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, 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 October 31, 1995, is
11,798,112.
<PAGE>
<TABLE>
INDEX TO FORM 10-Q
------------------
For Quarter Ended September 30, 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 . . . . . . . . . . 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 . . . . . . . . . . . . 16
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
-2-
<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 Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------- ------------------- -------------------
1 9 9 5 1 9 9 4 1 9 9 5 1 9 9 4 1 9 9 5 1 9 9 4
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Gas sales $23,618 $23,560 $126,425 $145,543 $176,842 $216,892
Gas marketing 23,200 32,959 93,902 112,134 140,052 132,544
Transportation 2,540 2,512 8,998 8,731 12,266 11,925
Other operations 1,249 1,422 4,328 4,786 5,729 6,179
------- ------- -------- -------- -------- --------
$50,607 $60,453 $233,653 $271,194 $334,889 $367,540
------- ------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $15,326 $15,463 $ 83,256 $101,586 $117,339 $154,680
Cost of gas marketed 22,390 32,060 91,263 109,042 136,194 128,323
Operations 7,958 7,949 23,946 23,074 31,927 30,769
Maintenance 1,254 1,150 3,324 3,311 4,516 4,598
Depreciation 3,004 2,879 8,965 8,715 11,799 12,176
Income taxes (1,338) (1,601) 3,092 3,699 4,597 5,863
Taxes other than income taxes 2,006 2,039 6,181 6,432 7,935 8,621
------- ------- -------- -------- -------- --------
$50,600 $59,939 $220,027 $255,859 $314,307 $345,030
------- ------- -------- -------- -------- --------
OPERATING INCOME $ 7 $ 514 $ 13,626 $ 15,335 $ 20,582 $ 22,510
OTHER INCOME (LOSS), NET (113) (115) (560) 77 (679) 505
------- ------- -------- -------- -------- --------
INCOME BEFORE INCOME DEDUCTIONS $ (106) $ 399 $ 13,066 $ 15,412 $ 19,903 $ 23,015
------- ------- -------- -------- -------- --------
INCOME DEDUCTIONS
Interest on long-term debt $ 2,129 $ 2,570 $ 6,419 $ 6,448 $ 8,576 $ 8,802
Other interest 292 224 1,101 1,086 1,803 1,725
Amortization of debt expense 112 112 336 270 448 354
Dividends on preferred stock of subsidiary 44 45 133 133 178 178
------- ------- -------- -------- -------- --------
$ 2,577 $ 2,951 $ 7,989 $ 7,937 $ 11,005 $ 11,059
------- ------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK BEFORE PREFERRED
STOCK DIVIDENDS AND EXTRAORDINARY ITEM $(2,683) $(2,552) $ 5,077 $ 7,475 $ 8,898 $ 11,956
Dividends on convertible preferred stock 5 4 13 13 18 17
------- ------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK BEFORE
EXTRAORDINARY ITEM $(2,688) $(2,556) $ 5,064 $ 7,462 $ 8,880 $ 11,939
EXTRAORDINARY ITEM-Loss on early extinguishment of debt,
net of income taxes of $692 for the nine months ended
September 30, 1994, and $788 for the twelve months ended
September 30, 1994 - - - 1,286 - 1,463
------- ------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $(2,688) $(2,556) $ 5,064 $ 6,176 $ 8,880 $ 10,476
======= ======= ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK BEFORE
EXTRAORDINARY ITEM $ (.23) $ (.22) $ .43 $ .65 $ .75 $ 1.06
======= ======= ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ (.23) $ (.22) $ .43 $ .53 $ .75 $ .93
======= ======= ======== ======== ======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .20 $ .19 $ .58 $ .56 $ .77 $ .74
======= ======= ======== ======== ======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 11,801 11,707 11,837 11,551 11,823 11,313
======= ======= ======== ======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-3-
<PAGE>
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
A S S E T S
<CAPTION>
(Unaudited) (Unaudited)
September 30, December 31, September 30,
1995 1994 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
UTILITY PLANT
Plant in Service, at Cost $300,200 $287,414 $283,971
Less - Accumulated depreciation 84,613 76,674 77,673
-------- -------- --------
$215,587 $210,740 $206,298
OTHER PROPERTY, net 14,266 16,015 15,479
-------- -------- --------
$229,853 $226,755 $221,777
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash investments, at cost $ 2,785 $ 2,611 $ 1,988
Receivables, less allowances of $930 at
September 30, 1995, $889 at December 31, 1994, and
$893 at September 30, 1994 7,947 22,807 15,177
Accrued revenue 13,630 33,299 13,692
Materials and supplies, at average cost 4,123 3,352 3,363
Gas in underground storage 31,402 36,120 43,818
Gas charges, recoverable from customers 9,746 8,203 11,550
Accumulated deferred income taxes 2,455 2,471 -
Other 7,458 12,016 10,089
-------- -------- --------
$ 79,546 $120,879 $ 99,677
-------- -------- --------
DEFERRED CHARGES
Unamortized debt expense $ 5,813 $ 6,150 $ 6,262
Deferred gas charges, recoverable from customers 547 798 179
Advances to equity investees 3,346 906 -
Other 18,854 16,210 14,440
-------- -------- --------
$ 28,560 $ 24,064 $ 20,881
-------- -------- --------
$337,959 $371,698 $342,335
======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-4-
<PAGE>
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<CAPTION>
(Unaudited) (Unaudited)
September 30, December 31, September 30,
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; 11,805,551, 11,260,584 and
11,185,305 shares outstanding, respectively $ 11,806 $ 11,261 $ 11,185
Capital surplus 82,846 81,091 79,796
Retained earnings 10,418 15,027 13,450
-------- -------- --------
$105,070 $107,379 $104,431
-------- -------- --------
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 172 180 180
-------- -------- --------
$ 179 $ 188 $ 188
-------- -------- --------
$105,249 $107,567 $104,619
-------- -------- --------
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 $103,588 $104,910 $104,945
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 37,850 $ 50,000 $ 37,450
Accounts payable 17,063 36,245 26,209
Customer advance payments 5,538 8,736 7,280
Accrued taxes 1,288 726 1,496
Accrued interest 2,666 1,145 2,154
Accumulated deferred income taxes - - 135
Amounts payable to customers - 115 557
Other 6,218 7,723 7,327
-------- -------- --------
$ 70,623 $104,690 $ 82,608
-------- -------- --------
DEFERRED CREDITS
Accumulated deferred income taxes $ 19,160 $ 18,722 $ 17,046
Unamortized investment tax credit 3,116 3,325 3,383
Customer advances for construction 8,664 8,559 8,353
Other 24,459 20,825 18,281
-------- -------- --------
$ 55,399 $ 51,431 $ 47,063
-------- -------- --------
$337,959 $371,698 $342,335
======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-5-
<PAGE>
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------- ------------------- -------------------
1 9 9 5 1 9 9 4 1 9 9 5 1 9 9 4 1 9 9 5 1 9 9 4
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 52,843 $ 64,191 $263,319 $295,424 $343,431 $351,884
Cash paid for payrolls and to suppliers (63,997) (81,396) (210,989) (254,714) (281,946) (306,836)
Interest paid (781) (2,061) (5,998) (7,235) (9,867) (9,831)
Income taxes paid (786) (1,500) (5,172) (3,000) (5,551) (5,200)
Taxes other than income taxes paid (3,257) (3,198) (4,644) (4,676) (7,934) (8,599)
Other cash receipts and payments, net 736 725 1,874 1,508 1,212 812
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $(15,242) $(23,239) $ 38,390 $ 27,307 $ 39,345 $ 22,230
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $ (6,103) $ (5,590) $(13,975) $(12,873) $(21,455) $(20,532)
Interest in other natural gas related property - - - (32) (1) (1,351)
Other property additions (90) (42) (501) (709) (1,210) (896)
Property retirement costs, net of proceeds (147) (36) (300) (151) (462) (216)
Advances to equity investees (880) - (2,440) - (3,346) -
-------- -------- -------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $ (7,220) $ (5,668) $(17,216) $(13,765) $(26,474) $(22,995)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 1,253 $ 1,315 $ 4,320 $ 19,013 $ 5,691 $ 21,076
Repurchase of common stock <F1> (1,308) - (4,829) - (4,829) -
Net change in notes payable to banks 25,300 37,450 (12,150) (14,892) 400 (13,750)
Issuance of long-term debt - - - 80,000 - 100,000
Repayment of long-term debt - (58,280) (1,322) (92,077) (4,028) (96,751)
Payment of dividends (2,406) (2,272) (7,019) (6,563) (9,308) (8,530)
-------- -------- -------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $ 22,839 $(21,787) $(21,000) $(14,519) $(12,074) $ 2,045
-------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS $ 377 $(50,694) $ 174 $ (977) $ 797 $ 1,280
-------- -------- -------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Period $ 2,408 $ 52,682 $ 2,611 $ 2,965 $ 1,988 $ 708
-------- -------- -------- -------- -------- --------
End of Period $ 2,785 $ 1,988 $ 2,785 $ 1,988 $ 2,785 $ 1,988
======== ======== ======== ======== ======== ========
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES
Net income (loss) available for common stock $ (2,688) $ (2,556) $ 5,064 $ 6,176 $ 8,880 $ 10,476
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 3,004 2,879 8,965 8,715 11,799 12,176
Extraordinary item - - - 1,286 - 1,463
Deferred taxes and investment tax credits 255 (1,057) 245 150 (743) 2,535
Equity (income) loss, net of distributions 593 590 1,397 530 1,701 357
Receivables 6,053 4,979 14,860 6,069 4,088 (7,434)
Accrued revenue (150) (1,627) 19,669 14,444 3,204 1,416
Materials and supplies and gas in underground storage (12,492) (20,711) 3,947 (13,171) 11,686 8,981
Gas charges, recoverable from customers (6,089) (5,439) (1,543) 4,420 1,804 (5,966)
Other current assets (1,712) (2,888) 4,558 (227) 2,631 (3,426)
Accounts payable (4,056) (2,548) (19,182) (3,844) (9,146) 1,890
Customer advances and amounts payable to customers 1,789 5,048 (3,208) 491 (1,988) 3,440
Accrued taxes (870) (1,610) 562 1,928 (210) (1,634)
Other, net 1,121 1,701 3,056 340 5,639 (2,044)
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $(15,242) $(23,239) $ 38,390 $ 27,307 $ 39,345 $ 22,230
======== ======== ======== ======== ======== ========
<FN>
<F1>
See note 3 of notes to the consolidated financial statements.
</FN>
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-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 the recognition of 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 the adoption of the standard will have a material impact
on the financial position or results of operations of the Company.
(2) REGULATORY MATTERS
In December 1992, the Michigan Public Service Commission (MPSC) issued
Order U-10040 addressing the change in accounting for the cost of retiree
medical benefits. Pursuant to this order, Southeastern Michigan Gas Company
(Southeastern) and Michigan Gas Company (Michigan Gas) were required to file
general rate cases before 1996 in order to recover certain expenses related to
this change in accounting treatment.
In October 1995, the MPSC approved an application by Southeastern and
Michigan Gas to extend the deadline for filing these general rate cases to
December 31, 1996.
-7-
<PAGE>
At this time Southeastern and Michigan Gas expect to file general rate
cases before 1997 in accordance with Order U-10040 to recover certain expenses
related to the change in accounting for the cost of retiree medical benefits.
Any relief granted will be based on all elements of cost of service.
On November 3, 1995, Battle Creek Gas Company (Battle Creek) filed a
request for rate relief with the City of Battle Creek. Battle Creek is
requesting an increase in gross margin of approximately $1.8 million to recover
the cost of certain accelerated main replacement projects, the cost of its
retiree medical benefits and overall increases in operating expenses. If
approved, this request will result in an increase to Battle Creek's net income
of approximately $500,000 on an annualized basis. The request is scheduled for
review by the City Commission of Battle Creek on November 21, 1995.
At September 30, 1995, the Company had a total of $162,000 in remaining
take-or-pay liabilities. These costs are substantially recoverable from
ratepayers. The Company does not anticipate additional take-or-pay
assessments.
At September 30, 1995, the Company had $912,000 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.
(3) CAPITALIZATION
Common Stock Equity
- -------------------
On October 12, 1995, the Company's Board of Directors declared a regular
quarterly cash dividend on common stock of $.20 per share payable on November
15 to shareholders of record on November 3.
In August 1995, the Company paid a quarterly cash dividend of $.20 per
share to its common shareholders. Of the total cash dividend of $2,357,000,
$862,000 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
$391,000 resulted in 64,320 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 third quarter of 1995, the Company
purchased 67,738 shares for $1,308,000.
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 1995 and 1994.
-8-
<PAGE>
(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 $87,000,000 of debt
used to finance the pipeline. Of the total debt, approximately $57,000,000 is
outstanding pursuant to a long-term arrangement requiring annual principal
payments of $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, 1995, NOARK had $29,550,000
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. See Results of Operations for a discussion of losses from
the Company's investment in NOARK. 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 Company (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.
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.
As these circumstances continue, NOARK's operating cash flows will be
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,
pursuant to the guarantee.
The NOARK partners are currently investigating several options available
to NOARK. Periodic evaluations of the recoverability of this asset are made by
management. Management believes that no write-down of its investment in NOARK
is appropriate at this time based on its most recent evaluation. Therefore, no
write-down provision has been made in the accompanying financial statements.
-9-
<PAGE>
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. SEMCO
Arkansas Pipeline Company is a party to that claim in its capacity as a general
partner of NOARK. In June 1995, the state court judge ruled that, in order to
avoid multiple lawsuits, the state court action should be dismissed without
prejudice to filing of the claim in the pending Arkansas federal court action
described below. The NOARK general partners have since taken steps to assert
the claim for breach of the firm transportation agreement in the pending
federal action.
The NOARK managing partner and three related parties sued Vesta in
Arkansas federal court over certain contracts in February 1994. 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 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 November 1995 and no settlement was reached. Trial of the federal
action is scheduled for December 1995.
-10-
<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 loss available for common shareholders for the quarter
ended September 30, 1995 was $2,688,000, or $.23 per share, compared to a net
loss of $2,556,000 or $.22 per share, for the quarter ended September 30,
1994.
Consolidated net income available for common shareholders before
extraordinary item was $5,064,000, or $.43 per share, and $7,462,000, or $.65
per share for the nine months ended September 30, 1995 and September 30, 1994,
respectively. In the nine months ended September 30, 1994, the Company
recorded an extraordinary charge, net of tax, of $1,286,000, or $.12 per share,
for the early extinguishment of debt.
For the twelve months ended September 30, 1995 and 1994, consolidated net
income available for common shareholders before extraordinary item was
$8,880,000, or $.75 per share, and $11,939,000, or $1.06 per share,
respectively. In the twelve months ended September 30, 1994, the Company
recorded a net-of-tax extraordinary charge of $1,463,000, or $.13 per share,
for the early extinguishment of debt.
Since the Company's primary business of natural gas distribution depends
upon the winter months for the majority of its operating revenue, the Company
typically experiences a consolidated net loss in the third quarter.
See Note 4 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-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------- ------------------- -------------------
1 9 9 5 1 9 9 4 1 9 9 5 1 9 9 4 1 9 9 5 1 9 9 4
------- ------- -------- -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Gas Sales Revenue
Residential $14,584 $13,882 $ 78,972 $ 90,197 $109,841 $132,642
Commercial 6,694 7,091 37,583 43,800 53,196 66,891
Industrial 2,340 2,587 9,870 11,546 13,805 17,359
------- ------- -------- -------- -------- --------
$23,618 $23,560 $126,425 $145,543 $176,842 $216,892
Cost of Gas Sold 15,326 15,463 83,256 101,586 117,339 154,680
------- ------- -------- -------- -------- --------
Gross Margin - Gas Sales $ 8,292 $ 8,097 $ 43,169 $ 43,957 $ 59,503 $ 62,212
======= ======= ======== ======== ======== ========
Gas Marketing Revenue $23,200 $32,959 $ 93,902 $112,134 $140,052 $132,544
Cost of Gas Marketed 22,390 32,060 91,263 109,042 136,194 128,323
------- ------- -------- -------- -------- --------
Gross Margin - Gas Marketing $ 810 $ 899 $ 2,639 $ 3,092 $ 3,858 $ 4,221
======= ======= ======== ======== ======== ========
Transportation Revenue $ 2,540 $ 2,512 $ 8,998 $ 8,731 $ 12,266 $ 11,925
======= ======= ======== ======== ======== ========
Other Revenue $ 1,249 $ 1,422 $ 4,328 $ 4,786 $ 5,729 $ 6,179
======= ======= ======== ======== ======== ========
<CAPTION>
(in millions of cubic feet)
<S> <C> <C> <C> <C> <C> <C>
Gas Sales Volumes
Residential 1,684 1,608 16,015 16,866 22,586 24,476
Commercial 922 960 8,331 8,815 11,985 13,103
Industrial 378 386 2,279 2,473 3,270 3,556
------- ------- -------- -------- -------- --------
2,984 2,954 26,625 28,154 37,841 41,135
======= ======= ======== ======== ======== ========
Gas Marketing Volumes 16,500 18,243 61,553 52,398 87,237 60,541
======= ======= ======== ======== ======== ========
Gas Transportation Volumes 4,952 4,284 17,896 14,998 24,191 20,108
======= ======= ======== ======== ======== ========
Degree Days - Actual 230 199 4,529 4,910 6,604 7,353
- Percent of Normal 106% 95% 103% 112% 97% 108%
Gas Sales Customers - Average 221,491 214,974 221,531 215,321 220,740 214,747
</TABLE>
QUARTER RESULTS
Gross margin on gas sales increased by $195,000, or 2%, for the quarter
ended September 30, 1995 over the same period in 1994. The increase was due
primarily to the addition of over 6,500 gas sales customers.
Natural gas volumes marketed for the third quarter of 1995 decreased by
10% over the same period in 1994 and gas marketing margins declined by
$89,000. Renewals of existing marketing contracts and new contracts are being
sold at much lower per-unit margins as the industry becomes more sophisticated
and competitive.
Transportation revenues during the quarter increased $28,000, or 1%,
compared to the same period in 1994 while volumes increased 16%. 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.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Other income (loss), net, reflects the after-tax loss from the Company's
investment in NOARK of $421,000 for the third quarter of 1995 compared with a
loss of $369,000 for the third quarter of 1994.
Interest on long-term debt decreased $441,000 and other interest increased
$68,000 due primarily to the timing of debt refinancing in 1994.
YEAR-TO-DATE RESULTS
Gross margin on gas sales for the nine-month period ended September 30,
1995, decreased $788,000 over the same period last year primarily due to the
impact of warmer temperatures on volumes sold in the first quarter of this year
compared to last year. Overall, temperatures in the first nine months of 1995
were approximately 8% warmer than the same period last year. Offsetting some
of the impact of warmer weather were increases in customers. The average
number of customers served year-to-date 1995 increased from 1994 by over 6,200.
Year-to-date 1995, gross margin from gas marketing decreased $453,000, or
15%, from 1994 even as gas marketing volumes increased by 17%. As noted above,
renewals of existing marketing contracts and new contracts are being sold at
much lower per-unit margins as the industry becomes more sophisticated and
competitive.
Operations and maintenance expense increased by $885,000, or 3%, in the
first nine months of 1995 compared to a year ago. Approximately $430,000 of
the increase was due to the expensing of certain retiree medical expenses
pursuant to particular MPSC orders. The orders require that savings generated
by property tax reductions in the State of Michigan be offset by reductions in
the retiree medical regulatory assets. The $430,000 of savings from property
tax reductions is reflected in the decrease in taxes other than income taxes
over these periods. Also contributing to the increase in operations and
maintenance expense was increased medical costs and restructuring charges
associated with a plan to centralize certain administration 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.
Through September 1995, the Company recorded approximately $530,000 of
restructuring charges for the cost of severance agreements accepted by 33
employees and at September 30, 1995, approximately $270,000 remained accrued
for the balance of payments related to these individuals.
The Company does not expect to incur additional material charges in
connection with the restructuring. The Company is, however, continuing to
evaluate opportunities to restructure other appropriate functions.
For the nine months ended September 30, 1995, income taxes decreased
$607,000 over the same period in 1994 due primarily to lower pre-tax earnings.
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Other income (loss), net reflects the after-tax loss from the Company's
investment in NOARK of $1,244,000 for the nine months ended September 1995
compared with a loss of $773,000 for the same period in 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.
In the first nine months of 1995 compared to the same period in 1994,
interest on long-term debt decreased slightly while other interest increased
slightly. These changes reflect the timing of debt refinancing in 1994.
TWELVE-MONTH RESULTS
Gas sales margin decreased $2,709,000, or 4%, for the twelve month period
ended September 30, 1995, compared to the same period a year earlier. The
addition of over 5,900 gas sales customers offset a portion of the impact of
weather that was 10% warmer than the prior period.
Gas marketing volumes increased by 26,696 million cubic feet, or 44%,
while gas marketing margin decreased by $363,000, or 9%, over the prior
period. The twelve-month comparison of marketing activities highlights the
impact of Federal Energy Regulatory Commission Order 636, which
significantly increased the demand for natural gas marketing and related
services.
As noted above, weather and changes in the natural gas marketing industry
also significantly impact the results of SEMCO's marketing activities. This is
especially apparent as sophistication and competition in the gas marketing
industry have led to reduced per-unit margins over the twelve-month periods.
Operations and maintenance expense increased by $1,076,000 in the current
period compared to the same period a year ago. Approximately $790,000 of the
increase was due to the expensing of certain retire medical expenses pursuant
to MPSC orders. The $790,000 of savings from property tax reductions is
reflected in the decrease in taxes other than income taxes over these periods.
Also contributing to the increase were certain restructuring costs, as
discussed above, and increased medical expenses.
Depreciation expense declined $377,000 from the $12,176,000 expensed in
the twelve-months ended September 30, 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 $505,000 for the twelve
months ended September 30, 1994 to a loss of $679,000 in the same period ending
September 30, 1995. The decline primarily reflects the increase in the loss
(net of tax) from the Company's investment in NOARK from $836,000 to $1,670,000
over the respective periods.
-14-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Interest on long-term debt decreased by $226,000 and other interest
increased by $78,000 due primarily to the timing to the Company's refinancing
of long-term debt in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the three, nine and twelve month
periods ended September 30, 1995, as compared to the same periods last year,
increased $7,997,000, $11,083,000, and $17,115,000, 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 $11,840,000 for capital
items during the remainder of 1995. These estimated amounts will primarily
relate to customers 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 provided $22,839,000 in funds during the third
quarter of 1995, primarily from increased notes payable to banks. Changes in
financing cash flows between the three, nine and twelve month periods ended
September 30, 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 resale 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 September 30, 1995, the Company had $52,050,000 in unused lines
of credit.
-15-
<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 September 30, 1995 as follows:
Total Retained Earnings - $10,418,000
Amount Available for Payment of Dividends - $10,418,000
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 18 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 third quarter of 1995.
-16-
<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: November 14, 1995
By: Marcia M. Chmielewski
Vice President and Principal
Accounting and Financial Officer
-17-
<PAGE>
EXHIBIT INDEX
Form 10-Q
Third Quarter 1995
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- ------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3(a) 1--Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
(Enterprises), as restated July 11, 1989.(e) x
2--Certificate of Amendment to Article III of
the Articles of Incorporation dated
May 16, 1990.(f) x
3(b) Bylaws of Enterprises--last revised
March 1, 1995.(g) x
4(a) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(b) x
4(b) Note Agreement dated as of June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(d) x
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(a) x
10(b) Group A Employment Contract.(c) x
10(c) Short-Term Incentive Plan.(c) x
10(d) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside directors
only).(h) x
11 Statement re computation of per share earnings. NA NA
15 Letter re unaudited interim financial
information. NA NA
18 Letter re change in accounting principle. NA NA
19 Report furnished to security holders. NA NA
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. NA NA
24 Power of Attorney. NA NA
27 Financial Data Schedule. x
99 Additional exhibits. NA NA
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(b) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(c) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(d) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(e) Filed with Enterprises' Form 10-K for 1989, dated March 29, 1990,
File No. 0-8503.
(f) Filed with Enterprises' Form 10-K for 1990, dated March 28, 1991,
File No. 0-8503.
(g) Filed with Enterprises' Form 10-K for 1994, dated March 28, 1995,
File No. 0-8503.
(h) Filed with Enterprises' Form 10-Q for the quarter ended September 30,
1994, File No. 0-8503.
-18-
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, THE CONSOLIDATED BALANCE SHEETS AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 215,587
<OTHER-PROPERTY-AND-INVEST> 14,266
<TOTAL-CURRENT-ASSETS> 79,546
<TOTAL-DEFERRED-CHARGES> 28,560
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 337,959
<COMMON> 11,806
<CAPITAL-SURPLUS-PAID-IN> 82,846
<RETAINED-EARNINGS> 10,418
<TOTAL-COMMON-STOCKHOLDERS-EQ> 105,070
0
3,279
<LONG-TERM-DEBT-NET> 103,588
<SHORT-TERM-NOTES> 37,850
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 88,172
<TOT-CAPITALIZATION-AND-LIAB> 337,959
<GROSS-OPERATING-REVENUE> 233,653
<INCOME-TAX-EXPENSE> 3,092
<OTHER-OPERATING-EXPENSES> 216,935
<TOTAL-OPERATING-EXPENSES> 220,027
<OPERATING-INCOME-LOSS> 13,626
<OTHER-INCOME-NET> (560)
<INCOME-BEFORE-INTEREST-EXPEN> 13,066
<TOTAL-INTEREST-EXPENSE> 7,989
<NET-INCOME> 5,077
13
<EARNINGS-AVAILABLE-FOR-COMM> 5,064
<COMMON-STOCK-DIVIDENDS> 6,873
<TOTAL-INTEREST-ON-BONDS> 6,419
<CASH-FLOW-OPERATIONS> 38,390
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
