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 June 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 July 28, 1995, is
11,799,796.
<PAGE>
<TABLE>
INDEX TO FORM 10-Q
------------------
For Quarter Ended June 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 . . . . . . . . . . 10
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 STATEMENT OF INCOME
(Unaudited)
(Thousands of Dollars Except Per Share Amounts)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 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 $33,523 $32,928 $102,807 $121,983 $176,784 $212,710
Gas marketing 27,980 38,458 70,702 79,174 149,812 116,474
Transportation 2,915 2,837 6,458 6,220 12,237 11,969
Other operations 1,323 1,730 3,079 3,364 5,902 6,385
------- ------- -------- -------- -------- --------
$65,741 $75,953 $183,046 $210,741 $344,735 $347,538
------- ------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $21,504 $22,156 $ 67,930 $ 86,124 $117,475 $149,688
Cost of gas marketed 27,165 37,343 68,873 76,982 145,864 112,351
Operations 7,740 7,403 15,988 15,125 31,918 30,400
Maintenance 1,029 1,095 2,070 2,160 4,413 4,581
Depreciation 2,975 2,916 5,961 5,836 11,674 12,145
Income taxes 408 272 4,430 5,299 4,335 7,432
Taxes other than income taxes 1,960 2,053 4,175 4,393 7,968 8,605
------- ------- -------- -------- -------- --------
$62,781 $73,238 $169,427 $195,919 $323,647 $325,202
------- ------- -------- -------- -------- --------
OPERATING INCOME $ 2,960 $ 2,715 $ 13,619 $ 14,822 $ 21,088 $ 22,336
OTHER INCOME (LOSS), NET (237) 22 (447) 192 (681) 723
------- ------- -------- -------- -------- --------
INCOME BEFORE INCOME DEDUCTIONS $ 2,723 $ 2,737 $ 13,172 $ 15,014 $ 20,407 $ 23,059
------- ------- -------- -------- -------- --------
INCOME DEDUCTIONS
Interest on long-term debt $ 2,133 $ 1,708 $ 4,290 $ 3,878 $ 9,017 $ 8,589
Other interest 135 391 809 862 1,735 1,886
Amortization of debt expense 112 76 224 158 448 326
Dividends on preferred stock of subsidiary 44 45 89 89 178 178
------- ------- -------- -------- -------- --------
$ 2,424 $ 2,220 $ 5,412 $ 4,987 $ 11,378 $ 10,979
------- ------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK BEFORE PREFERRED
STOCK DIVIDENDS AND EXTRAORDINARY ITEM $ 299 $ 517 $ 7,760 $ 10,027 $ 9,029 $ 12,080
Dividends on convertible preferred stock 4 4 8 9 17 18
------- ------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK BEFORE EXTRAORDINARY ITEM $ 295 $ 513 $ 7,752 $ 10,018 $ 9,012 $ 12,062
EXTRAORDINARY ITEM-Loss on early extinguishment of debt,
net of income taxes of $692 for the three and six months
ended June 30, 1994, and $788 for the twelve months ended
June 30, 1994 - 1,286 - 1,286 - 1,463
------- ------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $ 295 $ (773) $ 7,752 $ 8,732 $ 9,012 $ 10,599
======= ======= ======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK BEFORE EXTRAORDINARY ITEM $ .02 $ .04 $ .65 $ .87 $ .76 $ 1.09
======= ======= ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ .02 $ (.07) $ .65 $ .76 $ .76 $ .96
======= ======= ======== ======== ======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .19 $ .18 $ .38 $ .37 $ .76 $ .73
======= ======= ======== ======== ======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 11,848 11,632 11,855 11,472 11,799 11,018
======= ======= ======== ======== ======== ========
</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 SHEET
A S S E T S
<CAPTION>
(Unaudited) (Unaudited)
June 30, December 31, June 30,
1995 1994 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
UTILITY PLANT:
Plant in Service, at Cost $294,403 $287,414 $278,958
Less - Accumulated depreciation 81,925 76,674 75,339
-------- -------- --------
$212,478 $210,740 $203,619
OTHER PROPERTY, net 15,006 16,015 16,254
-------- -------- --------
$227,484 $226,755 $219,873
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash investments, at cost $ 2,408 $ 2,611 $ 52,682
Receivables, less allowances of $974 at June 30, 1995,
$889 at December 31, 1994, and $1,103 at June 30, 1994 14,000 22,807 18,897
Accrued revenue 13,480 33,299 13,326
Materials and supplies, at average cost 3,985 3,352 3,623
Gas in underground storage 19,048 36,120 22,877
Gas charges, recoverable from customers 3,657 8,203 6,111
Accumulated deferred income taxes 2,557 2,471 -
Other 5,746 12,016 7,200
-------- -------- --------
$ 64,881 $120,879 $124,716
-------- -------- --------
DEFERRED CHARGES:
Unamortized debt expense $ 5,926 $ 6,150 $ 6,134
Deferred gas charges, recoverable from customers 655 798 1,101
Advances to equity investees 2,466 906 -
Other 17,756 16,210 13,742
-------- -------- --------
$ 26,803 $ 24,064 $ 20,977
-------- -------- --------
$319,168 $371,698 $365,566
======== ======== ========
</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 SHEET
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<CAPTION>
(Unaudited) (Unaudited)
June 30, December 31, June 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; 11,808,969, 11,260,584 and
11,114,473 shares outstanding, respectively $ 11,809 $ 11,261 $ 11,114
Capital surplus 82,130 81,091 78,549
Retained earnings 16,229 15,027 18,231
-------- -------- --------
$110,168 $107,379 $107,894
-------- -------- --------
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 175 180 182
-------- -------- --------
$ 182 $ 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 $103,588 $104,910 $104,950
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 12,550 $ 50,000 $ -
Current maturities of long-term debt - - 58,275
Accounts payable 21,119 36,245 30,193
Customer advance payments 3,146 8,736 2,449
Accrued taxes 2,158 726 3,108
Accrued interest 1,026 1,145 1,422
Accumulated deferred income taxes - - 140
Amounts payable to customers 969 115 549
Other 8,230 7,723 6,175
-------- -------- --------
$ 49,198 $104,690 $102,311
-------- -------- --------
DEFERRED CREDITS
Accumulated deferred income taxes $ 18,940 $ 18,722 $ 18,031
Unamortized investment tax credit 3,183 3,325 3,450
Customer advances for construction 8,298 8,559 8,142
Other 22,511 20,825 17,498
-------- -------- --------
$ 52,932 $ 51,431 $ 47,121
-------- -------- --------
$319,168 $371,698 $365,566
======== ======== ========
</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 Six Months Ended Twelve Months Ended
June 30, June 30, June 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 $ 86,981 $114,747 $210,476 $231,233 $354,779 $341,021
Cash paid for payrolls and to suppliers (63,727) (90,178) (146,992) (173,318) (299,345) (291,990)
Interest paid (3,927) (1,877) (5,217) (5,174) (11,147) (10,753)
Income taxes paid (2,985) (1,500) (4,386) (1,500) (6,265) (4,475)
Taxes other than income taxes paid (731) (682) (1,387) (1,478) (7,875) (8,479)
Other cash receipts and payments, net 659 383 1,138 783 1,201 2,425
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 16,270 $ 20,893 $ 53,632 $ 50,546 $ 31,348 $ 27,749
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $ (4,972) $ (4,735) $ (7,872) $ (7,283) $(20,942) $(20,559)
Interest in other natural gas related property - - - (32) (1) (1,600)
Other property additions (335) 23 (411) (667) (1,162) (990)
Property retirement costs, net of proceeds (95) (93) (153) (115) (351) (312)
Advances to equity investees (800) - (1,560) - (2,466) -
-------- -------- -------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $ (6,202) $ (4,805) $ (9,996) $ (8,097) $(24,922) $(23,461)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 1,207 $ 1,374 $ 3,067 $ 17,698 $ 5,753 $ 21,122
Repurchase of common stock<F1> (2,552) - (3,521) - (3,521) -
Net change in notes payable to banks (6,650) (44,350) (37,450) (52,342) 12,550 (26,325)
Issuance of long-term debt - 80,000 - 80,000 - 100,000
Repayment of long-term debt (1,290) (10) (1,322) (33,797) (62,308) (38,712)
Payment of dividends (2,306) (2,154) (4,613) (4,291) (9,174) (8,215)
-------- -------- -------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $(11,591) $ 34,860 $(43,839) $ 7,268 $(56,700) $ 47,870
-------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS $ (1,523) $ 50,948 $ (203) $ 49,717 $(50,274) $ 52,158
-------- -------- -------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Period $ 3,931 $ 1,734 $ 2,611 $ 2,965 $ 52,682 $ 524
-------- -------- -------- -------- -------- --------
End of Period $ 2,408 $ 52,682 $ 2,408 $ 52,682 $ 2,408 $ 52,682
======== ======== ======== ======== ======== ========
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES
Net income (loss) available for common stock $ 295 $ (773) $ 7,752 $ 8,732 $ 9,012 $ 10,599
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 2,975 2,916 5,961 5,836 11,674 12,145
Extraordinary item - 1,286 - 1,286 - 1,463
Deferred taxes and investment tax credits 132 694 (10) 1,207 (2,055) 3,177
Equity (income) loss, net of distributions 388 (19) 804 (60) 1,698 3
Receivables 13,732 14,033 8,807 1,090 3,014 (9,489)
Accrued revenue 9,933 21,482 19,819 16,071 1,727 305
Materials and supplies and gas in underground storage (7,887) (14,089) 16,439 7,540 3,467 5,797
Gas charges, recoverable from customers (76) 5,366 4,546 9,859 2,454 9
Other current assets 2,146 1,695 6,270 2,661 1,455 65
Accounts payable (798) (10,072) (15,126) (1,296) (7,638) 6,114
Customer advances and amounts payable to customers (2,010) (323) (4,997) (4,557) 1,271 441
Accrued taxes (2,135) (2,272) 1,432 3,538 (950) (2,346)
Other, net (425) 969 1,935 (1,361) 6,219 (534)
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 16,270 $ 20,893 $ 53,632 $ 50,546 $ 31,348 $ 27,749
======== ======== ======== ======== ======== ========
<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 adoption will have a material impact on the financial
position or results of operations of the Company.
(2) REGULATORY MATTERS
At June 30, 1995, the Company had a total of $195,000 in remaining
take-or-pay liabilities. These costs are substantially recoverable from
ratepayers. The Company does not anticipate additional take-or-pay
assessments.
At June 30, 1995, the Company had $1,257,000 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 June 8, 1995, the Company's Board of Directors declared a regular
quarterly cash dividend on common stock of $.20 per share payable on August 15
to shareholders of record at the close of business on August 4.
In May 1995, the Company issued a 5% stock dividend and paid a quarterly
cash dividend of $.20 per share to its common shareholders. Shareholders
reinvested $818,000 of the cash dividend into common stock through the Dividend
Reinvestment and Common Stock Purchase Plan (the DRIP). This portion of the
second quarter dividend and shareholders' optional cash payments of $389,000,
resulted in 63,008 shares issued to existing shareholders during the quarter
pursuant to the DRIP; 61,934 of such shares were purchased in the open market
for reissuance and 1,074 shares of which were newly issued.
In connection with the repurchase of common stock for reissuance, a total
of 130,000 and 50,000 shares of common stock were purchased on the open market
for $2,552,000 and $969,000 during the second and first quarters of 1995,
respectively.
The May 1995 5% stock dividend resulted in 565,000 shares issued to
existing shareholders. 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.
(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, $57,488,000 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 June 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. 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.
-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. 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 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, $800,000 in April 1995, and $880,000 in July 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 June 30, 1995 was $295,000, or $.02 per share, compared to a net loss of
$773,000 or $.07 per share, for the quarter ended June 30, 1994. The second
quarter 1994 results reflect an extraordinary charge, net of tax, of
$1,286,000, or $.11 per share, for the early extinguishment of debt.
Consolidated net income available for common shareholders was $7,752,000,
or $.65 per share, and $8,732,000, or $.76 per share for the six months ended
June 30, 1995 and June 30, 1994, respectively. The extraordinary charge, noted
above, of $1,286,000, net of tax, or $.11 per share, is reflected in the
results for the first half of 1994.
For the twelve months ended June 30, 1995 and 1994, consolidated net
income available for common shareholders was $9,012,000, or $.76 per share, and
$10,599,000, or $.96 per share, respectively. The 1994 twelve month results
reflect 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 nominal net income in the second 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.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 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>
Operating Revenue
Gas Sales
Residential $21,082 $20,760 $ 64,388 $ 76,315 $109,139 $130,859
Commercial 9,856 9,527 30,889 36,709 53,593 65,084
Industrial 2,585 2,641 7,530 8,959 14,052 16,767
------- ------- -------- -------- -------- --------
$33,523 $32,928 $102,807 $121,983 $176,784 $212,710
Cost of Gas Sold 21,504 22,156 67,930 86,124 117,475 149,688
------- ------- -------- -------- -------- --------
Gross Margin $12,019 $10,772 $ 34,877 $ 35,859 $ 59,309 $ 63,022
======= ======= ======== ======== ======== ========
Gas Marketing $27,980 $38,458 $ 70,702 $ 79,174 $149,812 $116,474
Cost of Gas Marketed 27,165 37,343 68,873 76,982 145,864 112,351
------- ------- -------- -------- -------- --------
Gross Margin $ 815 $ 1,115 $ 1,829 $ 2,192 $ 3,948 $ 4,123
======= ======= ======== ======== ======== ========
Transportation $ 2,915 $ 2,837 $ 6,458 $ 6,220 $ 12,237 $ 11,969
======= ======= ======== ======== ======== ========
Other $ 1,323 $ 1,730 $ 3,079 $ 3,364 $ 5,902 $ 6,385
======= ======= ======== ======== ======== ========
<CAPTION>
(in millions of cubic feet)
<S> <C> <C> <C> <C> <C> <C>
Gas Volumes
Gas Sales
Residential 3,928 3,521 14,331 15,257 22,511 24,650
Commercial 2,055 1,814 7,409 7,855 12,023 13,147
Industrial 572 551 1,901 2,087 3,278 3,621
------- ------- -------- -------- -------- --------
6,555 5,886 23,641 25,199 37,812 41,418
======= ======= ======== ======== ======== ========
Gas Marketing 17,884 18,589 45,053 34,155 88,980 50,490
======= ======= ======== ======== ======== ========
Gas Transported 5,459 4,729 12,944 10,714 23,523 19,931
======= ======= ======== ======== ======== ========
Degree Days - Actual 1,053 994 4,299 4,713 6,572 7,422
- Percent of Normal 114% 107% 103% 113% 97% 110%
Gas Sales Customers - Average 221,883 215,532 221,552 215,494 219,111 213,366
</TABLE>
QUARTER RESULTS
Gross margin on gas sales increased by $1,247,000 as gas volumes sold for
the three month period ended June 30, 1995 increased 11% from the same period
in 1994. Volumes increased with the addition of over 6,300 gas sales customers
and 6% colder temperatures during the second quarter of 1995.
Natural gas volumes marketed for the second quarter of 1995 decreased by
4% over the same period in 1994 and gas marketing margins declined by
$300,000. In the three months ended June 30, 1994, SEMCO Energy Services
(SEMCO), the Company's gas marketing affiliate, benefitted from contracts
for storage injection which were not renewed in the same period in 1995.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Transportation revenues during the quarter increased $78,000, or 3%,
compared to the same period in 1994 while volumes increased 15%. 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 $271,000, or 3%, in the
first quarter compared to a year ago. A primary component of the increase was
higher employee medical expenses.
Other income (loss), net reflects the after-tax loss from the Company's
investment in NOARK of $428,000 for the second quarter of 1995 compared with a
loss of $249,000 for the second quarter of 1994. The 1995 result reflects the
loss of all firm volumes associated with Vesta. 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 increased $425,000 and other interest decreased
$256,000 due primarily to the timing of debt refinancing in 1994.
YEAR-TO-DATE RESULTS
Gross margin on gas sales for the six-month period ended June 30, 1995,
decreased $982,000 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 six months of 1995
were approximately 9% 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 6,000.
Year-to-date 1995, gross margin from gas marketing decreased $363,000, or
17%, from 1994 even as gas marketing volumes increased by 32%. 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 $773,000, or 4%, in the
first six months of 1995 compared to a year ago. Approximately $300,000 of the
increase was due to the expensing of certain retiree medical expenses pursuant
to particular Michigan Public Service Commission (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.
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.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
In connection with this restructuring certain employees were given the
option of moving to the centralized location or accepting severance agreements.
Through June 1995, the Company recorded approximately $400,000 of restructuring
charges for the cost of severance agreements accepted by 18 employees and at
June 30, 1995, approximately $270,000 remained accrued for the balance of
payments related to these individuals. Less than 10 employees receiving the
severance option had not made decisions as of June 30, 1995.
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 six months ended June 30, 1995, income taxes decreased $869,000,
or 16%, 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 $823,000 for the first half of 1995 compared with a loss
of $404,000 for the first half 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.
In the first six months of 1995 compared to the same period in 1994,
interest on long-term debt increased by approximately $412,000 while other
interest decreased slightly. These changes resulted primarily from the timing
of debt refinancing in 1994.
TWELVE-MONTH RESULTS
Gas sales margin decreased $3,713,000, or 6%, for the twelve month period
ended June 30, 1995, compared to the same period a year earlier. The addition
of over 5,700 gas sales customers offset a portion of the impact of weather
that was 11% warmer than the prior period.
Gas marketing volumes increased by 38,490 million cubic feet, or 76%,
while gas marketing margin decreased by $175,000, or 4%, 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 the increased sophistication and competition
of the natural gas marketing industry also significantly impact the results of
SEMCO's marketing activities. This is especially apparent as competition and
sophistication in the gas marketing industry have led to reduced per-unit
margins over the twelve-month periods.
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Operations and maintenance expense increased by $1,350,000 in the current
period compared to the same period a year ago. Approximately $770,000 of the
increase was due to the expensing of certain retire medical expenses pursuant
to MPSC orders. Also contributing to the increase were certain restructuring
costs, as discussed above, and increased medical expenses.
Depreciation expense declined $471,000 from the $12,145,000 expensed in
the twelve-months ended June 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 $723,000 for the twelve
months ended June 30, 1994 to a loss of $681,000 in the same period ending June
30, 1995. The decline primarily reflects the increase in the loss (net of tax)
from the Company's investment in NOARK from $520,000 to $1,619,000 over the
respective periods.
Interest on long-term debt increased by $428,000 and other interest
decreased by $151,000 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, six and twelve month
periods ended June 30, 1995, as compared to the same periods last year,
increased/(decreased) ($4,623,000), $3,086,000, and $3,599,000, 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 $19,000,000 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 used $11,591,000 in funds during the second quarter
of 1995, primarily to reduce notes payable to banks. Changes in financing cash
flows between the three, six and twelve month periods ended June 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 resales through the DRIP, increased dividend payments, and the timing
of the Company's debt refinancing in 1993 and 1994.
-14-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
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 June 30, 1995, the Company had $77,350,000 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 June 30, 1995 as follows:
Total Retained Earnings - $16,229,000
Amount Available for Payment of Dividends - $16,229,000
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 second 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: August 14, 1995
By: Marcia M. Chmielewski, Vice President and
Principal Accounting and Financial
Officer
-17-
<PAGE>
<TABLE>
EXHIBIT INDEX
Form 10-Q
Second 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 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
</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.
(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 STATEMENT OF INCOME, CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 212,478
<OTHER-PROPERTY-AND-INVEST> 15,006
<TOTAL-CURRENT-ASSETS> 64,881
<TOTAL-DEFERRED-CHARGES> 26,803
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 319,168
<COMMON> 11,809
<CAPITAL-SURPLUS-PAID-IN> 82,130
<RETAINED-EARNINGS> 16,229
<TOTAL-COMMON-STOCKHOLDERS-EQ> 110,168
0
3,282
<LONG-TERM-DEBT-NET> 103,588
<SHORT-TERM-NOTES> 12,550
<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> 89,580
<TOT-CAPITALIZATION-AND-LIAB> 319,168
<GROSS-OPERATING-REVENUE> 183,046
<INCOME-TAX-EXPENSE> 4,430
<OTHER-OPERATING-EXPENSES> 164,997
<TOTAL-OPERATING-EXPENSES> 169,427
<OPERATING-INCOME-LOSS> 13,619
<OTHER-INCOME-NET> (447)
<INCOME-BEFORE-INTEREST-EXPEN> 13,172
<TOTAL-INTEREST-EXPENSE> 5,412
<NET-INCOME> 7,760
8
<EARNINGS-AVAILABLE-FOR-COMM> 7,752
<COMMON-STOCK-DIVIDENDS> 4,516
<TOTAL-INTEREST-ON-BONDS> 4,290
<CASH-FLOW-OPERATIONS> 53,632
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
</TABLE>
