales Customers-Average 235,516 227,680 235,703 227,583 234,766 226,898
QUARTER RESULTS
Gross margin on gas sales decreased by $525,000 (6%) for the three month
period ending September 30, 1997 primarily due to an adjustment to recognize
lost and unaccounted for gas. Offsetting this adjustment was continued strong
growth in the residential and commercial customer base as gas sales customers
increased by over 3%.
-12-
Gas marketing revenues and volumes increased by $27,528,000 (43%) and
9,730,000 Mcf (31%), respectively. These increases were due to the growth in
out-of-state marketing operations and the start-up of the Mid-Atlantic office
in late 1996. Marketing revenues were also affected by increases in the price
of gas compared to the prior year period. Overall marketing revenues, net of
marketers' incentive compensation, decreased by $82,000 or 10% as a result of
smaller per unit margin at both the retail and wholesale levels.
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 revenue increased $183,000 (7%) as a result of gas sales
customers switching to transportation. Other operations revenue increased
$4,658,000 (422%) due to the purchase of Sub-Surface in August 1997. The
acquisition was accounted for as a purchase and revenues have been recorded
since the acquisition date.
Operation and maintenance expense increased by $3,961,000 (40%), primarily
due to the acquisition of Sub-Surface. Operations and maintenance expenses
attributable to Sub-Surface totaled $4,341,000. The Company experienced a 4%
decrease in operation and maintenance expense after excluding the Sub-Surface
acquisition. Depreciation expense increased by $513,000 (18%) as a result of
utility plant additions and the depreciation of Sub-Surface equipment.
Other interest increased by $482,000 (106%) as a result of higher
borrowing on the Company's lines of credit. These borrowings were primarily
for utility plant, increased working capital to support higher marketing
activity and increased gas prices from the same period a year ago.
Other income (net) increased $131,000 resulting from significantly smaller
losses from NOARK Pipeline.
YEAR-TO-DATE RESULTS
Gross margin on gas sales decreased $833,000 (2%) for the nine month
period ending September 30, 1997 over the same period in 1996. Although the
Company experienced normal weather during the first nine months of 1997, the
comparable period in 1996 was 6% colder than normal resulting in a 2%
decrease in residential and commercial volumes sold. The margin decreases
were offset in part by the increase in gas sales customers of approximately
8,100 or 4%. The annual true-up of unbilled revenue adversely affected
margins, year-to-year, by $546,000.
Margins from natural gas marketing activities, net of marketers' incentive
compensation, increased by $1,710,000 (67%) while volumes increased 63%. The
addition of the Mid-Atlantic marketing area in December 1996 and continued
growth in other out-of-state markets contributed to these increases.
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The acquisition of Sub-Surface in 1997 accounted for the significant
increase in other operations of $4,749,000 (142%). The increase in operations
and maintenance expense of $6,119,000 (20%) is primarily due to the inclusion
of Sub-Surface [$4,300,000] and increases in the costs of independent marketing
contracts [$2,200,000] related to the growth in the Company's marketing
operations. The Company experienced a slight decrease in operations and
maintenance expense ($466,000), exclusive of Sub-Surface and independent
marketing contracts.
Depreciation expense increased by $1,075,000 (13%) due to property
additions of $700,000 and the acquisition of Sub-Surface of $300,000. Property
additions, higher marketing and higher cost of storage gas were financed by an
increase in short-term borrowing resulting in an increase in other interest of
$1,149,000 (87%).
Other income (loss) net increased $496,000 as a result of the reduction of
losses from the NOARK Pipeline investment.
TWELVE-MONTH RESULTS
Gas sales margins decreased $597,000 (1%) for the twelve month period
ended September 30, 1997, compared to the same period a year earlier.
Adjustments relating to the annual true-up of unbilled revenue and 7% warmer
weather were offset by the addition of approximately 7,900 gas sales customers.
Gas marketing margins increased $2,494,000 (78%), net of marketers'
incentive compensation, primarily due to a 75% increase in volumes sold. In
1996 the Company began expanding its operations outside of its traditional
markets through the use of independent contractors.
Other operations revenue increased by $4,568,000 due to the Sub-Surface
acquisition.
Operations and maintenance expense increased by $7,409,000 (19%). This
increase is attributed to the purchase of Sub-Surface and increased expenses
associated with the independent marketing contractors, which accounted for
$4,300,000 and $3,264,000 of the increase, respectively.
Other interest increase $1,370,000 (70%). This increase is due to
short-term debt incurred to fund the Company's increased marketing activity,
customer additions and increased gas prices.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the three, nine and twelve month
periods ended September 30, 1997, as compared to the same periods last year,
decreased $(4,584,000), $8,438,000 and $(2,069,000), 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.
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The Company anticipates spending approximately $6,200,000 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 5 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.
Financing activities contributed $46,632,000 in funds during the third
quarter, primarily for notes payable to banks used to fund gas purchases and
normal gas distribution construction.
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 1997, is expected
to be generated primarily through operating activities and short-term
borrowings. At September 30, 1997, the Company had $56,700,000 in unused lines
of credit.
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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.
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Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits - (See 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 August 15, 1997.
--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.
--Note Agreement dated as of October 1, 1997, relating to issuance of
$60,000,000 of long-term debt.
--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.
--Employment Agreement dated October 10, 1996, with William L.
Johnson.
--Change of Control Employment Agreement dated October 10, 1996, with
William L. Johnson.
--Financial Data Schedule.
--Proxy Statement dated March 7, 1997.
(b) Reports on Form 8-K.
On August 28, 1997, the Company filed Form 8-K to report the
acquisition of Sub-Surface Construction Co.
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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: November 14, 1997
By: /s/Robert J. Digan, II
------------------------------------
Robert J. Digan, II
Senior Vice President and Principal
Accounting and Financial Officer
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EXHIBIT INDEX
Form 10-Q
Third 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.(l) x
3.(ii) Bylaws--last revised August 15, 1997. 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.(j) x
4.4 Note Agreement dated as of October 1, 1997,
relating to issuance of $60,000,000 of
long-term debt. 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).(g) x
10.4 Supplemental Retirement Plan for Certain
Officers.(h) x
10.5 1997 Long-Term Incentive Plan.(j) x
10.6 Stock Option Certificate and Agreement
dated October 10, 1996 with
William L. Johnson.(k) x
10.7 Stock Option Certificate and Agreement
dated February 26, 1997 with
William L. Johnson.(k) x
10.8 Employment Agreement dated October 10, 1996,
with William L. Johnson.(l) x
10.9 Change of Control Employment Agreement dated
October 10, 1996, with William L. Johnson.(l) 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-
EXHIBIT INDEX
(Continued)
Form 10-Q
Third 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.(i) 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-Q for the quarter ended
September 30, 1994, File No. 0-8503.
(h) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
March 31, 1996, File No. 0-8503.
(i) Filed March 6, 1997, pursuant to Rule 14a-6 of the Exchange Act, File
No. 0-8503.
(j) Filed as part of SEMCO Energy, Inc.'s 1997 Proxy Statement, dated
March 7, 1997, File No. 0-8503.
(k) Filed with SEMCO Energy, Inc.'s Form 10-K for 1996, dated March 27,
1997, File No. 0-8503.
(l) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
March 31, 1997, File No. 0-8503.
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