UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition 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
filing 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 $235,043,000 based on 11,396,000
shares held by non--affiliates as of February 28, 1997 at the average of the
bid and ask prices on the closest trading date for such stock of $20.25 and
$21.00, 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 28, 1997: 12,411,000 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 15, 1997 Annual Meeting of
Shareholders are incorporated by reference herein in response to Part III.
On March 10, 1998, SEMCO Energy, Inc. (the Company), formerly known as
Southeastern Michigan Gas Enterprises, Inc., announced that it had discovered
that certain transactions were incorrectly recorded at its gas marketing
subsidiary, SEMCO Energy Services, Inc. The Company's financial statements for
1996 have been restated to reflect the related corrections and are included in
this Form 10-K/A for the year ended December 31, 1996. While this Form 10-K/A
restates in its entirety (as originally filed) the Company's Form 10-K for the
year ended December 31, 1996, for the convenience of the reader, only Items 1,
6, 7 and 8 have been modified to reflect such restated financial statements and
are hereby amended. The Company's name and subsidiary names have not been
changed from their usage in the originally filed 10-K. For additional
information regarding these corrections, reference is made to Note 2 of the
Notes to Consolidated Financial Statements in Item 8 below.
<PAGE>
T A B L E O F C O N T E N T S
PAGE
CONTENTS NUMBER
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 . . . . . . 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 41
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . 42
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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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
NASDAQ . . . . . . . . . National Association of Securities Dealers Automated
Quotations system
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 234,000
customers in twenty-four 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>
1996 1995 1994
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gas sales revenue:
Residential.................. $138,644 63% $115,242 62% $121,066 62%
Commercial................... 65,509 30 54,763 30 59,413 30
Industrial................... 15,218 7 14,019 8 15,481 8
-------- --- -------- --- -------- ---
Total gas sales revenue.... $219,371 100% $184,024 100% $195,960 100%
======== === ======== === ======== ===
Gas transportation revenue..... $ 12,358 $ 12,448 $ 11,999
======== ======== ========
Throughput volumes (MMcf):
Gas sales volumes:
Residential.................. 26,703 61% 24,676 61% 23,437 59%
Commercial................... 13,670 31 12,738 31 12,469 32
Industrial................... 3,385 8 3,373 8 3,464 9
------ --- ------ --- ------ ---
Total gas sales volumes.... 43,758 100% 40,787 100% 39,370 100%
====== === ====== === ====== ===
Gas transportation volumes..... 20,532 23,849 21,293
====== ====== ======
</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 home appliance service and repair
options and the sale of NGV equipment.
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 245 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 and 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, and earnings (loss) from equity investments for the past three years:
<TABLE>
<CAPTION>
1996 1995 1994
(restated)
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Natural gas marketing operations:
Gas marketing revenues............ $308,703 $133,396 $158,284
Cost of gas marketed.............. 308,619 130,087 153,973
-------- -------- --------
Gross margin.................... $ 84 $ 3,309 $ 4,311
======== ======== ========
Gas volumes marketed (MMcf)....... 129,429 82,504 78,082
Earnings (loss) from equity
investments....................... $ (1,775) $ 175 $ (437)
</TABLE>
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<PAGE>
See "Management's Discussion and Analysis" for a discussion relating to
competitive pressures in the gas marketing industry and Note 2 of the Notes to
the Consolidated Financial Statements for a discussion of the Company's
restatement of gas marketing revenue and cost of gas marketed.
Gas Supply. 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 1996, the utility subsidiaries purchased 60% of their natural gas
volumes from term suppliers and 40% from the spot market. Nearly 20% of the
firm supply volumes were purchased under fixed-price contracts, while the other
80% were purchased under contracts indexed to the spot market. Less than 1% of
1996 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 35% 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 6.9 Bcf of storage from Eaton
Rapids Gas Storage System and 4.3 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 7 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.
-3-
<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. Southeastern
and Michigan Gas filed a combined rate case in December 1996 seeking $5,500,000
of rate relief. See "Management's Discussion and Analysis" and Note 3 of
"Notes to the Consolidated Financial Statements" for further discussion.
Battle Creek placed new rates into effect in December 1995.
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, 1996, included
approximately 112 miles of transmission pipelines and 2,092 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).
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.
-4-
<PAGE>
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.
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, 1996, included
approximately 27 miles of transmission pipelines and 693 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 two
depleted salt caverns 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 2,177 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.
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.
-5-
<PAGE>
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, 1996:
<TABLE>
<CAPTION>
Total SEMCO's SEMCO's
Non-current Percent Equity
Assets Ownership Investment
----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
NOARK Pipeline System................. $ 95,861 32% $ -0-
NOARK Gas Services, L.P............... 91 40 (44)
Eaton Rapids Gas Storage System....... 27,537 50 4,219
Nimrod Limited Partnership............ 1,399 29 342
Michigan Intrastate Pipeline System... 5,656 50 313
Michigan Intrastate Lateral System.... 667 50 290
-------- ------
$131,211 $5,120
======== ======
</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. In December 1996, SEMCO recorded a $21,000,000 after-tax
write-down on its investment in NOARK. See Note 9 of the "Notes to the
Consolidated Financial Statements" for further discussion of the write-down and
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, 6.9 Bcf
is leased by the Company's subsidiaries.
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.
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<PAGE>
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, 1996:
<TABLE>
<CAPTION>
Total SEMCO's SEMCO's
Net Percent Net
Property Ownership Property
-------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Litchfield Lateral...................... $11,055 33% $ 3,648
Greenwood Pipeline...................... 6,629 100 6,629
Iosco-Reno System....................... 3,310 40 1,324
Eaton Rapids Pipeline................... 1,126 100 1,126
------- -------
$22,120 $12,727
======= =======
</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.
-7-
<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 First
of Michigan Corporation, a market maker in the Company's stock, adjusted to
reflect the 5% stock dividends in May 1996 and 1995. 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>
1996
High 17 5/8 17 1/2 17 3/4 18 3/4
Low 15 1/4 15 15 3/4 17 1/4
1995
High 17 7/8 18 9/16 18 5/16 17 1/8
Low 16 5/16 17 5/8 16 7/8 15 1/2
</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 5 and 11 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, 1996 1995 1994 1993 1992
(restated)<F8>
--------- -------- -------- -------- --------
(thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Operating Revenue................... $544,949 $335,538 $372,430 $288,963 $251,526
-------- -------- -------- -------- --------
Operating Expenses
Cost of gas sold................... $151,135 $120,619 $135,669 $139,051 $121,643
Cost of gas marketed............... 308,619 130,087 153,973 67,474 52,347
Operations and maintenance......... 40,669 36,217 35,558 34,496 33,590
Depreciation....................... 11,317 12,035 11,549 12,468 12,344
Income taxes....................... 4,304 6,188 5,204 5,598 3,899
Taxes other than income taxes...... 8,648 7,966 8,186 8,446 7,729
-------- -------- -------- -------- --------
$524,692 $313,112 $350,139 $267,533 $231,552
-------- -------- -------- -------- --------
Operating income.................... $ 20,257 $ 22,426 $ 22,291 $ 21,430 $ 19,974
Other income (expense), net......... (21,813)<F6> (179) (1,328)<F4> (136)<F4> (339)<F4>
-------- -------- -------- -------- --------
Income (loss) before interest....... $ (1,556) $ 22,247 $ 20,963 $ 21,294 $ 19,635
Interest............................ 11,053 10,721 10,775 11,534 11,126
Dividends on preferred stock
of subsidiary and
convertible preferred.............. 194 195 196 197 199
-------- -------- -------- -------- --------
Net income (loss)................... $(12,803)<F6> $ 11,331 $ 9,992 <F4> $ 9,563 <F4> $ 8,310 <F4>
Common dividends.................... 9,670 9,230 8,656 7,419 6,875
-------- -------- -------- -------- --------
Earnings (deficit) reinvested
in the business.................... $(22,473) $ 2,101 $ 1,336 $ 2,144 $ 1,435
======== ======== ======== ======== ========
Common Stock Data
Average shares outstanding(000)<F1>. 12,397 12,423 12,190 11,025 10,734
Earnings (loss) per share<F1>....... $ (1.03)<F6> $ .91 $ .82 <F4> $ .87 <F4> $ .77 <F4>
Dividends paid per share<F1>........ $ .78 $ .74 $ .71 $ .67 $ .64
Dividend payout ratio............... N/A 81.5% 86.6% 77.6% 82.7%
Book value per share<F1><F2>........ $ 6.98 $ 8.81 $ 8.66 $ 7.65 $ 7.11
Market value per share<F1><F2><F3>.. $ 18.50 $ 17.14 $ 16.32 $ 19.00 $ 15.64
Number of common shareholders....... 8,509 8,334 8,149 7,261 6,892
Balance Sheet Data<F2>
Total assets........................ $478,238 $378,523 $368,498 $348,813 $319,548
======== ======== ======== ======== ========
Capitalization
Long-term debt<F5>................. $108,112 $107,325 $104,910 $117,022 $102,728
Preferred stock.................... 3,269 3,272 3,288 3,290 3,320
Common equity...................... 86,544 109,511 107,379 85,657 77,353
-------- -------- -------- -------- --------
$197,925 $220,108 $215,577 $205,969 $183,401
======== ======== ======== ======== ========
Financial Ratios
Capitalization
Long-term debt<F5>................. 54.6% 48.8% 48.7% 56.8% 56.0%
Preferred stock.................... 1.7% 1.5% 1.5% 1.6% 1.8%
Common equity...................... 43.7% 49.7% 49.8% 41.6% 42.2%
-------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Return on average common equity...... (11.8%)<F7> 10.4% 9.5% 11.6% 11.1%
======== ======== ======== ======== ========
<FN>
<F1>
Adjusted to give effect to 5 percent stock dividends in May each year, 1992 through 1996.
<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 $.08 per share in 1994, 1993 and 1992, respectively, attributable to an extraordinary item-loss on
early extinguishment of debt.
<F5>
Includes current maturities.
<F6>
Includes write-down of NOARK investment--$21,000 (net of tax) or $1.69 per share.
<F7>
Excluding the write-down of NOARK investment, return on average common equity was 7.4%.
<F8>
See Note 2 of the Notes to Consolidated Financial Statements which is included in Item 8.
</FN>
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Restatement of Financial Statements. As described in Note 2 of the Notes to
Consolidated Financial Statements, on March 10, 1998, the Company announced
that it had discovered that certain transactions were incorrectly recorded at
its gas marketing subsidiary, SEMCO Energy Services. The related financial
impact has been quantified based on work completed by the Company, outside
consultants and its independent auditors. The adjustments relate to incorrect
margin recognition, incorrect accounting of gas in storage, previously
unrecorded borrowed gas and various other items. Throughout 1997, the Company
has implemented new systems, stricter controls, and management and accounting
personnel changes which will prevent these errors from repeating in the future.
The corrections resulted in a $3,838,000 after-tax reduction in 1996
earnings. The information in the discussion which follows is presented after
restatement of the financial statements.
Results of Operations
Net Income. For the year ended December 31, 1996, the Company recorded a net
loss of $12,803,000, or $1.03 per share, which includes a $21,000,000 non-cash
after-tax write-down of the Company's investment in the NOARK Pipeline System
(NOARK). Excluding the NOARK write-down, the Company's net income was
$8,197,000, or $.66 per share, compared to net income of $11,331,000, or $.91
per share, in 1995.
In 1996, SEMCO's gas marketing operation lost $2,769,000, compared to
income of $681,000 in 1995. The loss in 1996 was due primarily to the
recognition of losses on certain uneconomical marketing contracts which SEMCO
entered into during 1996.
Offsetting the impact of 1996 gas marketing losses was an 8% increase in
gas sales margin from the Company's natural gas distribution operations, which
benefited from record customer additions.
The Company's 1995 net income was comparable to 1994. In 1994, net income
before extraordinary item was $11,278,000, or $.93 per share. The Company
recognized an extraordinary charge of $1,286,000, or $.11 per share, for the
early extinguishment of debt in 1994.
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>
<CAPTION>
1996 1995 1994
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Revenues
Gas sales revenues:
Residential $138,644 $115,242 $121,066
Commercial 65,509 54,763 59,413
Industrial 15,218 14,019 15,481
-------- -------- --------
Total gas sales revenue $219,371 $184,024 $195,960
Cost of gas sold 151,135 120,619 135,669
-------- -------- --------
Gross margin $ 68,236 $ 63,405 $ 60,291
Gas transportation revenue 12,358 12,448 11,999
-------- -------- --------
Total sales margin and
transportation revenue $ 80,594 $ 75,853 $ 72,290
======== ======== ========
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(in MMcf)
<S> <C> <C> <C>
Throughput volumes
Gas sales volumes:
Residential 26,703 24,676 23,437
Commercial 13,670 12,738 12,469
Industrial 3,385 3,373 3,464
------ ------ ------
Total gas sales volumes 43,758 40,787 39,370
Gas transportation volumes 20,532 23,849 21,293
------ ------ ------
Total throughput 64,290 64,636 60,663
====== ====== ======
Degree days:
Actual 7,099 7,158 6,861
Percent of normal 104.5% 105.3% 102.4%
Average number of gas sales customers 228,802 222,303 216,082
</TABLE>
Gross margin on gas sales increased $4,831,000 (8%) in 1996 as gas sales
volumes sold increased by 7% over 1995. The addition of an average 6,499 gas
sales customers (2.9%) in 1996 was the primary reason for the increase in
margin and volumes. In addition, approximately $1,300,000 of the increased
margin was due to the impact of a Battle Creek rate increase in December 1995.
Since retiree medical benefits are now included in Battle Creek's rates,
however, the entire retiree medical cost determined under the accrual method
was expensed in 1996, resulting in a $490,000 increase in 1996 operations
expense. Overall, the effect of the rate increase was to increase 1996 net
income by approximately $500,000.
In 1995 compared to 1994, natural gas sales volumes and gross margin from
gas sales increased 1,417 MMcf (3.6%) and $3,114,000 (5%). The addition of an
average of 6,221 new gas sales customers (2.9%) in 1995 accounted for over half
the increase in margin. Also contributing to the increase was the impact of
4.3% colder temperatures on the weather-sensitive residential and commercial
customers.
Transportation volumes decreased by 3,317 MMcf (14%) in 1996, compared to
1995, while transportation revenue declined by $90,000 (.7%). The decrease in
volumes was primarily due to less transportation for customers who have
alternative fuel sources -- primarily coal. During 1996, "coal-displacement"
transportation volumes were significantly lower than the prior year.
Transportation revenues declined only slightly, despite the larger volume
declines, because coal-displacement volumes generally contribute a lower
revenue per unit.
Transportation volumes and revenue increased by 2,556 MMcf (12%) and
$449,000 (3.7%) in 1995 compared to 1994. Revenues increased by only 3.7%,
despite the 12.0% increase in volumes, because most of the increased volumes
were attributable to coal-displacement customers.
Natural Gas Marketing. In 1996, natural gas marketing revenues and volumes
increased $175,307,000 (131%) and 46,925 MMcf (57%), respectively, from the
prior year. Volumes increased significantly due to new business generated by
the Northeast and Midwest marketing units of SEMCO. Marketing margin, however,
decreased to $84,000 in 1996 compared to $3,309,00 in 1995 due to the
recognition of losses on certain uneconomical contracts entered into during
1996.
-12-
<PAGE>
The Northeast marketing unit was established in New York in October 1995
and covers a number of northeastern states. The Midwest unit was expanded from
offices in Michigan by adding a Chicago office in November 1995. SEMCO
expanded its Chicago presence in July 1996.
SEMCO recently announced the opening of two additional marketing offices
in West Virginia and Kentucky to serve markets in Maryland, Virginia and
Washington, D.C. These mid-Atlantic offices further SEMCO's development of
sales channels that deliver a full complement of wholesale and retail-oriented
products and services.
Overall gas marketing volumes and margins are subject to significant
competitive factors which generally place downward pressure on margins. The
per-unit margin on SEMCO's marketing contracts, however, also varies depending
on the price and availability of alternative fuels, seasonal patterns and the
type of customer. For example, margins on wholesale marketing contracts to gas
utilities and other gas marketers generally contribute less than half the
margin of retail marketing sales.
Gas marketing margins declined $1,002,000 (23%) in 1995, when compared to
1994, even as marketing volumes increased by 4,422 MMcf (6%). The decrease in
per-unit margins between the years highlights the increased competition which
resulted from the marketing industry's adaptation to deregulation of the
interstate pipelines under FERC 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.
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 new marketing offices and by
expanding its product and service offerings to create value-adding
opportunities for its customers.
Other Operating Revenues. Other operating revenues consist principally of the
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 $4,517,000, $5,670,000 and $6,187,000 in
1996, 1995 and 1994, respectively. The decrease in other operating revenues
reflects the Company's declining involvement in equipment leasing, real estate
development and oil and gas activities.
Operations and Maintenance. Operations and maintenance expense increased
$4,452,000 (12%) in 1996 compared to 1995 due primarily to an increase in
compensation paid to independent marketers and the costs associated with
opening several marketing offices ($2,400,000), a change in the classification
of the Company's vehicle fleet from depreciation to operations expense
resulting from the December 1995 sale and leaseback ($1,500,000) and higher
benefits costs including pension ($750,000) and retiree medical ($490,000).
Partially offsetting these increases were savings generated from the
Company's 1995 restructuring and the Company's declining involvement in
equipment leasing, real estate development and oil and gas activities.
Operations and maintenance expense increased $659,000 (1.9%) in 1995
compared to 1994. Most of the increase relates to restructuring charges
associated with centralizing certain administration and engineering functions
previously performed in several locations throughout the State of Michigan.
-13-
<PAGE>
Depreciation Expense. Depreciation expense decreased $718,000 (6%) in 1996
compared to 1995. This decrease highlights the impact of the change in
classification of vehicle fleet expenses partially offset by increased
depreciation from utility plant additions. Depreciation expense increased
$486,000 (4.2%) in 1995 compared to 1994 primarily due to growth in utility
plant.
Taxes Other Than Income Taxes. Taxes other than income taxes were $8,648,000,
$7,966,000 and $8,186,000 for 1996, 1995 and 1994, respectively. Taxes other
than income taxes consist primarily of State of Michigan property taxes and
generally increase due to the growth in utility plant. The slight decrease in
1995, compared to 1994, resulted from Michigan legislation which lowered
property tax rates.
Interest. Other interest expense increased $439,000 (25%) in 1996, compared to
1995, due to an increase in average short-term borrowings for property
additions and higher gas costs. Other interest expense decreased slightly in
1995, compared to 1994, due primarily to decreased borrowings resulting from
lower average gas costs and lower volumes of gas in storage.
Write-Down of NOARK Investment, Net. In December 1996, the Company recorded a
non-cash write-down of $21,000,000, net of tax, on its investment in the NOARK
Pipeline System. NOARK is a 302-mile intrastate natural gas pipeline which
became operational in 1992. The Company owns a 32% general partnership
interest in NOARK through a subsidiary.
NOARK experienced significant cost overruns during construction which
resulted in higher financing costs than expected. In addition, competition
from two interstate pipelines in the Arkansas region has required NOARK to
discount its transportation charges to attract volumes to the pipeline. Even
with discounted rates, NOARK has operated at less than 65% capacity since
inception. As a result, NOARK has continued to generate losses and its
operating cash flows are insufficient to meet principal and interest payments
on its debt. Since October 1994, the Company has contributed additional
financing of $5,062,000 in connection with its loan guarantee. The Company
expects to make continued contributions to NOARK in 1997.
The write-down of the Company's investment establishes a $32,942,000
reserve, which is expected to eliminate the need for significant NOARK
operating losses being recorded in future income statements. The write-down is
expected to positively impact 1997 earnings per share by $.14 and will not
affect the Company's cash or stock dividend.
The Company will continue to explore opportunities to improve NOARK;
however, the Company is also interested in selling its interest in NOARK.
See Note 9 of Notes to the Consolidated Financial Statements for further
discussion of NOARK and the Company's guarantees related to the pipeline's
financing.
Other Income (Loss), Net. Other income (loss), net, consists primarily of
income and losses from SEMCO's equity investments but also includes
miscellaneous nonoperating income and expense items, net of tax. Other income
(loss), net, was ($813,000), ($179,000) and ($42,000) in 1996, 1995 and 1994,
respectively.
-14-
<PAGE>
Included in other income (loss), net is the Company's share of losses in
NOARK, before a 1995 litigation settlement and net of tax, totaling $1,702,000,
$1,836,000 and $1,200,000 over those same years. In 1995, the Company recorded
a gain of $1,251,000, net of tax, for its share of a settlement paid to NOARK
by Vesta Energy Company. The payment was in settlement of litigation,
termination of a firm transportation agreement with NOARK and release from all
contracts and obligations related to NOARK.
Due to the 1996 write-down of its investment in NOARK, the Company does
not expect to record losses related to the NOARK Pipeline System in 1997 and
thereafter.
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>
<CAPTION>
1996 1995 1994
------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C>
Capital Expenditures
Natural gas distribution $30,169 $26,259 $20,353
Gas transmission, gathering and storage -- 85 835
Other 340 628 616
------- ------- -------
$30,509 $26,972 $21,804
======= ======= =======
</TABLE>
Capital expenditures for natural gas distribution represent primarily new
customer additions and, to a lesser extent, plant repair and replacement.
The increases in distribution expenditures in 1996 and 1995 were due to record
customer growth for each of those years. In addition, the Company installed
approximately $2,000,000 of automated meter reading equipment in its
distribution plant in 1996.
In 1997, the Company plans to spend approximately $29,400,000 on capital
additions. Again, the Company expects to achieve record customer additions in
1997. Also, approximately $6,000,000 of the planned expenditures are for new
technology, such as automated meter reading and in-truck computer terminals.
This technology is expected to significantly increase customer service and
operational efficiency.
Cash Flows From Operations. The Company's net cash provided from operating
activities totaled $11,432,000 in 1996, $32,593,000 in 1995 and $28,262,000 in
1994. 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 35% 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
$38,170,000, $34,233,000 and $45,910,000 in October 1996, 1995 and 1994,
respectively.
-15-
<PAGE>
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. In 1996 and 1995, therefore,
the Company substantially met the requirements of the DRIP by repurchasing
shares. In 1994, the Company received $5,755,000 from the sale of shares
through the DRIP. In addition, the Company received $14,629,000 through the
sale of 747,500 shares of common stock in January 1994.
In 1994, the Company also received $80,000,000 through the issuance of
$55,000,000, 8.00% senior notes and $25,000,000, 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 $1,286,000 ($.11 per share)
extraordinary charge to income in 1994.
Dividends paid to common shareholders increased from 1994 through 1996 due
to the impact of 5% stock dividends in each of those years and the issuance of
additional shares through the DRIP in 1994.
Future Financing. In general, the Company funds its capital expenditure
program and dividend payments with operating cash flows and the utilization of
short-term lines of credit. When appropriate, the Company will refinance its
short-term lines with long-term debt, common stock or other long-term financing
instruments. In 1997, the Company expects to refinance a portion of its
$91,000,000 outstanding short-term credit facilities.
During 1997, the Company expects to make contributions to the NOARK
Pipeline System in connection with its guarantees of the pipeline's debt. See
Note 9 of Notes to the Consolidated Financial Statements for 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 60
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 gains and losses on
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, 1996 and 1995, SEMCO had recorded net deferred gains
(losses) from its hedging program of approximately ($1,700,000) and $100,000,
respectively. At the same time, SEMCO had offsetting amounts of unrecorded
gains or losses pursuant to the underlying long-term sales commitments.
See Note 7 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, 1996 and December 31, 1995.
-16-
<PAGE>
Other Areas
In the first quarter of 1993, the Company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new FASB
accounting standard requires the accrual method of accounting for
postretirement benefits. Although the adoption of this standard did not have a
material impact on the Company's results of operations, it does have
significant regulatory ratemaking implications.
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 filed a combined rate case in December
1996 in accordance with this order. The Company is seeking $5,500,000 of rate
relief through this rate case, and expects to receive a rate order from the
MPSC in the fourth quarter of 1997. The outcome of future rate cases cannot be
predicted.
Until Battle Creek received its 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 8 of the Notes to the Consolidated Financial Statements for
further discussion of SFAS 106 and Note 3 of the Notes to the Consolidated
Financial Statements for further discussion of the combined rate case of
Southeastern and Michigan Gas.
Impact of Inflation
The cost of gas sold by the three distribution companies 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.
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. 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 and transported and associated
margins.
The natural gas marketing operations of the Company compete based on its
ability to access competitively priced natural gas and efficiently utilize the
pipeline transmission system. Price is the prominent competitive factor in
sales to wholesale customers, such as gas distribution companies and
municipalities. In retail activities, SEMCO competes based on its ability to
offer a broad range of competitively priced products and services that are
tailored to meet the needs of individual customers.
-17-
<PAGE>
Regulation. Interstate pipelines were required to comply with FERC Order 636
by the 1993-1994 heating season. Order 636 was intended to increase
competition within the gas industry. The Order requires pipelines to unbundle
their services and instead offer separate service for gas transportation,
storage and gathering.
As a result of this restructuring, 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.
The availability of unbundled pipeline services has resulted 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.
-18-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years Ended December 31, 1996 1995 1994
(restated)
-------- -------- --------
(in thousands of dollars,
except per share amounts)
<S> <C> <C> <C>
Operating Revenues
Gas sales $219,371 $184,024 $195,960
Gas marketing 308,703 133,396 158,284
Transportation 12,358 12,448 11,999
Other operations 4,517 5,670 6,187
-------- -------- --------
$544,949 $335,538 $372,430
-------- -------- --------
Operating Expenses
Cost of gas sold $151,135 $120,619 $135,669
Cost of gas marketed 308,619 130,087 153,973
Operations and maintenance 40,669 36,217 35,558
Depreciation 11,317 12,035 11,549
Income taxes 4,304 6,188 5,204
Taxes other than income taxes 8,648 7,966 8,186
-------- -------- --------
$524,692 $313,112 $350,139
-------- -------- --------
Income Before Income Deductions
Operating Income $ 20,257 $ 22,426 $ 22,291
Write-down of NOARK investment,
net of income taxes of $11,308 (21,000) -- --
Other income (loss), net (813) (179) (42)
-------- -------- --------
$ (1,556) $ 22,247 $ 22,249
-------- -------- --------
Income Deductions
Interest on long-term debt $ 8,514 $ 8,546 $ 8,605
Other interest 2,166 1,727 1,788
Amortization of debt expense 373 448 382
Dividends on preferred stock of
subsidiary and convertible preferred 194 195 196
-------- -------- --------
$ 11,247 $ 10,916 $ 10,971
-------- -------- --------
Net Income (Loss)
Before extraordinary item $(12,803) $ 11,331 $ 11,278
Extraordinary item--Loss on early
extinguishment of debt, net of
income taxes of $692 -- -- 1,286
-------- -------- --------
$(12,803) $ 11,331 $ 9,992
======== ======== ========
Earnings (loss) per share before
extraordinary item $ (1.03) $ .91 $ .93
======== ======== ========
Earnings (loss) per share $ (1.03) $ .91 $ .82
======== ======== ========
Cash dividends paid per share $ .78 $ .74 $ .71
======== ======== ========
Average common shares outstanding 12,397,132 12,423,264 12,189,806
========== ========== ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-19-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31, 1996 1995 1994
(restated)
--------- --------- ---------
(in thousands of dollars)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Cash received from customers $ 486,717 $ 320,707 $ 375,536
Cash paid for payrolls and to suppliers (456,169) (264,440) (325,671)
Interest paid (10,543) (10,283) (11,104)
Income taxes paid (3,275) (5,570) (3,379)
Taxes other than income taxes paid (8,197) (7,995) (7,966)
Other cash receipts and payments, net 2,899 174 846
--------- --------- ---------
Net Cash From Operating Activities $ 11,432 $ 32,593 $ 28,262
--------- --------- ---------
Cash Flows From Investing Activities
Natural gas distribution property additions $ (30,169) $ (26,259) $ (20,353)
Other property additions (340) (713) (1,451)
Proceeds from property sales, net of retirement costs 865 640 (313)
Proceeds from sale and leaseback of capital assets -- 3,737 --
Advances to equity investees (844) (3,312) (906)
--------- --------- ---------
Net Cash From Investing Activities $ (30,488) $ (25,907) $ (23,023)
--------- --------- ---------
Cash Flows From Financing Activities
Issuance of common stock $ 5,132 $ 6,012 $ 20,384
Repurchase of common stock (5,629) (5,998) --
Net change in notes payable to banks 39,400 1,700 (2,342)
Issuance of long-term debt -- -- 80,000
Repayment of long-term debt (15) (1,322) (94,783)
Payment of dividends (9,864) (9,425) (8,852)
--------- --------- ---------
Net Cash From Financing Activities $ 29,024 $ (9,033) $ (5,593)
--------- --------- ---------
Cash and Temporary Cash Investments
Net increase (decrease) $ 9,968 $ (2,347) $ (354)
Beginning of year 264 2,611 2,965
--------- --------- ---------
End Of Year $ 10,232 $ 264 $ 2,611
========= ========= =========
Reconciliation of Net Income (Loss) to
Net Cash From Operating Activities
Net income (loss) $ (12,803) $ 11,331 $ 9,992
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation 11,317 12,035 11,549
Extraordinary item, net -- -- 1,286
Write-down of NOARK investment, net 21,000 -- --
Deferred taxes and investment tax credits 3,958 304 (838)
Equity loss, net of distributions 3,740 990 834
Receivables (10,189) (9,513) (4,703)
Accrued revenue (37,695) (5,555) (2,021)
Materials and supplies and gas in underground storage (12,380) 12,820 (2,232)
Gas charges, recoverable from customers (7,937) 2,349 7,767
Other current assets (4,839) 6,189 (2,154)
Accounts payable 57,382 4,973 2,992
Customer advances and amounts payable to customers (1,539) (1,638) 1,711
Accrued taxes (2,528) (22) 1,156
Other, net 3,945 (1,670) 2,923
--------- --------- ---------
Net Cash From Operating Activities $ 11,432 $ 32,593 $ 28,262
========= ========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-20-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At December 31, 1996 1995
(restated)
--------- --------
(in thousands of dollars)
<S> <C> <C>
ASSETS
Utility Plant
Plant in service, at cost $340,675 $313,658
Less--Accumulated depreciation 96,391 87,308
-------- --------
$244,284 $226,350
Construction work in progress 2,103 944
-------- --------
$246,387 $227,294
-------- --------
Other Property, Net $ 9,585 $ 12,883
-------- --------
Current Assets
Cash and temporary cash investments, at cost $ 10,232 $ 264
Receivables, less allowances of $1,247 and $729 42,509 32,320
Accrued revenue 76,549 38,854
Materials and supplies, at average cost 3,025 3,280
Gas in underground storage 32,807 20,172
Gas charges, recoverable from customers 13,791 5,854
Accumulated deferred income taxes 364 2,249
Other 11,864 5,827
-------- --------
$191,141 $108,820
-------- --------
Deferred Charges and Other
Unamortized debt expense $ 5,328 $ 5,702
Deferred gas charges, recoverable from customers 290 615
Advances to equity investees 5,062 4,218
Other 20,445 18,991
-------- --------
$ 31,125 $ 29,526
-------- --------
$478,238 $378,523
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity $ 86,544 $109,511
Cumulative convertible preferred stock 169 172
Cumulative preferred stock of subsidiary 3,100 3,100
Long-term debt, including capital lease obligations 106,468 105,858
-------- --------
$196,281 $218,641
-------- --------
Current Liabilities
Notes payable to banks $ 91,100 $ 51,700
Current portion of capital lease obligations 1,644 1,467
Accounts payable 95,400 38,018
Customer advance payments 5,612 5,764
Accrued taxes -- 704
Accrued interest 1,272 1,135
Amounts payable to customers -- 682
Other 6,998 4,851
-------- --------
$202,026 $104,321
-------- --------
Deferred Credits
Reserve for equity investment $ 32,942 $ --
Accumulated deferred income taxes 10,113 19,080
Unamortized investment tax credit 2,782 3,049
Customer advances for construction 8,621 9,326
Other 25,473 24,106
-------- --------
$ 79,931 $ 55,561
-------- --------
$478,238 $378,523
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-21-
<TABLE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
At December 31, 1996 1995
(restated)
-------- --------
(in thousands of dollars)
<S> <C> <C>
Common Stock Equity
Common stock, par value $1 per share--authorized
20,000,000 shares; 12,400,331 and 11,837,075
shares outstanding $ 12,400 $ 11,837
Capital surplus 79,489 80,546
Retained earnings (deficit) (5,345) 17,128
-------- --------
$ 86,544 $109,511
-------- --------
Cumulative Convertible Preferred Stock
Convertible preferred stock, par value $1 per
share--authorized 500,000 shares issuable in
series; 6,751 and 6,885 shares outstanding $ 7 $ 7
Capital surplus 162 165
-------- --------
$ 169 $ 172
-------- --------
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 23,573 23,588
Long term capital lease obligations 2,895 2,270
-------- --------
$106,468 $105,858
-------- --------
$196,281 $218,641
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-22-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
<CAPTION>
Years Ended December 31, 1996 1995 1994
(restated)
--------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C>
Common Stock
Beginning of year $11,837 $11,261 $ 9,680
5% stock dividends May 1996, May 1995
and May 1994 590 564 525
Issuance of common stock -- -- 748
Issuance of common stock through DRIP
and other 293 326 308
Repurchase of common stock (320) (314) --
------- ------- -------
End of year $12,400 $11,837 $11,261
======= ======= =======
Common Stock Capital Surplus
Beginning of year $80,546 $81,091 $62,286
5% stock dividends May 1996, May 1995
and May 1994 (590) (564) (543)
Issuance of common stock -- -- 13,881
Issuance of common stock through DRIP
and other 4,842 5,702 5,467
Repurchase of common stock (5,309) (5,683) --
------- ------- -------
End of year $79,489 $80,546 $81,091
======= ======= =======
Retained Earnings (Deficit)
Beginning of year $17,128 $15,027 $13,691
Net income (loss) (12,803) 11,331 9,992
Cash dividends on common stock (9,670) (9,230) (8,656)
------- ------- -------
End of year $(5,345) $17,128 $15,027
======= ======= =======
Cumulative Convertible Preferred Stock
Beginning of year $ 7 $ 8 $ 8
Conversion of preferred stock -- (1) --
------- ------- -------
End of year $ 7 $ 7 $ 8
======= ======= =======
Cumulative Convertible Preferred Stock
Capital Surplus
Beginning of year $ 165 $ 180 $ 182
Conversion of preferred stock (3) (15) (2)
------- ------- -------
End of year $ 162 $ 165 $ 180
======= ======= =======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-23-
<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 234,000 customers within the state of Michigan. The
Company is also engaged in the marketing of natural gas to approximately 245
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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 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
3.6%, 4.0% and 4.1% for the years 1996, 1995 and 1994, respectively. Certain
investments in unconsolidated companies recorded using the equity method are
reported as other property. See Note 10 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 7
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 (LIFO) cost. At December 31, 1996 and 1995, the
replacement cost of Battle Creek's gas inventory exceeded LIFO cost by
$1,440,000 and $343,000, respectively. SEMCO reports gas in storage at cost.
-24-
<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.
Statements 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 $3,252,000
and $3,737,000 in 1996 and 1995, respectively. In 1996, the Company amortized
and retired capital leases totaling $2,450,000. These noncash investing and
financing activities have been excluded from the consolidated statements of
cash flows.
Impairment of Long-Lived Assets. In January 1996, the Company adopted 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 adoption of SFAS 121 did not have a material impact on
the Company's financial position or results of operations.
Stock-Based Compensation. In October 1995 the FASB issued SFAS 123,
"Accounting for Stock-Based Compensation." In general, SFAS 123 recommends
that all stock-based compensation given to employees in exchange for their
services be expensed based on the fair value of the stock instrument.
Companies may choose to continue accounting for these transactions under
previously existing accounting standards, however those companies must
disclose, in a footnote, net income and earnings per share as if SFAS 123
accounting had been applied.
-25-
<PAGE>
As of December 31, 1996, the Company did not have any material stock-based
compensation plans in effect. In January 1997, however, the Company's Board of
Directors adopted, subject to approval by the Company's shareholders at the
Company's 1997 annual meeting, a Long-Term Incentive Plan providing for
stock-based awards to key management personnel. Awards would take the form of
one or more of the following: stock options, restricted stock, stock
appreciation rights, performance units and other stock incentives deemed
appropriate. Up to 500,000 shares of the Company's common stock would be
available for this plan.
2. RESTATEMENT OF FINANCIAL STATEMENTS
On March 10, 1998, the Company announced that it had discovered that certain
transactions associated with its gas marketing subsidiary, SEMCO Energy
Services, Inc., were incorrectly recorded. The related financial impact has
been quantified based upon work completed by the Company, outside consultants
and its independent auditors. The adjustments relate to incorrect margin
recognition, incorrect accounting of gas in storage, previously unrecorded
borrowed gas and various other items. During 1997, the Company implemented new
computer, procedural and accounting systems along with employing new management
and accounting personnel at its marketing subsidiary, which management believes
will help mitigate such items from reoccurring.
In the opinion of management, all material adjustments necessary to
correct the financial statements have been recorded. In addition, see Note 11
for restated interim financial information for 1996. The impact of these
adjustments on the Company's results of operations as previously reported for
1996 is summarized below (in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
Previously
Reported Restated
---------- --------
<S> <C> <C>
Operating Revenues
Gas marketing $311,384 $308,703
Operating Expenses
Cost of gas marketed 305,395 308,619
Income taxes 6,371 4,304
Operating income 24,095 20,257
Net loss (8,965) (12,803)
Loss per share $ (.72) $ (1.03)
</TABLE>
The effect of the restatement on the December 31, 1996 Consolidated
Balance Sheet resulted in corresponding decreases of $1,076,000 in receivables,
$789,000 in gas in underground storage, $3,838,000 in retained earnings and
$2,067,000 in accrued taxes while accounts payable increased $4,040,000
compared to December 31, 1996 amounts previously reported.
-26-
<PAGE>
3. REGULATORY MATTERS
Southeastern and Michigan Gas Rate Case. In December 1996, Southeastern and
Michigan Gas filed a combined general rate case with the MPSC requesting an
annual rate increase of $5,500,000. The rate case includes a request for the
recovery of certain expenses related to the change in accounting for the cost
of retiree medical benefits. In addition, the combined filing proposes a
merger of Southeastern and Michigan Gas, incorporates a declining block rate
schedule for sales customers and capacity reservation charges for
transportation, and would introduce incentive regulation, comprised of a
proposal to share excess authorized returns with ratepayers. The Company
expects an order from the MPSC in the fourth quarter of 1997. Any rate relief
granted will be based on all elements of cost of service.
State Property Tax Reductions. 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 the companies' general rate case. 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 1996, $663,000 in 1995 and $437,000 in
1994.
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.
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 and $1,223,000 in 1994. These costs
have been deferred because they are substantially recoverable from ratepayers
through gas cost recovery mechanisms. At December 31, 1996 and 1995, the
Company's recorded liabilities related to Order 636, and related deferred
assets, totaled $637,000 and $1,102,000, respectively. The Company does not
anticipate any significant additional direct billings related to Order 636.
Regulatory Assets and Liabilities. The Company's utility subsidiaries are
subject to the provisions of SFAS 71, "Accounting for the Effects of Certain
Types of Regulation." As a result, the actions of regulators affect when
revenues and expenses are recognized. Regulatory assets represent incurred
costs to be recovered from customers through the ratemaking process.
Regulatory liabilities represent benefits to be refunded to customers. The
following regulatory assets and liabilities were recorded on the consolidated
balance sheets as of December 31 (in thousands of dollars):
-27-
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Regulatory Assets
Deferred retiree medical benefits $13,260 $12,474
Deferred pension benefits 2,287 2,287
Unamortized loss on retirement of debt 3,353 3,598
Other 1,971 2,113
------- -------
$20,871 $20,472
======= =======
Regulatory Liabilities
Unamortized investment tax credit $ 3,417 $ 3,782
Tax benefits amortizable to customers 4,460 4,744
Other 67 --
------- -------
$ 7,944 $ 8,526
======= =======
</TABLE>
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.
4. INCOME TAXES
SFAS No. 109. The Company accounts for income taxes in accordance with SFAS
109, "Accounting For Income Taxes."
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.
Provision for Income Taxes. The components of the provision for income taxes
are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
(restated)
------- ------- -------
<S> <C> <C> <C>
Federal
Currently payable $ 1,160 $ 5,606 $ 5,849
Deferred to future periods (8,201) 812 (1,023)
Investment tax credits (267) (267) (267)
------- ------- -------
Total income taxes $(7,308) $ 6,151 $ 4,559
Less amounts included in:
Write-down of NOARK investment, net (11,308) -- --
Other income (loss), net (304) (37) 47
Extraordinary item, net -- -- (692)
------- ------- -------
Amount included in operating expenses $ 4,304 $ 6,188 $ 5,204
======= ======= =======
</TABLE>
-28-
<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>
1996 1995 1994
(restated)
-------- ------- -------
<S> <C> <C> <C>
Net income (loss) $(12,803) $11,331 $ 9,992
Add back:
Preferred dividends 194 195 196
Income taxes (7,308) 6,151 4,559
-------- ------- -------
Pre-tax income (loss) $(19,917) $17,677 $14,747
======== ======= =======
Computed federal income taxes $ (6,971) $ 6,187 $ 5,161
Depreciation -- (43) (184)
Amortization of deferred ITC (267) (267) (267)
Amortization of non-deductible amounts
resulting from acquisitions 216 217 216
Other (286) 57 (367)
-------- ------- -------
Total income taxes $ (7,308) $ 6,151 $ 4,559
======== ======= =======
</TABLE>
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>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Property $(24,256) $(19,668)
Reserve for equity investment 11,530 --
Retiree medical benefit obligation 4,741 4,578
Retiree medical benefit regulatory assets (4,641) (4,549)
Gas in underground storage 2,934 2,412
ITC 1,392 1,526
Unamortized debt expense (1,197) (1,284)
Gas cost underrecovery (1,166) (641)
Other 914 795
-------- --------
Total deferred taxes $ (9,749) $(16,831)
======== ========
Gross deferred tax liabilities $(41,043) $(35,105)
Gross deferred tax assets 31,294 18,274
-------- --------
Total deferred taxes $ (9,749) $(16,831)
======== ========
</TABLE>
At December 31, 1996 and December 31, 1995 there was no valuation
allowance recorded against deferred tax assets.
5. CAPITALIZATION
Common Stock Equity. The Company issued five percent stock dividends in May
1996, May 1995 and May 1994. 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.
-29-
<PAGE>
Pursuant to its DRIP, the Company issued 292,000 shares of common stock in
1996, 274,000 in 1995, and 307,000 shares in 1994. 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 1996 and 1995, the Company purchased a total of 320,000
and 314,000 shares, respectively, for the DRIP.
In January 1994, the Company issued 747,500 shares of common stock. 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, note agreements and
long-term debt indentures which contain restrictive financial covenants
including, among others, limits on the payment of dividends beyond certain
levels. Because of the NOARK write-down in December 1996, the Company would
not have been in compliance with certain of these covenants. However, the
Company has received waivers or amendments with respect to the affected credit
arrangements and expects no deviation from its historical dividend payment
record in 1997.
Cumulative Convertible Preferred Stock. At December 31, 1996 and 1995, 6,751
and 6,885 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, 1996, 27,747 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 an extraordinary charge for the
early extinguishment of debt of $1,286,000, net of tax.
There are no annual maturities or sinking fund requirements for the
Company's existing debt over the next five years.
Capital Lease Obligations. 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.
-30-
<PAGE>
The future minimum payments under capital leases at December 31, 1996 were
as follows (in thousands of dollars):
1997 $2,008
1998 1,573
1999 1,071
2000 501
2001 1
------
Total minimum lease payments $5,154
Interest included in payments 615
------
Present value of minimum lease payments $4,539
Current portion 1,644
------
$2,895
======
6. 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 1997 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>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Notes payable balance at year end $91,100 $51,700 $50,000
Unused lines of credit at year end 8,800 38,200 39,900
Average interest rate at year end 7.0% 6.4% 6.6%
Maximum borrowings at any month-end $91,100 $52,400 $55,842
Average borrowings 41,228 28,224 31,392
Weighted average cost of borrowing 6.0% 6.5% 5.2%
</TABLE>
7. 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, accounts payables, receivables, notes payable
to banks, and capital lease obligations. 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, 1996 and 1995 are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Long-term debt $103,573 $107,625 $103,588 $113,198
</TABLE>
-31-
<PAGE>
Hedging Activities. SEMCO enters into sales commitments which may extend up to
60 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
$7,465,000 and $2,009,000 as of December 31, 1996 and 1995, 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.
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>
1996 1995
------ -------
<S> <C> <C>
Futures Contracts
Notional amount (MMcf) 8,080 5,150
Unrealized gain (loss) $ (843) $ 479
Options Contracts
Notional amount (MMcf) 148 1,790
Unrealized gain $ 176 $ 213
</TABLE>
In addition to the above balances, SEMCO recorded approximately $250,000
in net deferred gains on contracts closed prior to December 31, 1996 related to
1997 sales commitments which is also included in other current assets.
As of December 31, 1996 and 1995, SEMCO also had outstanding natural gas
swap agreements covering a notional amount of 7,476,000 Mcf and 2,292,000 Mcf,
respectively. The estimated unrealized gain of these agreements, determined by
market quotes, was $450,000 and $170,000 at December 31, 1996 and 1995,
respectively.
SEMCO also hedges certain of its sales commitments with gas held in
storage. At December 31, 1996 and 1995, SEMCO held approximately 1,868,000 Mcf
and 1,207,000 Mcf in storage with a carrying value of $7,196,000 and
$2,253,000, respectively. At December 31, 1996 and 1995, SEMCO had deferred
losses associated with this gas of $1,732,000 and $978,000, respectively.
-32-
<PAGE>
8. 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, 1996, plan assets consisted of 53.2% equity investments,
12.9% guaranteed income insurance contracts, 33.7% fixed income securities and
.2% 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>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost $ 1,796 $ 1,465 $ 1,700
Interest cost on projected benefit obligation 3,803 3,495 3,246
Actual return on assets (6,290) (8,497) 287
Amortization of prior service costs 471 471 471
Amortization of unrecognized net (gain) loss 133 (329) (8)
Amortization of transition obligation 79 79 79
Asset gain (loss) deferred 2,507 5,066 (3,514)
------- ------- -------
Net periodic pension cost $ 2,499 $ 1,750 $ 2,261
======= ======= =======
</TABLE>
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, 1996
and 1995 (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $39,074 $38,120
Non-vested benefit obligation 2,012 2,302
------- -------
Accumulated benefit obligation $41,086 $40,422
======= =======
Projected benefit obligation $52,869 $53,588
Plan assets at fair value 49,788 44,475
------- -------
Projected benefit obligation in excess of plan assets $ 3,081 $ 9,113
Unrecognized net gain (loss) 6,316 (372)
Unrecognized prior service cost (4,106) (4,577)
Unrecognized net transition obligation at December 31 (505) (585)
------- -------
Pension liability recognized in the consolidated
balance sheet $ 4,786 $ 3,579
======= =======
</TABLE>
Significant pension plan assumptions are as follow:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Plan discount rates 7.75% 7.25% 8.25%
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>
-33-
<PAGE>
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 filed a combined
general rate case 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 retiree
medical benefits in Battle Creek's December 1995 rate increase, as discussed in
Note 3.
The combined net periodic retiree medical costs consisted of the following
components (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost $ 865 $1,443 $1,621
Interest cost 1,854 2,945 2,825
Actual return on assets (1,009) (1,116) 42
Net amortization and deferral 844 2,106 1,238
------ ------ ------
Net periodic retiree medical cost $2,554 $5,378 $5,726
====== ====== ======
</TABLE>
In 1996, 1995 and 1994, the Company expensed net retiree medical costs of
$1,395,000, $905,000 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 1996, 1995 and
1994, the Company also expensed $663,000, $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 3 for further discussion
of these MPSC orders. The Company recorded regulatory assets related to the
utility subsidiaries' retiree medical costs of $496,000, $3,810,000 and
$4,448,000 in 1996, 1995 and 1994, respectively.
The Company funds retiree medical benefits on a discretionary basis
through an Internal Revenue Code Section 401(h) account. In 1996 and 1995, the
Company made cash contributions to the 401(h) account of $744,000 and $437,000,
respectively. No contributions were made to the 401(h) account in 1994.
-34-
<PAGE>
The funded status of the retiree medical benefit plans is reconciled with
the liability recorded at December 31, 1996 and 1995 as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of estimated benefits:
Retirees $ 9,796 $ 13,006
Fully eligible active 5,252 8,772
Other active 11,477 19,487
-------- --------
Accumulated retiree medical obligation $ 26,525 $ 41,265
Plan assets at fair value 7,702 5,949
-------- --------
Accumulated retiree medical obligation in excess
of plan assets $ 18,823 $ 35,316
Unrecognized net obligation at transition (26,878) (28,558)
Unrecognized net gain 22,791 7,084
-------- --------
Recorded liability $ 14,736 $ 13,842
======== ========
</TABLE>
Significant plan assumptions are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Plan discount rate 7.75% 7.25% 8.25%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
The 1996 costs were developed based on the substantive health care plan in
effect at January 1, 1996. As of December 31, 1996, the actuary assumed that
retiree medical cost increases would be 9.0% in 1996, 8.6% in 1997, and
decrease uniformly to 5.8% in 2005 and thereafter and that prescription drug
cost increases would be 13.0% in 1996, 12.1% in 1997, 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, 1996 by $4,784,000 and the aggregate of the
service and interest cost components of net periodic retiree medical costs for
1996 by $703,000.
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 and 1994, the
Company's contributions were $300,000 and $600,000, respectively. The Company
did not make a contribution to the ESOT in 1996.
9. 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 1997 are projected at $29,400,000. 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.
-35-
<PAGE>
The Company, SEMCO Arkansas Pipeline Company and SEMCO have guaranteed 40%
of the principal and interest payments on approximately $82,300,000 of debt
used to finance the pipeline. Of the total debt, $53,550,000 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, 1996, NOARK had $28,750,000
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.
In December 1995, NOARK received $6,000,000 in settlement of litigation
between Vesta Energy Company and the NOARK partners. Vesta paid the settlement
in consideration of termination of a firm transportation agreement with NOARK,
including all related contracts, and release from all obligations related to
the NOARK Pipeline System.
NOARK used the Vesta settlement to temporarily reduce outstanding
borrowings on its revolving line of credit. Therefore, the Company was not
required to make another contribution to NOARK until October 1996, when the
Company contributed $844,000. In 1997, the Company estimates its required
contributions to NOARK in the range of $3,000,000 to $3,500,000.
In December 1996, the Company recorded a one-time non-cash after-tax
charge against earnings of $21,000,000 on its investment and participation as a
general partner in NOARK. On a pre-tax basis, the charge against earnings
represents a significant portion of the Company's current investment, including
loan guarantees, in NOARK. The Company recorded this write-down due to its
inability to recover the carrying amount of its investment in NOARK, including
the loan guarantees. The Company recognized a loss in value of its NOARK
investment due to recurring losses generated by NOARK and NOARK's continued
inability to meet principal and interest payments on the partnership debt.
The Company's short-term credit arrangements, note agreements and
long-term debt indentures contain restrictive covenants requiring certain
levels of earnings and the maintenance of certain financial ratios. Because of
the NOARK write-down, the Company would have been in violation of certain of
these covenants, however the Company has received waivers or amendments for all
affected covenants.
The Company will continue to explore opportunities to improve the project,
but the write-down is expected to eliminate the need for significant NOARK
operating losses being recorded in the Company's future income statements and
will not affect the Company's cash or stock dividend.
The Company sold its interest in NOARK in early 1998.
Environmental. Effective January 1, 1997, the Company will adopt the
provisions of Statement of Position 96-1, "Environmental Remediation
Liabilities." This Statement provides authoritative guidance for recognition,
measurement, display, and disclosure of environmental remediation liabilities
in financial statements. Upon adoption, SOP 96-1 is not expected to have a
material impact on the Company's financial position or results of operations.
-36-
<PAGE>
10. 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 9 for
a discussion of the Company's significant guarantees of affiliate debt.
At December 31, 1996, 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 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, 1996, 1995 and 1994 is as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 13,866 $ 39,179 $ 20,152
Operating income $ 4,029 $ 9,958 $ 8,334
Net income (loss) $ (4,230) $ (225) $ 329
======== ======== ========
The Company's share of net loss $ (1,196) $ (258) $ (20)
======== ======== ========
Current assets $ 2,744 $ 8,988 $ 9,320
Non-current assets 131,211 138,741 140,530
-------- -------- --------
Total assets $133,955 $147,729 $149,850
======== ======== ========
Current liabilities $ 9,659 $ 12,310 $ 12,505
Non-current liabilities 114,997 118,322 113,902
Equity 9,299 17,097 23,443
-------- -------- --------
Total liabilities and equity $133,955 $147,729 $149,850
======== ======== ========
The Company's equity investment $ 5,120 $ 8,024 $ 9,754
======== ======== ========
The Company's share of undistributed
losses $ (1,733) $ (1,193) $ (903)
======== ======== ========
</TABLE>
11. 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.
-37-
<PAGE>
The following amounts are shown in thousands of dollars, except per share
amounts:
<TABLE>
<CAPTION>
Quarters First Second Third Fourth
- -------- -------------------- ------------------- -------------------- --------------------
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Operating revenue $176,128 $175,047 $82,390 $82,105 $91,082 $90,669 $198,030 $197,128
Operating income 11,859 10,669 2,696 2,428 34 (377) 9,506 7,537
Net income (loss)<F1> 8,742 7,552 89 (179) (2,853) (3,264) (14,943) (16,912)
Earnings (loss) per
share<F1><F2><F3> .71 .61 .01 (.01) (.23) (.26) (1.20) (1.36)
Cash dividends per
share<F2> .19 .19 .20 .20
<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) 7,457 295 (2,688) 6,267
Earnings (loss) per
share<F2><F3> .60 .02 (.22) .50
Cash dividends per
share<F2> .18 .18 .19 .19
<FN>
<F1>
Includes the impact of a $21,000 (net of tax), or $1.69 per share, write-down of NOARK
investment in the Fourth Quarter (see note 9). Excluding the write-down, restated net income
was $4,088, or $.33 per share.
<F2>
Adjusted for five percent stock dividends in May 1996 and May 1995.
<F3>
Total for each year may not equal annual earnings per share due to changes in shares
outstanding.
</FN>
</TABLE>
The unaudited quarterly information for fiscal 1996 has been restated due
to the discovery of certain transactions that were incorrectly recorded at the
Company's gas marketing subsidiary (see Note 2).
-38-
<PAGE>
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To SEMCO Energy, Inc.:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC. (a Michigan
corporation, now doing business as SEMCO Energy, Inc.) and subsidiaries as of
December 31, 1996 (as restated, see Note 2 of the Notes to the Consolidated
Financial Statements) and December 31, 1995, 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, 1996. 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, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
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,
March 10, 1998.
-39-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-40-
<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 15, 1997 Annual Meeting of Shareholders is
incorporated by reference herein.
The executive officers of the Company are William L. Johnson, Robert F.
Caldwell, Carl W. Porter and George C. Noble.
Mr. Johnson (age 54) has been President and Chief Executive Officer of the
Company since May 1996. From 1994 to May 1996 he was Chief Executive Officer
of Northern Pipeline Construction Company of Kansas City, Missouri, and from
1990 to 1994 he was President, Gas Service Division of Western Resources, Inc.
of Topeka, Kansas.
Mr. Caldwell (age 41) 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.
Mr. Porter (age 47) has been Senior Vice President and Chief Operating
Officer of the Company since July 1996. He was Vice President-Gas Utilities of
Itron, Inc., Spokane, Washington, from August 1995 to July 1996. From 1992 to
1995 he was Senior Vice President of Operations of New Jersey Natural Gas,
Wall, New Jersey, and from 1990 to 1992 he was Vice President of Operations of
Western Resources, Inc., Topeka, Kansas.
Mr. Noble (age 47) was elected Vice President of Information Systems of
the Company in August 1997. He served the Company as Director of Information
Systems from 1993 to August 1997 and Manager of Information Systems from 1985
to 1993.
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 15, 1997 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 15, 1997
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 15, 1997 Annual Meeting of
Shareholders, is incorporated by reference herein.
-41-
<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.
Pages in 10-K
-------------
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 19
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 20
Consolidated Balance Sheets as of
December 31, 1996 and 1995 21
Consolidated Statements of Capitalization as
of December 31, 1996 and 1995 22
Consolidated Statements of Changes in
Stockholders' Investment for the years
ended December 31, 1996, 1995 and 1994 23
Notes to the Consolidated Financial Statements 24-38
Report of Independent Public Accountants 39
(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.
Schedule
Number Pages in 10-K
-------- -------------
I Condensed Financial Information of
Southeastern Michigan Gas Company 46
II Consolidated Valuation and Qualifying
Accounts for the years ended
December 31, 1996, 1995 and 1994 50
-42-
<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.(k) 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.(k) x
27 Financial Data Schedule. x
28 Information from reports furnished to state
insurance regulatory authorities. NA NA
99.1 Proxy Statement dated March 7, 1997.(j) x
99.2 Stock Option Certificate and Agreement
dated October 10, 1996 between Enterprises
and William L. Johnson.(k) x
99.3 Stock Option Certificate and Agreement
dated February 26, 1997 between Enterprises
and William L. Johnson.(k) x
99.4 Rights Agreement dated as of April 15, 1997
between Enterprises and Continental Stock
Transfer & Trust Company, as Rights Agent.(k) x
-43-
<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 6, 1997, pursuant to Rule 14a-6 of the Exchange Act, File
No. 0-8503.
(k) Filed with Enterprises' Form 10-K for 1996, dated March 27, 1996,
File No. 0-8503.
ITEM 14. (Continued)
(b) No reports on Form 8-K have been filed during the quarter ended
December 31, 1996.
(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.
-44-
<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 10, 1998 By /s/ William L. Johnson
----------------------------------------
William L. Johnson
President and Chief Executive 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
--------- ----- ----
/s/William L. Johnson President and Chief Executive March 10, 1998
- ------------------------
William L. Johnson Officer (Director)
/s/Robert J. Digan, II Senior Vice President and March 10, 1998
- ------------------------
Robert J. Digan, II Chief Financial Officer
(Principal Financial and
Accounting Officer)
Director
- ------------------------
Frank G. Andreoni
/s/Daniel A. Burkhardt* Director March 10, 1998
- ------------------------
Daniel A. Burkhardt
/s/Edward J. Curtis* Director March 10, 1998
- ------------------------
Edward J. Curtis
/s/John T. Ferris* Director March 10, 1998
- ------------------------
John T. Ferris
/s/Michael O. Frazer* Director March 10, 1998
- ------------------------
Michael O. Frazer
/s/Harvey I. Klein* Director March 10, 1998
- ------------------------
Harvey I. Klein
/s/Frederick S. Moore* Director March 10, 1998
- ------------------------
Frederick S. Moore
/s/Edith A. Stotler* Director March 10, 1998
- ------------------------
Edith A. Stotler
/s/Donald W. Thomason* Director March 10, 1998
- ------------------------
Donald W. Thomason
*By/s/William L. Johnson March 10, 1998
---------------------
William L. Johnson
Attorney-in-fact
-45-
<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,
---------------------------------
1996 1995 1994
------- ------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUE
Gas sales $87,450 $68,321 $74,151
Transportation 3,103 3,055 3,057
Other operations 382 470 490
------- ------- -------
90,935 71,846 77,698
------- ------- -------
OPERATING EXPENSES
Cost of gas sold 57,242 40,181 47,240
Operations and maintenance 15,175 14,182 13,869
Depreciation 4,477 4,111 3,869
Income taxes 2,206 2,276 2,019
Taxes other than income taxes 3,475 3,275 3,538
------- ------- -------
82,575 64,025 70,535
------- ------- -------
OPERATING INCOME 8,360 7,821 7,163
OTHER INCOME, NET 76 239 203
------- ------- -------
INCOME BEFORE INCOME DEDUCTIONS 8,436 8,060 7,366
------- ------- -------
INCOME DEDUCTIONS
Interest on long-term debt 1,863 1,864 1,853
Other interest 971 624 516
Amortization of debt expense 117 193 169
------- ------- -------
2,951 2,681 2,538
------- ------- -------
NET INCOME 5,485 5,379 4,828
Dividends on preferred stock 178 178 178
------- ------- -------
NET INCOME AFTER DIVIDENDS
ON PREFERRED STOCK $ 5,307 $ 5,201 $ 4,650
======= ======= =======
</TABLE>
-46-
<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,
------------------------
1996 1995
-------- --------
(Thousands of Dollars)
<S> <C> <C>
UTILITY PLANT
Plant in service, at original cost $159,111 $142,645
Less - Accumulated depreciation 60,803 56,676
-------- --------
98,308 85,969
Construction work in progress 16 918
-------- --------
98,324 86,887
-------- --------
OTHER PROPERTY, NET 440 573
-------- --------
CURRENT ASSETS
Cash and temporary cash investments, at cost 93 163
Receivables
Affiliates 27 369
Nonaffiliates, less reserves of $476 and $128 11,796 10,155
Accrued utility revenue 6,998 6,533
Material and supplies, at average cost 1,634 1,858
Gas in underground storage, at average cost 8,518 4,261
Property taxes assessed and prepayments 1,822 1,678
Accumulated deferred income taxes -- 892
Other current assets 3,627 --
-------- --------
34,515 25,909
-------- --------
DEFERRED CHARGES
Unamortized debt expense 1,602 1,719
Other 10,508 9,689
-------- --------
12,110 11,408
-------- --------
$145,389 $124,777
======== ========
</TABLE>
-47-
<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,
------------------------
1996 1995
-------- --------
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION
Common stock equity $ 41,501 $ 40,594
Cumulative preferred stock 3,100 3,100
Long-term debt 23,000 23,000
Capital lease obligations 2,319 1,826
-------- --------
69,920 68,520
-------- --------
CURRENT LIABILITIES
Note payable to affiliate 29,432 17,375
Accounts payable
Affiliates 2,202 1,912
Nonaffiliates 11,083 5,402
Customer advance payments 2,889 3,023
Accrued taxes 2,078 1,603
Accumulated deferred income taxes 48 --
Amounts payable to customers 328 682
Other 2,397 1,499
-------- --------
50,457 31,496
-------- --------
COMMITMENTS AND CONTINGENCIES
DEFERRED CREDITS
Accumulated deferred income taxes 4,643 4,240
Unamortized investment tax credits 1,859 2,027
Customer advances for construction 5,853 6,405
Other 12,657 12,089
-------- --------
25,012 24,761
-------- --------
$145,389 $124,777
======== ========
</TABLE>
-48-
<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,
---------------------------------
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITY
Cash received from customers $ 88,606 $ 67,202 $ 81,263
Cash paid for payrolls and to suppliers (73,878) (50,046) (59,478)
Interest paid (2,951) (2,488) (2,647)
Income taxes paid (792) (1,652) (3,069)
Taxes other than income taxes paid (3,499) (3,405) (3,272)
Other cash receipts, net 445 372 11
-------- -------- --------
NET CASH FROM OPERATING ACTIVITY 7,931 9,983 12,808
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITY
Capital expenditures (15,487) (10,759) (6,371)
Proceeds from sale of property
and equipment less removal costs 7 (103) 128
-------- -------- --------
NET CASH FROM INVESTING ACTIVITY (15,480) (10,862) (6,243)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITY
Change in notes payable to affiliate 12,057 4,705 (7,270)
Issuance of long-term debt -- -- 23,000
Repayment of long-term debt -- -- (17,502)
Payment of dividends (4,578) (4,378) (4,178)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITY 7,479 327 (5,950)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS (70) (552) 615
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Year 163 715 100
-------- -------- --------
End of Year $ 93 $ 163 $ 715
======== ======== ========
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITY
Net income available for common stock $ 5,307 $ 5,201 $ 4,650
Adjustments to reconcile net income to
net cash from operating activity
Depreciation 4,477 4,111 3,869
Deferred taxes and ITC 1,175 94 (1,349)
Accounts receivable (1,299) (2,484) 697
Accrued utility revenue (465) (2,061) 1,737
Materials and supplies and gas in
underground storage (4,033) 4,374 2,421
Property taxes assessed and
prepayments (144) (130) 271
Accounts payable 5,971 746 (1,438)
Amounts payable to customers (354) 64 102
Other, net (2,704) 68 1,848
-------- -------- --------
NET CASH FROM OPERATING ACTIVITY $ 7,931 $ 9,983 $ 12,808
======== ======== ========
</TABLE>
-49-
<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, 1996
------------------------------------
<S> <C> <C> <C> <C>
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
UNCOLLECTIBLE ACCOUNTS $ 729 $ 1,209 $ 691 $ 1,247
====== ======= ====== =======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET $2,401 $ -0- $ -0- $ 2,401
====== ======= ====== =======
RESERVE FOR EQUITY INVESTMENT $ -0- $32,942 $ -0- $32,942
====== ======= ====== =======
<CAPTION>
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> <S> <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
====== ====== ====== ======
</TABLE>
-50-
<PAGE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
Exhibit Index
Form 10-K
1996
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.(k) 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.(k) x
27 Financial Data Schedule. x
28 Information from reports furnished to state
insurance regulatory authorities. NA NA
99.1 Proxy Statement dated March 7, 1997.(j) x
99.2 Stock Option Certificate and Agreement
dated October 10, 1996 between Enterprises
and William L. Johnson.(k) x
99.3 Stock Option Certificate and Agreement
dated February 26, 1997 between Enterprises
and William L. Johnson.(k) x
99.4 Rights Agreement dated as of April 15, 1997
between Enterprises and Continental Stock
Transfer & Trust Company, as Rights Agent.(k) 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 6, 1997, pursuant to Rule 14a-6 of the Exchange Act, File
No. 0-8503.
(k) Filed with Enterprises' Form 10-K for 1996, dated March 27, 1996,
File No. 0-8503.
Exhibit 23
ARTHUR ANDERSEN LLP
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report dated March 10, 1998, included in this Form 10-K/A for the year
ended December 31, 1996, into the Company's previously filed Registration
Statements No. 33-46413 and 333-18927.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
March 10, 1998.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS, 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> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 246,387
<OTHER-PROPERTY-AND-INVEST> 9,585
<TOTAL-CURRENT-ASSETS> 191,141
<TOTAL-DEFERRED-CHARGES> 31,125
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 478,238
<COMMON> 12,400
<CAPITAL-SURPLUS-PAID-IN> 79,489
<RETAINED-EARNINGS> (5,345)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 86,544
0
3,269
<LONG-TERM-DEBT-NET> 103,573
<SHORT-TERM-NOTES> 91,100
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 2,895
<LEASES-CURRENT> 1,644
<OTHER-ITEMS-CAPITAL-AND-LIAB> 189,213
<TOT-CAPITALIZATION-AND-LIAB> 478,238
<GROSS-OPERATING-REVENUE> 544,949
<INCOME-TAX-EXPENSE> 4,304
<OTHER-OPERATING-EXPENSES> 520,388
<TOTAL-OPERATING-EXPENSES> 524,692
<OPERATING-INCOME-LOSS> 20,257
<OTHER-INCOME-NET> (21,813)
<INCOME-BEFORE-INTEREST-EXPEN> (1,556)
<TOTAL-INTEREST-EXPENSE> 11,231
<NET-INCOME> (12,787)
16
<EARNINGS-AVAILABLE-FOR-COMM> (12,803)
<COMMON-STOCK-DIVIDENDS> 9,670
<TOTAL-INTEREST-ON-BONDS> 8,514
<CASH-FLOW-OPERATIONS> 11,432
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
