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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period from to
------------- ------------
Commission file number 0-8503
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2144267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 Water Street, Port Huron, Michigan 48060
(Address of principal executive offices)
810-987-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock outstanding as of April 30, 1995, is
11,296,241.
<PAGE>
<TABLE>
INDEX TO FORM 10-Q
------------------
For Quarter Ended March 31, 1995
<CAPTION>
Page
Number
------
<S> <C>
COVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 15
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars Except Per Share Amounts)
<CAPTION>
Three Twelve
Months Ended Months Ended
March 31, March 31,
--------------------- ---------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Gas sales $ 69,284 $ 89,054 $176,190 $210,931
Gas marketing 42,722 40,716 160,288 95,459
Transportation 3,543 3,383 12,160 11,843
Other operations 1,756 1,635 6,309 6,362
-------- -------- -------- --------
$117,305 $134,788 $354,947 $324,595
-------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $ 46,426 $ 63,967 $118,128 $147,966
Cost of gas marketed 41,708 39,639 156,041 91,988
Operations 8,248 7,722 31,581 30,556
Maintenance 1,041 1,066 4,478 4,380
Depreciation 2,986 2,920 11,615 12,265
Income taxes 4,022 5,027 4,198 6,920
Taxes other than income taxes 2,215 2,340 8,061 8,575
-------- -------- -------- --------
$106,646 $122,681 $334,102 $302,650
-------- -------- -------- --------
OPERATING INCOME $ 10,659 $ 12,107 $ 20,845 $ 21,945
OTHER INCOME (LOSS), NET (210) 170 (423) 959
-------- -------- -------- --------
INCOME BEFORE INCOME DEDUCTIONS $ 10,449 $ 12,277 $ 20,422 $ 22,904
-------- -------- -------- --------
INCOME DEDUCTIONS
Interest on long-term debt $ 2,157 $ 2,170 $ 8,592 $ 9,233
Other interest 674 471 1,991 1,758
Amortization of debt expense 112 82 413 334
Dividends on preferred stock of subsidiary 45 45 178 178
-------- -------- -------- --------
$ 2,988 $ 2,768 $ 11,174 $ 11,503
-------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK BEFORE PREFERRED
STOCK DIVIDENDS AND EXTRAORDINARY ITEM $ 7,461 $ 9,509 $ 9,248 $ 11,401
Dividends on convertible preferred stock 4 4 18 18
-------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK
BEFORE EXTRAORDINARY ITEM $ 7,457 $ 9,505 $ 9,230 $ 11,383
EXTRAORDINARY ITEM-Loss on early extinguishment of debt,
net of income taxes of $692 and $96 in 1995 and
1994, respectively - - 1,286 177
-------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK $ 7,457 $ 9,505 $ 7,944 $ 11,206
======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK BEFORE EXTRAORDINARY ITEM $ .63 $ .84 $ .79 $ 1.06
======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK $ .63 $ .84 $ .68 $ 1.04
======== ======== ======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .19 $ .18 $ .75 $ .72
======== ======== ======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 11,862 11,311 11,745 10,727
======== ======== ======== ========
<FN>
The notes to the consolidated financial statements are an integral part of these statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
A S S E T S
<CAPTION>
(Unaudited) (Unaudited)
March 31, December 31, March 31,
1995 1994 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
UTILITY PLANT
Plant in Service, at Cost $290,141 $287,414 $275,047
Less - Accumulated depreciation 79,435 76,674 73,326
-------- -------- --------
$210,706 $210,740 $201,721
OTHER PROPERTY, net 15,390 16,015 16,689
-------- -------- --------
$226,096 $226,755 $218,410
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash investments,
at cost $ 3,931 $ 2,611 $ 1,734
Receivables, less allowances of
$1,061 at March 31, 1995, $899
at December 31, 1994 and $1,552
at March 31, 1994 27,732 22,807 31,047
Accrued revenue 23,413 33,299 36,689
Materials and supplies, at average cost 3,587 3,352 3,192
Gas in underground storage 11,559 36,120 9,219
Gas charges, recoverable from customers 3,581 8,203 11,477
Accumulated deferred income taxes 2,558 2,471 0
Other 7,892 12,016 8,896
-------- -------- --------
$ 84,253 $120,879 $102,254
-------- -------- --------
DEFERRED CHARGES
Unamortized debt expense $ 6,038 $ 6,150 $ 5,879
Deferred gas charges, recoverable
from customers 729 798 1,171
Advances to equity investees 1,666 906 -
Other 16,922 16,210 12,506
-------- -------- --------
$ 25,355 $ 24,064 $ 19,556
-------- -------- --------
$335,704 $371,698 $340,220
======== ======== ========
<FN>
The notes to the consolidated financial statements are an integral part of
these statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<CAPTION>
(Unaudited) (Unaudited)
March 31, December 31, March 31,
1995 1994 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
COMMON STOCK EQUITY
Common stock-par value $1 per share,
20,000,000 shares authorized;
11,310,943, 11,260,584 and
10,507,607 shares outstanding $ 11,311 $ 11,261 $ 10,508
Capital surplus 82,489 81,091 77,780
Retained earnings 19,672 15,027 21,109
-------- -------- --------
$113,472 $107,379 $109,397
-------- -------- --------
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 $ 8 $ 8
Capital surplus 178 180 182
-------- -------- --------
$ 185 $ 188 $ 190
-------- -------- --------
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 $104,878 $104,910 $ 79,570
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 19,200 $ 50,000 $ 44,350
Current maturities of long-term debt - - 3,665
Accounts payable 21,917 36,245 38,829
Customer advance payments 5,141 8,736 2,156
Accrued taxes 4,293 726 6,072
Accrued interest 2,686 1,145 1,199
Accumulated deferred income taxes - - 139
Amounts payable to customers 922 115 1,582
Other 7,906 7,723 5,252
-------- -------- --------
$ 62,065 $104,690 $103,244
-------- -------- --------
DEFERRED CREDITS
Accumulated deferred income taxes $ 18,742 $ 18,722 $ 16,744
Unamortized investment tax credit 3,250 3,325 3,517
Deferred gas costs payable to suppliers 788 866 1,224
Customer advances for construction 8,360 8,559 7,727
Other 20,864 19,959 15,507
-------- -------- --------
$ 52,004 $ 51,431 $ 44,719
-------- -------- --------
$335,704 $371,698 $340,220
======== ======== ========
<FN>
The notes to the consolidated financial statements are an integral part of
these statements.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
--------------------- ---------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $123,495 $116,486 $382,545 $303,001
Cash paid for payrolls and to suppliers (83,265) (83,140) (325,796) (268,862)
Interest paid (1,290) (3,297) (9,097) (11,401)
Income taxes paid (1,401) -- (4,780) (5,975)
Taxes other than income taxes paid (656) (796) (7,826) (8,597)
Other cash receipts and payments, net 479 400 925 2,911
-------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 37,362 $ 29,653 $ 35,971 $ 11,077
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $ (2,900) $ (2,548) (20,705) (19,363)
Investment in other natural gas related prop. -- (32) (1) (1,541)
Other property additions (76) (690) (804) (1,168)
Property retirement costs, net of proceeds (58) (22) (349) (323)
Advances to equity investees (760) -- (1,666) --
-------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $ (3,794) $ (3,292) $(23,525) $(22,395)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 1,860 $ 16,324 5,920 21,158
Repurchase of common stock <F1> (969) -- (969) --
Net change in notes payable to banks (30,800) (7,992) (25,150) 16,475
Issuance of long-term debt -- -- 80,000 20,000
Repayment of long-term debt (32) (33,787) (61,028) (39,036)
Payment of dividends (2,307) (2,137) (9,022) (7,913)
-------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $(32,248) $(27,592) $(10,249) $ 10,684
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS $ 1,320 $ (1,231) $ 2,197 $ (634)
-------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Period $ 2,611 $ 2,965 $ 1,734 $ 2,368
-------- -------- -------- --------
End of Period $ 3,931 $ 1,734 $ 3,931 $ 1,734
======== ======== ======== ========
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITIES
Net income available for common stock $ 7,457 $ 9,505 $ 7,944 $ 11,207
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 2,986 2,920 11,615 12,265
Extraordinary Item -- -- 1,286 177
Deferred taxes and investment tax credits (142) 513 (1,493) 2,141
Equity (income) loss, net of distributions 416 (41) 1,291 407
Receivables (4,925) (12,943) 3,315 (6,309)
Accrued revenue 9,886 (5,411) 13,276 (12,075)
Materials and supplies and gas in underground storage 24,326 21,629 (2,735) (2,451)
Gas charges, recoverable from customers 4,622 4,493 7,896 (7,463)
Other current assets 4,124 966 1,004 (1,090)
Accounts payable (14,328) 8,776 (16,912) 16,297
Customer advances and amounts payable to customers (2,987) (4,234) 2,958 1,206
Accrued taxes 3,567 5,810 (1,087) (2,740)
Other, net 2,360 (2,330) 7,613 (495)
-------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 37,362 $ 29,653 $ 35,971 $ 11,077
======== ======== ======== ========
<FN>
The notes to the consolidated financial statements are an integral part of these statements.
<F1>
See note 3 of notes to the consolidated financial statements.
</FN>
</TABLE>
-6-
<PAGE>
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 1994
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.
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 regulatory assets by requiring
that such assets be probable of future recovery at each balance sheet date.
The Company anticipates adopting this standard on January 1, 1996, and
does not expect that adoption will have a material impact on the financial
position or results of operations of the Company.
(2) REGULATORY MATTERS
At March 31, 1995, the Company had a total of $226,000 in remaining
take-or-pay liabilities. These costs are substantially recoverable from
ratepayers. The Company does not anticipate additional take-or-pay
assessments.
At March 31, 1995, the Company had $1,580,000 of remaining direct-billed
liabilities related to Federal Energy Regulatory Commission (FERC) Order 636
(Order 636). The Company does not anticipate any significant additional direct
billings. As with take-or-pay costs, Order 636 costs are substantially
recoverable from ratepayers.
-7-
<PAGE>
(3) CAPITALIZATION
Common Stock Equity
- -------------------
On April 18, 1995, 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 1995 and 1994.
In February 1995, the Company paid a quarterly cash dividend of $.20 per
share to its common shareholders. Of the total dividend of $2,259,000,
$814,000 was reinvested by shareholders into common stock through participation
in the Dividend Reinvestment and Common Stock Purchase Plan (the DRIP). This
portion of the first quarter dividend and shareholders' optional cash payments
of $446,000, resulted in 66,879 shares issued to existing shareholders during
the quarter pursuant to the DRIP; 49,761 of such shares were purchased in the
open market for reissuance and 17,118 shares of which were newly issued. In
addition, the Company sold 32,830 shares of common stock to the Southeastern
Michigan Gas Enterprises, Inc. Employee Stock Ownership Trust for $600,000 in
January 1995.
(4) COMMITMENTS AND CONTINGENCIES
SEMCO Arkansas Pipeline Company, a wholly-owned subsidiary of SEMCO Energy
Services, Inc. (SEMCO), has a 32% interest in a partnership which operates the
NOARK Pipeline System (NOARK). NOARK is a 302-mile intrastate natural gas
pipeline, originating in northwest Arkansas and extending northeast across the
state. The pipeline became operational during the third quarter of 1992.
The Company, SEMCO Arkansas Pipeline Company and SEMCO have guaranteed 40%
of the principal and interest payments on approximately $88,400,000 of debt
used to finance the pipeline. Of the total debt, $59,063,000 is outstanding
pursuant to a long-term arrangement requiring annual principal payments of
approximately $3,150,000 together with interest on the unpaid balance. This
arrangement matures in 2009 and has a fixed interest rate of 9.7375%. The
remaining debt is pursuant to a $30,000,000 multibank revolving line of credit
which currently matures April 26, 1998. Under the terms of the credit
agreement, NOARK may request, on an annual basis, a one year extension of the
then-effective termination date. At March 31, 1995, NOARK had $29,350,000
outstanding under the agreement with interest payments at a variable interest
rate.
NOARK has been operating below capacity and generating losses since it was
placed in service. The pipeline experienced significant cost overruns during
construction which resulted in higher financing costs than expected.
Competition from two interstate pipelines in the Arkansas region has required
NOARK to discount its transportation charges to attract volumes to the
pipeline. In addition, on January 1, 1994, Vesta Energy Corporation (Vesta), a
major shipper of firm volumes on the NOARK system, discontinued shipments of
gas under its contract and ceased payment of the firm demand fee.
-8-
<PAGE>
Under the terms of Vesta's 50,000 Mcf per day contract with NOARK, Vesta
is obligated to pay full firm rates which consist of a demand fee of
approximately 19.3 cents per Mcf on 50,000 Mcf per day and approximately 9.2
cents per Mcf for volumes actually transported on the NOARK system. This
contract is set to expire in 1997.
Litigation involving the Vesta firm transportation agreement has occurred
in three forums. In December 1993, Vesta filed suit in an Oklahoma federal
court against NOARK and several other defendants, not including SEMCO Arkansas
Pipeline Company. Vesta sought rescission of the firm transportation agreement
and its contracts with other defendants and sought actual damages in excess of
$1,000,000 and punitive damages exceeding $1,000,000. In June 1994, the
Oklahoma suit was dismissed on federal jurisdiction grounds only.
In February 1994, NOARK filed suit in Arkansas state court against Vesta
seeking recovery for breach of the firm transportation agreement. That action,
in which SEMCO Arkansas Pipeline Company is a party in its capacity as a
general partner of NOARK, remains pending in Arkansas state court and no trial
date has been set.
Also in February 1994, the NOARK managing partner and three related
parties sued Vesta in Arkansas federal court over certain contracts. In
January 1995, Vesta filed in that action a counterclaim and third-party
complaint against eleven parties, bringing SEMCO Arkansas Pipeline Company into
that lawsuit. Vesta alleges it was fraudulently induced into executing the
firm transportation agreement and other contracts and also alleges a conspiracy
among the defendants and violations of federal and state antitrust laws. Vesta
seeks rescission of the firm transportation agreement and its contracts with
other defendants and seeks actual and punitive damages each in excess of
$1,000,000. SEMCO Arkansas Pipeline Company has filed an answer to the
third-party complaint, denying any liability. A court-ordered settlement
conference was held in April 1995 and no settlement was reached. Trial of the
federal action is scheduled for December 1995. The Company does not expect
that the January 1995 action by Vesta against SEMCO Arkansas Pipeline Company
will have a significant negative impact on the Company's results of operation.
As these circumstances continue, NOARK's operating cash flows will be
insufficient to meet debt service requirements. Assuming no resolution of the
above legal actions, the Company estimates a net cash outflow in the range of
$1,500,000 to $2,000,000 during 1995 related to its investment in NOARK and the
guarantee. The Company contributed $906,000 to NOARK in October 1994, $760,000
in January 1995 and $800,000 in April 1995.
The NOARK partners are currently investigating several options available
to NOARK. Management continues to believe that no write-down of its investment
in NOARK is appropriate at this time. Therefore, no provision for any loss has
been made in the accompanying financial statements.
-9-
<PAGE>
PART I - FINANCIAL INFORMATION - (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Consolidated net income available for common shareholders for the quarter
ended March 31, 1995 was $7,457,000, or $.63 per share, compared to $9,505,000,
or $.84 per share, for the quarter ended March 31, 1994.
Consolidated net income available for common shareholders before
extraordinary item for the twelve months ended March 31, 1995 was $9,230,000,
or $.79 per share, compared to $11,383,000, or $1.06 per share, for twelve
months ended March 31, 1994. Consolidated net income available for common
shareholders for the twelve months ended March 31, 1995 and March 31, 1994 was
$7,944,000 ($.68 per share) and $11,206,000 ($1.04 per share) reflecting
extraordinary charges, net of tax, of $1,286,000, ($.11 per share) and $177,000
($.02 per share), respectively, for the early extinguishment of debt.
Since the Company's primary business of natural gas distribution depends
upon the winter months for the majority of its operating revenue, a substantial
portion of the annual results of operations is earned during the first quarter
of the year. Therefore, the Company's results of operations for the
three-month periods ended March 31, 1995 and 1994 are not necessarily
indicative of results for a full year.
See Note 4 in the notes to the consolidated financial statements for a
discussion of commitments and contingencies.
A comparison of quarterly and twelve-month-to-date revenues, margins and
system throughput follows on the next page.
-10-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- ---------------------
1995 1994 1995 1994
------- ------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Operating Revenue
Gas Sales
Residential $43,306 $55,555 $108,817 $129,898
Commercial 21,033 27,181 53,265 64,554
Industrial 4,945 6,318 14,108 16,479
------- ------- -------- --------
$69,284 $89,054 $176,190 $210,931
Cost of Gas Sold 46,426 63,967 118,128 147,966
------- ------- -------- --------
Gross Margin $22,858 $25,087 $ 58,062 $ 62,965
======= ======= ======== ========
Gas Marketing $42,722 $40,716 $160,288 $ 95,459
Cost of Gas Marketed 41,708 39,639 156,041 91,988
------- ------- -------- --------
$ 1,014 $ 1,077 $ 4,247 $ 3,471
======= ======= ======== ========
Transportation $ 3,543 $ 3,383 $ 12,160 $ 11,843
======= ======= ======== ========
Other $ 1,756 $ 1,635 $ 6,309 $ 6,362
======= ======= ======== ========
<CAPTION>
(in millions of cubic feet)
<S> <C> <C> <C> <C>
Gas Volumes
Gas Sales
Residential 10,403 11,736 22,104 24,673
Commercial 5,354 6,042 11,782 13,201
Industrial 1,329 1,536 3,257 3,623
------- ------- -------- --------
17,086 19,314 37,143 41,497
======= ======= ======== ========
Gas Marketing 27,169 15,566 89,685 39,203
======= ======= ======== ========
Gas Transported 7,485 5,985 22,793 19,399
======= ======= ======== ========
Degree Days - Actual 3,247 3,715 6,394 7,399
- Percent of Normal 100% 115% 95% 110%
Gas Sales Customers-Average 221,221 215,455 217,523 211,958
</TABLE>
QUARTER RESULTS
Gross margin on gas sales decreased by $2,229,000 as gas volumes sold for
the three month period ended March 31, 1995 decreased 12% from the same period
in 1994. Volumes decreased despite the addition of over 5,700 gas sales
customers as temperatures during the first quarter of 1994 were 15% colder than
normal while temperatures in the first quarter of 1995 were almost normal.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Natural gas volumes marketed for the first quarter of 1995 increased by
75% over the same period in 1994 while gas marketing margins declined by
$63,000. Increased competition in the gas marketing industry, prompted by
Order 636, contributed to the decrease in margins per unit of gas marketed,
while volumes increased through SEMCO's expanded services and the increased
demand for gas marketing services. While marketing volumes have increased
substantially, future 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 in the post-Order 636 environment.
Transportation revenues during the quarter increased $160,000, or 5%,
compared to the same period in 1994 while volumes increased 25%. The increase
in volumes was primarily due to the increase of coal-displacement volumes
realized in 1995. Coal-displacement transportation volumes are sensitive to
natural gas prices relative to coal and generally contribute a lower margin.
Operations and maintenance expense increased by $501,000, or 6%, in the
first quarter compared to a year ago. Contributing to the increase were
approximately $300,000 of restructuring charges associated with a plan to
centralize certain administrative and engineering functions previously
performed in several locations throughout the State of Michigan.
In connection with this restructuring certain employees were given the
option of moving to the centralized location or accepting severance
agreements. As of March 31, 1995, the Company recorded restructuring
charges for the cost of severance agreements accepted by 16 employees.
Less than 10 employees receiving the severance option had not made
decisions as of March 31, 1995.
The Company does not expect to incur additional material charges in
connection with this restructuring. The Company is, however, continuing to
evaluate opportunities to restructure other appropriate functions.
For the three months ended March 31, 1995, income taxes decreased
$1,005,000, or 20%, over the same period in 1994 due primarily to lower pre-tax
earnings.
Other income (loss), net reflects the after-tax loss from the Company's
investment in NOARK of $395,000 for the first quarter of 1995 compared with a
loss of $156,000 for the first quarter of 1994. The 1995 results reflect the
loss of all firm volumes associated with Vesta. From January through May 1994,
an affiliate of Southwestern Energy Pipeline Company, a NOARK general partner,
which was providing 25,000 Mcf per day of the gas transported by Vesta over the
NOARK system, shipped these volumes at the full firm rate.
Interest on long-term debt decreased slightly year-to-year due to the
refinancing of higher rate debt during 1994. Other interest increased $203,000
due primarily to higher interest rates on short-term borrowings.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
TWELVE-MONTH RESULTS
Gas sales margin decreased $4,903,000, or 8%, for the twelve month period
ended March 31, 1995, compared to the same period a year earlier. The addition
of over 5,500 gas sales customers offset a portion of the impact of weather
that was 14% warmer than the prior period. In the period ending March 31,
1995, temperatures were 5% warmer than normal, while temperatures in the prior
period were 10% colder than normal.
Gas marketing volumes and margins increased by 50,482 million cubic feet,
or 129%, and $776,000, or 22%, respectively, over the prior period. The
twelve-month comparison of marketing activities continues to highlight the
impact of Order 636, which significantly increased the demand for natural gas
marketing and related services.
Operations and maintenance expense increased by $1,123,000 in the current
period compared to the same period a year ago. Approximately $600,000 of the
increase was due to the expensing of certain retiree medical expenses pursuant
to particular Michigan Public Service Commission orders. The orders required
that savings generated by property tax reductions in the State of Michigan be
offset by reductions in the retiree medical regulatory assets. Also
contributing to the increase in operations and maintenance expenses was
approximately $300,000 in certain restructuring costs.
Depreciation expense declined $650,000 from the $12,265,000 expensed in
the twelve-months ended March 31, 1994. The decrease results primarily from
lower depletion costs and a decline in non-affiliate equipment leasing.
Other income (loss), net, declined from income of $959,000 for the twelve
months ended March 31, 1994 to a loss of $423,000 in the same period ending
March 31, 1995. The decline primarily reflects the increase in the loss (net
of tax) from the Company's investment in NOARK from $395,000 to $1,439,000 over
the respective periods.
Interest on long-term debt decreased by $641,000 and other interest
increased by $233,000 due primarily to the Company's refinancing of long-term
debt and the increase in short-term borrowing rates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the three and twelve month periods
ended March 31, 1995, as compared to the same periods last year, increased
$7,709,000 and $24,894,000, 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.
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
The Company anticipates spending approximately $17,000,000 for capital
items during the remainder of 1995. These estimated amounts will primarily
relate to customer additions and system replacement in the gas distribution
operations.
See Note 4 for a discussion of contributions to the NOARK Pipeline System
pursuant to the Company's guarantees of the pipeline's debt.
Financing activities used $32,248,000 in funds during the first quarter of
1995, primarily to reduce notes payable to banks. Changes in financing cash
flows between the three and twelve month periods ended March 31, 1995 and 1994
primarily highlight the February 1994 issuance of 747,500 shares of common
stock, the Company's implementation of common stock repurchasing in January,
1995 for resales through the DRIP, increased dividend payments, and the timing
of the Company's debt refinancing in 1993 and 1994.
FUTURE FINANCING SOURCES
The remainder of the Company's operating cash flow needs, as well as
dividend payments and capital expenditures for the balance of 1995, is expected
to be generated primarily through operating activities and short-term
borrowings.
At March 31, 1995, the Company had $70,700,000 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-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 of "Notes to the Consolidated Financial Statements" for a
discussion regarding litigation involving the NOARK Pipeline System.
Item 2. Changes in Securities.
Retained earnings were available for payment of dividends on
preferred and common stock at March 31, 1995, as follows:
Total Retained Earnings - $19,672,000
Amount Available for Payment of Dividends - $19,672,000
Item 3. Not applicable.
Item 4. Not applicable.
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits - (See page 17 for the Exhibit Index.)
--Articles of Incorporation of Southeastern Michigan Gas
Enterprises, Inc. (Enterprises), as restated July 11, 1989.
--Certificate of Amendment to Article III of the Articles of
Incorporation dated May 16, 1990.
--Bylaws of Enterprises--last revised March 1, 1995.
--Trust Indenture dated April 1, 1992, between Enterprises and
NBD Bank, N.A. as Trustee.
--Note Agreement dated as of June 1, 1994, relating to issuance of
$80,000,000 of long-term debt.
--Guaranty Agreement dated October 10, 1991, relating to financing of
NOARK.
--Group A Employment Contract.
--Short-Term Incentive Plan.
--Deferred Compensation and Phantom Stock Purchase Agreement (for
outside directors only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the first quarter of 1995.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
(Registrant)
Dated: May 15, 1995
By: /s/Marcia M. Chmielewski
-----------------------------------------
Marcia M. Chmielewski, Vice President and
Principal Accounting and Financial
Officer
-16-
<PAGE>
<TABLE>
EXHIBIT INDEX
Form 10-Q
First Quarter 1995
<CAPTION>
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- ------- ----------- -------- ---------
<S> <C> <C> <C>
2 Plan of Acquisition, etc. NA NA
3(a) 1--Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
(Enterprises), as restated
July 11, 1989.(e) x
2--Certificate of Amendment to Article III
of the Articles of Incorporation dated
May 16, 1990.(f) x
3(b) Bylaws of Enterprises--last revised
March 1, 1995.(g) x
4(a) Trust Indenture dated April 1, 1992, between
Enterprises and NDB Bank, N.A. as Trustee.(b) x
4(b) Note Agreement dated as of June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(d) x
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(a) x
10(b) Group A Employment Contract.(c) x
10(c) Short-Term Incentive Plan.(c) x
10(d) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only). x
11 Statement re computation of per share earnings. NA NA
15 Letter re unaudited interim financial
information. NA NA
18 Letter re change in accounting principle. NA NA
19 Report furnished to security holders. NA NA
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. NA NA
24 Power of Attorney. NA NA
27 Financial Data Schedule. x
99 Additional exhibits. NA NA
</TABLE>
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.
-17-
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME, THE CONSOLIDATED BALANCE SHEET AND THE
CONSOLIDATED STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 210,706
<OTHER-PROPERTY-AND-INVEST> 15,390
<TOTAL-CURRENT-ASSETS> 84,253
<TOTAL-DEFERRED-CHARGES> 25,355
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 335,704
<COMMON> 11,311
<CAPITAL-SURPLUS-PAID-IN> 82,489
<RETAINED-EARNINGS> 19,672
<TOTAL-COMMON-STOCKHOLDERS-EQ> 113,472
0
3,285
<LONG-TERM-DEBT-NET> 104,878
<SHORT-TERM-NOTES> 19,200
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
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0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 94,869
<TOT-CAPITALIZATION-AND-LIAB> 335,704
<GROSS-OPERATING-REVENUE> 117,305
<INCOME-TAX-EXPENSE> 4,022
<OTHER-OPERATING-EXPENSES> 102,624
<TOTAL-OPERATING-EXPENSES> 106,646
<OPERATING-INCOME-LOSS> 10,659
<OTHER-INCOME-NET> (210)
<INCOME-BEFORE-INTEREST-EXPEN> 10,449
<TOTAL-INTEREST-EXPENSE> 2,988
<NET-INCOME> 7,461
4
<EARNINGS-AVAILABLE-FOR-COMM> 7,457
<COMMON-STOCK-DIVIDENDS> 2,258
<TOTAL-INTEREST-ON-BONDS> 2,157
<CASH-FLOW-OPERATIONS> 37,362
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
