UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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) (Zip Code)
Registrant's telephone number, including area code 810-987-2200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 Par Value
--------------------------
(Title of Class)
$2.3125, Series A, Convertible
Cumulative Preferred Stock
------------------------------
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock (Common Stock, $1 Par Value)
held by non-affiliates is computed at $187,818,000 based on 10,888,000 shares
held by non--affiliates as of February 29, 1996 at the average of the bid and
ask prices on the closest trading date for such stock of $16.75 and $17.75,
respectively, as quoted on the National Association of Securities Dealers
Automated Quotation National Market System (NASDAQ/NMS) (which prices may not
represent actual transactions).
Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of February 29, 1996: 11,830,000 shares of Common Stock, $1 Par
Value.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to Registrant's April 16, 1996 Annual Meeting of
Shareholders are incorporated by reference herein in response to Part III.
<PAGE>
<TABLE>
T A B L E O F C O N T E N T S
<CAPTION>
PAGE
CONTENTS NUMBER
<S> <C>
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 8
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . 9
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 39
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . 40
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
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<PAGE>
GLOSSARY
Bcf . . . . . . . . . . A measure of natural gas volumes equivalent to one
billion cubic feet
Degree Day . . . . . . . A measure of coldness computed by the number of
degrees the average daily temperature falls below
65 degrees Fahrenheit
DRIP . . . . . . . . . . Dividend Reinvestment and Common Stock Purchase Plan
FASB . . . . . . . . . . Financial Accounting Standards Board
FERC . . . . . . . . . . Federal Energy Regulatory Commission
Mcf . . . . . . . . . . A measure of natural gas volumes equivalent to one
thousand cubic feet
MMcf . . . . . . . . . . A measure of natural gas volumes equivalent to one
million cubic feet
MPSC . . . . . . . . . . Michigan Public Service Commission
NGV . . . . . . . . . . Natural gas vehicle
Normal Degree Days . . . An average of degree days over the last 10 years
NYMEX . . . . . . . . . New York Mercantile Exchange
SFAS . . . . . . . . . . Statement of Financial Accounting Standards
-ii-
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
Southeastern Michigan Gas Enterprises, Inc. (the Company) was formed as a
holding company in 1977 and has four direct subsidiaries. The Company provides
professional and technical services to the consolidated group in the areas of
finance, accounting, tax, risk management, legal, human resources, and
information systems. The Company and its subsidiaries employ approximately 520
persons throughout the state of Michigan.
Southeastern Michigan Gas Company (Southeastern), Battle Creek Gas Company
(Battle Creek) and Michigan Gas Company (Michigan Gas) (collectively, the
utility subsidiaries) purchase, distribute and transport natural gas to 226,000
customers in twenty-three counties in the lower and upper peninsulas of
Michigan. These operations have historically generated over 90% of
consolidated income. Set forth in the table below is sales and transportation
information for the past three years:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gas sales revenue:
Residential.................. $115,242 62% $121,066 62% $122,216 61%
Commercial................... 54,763 30 59,413 30 61,379 31
Industrial................... 14,019 8 15,481 8 16,049 8
-------- --- -------- --- -------- ---
Total gas sales revenue.... $184,024 100% $195,960 100% $199,644 100%
======== === ======== === ======== ===
Gas transportation revenue..... $ 12,448 $ 11,999 $ 11,968
======== ======== ========
Throughput volumes (MMcf):
Gas sales volumes:
Residential.................. 24,676 61% 23,437 59% 23,302 59%
Commercial................... 12,738 31 12,469 32 12,608 32
Industrial................... 3,373 8 3,464 9 3,500 9
------ --- ------ --- ------ ---
Total gas sales volumes.... 40,787 100% 39,370 100% 39,410 100%
====== === ====== === ====== ===
Gas transportation volumes..... 23,849 21,293 19,073
====== ====== ======
</TABLE>
Residential and commercial gas sales customers use natural gas primarily
for space heating purposes. Consequently, weather has a significant impact on
sales to these customers. For the same reason, the Company's operations are
seasonal with most gas sales revenue being earned in the first and fourth
quarters.
In the industrial markets, the utility subsidiaries principally provide
natural gas transportation service. Many larger volume users purchase their
own gas supply and rely on the utilities for transportation service. In
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<PAGE>
addition to transportation, the utilities also provide natural gas storage,
backup supply and balancing services. Industrial sales and transportation
revenues are primarily dependent upon the comparative cost of alternate fuels,
economic conditions and government policies.
Other utility operations include the sale of natural gas-fired equipment,
including heating units, home appliances and NGV equipment. In addition to
sales, the utilities offer financing, installation, service and repair options.
Southeastern and Michigan Gas are subject to the jurisdiction of the MPSC
as to various phases of their operations including rates, accounting, service
standards and the issuance of securities. Battle Creek is subject to the
jurisdiction of the MPSC as to various phases of its operations including
accounting, service standards and issuance of securities, but not as to rates.
Battle Creek's rates are subject to the jurisdiction of the City Commissioners
of Battle Creek, Michigan.
SEMCO Energy Services, Inc. (SEMCO) is a diversified company with
operations and investments in many segments of the natural gas industry.
SEMCO's principal operating activity is natural gas marketing. SEMCO markets
gas to approximately 130 customers located in several states. Its customers
include industrial, commercial and municipal natural gas users, natural gas
distribution companies and other marketers.
SEMCO purchases and markets natural gas to customers on a month-to-month
basis and under long-term agreements. SEMCO also arranges for transportation
of gas supplies to the customers' premises, offers storage capacity, contract
administration and a variety of risk management services.
SEMCO's activities also include operations and interests in natural gas
transmission and gathering systems and an underground gas storage system.
SEMCO, through its subsidiaries Southeastern Development Company and
Southeastern Financial Services, Inc., also manages the leasing of data
processing equipment to companies in the consolidated group and oversees the
real estate operations of the Company. SEMCO has no plans to expand its real
estate operations.
Set forth below are SEMCO's gas marketing revenues, cost of gas marketed,
volumes, average number of customers and earnings (loss) from equity
investments for the past three years:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Natural gas marketing operations:
Gas marketing revenues............ $133,396 $158,284 $70,991
Cost of gas marketed.............. 130,087 153,973 67,474
-------- -------- -------
Gross margin.................... $ 3,309 $ 4,311 $ 3,517
======== ======== =======
Gas volumes marketed (MMcf)....... 82,504 78,082 31,501
Earnings (loss) from equity
investments....................... $ 175 $ (437) $ (23)
</TABLE>
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<PAGE>
SEMCO's gas marketing margins and volumes are sensitive to increasing
competition within the gas marketing industry. See "Management's Discussion
and Analysis" for a discussion relating to competitive pressures in the gas
marketing industry.
Gas Supply. The service territories of the utility subsidiaries are
served by four major interstate pipelines: Panhandle Eastern Pipe Line
Company, Northern Natural Gas Company, Great Lakes Gas Transmission Company and
ANR Pipeline Company.
During 1995, the utility subsidiaries purchased 76% of their natural gas
volumes from firm suppliers and 24% from the spot market. Nearly 35% of the
firm supply volumes were purchased under fixed-price contracts, while the other
65% were purchased under contracts indexed to the spot market. Less than 6% of
1995 gas purchases were from interstate pipelines and intrastate suppliers.
Natural gas purchases are transported to the utility subsidiaries' systems
under various firm and interruptible transportation arrangements with
interstate and intrastate transmission companies.
The utility subsidiaries utilize on-system and leased storage capacity of
approximately 40% of annual gas sales volumes to reduce their reliance on the
interstate pipelines for peak day needs and allow for the purchase of natural
gas at lower prices.
The utility subsidiaries own underground storage facilities with a working
capacity of 4.5 Bcf. In addition, they lease 6.5 Bcf of storage from Eaton
Rapids Gas Storage System and 5.0 Bcf from non-affiliates. SEMCO Gas Storage
Company (an affiliated company) is a 50% owner of Eaton Rapids Gas Storage
System.
SEMCO obtains its gas supply from various production sources, primarily
located in Louisiana, Oklahoma and Michigan. SEMCO generally contracts for gas
supply on a monthly basis, however, it does enter into some long-term gas
purchasing arrangements. See Note 6 of "Notes to the Consolidated Financial
Statements" for a description of SEMCO's hedging activities as they relate to
SEMCO's gas supply strategy.
New Business. Since 1987 the utility subsidiaries have added
approximately 5,000 gas sales customers per year. Customer additions have been
primarily residential and commercial.
Clean air legislation and resultant pressures on industry and electric
utilities to reduce emissions from their plants continue to support interest in
natural gas as an industrial fuel. The use of natural gas as a primary vehicle
fuel is also receiving serious attention for the same environmental reasons.
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<PAGE>
Rates and Regulation. Management continually reviews the adequacy of the
utility subsidiaries' rates. It is management's intention to file requests for
rate increases whenever it is deemed necessary and appropriate. There have
been no general rate filings by Southeastern since 1983 or Michigan Gas since
1990. Battle Creek placed new rates into effect in December 1995. See
"Management's Discussion and Analysis" for a discussion regarding Battle
Creek's rate increase.
In 1992, the MPSC issued a generic order addressing the accounting for the
cost of postretirement benefits other than pensions. Pursuant to this order,
Southeastern and Michigan Gas plan to file rate cases before 1997 in order to
recover certain expenses related to this change in accounting treatment. Any
relief granted will be based on all elements of cost of service. See Note 7 of
"Notes to the Consolidated Financial Statements" for further discussion.
Competition. Natural gas competes with other forms of energy available to
customers, primarily on the basis of rates. These competitive forms of energy
include electricity, coal, propane and fuel oils. Changes in the availability
or price of natural gas or other forms of energy, as well as business
conditions, conservation, legislation, regulations, capability to convert to
alternate fuels and other factors may affect the demand for natural gas in
areas served by the Company's subsidiaries.
The Company's subsidiaries sell natural gas to and transport natural gas
for several large customers who have the ability to use alternate fuels.
SEMCO's natural gas marketing operations compete with other marketing
firms on the basis of price, the ability to arrange suitable transportation to
the customer's premises and the ability to provide related services such as
pipeline nominations and balancing.
Competition has increased significantly in the natural gas marketing
industry. See "Management's Discussion and Analysis" for further discussion.
ITEM 2. PROPERTIES
The properties of the Company consist of the Common Stock of Southeastern,
Michigan Gas, Battle Creek, SEMCO, and leasehold improvements and office
equipment.
SOUTHEASTERN MICHIGAN GAS COMPANY
Southeastern owns gas supply systems which, on December 31, 1995, included
approximately 112 miles of transmission pipelines and 1,895 miles of
distribution pipelines. The pipelines are located in southeastern Michigan
(centered in and around the City of Port Huron) and south-central Michigan
(centered in and around the City of Albion).
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<PAGE>
Southeastern's distribution system and service lines are, for the most
part, located on or under public streets, alleys, highways, and other public
places, or on private property not owned by Southeastern with permission or
consent, except to an inconsequential extent, of the individual owners. The
distribution system and service lines located on or under public streets,
alleys, highways, and other public places were all installed under valid rights
and consents granted by appropriate local authorities.
Southeastern's underground storage system consists of six salt caverns and
a depleted gas field, located in St. Clair County, Michigan, together with
measuring, compressor and transmission facilities. The aggregate working
capacity of the system is approximately 3.4 Bcf, with a capacity to deliver
85 MMcf on a peak day.
Southeastern also owns meters and service lines, gas regulating and
metering stations, garages, warehouses and other buildings necessary and useful
in conducting its business. Southeastern leases its computer and
transportation equipment.
BATTLE CREEK GAS COMPANY
Battle Creek owns gas supply systems which, on December 31, 1995, included
approximately 27 miles of transmission pipelines and 680 miles of distribution
pipelines. The pipelines are located in southwestern Michigan (centered in and
around the City of Battle Creek, Michigan).
Battle Creek's distribution system and service lines are, for the most
part, located on or under public streets, alleys, highways, and other public
places, or on private property not owned by Battle Creek with permission or
consent, except to an inconsequential extent, of the individual owners. The
distribution system and service lines located on or under public streets,
alleys, highways, and other public places were all installed under valid rights
and consents granted by appropriate local authorities.
Battle Creek owns and operates underground gas storage facilities in a
depleted salt cavern and two depleted gas fields. The aggregate working
capacity of the storage system is approximately 1.6 Bcf.
Battle Creek also owns meters and service lines, gas regulating and
metering stations, garages, warehouses and other buildings necessary and useful
in conducting its business. Battle Creek leases its computer and
transportation equipment.
MICHIGAN GAS COMPANY
Michigan Gas owns gas supply systems located in the southwest portion of
Michigan's lower peninsula and the central and western areas of Michigan's
upper peninsula. The systems include 2,102 miles of distribution pipeline,
meters, service lines, gas regulating and metering stations, garages,
warehouses, and other buildings necessary and useful in conducting its
business. Michigan Gas leases its computer equipment, transportation
equipment, and certain buildings.
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<PAGE>
Michigan Gas's distribution system and service lines are for the most
part, located on or under public streets, alleys, highways, and other public
places, or on private property not owned by Michigan Gas with permission or
consent, except to an inconsequential extent, of individual owners. The
distribution system and service lines located on or under public streets,
alleys, highways, and other public places were all installed under valid rights
and consents granted by appropriate local authorities.
SEMCO ENERGY SERVICES, INC.
The principal properties of SEMCO and its affiliates include interests and
operations in natural gas transmission and gathering systems and an underground
gas storage system.
Set forth in the following table are the equity investments of SEMCO and
its affiliates, the total non-current asset balance of each entity, and SEMCO's
ownership percentage and equity investment at December 31, 1995:
<TABLE>
<CAPTION>
Total SEMCO's SEMCO's
Non-current Percent Equity
Assets Ownership Investment
----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
NOARK Pipeline System................. $ 98,175 32% $1,358
NOARK Gas Services, L.P............... 91 40 (45)
Eaton Rapids Gas Storage System....... 28,534 50 5,333
Nimrod Natural Gas Corporation........ 4,328 11 413
Nimrod Limited Partnership............ 1,426 29 372
Michigan Intrastate Pipeline System... 5,563 50 217
Michigan Intrastate Lateral System.... 624 50 376
-------- ------
$138,741 $8,024
======== ======
</TABLE>
SEMCO Arkansas Pipeline Company (a wholly-owned subsidiary of SEMCO) is a
32% general partner in the NOARK Pipeline System. The partnership operates a
302-mile pipeline crossing northern Arkansas which completed its first year of
service in 1993. The pipeline provides area producers access to interstate and
intrastate pipelines. See Note 8 of the "Notes to the Consolidated Financial
Statements" for a discussion of commitments made relating to this project.
SEMCO Gas Storage Company (a wholly-owned subsidiary of SEMCO) owns a 50%
equity interest in the Eaton Rapids Gas Storage System. This system, located
near Eaton Rapids, Michigan, became operational in March 1990 and consists of
approximately 12.8 Bcf of underground storage capacity. Of the total, 12 Bcf
is leased under long-term contracts and 7.3 Bcf is leased by the Company's
subsidiaries.
SEMCO Pipeline Company (SEMCO Pipeline) (a wholly-owned subsidiary of
SEMCO) is an 11% owner of Nimrod Natural Gas Corporation (Nimrod) of Tulsa,
Oklahoma. Nimrod engages in the installation or purchase and operation of
natural gas gathering systems. These systems purchase, collect and re-sell
wellhead natural gas delivering it to major transportation pipelines for
redelivery to customers.
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<PAGE>
SEMCO Pipeline also owns 50% of the Michigan Intrastate Pipeline System
and the Michigan Intrastate Lateral System partnerships. The sole purpose of
these partnerships is to hold a 10% ownership of the Saginaw Bay Pipeline
Project, a 126-mile pipeline from Michigan's Saginaw Bay area to processing
plants in Kalkaska, Michigan.
The following table sets forth the operations wholly or partially owned by
SEMCO and its affiliates, the total net property of the project, and SEMCO's
ownership percentage and net property at December 31, 1995:
<TABLE>
<CAPTION>
Total SEMCO's SEMCO's
Net Percent Net
Property Ownership Property
-------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Litchfield Lateral...................... $11,212 33% $ 3,700
Greenwood Pipeline...................... 6,899 100 6,899
Iosco-Reno System....................... 3,745 40 1,498
Eaton Rapids Pipeline................... 1,217 100 1,217
Production Gathering Systems and
Oil and Gas Properties................ 84 100 84
------- -------
$23,157 $13,398
======= =======
</TABLE>
SEMCO Pipeline is a 33% owner in the Litchfield Lateral, a 31-mile
pipeline located in southwest Michigan. The line, which is leased entirely to
ANR Pipeline Company, links the Eaton Rapids Gas Storage System with interstate
pipeline supplies. The Litchfield Lateral began operations in February 1993.
In 1991, SEMCO Pipeline constructed an 18-mile pipeline to serve Detroit
Edison's Greenwood power plant located in Michigan's thumb area. SEMCO
Pipeline and Detroit Edison have entered into an agreement whereby Detroit
Edison has contracted for the entire capacity of the line of 240 MMcf per day.
SEMCO Pipeline is a 40% owner of the Iosco County Pipeline and Reno Gas
Processing Plant (Iosco-Reno System), which was placed in service in March
1992. The Iosco-Reno System gathers and processes wet gas in the Au Gres and
Santiago fields located in mid-Michigan for delivery to the processing plant
and ultimate delivery to the gas markets.
SEMCO Pipeline completed the 7.1-mile Eaton Rapids Pipeline in 1990,
providing direct delivery of gas from the Eaton Rapids Gas Storage System to
Battle Creek and Southeastern's Albion division.
Other properties of SEMCO consist of data processing equipment primarily
leased to affiliates, real property and related improvements held for resale,
and office properties leased to affiliates and third parties. These other
properties total $2.7 million or 1.1% of consolidated utility plant and other
property, net.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-8-
<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
COMMON STOCK DATA
The common stock of the Company is traded on The Nasdaq Stock Market under
the symbol "SMGS." The table below shows high and low closing bid prices of
the Company's common stock in the over-the-counter market as reported by the
Detroit Free Press, adjusted to reflect the 5% stock dividends in May 1995 and
1994. These quotations reflect dealer prices, without brokerage commission,
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Quarters
------------------------------------------
1st 2nd 3rd 4th
------ ------ ------ ------
<S> <C> <C> <C> <C>
1995
High 18 3/4 19 1/2 19 1/4 18
Low 17 1/8 18 1/2 17 3/4 16 1/4
1994
High 20 17 3/8 18 1/8 17 7/8
Low 16 1/4 16 1/4 17 3/8 16 7/8
</TABLE>
See the cover page for a recent stock price and the number of shares
outstanding.
See "Selected Financial Data" below for the number of shareholders at year
end for the past five years.
DIVIDENDS
See Notes 4 and 10 of "Notes to the Consolidated Financial Statements" and
"Selected Financial Data."
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Operating Revenue.................... $335,538 $372,430 $288,963 $251,526 $231,522
-------- -------- -------- -------- --------
Operating Expenses
Cost of Gas Sold.................... $120,619 $135,669 $139,051 $121,643 $111,005
Cost of Gas Marketed................ 130,087 153,973 67,474 52,347 46,237
Operations.......................... 31,880 31,055 30,243 29,426 29,614
Maintenance......................... 4,337 4,503 4,253 4,164 3,811
Depreciation........................ 12,035 11,549 12,468 12,344 12,138
Income Taxes........................ 6,188 5,204 5,598 3,899 3,360
Taxes Other Than Income Taxes....... 7,966 8,186 8,446 7,729 7,193
-------- -------- -------- -------- --------
$313,112 $350,139 $267,533 $231,552 $213,358
-------- -------- -------- -------- --------
Operating Income..................... $ 22,426 $ 22,291 $ 21,430 $ 19,974 $ 18,164
Other Income (Expense), Net.......... (179) (1,328)<F4> (136)<F4> (339)<F4> 570
-------- -------- -------- -------- --------
Income Before Interest............... $ 22,247 $ 20,963 $ 21,294 $ 19,635 $ 18,734
Interest............................. 10,721 10,775 11,534 11,126 11,233
Dividends on Preferred Stock
of Subsidiary....................... 178 178 178 178 178
-------- -------- -------- -------- --------
Net Income........................... $ 11,348 $ 10,010 $ 9,582 $ 8,331 $ 7,323
Dividends on Convertible
Preferred Stock..................... 17 18 19 21 22
-------- -------- -------- -------- --------
Net Income Available for
Common Stock........................ $ 11,331 $ 9,992 $ 9,563 $ 8,310 $ 7,301
Common Dividends..................... 9,230 8,656 7,419 6,875 6,385
-------- -------- -------- -------- --------
Earnings Reinvested in the Business.. $ 2,101 $ 1,336 $ 2,144 $ 1,435 $ 916
======== ======== ======== ======== ========
Common Stock Data
Average Shares Outstanding(000)<F1>.. 11,832 11,609 10,500 10,223 9,963
Earnings Per Share<F1>............... $ .96 $ .86 <F4> $ .91 <F4> $ .81 <F4> $ .73
Dividends Paid Per Share<F1>......... $ .78 $ .74 $ .71 $ .67 $ .64
Dividend Payout Ratio................ 81.5% 86.6% 77.6% 82.7% 87.5%
Book Value Per Share<F1><F2>......... $ 9.25 $ 9.09 $ 8.03 $ 7.47 $ 7.02
Market Value Per Share<F1><F2><F3>... $ 18.00 $ 17.14 $ 19.95 $ 16.42 $ 12.55
Number of Common Shareholders........ 8,334 8,149 7,261 6,892 6,594
Price To Earnings Ratio<F2><F3>...... 18.8 20.0 21.9 20.2 17.1
Balance Sheet Data<F2>
Total Assets......................... $378,523 $368,498 $348,813 $319,548 $294,933
======== ======== ======== ======== ========
Capitalization
Long-Term Debt<F5>.................. $107,325 $104,910 $117,022 $102,728 $ 95,656
Preferred Stock..................... 3,272 3,288 3,290 3,320 3,332
Common Equity....................... 109,511 107,379 85,657 77,353 70,758
-------- -------- -------- -------- --------
$220,108 $215,577 $205,969 $183,401 $169,746
======== ======== ======== ======== ========
Financial Ratios
Capitalization
Long-Term Debt<F5>.................. 48.8% 48.7% 56.8% 56.0% 56.4%
Preferred Stock..................... 1.5% 1.5% 1.6% 1.8% 2.0%
Common Equity....................... 49.7% 49.8% 41.6% 42.2% 41.6%
-------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Return on Average Common Equity....... 10.4% 9.5% 11.6% 11.1% 10.6%
======== ======== ======== ======== ========
<FN>
<F1>
Adjusted to give effect to 5 percent stock dividends in May 1995, 1994, 1993, 1992 and 1991.
<F2>
Year end.
<F3>
Based on NASDAQ closing bid price.
<F4>
Includes $1,286 (net of tax) or $.11 per share, $177 (net of tax) or $.02 per share and $901 (net of tax)
or $.09 per share in 1994, 1993 and 1992, respectively, attributable to an extraordinary item-loss on
early extinguishment of debt.
<F5>
Includes current maturities.
</FN>
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Income
Net income available for common stock was $11.3 million ($.96 per share)
for the year ended December 31, 1995. This compares to $11.3 million ($.97 per
share) net income available for common stock before extraordinary item recorded
for the year ended December 31, 1994. The Company recognized an extraordinary
charge to income in 1994 of $1.3 million ($.11 per share) for the early
extinguishment of debt.
Customer additions and colder weather in 1995 resulted in a 5.2% increase
in natural gas sales margin from the Company's natural gas distribution
operations. The Company also recorded a nonrecurring gain on the settlement of
a lawsuit involving the NOARK Pipeline System (NOARK) in 1995. These increases
were offset by increased losses from the Company's investment in NOARK and a
23% reduction in gas marketing margins due to increased competition in the gas
marketing industry.
In 1994, net income available for common stock before extraordinary item
increased $1.6 million from $9.7 million ($.93 per share) in 1993. The
Company recorded an extraordinary charge of $177,000 ($.02 per share) for the
early extinguishment of debt in 1993. The increase in net income before
extraordinary items primarily reflected improved results from the natural gas
marketing operations, the interest savings generated by the refinancing of
certain higher rate debt and lower depletion charges related to the Company's
remaining oil and gas operations. These earnings were partially offset by an
increase in the loss from NOARK and a decrease in natural gas sales margin due
to weather. The change in per share amounts between 1994 and 1993 also
reflects the impact of the sale of 747,500 new common shares in January 1994
and the sale of 307,000 shares through the DRIP.
Operating Revenues and Gross Margin
Natural Gas Distribution. The Company's natural gas distribution business
involves the operations of Southeastern, Battle Creek and Michigan Gas. These
companies generate revenue mainly through the sale and transportation of
natural gas. The following table compares sales and transportation information
for the last three years:
<TABLE>
Revenues
<CAPTION>
1995 1994 1993
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Gas sales revenues:
Residential............................ $115,242 $121,066 $122,216
Commercial............................. 54,763 59,413 61,379
Industrial............................. 14,019 15,481 16,049
-------- -------- --------
Total gas sales revenue.............. $184,024 $195,960 $199,644
Cost of gas sold....................... 120,619 135,669 139,051
-------- -------- --------
Gross margin......................... $ 63,405 $ 60,291 $ 60,593
Gas transportation revenue............... 12,448 11,999 11,968
-------- -------- --------
Total sales margin and
transportation revenue............. $ 75,853 $ 72,290 $ 72,561
======== ======== ========
</TABLE>
-11-
<PAGE>
<TABLE>
Throughput volumes
<CAPTION>
1995 1994 1993
------ ------ ------
(in MMcf)
<S> <C> <C> <C>
Gas sales volumes:
Residential............................ 24,676 23,437 23,302
Commercial............................. 12,738 12,469 12,608
Industrial............................. 3,373 3,464 3,500
------ ------ ------
Total gas sales volumes.............. 40,787 39,370 39,410
Gas transportation volumes............... 23,849 21,293 19,073
------ ------ ------
Total throughput..................... 64,636 60,663 58,483
====== ====== ======
Degree Days
Actual................................. 7,158 6,861 7,053
Percent of normal...................... 105.3% 102.4% 105.0%
Average number of gas sales customers.... 222,303 216,082 210,522
</TABLE>
Natural gas sales volumes and gross margin from gas sales increased
1,417 MMcf and $3.1 million in 1995 compared to 1994. The addition of an
average of 6,221 new gas sales customers, or 2.9%, accounted for over half the
increase in margin. Also contributing to the increase were the impact of 4.3%
colder temperatures on the weather-sensitive residential and commercial
customers and the impact of a Battle Creek rate increase in December 1995.
Battle Creek received approval to increase their rates to recover the cost
of certain accelerated main replacement projects, the cost of retiree medical
benefits and overall increases in operating expenses. This rate increase
resulted in additional gas sales margin of approximately $400,000 in 1995 and
is expected to increase gas sales margin by approximately $1.8 million in
1996. Since retiree medical benefits are now included in Battle Creek's rates,
however, the entire retiree medical cost determined under the accrual method
will be expensed in 1996, resulting in a $1.0 million increase in 1996
operations expense. Previously, Battle Creek deferred retiree medical costs
above the expense incurred under the pay-as-you-go method. Overall, the rate
increase should increase 1996 net income, after tax, by approximately $500,000
under normal weather conditions.
In 1994 compared to 1993, natural gas sales volumes and gross margin from
gas sales decreased 40 MMcf and $302,000. The addition of an average of 5,560
new gas sales customers in 1994, a 2.6% increase, helped reduce the impact of
2.7% warmer temperatures than 1993.
Transportation volumes increased 2,556 MMcf, or 12.0%, in 1995 from 1994
while transportation revenues increased $449,000, or 3.7%. The increase in
volumes relative to revenues reflects the pressure of competition on
transportation margins and the impact of additional volumes transported by
certain lower margin customers, including coal-displacement customers.
Coal-displacement volumes are sensitive to natural gas prices relative to coal
and are priced at lower margins.
In 1994 compared to 1993, transportation volumes increased 2,220 MMcf
while revenues increased slightly. This was due to some coal-displacement
sales in 1994, compared to none in 1993, and lower overall transportation
margins.
Natural Gas Marketing. Natural gas marketing margins were $3.3 million,
$4.3 million and $3.5 million in 1995, 1994 and 1993, respectively. These
margins relate to natural gas volumes marketed of 82,504 MMcf, 78,082 MMcf and
31,501 MMcf for the same periods.
-12-
<PAGE>
The substantial increase in volumes marketed in 1994 compared to 1993 is
primarily attributable to the 1993 implementation of FERC Order 636 (Order
636). With interstate pipelines no longer able to sell "bundled" natural gas
sales services with gathering, transportation and storage services, the demand
for natural gas marketing services increased.
As the industry adapted to Order 636 in 1994 and 1995, competition also
increased significantly. The increased competition impacted the Company's
marketing operations in 1995 by slowing the growth in marketing volumes and
significantly reducing the per-unit margins.
The Company expects competition in the gas marketing industry will
continue to generate pressure on per-unit margins. The marketing operation's
primary focus is on growing revenues through the addition of several
independent marketing contractors and by continuing to offer flexible and
competitive products and services.
Other Operating Revenues. Other operating revenues consist principally of
revenues generated by natural gas transmission and gathering activities and
miscellaneous utility operations. Also included in other operating revenues
are revenues generated by oil and gas exploration and production, equipment
leasing and real estate development.
Other operating revenues totaled $5.7 million, $6.2 million and
$6.4 million in 1995, 1994 and 1993, respectively. The decrease in other
operating revenues reflects the Company's declining involvement in equipment
leasing, real estate development and oil and gas activities.
Operating Expenses and Income Deductions
Operations expense increased $825,000, or 2.7%, in 1995 compared to 1994.
Approximately $530,000 of the increase relates to 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. Severance agreements were accepted by 33 employees and at
December 31, 1995, approximately $158,000 remained accrued for the balance
of payments relating to these individuals. The Company does not expect to
incur additional material charges in connection with the restructuring but
is, however, continuing to evaluate opportunities to restructure other
appropriate functions.
Also contributing to the increase in operations expense was a $307,000
increase in retiree medical expenses. Pursuant to a 1994 MPSC order,
Southeastern and Michigan Gas were required to use savings generated by
property tax reductions in the State of Michigan to offset an equal amount of
the retiree medical regulatory asset. As a result of this order the two
companies expensed a combined $663,000 of their regulatory assets in 1995 and
$437,000 in 1994. The $663,000 and $437,000 of respective savings from
property tax reductions are reflected in the decrease in taxes other than
income taxes over these periods.
The balance of the $307,000 increase in retiree medical during 1995 is
attributable to Battle Creek's transition from expensing retiree medical costs
on a pay-as-you-go method to the accrual method effective with their December
1995 rate increase. In 1996, the increase to operations expense from Battle
Creek expensing their retiree medical costs under the accrual method, including
the amortization of their retiree medical regulatory asset, will be
approximately $1.0 million.
-13-
<PAGE>
Other increases in operations expense during 1995, including the costs
associated with adding new customers, were generally offset by lower pension
and profit sharing expenses.
In 1994 operations expense increased $812,000, or 2.7%, over 1993.
Reflected in this increase were higher retiree medical expenses of $437,000 due
to the property tax offset at Southeastern and Michigan Gas and increased
payroll related costs, including higher pension and medical expenses.
Maintenance expense was $4.3 million, $4.5 million and $4.3 million in
1995, 1994 and 1993, respectively. In 1994, the Company experienced higher
maintenance charges due to the extremely cold temperatures in the first quarter
of that year.
Depreciation expense increased $486,000, or 4.2%, in 1995 compared to
1994 primarily due to growth in utility plant. In 1994, depreciation expense
decreased by $919,000 despite the growth in utility plant. This was primarily
due to lower depletion costs and the decline in non-affiliate equipment
leasing.
Income taxes increased $984,000 in 1995 compared to 1994 and decreased
$394,000 in 1994 compared to 1993 due to year-to-year changes in pre-tax
income.
Taxes other than income taxes were $8.0 million, $8.2 million and
$8.4 million for 1995, 1994 and 1993, respectively. Taxes other than income
taxes consist primarily of State of Michigan property taxes. The changes
year-to-year reflect the partial impact of property tax reductions during 1994
and the full impact of the reductions in 1995. These property tax reductions
more than offset increases in property taxes due to the growth in the Company's
utility plant.
Interest on long-term debt was approximately the same in 1995 when
compared to 1994. This was due to the timing of the debt restructuring in 1994
combined with the interest savings from having lower cost debt outstanding
during all of 1995. Interest on long-term debt decreased $821,000 in 1994
compared to 1993 due to the impact of the debt restructuring. Other interest
expense, consisting primarily of interest on short-term borrowings, decreased
slightly in 1995 and increased slightly in 1994 when compared to the previous
years. Declining average borrowings over the three year period were offset by
increased short-term interest rates. Average borrowings declined in 1995 due
primarily to lower average gas costs and lower volumes of gas in storage. The
decrease in average borrowings in 1994 compared to 1993 resulted from the
refinancing of the permanent portion of short-term debt with common equity in
January 1994 and the timing of debt restructurings.
Other Income (Loss), Net
Other income (loss), net, consists primarily of income from SEMCO's equity
investments but also includes miscellaneous nonoperating income and expense
items, net of tax. Other income (loss), net, was ($179,000), ($42,000) and
$41,000 in 1995, 1994 and 1993, respectively.
The year-to-year changes reflect the Company's share of losses in NOARK,
before a 1995 litigation settlement and net of tax, totaling $1.8 million,
$1.2 million and $834,000 over those same years.
Through a subsidiary, the Company holds a 32% general partnership interest
in the $99 million pipeline.
-14-
<PAGE>
In December 1995, NOARK received $6.0 million from Vesta Energy Company
(Vesta) in consideration of settlement of litigation, termination of a firm
transportation agreement with NOARK, and the related contracts, and release
from all obligations related to the NOARK Pipeline System. The Company's
after-tax share of this settlement totaled $1.3 million.
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, 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. 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.
The increase in year-to-year losses principally reflects the loss of firm
transportation revenues associated with Vesta and increases in operating and
interest expenses. Volumes transported by NOARK averaged 86,000 Mcf,
82,000 Mcf and 79,000 Mcf per day for the years 1995, 1994 and 1993,
respectively. NOARK has an operating capacity of 141,000 Mcf per day.
NOARK's operating cash flows are insufficient to meet principal and
interest payments on the debt. NOARK will need additional financing to fund
its anticipated negative operating cash flows. Accordingly, the Company
expects to make further contributions to NOARK in 1996. See Note 8 of Notes to
the Consolidated Financial Statements for further discussion of the Company's
guarantees related to the pipeline's financing.
Liquidity and Capital Resources
Cash Flows From Investing. The Company's single largest use of cash is
capital expenditures. The following table identifies capital expenditures for
the past three years:
<TABLE>
Capital Expenditures
<CAPTION>
1995 1994 1993
------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C>
Natural gas distribution.................. $26,259 $20,353 $19,238
Gas transmission, gathering and storage... 85 835 1,218
Other..................................... 628 616 513
------- ------- -------
$26,972 $21,804 $20,969
======= ======= =======
</TABLE>
Capital expenditures for natural gas distribution represent primarily new
customer additions and, to a lesser extent, plant repair and replacement.
Distribution expenditures increased $5.9 million in 1995 compared to 1994 as
the utility companies not only added customers to the existing distribution
system, but also expanded their systems through the addition of several new
franchise areas throughout Michigan.
-15-
<PAGE>
Cash Flows From Operations. The Company's net cash provided from
operating activities totaled $32.6 million in 1995, $28.3 million in 1994 and
$12.1 million in 1993. The change in operating cash flows is significantly
influenced by changes in the level and cost of gas in underground storage,
changes in accounts receivable and accrued revenue, and other working capital
changes. The changes in these accounts are largely the result of the timing of
receipts and payments.
The Company uses significant amounts of short-term borrowings to finance
natural gas purchases for storage during the non-heating season. The Company
owns and leases natural gas storage facilities with available capacity
approximating 40% of annual gas sales. Generally gas is stored during the
months of April through October and withdrawn for sale from November through
March. The carrying amount of natural gas stored underground peaked at
$34.2 million, $45.9 million and $45.7 million in October 1995, 1994 and 1993,
respectively.
Cash Flows From Financing. In January 1995, the Company began purchasing
shares of its common stock on the open market to meet the dividend reinvestment
and optional payment requirements of the DRIP. The Company purchased 314,000
shares for $6.0 million during 1995, substantially meeting the requirements for
the 1995 DRIP sales totaling $6.0 million. In 1994 and 1993 the Company
received $5.8 million and $5.9 million from the sale of shares through the
DRIP. In addition, the Company received $14.6 million through the sale of
747,500 shares of common stock in January 1994.
In 1994, the Company also received $80.0 million through the issuance of
$55.0 million, 8.00% senior notes and $25.0 million, 8.32% senior notes. The
proceeds of these financings were used principally to redeem certain
higher-rate long-term debt instruments. Expensing the portion of the call
premiums and unamortized debt expense associated with the Company's
non-regulated operations resulted in a $1.3 million ($.11 per share)
extraordinary charge to income in 1994 and $177,000 ($.02 per share)
extraordinary charge to income in 1993.
During 1993, $20.0 million in funds was provided through a term loan and
$5.5 million was used to repay certain portions of long-term debt.
Dividends paid to common shareholders increased from 1993 through 1995 due
to the impact of 5% stock dividends in each of those years and the issuance of
additional shares through the DRIP and the January 1994 stock issuance.
Future Capital Expenditures and Liquidity
1996 Capital Expenditures. For 1996, the Company plans to spend
approximately $27.7 million on capital additions. Almost all of the
expenditures are planned for natural gas distribution additions with the
emphasis on new customers.
Future Financing. Funds needed for the Company's 1996 capital expenditure
program and dividend payments will be provided primarily through internally
generated funds and utilization of short-term lines of credit. At year end
1995, the Company had $38.2 million available on short-term credit facilities
totaling $89.9 million.
-16-
<PAGE>
Common stock issuances in 1993 and 1994 have been a major factor in
strengthening the Company's equity position. While the Company has the
availability to issue new stock through the DRIP, the Company does not expect
to require additional common equity funding during the next few years.
Therefore, except to the extent that the purchase of shares on the open market
becomes difficult, the Company expects that newly issued shares will not be
sold under the DRIP.
During 1996, the Company expects to make contributions to the NOARK
Pipeline System in connection with its guarantees of the pipeline's debt. See
Note 8 of Notes to the Consolidated Financial Statements for a discussion of
the Company's guarantees related to NOARK's financing.
Commodity Hedging. The Company's natural gas marketing subsidiary, SEMCO,
has entered into various long-term sales commitments which may extend up to 24
months into the future. SEMCO maintains a hedging program with the objective
of preserving the anticipated margin on these sales commitments. The hedges
are designed to ensure that the impact of natural gas price fluctuations on the
fair value of long-term sales commitments will be offset by the impact of such
price fluctuations on the fair value of the hedging instrument. The most
frequently used hedging instruments are natural gas futures and options,
although SEMCO may also enter into natural gas swap agreements, contract to
purchase natural gas from producers for future delivery or inject gas into
storage for later withdrawal.
Critical to the success of the hedging program is the performance by both
the party to the hedge and the marketing customer buying gas under the
long-term sales commitment. SEMCO performs extensive credit reviews on new and
existing marketing customers and only enters into hedging transactions with
reputable dealers, primarily on the NYMEX, or directly with reliable suppliers.
At December 31, 1995 and 1994, SEMCO had recorded net deferred gains
(losses) from its hedging program of approximately $1.1 million and
($4.6 million), respectively. At the same time, SEMCO had similar amounts of
unrecorded losses (gains) pursuant to the underlying long-term sales
commitments.
See Note 6 of Notes to the Consolidated Financial Statements for further
information regarding the types, underlying notional volumes, and fair values
of SEMCO's hedges at December 31, 1995 and December 31, 1994.
Other Areas
Adoption of New Accounting Standards. In the first quarter of 1993, the
Company adopted two new standards issued by the FASB. SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106) requires
the accrual method of accounting for postretirement benefits. SFAS 109,
"Accounting for Income Taxes" (SFAS 109) requires measurement and restatement
of deferred tax assets and liabilities based upon the estimated future tax
effects of temporary differences and carryforwards. Although the adoption of
these standards did not have a material impact on the Company's results of
operations, adoption of SFAS 106 by the utility subsidiaries has significant
regulatory ratemaking implications.
-17-
<PAGE>
Pursuant to a generic order issued by the MPSC, Southeastern and Michigan
Gas are recording a liability and a corresponding regulatory asset for their
portion of retiree medical costs. The generic order provides for recovery of
this regulatory asset provided a utility files a general rate case and
demonstrates the need for a rate increase to compensate for this additional
cost. Southeastern and Michigan Gas plan to file rate cases prior to 1997 in
accordance with this order. Every aspect of the business of a utility is open
to scrutiny when its rates are redetermined. The outcome of future rate cases
cannot be predicted.
Until Battle Creek received their rate increase in December 1995, the
utility was also recording a regulatory asset for its portion of retiree
medical costs. Since the costs were allowed in rates in December 1995, Battle
Creek is no longer deferring any retiree medical costs and is amortizing its
regulatory asset into expense.
See Note 7 and Note 3 of the Notes to the Consolidated Financial
Statements for further discussion of SFAS 106 and SFAS 109.
Impact of Inflation
The cost of gas sold by the utility subsidiaries is recovered from natural
gas distribution customers on a current basis. Although inflation has steadied
in recent years, increases in other utility operating costs are recovered
through the regulatory process of filing a rate case and, therefore may
adversely affect the results of operations in inflationary periods due to the
time lag involved in this process. The Company attempts to minimize the impact
of inflation by controlling costs, increasing productivity and filing rate
cases on a timely basis.
Southeastern and Michigan Gas plan to file rate cases before January 1997
in conjunction with the adoption of SFAS 106. See Note 7 of the Notes to the
Consolidated Financial Statements.
Industry Trends
Competition. The market prices of alternate sources of energy such as
coal and #6 fuel oil compete directly with the price the utilities charge for
industrial sales and transportation of natural gas. The prices of alternate
fuels similarly affect the volumes and margins of the natural gas marketing
operations of the Company. In addition, continued deregulation of the natural
gas industry has further increased the sources of competition. See
"Regulation" discussion below.
To lessen the impact of prices on fuel choice by industrial customers, the
Company offers additional services, such as gas storage and balancing.
However, the competition among fuels is expected to continue to affect volumes
sold, transported and marketed and the associated margins.
Regulation. Interstate pipelines were required to comply with FERC Order
636 by the 1993-1994 heating season. The focus of Order 636 was intended to
increase competition within the gas industry and requires pipelines to unbundle
their services and instead offer separate service for gas transportation,
storage and gathering.
As a result of this restructuring of the interstate pipeline service,
natural gas distribution companies have the ability to select and pay for only
those pipeline services they require. In addition, Order 636 allows customers
on natural gas distribution systems to purchase the same level of unbundled
service directly from the interstate pipelines. Under such circumstances,
natural gas distribution companies generally provide transportation services to
those customers.
-18-
<PAGE>
It is expected that the availability of unbundled pipeline services to
customers will result in continued pressure on gas distribution companies to
offer similar unbundled services in order to compete with the pipelines. This
competition has resulted in pressure to reduce natural gas transportation
margins. Currently, the utility subsidiaries are providing transportation
services principally to large industrial customers.
In addition to pressure on the transportation margins of the utility
subsidiaries, Order 636 is impacting the natural gas marketing operations of
SEMCO. Access to unbundled pipeline services has attracted new competitors to
the marketing industry and presented opportunities for marketers to offer
expanded services to their customers.
As described in Note 1 to the consolidated financial statements, the
Company complies with the provisions of SFAS 71, "Accounting for the Effects of
Certain Types of Regulation." In the event the Company determines that it no
longer meets the criteria for following SFAS 71, the accounting impact would be
an extraordinary, non-cash charge to operations of an amount that could be
material. Criteria that give rise to the discontinuance of SFAS 71 include
(1) increasing competition that restricts the Company's ability to establish
prices to recover specific costs, and (2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form of
regulation. The Company periodically reviews these criteria to ensure the
continuing application of SFAS 71 is appropriate.
Gas Supply. The Company's utility subsidiaries are served by four
interstate pipelines: Panhandle Eastern Pipe Line Company, ANR Pipeline
Company, Great Lakes Gas Transmission Company and Northern Natural Gas
Company. These pipelines received authority from the FERC to substantially
implement their restructuring plans effective November 1, 1993. In
conjunction with these plans, the FERC has given interstate pipelines
authority to directly bill customers for certain transition costs resulting
from the restructuring. As former purchasers of bundled interstate pipeline
service, the utility subsidiaries are responsible for some of these
transition costs.
To date, the utility subsidiaries have been billed approximately
$3.3 million in Order 636 transition costs. At this time, no further
direct-billed transition costs are anticipated. As with previously
FERC-mandated billings, Order 636 transition costs are recoverable from
ratepayers through gas cost recovery mechanisms.
-19-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31, 1995 1994 1993
-------- -------- --------
(in thousands of dollars,
except per share amounts)
<S> <C> <C> <C>
Operating Revenue
Gas sales............................. $184,024 $195,960 $199,644
Gas marketing......................... 133,396 158,284 70,991
Transportation........................ 12,448 11,999 11,968
Other operations...................... 5,670 6,187 6,360
-------- -------- --------
$335,538 $372,430 $288,963
-------- -------- --------
Operating Expenses
Cost of gas sold...................... $120,619 $135,669 $139,051
Cost of gas marketed.................. 130,087 153,973 67,474
Operations............................ 31,880 31,055 30,243
Maintenance........................... 4,337 4,503 4,253
Depreciation.......................... 12,035 11,549 12,468
Income taxes.......................... 6,188 5,204 5,598
Taxes other than income taxes......... 7,966 8,186 8,446
-------- -------- --------
$313,112 $350,139 $267,533
-------- -------- --------
Operating Income........................ $ 22,426 $ 22,291 $ 21,430
Other Income (Loss), Net................ (179) (42) 41
-------- -------- --------
Income Before Income Deductions......... $ 22,247 $ 22,249 $ 21,471
-------- -------- --------
Income Deductions
Interest on long-term debt............ $ 8,546 $ 8,605 $ 9,426
Other interest........................ 1,727 1,788 1,771
Amortization of debt expense.......... 448 382 337
Dividends of preferred stock
of subsidiary....................... 178 178 178
-------- -------- --------
$ 10,899 $ 10,953 $ 11,712
-------- -------- --------
Net Income Available For Common Stock
Before Preferred Stock Dividends
and Extraordinary Item................ $ 11,348 $ 11,296 $ 9,759
Dividends on convertible
preferred stock..................... 17 18 19
-------- -------- --------
Net Income Available For Common Stock
Before Extraordinary Item............. $ 11,331 $ 11,278 $ 9,740
Extraordinary Item--Loss on early
extinguishment of debt, net of
income taxes of $692 and $96.......... -- 1,286 177
-------- -------- --------
Net Income Available For Common Stock... $ 11,331 $ 9,992 $ 9,563
======== ======== ========
Earnings Per Share of Common Stock
Before Extraordinary Item............. $ .96 $ .97 $ .93
======== ======== ========
Earnings Per Share of Common Stock...... $ .96 $ .86 $ .91
======== ======== ========
Cash Dividends Per Share of
Common Stock.......................... $ .78 $ .74 $ .71
======== ======== ========
Average Number of Common Shares
Outstanding........................... 11,831,680 11,609,339 10,499,603
========== ========== ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-20-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31, 1995 1994 1993
--------- --------- ---------
(in thousands of dollars)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Cash received from customers.................................. $ 320,707 $ 375,536 $ 278,621
Cash paid for payrolls and to suppliers....................... (264,440) (325,671) (243,923)
Interest paid................................................. (10,283) (11,104) (11,244)
Income taxes paid............................................. (5,570) (3,379) (6,175)
Taxes other than income taxes paid............................ (7,995) (7,966) (8,541)
Other cash receipts and payments, net......................... 174 846 3,370
--------- --------- ---------
Net Cash From Operating Activities........................... $ 32,593 $ 28,262 $ 12,108
--------- --------- ---------
Cash Flows From Investing Activities
Natural gas distribution property additions................... $ (26,259) $ (20,353) $ (19,238)
Investments in other natural gas related property............. -- (33) (2,530)
Other property additions...................................... (713) (1,418) (513)
Property retirement costs, net of proceeds.................... 640 (313) (301)
Proceeds from sale and leaseback of capital assets............ 3,737 -- --
Advances to equity investees.................................. (3,312) (906) --
--------- --------- ---------
Net Cash From Investing Activities........................... $ (25,907) $ (23,023) $ (22,582)
--------- --------- ---------
Cash Flows From Financing Activities
Issuance of common stock...................................... $ 6,012 $ 20,384 $ 5,889
Repurchase of common stock.................................... (5,998) -- --
Net change in notes payable to banks.......................... 1,700 (2,342) (758)
Issuance of long-term debt.................................... -- 80,000 20,000
Repayment of long-term debt................................... (1,322) (94,783) (5,521)
Payment of dividends.......................................... (9,425) (8,852) (7,616)
--------- --------- ---------
Net Cash From Financing Activities........................... $ (9,033) $ (5,593) $ 11,994
--------- --------- ---------
Net Increase (Decrease) in Cash
and Temporary Cash Investments.............................. $ (2,347) $ (354) $ 1,520
Cash and Temporary Cash Investments
Beginning of year............................................. 2,611 2,965 1,445
--------- --------- ---------
End of year................................................... $ 264 $ 2,611 $ 2,965
========= ========= =========
Reconciliation of Net Income to Net Cash
From Operating Activities
Net income available for common stock......................... $ 11,331 $ 9,992 $ 9,563
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation................................................ 12,035 11,549 12,468
Extraordinary item.......................................... -- 1,286 177
Deferred taxes and investment tax credits................... 304 (838) 873
Equity loss, net of distributions........................... 990 834 1,218
Receivables................................................. (9,513) (4,703) 853
Accrued revenue............................................. (5,555) (2,021) (1,143)
Materials and supplies and gas in underground storage....... 12,820 (2,232) (1,023)
Gas charges, recoverable from customers..................... 2,349 7,767 (11,122)
Other current assets........................................ 6,189 (2,154) (3,430)
Accounts payable............................................ 4,973 2,992 4,082
Customer advances and amounts payable to customers.......... (1,638) 1,711 1,332
Accrued taxes............................................... (22) 1,156 (3,362)
Other, net.................................................. (1,670) 2,923 1,622
--------- --------- ---------
Net Cash From Operating Activities......................... $ 32,593 $ 28,262 $ 12,108
========= ========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-21-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At December 31, 1995 1994
-------- --------
(in thousands of dollars)
<S> <C> <C>
ASSETS
Utility Plant
Plant in service, at cost.......................... $313,658 $287,214
Less--Accumulated depreciation..................... 87,308 76,674
-------- --------
$226,350 $210,540
Construction work in progress...................... 944 200
-------- --------
$227,294 $210,740
-------- --------
Other Property, Net.................................. $ 12,883 $ 16,015
-------- --------
Current Assets
Cash and temporary cash investments, at cost....... $ 264 $ 2,611
Receivables, less allowances of $729 and $889...... 32,320 22,807
Accrued revenue.................................... 38,854 33,299
Materials and supplies, at average cost............ 3,280 3,352
Gas in underground storage......................... 20,172 32,920
Gas charges, recoverable from customers............ 5,854 8,203
Accumulated deferred income taxes.................. 2,249 2,471
Other.............................................. 5,827 12,016
-------- --------
$108,820 $117,679
-------- --------
Deferred Charges and Other
Unamortized debt expense........................... $ 5,702 $ 6,150
Deferred gas charges, recoverable from customers... 615 798
Advances to equity investees....................... 4,218 906
Other.............................................. 18,991 16,210
-------- --------
$ 29,526 $ 24,064
-------- --------
$378,523 $368,498
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity................................ $109,511 $107,379
Cumulative convertible preferred stock equity...... 172 188
Cumulative preferred stock of subsidiary........... 3,100 3,100
Long-term debt..................................... 103,588 104,910
Obligations under capital leases................... 2,270 --
-------- --------
$218,641 $215,577
-------- --------
Current Liabilities
Notes payable to banks............................. $ 51,700 $ 50,000
Current portion of obligations under
capital leases................................... 1,467 --
Accounts payable................................... 38,018 33,045
Customer advance payments.......................... 5,764 8,736
Accrued taxes...................................... 704 726
Accrued interest................................... 1,135 1,145
Amounts payable to customers....................... 682 115
Other.............................................. 4,851 7,723
-------- --------
$104,321 $101,490
-------- --------
Deferred Credits
Accumulated deferred income taxes.................. $ 19,080 $ 18,722
Unamortized investment tax credit.................. 3,049 3,325
Customer advances for construction................. 9,326 8,559
Other.............................................. 24,106 20,825
-------- --------
$ 55,561 $ 51,431
-------- --------
$378,523 $368,498
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-22-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
At December 31, 1995 1994
-------- --------
(in thousands of dollars)
<S> <C> <C>
Common Stock Equity
Common stock, par value $1 per share--authorized
20,000,000 shares; 11,837,075 and 11,260,584
shares outstanding.............................. $ 11,837 $ 11,261
Capital surplus................................... 80,546 81,091
Retained earnings................................. 17,128 15,027
-------- --------
$109,511 $107,379
-------- --------
Cumulative Convertible Preferred Stock
Convertible preferred stock, par value $1 per
share--authorized 500,000 shares issuable in
series; 6,885 and 7,505 shares outstanding...... $ 7 $ 8
Capital surplus................................... 165 180
-------- --------
$ 172 $ 188
-------- --------
Cumulative Preferred Stock of Subsidiary
$100 par value (callable at option of Subsidiary)
6% series A--15,000 shares authorized and
outstanding................................... $ 1,500 $ 1,500
5 1/2% series B--10,000 shares authorized and
outstanding................................... 1,000 1,000
5 1/2% series C--5,000 shares authorized;
4,000 shares outstanding...................... 400 400
5 1/2% series D--2,000 shares authorized and
outstanding................................... 200 200
-------- --------
$ 3,100 $ 3,100
-------- --------
Long-Term Debt
Southeastern Michigan Gas Enterprises, Inc.
8.00% notes due 2004............................ $ 55,000 $ 55,000
8.32% notes due 2024............................ 25,000 25,000
8.625% debentures due 2017...................... 23,588 24,910
-------- --------
$103,588 $104,910
-------- --------
Obligations under capital leases.................... $ 3,737 $ --
-------- --------
Less--current portion............................. 1,467 --
-------- --------
$ 2,270 $ --
-------- --------
$218,641 $215,577
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-23-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
<CAPTION>
Years Ended December 31, 1995 1994 1993
------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C>
Common Stock
Beginning of year........................... $11,261 $ 9,680 $ 8,952
5% stock dividends May 1995, May 1994
and May 1993............................ 564 525 449
Issuance of common stock.................. -- 748 --
Issuance of common stock through dividend
reinvestment plan and other............. 326 308 279
Repurchase of common stock................ (314) -- --
------- ------- -------
End of year................................. $11,837 $11,261 $ 9,680
======= ======= =======
Common Stock Capital Surplus
Beginning of year........................... $81,091 $62,286 $57,039
5% stock dividends May 1995, May 1994
and May 1993............................ (564) (543) (471)
Issuance of common stock.................. -- 13,881 --
Issuance of common stock through dividend
reinvestment plan and other............. 5,702 5,467 5,718
Repurchase of common stock................ (5,683) -- --
------- ------- -------
End of year................................. $80,546 $81,091 $62,286
======= ======= =======
Retained Earnings
Beginning of year........................... $15,027 $13,691 $11,547
Net income available for common stock..... 11,331 9,992 9,563
Cash dividends on common stock............ (9,230) (8,656) (7,419)
------- ------- -------
End of year................................. $17,128 $15,027 $13,691
======= ======= =======
Unearned Compensation--ESOT
Beginning of year........................... $ -- $ -- $ (185)
Compensation earned....................... -- -- 185
------- ------- -------
End of year................................. $ -- $ -- $ --
======= ======= =======
Cumulative Convertible Preferred Stock
Beginning of year........................... $ 8 $ 8 $ 9
Conversion of preferred stock............. (1) -- (1)
------- ------- -------
End of year................................. $ 7 $ 8 $ 8
======= ======= =======
Cumulative Convertible Preferred Stock
Capital Surplus
Beginning of year........................... $ 180 $ 182 $ 211
Conversion of preferred stock............. (15) (2) (29)
------- ------- -------
End of year................................. $ 165 $ 180 $ 182
======= ======= =======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-24-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Southeastern Michigan Gas Enterprises, Inc. (the Company) is an
investor-owned holding company. The Company's utility subsidiaries purchase,
distribute, and transport natural gas to 226,000 customers within the state of
Michigan. The Company is also engaged in the marketing of natural gas to
approximately 130 customers located in several states.
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Southeastern, Battle Creek, Michigan Gas and SEMCO. Investments in
unconsolidated companies at least 20% owned, but not greater than 50% owned,
are reported using the equity method of accounting. All significant
intercompany transactions have been eliminated in consolidation. Certain
previously reported amounts have been reclassified to conform with 1995
presentations. These reclassifications had no effect on net income.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Rate Regulation. The Company accounts for the effects of regulation under
SFAS 71, "Accounting for the Effects of Certain Types of Regulation." As a
result, the actions of regulators affect when revenues, expenses, assets and
liabilities are recognized.
The rates of the utility subsidiaries, Southeastern, Battle Creek and
Michigan Gas, are subject in certain respects to the requirements of state and
local regulatory bodies. The MPSC authorizes the rates charged to customers by
Southeastern and Michigan Gas. Battle Creek's rates are subject to the
jurisdiction of the City Commission of Battle Creek, Michigan.
Utility Plant, Other Property and Depreciation. Utility plant and other
property are recorded at cost. The subsidiaries provide for depreciation on a
straight-line basis over the estimated useful lives of the related property.
The ratio of depreciation to the average balance of property approximated
4.0%, 4.1% and 4.3% for the years 1995, 1994 and 1993, respectively.
Certain investments in unconsolidated companies recorded using the equity
method are also reported as other property. See Note 9 for further discussion.
Receivables, Gas Sales, Transportation and Gas Marketing Revenues.
Customer receivables, gas sales and transportation revenues arise from the
operations of the utility subsidiaries. Gas marketing revenues and receivables
arise from SEMCO's marketing operations.
Revenue Recognition. Southeastern, Michigan Gas and Battle Creek bill
monthly on a cycle basis and follow the industry practice of recognizing
accrued revenue for gas services rendered to their customers but not billed at
month end. SEMCO recognizes marketing revenues, and any related hedging gains
or losses, in the same period natural gas is delivered to customers. See Note
6 for further discussion about SEMCO's hedging activities.
Gas in Underground Storage. Gas in underground storage for Southeastern
and Michigan Gas is reported at average cost. Battle Creek's gas inventory is
stated at last-in, first-out cost. At December 31, 1995 and 1994, the balance
in this account approximates the replacement value of the gas in storage.
SEMCO reports gas in storage at the lower of cost or market.
-25-
<PAGE>
In general, commodity costs and variable transportation costs are
capitalized as gas in underground storage. Fixed costs, primarily pipeline
demand charges and storage charges, are expensed as incurred through cost of
gas.
Cost of Gas. The utility subsidiaries have gas cost recovery mechanisms
which allow for the adjustment of rates charged to customers in response to
increases and decreases in the cost of gas purchased.
Income Taxes. Investment tax credits (ITC) utilized in prior years for
income tax purposes are deferred for financial accounting purposes and are
amortized through credits to the income tax provision over the lives of the
related property. The Company and its subsidiaries file a consolidated Federal
income tax return. Income taxes are allocated to each subsidiary based on its
separate taxable income.
Statement of Cash Flows. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash and temporary cash
investments.
The Company entered into capital lease transactions totaling $3,737,000 in
1995. These noncash investing and financing activities have been excluded from
the consolidated statements of cash flows.
Impairment of Long-Lived Assets. In March 1995, the FASB issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of," which is effective for 1996 financial statements. 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 does not expect the adoption of SFAS 121 to have a material impact on
the financial position or results of operations, based on the current
regulatory structure in which the Company operates.
2. REGULATORY MATTERS
MPSC Orders. In December 1992, the MPSC issued Order U-10040 addressing
the change in accounting for the cost of retiree medical benefits. Pursuant to
this order, Southeastern and 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. At this time Southeastern and Michigan Gas
expect to file general rate cases before 1997 in accordance with Order
U-10040. Any relief granted will be based on all elements of cost of service.
In June 1994, the MPSC issued Orders U-10617 and U-10618 to Michigan
Gas and Southeastern, respectively. These orders require the companies to
offset deferred retiree medical costs with certain reductions in Michigan state
property taxes until the MPSC issues a final order in a rate case filed
pursuant to Order U-10040. In accordance with orders U-10617 and U-10618,
Michigan Gas and Southeastern have reduced deferred retiree medical costs by a
combined total of $663,000 in 1995 and $437,000 in 1994.
-26-
<PAGE>
Battle Creek Rate Increase. In November 1995, the City Commission of
Battle Creek approved a Battle Creek rate increase, effective December 1995, of
approximately $1,800,000. Battle Creek requested the increase to recover the
cost of certain accelerated main replacement projects, the cost of its retiree
medical benefits and overall increases in operating expenses. Battle Creek's
annual net income should increase by approximately $500,000 as a result of this
rate increase.
Order 636 Transition Costs. Through the implementation of Order 636, the
FERC authorized interstate pipelines to directly bill certain transition costs
to former sales service customers. As a result, the Company incurred and
recorded Order 636 liabilities of $103,000 in 1995, $1,223,000 in 1994 and
$2,014,000 in 1993. These costs are substantially recoverable from
ratepayers. At December 31, 1995 and 1994, the Company's recorded
liabilities related to Order 636 totaled $1,102,000 and $1,904,000,
respectively. The Company does not anticipate any significant additional
direct billings related to Order 636.
3. INCOME TAXES
SFAS No. 109. In January 1993, the Company prospectively adopted SFAS
109, "Accounting For Income Taxes." Previously, the Company accounted for
income taxes under Accounting Principles Board Opinion No. 11.
SFAS 109 requires an annual measurement of deferred tax assets and
deferred tax liabilities based upon the estimated future tax effects of
temporary differences and carry forwards. In general, the total deferred tax
expense or benefit for the year equals the difference between the beginning and
end of year balances in deferred tax assets and liabilities.
Upon adoption, the initial application of SFAS 109 was determined by
recomputing the balance sheet deferred tax amounts as of January 1, 1993 using
currently enacted tax rates. The most significant adjustments were related to
the Company's regulated operations and, since these adjustments are expected to
be recovered from or refunded to customers in future rates, were offset on the
balance sheet by regulatory assets and regulatory liabilities. As a result,
the adoption of SFAS 109 had no material impact on the results of operations.
Provision for Income Taxes. The components of the provision for income
taxes are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Federal
Currently payable......................... $5,606 $5,849 $4,879
Deferred to future periods................ 812 (1,023) 1,064
Investment tax credits.................... (267) (267) (267)
------ ------ ------
Total income taxes.......................... $6,151 $4,559 $5,676
Less amounts included in:
Other income.............................. (37) 47 174
Extraordinary item........................ -- (692) (96)
------ ------ ------
Amount included in operating expenses....... $6,188 $5,204 $5,598
====== ====== ======
</TABLE>
-27-
<PAGE>
Reconciliation of Statutory Rate to Effective Rate. A reconciliation of
the difference between the Company's provision for income taxes and income
taxes computed at the statutory rate follows (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net income available for common stock....... $11,331 $ 9,992 $ 9,563
Add back:
Preferred dividends....................... 195 196 197
Income taxes.............................. 6,151 4,559 5,676
------- ------- -------
Pre-tax income.............................. $17,677 $14,747 $15,436
======= ======= =======
Computed federal income taxes............... $ 6,187 $ 5,161 $ 5,403
Depreciation................................ (43) (184) (108)
Amortization of deferred ITC................ (267) (267) (267)
Amortization of non-deductible amounts
resulting from acquisitions............... 217 216 216
Rate differential on other deferred items... (19) (2) (49)
Other....................................... 76 (365) 481
------- ------- -------
Total income taxes.......................... $ 6,151 $ 4,559 $ 5,676
======= ======= =======
Deferred Income Taxes. Deferred income taxes arise from temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements. The principal components of the Company's
deferred tax assets (liabilities) were as follows (in thousands of dollars):
</TABLE>
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Property............................................... $(19,668) $(18,198)
Employee benefit obligation (including retiree
medical)............................................. 4,578 3,488
Retiree medical benefit regulatory assets.............. (4,549) (3,200)
Gas in storage......................................... 2,412 1,867
ITC.................................................... 1,526 1,605
Debt premium........................................... (1,284) (1,432)
Gas cost underrecovery................................. (641) (1,163)
Other.................................................. 795 782
-------- --------
Total deferred taxes................................. $(16,831) $(16,251)
======== ========
Gross deferred tax liabilities......................... $(35,105) $(32,806)
Gross deferred tax assets.............................. 18,274 16,555
-------- --------
$(16,831) $(16,251)
======== ========
</TABLE>
At December 31, 1995 and December 31, 1994 there was no valuation
allowance recorded against deferred tax assets.
4. CAPITALIZATION
Common Stock Equity. The Company issued five percent stock dividends in
May 1995, May 1994 and May 1993. Earnings per share of common stock, cash
dividends per share of common stock and average number of common shares
outstanding have been restated to reflect the stock dividends.
-28-
<PAGE>
Pursuant to its DRIP, the Company issued 274,000 shares of common stock in
1995, 307,000 shares in 1994, and 247,000 shares in 1993. In January 1995, the
Company amended its DRIP to allow the Company to acquire common shares on the
open market to meet the dividend reinvestment and optional payment requirements
of the DRIP. During 1995, the Company purchased a total of 314,000 shares for
the DRIP. Except to the extent that purchase of shares on the open market
becomes difficult, the Company does not expect to issue new shares under the
plan.
In January 1994, the Company issued 747,500 shares of common stock
pursuant to a shelf registration. Net proceeds of approximately $14,629,000
were used to reduce notes payable to banks incurred to finance the Company's
ongoing capital expenditure program and for general corporate purposes.
The Company has short-term credit arrangements and long-term debt
indentures which contain, among other restrictions, limits on the payment of
dividends beyond certain levels of retained earnings. Under the most
restrictive of these covenants, all of the Company's retained earnings of
$17,128,000 was available for the payment of dividends on any class of stock at
December 31, 1995.
Cumulative Convertible Preferred Stock. At December 31, 1995 and 1994,
6,885 and 7,505 shares of the Company's $2.3125 cumulative convertible
preferred shares were outstanding and each share was convertible at the option
of the holder to 4.11 shares of common stock. At December 31, 1995, 28,297
shares of common stock are reserved for issuance upon conversion to holders of
the convertible preferred stock.
Cumulative Preferred Stock of Subsidiary. The cumulative preferred stock
of Southeastern is callable at Southeastern's option at $105 per share.
Payment of dividends on Southeastern's preferred stock is fully guaranteed by
the Company.
Long-Term Debt. In 1994, the Company issued $80,000,000 of private
placement debt to complete the refinancing of certain higher cost debt. In
connection with the refinancing, the Company recorded extraordinary charges for
the early extinguishment of debt of $1,286,000 and $177,000 net of tax, in 1994
and 1993, respectively.
There are no annual maturities or sinking fund requirements for the
Company's existing debt over the next five years.
Obligations Under Capital Leases. In December 1995, the Company entered
into an agreement for the sale and leaseback of vehicles and related
equipment. The resulting leases are classified as capital leases in
accordance with SFAS 13, "Accounting for Leases." The lease periods range
from a few months on older vehicles to fifty months on new vehicles.
However, the Company may cancel any lease at any time. When the leasing
agent disposes of a leased vehicle, the Company is liable for the difference
between the remaining capital lease obligation and the sales proceeds. Any
gain on the sale of leased vehicles also accrues to the Company.
The future minimum payments under capital leases at December 31, 1995 were
as follows (in thousands of dollars):
<TABLE>
<S> <C>
1996.............................................................. $1,679
1997.............................................................. 1,315
1998.............................................................. 831
1999.............................................................. 301
2000.............................................................. 1
------
Total minimum lease payments...................................... $4,127
Interest included in payments..................................... 390
------
Present value of minimum lease payments........................... $3,737
Current portion................................................... 1,467
------
$2,270
======
</TABLE>
-29-
<PAGE>
5. SHORT-TERM BORROWINGS
The Company maintains unsecured lines of credit at two banks. Interest on
all such lines are at variable rates, which do not exceed the banks' prime
lending rates. These arrangements are set to expire during 1996 and the
Company expects they will be renegotiated at comparable terms.
Information regarding these borrowings for each of the last three years is
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Notes payable balance at year end........... $51,700 $50,000 $52,342
Unused lines of credit at year end.......... 38,200 39,900 17,658
Average interest rate at year end........... 6.4% 6.6% 4.2%
Maximum borrowings at any month-end......... $52,400 $55,842 $63,450
Average borrowings.......................... 28,224 31,392 42,347
Weighted average cost of borrowing.......... 6.5% 5.2% 4.1%
</TABLE>
6. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Financial Instruments. The following methods and assumptions were used to
estimate the fair value of each significant class of financial instruments:
Cash, temporary cash investments, trade payables, receivables, notes
payable to banks, and obligations under capital leases. The carrying amount
approximates fair value.
Long-term debt. The fair values of the Company's long-term debt are
estimated based on quoted market prices for the same or similar issues or,
where no market quotes are available, based on discounted future cash flows
using current interest rates at which similar loans would be made to borrowers
with similar credit ratings and remaining maturities.
The estimated fair values of the Company's long-term debt as of
December 31, 1995 and 1994 are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Long-term debt..................... $103,588 $113,198 $104,910 $99,313
</TABLE>
Hedging Activities. SEMCO enters into sales commitments which may extend
up to 24 months into the future. Because of the volatility of natural gas
prices, there are significant market risks associated with these commitments.
To manage these risks, SEMCO maintains a hedging program. The primary
objective of SEMCO's hedging program is to attempt to eliminate the effect of
price fluctuations in the natural gas spot market on their extended sales
commitments.
SEMCO uses several mechanisms to hedge against this market risk. The most
frequently used hedges are natural gas futures and options. SEMCO may also
enter into natural gas swap agreements, contract to purchase natural gas from
producers for future delivery or inject gas into storage for later withdrawal.
Gains and losses on these transactions, accounted for as hedges, are included
in income in the same period natural gas is delivered to customers pursuant to
the underlying marketing contracts.
Cash or other assets are deposited with brokers at the time future or
option contracts are initiated. The change in market value of these contracts
requires adjustment of the margin account balances. The margin deposits of
$2,009,000 and $6,351,000 as of December 31, 1995 and 1994, respectively, are
included with the deferred gains and losses on future and option contracts in
other current assets. The cost of margin deposits approximates fair value.
-30-
<PAGE>
SEMCO records deferred gains and losses on future and option contracts
which will be offset by the corresponding underlying physical transaction. The
following summarizes the deferred gain (loss) on open contracts at December 31,
representing the difference between the current market value and the original
contract value (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Futures Contracts
Notional amount (MMcf)...................... 5,150 8,730
Unrealized gain (loss)...................... $ 479 $(2,863)
Options Contracts
Notional amount (MMcf)...................... 1,790 1,810
Unrealized gain (loss)...................... $ 213 $ (412)
</TABLE>
In addition to the above balances, SEMCO recorded approximately $224,000
in net deferred gains on contracts closed prior to December 31, 1995 related to
January 1996 sales commitments which is also included in other current assets.
As of December 31, 1995 and 1994, SEMCO also had outstanding natural gas
swap agreements covering a notional amount of 2,292,000 Mcf and 16,663,000 Mcf,
respectively. The estimated unrealized gain of these agreements, determined by
market quotes, was $170,000 at December 31, 1995 and the estimated unrealized
loss was $123,000 at December 31, 1994.
SEMCO also hedges certain of its sales commitments with gas held in
storage. At December 31, 1995 and 1994, SEMCO held approximately 1,207,000 Mcf
and 3,053,000 Mcf in storage with a carrying value of $2,253,000 and
$6,666,000, respectively. In addition, at December 31, 1995 and 1994, SEMCO
had deferred losses associated with this gas of $978,000 and $1,207,000,
respectively, which is recorded in other current assets. The net carrying
value of gas in storage approximates fair value.
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans. The Company has non-contributory, defined benefit pension
plans, covering substantially all employees. Pension plan benefits are
generally based upon years of service and compensation during the final years
of employment. The Company's funding policy is to contribute amounts annually
to the plans based upon actuarial and economic assumptions designed to achieve
adequate funding of projected benefit obligations. The Company contributes at
least the minimum required by the Employee Retirement Income Security Act of
1974, as amended.
At December 31, 1995, plan assets consisted of 50.9% equity investments,
15.2% guaranteed income insurance contracts, 33.6% fixed income securities and
.3% cash equivalents.
Combined net periodic pension cost for the Company's defined benefit plans
consists of the following components (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost................................ $ 1,465 $ 1,700 $ 1,442
Interest cost on projected benefit
obligation................................ 3,495 3,246 2,983
Actual return on assets..................... (8,497) 287 (2,562)
Amortization of prior service costs......... 471 471 482
Amortization of unrecognized net gain....... (329) (8) (313)
Amortization of transition obligation....... 79 79 79
Asset gain (loss) deferred.................. 5,066 (3,514) (383)
------- ------- -------
Net periodic pension cost................... $ 1,750 $ 2,261 $ 1,728
======= ======= =======
</TABLE>
-31-
<PAGE>
The following table sets forth the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets as of December 31, 1995
and 1994 (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................. $38,120 $30,744
Non-vested benefit obligation......................... 2,302 1,748
------- -------
Accumulated benefit obligation.......................... $40,422 $32,492
======= =======
Projected benefit obligation............................ $53,588 $42,068
Plan assets at fair value............................... 44,475 35,816
------- -------
Projected benefit obligation in excess of plan assets... $ 9,113 $ 6,252
Unrecognized net gain (loss)............................ (372) 3,464
Unrecognized prior service cost......................... (4,577) (5,048)
Unrecognized net transition obligation at December 31... (585) (664)
------- -------
Pension liability recognized in the consolidated
balance sheet......................................... $ 3,579 $ 4,004
======= =======
</TABLE>
Significant pension plan assumptions are as follow:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Plan discount rates............................... 7.25% 8.25% 7.25%
Expected long-term rate of return on assets....... 9.00% 9.00% 9.00%
Rates of increase in future compensation levels... 5.00% 5.00% 5.00%
</TABLE>
Other Postretirement Benefits. In addition to providing pension benefits,
the Company provides certain medical and prescription drug benefits to
qualified retired employees, their spouses and covered dependents. To qualify,
a retiree must have started employment before January 1, 1992 and have had at
least ten years of service. Retirees with less than 30 years of service are
required to contribute from 5% to 50% of the Company's coverage cost, with the
percentage depending on the retiree's age and years of service. Employees
hired after January 1, 1992 are not eligible for these benefits under the
current plan.
The Company accounts for retiree medical benefits in accordance with
SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." This standard requires the full accrual of such costs during the
years that the employee renders service to the Company until the date of full
eligibility. The Company adopted SFAS 106 effective January 1, 1993.
In December 1992, the MPSC issued a generic order addressing the adoption
of SFAS 106 by utilities under their jurisdiction. The order allows Michigan
utilities to adopt SFAS 106 for accounting and ratemaking purposes, subject to
a final order in a general rate case, and requires the external funding for
amounts recovered in rates. Southeastern and Michigan Gas plan to file general
rate cases in accordance with the order during 1996. Any rate relief granted
will be based on all elements of cost of service, including this obligation.
The City Commission of Battle Creek allowed the recovery of Battle Creek's
retiree medical benefits in the December 1995 rate increase. See Note 2 for
further discussion of Battle Creek's rate increase.
-32-
<PAGE>
The combined net periodic retiree medical costs consisted of the following
components (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost.......................... $1,443 $1,621 $1,546
Interest cost......................... 2,945 2,825 2,943
Actual return on assets............... (1,116) 42 (255)
Net amortization and deferral......... 2,106 1,238 1,611
------ ------ ------
Net periodic retiree medical cost..... $5,378 $5,726 $5,845
====== ====== ======
</TABLE>
In 1995, 1994 and 1993, the Company expensed net retiree medical costs of
$905,000, $841,000 and $841,000, respectively, consisting of total costs
incurred under the pay-as-you-go method plus additional retiree medical costs
recorded by the non-utility subsidiaries and Battle Creek. In 1995 and 1994,
the Company also expensed $663,000 and $437,000, respectively, of retiree
medical costs pursuant to certain MPSC orders regarding the reduction in
Michigan state property taxes. See Note 2 for further discussion of these MPSC
orders. The Company recorded regulatory assets related to the utility
subsidiaries' retiree medical costs of $3,810,000, $4,448,000 and $4,425,000 in
1995, 1994 and 1993, respectively.
The Company funds retiree medical benefits on a discretionary basis
through an Internal Revenue Code Section 401(h) account. In 1995 and 1993, the
Company made cash contributions to the 401(h) account of $437,000 and $579,000,
respectively. No contributions were made to the 401(h) account in 1994.
The funded status of the retiree medical benefit plans is reconciled with
the liability recorded at December 31, 1995 and 1994 as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of estimated benefits:
Retirees.......................................... $ 13,006 $ 12,605
Fully eligible active............................. 8,772 8,822
Other active...................................... 19,487 19,851
-------- --------
Accumulated retiree medical obligation.............. $ 41,265 $ 41,278
Plan assets at fair value........................... 5,949 4,396
-------- --------
Accumulated retiree medical obligation in excess of
plan assets....................................... $ 35,316 $ 36,882
Unrecognized net obligation at transition........... (28,558) (30,237)
Unrecognized net gain............................... 7,084 2,919
-------- --------
Recorded liability.................................. $ 13,842 $ 9,564
======== ========
</TABLE>
Significant plan assumptions are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Plan discount rate............................... 7.25% 8.25% 7.25%
Expected long-term rate of return on assets...... 9.00% 9.00% 9.00%
</TABLE>
-33-
<PAGE>
The 1995 costs were developed based on the substantive health care plan in
effect at January 1, 1995. As of December 31, 1995, the actuary assumed that
retiree medical cost increases would be 11.1% in 1995, 10.7% in 1996, and
decrease uniformly to 5.8% in 2005 and thereafter and that prescription drug
cost increases would be 14.5% in 1995, 13.7% in 1996, and decrease uniformly to
5.8% in 2005 and thereafter. The health care cost trend rate assumption
significantly affects the amounts reported. For example, a one percentage
point increase in each year would increase the accumulated retiree medical
obligation as of December 31, 1995 by $8,021,000 and the aggregate of the
service and interest cost components of net periodic retiree medical costs for
1995 by $951,000.
Employee Stock Ownership Trust. The Company has an employee stock
ownership trust (ESOT) which covers substantially all employees. Under the
provisions of this trust, the Company may contribute an annual amount at its
discretion for the benefit of eligible employees. The contribution, if any,
may be made in cash or in common shares of the Company. For the years 1995,
1994 and 1993, the Company's contributions were $300,000, $600,000 and
$600,000, respectively.
8. COMMITMENTS AND CONTINGENCIES
Construction Program. The Company's plans for expansion and improvement
of its distribution and transmission system, as well as other operations, are
under a process of continuing review. Aggregate capital expenditures for all
segments of the Company's operations for 1996 are projected at $27,726,000.
Certain commitments have been made in connection with these expenditures.
Guarantees. SEMCO Arkansas Pipeline Company, a wholly-owned subsidiary of
SEMCO, has a 32% interest in a partnership which operates the NOARK Pipeline
System. NOARK is a 302-mile intrastate natural gas pipeline, originating in
northwest Arkansas and extending northeast across the state. The 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 $79,900,000 of debt
used to finance the pipeline. Of the total debt, $56,700,000 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 December 31, 1995, NOARK had $23,200,000
outstanding under the agreement with interest payments at a variable interest
rate.
NOARK has been operating below capacity and generating losses since it was
placed in service. Operating cash flows have been insufficient to meet
principal and interest payments on the debt. The Company contributed $906,000
to NOARK in October 1994, $760,000 in January 1995, $800,000 in April 1995,
$880,000 in July 1995 and $872,000 in October 1995, in connection with its
guarantee.
For 1996, the Company estimates its required contributions to NOARK in the
range of $1,000,000 to $1,500,000. In December 1995, NOARK received $6,000,000
in settlement of litigation between Vesta and the NOARK partners. These funds
temporarily reduced outstanding borrowings on NOARK's revolving line of
credit. During 1996, cash flow deficiencies will be funded by the available
line of credit and partner contributions.
-34-
<PAGE>
The $6,000,000 settlement was paid to the partnership by Vesta Energy
Company in consideration of termination of a firm transportation agreement with
NOARK, and the related contracts, and release from all obligations related to
the NOARK Pipeline System.
The NOARK partners are currently investigating 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. INVESTMENTS IN AFFILIATES
The equity method of accounting is used for interests the Company holds in
affiliates 20% to 50% owned or in which the Company has significant influence
over operations. These affiliate companies are generally involved in natural
gas transmission, storage, or associated operations. The Company provides
income taxes on its share of undistributed earnings of these subsidiaries at
the time the earnings are included in consolidated income. Refer to Note 8 for
a discussion of the Company's significant guarantees of affiliate debt.
At December 31, 1995, the Company held the following interests in these
affiliates:
<TABLE>
<CAPTION>
Percent
Ownership
---------
<S> <C>
Eaton Rapids Gas Storage System.................................. 50%
Michigan Intrastate Lateral System............................... 50
Michigan Intrastate Pipeline System.............................. 50
Nimrod Natural Gas Corporation................................... 11
Nimrod Limited Partnership....................................... 29
NOARK Gas Services, L.P.......................................... 40
NOARK Pipeline System, L.P....................................... 32
</TABLE>
Summarized combined financial information for the Company's investments in
affiliate companies for the years ended December 31, 1995, 1994 and 1993 is as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales................................... $ 39,179 $ 20,152 $ 19,717
Operating income............................ $ 9,958 $ 8,334 $ 8,105
Net income (loss)........................... $ (225) $ 329 $ (1,284)
======== ======== ========
The Company's share of net loss............. $ (258) $ (20) $ (51)
======== ======== ========
Current assets.............................. $ 8,988 $ 9,320 $ 5,636
Non-current assets.......................... 138,741 140,530 144,961
-------- -------- --------
Total assets................................ $147,729 $149,850 $150,597
======== ======== ========
Current liabilities......................... $ 12,310 $ 12,505 $ 16,748
Non-current liabilities..................... 118,322 113,902 108,259
Equity...................................... 17,097 23,443 25,590
-------- -------- --------
Total liabilities and equity................ $147,729 $149,850 $150,597
======== ======== ========
The Company's equity investment............. $ 8,024 $ 9,754 $ 8,902
======== ======== ========
The Company's share of undistributed
losses.................................... $ (1,193) $ (903) $ (151)
======== ======== ========
</TABLE>
-35-
<PAGE>
10. QUARTERLY FINANCIAL INFORMATION (Unaudited)
In the opinion of the Company, the following quarterly information
includes all adjustments necessary for a fair statement of the results of
operations for such periods. Earnings and dividends per share of common stock
are calculated based upon the weighted average number of shares outstanding
during each quarter. Due to the seasonal nature of the Company's gas
distribution business, the results of operations reported on a quarterly basis
show substantial variations.
The following amounts are shown in thousands of dollars, except per share
amounts:
<TABLE>
<CAPTION>
Quarters First Second Third Fourth
- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C>
1995
Operating revenue................... $117,305 $65,741 $50,607 $101,885
Operating income.................... 10,659 2,960 7 8,800
Net income (loss) available for
common stock...................... 7,457 295 (2,688) 6,267
Earnings (loss) per share of
common stock<F1><F2>.............. .63 .02 (.23) .53
Cash dividends per share of
common stock<F1>.................. .19 .19 .20 .20
1994
Operating revenue................... $134,788 $75,953 $60,453 $101,236
Operating income.................... 12,107 2,715 514 6,955
Net income (loss) available for
common stock before
extraordinary item................ 9,505 513 (2,556) 3,816
Extraordinary item.................. -- (1,286) -- --
-------- ------- ------- --------
Net income (loss) available for
common stock...................... 9,505 (773) (2,556) 3,816
Earnings (loss) per share of
common stock before
extraordinary item<F1><F2>........ .84 .04 (.22) .32
Earnings (loss) per share of
common stock<F1><F2>.............. .84 (.07) (.22) .32
Cash dividends per share of
common stock<F1>.................. .18 .18 .19 .19
<FN>
<F1>
Adjusted for five percent stock dividends in May 1995 and May 1994.
<F2>
Total for each year may not equal annual earnings per share due to
changes in shares outstanding.
</FN>
</TABLE>
-36-
<PAGE>
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Southeastern Michigan Gas Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC. (a Michigan
corporation) and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' investment and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements and the schedules referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southeastern
Michigan Gas Enterprises, Inc. and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes 3 and 7 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting for
income taxes and other postretirement benefits.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in item 14(a)2 are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 6, 1996.
-37-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-38-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions "Information About Directors"
in Registrant's definitive Proxy Statement (filed pursuant to Regulation 14A)
with respect to Registrant's April 16, 1996 Annual Meeting of Shareholders is
incorporated by reference herein.
The executive officers of the Company are Robert F. Caldwell and Marcia M.
Chmielewski.
Mr. Caldwell (age 40) was elected Executive Vice President of the Company
in April 1993. He served as Senior Vice President of the Company from April
1991 to April 1993, Vice President from February 1989 to April 1991, Secretary
from January 1985 to February 1991, and has been with the Company or one of its
subsidiaries in other capacities since 1979.
Ms. Chmielewski (age 37) was elected Vice President and Chief Financial
Officer of the Company in October 1994. She has also served as Treasurer
since August 1992, Assistant Secretary from October 1990 to October 1994, and
has been with the Company in other capacities since 1986.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions "Compensation Committee
Interlocks and Insider Participation" and "Compensation of Directors and
Executive Officers" in Registrant's definitive Proxy Statement (filed pursuant
to Regulation 14A) with respect to Registrant's April 16, 1996 Annual Meeting
of Shareholders is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Stock Outstanding, Voting
Rights and Votes Required" in the Registrant's definitive Proxy Statement
(filed pursuant to Regulation 14A) with respect to Registrant's April 16, 1996
Annual Meeting of Shareholders, is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Employment and Related
Agreements" in the Registrant's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to Registrant's April 16, 1996 Annual Meeting of
Shareholders, is incorporated by reference herein.
-39-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements. The following financial
statements are included in Part II, item 8 above.
<TABLE>
<CAPTION>
Pages in 10-K
-------------
<S> <C>
Consolidated Statements of Income for the years
ended December 31, 1995, 1994 and 1993 20
Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1994 and 1993 21
Consolidated Balance Sheets as of
December 31, 1995 and 1994 22
Consolidated Statements of Capitalization as
of December 31, 1995 and 1994 23
Consolidated Statements of Changes in
Stockholders' Investment for the years
ended December 31, 1995, 1994 and 1993 24
Notes to the Consolidated Financial Statements 25-36
Report of Independent Public Accountants 37
</TABLE>
(a) 2. Financial Statement Schedules.
The following additional data should be read in conjunction with the
Consolidated Financial Statements in Part II, item 8 above.
Schedules not included herein have been omitted because they are not
applicable or the required information is shown in such financial
statements or notes thereto.
<TABLE>
<CAPTION>
Schedule
Number Pages in 10-K
-------- -------------
<S> <C> <C> <C>
I Condensed Financial Information of
Southeastern Michigan Gas Company 44
II Consolidated Valuation and Qualifying
Accounts for the years ended
December 31, 1995, 1994 and 1993 48
</TABLE>
-40-
<PAGE>
(a) 3. Exhibits, including those incorporated by reference
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- ------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3 Articles of Incorporation and Bylaws
3(a) 1--Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
(Enterprises), as restated
July 11, 1989.(a) x
2--Certificate of amendment to Article III of
the Articles of Incorporation dated
May 16, 1990.(b) x
3(b) Bylaws of Enterprises--last revised
March 1, 1995.(i) x
4(a) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(e) x
4(b) Note Agreement dated June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(g) x
9 Voting Trust Agreement. NA NA
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(c) x
10(b) Group A Employment Contract.(f) x
10(c) Short-Term Incentive Plan.(f) 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
12 Statements re computation of ratios.(d) x
13 Annual report to shareholders. NA NA
16 Letter re change in certifying accountant. NA NA
18 Letter re change in accounting principles. NA NA
21 Subsidiaries of the Registrant. x
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. x
24 Power of Attorney. x
27 Financial Data Schedule. x
28 Information from reports furnished to state
insurance regulatory authorities. NA NA
99 Proxy Statement dated March 15, 1996.(j) x
-41-
<PAGE>
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Form 10-K for 1989, dated March 29, 1990,
File No. 0-8503.
(b) Filed with Enterprises' Form 10-K for 1990, dated March 28, 1991,
File No. 0-8503.
(c) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(d) Filed with Enterprises' Form 10-K for 1991, dated March 27, 1992,
File No. 0-8503.
(e) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(f) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(g) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(h) Filed with Enterprises' Form 10-Q for the quarter ended September 30,
1994, File No. 0-8503.
(i) Filed with Enterprises' Form 10-K for 1995, dated March 28, 1995,
File No. 0-8503.
(j) Filed March 15, 1996, pursuant to Rule 14a-6 of the Exchange Act,
File No. 0-8503.
ITEM 14. (Continued)
(b) No reports on Form 8-K have been filed during the quarter ended
December 31, 1995.
(c) The Exhibits, if any, filed herewith are identified on the Exhibit Index.
(d) The financial statement schedules filed are listed under Item 14.(a).2.
above.
-42-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
Date: March 29, 1996 By Robert F. Caldwell
----------------------------------------
Executive Vice President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Robert F. Caldwell Executive Vice President March 29, 1996
(Director)
Marcia M. Chmielewski Vice President, Treasurer and March 29, 1996
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Frank G. Andreoni* Director March 29, 1996
Daniel A. Burkhardt* Director March 29, 1996
Edward J. Curtis* Director March 29, 1996
John T. Ferris* Director March 29, 1996
Michael O. Frazer* Director March 29, 1996
Harvey I. Klein* Director March 29, 1996
Frederick S. Moore* Director March 29, 1996
Edith A. Stotler* Director March 29, 1996
Donald W. Thomason* Director March 29, 1996
*By Robert F. Caldwell March 29, 1996
Attorney-in-fact
-43-
<PAGE>
SCHEDULE I
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
<TABLE>
STATEMENT OF INCOME
<CAPTION>
Years ended December 31,
---------------------------------
1995 1994 1993
------- ------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUE
Gas sales $68,321 $74,151 $72,486
Transportation 3,055 3,057 3,125
Other operations 470 490 380
------- ------- -------
71,846 77,698 75,991
------- ------- -------
OPERATING EXPENSES
Cost of gas sold 40,181 47,240 46,297
Operations 12,037 11,642 11,406
Maintenance 2,145 2,227 2,019
Depreciation 4,111 3,869 3,690
Income taxes 2,276 2,019 2,071
Taxes other than income taxes 3,275 3,538 3,488
------- ------- -------
64,025 70,535 68,971
------- ------- -------
OPERATING INCOME 7,821 7,163 7,020
OTHER INCOME, NET 239 203 179
------- ------- -------
INCOME BEFORE INCOME DEDUCTIONS 8,060 7,366 7,199
------- ------- -------
INCOME DEDUCTIONS
Interest on long-term debt 1,864 1,853 1,676
Other interest 624 516 614
Amortization of debt expense 193 169 145
------- ------- -------
2,681 2,538 2,435
------- ------- -------
NET INCOME 5,379 4,828 4,764
Dividends on preferred stock 178 178 178
------- ------- -------
NET INCOME AFTER DIVIDENDS
ON PREFERRED STOCK $ 5,201 $ 4,650 $ 4,586
======= ======= =======
</TABLE>
-44-
<PAGE>
SCHEDULE I
(cont.)
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
<TABLE>
BALANCE SHEET
A S S E T S
-----------
<CAPTION>
December 31,
------------------------
1995 1994
-------- --------
(Thousands of Dollars)
<S> <C> <C>
UTILITY PLANT
Plant in service, at original cost $142,645 $131,794
Less - Accumulated depreciation 56,676 52,526
-------- --------
85,969 79,268
Construction work in progress 918 110
-------- --------
86,887 79,378
-------- --------
OTHER PROPERTY 573 491
-------- --------
CURRENT ASSETS
Cash and temporary cash investments, at cost 163 715
Receivables
Affiliates 369 199
Nonaffiliates, less reserves of $128 and $177 10,155 7,841
Accrued utility revenue 6,533 4,472
Material and supplies, at average cost 1,858 1,719
Gas in underground storage, at average cost 4,261 8,774
Property taxes assessed and prepayments 1,678 1,548
Accumulated deferred income taxes 892 1,000
Other current assets -- 137
-------- --------
25,909 26,405
-------- --------
DEFERRED CHARGES
Unamortized debt expense 1,719 1,912
Other 9,689 7,853
-------- --------
11,408 9,765
-------- --------
$124,777 $116,039
======== ========
</TABLE>
-45-
<PAGE>
SCHEDULE I
(cont.)
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
<TABLE>
BALANCE SHEET
CAPITALIZATION AND LIABILITIES
<CAPTION>
December 31,
------------------------
1995 1994
-------- --------
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION
Common stock equity $ 40,594 $ 39,592
Cumulative preferred stock 3,100 3,100
Long-term debt 23,000 23,000
Capital lease obligations 1,826 649
-------- --------
68,520 66,341
-------- --------
CURRENT LIABILITIES
Note payable to affiliate 17,375 12,670
Accounts payable
Affiliates 1,912 2,001
Nonaffiliates 5,402 4,567
Customer advance payments 3,023 3,985
Accrued taxes 1,603 911
Amounts payable to customers 682 107
Other 1,499 2,557
-------- --------
31,496 26,798
-------- --------
COMMITMENTS AND CONTINGENCIES
DEFERRED CREDITS
Accumulated deferred income taxes 4,240 4,086
Unamortized investment tax credits 2,027 2,195
Customer advances for construction 6,405 5,954
Other 12,089 10,665
-------- --------
24,761 22,900
-------- --------
$124,777 $116,039
======== ========
</TABLE>
-46-
<PAGE>
SCHEDULE I
(cont.)
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
Years ended December 31,
---------------------------------
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITY
Cash received from customers $ 67,202 $ 81,263 $ 76,261
Cash paid for payrolls and to suppliers (50,046) (59,478) (61,665)
Interest paid (2,488) (2,647) (2,363)
Income taxes paid (1,652) (3,069) (5,711)
Taxes other than income taxes paid (3,405) (3,272) (3,540)
Other cash receipts and payments, net 372 11 1,921
-------- -------- --------
NET CASH FROM OPERATING ACTIVITY 9,983 12,808 4,903
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITY
Capital expenditures (10,759) (6,371) (6,413)
Proceeds from sale of property
and equipment less removal costs (103) 128 107
-------- -------- --------
NET CASH FROM INVESTING ACTIVITY (10,862) (6,243) (6,306)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITY
Change in notes payable to affiliate 4,705 (7,270) 5,575
Issuance of long-term debt -- 23,000 --
Repayment of long-term debt -- (17,502) (29)
Payment of dividends (4,378) (4,178) (4,078)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITY 327 (5,950) 1,468
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS (552) 615 65
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Year 715 100 35
-------- -------- --------
End of Year $ 163 $ 715 $ 100
======== ======== ========
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITY
Net income available for common stock $ 5,201 $ 4,650 $ 4,586
Adjustments to reconcile net income to
net cash from operating activity
Depreciation 4,111 3,869 4,163
Deferred taxes and ITC 94 (1,349) (2,971)
Accounts receivable (2,484) 697 1,318
Accrued utility revenue (2,061) 1,737 (798)
Materials and supplies and gas in
underground storage 4,374 2,421 (803)
Property taxes assessed and
prepayments (130) 271 2,268
Accounts payable 746 (1,438) 704
Amounts payable to customers 64 102 (230)
Other, net 68 1,848 (3,334)
-------- -------- --------
NET CASH FROM OPERATING ACTIVITY $ 9,983 $ 12,808 $ 4,903
======== ======== ========
</TABLE>
-47-
<PAGE>
SCHEDULE II
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
<CAPTION>
Additions Deductions
--------- From Reserve
Balance Provision for Purpose of Balance
Beginning Charged Which the Reserve End
Description of Period to Income Was Provided of Period
- ------------------------------------------------------- --------- --------- ----------------- ---------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
<S> <C> <C> <C> <C>
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
UNCOLLECTIBLE ACCOUNTS $ 889 $ 608 $ 768 $ 729
====== ====== ====== ======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET $1,801 $ 600 $ -0- $2,401
====== ====== ====== ======
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
------------------------------------
<S> <C> <C> <C> <C>
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
UNCOLLECTIBLE ACCOUNTS $1,355 $ 899 $1,365 $ 889
====== ====== ====== ======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET $2,202 $ -0- $ 401 $1,801
====== ====== ====== ======
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1993
------------------------------------
<S> <C> <C> <C> <C>
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
UNCOLLECTIBLE ACCOUNTS $1,008 $ 939 $ 592 $1,355
====== ====== ====== ======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET $2,205 $ 550 $ 553 $2,202
====== ====== ====== ======
</TABLE>
-48-
<PAGE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
Exhibit Index
Form 10-K
1995
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- ------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3 Articles of Incorporation and Bylaws
3(a) 1--Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
(Enterprises), as restated
July 11, 1989.(a) x
2--Certificate of amendment to Article III of
the Articles of Incorporation dated
May 16, 1990.(b) x
3(b) Bylaws of Enterprises--last revised
March 1, 1995.(i) x
4(a) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(e) x
4(b) Note Agreement dated June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(g) x
9 Voting Trust Agreement. NA NA
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(c) x
10(b) Group A Employment Contract.(f) x
10(c) Short-Term Incentive Plan.(f) 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
12 Statements re computation of ratios.(d) x
13 Annual report to shareholders. NA NA
16 Letter re change in certifying accountant. NA NA
18 Letter re change in accounting principles. NA NA
21 Subsidiaries of the Registrant. x
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. x
24 Power of Attorney. x
27 Financial Data Schedule. x
28 Information from reports furnished to state
insurance regulatory authorities. NA NA
99 Proxy Statement dated March 15, 1996.(j) x
<PAGE>
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Form 10-K for 1989, dated March 29, 1990,
File No. 0-8503.
(b) Filed with Enterprises' Form 10-K for 1990, dated March 28, 1991,
File No. 0-8503.
(c) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(d) Filed with Enterprises' Form 10-K for 1991, dated March 27, 1992,
File No. 0-8503.
(e) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(f) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(g) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(h) Filed with Enterprises' Form 10-Q for the quarter ended September 30,
1994, File No. 0-8503.
(i) Filed with Enterprises' Form 10-K for 1995, dated March 28, 1995,
File No. 0-8503.
(j) Filed March 15, 1996, pursuant to Rule 14a-6 of the Exchange Act,
File No. 0-8503.
<PAGE>
EXHIBIT 21
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
List of Subsidiaries
Exhibit 21 to Form 10-K (1995)
The subsidiaries of Southeastern Michigan Gas Enterprises, Inc. (the
Registrant) are:
Southeastern Michigan Gas Company
Michigan Gas Company
MI-GAS PROPANE COMPANY (a subsidiary of Michigan Gas Company)
Battle Creek Gas Company
SEMCO Energy Services, Inc.
SEMCO Pipeline Company (a subsidiary of SEMCO Energy Services, Inc.)
SEMCO Gas Storage Company (a subsidiary of SEMCO Energy Services, Inc.)
SEMCO Arkansas Pipeline Company (a subsidiary of SEMCO Energy Services, Inc.)
SEMCO Gathering Company (a subsidiary of SEMCO Energy Services, Inc.)
Southeastern Financial Services, Inc. (a subsidiary of SEMCO Energy Services,
Inc.)
Southeastern Development Company (a subsidiary of SEMCO Energy Services, Inc.)
Each is incorporated in the State of Michigan and each does business only under
its respective corporate name indicated above.
<PAGE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report dated February 6, 1996, included in this Form 10-K for the year
ended December 31, 1995, into the Company's previously filed Registration
Statements No. 33-37290, 33-46413 and 33-51553.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
March 28, 1996.
<PAGE>
EXHIBIT 24
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
POWER OF ATTORNEY
Whereas, the Board of Directors of Southeastern Michigan Gas Enterprises,
Inc., a Michigan corporation, at a meeting held on February 28, 1996,
authorized and approved the execution of Form 10-K Annual Report for 1995
pursuant to Section 13 of the Securities Exchange Act of 1934 and the filing of
said Form 10-K with the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
NOW, THEREFORE, each of the undersigned in his capacity as a Director or
officer, or both, as the case may be, of said Corporation, does hereby appoint
Robert F. Caldwell and Marcia M. Chmielewski, and each of them severally, his
true and lawful attorneys or attorney to execute in his name, place and stead,
in his capacity as a Director or officer or both, as the case may be, of said
Corporation, the Form 10-K for the year ended December 31, 1995, and any and
all amendments thereto and all instruments necessary or incidental in
connection therewith, and to file the same with the Securities and Exchange
Commission. Each of said attorneys shall have full power of substitution and
resubstitution. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of each of the undersigned, in any and
all capacities, each act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as each of the undersigned
might or could do in person, and each of the undersigned hereby ratifies and
approves the acts of said attorneys and each of them.
IN WITNESS WHEREOF, we have hereunto set our hands as of the 28th day of
February, 1996.
Frank G. Andreoni, Director Michael O. Frazer, Director
Daniel A. Burkhardt, Director Harvey I. Klein, Director
Robert F. Caldwell, Executive Vice Frederick S. Moore, Director
President and Director
Marcia M. Chmielewski, Principal Edith A. Stotler, Director
Financial and Accounting Officer,
Vice President, Treasurer and
Controller
Edward J. Curtis, Director Donald W. Thomason, Director
John T. Ferris, Director
POA10K.SAM(sla)
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 227,294
<OTHER-PROPERTY-AND-INVEST> 12,883
<TOTAL-CURRENT-ASSETS> 108,820
<TOTAL-DEFERRED-CHARGES> 29,526
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 378,523
<COMMON> 11,837
<CAPITAL-SURPLUS-PAID-IN> 80,546
<RETAINED-EARNINGS> 17,128
<TOTAL-COMMON-STOCKHOLDERS-EQ> 109,511
0
3,272
<LONG-TERM-DEBT-NET> 103,588
<SHORT-TERM-NOTES> 51,700
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 2,270
<LEASES-CURRENT> 1,467
<OTHER-ITEMS-CAPITAL-AND-LIAB> 106,715
<TOT-CAPITALIZATION-AND-LIAB> 378,523
<GROSS-OPERATING-REVENUE> 335,538
<INCOME-TAX-EXPENSE> 6,188
<OTHER-OPERATING-EXPENSES> 306,924
<TOTAL-OPERATING-EXPENSES> 313,112
<OPERATING-INCOME-LOSS> 22,426
<OTHER-INCOME-NET> (179)
<INCOME-BEFORE-INTEREST-EXPEN> 22,247
<TOTAL-INTEREST-EXPENSE> 10,899
<NET-INCOME> 11,348
17
<EARNINGS-AVAILABLE-FOR-COMM> 11,331
<COMMON-STOCK-DIVIDENDS> 9,230
<TOTAL-INTEREST-ON-BONDS> 8,546
<CASH-FLOW-OPERATIONS> 32,593
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
</TABLE>
