UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period from to
------------- ------------
Commission file number 0-8503
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2144267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 Water Street, Port Huron, Michigan 48060
(Address of principal executive offices)
810-987-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock outstanding as of July 31, 1996, is
12,375,313.
<PAGE>
INDEX TO FORM 10-Q
------------------
For Quarter Ended June 30, 1996
Page
Number
------
COVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars Except Per Share Amounts)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
----------------- ------------------- -------------------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Gas sales $38,624 $33,523 $126,587 $102,807 $207,804 $176,784
Gas marketing 39,876 27,980 123,339 70,702 186,033 149,812
Transportation 2,821 2,915 6,339 6,458 12,329 12,237
Other operations 1,069 1,323 2,253 3,079 4,844 5,902
------- ------- -------- -------- -------- --------
$82,390 $65,741 $258,518 $183,046 $411,010 $344,735
------- ------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $25,840 $21,504 $ 87,365 $ 67,930 $140,054 $117,475
Cost of gas marketed 39,195 27,165 120,969 68,873 182,183 145,864
Operations 8,663 7,740 18,818 15,988 34,710 31,918
Maintenance 951 1,029 1,864 2,070 4,131 4,413
Depreciation 2,797 2,975 5,660 5,961 11,734 11,674
Income taxes 123 408 4,918 4,430 6,676 4,335
Taxes other than income taxes 2,125 1,960 4,369 4,175 8,160 7,968
------- ------- -------- -------- -------- --------
$79,694 $62,781 $243,963 $169,427 $387,648 $323,647
------- ------- -------- -------- -------- --------
OPERATING INCOME $ 2,696 $ 2,960 $ 14,555 $ 13,619 $ 23,362 $ 21,088
OTHER INCOME (LOSS), NET (45) (237) (319) (447) (51) (681)
------- ------- -------- -------- -------- --------
INCOME BEFORE INCOME DEDUCTIONS $ 2,651 $ 2,723 $ 14,236 $ 13,172 $ 23,311 $ 20,407
------- ------- -------- -------- -------- --------
INCOME DEDUCTIONS
Interest on long-term debt $ 2,129 $ 2,133 $ 4,257 $ 4,290 $ 8,513 $ 9,017
Other interest 292 135 864 809 1,782 1,735
Amortization of debt expense 93 112 187 224 411 448
Dividends on preferred stock of subsidiary 44 44 89 89 178 178
------- ------- -------- -------- -------- --------
$ 2,558 $ 2,424 $ 5,397 $ 5,412 $ 10,884 $ 11,378
------- ------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK BEFORE PREFERRED
STOCK DIVIDENDS $ 93 $ 299 $ 8,839 $ 7,760 $ 12,427 $ 9,029
Dividends on convertible preferred stock 4 4 8 8 17 17
------- ------- -------- -------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK $ 89 $ 295 $ 8,831 $ 7,752 $ 12,410 $ 9,012
======= ======= ======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK $ .01 $ .02 $ .71 $ .62 $ 1.00 $ .73
======= ======= ======== ======== ======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .19 $ .18 $ .38 $ .36 $ .76 $ .72
======= ======= ======== ======== ======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 12,388 12,440 12,391 12,447 12,396 12,389
======= ======= ======== ======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-3-
<PAGE>
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
A S S E T S
<CAPTION>
(Unaudited) (Unaudited)
June 30, December 31, June 30,
1996 1995 1995
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
UTILITY PLANT
Plant in service, at cost $324,928 $314,602 $294,403
Less - Accumulated depreciation 93,554 87,308 81,925
-------- -------- --------
$231,374 $227,294 $212,478
OTHER PROPERTY, net 10,940 12,883 15,006
-------- -------- --------
$242,314 $240,177 $227,484
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash investments,
at cost $ 5,770 $ 264 $ 2,408
Receivables, less allowances of
$785 at June 30, 1996, $729
at December 31, 1995 and $974
at June 30, 1995 20,976 32,320 14,000
Accrued revenue 17,556 38,854 13,480
Materials and supplies, at average cost 4,099 3,280 3,985
Gas in underground storage 15,899 20,172 17,740
Gas charges, recoverable from customers 9,400 5,854 3,657
Accumulated deferred income taxes 2,345 2,249 2,557
Other 2,541 5,827 5,746
-------- -------- --------
$ 78,586 $108,820 $ 63,573
-------- -------- --------
DEFERRED CHARGES
Unamortized debt expense $ 5,515 $ 5,702 $ 5,926
Deferred gas charges, recoverable
from customers 431 615 655
Advances to equity investees 4,218 4,218 2,466
Other 20,360 18,991 17,756
-------- -------- --------
$ 30,524 $ 29,526 $ 26,803
-------- -------- --------
$351,424 $378,523 $317,860
======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-4-
<PAGE>
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<CAPTION>
(Unaudited) (Unaudited)
June 30, December 31, June 30,
1996 1995 1995
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
COMMON STOCK EQUITY
Common stock-par value $1 per share,
20,000,000 shares authorized;
12,376,737, 11,837,075 and
11,808,969 shares outstanding $ 12,377 $ 11,837 $ 11,809
Capital surplus 79,179 80,546 82,130
Retained earnings 21,244 17,128 16,229
-------- -------- --------
$112,800 $109,511 $110,168
-------- -------- --------
CUMULATIVE CONVERTIBLE PREFERRED STOCK
Convertible preferred stock - par value
$1 per share; authorized 500,000
shares issuable in series; each
convertible to 4.11 common shares $ 7 $ 7 $ 7
Capital surplus 165 165 175
-------- -------- --------
$ 172 $ 172 $ 182
-------- -------- --------
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY
$100 par value (redemption price
$105 per share); authorized
50,000 shares issuable in series;
31,000 shares outstanding $ 3,100 $ 3,100 $ 3,100
-------- -------- --------
LONG-TERM DEBT INCLUDING CAPITAL LEASES $105,702 $105,858 $103,588
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 29,000 $ 51,700 $ 12,550
Current portion of long-term debt
and capital leases 1,394 1,467 -
Accounts payable 29,199 38,018 19,811
Customer advance payments 1,757 5,764 3,146
Accrued taxes 5,229 704 2,158
Accrued interest 977 1,135 1,026
Amounts payable to customers - 682 969
Other 5,232 4,851 8,230
-------- -------- --------
$ 72,788 $104,321 $ 47,890
-------- -------- --------
DEFERRED CREDITS
Accumulated deferred income taxes $ 19,420 $ 19,080 $ 18,940
Unamortized investment tax credit 2,915 3,049 3,183
Customer advances for construction 8,854 9,326 8,298
Other 25,673 24,106 22,511
-------- -------- --------
$ 56,862 $ 55,561 $ 52,932
-------- -------- --------
$351,424 $378,523 $317,860
======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-5-
<PAGE>
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- ------------------- -------------------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $139,365 $ 86,981 $281,960 $210,476 $392,191 $354,779
Cash paid for payrolls and to suppliers (109,250) (63,727) (230,823) (146,992) (348,271) (299,345)
Interest paid (4,012) (3,927) (5,278) (5,217) (10,344) (11,147)
Income taxes paid (2,525) (2,985) (2,525) (4,386) (3,709) (6,265)
Taxes other than income taxes paid (469) (731) (754) (1,387) (7,362) (7,875)
Other cash receipts and payments, net 9 659 1,414 1,138 450 1,201
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 23,118 $ 16,270 $ 43,994 $ 53,632 $ 22,955 $ 31,348
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $ (5,092) $ (4,972) $(10,023) $ (7,872) $(28,410) $(20,942)
Investment in other natural gas related property - - - - - (1)
Other property additions (86) (335) (193) (411) (495) (1,162)
Property retirement costs, net of proceeds (63) (95) 82 (153) 875 (351)
Proceeds from sale and leaseback of capital assets - - - - 3,737 -
Advances to equity investees - (800) - (1,560) (1,752) (2,466)
-------- -------- -------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $ (5,241) $ (6,202) $(10,134) $ (9,996) $(26,045) $(24,922)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 1,235 $ 1,207 $ 2,595 $ 3,067 $ 5,540 $ 5,753
Repurchase of common stock (see note 2) (1,520) (2,552) (3,422) (3,521) (5,899) (3,521)
Net change in notes payable to banks (13,500) (6,650) (22,700) (37,450) 16,450 12,550
Repayment of long-term debt (15) (1,290) (15) (1,322) (15) (62,308)
Payment of dividends (2,407) (2,306) (4,812) (4,613) (9,624) (9,174)
-------- -------- -------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $(16,207) $(11,591) $(28,354) $(43,839) $ 6,452 $(56,700)
-------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS $ 1,670 $ (1,523) $ 5,506 $ (203) $ 3,362 $(50,274)
-------- -------- -------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Period $ 4,100 $ 3,931 $ 264 $ 2,611 $ 2,408 $ 52,682
-------- -------- -------- -------- -------- --------
End of Period $ 5,770 $ 2,408 $ 5,770 $ 2,408 $ 5,770 $ 2,408
======== ======== ======== ======== ======== ========
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES
Net income available for common stock $ 89 $ 295 $ 8,831 $ 7,752 $ 12,410 $ 9,012
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 2,797 2,975 5,660 5,961 11,734 11,674
Deferred taxes and investment tax credits 80 132 110 (10) 424 (2,055)
Equity (income) loss, net of distributions 81 388 1,827 804 2,013 1,698
Receivables 31,803 13,732 11,344 8,807 (6,976) 3,014
Accrued revenue 29,796 9,933 21,298 19,819 (4,076) 1,727
Materials and supplies and gas in underground storage (11,715) (7,887) 3,454 16,439 (165) 3,467
Gas charges, recoverable from customers (4,269) (76) (3,546) 4,546 (5,743) 2,454
Other current assets 834 2,146 3,286 6,270 3,205 1,455
Accounts payable (23,418) (798) (8,819) (15,126) 11,280 (7,638)
Customer advances and amounts payable to customers (236) (2,010) (5,161) (4,997) (1,802) 1,271
Accrued taxes (1,513) (2,135) 4,525 1,432 3,071 (950)
Other, net (1,211) (425) 1,185 1,935 (2,420) 6,219
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ 23,118 $ 16,270 $ 43,994 $ 53,632 $ 22,955 $ 31,348
======== ======== ======== ======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-6-
<PAGE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES
Under the rules and regulations of the Securities and Exchange Commission
for Form 10-Q Quarterly Reports, certain footnotes and other financial
statement information normally included in Southeastern Michigan Gas
Enterprises, Inc.'s (the Company's) year-end financial statements have been
condensed or omitted in the accompanying unaudited financial statements. These
financial statements prepared by the Company should be read in conjunction with
the financial statements and notes thereto included in the Company's 1995
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The information in the accompanying financial statements reflects, in the
opinion of the Company's management, all adjustments (which include only normal
recurring adjustments) necessary for a fair statement of the information shown,
subject to year-end and other adjustments, as later information may require.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
In general, this statement requires that long-lived assets held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The need for an impairment loss is evaluated by comparing the
carrying cost of the asset to the future cash flows (undiscounted and without
interest charges) expected from the use and eventual disposition of the asset.
Measurement of the impairment loss is based on the fair value of the asset. In
addition, SFAS 121 imposes stricter criteria for the recognition of regulatory
assets by requiring that such assets be probable of future recovery at each
balance sheet date.
The Company's adoption of this standard on January 1, 1996 did not have a
material impact on the financial position or results of operations of the
Company.
(2) CAPITALIZATION
Common Stock Equity
- -------------------
On June 13, 1996, the Company's Board of Directors declared a regular
quarterly cash dividend on common stock of $.20 per share payable on August 15
to shareholders of record at the close of business on August 5.
-7-
<PAGE>
In May 1996, the Company issued a 5% stock dividend and paid a quarterly
cash dividend of $.20 per share to its common shareholders. Of the total cash
dividend of $2,359,000, shareholders reinvested $827,000 into common stock
through the Dividend Reinvestment and Common Stock Purchase Plan (the DRIP).
This portion of the second quarter dividend and shareholders' optional cash
payments of $408,000, resulted in 71,757 shares issued to existing shareholders
during the quarter pursuant to the DRIP.
The Company purchases shares of its own common stock in the open market
for reissuance pursuant to the DRIP. In the second quarter of 1996, the
Company purchased 90,983 shares for $1,520,000.
The May 1996 5% stock dividend resulted in 589,897 shares issued to
existing shareholders. Earnings per common share, cash dividends per common
share and weighted average number of shares outstanding give retroactive effect
for all periods presented to the 5% stock dividends in May 1996 and 1995.
(3) COMMITMENTS AND CONTINGENCIES
SEMCO Arkansas Pipeline Company, a wholly-owned subsidiary of SEMCO Energy
Services, Inc. (SEMCO), has a 32% interest in a partnership which operates the
NOARK Pipeline System (NOARK). NOARK is a 302-mile intrastate natural gas
pipeline originating in northwest Arkansas and extending northeast across the
state. The pipeline became operational during the third quarter of 1992.
The Company, SEMCO Arkansas Pipeline Company and SEMCO have guaranteed 40%
of the principal and interest payments on approximately $81,875,000 of debt
used to finance the pipeline. Of the total debt, $55,125,000 is outstanding
pursuant to a long-term arrangement requiring annual principal payments of
approximately $3,150,000 together with interest on the unpaid balance. This
arrangement matures in 2009 and has a fixed interest rate of 9.7375%. The
remaining debt is pursuant to a $30,000,000 multibank revolving line of credit
which currently matures April 26, 1998. Under the terms of the credit
agreement, NOARK may request, on an annual basis, a one year extension of the
then-effective termination date. At June 30, 1996, NOARK had $26,750,000
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. The Company did not make any contributions to NOARK in the first
or second quarter of 1996, but estimates that required contributions for 1996
will be in the range of $1,000,000 to $1,500,000.
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.
-8-
<PAGE>
PART I - FINANCIAL INFORMATION - (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 1996 was $89,000 ($.01 per
share). This compares to net income of $295,000 ($.02 per share) for the
quarter ended June 30, 1995.
Net income was $8,831,000 ($.71 per share) and $7,752,000 ($.62 per share)
for the six months ended June 30, 1996 and June 30, 1995, respectively.
For the twelve months ended June 30, 1996 and 1995, net income was
$12,410,000 ($1.00 per share) and $9,012,000 ($.73 per share), respectively.
Since the Company's primary business of natural gas distribution depends
upon the winter months for the majority of its operating revenue, the Company
typically experiences nominal net income in the second quarter.
See Note 3 in the Notes to the Consolidated Financial Statements for a
discussion of commitments and contingencies.
A comparison of quarterly, year-to-date and twelve-month-to-date revenues,
margins and system throughput follows on the next page.
-9-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
----------------- ------------------- -------------------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- -------- -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue
Gas Sales
Residential $24,485 $21,082 $ 79,804 $ 64,388 $130,658 $109,139
Commercial 11,458 9,856 38,034 30,889 61,908 53,593
Industrial 2,681 2,585 8,749 7,530 15,238 14,052
------- ------- -------- -------- -------- --------
$38,624 $33,523 $126,587 $102,807 $207,804 $176,784
Cost of Gas Sold 25,840 21,504 87,365 67,930 140,054 117,475
------- ------- -------- -------- -------- --------
Gross Margin $12,784 $12,019 $ 39,222 $ 34,877 $ 67,750 $ 59,309
======= ======= ======== ======== ======== ========
Gas Marketing $39,876 $27,980 $123,339 $ 70,702 $186,033 $149,812
Cost of Gas Marketed 39,195 27,165 120,969 68,873 182,183 145,864
------- ------- -------- -------- -------- --------
Gross Margin $ 681 $ 815 $ 2,370 $ 1,829 $ 3,850 $ 3,948
======= ======= ======== ======== ======== ========
Transportation $ 2,821 $ 2,915 $ 6,339 $ 6,458 $ 12,329 $ 12,237
======= ======= ======== ======== ======== ========
Other $ 1,069 $ 1,323 $ 2,253 $ 3,079 $ 4,844 $ 5,902
======= ======= ======== ======== ======== ========
<CAPTION>
(in millions of cubic feet)
<S> <C> <C> <C> <C> <C> <C>
Gas Volumes
Gas Sales
Residential 4,253 3,928 16,349 14,331 26,694 22,511
Commercial 2,239 2,055 8,342 7,409 13,671 12,023
Industrial 546 572 2,090 1,901 3,562 3,278
------- ------- -------- -------- -------- --------
7,038 6,555 26,781 23,641 43,927 37,812
======= ======= ======== ======== ======== ========
Gas Marketing 21,221 17,884 51,495 45,053 88,946 88,980
======= ======= ======== ======== ======== ========
Gas Transported 4,674 5,459 10,621 12,944 21,526 23,523
======= ======= ======== ======== ======== ========
Degree Days - Actual 986 1,053 4,532 4,299 7,391 6,572
- Percent of Normal 109% 114% 108% 103% 109% 97%
Gas Sales Customers - Average 228,040 221,883 227,564 221,552 225,482 219,111
</TABLE>
QUARTER RESULTS
Gross margin on gas sales increased by $765,000 (6%) as gas volumes sold
for the three month period ended June 30, 1996 increased 7.4% from the same
period in 1995. Volumes increased due primarily to the addition of over 6,100
gas sales customers.
Gas marketing margin declined by $134,000 (16%) even though natural gas
volumes marketed for the second quarter of 1996 increased by 19% over the same
period in 1995. The decrease in per-unit marketing margin is due primarily to
increased competition in the gas marketing industry. Marketing volumes
increased primarily from new business generated from independent marketing
contractors.
-10-
<PAGE>
Gas marketing volumes and margins are subject to significant competitive
factors. In addition to fluctuations caused by the price of alternative fuels
and seasonal patterns, competition within the natural gas marketing industry
continues to increase.
Transportation revenues during the quarter decreased $94,000 (3%) compared
to the same period in 1995 while volumes decreased 14%. The decrease in
volumes was primarily due to the decrease of coal-displacement volumes.
Coal-displacement transportation volumes are sensitive to natural gas prices
relative to coal and generally contribute a lower margin.
Operations and maintenance expense increased $845,000 (10%) in the second
quarter compared to a year ago. Approximately half of the increase was due to
the sale and leaseback of the Company's vehicle fleet in December 1995. The
Company recorded depreciation expense for its fleet in 1995, and operations
expense for the leased fleet in 1996. Also contributing to the increase in
operations and maintenance expense were higher pension and retiree medical
expenses.
Depreciation expense for the second quarter of 1996 decreased $178,000
compared to the second quarter of 1995. The impact of the vehicle fleet sale
and leaseback, as discussed above, more than offset the increase in
depreciation from capital additions.
Other income (loss), net, reflects the after-tax loss from the Company's
investment in NOARK of $380,000 for the three months ended June 30, 1996. This
compares to a loss from NOARK of $428,000 for the same period in 1995.
YEAR-TO-DATE RESULTS
Gross margin on gas sales increased by $4,345,000 (12%) as gas volumes
sold for the first six months of 1996 increased 13% over the same period in
1995. The increase in gas volumes sold was primarily due to colder weather.
Temperatures during the first half of 1996 were 8% colder than normal while
temperatures in the first half of 1995 were 3% colder than normal. Also
contributing to the increase in gas sales margin was the addition of over 6,000
gas sales customers and the impact of the December 1995 Battle Creek Gas
Company (Battle Creek) rate increase.
Natural gas marketing margin for the first six months of 1996 increased by
$541,000 (30%) over the same period in 1995 while volumes increased by 14%.
The increase in per-unit margin is attributable to the impact of
colder-than-normal temperatures in the first quarter of 1996 on the demand for
natural gas. Increased marketing volumes resulted from the increased demand
and new business generated through contracts with independent marketing
contractors.
-11-
<PAGE>
Operations and maintenance expense increased by $2,624,000 (15%) in the
first half of 1996 compared to the first half of 1995. Contributing to the
increase were the change in the classification of vehicle expenses, severance
expenses incurred in the first quarter of 1996, expenses associated with the
independent marketing contracts, and slightly higher employee compensation and
benefits expenses. In addition, Battle Creek was authorized to recover its
retiree medical costs effective with the December 1995 rate increase.
Consequently, these costs are being included in operations expense in 1996.
The $301,000 decrease in depreciation expense from the six months ended
June 30, 1995 to the same period in 1996 highlights the impact of the change in
classification of vehicle expenses partially offset by increased depreciation
from capital additions.
Other income (loss), net, includes after-tax losses from NOARK of $806,000
and $823,000 for the six months ended June 30, 1996 and 1995, respectively.
TWELVE-MONTH RESULTS
Gas sales margin increased $8,441,000 (14%) for the twelve month period
ended June 30, 1996, compared to the same period a year earlier. Twelve
percent colder weather, the Battle Creek rate increase and the addition of over
6,300 gas sales customers contributed to the increase.
Gas marketing margin decreased $98,000 (2%) from the prior period with no
significant change in volumes. The twelve-month comparison of marketing
activities highlights the impact of competition in the natural gas marketing
industry. In response to this competition, the Company began contracting with
independent marketers in 1996, which has resulted in higher marketing volumes
(see quarter and year-to-date results, above). Competition, however, is
expected to continue putting pressure on per-unit margins.
Operations and maintenance expense increased by $2,510,000 (7%) in the
current period compared to the same period a year ago. Contributing to the
increase between periods was the change in classification of vehicle expenses,
the expensing of Battle Creek retiree medical costs and higher severance and
marketing expenses.
Other income (loss), net, increased from a loss of $681,000 for the twelve
months ended June 30, 1995 to a loss of $51,000 in the same period ending
June 30, 1996. The twelve-month results for 1996 include a non-recurring gain
of $1,251,000, net of tax, on the settlement of the lawsuit involving NOARK.
Excluding this gain, the loss from NOARK, net of tax, was $1,821,000 for the
twelve-month period ended June 30, 1996 compared to $1,619,000 for the same
period ended June 30, 1995.
-12-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the three, six and twelve month
periods ended June 30, 1996, as compared to the same periods last year,
increased/(decreased) $6,848,000, ($9,638,000) and ($8,393,000), respectively.
The changes in operating cash flows between the periods is primarily due to the
timing of cash receipts and cash payments and its effect on working capital.
The Company anticipates spending approximately $14,000,000 for capital
items during the remainder of 1996. These estimated amounts will primarily
relate to customer additions and system replacement in the gas distribution
operations.
See Note 3 of the Notes to the Consolidated Financial Statements for a
discussion of contributions to the NOARK Pipeline System pursuant to the
Company's guarantees of the pipeline's debt.
Financing activities used $16,207,000 in funds during the second quarter
of 1996, primarily to reduce notes payable to banks. Changes in financing cash
flows between the three-, six- and twelve-month periods ended June 30, 1996 and
1995 highlight the Company's implementation of common stock repurchasing in
January 1995 for resale through the DRIP, increased dividend payments, and the
completion of the Company's 1994 debt refinancing.
FUTURE FINANCING SOURCES
The remainder of the Company's operating cash flow needs, as well as
dividend payments and capital expenditures for the balance of 1996, is expected
to be generated primarily through operating activities and short-term
borrowings. At June 30, 1996, the Company had $60,900,000 in unused lines of
credit.
-13-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
Retained earnings were available for payment of dividends on
preferred and common stock at June 30, 1996, as follows:
Total Retained Earnings - $21,244,000
Amount Available for Payment of Dividends - $21,244,000
Item 3. Not applicable.
Item 4. Submission of Matters to a Vote of Securityholders.
At the April 16, 1996 Annual Meeting of Common Shareholders the
following nominees were elected to hold office on the Board of Directors for a
term of three years:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Frank G. Andreoni 8,701,183 221,551
Daniel A. Burkhardt 8,681,776 240,958
Edward J. Curtis 8,615,595 307,139
Harvey I. Klein 8,508,879 413,855
</TABLE>
Item 5. Not applicable.
-14-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits - (See Exhibit Index.)
3(i)(1) --Articles of Incorporation of Southeastern Michigan Gas
Enterprises, Inc. ("Enterprises"), as restated
July 11, 1989.
3(i)(2) --Certificate of Amendment to Article III of the Articles
of Incorporation dated May 16, 1990.
3(ii) --Bylaws of Enterprises--last revised March 1, 1995.
4(i) --Trust Indenture dated April 1, 1992, between Enterprises
and NBD Bank, N.A. as Trustee.
4(ii) --Note Agreement dated as of June 1, 1994, relating to
issuance of $80,000,000 of long-term debt.
10(i) --Guaranty Agreement dated October 10, 1991, relating to
financing of NOARK.
10(ii) --Group A Employment Contract.
10(iii) --Short-Term Incentive Plan.
10(iv) --Deferred Compensation and Phantom Stock Purchase
Agreement (for outside directors only).
10(v) --Supplemental Retirement Plan for Certain Officers.
10(vi) --Separation Agreement and Release dated January 18, 1996
between Ward Kirby and Enterprises.
10(vii) --Consulting Agreement dated January 17, 1996 between Ward
Kirby and Enterprises.
27 --Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter of 1996.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
(Registrant)
Dated: August 13, 1996
By: /s/Robert F. Caldwell
-----------------------------------------
Executive Vice President and Principal
Accounting and Financial Officer
-16-
<PAGE>
EXHIBIT INDEX
Form 10-Q
Second Quarter 1996
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- ------- ----------- -------- ---------
3(i)(1) Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
("Enterprises"), as restated
July 11, 1989.(e) x
3(i)(2) Certificate of Amendment to Article III
of the Articles of Incorporation dated
May 16, 1990.(f) x
3(ii) Bylaws of Enterprises--last revised
March 1, 1995.(g) x
4(i) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(b) x
4(ii) Note Agreement dated as of June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(d) x
10(i) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(a) x
10(ii) Group A Employment Contract.(c) x
10(iii) Short-Term Incentive Plan.(c) x
10(iv) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only).(h) x
10(v) Supplemental Retirement Plan for Certain
Officers.(i) x
10(vi) Separation Agreement and Release dated
January 18, 1996 between Ward Kirby and
Enterprises.(j) x
10(vii) Consulting Agreement dated January 17, 1996
between Ward Kirby and Enterprises.(j) x
27 Financial Data Schedule. x
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(b) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(c) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(d) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(e) Filed with Enterprises' Form 10-K for 1989, dated March 29, 1990,
File No. 0-8503.
(f) Filed with Enterprises' Form 10-K for 1990, dated March 28, 1991,
File No. 0-8503.
(g) Filed with Enterprises' Form 10-K for 1994, dated March 28, 1995,
File No. 0-8503.
(h) Filed with Enterprises' Form 10-Q for the quarter ended September
30, 1994, File No. 0-8503.
(i) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1996, File No. O-8503.
(j) Filed with Enterprises' Form 10-Q/A for the quarter ended March 31,
1996, File No. O-8503.
-17-
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 231,374
<OTHER-PROPERTY-AND-INVEST> 10,940
<TOTAL-CURRENT-ASSETS> 78,586
<TOTAL-DEFERRED-CHARGES> 30,524
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 351,424
<COMMON> 12,377
<CAPITAL-SURPLUS-PAID-IN> 79,179
<RETAINED-EARNINGS> 21,244
<TOTAL-COMMON-STOCKHOLDERS-EQ> 112,800
0
3,272
<LONG-TERM-DEBT-NET> 103,573
<SHORT-TERM-NOTES> 29,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
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<CAPITAL-LEASE-OBLIGATIONS> 2,129
<LEASES-CURRENT> 1,394
<OTHER-ITEMS-CAPITAL-AND-LIAB> 99,256
<TOT-CAPITALIZATION-AND-LIAB> 351,424
<GROSS-OPERATING-REVENUE> 258,518
<INCOME-TAX-EXPENSE> 4,918
<OTHER-OPERATING-EXPENSES> 239,045
<TOTAL-OPERATING-EXPENSES> 243,963
<OPERATING-INCOME-LOSS> 14,555
<OTHER-INCOME-NET> (319)
<INCOME-BEFORE-INTEREST-EXPEN> 14,236
<TOTAL-INTEREST-EXPENSE> 5,397
<NET-INCOME> 8,839
8
<EARNINGS-AVAILABLE-FOR-COMM> 8,831
<COMMON-STOCK-DIVIDENDS> 4,715
<TOTAL-INTEREST-ON-BONDS> 4,257
<CASH-FLOW-OPERATIONS> 43,994
<EPS-PRIMARY> .71
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