UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period from to
------------- ------------
Commission file number 0-8503
SEMCO Energy, Inc.
(Exact name of registrant as specified in its charter)
Michigan 38-2144267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 Water Street, Port Huron, Michigan 48060
(Address of principal executive offices)
810-987-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock outstanding as of October 31, 1998, is
16,405,691.
<PAGE>
INDEX TO FORM 10-Q
------------------
For Quarter Ended September 30, 1998
Page
Number
------
COVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 30
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 30
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars Except Per Share Amounts)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ------------------- -------------------
1998 1997 1998 1997 1998 1997<F1>
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Gas sales $ 21,520 $ 24,053 $119,332 $150,237 $187,275 $219,365
Gas marketing 73,370 91,380 285,271 330,079 482,156 453,369
Transportation 2,367 2,654 8,917 9,643 12,518 13,191
Other operations 9,980 5,761 24,859 8,105 28,640 9,266
-------- -------- -------- -------- -------- --------
$107,237 $123,848 $438,379 $498,064 $710,589 $695,191
-------- -------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $ 13,698 $ 16,036 $ 78,085 $103,306 $125,747 $151,962
Cost of gas marketed 72,108 90,175 281,266 322,610 476,813 446,457
Operations and maintenance 16,170 13,711 48,718 36,551 62,729 46,788
Depreciation 3,888 3,346 11,423 9,568 14,718 12,392
Income taxes (1,679) (1,789) 165 3,328 2,242 5,406
Taxes other than income taxes 2,416 2,274 7,157 6,867 9,624 8,817
-------- -------- -------- -------- -------- --------
$106,601 $123,753 $426,814 $482,230 $691,873 $671,822
-------- -------- -------- -------- -------- --------
OPERATING INCOME $ 636 $ 95 $ 11,565 $ 15,834 $ 18,716 $ 23,369
Write-down of NOARK investment, net of income taxes of $11,308 -- -- -- -- -- (21,000)
Adjustment to NOARK reserve, net of income taxes of $2,705 -- -- -- -- 5,025 --
Other income (loss), net 371 (31) 1,014 15 1,131 (317)
-------- -------- -------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES $ 1,007 $ 64 $ 12,579 $ 15,849 $ 24,872 $ 2,052
-------- -------- -------- -------- -------- --------
INTEREST CHARGES
Interest on long-term debt $ 2,672 $ 2,129 $ 8,609 $ 6,385 $ 11,614 $ 8,513
Other interest 941 938 1,987 2,469 2,764 3,315
Amortization of debt expense 108 97 320 287 425 380
Dividends on preferred stock 48 48 145 145 193 194
-------- -------- -------- -------- -------- --------
$ 3,769 $ 3,212 $ 11,061 $ 9,286 $ 14,996 $ 12,402
-------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING METHOD CHANGE AND EXTRAORDINARY CHARGE $ (2,762) $ (3,148) $ 1,518 $ 6,563 $ 9,876 $(10,350)
Cumulative effect of change in accounting method for
property taxes, net of income taxes of $960 -- -- 1,784 -- 1,784 --
Extraordinary charge due to early retirement of debt,
net of income taxes of $269 -- -- (499) -- (499) --
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) $ (2,762) $ (3,148) $ 2,803 $ 6,563 $ 11,161 $(10,350)
======== ======== ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ (.18) $ (.23) $ .19 $ .48 $ .78 $ (.76)
======== ======== ======== ======== ======== ========
CASH DIVIDENDS PER SHARE $ .19 $ .19 $ .57 $ .56 $ .76 $ .74
======== ======== ======== ======== ======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 15,356 13,705 14,520 13,677 14,333 13,677
======== ======== ======== ======== ======== ========
<FN>
<F1>
Restated - See note 1 of the notes to the consolidated financial statements.
</FN>
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-3-
<PAGE>
<TABLE>
SEMCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
A S S E T S
<CAPTION>
(Unaudited) (Unaudited)
September 30, December 31, September 30,
1998 1997 1997
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
UTILITY PLANT
Plant in service, at cost $374,222 $360,022 $357,586
Less - Accumulated depreciation 111,937 102,790 102,325
-------- -------- --------
$262,285 $257,232 $255,261
OTHER PROPERTY, net 24,089 18,230 18,563
-------- -------- --------
$286,374 $275,462 $273,824
-------- -------- --------
CURRENT ASSETS
Cash and temporary cash
investments, at cost $ 2,229 $ 3,985 $ 6,417
Receivables, less allowances of
$1,725 at September 30, 1998,
$1,498 at December 31, 1997
and $590 at September 30, 1997 10,485 50,154 17,988
Accrued revenue 27,504 66,998 42,989
Materials and supplies, at
average cost 2,470 2,924 3,089
Gas in underground storage 58,017 36,083 48,348
Gas charges, recoverable
from customers 14,778 19,931 17,960
Accumulated deferred income taxes -- -- 283
Other 9,715 11,702 6,579
-------- -------- --------
$125,198 $191,777 $143,653
-------- -------- --------
DEFERRED CHARGES
Unamortized debt expense $ 5,442 $ 5,284 $ 5,173
Deferred gas charges, recoverable
from customers -- -- 29
Advances to equity investees -- 8,370 7,546
Other 30,850 24,594 24,817
-------- -------- --------
$ 36,292 $ 38,248 $ 37,565
-------- -------- --------
$447,864 $505,487 $455,042
======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-4-
<PAGE>
<TABLE>
SEMCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<CAPTION>
(Unaudited) (Unaudited)
September 30, December 31, September 30,
1998 1997 1997
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
COMMON STOCK EQUITY
Common stock-par value $1 per share,
20,000,000 shares authorized; 16,384,860,
13,204,147 and 13,078,442 shares outstanding $ 16,385 $ 13,204 $ 13,078
Capital surplus 116,478 81,938 79,921
Retained earnings (deficit) (6,104) (640) (2,540)
-------- -------- --------
$126,759 $ 94,502 $ 90,459
-------- -------- --------
CUMULATIVE CONVERTIBLE PREFERRED STOCK
Convertible preferred stock - par value $1 per share;
authorized 500,000 shares issuable in series; each
convertible to 4.11 common shares $ 6 $ 7 $ 7
Capital surplus 149 162 162
-------- -------- --------
$ 155 $ 169 $ 169
-------- -------- --------
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY
$100 par value (redemption price $105 per share);
authorized 50,000 shares issuable in series;
31,000 shares outstanding $ 3,100 $ 3,100 $ 3,100
-------- -------- --------
LONG-TERM DEBT INCLUDING CAPITAL LEASES $140,009 $163,548 $103,548
-------- -------- --------
CURRENT LIABILITIES
Notes payable to banks $ 71,140 $ 71,019 $ 98,900
Accounts payable 38,650 79,842 63,717
Customer advance payments 8,707 8,035 7,207
Accrued taxes -- -- 1,118
Accrued interest 4,337 1,985 2,808
Accumulated deferred income taxes 1,154 1,150 --
Other 7,225 13,986 6,804
-------- -------- --------
$131,213 $176,017 $180,554
-------- -------- --------
DEFERRED CREDITS
Reserve for equity investment $ -- $ 25,212 $ 32,942
Accumulated deferred income taxes 22,258 15,046 10,607
Unamortized investment tax credit 2,314 2,515 2,581
Customer advances for construction 3,470 3,935 7,801
Other 18,586 21,443 23,281
-------- -------- --------
$ 46,628 $ 68,151 $ 77,212
-------- -------- --------
$447,864 $505,487 $455,042
======== ======== ========
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-5-
<PAGE>
<TABLE>
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997<F1>
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $112,910 $117,784 $525,855 $556,899 $733,861 $681,020
Cash paid for payrolls and to suppliers (127,246) (134,108) (475,821) (505,320) (702,778) (637,569)
Interest paid (912) (1,288) (8,244) (7,316) (12,849) (11,717)
Income taxes paid (1,500) (100) (2,100) (3,100) (2,153) (3,100)
Taxes other than income taxes paid (3,794) (3,282) (6,191) (5,382) (10,403) (9,243)
Other cash receipts and payments, net 817 152 766 393 1,312 479
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $(19,725) $(20,842) $ 34,265 $ 36,174 $ 6,990 $ 19,870
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Natural gas distribution property additions $ (5,780) $ (8,551) $(15,263) $(23,116) $(20,348) $(36,166)
Other property additions (727) (621) (1,984) (767) (2,397) (857)
Proceeds from property sales, net of retirement costs 533 (1) 339 200 512 481
Acquisition of businesses, net of cash acquired -- (14,966) 26 (14,966) (125) (14,966)
Advances to equity investees -- (820) (4,284) (2,484) (5,108) (3,328)
-------- -------- -------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $ (5,974) $(24,959) $(21,166) $(41,133) $(27,466) $(54,836)
-------- -------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 27,683 $ 1,384 $ 31,034 $ 4,092 $ 32,816 $ 5,308
Repurchase of common stock -- (282) -- (2,982) (89) (4,491)
Net change in notes payable to banks (28) 48,200 (3,405) 7,800 (31,286) 47,200
Net change in notes payable - other -- -- (9,205) -- (9,205) --
Costs related to early extinguishment of debt -- -- (941) -- 59,059 --
Costs related to issuance of debt and stock (274) -- (373) -- (373) --
Repayment of long-term debt (4) -- (23,554) (25) (23,554) (25)
Payment of dividends (2,940) (2,670) (8,411) (7,741) (11,080) (10,269)
-------- -------- -------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $ 24,437 $ 46,632 $(14,855) $ 1,144 $ 16,288 $ 37,723
-------- -------- -------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease) $ (1,262) $ 831 $ (1,756) $ (3,815) $ (4,188) $ 2,757
Beginning of Period 3,491 5,586 3,985 10,232 6,417 3,660
-------- -------- -------- -------- -------- --------
End of Period $ 2,229 $ 6,417 $ 2,229 $ 6,417 $ 2,229 $ 6,417
======== ======== ======== ======== ======== ========
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITIES
Net income (loss) $ (2,762) $ (3,148) $ 2,803 $ 6,563 $ 11,161 $(10,350)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation 3,888 3,346 11,424 9,568 14,719 12,392
Extraordinary charge -- -- 499 -- 499 --
Write-down of NOARK investment, net -- -- -- -- -- 21,000
Adjustment to reserve for NOARK investment, net -- -- -- -- (5,025) --
Deferred taxes and investment tax credits (24) (1) (3,031) 374 37 2,560
Equity (income) loss, net of distributions 172 107 (266) 39 97 538
Receivables 7,911 8,612 39,603 29,973 6,516 4,585
Accrued revenue (1,835) (11,918) 39,495 33,560 15,486 (14,170)
Materials and supplies and gas in underground storage (14,269) (25,711) (21,481) (14,816) (9,840) (13,090)
Gas charges, recoverable from customers (5,500) (7,202) 6,194 (4,169) 4,223 (3,464)
Other current assets (2,528) (2,232) 3,793 4,547 1,776 (84)
Accounts payable (8,266) 13,603 (41,848) (32,403) (29,912) 20,183
Customer advances and amounts payable to customers 4,323 5,377 206 838 (2,895) 59
Accrued taxes (2,660) (2,582) (1,608) 875 (3,459) (2,158)
Other, net 1,825 907 (1,518) 1,225 3,607 1,869
-------- -------- -------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $(19,725) $(20,842) $ 34,265 $ 36,174 $ 6,990 $ 19,870
======== ======== ======== ======== ======== ========
<FN>
<F1>
Restated - See note 1 of the notes to the consolidated financial statements.
</FN>
</TABLE>
The notes to the consolidated financial statements are an integral part of
these statements.
-6-
<PAGE>
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES AND CHANGE IN ACCOUNTING METHOD
Under the rules and regulations of the Securities and Exchange
Commission for Form 10-Q Quarterly Reports, certain footnotes and other
financial statement information normally included in SEMCO Energy, Inc.'s
(the Company's) year-end financial statements have been condensed or omitted
in the accompanying unaudited financial statements. These financial
statements prepared by the Company should be read in conjunction with the
financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
information in the accompanying financial statements reflects, in the opinion
of the Company's management, all adjustments (which include only normal
recurring adjustments) necessary for a fair statement of the information
shown, subject to year-end and other adjustments, as later information may
require.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<TABLE>
Supplemental Cash Flow Information. Supplemental cash flow information
for the three, nine and twelve months ended September 30, 1998 and 1997 is as
follows (in thousands of dollars):
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
----- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Acquisitions of Businesses,
Net of Cash Acquired
Fair value of assets acquired $ -- $21,284 $ 9,865 $21,284 $11,045 $21,284
Liabilities assumed -- (5,884) (3,556) (5,884) (4,002) (5,884)
Capital stock issued for acquisitions -- -- (6,309) -- (6,759) --
----- ------- ------- ------- ------- -------
Cash paid $ -- $15,400 $ 0 $15,400 $ 284 $15,400
Less cash acquired -- 434 26 434 159 434
----- ------- ------- ------- ------- -------
Net Cash Paid/(Received) for Acquisitions $ -- $14,966 $ (26) $14,966 $ 125 $14,966
===== ======= ======= ======= ======= =======
</TABLE>
Extraordinary Charge. During the second quarter of 1998, the Company
redeemed all of its outstanding 8 5/8% debentures due April 15, 2017 at a
redemption price of 104% of the principal amount of $23,548,000. The payment
of the call premium and the unamortized debt expense associated with the
non-regulated operations of the Company is reflected as an extraordinary
charge of $499,000 after taxes.
-7-
<PAGE>
Change in Method of Accounting for Property Taxes. During the first
quarter of 1998, the Company implemented a change in its method of accounting
for property taxes so that such taxes are expensed monthly during the fiscal
period of the taxing authority for which the taxes are levied. This change
provides a better matching of property tax expense with both the payment of
services and those services provided by the taxing authority. Prior to 1998,
the Company expensed property taxes monthly during the year following the
assessment date. The cumulative effect of this change in accounting for
property taxes increased earnings by $1,784,000. The pro forma effect on
prior years' consolidated net income of retroactively recording property
taxes as if the new method of accounting had been in effect for all periods
presented is not material.
Restatement of Financial Statements. The consolidated statements of
income and cash flows for the twelve months ended September 30, 1997 have
been restated as more fully described in the Company's 1997 Annual Report on
Form 10-K. The results contained herein reflect the restatement.
-8-
<PAGE>
(2) EARNINGS PER SHARE
<TABLE>
The computations of basic and diluted earnings (loss) per share for the
three, nine and twelve months ended September 30, 1998 and 1997 are as
follows (in thousands except per share amounts):
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share Computation
Income (loss) before cumulative effect of
accounting change and extraordinary charge $(2,762) $(3,148) $ 1,518 $ 6,563 $ 9,876 $(10,350)
Cumulative effect of change in accounting
for property taxes -- -- 1,784 -- 1,784 --
Extraordinary charge -- -- (499) -- (499) --
------- ------- ------- ------- ------- --------
Net Income (Loss) $(2,762) $(3,148) $ 2,803 $ 6,563 $11,161 $(10,350)
======= ======= ======= ======= ======= ========
Weighted average common shares outstanding 15,356 13,705 14,520 13,677 14,333 13,677
Earnings (Loss) Per Share - Basic
Income (loss) before cumulative effect of
accounting change and
extraordinary charge $ (.18) $ (.23) $ .10 $ .48 $ .69 $ (.76)
Cumulative effect of change in accounting
for property taxes -- -- .12 -- .12 --
Extraordinary charge -- -- (.03) -- (.03) --
------- ------- ------- ------- ------- --------
Net Income (Loss) $ (.18) $ (.23) $ .19 $ .48 $ .78 $ (.76)
======= ======= ======= ======= ======= ========
Diluted Earnings (Loss) Per Share Computation
Income (loss) before cumulative effect of
accounting change and extraordinary charge $(2,762) $(3,148) $ 1,518 $ 6,563 $ 9,876 $(10,350)
Adjustment for effect of assumed conversions:
Preferred convertible stock dividends -- -- 11 12 15 --
------- ------- ------- ------- ------- --------
Adjusted income (loss) before cumulative
effect of accounting change and
extraordinary charge $(2,762) $(3,148) $ 1,529 $ 6,575 $ 9,891 $(10,350)
Cumulative effect of change in accounting
for property taxes -- -- 1,784 -- 1,784 --
Extraordinary charge -- -- (499) -- (499) --
------- ------- ------- ------- ------- --------
Net Income (Loss) $(2,762) $(3,148) $ 2,814 $ 6,575 $11,176 $(10,350)
======= ======= ======= ======= ======= ========
Weighted average common shares outstanding 15,356 13,705 14,520 13,677 14,333 13,677
Incremental shares from assumed conversions:
Preferred convertible stock -- -- 26 28 26 --
Stock options converted -- -- 2 1 2 --
------- ------- ------- ------- ------- --------
Diluted weighted average common
shares outstanding 15,356 13,705 14,548 13,706 14,361 13,677
======= ======= ======= ======= ======= ========
Earnings (Loss) Per Share - Basic
Income (loss) before cumulative effect of
accounting change and
extraordinary charge $ (.18) $ (.23) $ .10 $ .48 $ .69 $ (.76)
Cumulative effect of change in accounting
for property taxes -- -- .12 -- .12 --
Extraordinary charge -- -- (.03) -- (.03) --
------- ------- ------- ------- ------- --------
Net Income (Loss) $ (.18) $ (.23) $ .19 $ .48 $ .78 $ (.76)
======= ======= ======= ======= ======= ========
</TABLE>
-9-
<PAGE>
As a result of the loss from continuing operations for the three months
ended September 30,1998 and 1997, and the twelve months ended September 30,
1997, basic loss per share was not adjusted because to do so would be
antidilutive.
(3) CAPITALIZATION
Common Stock Equity
- -------------------
On October 8, 1998 the Company's Board of Directors declared a regular
quarterly cash dividend on common stock of $.20 per share payable on November
15 to shareholders of record at the close of business on November 5.
In August 1998, the Company paid a quarterly cash dividend on common
stock of $.20 per share. Of the total cash dividend of $2,892,000, $817,000
was reinvested by shareholders into common stock through participation in the
Company's Direct Stock Purchase and Dividend Reinvestment Plan (DRIP). This
portion of the quarterly dividend and shareholders' optional cash payments of
$1,008,000, resulted in 113,715 new shares issued to existing shareholders
during the quarter pursuant to the DRIP.
On July 8, 1998, the Company and SEMCO Capital Trust filed a
registration statement on Form S-3 (Registration Statement) with the
Securities and Exchange Commission (Commission) for the registration of
debt securities and common stock of the Company and trust preferred
securities of SEMCO Capital Trust in any combination up to $200,000,000. A
guaranty of the Company in connection with the trust preferred securities was
also registered. The registration statement was declared effective by the
Commission on July 24, 1998.
During the third quarter, the Company issued and sold 1,820,000 shares
of its common stock registered pursuant to the Registration Statement in a
public offering. Proceeds of the offering were $26,153,400, after
underwriting discounts but before expenses. The proceeds from the common
stock issuance were used to repay short-term debt and for general corporate
purposes.
Earnings per common share, cash dividends per common share and weighted
average number of shares outstanding have been retroactively adjusted for all
periods presented to reflect the 5% stock dividends in May 1998 and 1997.
(4) COMMITMENTS AND CONTINGENCIES
On January 14, 1998, the Company sold its entire 32% partnership
interest in the NOARK Pipeline System to ENOGEX Arkansas Pipeline Corporation
(EAPC). NOARK is a 302-mile intrastate natural gas pipeline located in
Arkansas which operated at less than 65% capacity since its inception in 1992
as a result of significant cost overruns during construction and competition
from two other interstate pipelines.
-10-
<PAGE>
The sale of NOARK releases the Company from all its NOARK guarantees,
which related to 40% of NOARK's debt. Furthermore, the Company agreed to pay
approximately $9,200,000, $3,100,000 and $800,000 to EAPC in April 1998, 1999
and 2000, respectively. In return, the Company will receive annual payments
for seventeen years beginning July 1, 2004 in the amount of $842,000 from
EAPC. The $21,000,000 (after-tax) reserve for the NOARK investment provided
at year-end 1996 was adjusted by a $5,025,000 (after-tax) reduction at
year-end 1997 to record the terms of the sale.
The Company expects to incur costs to investigate and/or clean up
several properties, including former manufactured gas plant sites. The
Company has submitted a plan to the State of Michigan for clean up of one
site. The extent of the Company's liabilities and potential costs in
connection with these sites cannot be reasonably estimated at this time. Any
environmental costs incurred by the gas distribution company will be
amortized over ten years starting the year after incurred.
(5) ACQUISITIONS
On May 15, 1998, a subsidiary of the Company purchased the assets and
business of King Energy & Construction, Inc. (King Energy) for 18,062 shares
of common stock. King Energy which is located in Tennessee, is a
multi-utility service provider furnishing water, sewer and natural gas
construction services to customers.
On March 31, 1998, a subsidiary of the Company purchased the assets and
business of Hot Flame Gas, Inc. (Hot Flame) for 352,944 shares of common
stock. Hot Flame supplies propane gas to over 10,000 customers in northern
Michigan and northeast Wisconsin.
For financial statement purposes, the acquisition of both King Energy
and Hot Flame were accounted for as purchases and, accordingly, results of
operations are included in the consolidated financial statements since the
date of each acquisition.
(6) EARLY RETIREMENT PROGRAM
The Company offered an early retirement program to all eligible
employees during the first quarter of 1998. In addition, the Company also
offered all eligible employees the additional option of receiving a lump sum
pension benefit if they elected to retire during the period of January 14,
1998 through February 27, 1998. One hundred and one employees accepted the
early retirement offer. A pre-tax charge of $516,000 was recognized during
the first quarter of 1998 in the Company's results of operations based on the
then available information. The final actuarial analyses were performed
during the third quarter of 1998 and the Company's outside actuaries
determined that there was actually a one-time reduction in employee benefit
expenses of $344,000 as a result of the early retirement program. The
Company recorded a positive adjustment of $860,000 in the third quarter of
1998 to reflect the one-time $344,000 benefit expense reduction and the
reversal of the $516,000 pre-tax charge in the Company's results of
operations for the nine months ended September 30, 1998.
-11-
<PAGE>
(7) SUBSEQUENT EVENT
On November 3, 1998, a subsidiary of SEMCO Energy, Inc. exchanged
905,202 shares of SEMCO Energy, Inc. common stock for 100% of the outstanding
shares of Oilfield Materials Consultants, Inc. (OMC). OMC is an engineering
and consulting firm located in Texas that specializes in quality control and
quality assurance services for the natural gas, oil transmission, and
exploration/production industries. The acquisition of OMC will be accounted
for as a pooling of interests, and all consolidated financial data will be
restated in the 1998 Form 10-K and all subsequent filings with the Securities
and Exchange Commission to incl-ude the financial data of OMC.
-12-
<PAGE>
PART I - FINANCIAL INFORMATION - (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net loss for the quarter ended September 30, 1998 was $2,762,000 ($.18
per share) compared to a net loss of $3,148,000 ($.23 per share) for the
quarter ended September 30, 1997. On a weather-normalized basis, the net
loss would have been $2,112,000 ($.14 per share) for the quarter ended
September 30, 1998 compared to $2,848,000 ($.21 per share) for the same
period of the prior year.
Net Income for the nine months ended September 30, 1998, after a change
in accounting method and an extraordinary charge, was $2,803,000 ($.19 per
share) compared to $6,563,000 ($.48 per share) for the nine months ended
September 30, 1997. Net income for the nine months ended September 30, 1998,
before the change in accounting method and the extraordinary charge, was
$1,518,000 ($.10 per share). On a weather-normalized basis, including the
change in accounting method and extraordinary charge, the net income would
have been $7,303,000 ($.50 per share) for the nine months ended September 30,
1998 compared to $6,563,000 ($.48 per share) for the same period of the prior
year.
Net income for the twelve months ended September 30, 1998, after a
change in accounting method and an extraordinary charge, was $11,161,000
($.78 per share) compared to a net loss of $10,350,000 ($.76 per share) for
the twelve months ended September 30, 1997. Net income for the twelve months
ended September 30, 1998, before the change in accounting method and the
extraordinary charge, was $9,876,000 ($.69 per share). Net income for the
twelve months ended September 30, 1998 also includes $5,025,000 of after-tax
income related to the December 1997 adjustment to the NOARK reserve based on
the then pending sale. Net income for the twelve months ended September 30,
1997 includes a $21,000,000 after-tax write-down of the Company's NOARK
investment.
The Company's primary business of natural gas distribution is seasonal
in nature and depends on the winter months for the majority of its operating
revenue. Therefore, the Company's results of operations for the three month
and nine month periods ended September 30, 1998 and 1997 are not necessarily
indicative of results for a full year.
See Note 4 in the notes to the consolidated financial statements for a
discussion of commitments and contingencies.
The tables on the following page show a comparison of revenues, margins
and operating expenses for the quarter, nine months and twelve months ended
September 30, 1998 and 1997.
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
<TABLE>
<CAPTION>
GAS DISTRIBUTION OPERATION
- --------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ------------------- --------------------
1998 1997 1998 1997 1998 1997
------- ------- -------- -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Gas sales revenue $21,060 $24,053 $118,377 $150,237 $186,320 $219,365
Cost of gas sold 13,525 16,036 77,665 103,306 125,326 151,963
------- ------- -------- -------- -------- --------
Gas sales margin $ 7,535 $ 8,017 $ 40,712 $ 46,931 $ 60,994 $ 67,402
Transportation revenue $ 2,367 $ 2,654 $ 8,917 $ 9,643 $ 12,517 $ 13,190
Other operating revenue 932 279 2,924 1,012 3,001 1,405
------- ------- -------- -------- -------- --------
Gross margin $10,834 $10,950 $ 52,553 $ 57,586 $ 76,512 $ 81,997
Operations and maintenance $ 7,344 $ 7,886 $ 24,569 $ 25,808 $ 34,195 $ 34,266
Depreciation 3,001 2,782 9,002 8,499 11,615 11,105
Income taxes (1,510) (1,521) 1,659 3,248 3,990 6,347
Taxes other than income taxes 2,175 2,112 6,634 6,427 8,858 8,250
------- ------- -------- -------- -------- --------
Other operating expenses $11,010 $11,259 $ 41,864 $ 43,982 $ 58,658 $ 59,968
------- ------- -------- -------- -------- --------
Operating Income (Loss) $ (176) $ (309) $ 10,689 $ 13,604 $ 17,854 $ 22,029
======= ======= ======== ======== ======== ========
<CAPTION>
NON-REGULATED OPERATIONS
- ------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
------------------ ------------------- --------------------
1998 1997 1998 1997 1998 1997
------- ------- -------- -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Gas marketing revenue $74,879 $97,945 $291,482 $350,469 $496,380 $482,573
Cost of gas marketed 73,618 96,743 287,477 343,000 491,037 475,658
------- ------- -------- -------- -------- --------
Gas marketing margin $ 1,261 $ 1,202 $ 4,005 $ 7,469 $ 5,343 $ 6,915
Gas sales revenue (Propane) $ 460 $ -- $ 955 $ -- $ 955 $ --
Cost of gas sold 173 -- 420 -- 420 --
------- ------- -------- -------- -------- --------
Gas sales margin (Propane) $ 287 $ -- $ 535 $ -- $ 535 $ --
Other operating revenue $12,595 $ 5,605 $ 29,324 $ 7,465 $ 38,878 $ 8,229
Operations and maintenance $12,282 $ 5,737 $ 31,352 $ 10,871 $ 41,476 $ 12,640
Depreciation 887 563 2,421 1,069 3,103 1,287
Income taxes (10) (82) (757) 454 (1,025) (509)
Taxes other than income taxes 241 162 522 439 765 568
------- ------- -------- -------- -------- --------
Other operating expenses $13,400 $ 6,380 $ 33,538 $ 12,833 $ 44,319 $ 13,986
------- ------- -------- -------- -------- --------
Operating Income (Loss) $ 743 $ 427 $ 326 $ 2,101 $ 437 $ 1,158
======= ======= ======== ======== ======== ========
</TABLE>
The above information is on a segment basis only. Therefore, it does
not include intercompany eliminations that would be necessary if the
above information was reported on a consolidated basis. Refer to the
Supplemental Financial Information section later in Part I, Item 2 of
this Form 10-Q for an additional discussion regarding intercompany
eliminations.
-14-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
QUARTER RESULTS - GAS DISTRIBUTION OPERATION
The Company's gas sales margin during the third quarter of 1998
decreased by $482,000 compared to the third quarter of 1997. This was due
primarily to lower gas sales resulting from the unseasonably warm weather
during the third quarter of 1998 and the adoption of a new aggregation
tariff, offset partially by continued customer growth and the impact of an
October 1997 rate increase. The weather for the quarter ended September 30,
1998, was 58% warmer than the same period of the prior year and 64% warmer
than normal. The aggregation tariff, which was effective April 1, 1998,
provides all commercial and industrial customers the opportunity to purchase
their gas from a third party supplier, while allowing the Company to continue
charging the existing distribution fees and customer fees. Distribution and
customer fees associated with customers who have switched to third party gas
suppliers are recorded in other operating revenues (discussed below) rather
than gas sales revenue because the Company is now acting as a transporter for
those customers. In other words, the decrease in gas sales margin due to
customers switching to third party suppliers is offset by an increase in
other operating revenue. The October 1997 rate increase was granted to allow
for the recovery of costs related to a change in accounting for retiree
medical benefits. The rate increase is offset by a corresponding increase in
retiree medical expense. The rate increase and aggregation tariff referenced
above were approved in the October 1997 Order of the Michigan Public Service
Commission (1997 rate case) (see Note 3 in the Notes to the Consolidated
Financial Statements in the Company's 1997 Annual Report on Form 10-K).
Transportation revenue decreased by $287,000, due primarily to lower
off-peak transportation rates approved in the 1997 rate case. The new
off-peak transportation rates are in effect from April through October and
are $0.15 per Mcf lower than the Company's regular transportation rates.
Other operating revenue increased by $653,000 compared to the quarter ended
September 30, 1997. Approximately $460,000 of the increase is attributed to
the impact of the new aggregation tariff. As discussed above, under the new
aggregation tariff, certain revenues that were previously classified as gas
sales revenue are now classified as other operating revenue. The remainder
of the increase is due primarily to an increase in various miscellaneous fees
charged to customers as authorized in the 1997 rate case.
Operation and maintenance expense decreased by $542,000 during the three
months ended September 30, 1998 compared to the three months ended
September 30, 1997. The decrease is due in part to a one-time benefit
expense adjustment of $860,000 related to the early retirement program
reported in the results for the three months ended September 30, 1998. The
benefit expense adjustment was based on the final actuarial calculations
performed by the Company's outside actuaries to account for the impact of the
early retirement program under Financial Accounting Standards No. 87 and 88
(see Note 6 in the Notes to the Consolidated Financial Statements). The
Company had reported a one-time charge of $516,000 in the first quarter of
-15-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
1998 related to the early retirement program based on information available
at that time. The Company's outside actuaries have completed their final
actuarial analyses and have determined that there was actually a one-time
reduction in employee benefit expenses of $344,000 as a result of the early
retirement program, rather than the one-time charge recorded in the first
quarter of 1998. As a result, an adjustment of $860,000 was recorded in the
third quarter of 1998. Absent the one-time adjustment, operation and
maintenance expense would have increased by $318,000. This was due primarily
to increases in bad debt expense, outside services and retiree medical
expense offset partially by reductions in compensation and pension expenses
due primarily to the impact of the Company's early retirement program and
changes to the Company's employee pension plans.
Depreciation increased by $219,000 compared to the third quarter ended
September 30, 1997 due primarily to utility plant additions.
QUARTER RESULTS - NON-REGULATED OPERATIONS
Gas marketing margin during the quarter ended September 30, 1998,
increased slightly compared to the same period of the prior year despite a
decrease of approximately 25% in volumes marketed. The margin increase was
the result of the Company's efforts to eliminate lower margin transactions in
order to improve profitability.
Gas sales margin (propane), for the quarter ended September 30, 1998,
was $287,000. There were no propane operations during the same period of the
prior year because Hotflame Gas, Inc. (Hotflame), the Company's propane
business, was not acquired until March 31, 1998.
Other operating revenue during the quarter ended September 30, 1998
increased by $6,990,000 compared to the same period of the prior year.
Operating revenues recorded by Sub-Surface Construction Co. (Sub-Surface),
Maverick Pipeline Services, Inc. (Maverick), Utility Construction Services,
Inc. (UCS), and King Energy & Construction Co. (King) (new businesses
acquired or started since the prior year period) increased by approximately
$7,225,000. Sub-Surface (acquired on August 13, 1997) recorded $4,540,000 of
other operating revenue during the quarter ended September 30, 1997 (the one
and a half month period it was part of the Company's operation). There were
no revenues from Maverick, UCS and King recorded in the third quarter of 1997
because they were not part of the Company's operations during that period.
The offsetting decrease of $235,000 in other operating revenue is due
primarily to a reduction in gas transmission, gathering and production
revenues in 1998 and income recorded in 1997 related to the sale of property
by the Company's land development business.
-16-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Operation and maintenance expense increased by $6,545,000 during the
three months ended September 30, 1998 compared to the three months ended
September 30, 1997. The increase is attributable primarily to the Company's
new businesses.
Depreciation increased by $324,000 compared to the quarter ended
September 30, 1997 due primarily to depreciation of equipment acquired as
part of the Company's new businesses. The increase in income taxes compared
to the quarter ended September 30, 1997 is due to higher pre-tax earnings.
The increase in taxes other than income taxes is attributable primarily to
the Company's new businesses.
The Company's new businesses (Sub-Surface, Maverick, UCS, King, and
Hotflame) account for a significant portion of the increased revenues and
expenses of the Company's non-regulated operations. The seasonal cycle of
these new businesses (excluding Hotflame) is different than the seasonal
cycle of the regulated gas distribution business. Pipeline construction and
engineering businesses typically have losses in the first quarter (during
winter months), break-even in the second quarter and generate income in the
third and fourth quarters due to the seasonal nature of their business.
During the first quarter of 1998, the new businesses generated a loss from
operations of $838,000. The new businesses generated income from operations
of $145,000 during the second quarter and $239,000 during the third quarter.
The quarterly income from the new businesses is reflected in the results for
each quarter of 1998 but not in 1997 because the new businesses were not part
of the Company's operations during the first three quarters of 1997, except
for Sub-Surface, which was acquired on August 13, 1997. Sub-Surface reported
a loss from operations of $58,000 during the third quarter of 1997 (the one
and a half month period it was part of the Company's operations). Maverick
was acquired on December 31, 1997. UCS is a start-up company that began
operations in January of 1998. Hotflame was acquired on March 31, 1998 and
King was acquired on May 15, 1998. During the second quarter of 1998, the
operations at UCS were dis-continued in response to lower than expected
business levels and earnings. On November 3, 1998 (subsequent to the periods
reported in this Form 10-Q), the Company acquired Oilfield Materials
Consultants, Inc. (OMC). The acquisition of OMC will be accounted for as a
pooling of interests (see Note 7 in the Notes to the Consolidated Financial
Statements).
QUARTER RESULTS - NON-OPERATING INFORMATION
Other income (loss), net increased by $402,000 during the third quarter
of 1998 compared to the same period of the prior year due primarily to gains
on the sales of property and increased equity income from partnership
investments in gas pipeline and gas storage facilities.
-17-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Interest on long-term debt increased by $543,000 due to the increase in
long-term debt compared to the quarter ended September 30, 1997. During the
fourth quarter of 1997, the Company issued $60,000,000 of private placement
debt to reduce short-term notes payable to banks which had been incurred to
finance the Company's ongoing capital expenditure program and for general
corporate purposes. During the second quarter of 1998, the Company
refinanced $23,548,000 of long-term debt using short-term debt (see Note 1 in
the Notes to the Consolidated Financial Statements and the Future Financing
Sources section).
NINE-MONTH RESULTS - GAS DISTRIBUTION OPERATION
The Company's gas sales margin for the nine months ended September 30,
1998 decreased by $6,219,000 compared to the nine months ended September 30,
1997. The decrease was due primarily to lower gas sales resulting from the
unseasonably warm weather during the first nine months of 1998 and the
adoption of a new aggregation tariff, offset partially by continued customer
growth and the impact of the October 1997 rate increase. The weather for the
nine months ended September 30, 1998, was 20% warmer than the same period of
the prior year and 21% warmer than normal. Gas volumes sold were 22,414,000
Mcf compared to 28,745,000 Mcf for the first nine months of 1997. Under the
aggregation tariff, which was discussed in greater detail in the quarter
results, certain revenues associated with customers who have switched to
third party gas suppliers are now recorded in other operating revenue
(discussed below) rather than gas sales revenue. In other words, the
decrease in gas sales margin due to customers switching to third party
suppliers is offset by an increase in other operating revenue. The impact of
the rate increase, which was also discussed in the quarter results, is offset
by a corresponding increase in retiree medical expense.
Transportation revenue decreased by $726,000, due primarily to lower
off-peak transportation rates approved in the 1997 rate case. The new
off-peak transportation rates are in effect from April through October and
are $0.15 per Mcf lower than the Company's regular transportation rates.
Other operating revenue increased by $1,912,000 compared to the nine months
ended September 30, 1997. $1,060,000 of the increase is attributable to the
impact of the new aggregation tariff discussed above. The remainder of the
increase is due primarily to an increase in various miscellaneous fees
charged to customers as authorized in the 1997 rate case.
Operation and maintenance expense decreased by $1,239,000 during the
nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. The decrease is due in part to a one-time benefit
expense reduction of $344,000 related to the early retirement program
reported in the results for the nine months ended September 30, 1998 (see
Note 6 in the Notes to the Consolidated Financial Statements). There were
also reductions in compensation and pension expenses due primarily to the
impact of the Company's early retirement program and changes to the Company's
employee pension plans. The decreases were offset partially by increased
retiree medical expense and bad debt expense.
-18-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Depreciation increased by $503,000 compared to the nine months ended
September 30, 1997 due primarily to utility plant additions. Income taxes
decreased by $1,589,000 due to lower pre-tax earnings. The increase in taxes
other than income taxes is due primarily to property taxes on utility plant
additions.
NINE-MONTH RESULTS - NON-REGULATED OPERATIONS
Gas marketing margin for the nine months ended September 30, 1998
decreased by $3,464,000 compared to the same period last year due primarily
to the impact of warm weather on market conditions, increased competition and
restructuring activities in the Company's gas marketing operation. The warm
weather reduced price volatility which decreased gas marketing margins.
Increased competition continues to put downward pressure on gas marketing
margins. During the first half of 1998 the Company terminated agreements
with all but one of its independent gas marketing companies, retaining the
services of the largest such company, in an effort to reduce risks and
improve profitability. In addition, the Company continues to evaluate
whether, in the long term, to continue operating its gas marketing business
as it is presently operated, including strategic alternatives.
Gas marketing volumes and margins are subject to significant competitive
factors. In addition to fluctuations caused by seasonal patterns,
competition within the natural gas marketing industry continues to increase.
Gas sales margin (propane), for the nine months ended September 30,
1998, was $535,000. There were no propane operations during the same period
of the prior year because Hotflame, the Company's propane business, was not
acquired until March 31, 1998.
Other operating revenue during the nine months ended September 30, 1998
increased by $21,859,000 compared to the same period of the prior year.
Operating revenues recorded by Sub-Surface, Maverick, UCS and King (new
businesses) increased by approximately $22,250,000. There were no revenues
from Maverick, UCS and King recorded in the first nine months of 1997 because
they were not part of the Company's operations during that period.
Sub-Surface (acquired on August 13, 1997) recorded $4,540,000 of other
operating revenue during the nine months ended September 30, 1997 (the one
and a half month period it was part of the Company's operation). The
offsetting decrease of $391,000 in other operating revenue is due primarily
to a reduction in gas transmission, gathering and production revenues in 1998
and income recorded in 1997 related to the sale of property by the Company's
land development business.
Operation and maintenance expense increased by $20,481,000 during the
nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. Of this amount, operation and maintenance expenses
attributed to Sub-Surface, Maverick, Hotflame, UCS and King increased by
approximately $21,850,000. The Company also incurred increases in
professional fees for additional services associated with closing the
financial records at year-end. These increases were offset partially by
lower gas marketer incentive compensation.
-19-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Depreciation increased by $1,352,000 compared to the nine months ended
September 30, 1997 due primarily to depreciation of equipment acquired as
part of the Company's new businesses. Income taxes decreased by $1,211,000
compared to the nine months ended September 30, 1997 due to lower pre-tax
earnings. Approximately $200,000 of the decrease in income taxes is
attributed to the Company's new businesses. The increase in taxes other than
income taxes is due primarily to the Company's new businesses.
The Company's new businesses account for a significant portion of the
increased revenues and expenses of the Company's non-regulated operations.
There are additional details regarding these new businesses and their
seasonal cycles in the quarter results. The new businesses generated a loss
from operations of $454,000 during the nine months ended September 30, 1998.
The losses from the new businesses are reflected in the results for the first
nine months of 1998 but not in the first nine months of 1997 because the new
businesses were not part of the Company's operations during that period,
except for Sub-Surface which was acquired on August 13, 1997. Sub-Surface
reported a loss from operations of $58,000 during the first nine months of
1997 (the one and a half month period it was part of the Company's
operations). The $454,000 loss from operations for the first nine months of
1998 includes a $533,000 loss from UCS. UCS was a start-up company that
began operations in January of 1998. During the second quarter of 1998, the
operations at UCS were discontinued in response to lower than expected
business levels and earnings. Excluding UCS, the Company's new businesses
had income from operations of $79,000 for the first nine months of 1998.
NINE-MONTH RESULTS - NON-OPERATING INFORMATION
Other income (loss), net increased by $999,000 compared to the nine
months ended September 30, 1997 due primarily to a non-recurring income tax
benefit recognized during the first quarter of 1998 and the impact of
discontinuing the Company's unprofitable appliance merchandising programs in
1997. The income tax benefit relates to tax deductions available to the
Company due to the operating results of the NOARK Pipeline System
Partnership. The Company's interest in the NOARK Pipeline System Partnership
was sold on January 14, 1998 (see Note 4 in the Notes to the Consolidated
Financial Statements). The nine months ended September 30, 1997 includes
merchandising losses of approximately $225,000. During 1998, there were no
losses due to the discontinuance of the merchandising program.
Interest on long-term debt increased by $2,224,000 due to the increase
in long-term debt compared to the nine months ended September 30, 1997.
During the fourth quarter of 1997, the Company issued $60,000,000 of private
placement debt to reduce short-term notes payable to banks which had been
incurred to finance the Company's ongoing capital expenditure program and for
general corporate purposes. During the second quarter of 1998, the Company
refinanced $23,548,000 of long-term debt using short-term debt (see Note 1 in
the Notes to the Consolidated Financial Statements and the Future Financing
Sources section).
-20-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Other interest decreased by $482,000 due to the decrease in short-term
debt as a result of the above described refinancing during the fourth quarter
of 1997 and the repayment of short-term debt using the proceeds from the
issuance of common stock during the third quarter of 1998 (see Note 3 in the
Notes to the Consolidated Financial Statements). The decreases in notes
payable and corresponding interest are offset partially by the impact of the
additional short-term debt used in the refinancing during the second quarter
of 1998 (discussed above) and additional borrowings for utility plant
additions and other general corporate purposes.
The Consolidated Statement of Income for the nine months ended
September 30, 1998 includes after-tax income of $1,784,000 from a change in
the method of accounting for property taxes by the Company's gas distribution
business (see Note 1 in the Notes to the Consolidated Financial Statements).
The nine month results also include an extraordinary charge of $499,000
after-tax, related to the early redemption of a portion of the Company's
long-term debt (see Note 1 in the Notes to the Consolidated Financial
Statements).
TWELVE-MONTH RESULTS - GAS DISTRIBUTION OPERATION
The Company's gas sales margin for the twelve months ended September 30,
1998 decreased by $6,408,000 compared to the twelve months ended
September 30, 1997. The decrease was due primarily to lower gas sales
resulting from the warmer weather during the twelve months ended
September 30, 1998 and the adoption of a new aggregation tariff (discussed in
the quarter results) offset partially by continued customer growth and the
impact of the October 1997 rate increase (discussed in the quarter results).
The weather was 13% warmer during the twelve months ended September 30, 1998
compared to the same period of the prior year and 14% warmer than normal.
Gas volumes sold were 35,654,000 Mcf compared to 42,605,000 Mcf for the
twelve months ended September 30, 1997.
Transportation revenue decreased by $673,000 due primarily to lower
off-peak transportation rates approved in the 1997 rate case. The new
off-peak transportation rates are in effect from April through October and
are $0.15 per Mcf lower than the Company's regular transportation rates.
Other operating revenue increased by $1,596,000 compared to the twelve months
ended September 30, 1997. $1,060,000 of the increase is attributable to the
impact of the new aggregation tariff discussed above and in the quarter
results. The remainder of the increase is due primarily to an increase in
various miscellaneous fees charged to customers as authorized in the 1997
rate case.
-21-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Operation and maintenance expense decreased by $71,000 during the twelve
months ended September 30, 1998 compared to the twelve months ended
September 30, 1997. The decrease is due in part to the one-time benefit
expense reduction of $344,000 related to the early retirement program
reported in the results for the twelve months ended September 30, 1998 (see
Note 6 in the Notes to the Consolidated Financial Statements). The
offsetting $263,000 increase is attributable mainly to increased retiree
medical expenses partially offset by reduced compensation and pension
expenses.
Depreciation increased by $510,000 compared to the twelve months ended
September 30, 1997 due primarily to utility plant additions. Income taxes
decreased by $2,357,000 due to lower pre-tax earnings. Taxes other than
income taxes increased by $608,000 due primarily to property taxes on
additional utility plant in service.
TWELVE-MONTH RESULTS - NON-REGULATED OPERATIONS
During the twelve months ended September 30, 1998, gas volumes marketed
increased by approximately 3% compared to the twelve months ended
September 30,1997. Gas marketing margin during the same period decreased by
$1,572,000 due primarily to decreases in per unit margins, the effect of warm
weather on market conditions during 1998 and the restructuring activities
discussed in the nine month results, offset partially by the impact of the
increase in volumes. Gas marketing volumes and margins are subject to
significant competitive factors. In addition to fluctuations caused by
seasonal patterns, competition within the natural gas marketing industry
continues to increase.
Gas sales margin (propane), for the twelve months ended September 30,
1998, was $535,000. There were no propane operations during the same period
of the prior year because Hotflame, the Company's propane business, was not
acquired until March 31, 1998.
Other operating revenue during the twelve months ended September 30,
1998 increased by $30,649,000 compared to the same period of the prior year.
Operating revenues recorded by Sub-Surface, Maverick, UCS and King (new
businesses) increased by approximately $30,920,000. There were no revenues
from Maverick, UCS and King recorded in the twelve months ended September 30,
1997 because they were not part of the Company's operations during that
period. Sub-Surface (acquired on August 13, 1997) recorded $4,540,000 of
other operating revenue during the twelve months ended September 30, 1997
(the one and a half month period it was part of the Company's operation).
The offsetting decrease of $271,000 in other operating revenue is due
primarily to a reduction in gas transmission, gathering and production
revenues in 1998 and income recorded in 1997 related to the sale of property
by the Company's land development business.
-22-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Operation and maintenance expense increased by $28,836,000 during the
twelve months ended September 30, 1998 compared to the twelve months ended
September 30, 1997. Approximately $29,050,000 of the increase is
attributable to the new businesses. The Company also incurred increases in
professional fees for additional services associated with closing the
financial records at year-end. These increases were offset partially by
decreases in gas marketer incentive compensation.
Depreciation increased by $1,816,000 compared to the twelve months ended
September 30, 1997 due primarily to depreciation of equipment acquired as
part of the Company's new businesses. Income taxes decreased by $516,000
compared to the twelve months ended September 30, 1997 due to lower pre-tax
earnings. The increase in taxes other than income taxes is also attributed
primarily to the new businesses.
TWELVE-MONTH RESULTS - NON-OPERATING INFORMATION
Net loss for the twelve months ended September 30, 1997 includes a
$21,000,000 after-tax write-down of the Company's NOARK investment. Net
income for the twelve months ended September 30, 1998 includes $5,025,000 of
after-tax income related to the December 1997 adjustment to the NOARK reserve
based on the then pending sale. Other income (loss), net increased by
$1,448,000 during the twelve month period ended September 30, 1998. The
increase is due primarily to the non-recurring income tax benefit discussed
in the nine month results, the impact of discontinuing the merchandising
program (also discussed in the nine month results) and the impact of NOARK
losses. The twelve month period ended September 30, 1997 includes three
months of NOARK losses totaling approximately $450,000. As a result of the
December 1996 write-down of the NOARK investment, no losses were incurred
subsequent to that date.
The increase in interest on long-term debt is due to an increase in
long-term debt as a result of the issuance of the $60,000,000 private
placement debt in the fourth quarter of 1997 offset partially by the
refinancing in April of 1998 as discussed in the nine month results.
The decrease in other interest is due primarily to the same items
discussed in the nine month results.
The Consolidated Statement of Income for the twelve months ended
September 30, 1998 includes after-tax income of $1,784,000 from a change in
the method of accounting for property taxes by the Company's gas distribution
business (see Note 1 in the Notes to the Consolidated Financial Statements).
The twelve months ended September 30, 1998 also include an extraordinary
charge of $499,000 after-tax, related to the early redemption of a portion of
the Company's long-term debt (see Note 1 in the Notes to the Consolidated
Financial Statements).
-23-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
SUPPLEMENTAL FINANCIAL INFORMATION
The following table includes supplemental information on the Company's
operating lines of business. The financial information included in the table
is on a segment basis and therefore does not include intercompany
eliminations that would be necessary if the financial information was
reported on a consolidated basis. The intercompany eliminations referred to
above reduce operating revenues and operating expenses by equal amounts and
therefore do not change the operating income amounts reported in the table.
<TABLE>
Supplemental Information on The Company's Operating Lines of Business
(Unaudited).
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Construction Services <F1><F2>:
Operating Revenues $ 7,635 $ 4,540 $ 16,862 $ 4,540
Operating Income (Loss) <F3> 189 (58) (689) (58)
Total Assets 18,202 21,890 18,202 21,890
Engineering Services <F2>:
Operating Revenues $ 4,114 $ -- $ 9,899 $ --
Operating Income (Loss) <F3> 142 -- 387 --
Total Assets 3,681 -- 3,681 --
Propane Distribution <F2>:
Operating Revenues $ 475 $ -- $ 985 $ --
Operating Income (Loss) <F3> (92) -- (152) --
Total Assets 9,148 -- 9,148 --
Other Non-regulated Businesses <F4>:
Operating Revenues $ 75,710 $ 99,010 $294,015 $353,394
Operating Income (Loss) <F3> 504 485 780 2,159
Total Assets 75,221 95,016 75,221 95,016
Regulated Gas Distribution Business:
Operating Revenues $ 24,359 $ 26,986 $130,218 $160,892
Operating Income (Loss) <F3> (176) (309) 10,689 13,604
Total Assets 336,369 337,833 336,369 337,833
<FN>
<F1>
Operating income of the Construction Services Business for the nine months ended September 30, 1998 include
a $533,000 loss from UCS. The operations of UCS were discontinued during the second quarter of 1998.
<F2>
There has been no allocation of Parent Company (SEMCO Energy, Inc.) overhead to these lines of business.
Management believes any allocation would have an immaterial impact on the operating income (loss) for these
lines of business.
<F3>
Operating income (loss) includes income taxes.
<F4>
A significant portion of the operating revenues and assets of the Other Non-regulated Businesses relate to
the Company's gas marketing operations.
</FN>
</TABLE>
The above information is on a segment basis only. Therefore, it does
not include intercompany eliminations that would be necessary if the
above information were reported on a consolidated basis. Please refer to
the expanded discussion above.
-24-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the three, six and twelve month
periods ended September 30, 1998, as compared to the same periods last year,
increased (decreased) by $1,117,000, ($1,909,000) and ($12,880,000),
respectively. The changes in operating cash flows between periods is due
primarily to changes in net income and the timing of cash receipts and cash
payments and its effect on working capital.
The Company anticipates spending approximately $5,500,000 for capital
items during the remainder of 1998. These estimated amounts will primarily
relate to customer additions and system replacement in the gas distribution
operation. This amount does not include any sum for business acquisitions,
if any, the Company may make during the remainder of 1998.
See Note 4 in the Notes to the Consolidated Financial Statements for a
discussion of the amounts to be paid in conjunction with the sale of the
Company's partnership interest in the NOARK Pipeline System.
Financing activities contributed $24,437,000 in funds during the third
quarter of 1998, primarily from the issuance of 1,820,000 shares of common
stock. Notes payable to banks were used during the quarter to fund gas
purchases and normal gas distribution construction. However, the funds
borrowed during the quarter were repaid using the funds from the issuance of
common stock.
FUTURE FINANCING SOURCES
The Company's operating cash flow needs, as well as dividend payments
and capital expenditures for the balance of 1998, are expected to be met
primarily through operating activities and short-term borrowings. In
November of 1998, the Company financed the acquisition of OMC by issuing
unregistered stock (see Note 7 of the Notes to the Consolidated Financial
Statements). If the Company makes any additional business acquisitions
during the year, they may be financed with stock or long-term debt. At
Septem-ber 30, 1998, the Company had $42,900,000 in unused lines of credit.
On April 15, 1998, the Company redeemed all of its outstanding 8 5/8%
debentures due April 15, 2017 (see Note 1 in the Notes to the Consolidated
Financial Statements). The redemption was accomplished using short-term
debt. At September 30, 1998, the Company had $71,140,000 of short-term debt
outstanding.
On July 24, 1998, a Registration Statement filed by the Company and
SEMCO Capital Trust with the Securities and Exchange Commission under the
Securities Act of 1933 became effective. Debt securities and common stock of
the Company and trust preferred securities of SEMCO Capital Trust in any
combination up to $200,000,000 were registered for sale (see Note 3 in the
Notes to the Consolidated Financial Statements).
-25-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
During the third quarter of 1998 the Company issued and sold 1,820,000
shares of its common stock registered pursuant to the Registration Statement
in a public offering (see Note 3 of the Notes to the Consolidated Financial
Statements). The proceeds of the offering were $26,153,400, after
underwriting discounts but before expenses. The Company used the net
proceeds from the stock issuance to repay short-term debt and for general
corporate purposes.
On October 23, 1998, the Company entered into a Distribution Agreement
with Merrill Lynch & Co., Morgan Stanley Dean Witter, A.G. Edwards & Sons,
Inc. and Edward D. Jones & Co., L.P. pursuant to which it may issue, from
time to time, an aggregate of $150,000,000 of medium-term notes, which were
included in the securities registered.
The Company's consolidated ratio of earnings to fixed charges for the
twelve months ending September 30, 1998 was 2.06. See Exhibit 12 in Part II
of this Form 10-Q for further details.
RECENT DEVELOPMENTS
Pursuant to an order dated September 11, 1998, the Company's gas utility
subsidiary, SEMCO Energy Gas Company (Gas Company), received authority from
the Michigan Public Service Commission (MPSC) to: (1) implement an
experimental residential gas customer choice program; (2) suspend its gas
cost recovery (GCR) clause; (3) roll into its base rates and freeze for three
years a gas charge of $3.24 per thousand cubic feet (Mcf); (4) freeze
distribution rate adjustments for the same three year period, with
exceptions; and (5) suspend its current income sharing mechanism and adopt a
new income sharing mechanism for use during the 1999, 2000 and 2001 calendar
years; (6) establish gas service performance criteria. The new rates take
effect in April 1999 and generally extend through March 2002.
Under the experimental residential gas customer-choice program up to
21,000 residential customers, 11% of the Gas Company's residential customer
base, will be allowed to choose their own gas supplier by the third year of
the program. The Gas Company will deliver the customer-choice gas under a
tariff similar to its existing tariff used to provide such service to its
commercial and industrial customers. The Company anticipates that this
program will not significantly affect the Gas Company's income because the
Gas Company's approved rates for transportation service are designed to
recover all costs other than the cost of gas and provide a return in
approximately the same amounts as such costs are recovered from residential
customers for whom the Gas Company is the supplier.
-26-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
Several of the changes in the MPSC order are interrelated. The $3.24 GCR
rate represents a reduction of approximately $.33 per Mcf from the Gas
Company's present rates. The suspension of the GCR clause means that the Gas
Company will not be able to recover any amounts by which its gas costs exceed
a weighted average cost of gas in excess of the $3.24 GCR for the three year
period. The Gas Company was able to offer this GCR suspension partly as a
result of agreements reached with TransCanada Gas Services Inc., under which
the latter will provide the Gas Company's natural gas requirements and manage
the Gas Company's natural gas supply, and the supply aspects of
transportation and storage operations for the three year period.
There are two exceptions to the three year distribution rate freeze:
first, the incentive sharing mechanism described in the following paragraph,
and second, rate revisions arising in response to unanticipated legislative
or accounting actions. The MPSC order is applicable only in the geographic
areas subject to the regulatory jurisdiction of the MPSC, and, therefore,
does not govern rates regulated by the City of Battle Creek, Michigan.
However, the Gas Company is voluntarily reducing its Battle Creek GCR rate to
the $3.24 level to correspond with its GCR under the MPSC order.
The new income sharing mechanism substantially matches mechanisms
approved by the MPSC for the two other major utilities in Michigan. Under
the mechanism, if the Gas Company's return on equity for its natural gas
utility business exceeds 12.75%, amounts equal to 50% of the excess return
between 12.76% and 16.75%, plus amounts equal to 75% of the excess over
16.75% would be credited to customers, i.e., would be reflected prospectively
in reduced rates. Four safety and reliability performance measures were-
approved to be used to reduce the return on equity threshold used in the
income sharing mechanism.
Management believes that the overall impact of the MPSC order and the
Gas Company's agreements with TransCanada will be lower rates for its
customers and an opportunity for the Company to improve service to its
customers as well as improve profitability of the Gas Company.
The Gas Company serves a number of industrial plants on various parts of
its system, which plants are located in the vicinity of interstate natural
gas pipelines. As is the case with many local gas distribution utilities,
the Gas Company is subject to being "bypassed" by these pipelines. Several
of these plants are located in the Battle Creek, Michigan area. At the
request of the companies which own two of these plants, the Gas Company is in
the process of entering into agreements with these companies under which the
Gas Company will reduce the rates it charges for transportation of natural
gas to these plants, in return for which the plants will continue to use the
Gas Company system for all of their requirements for natural gas distribution
and transportation service, and not connect directly to the pipeline which
serves the Gas Company. The Gas Company has estimated that the effect of
reducing the Gas Company's transportation rates to these customers at the
levels expected to be included in the agreements will be to reduce the
Company's after tax income by approximately $400,000 to $500,000 annually.
The Gas Company reduced its rates to another plant in 1993, the effect of
which has been reflected in the Company's results. There can be no assurance
that other industrial plants located on the Gas Company's system and
accessible to interstate pipelines will not also seek to take advantage of
by-pass opportunities.
-27-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
YEAR 2000
The Company has initiated an enterprise-wide program to prepare its
computer systems and applications for the year 2000. The Company expects to
incur internal staff costs as well as consulting and other expenses related
to infrastructure and facilities enhancements necessary to prepare the
systems for the year 2000. Testing and conversion of system applications is
expected to cost approximately $1,500,000 to $2,000,000 spread over the next
year. A significant portion of these costs is not likely to be incremental,
but rather will represent the redeployment of existing information technology
resources. The Company has developed, and already is implementing a detailed
"Year-2000" strategy which identifies each software application utilized by
the Company and the steps necessary to ensure its continued viability in the
coming years. The Company believes it has identified all significant
internal systems and applications that require attention of some form in
order to be year-2000 ready. The Company has begun taking steps to correct
the systems identified. The Company currently plans to have all year-2000
issues addressed by the first quarter of 1999.
The Company has inquired of third parties, i.e. vendors, suppliers and
customers, which have a material relationship with the Company, as to the
status of their year-2000 readiness. To date, the Company has not received
sufficient responses from these third parties that would enable it to state
with reasonable assurance the status of their readiness for the year-2000.
The Company expects that its program will be adequate to address its
computer system related year-2000 issues and it is developing contingency
plans to improve assurance that vital functions of the Company dependent on
third parties will continue uninterrupted. Contingency plans include
existence of short-term in-house capabilities (i.e. back up electric
generation) and diversification of goods and services among multiple
suppliers (i.e. pipeline companies). However, there are functions, which
cannot be duplicated, such as the local telephone network, which remain a
vulnerability to the Company. Of course, there can be no assurance as to
whether the contingency plans will successfully address all contingencies
that may arise. In the event that the Company is unsuccessful in addressing
its year-2000 issues, there could be a material adverse effect on the
Company's liquidity, financial condition and operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
-28-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
fair value. The Statement requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
Statement 133 is effective for fiscal years beginning after June 15,
1999. The Company has not yet quantified the impacts of adopting Statement
133 on its financial statements and has not determined the timing of or
method of our adoption of Statement 133.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10Q contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
that are based on current expectations, estimates and projections.
Statements that are not historical facts, including statements about the
Company's belief and expectations are forward-looking statements. These
statements are subject to potential risks and uncertainties and, therefore,
actual results may differ materially. The Company undertakes no obligation
to update publicly any forward-looking statements whether as a result of new
information, future events or otherwise. Factors that may impact
forward-looking statements include, but are not limited to, the following:
(i) the effects of weather and other natural phenomena; (ii) the economic
climate and growth in the geographical areas where the Company does business;
(iii) the capital intensive nature of the Company's business; (iv) increased
competition within the energy marketing industry as well as from alternative
forms of energy; (v) the timing and extent of changes in commodity prices for
natural gas; (vi) the effects of changes in governmental and regulatory
policies, including income taxes, environmental compliance and authorized
rates; (vii) the Company's ability to bid on and win business contracts;
(viii) the nature, availability and projected profitability of potential
investments available to the Company and (ix) the conditions of capital
markets and equity markets.
-29-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Recent Developments in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion regarding a
rate order dated September 11, 1998 received by the Company's gas utility
subsidiary, incorporated herein by reference.
Item 2. Changes in Securities.
None.
Item 3. Not applicable.
Item 4. Not applicable.
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits - (See page 33 for the Exhibit Index.)
--Articles of Incorporation of SEMCO Energy, Inc., as restated
July 11, 1989.
--Certificate of Amendment to Article III of the Articles of
Incorporation dated May 16, 1990.
--Certificate of Amendment to Articles I, III and VI of the
Articles of Incorporation dated April 16, 1997.
--Bylaws--last revised August 15, 1997.
--Trust Indenture dated April 1, 1992, with NBD Bank, N.A. as
Trustee.
--Note Agreement dated as of June 1, 1994, relating to issuance of
$80,000,000 of long-term debt.
--Rights Agreement dated as of April 15, 1997 with Continental
Stock Transfer & Trust Company, as Rights Agent.
--Note Agreement dated as of October 1, 1997, relating to issuance
of $60,000,000 of long-term debt.
--Short-Term Incentive Plan.
--Deferred Compensation and Phantom Stock Purchase Agreement (for
outside directors only).
--Supplemental Retirement Plan for Certain Officers.
--1997 Long-Term Incentive Plan.
--Stock Option Certificate and Agreement dated October 10, 1996
with William L. Johnson.
-30-
<PAGE>
PART II - OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K. (Continued)
(a) List of Exhibits - (See page 34 for the Exhibit Index.) (Continued)
--Stock Option Certificate and Agreement dated February 26, 1997
with William L. Johnson.
--Employment Agreement dated October 10, 1996, with William L.
Johnson.
--Change of Control Employment Agreement dated October 10, 1996,
with William L. Johnson.
--Form of Change in Control Agreement for all other officers.
--Asset Purchase Agreement dated August 9, 1997 between Sub-Surface
Construction Co., Stewart Kniff and SEMCO Energy Construction
Co., First Amendment to Asset Purchase Agreement, Amendment to
Leased Equipment Purchase Agreements and Asset Purchase
Agreement, List of Schedules and Exhibits and Agreement to
Furnish Schedules and Exhibits.
--Purchase Agreement between the Company and Merrill Lynch & Co.,
etc., pertaining to an offering of 1,600,000 Shares of Common
Stock.
--Distribution Agreement between the Company and Merrill Lynch &
Co., etc., pertaining to an offering of $150,000,000
Medium-Term Notes and Form of Medium Term Note.
--Agreement and Plan of Merger dated as of October 30, 1998,
between the Company, SEMCO Consultants, Inc. and Jimmy C.
Foster and the Press Release announcing the merger.
--Ratio of Earnings to Fixed Charges.
--Letter from Arthur Andersen dated May 5, 1998 re: change in
accounting principle.
--Financial data schedule.
(b) Reports on Form 8-K.
On August 13, 1998, the Company filed Form 8-K to file the Purchase
Agreement between the Company and the underwriters for 1,600,000 shares of
common stock.
On October 23, 1998, the Company filed Form 8-K to file the
Distribution Agreement between the Company and the underwriters pertaining to
an offering of $150,000,000 Medium-Term Notes.
The Company filed Form 8-K on November 5, 1998, to file the
Agreement and Plan of Merger dated as of October 30, 1998, between the
Company, SEMCO Consultants, Inc. and Jimmy C. Foster.
-31-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEMCO ENERGY, INC.
(Registrant)
Dated: November 13, 1998
By: /s/Paul F. Naughton
------------------------------------
Paul F. Naughton
Vice President of Corporate
Development and Principal
Accounting and Financial Officer
-32-
<PAGE>
EXHIBIT INDEX
Form 10-Q
Third Quarter 1998
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- -------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3.(i).1 Articles of Incorporation of SEMCO Energy,
Inc., as restated July 11, 1989.(a) x
3.(i).2 Certificate of Amendment to Article III
of the Articles of Incorporation dated
May 16, 1990.(b) x
3.(i).3 Certificate of Amendment to Articles I,
III and VI of the Articles of Incorporation
dated April 16, 1997.(j) x
3.(ii) Bylaws--last revised August 15, 1997.(l) x
4.1 Trust Indenture dated April 1, 1992, with
NBD Bank, N.A. as Trustee.(c) x
4.2 Note Agreement dated as of June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(e) x
4.3 Rights Agreement dated as of April 15, 1997
with Continental Stock Transfer & Trust Company,
as Rights Agent.(h) x
4.4 Note Agreement dated as of October 1, 1997,
relating to issuance of $60,000,000 of
long-term debt.(l) x
10 Material Contracts.
10.1 Short-Term Incentive Plan.(d) x
10.2 Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only).(f) x
10.3 Supplemental Retirement Plan for Certain
Officers.(g) x
10.4 1997 Long-Term Incentive Plan.(h) x
10.5 Stock Option Certificate and Agreement
dated October 10, 1996 with
William L. Johnson.(i) x
10.6 Stock Option Certificate and Agreement
dated February 26, 1997 with
William L. Johnson.(i) x
10.7 Employment Agreement dated October 10, 1996,
with William L. Johnson.(j) x
10.8 Change of Control Employment Agreement dated
October 10, 1996, with William L. Johnson.(j) x
10.9 Form of Change in Control Agreement
effective March 20, 1998, for all
officers except Mr. Johnson.(n) x
-33-
<PAGE>
EXHIBIT INDEX
(Continued)
Form 10-Q
Third Quarter 1998
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- -------- ----------- -------- ---------
10.10 Asset Purchase Agreement dated August 9, 1997
between Sub-Surface Construction Co., Stewart
Kniff and SEMCO Energy Construction Co.,
First Amendment to Asset Purchase Agreement,
Amendment to Leased Equipment Purchase
Agreements and Asset Purchase Agreement,
List of Schedules and Exhibits and Agreement
to Furnish Schedules and Exhibits.(k) x
10.11 Purchase Agreement between the Company and
Merrill Lynch & Co., etc., pertaining to an
offering of 1,600,000 Shares of Common Stock.(o) x
10.12 Distribution Agreement between the Company
and Merrill Lynch & Co., etc., pertaining to
an offering of $150,000,000 Medium-Term
Notes and Form of Medium Term Note.(p) x
10.13 Agreement and Plan of Merger dated as of
October 30, 1998, between the Company,
SEMCO Consultants, Inc. and Jimmy C. Foster
and the Press Release announcing the merger.(q) x
11 Statement re computation of per share earnings. NA NA
12 Ratio of Earnings to Fixed Charges. x
15 Letter re unaudited interim financial
information. NA NA
18 Letter re change in accounting principle.(m) x
19 Report furnished to security holders. NA NA
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. NA NA
24 Power of Attorney. NA NA
27 Financial Data Schedule. x
Key to Exhibits Incorporated by Reference
(a) Filed with SEMCO Energy, Inc.'s Form 10-K for 1989, dated March 29,
1990, File No. 0-8503.
(b) Filed with SEMCO Energy, Inc.'s Form 10-K for 1990, dated March 28,
1991, File No. 0-8503.
(c) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
March 31, 1992, File No. 0-8503.
-34-
<PAGE>
Key to Exhibits Incorporated by Reference (Continued).
(d) Filed with SEMCO Energy, Inc.'s Form 10-K for 1992, dated March 30,
1993, File No. 0-8503.
(e) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
June 30, 1994, File No. 0-8503.
(f) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
September 30, 1994, File No. 0-8503.
(g) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
March 31, 1996, File No. 0-8503.
(h) Filed March 6, 1997 as part of SEMCO Energy, Inc.'s 1997 Proxy
Statement, dated March 7, 1997, File No. 0-8503.
(i) Filed with SEMCO Energy, Inc.'s Form 10-K for 1996, dated March 27,
1997, File No. 0-8503.
(j) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
March 31, 1997, File No. 0-8503.
(k) Filed with SEMCO Energy, Inc.'s Form 8-K dated August 13, 1997,
File No. 0-8503.
(l) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
September 30, 1997, File No. 0-8503.
(m) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
March 31, 1998, File No. 0-8503.
(n) Filed with SEMCO Energy, Inc.'s Form 10-Q/A for the quarter ended
March 31, 1998, File No. 0-8503.
(o) Filed with SEMCO Energy, Inc.'s Form 8-K dated August 13, 1998,
File No. 0-8503.
(p) Filed with SEMCO Energy, Inc.'s Form 8-K dated October 21, 1998,
File No. 0-8503.
(q) Filed with SEMCO Energy, Inc.'s Form 8-K dated November 5, 1998,
File No. 0-8503.
-35-
Exhibit 12
<TABLE>
SEMCO ENERGY, INC.
Ratio of Earnings to Fixed Charges
(Thousands of Dollars)
<CAPTION>
- --------------------------------- ------------------- --------------------------------------------------
Twelve Months Ended Year Ended
Description September 30, 1998 1997 1996 1995 1994 1993
- --------------------------------- ------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings as Defined <F1>
Net Income (Loss) $11,161 $14,921 $(12,803) $11,331 $ 9,992 $ 9,563
Income taxes 5,022 8,228 (7,308) 6,151 4,560 5,809
Other items 673 (96) (96) (96) 1,882 176
Fixed charges as defined 15,951 16,690 14,588 14,402 14,092 14,592
------- ------- -------- ------- ------- -------
Earnings as defined $32,807 $39,743 $ (5,619) $31,788 $30,526 $30,140
======= ======= ======== ======= ======= =======
Fixed charges as defined <F1>
Interest on long-term debt $11,614 $ 9,389 $ 8,514 $ 8,546 $ 8,605 $ 9,426
Amortization of debt expense 439 449 431 520 454 409
Other interest charges 3,626 6,578 5,369 5,062 4,759 4,483
Preferred securities dividends
and distributions 272 274 274 274 274 274
------- ------- -------- ------- ------- -------
Fixed charges as defined $15,951 $16,690 $ 14,588 $14,402 $14,092 $14,592
======= ======= ======== ======= ======= =======
Ratio of earnings to fixed charges 2.06 2.38 <F2> 2.21 2.17 2.07
======= ======= ======== ======= ======= =======
- ------------------
Notes:
<FN>
<F1>
Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K.
<F2>
For the year ended December 31, 1996, fixed charges exceeded earnings by $20.2 million. Earnings as
defined include a $32.3 million non-cash pretax write-down of the NOARK investment. Excluding the NOARK
write-down, the ratio of earnings to fixed charges would have been 1.83.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statements of income, the consolidated balance sheets and the
consolidated statement of cash flows and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 262,285
<OTHER-PROPERTY-AND-INVEST> 24,089
<TOTAL-CURRENT-ASSETS> 125,198
<TOTAL-DEFERRED-CHARGES> 36,292
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 447,864
<COMMON> 16,385
<CAPITAL-SURPLUS-PAID-IN> 116,478
<RETAINED-EARNINGS> (6,104)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 126,759
0
3,255
<LONG-TERM-DEBT-NET> 140,009
<SHORT-TERM-NOTES> 71,140
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 106,701
<TOT-CAPITALIZATION-AND-LIAB> 447,864
<GROSS-OPERATING-REVENUE> 438,379
<INCOME-TAX-EXPENSE> 165
<OTHER-OPERATING-EXPENSES> 426,649
<TOTAL-OPERATING-EXPENSES> 426,814
<OPERATING-INCOME-LOSS> 11,565
<OTHER-INCOME-NET> 1,014
<INCOME-BEFORE-INTEREST-EXPEN> 12,579
<TOTAL-INTEREST-EXPENSE> 10,916
<NET-INCOME> 1,663
145
<EARNINGS-AVAILABLE-FOR-COMM> 2,803<F1>
<COMMON-STOCK-DIVIDENDS> 8,266
<TOTAL-INTEREST-ON-BONDS> 8,609
<CASH-FLOW-OPERATIONS> 34,265
<EPS-PRIMARY> .19<F2>
<EPS-DILUTED> .19<F2>
<FN>
<F1>Includes the cumulative effect of a change in accounting for property
taxes of $1,784 and extraordinary charge due to early retirement of debt of
$499.
<F2>Adjusted to give retroactive effect to a 5% stock dividend payable in
May 1998. Prior Financial Data Schedules have not been restated for this
dividend.
</FN>
</TABLE>
