UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 July 31, 1999, is
17,755,854.
<PAGE>
INDEX TO FORM 10-Q
------------------
For Quarter Ended June 30, 1999
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 . . . . . . . . . . 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 33
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 33
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 34
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
FORWARD LOOKING STATEMENTS
This document 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 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 construction, engineering and quality assurance
contracts; (viii) the impact of energy prices on the amount of projects and
business available to the engineering business; (ix) the nature, availability
and projected profitability of potential investments available to the
Company; (x) the Company's ability to operate acquired businesses in
accordance with its plans and (xi) the conditions of capital markets and
equity markets.
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------- -------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Gas sales $ 32,325 $ 26,480 $101,303 $ 97,317 $170,686 $189,313
Gas transportation 3,632 3,126 10,261 7,155 17,938 13,409
Engineering services 3,435 9,151 7,981 12,299 36,619 14,951
Construction services 9,812 4,547 13,370 5,726 24,265 13,210
Gas marketing -- 66,228 96,855 211,902 275,770 500,166
Other operations 2,025 1,748 5,339 3,351 9,566 5,409
-------- -------- -------- -------- -------- --------
$ 51,229 $111,280 $235,109 $337,750 $534,844 $736,458
-------- -------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of gas sold $ 19,411 $ 15,626 $ 65,410 $ 64,140 $110,658 $127,837
Cost of gas marketed -- 66,481 95,632 211,712 270,613 497,435
Operations and maintenance 22,744 22,760 41,053 38,285 95,459 68,263
Depreciation and amortization 4,461 3,801 8,697 7,543 16,503 14,191
Property and other taxes 1,145 2,504 3,502 5,021 7,648 9,856
-------- -------- -------- -------- -------- --------
$ 47,761 $111,172 $214,294 $326,701 $500,881 $717,582
-------- -------- -------- -------- -------- --------
OPERATING INCOME $ 3,468 $ 108 $ 20,815 $ 11,049 $ 33,963 $ 18,876
OTHER INCOME (DEDUCTIONS)
Divestiture of NOARK investment $ -- $ -- $ -- $ 1,480 $ 3,568 $ 9,210
Divestiture of energy marketing business -- -- 1,122 -- 1,122 --
Interest expense (3,775) (3,541) (7,670) (7,229) (15,252) (14,291)
Dividends on preferred stock (48) (48) (96) (96) (192) (193)
Other 622 528 649 903 581 992
-------- -------- -------- -------- -------- --------
$ (3,201) $ (3,061) $ (5,995) $ (4,942) $(10,173) $ (4,282)
-------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES $ 267 $ (2,953) $ 14,820 $ 6,107 $ 23,790 $ 14,594
INCOME TAXES $ 146 $ (812) $ 4,295 $ 1,460 $ 9,157 $ 4,562
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING METHOD CHANGE AND EXTRAORDINARY CHARGE $ 121 $ (2,141) $ 10,525 $ 4,647 $ 14,633 $ 10,032
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) -- (499)
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) $ 121 $ (2,640) $ 10,525 $ 5,932 $ 14,633 $ 11,317
======== ======== ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ 0.01 $ (0.17) $ 0.60 $ 0.40 $ 0.85 $ 0.76
======== ======== ======== ======== ======== ========
CASH DIVIDENDS PER SHARE $ 0.255 $ 0.185 $ 0.454 $ 0.364 $ 0.836 $ 0.722
======== ======== ======== ======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 17,703 15,185 17,571 15,000 17,183 14,822
======== ======== ======== ======== ======== ========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
A S S E T S
(in thousands)
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and temporary cash investments, at cost $ 3,372 $ 4,953
Receivables, less allowances of $784 at
June 30, 1999 and $632 at December 31, 1998 28,954 31,003
Accrued revenue 4,587 60,915
Materials and supplies, at average cost 1,965 2,191
Gas in underground storage 19,603 38,526
Gas charges, recoverable from customers 2,508 11,556
Other 14,434 13,906
-------- --------
$ 75,423 $163,050
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Gas distribution $372,633 $364,513
Diversified businesses 51,217 43,857
-------- --------
$423,850 $408,370
Less - Accumulated depreciation 124,476 118,132
-------- --------
$299,374 $290,238
-------- --------
DEFERRED CHARGES AND OTHER
Unamortized debt expense $ 5,536 $ 5,619
Deferred retiree medical benefits 12,138 12,588
Other 22,872 18,167
-------- --------
$ 40,546 $ 36,374
-------- --------
TOTAL ASSETS $415,343 $489,662
======== ========
<FN>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND CAPITALIZATION
(in thousands)
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 34,664 $ 63,576
Accounts payable 11,338 57,498
Customer advance payments 5,214 10,417
Accumulated deferred income taxes 1,523 2,344
Accrued interest 2,263 1,935
Amounts payable to customers 2,877 --
Other 2,927 7,270
-------- --------
$ 60,806 $143,040
-------- --------
DEFERRED CREDITS AND OTHER
Accumulated deferred income taxes $ 19,454 $ 17,985
Unamortized investment tax credit 2,113 2,247
Customer advances for construction 2,697 3,147
Other 16,620 17,760
-------- --------
$ 40,884 $ 41,139
-------- --------
LONG-TERM DEBT INCLUDING CAPITAL LEASES $170,000 $170,000
-------- --------
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY
$100 par value (redemption price of $105 per
share); authorized 50,000 shares issuable
in series; 31,000 shares outstanding $ 3,100 $ 3,100
-------- --------
CUMULATIVE CONVERTIBLE PREFERRED STOCK
Convertible preferred stock - $1 par value;
authorized 500,000 shares issuable in series;
each convertible to 4.11 common shares;
6,218 shares outstanding $ 6 $ 6
Capital surplus 149 149
-------- --------
$ 155 $ 155
-------- --------
COMMON SHAREHOLDERS' EQUITY
Common stock - $1 par value; 40,000,000 shares
authorized; 17,750,429 and 17,382,229
shares outstanding $ 17,750 $ 17,382
Capital surplus 121,926 116,663
Retained earnings (deficit) 722 (1,817)
-------- --------
$140,398 $132,228
-------- --------
TOTAL LIABILITIES AND CAPITALIZATION $415,343 $489,662
======== ========
<FN>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 121 $ (2,640) $ 10,525 $ 5,932
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 4,461 3,801 8,697 7,543
Extraordinary charge -- 499 -- 499
Divestiture of energy marketing business -- -- (1,122) --
Divestiture of NOARK investment -- -- -- (1,480)
Equity (income) loss, net of distributions 212 (164) (47) (438)
Changes in assets and liabilities, net of
effects of acquisitions, divestitures and
other changes as shown below: (6,175) (8,729) 31,254 41,518
-------- -------- -------- --------
NET CASH FROM OPERATING ACTIVITIES $ (1,381) $ (7,233) $ 49,307 $ 53,574
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions - gas distribution $ (4,276) $ (4,452) $ (8,183) $ (9,483)
Property additions - diversified businesses (3,450) (873) (5,372) (1,283)
Proceeds from property sales, net of retirement costs 24 (144) (7) (194)
Proceeds from business divestiture 1,950 -- 1,950 --
Acquisitions of businesses, net of cash acquired -- 26 (925) 26
Advances to equity investees -- -- -- (4,284)
-------- -------- -------- --------
NET CASH FROM INVESTING ACTIVITIES $ (5,752) $ (5,443) $(12,537) $(15,218)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of expenses $ 1,559 $ 1,664 $ 3,555 $ 3,351
Repurchase of common stock and related expenses (193) -- (193) --
Net cash change in notes payable 7,866 40,046 (33,632) (12,059)
Issuance of long-term debt, net of expenses -- (99) -- (99)
Repayment of long-term debt and related expenses -- (24,491) -- (24,491)
Payment of dividends (4,554) (2,862) (8,081) (5,553)
-------- -------- -------- --------
NET CASH FROM FINANCING ACTIVITIES $ 4,678 $ 14,258 $(38,351) $(38,851)
-------- -------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease) $ (2,455) $ 1,582 $ (1,581) $ (495)
Beginning of period 5,827 1,983 4,953 4,060
-------- -------- -------- --------
End of period $ 3,372 $ 3,565 $ 3,372 $ 3,565
======== ======== ======== ========
Changes in assets and liabilities, net of effects
of acquisitions, divestitures and other changes:
Receivables, net $ 9,996 $ 13,189 $ 7,063 $ 30,051
Accrued revenue 7,267 33,765 30,201 41,330
Materials, supplies and gas in underground storage (7,036) (25,328) 16,546 (7,212)
Gas charges, recoverable from customers 256 2,808 9,048 11,694
Accounts payable (3,855) (28,025) (17,349) (33,145)
Customer advances and amounts payable to customers (31) (88) (2,776) (4,117)
Accrued taxes (9,646) (2,196) (7,884) 549
Deferred taxes and investment tax credit 279 317 514 (2,581)
Other (3,405) (3,171) (4,109) 4,949
-------- -------- -------- --------
$ (6,175) $ (8,729) $ 31,254 $ 41,518
======== ======== ======== ========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these statements.
</FN>
</TABLE>
-6-
<PAGE>
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES
Under the rules and regulations of the Securities and Exchange
Commission for Form 10-Q Quarterly Reports, certain footnotes and other
financial statement information normally included in the year-end financial
statements of SEMCO Energy, Inc. and its subsidiaries (the "Company") 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 1998 Annual Report on Form 10-K ("1998 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.
FINANCIAL STATEMENT PRESENTATION - Consistent with the presentation in
the 1998 Form 10-K, the financial statements of the Company are presented in
the conventional classification format rather than a regulated utility
format, which has been used in the past. Certain reclassifications have been
made to the prior periods' financial statements to conform with the 1999
presentation.
POOLING OF INTERESTS - During 1998, the Company acquired Oilfield
Materials Consultants, Inc. ("OMC"). The acquisition of OMC was accounted
for as a pooling of interests, and accordingly, the consolidated financial
statements and notes for the periods presented have been restated to include
the financial results of OMC. See Note 3 of the Notes to the Consolidated
Financial Statements in the 1998 Form 10-K for further information.
USE OF ESTIMATES - 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.
-7-
<PAGE>
<TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION - Supplemental cash flow information
for the three and six months ended June 30, 1999 and 1998 is as follows (in
thousands of dollars):
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash paid during the period for:
Interest $ 5,815 $ 6,313 $ 7,086 $ 7,377
Income taxes $ 6,850 $ 600 $12,350 $ 600
Non-Cash Investing and Financing Activities:
Capital stock issued for acquisitions $ 2,099 $ 309 $ 2,099 $ 6,309
Debt incurred for acquisitions $ -- $ -- $ 1,000 $ --
Details of Acquisitions:
Fair value of assets acquired $ 5,226 $ 1,559 $10,378 $ 9,865
Liabilities assumed (3,127) (1,250) (6,279) (3,556)
Debt incurred -- -- (1,000) --
Stock issued (2,099) (309) (2,099) (6,309)
------- ------- ------- -------
Cash paid $ -- $ -- $ 1,000 $ --
Less cash acquired -- 26 75 26
------- ------- ------- -------
Net cash paid for (acquired via) acquisitions $ -- $ (26) $ 925 $ (26)
======= ======= ======= =======
</TABLE>
2. ACQUISITIONS AND DIVESTITURES
On February 3, 1999, the Company acquired K&B Construction, Inc.
("K&B"). K&B provides underground pipeline construction services in Kansas
and Missouri. The purchase price was $2,000,000 plus a potential incentive
payment based on operating results during 1999, 2000 and 2001. $1,000,000
was paid in cash at closing and the remainder is to be paid on or before
April 15, 2002. For financial statement purposes, the acquisition of K&B was
accounted for as a purchase and, accordingly, its results of operations are
included in the consolidated financial statements since the date of
acquisition. There were no adjustments necessary to the accounting practices
of K&B to conform with the practices of the Company.
The Company sold the subsidiary which comprised its energy marketing
business, SEMCO Energy Services, Inc., effective March 31, 1999. The Company
recorded a gain of $1,122,000 ($729,000 after tax) on the sale, which is
reflected in other income and deductions. Pursuant to the stock sale
agreement, the Company agreed that, for a period of two years after the
closing date, it would not compete in the unregulated natural gas marketing
business in the state of Michigan. The stock sale agreement contains
provisions that could result in subsequent adjustments to the sale price. If
adjustments are required, management does not believe there would be a
material change to the gain recognized on the sale.
-8-
<PAGE>
On April 1, 1999 the Company acquired Iowa Pipeline Associates, Inc.
("Iowa Pipeline") for 138,525 shares of common stock. Iowa Pipeline builds
underground natural gas pipelines and local gas distribution networks for
customers in Iowa, Kansas, Missouri and Nebraska. For financial statement
purposes, the acquisition of Iowa Pipeline was accounted for as a purchase
and, accordingly, its results of operations are included in the consolidated
financial statements since the date of acquisition. There were no
adjustments necessary to the accounting practices of Iowa Pipeline to conform
with the practices of the Company.
3. CAPITALIZATION
COMMON STOCK EQUITY - On June 10, 1999 the Company's Board of Directors
declared a regular quarterly cash dividend on common stock of $.205 per share
payable on August 15, 1999 to shareholders of record at the close of business
on August 5, 1999.
In May 1999, the Company paid a regular quarterly cash dividend on
common stock of $.205 per share (a 2.5% increase over the prior quarterly
cash dividend) and a special cash dividend of $.05 per share. The total cash
dividend was $4,506,000, of which $921,000 was reinvested by shareholders
into common stock through participation in the Direct Stock Purchase and
Dividend Reinvestment Plan ("DRIP"). The reinvested portion of the quarterly
dividend plus shareholders' optional cash payments of $654,000, resulted in
105,000 new shares issued to existing shareholders during the quarter
pursuant to the DRIP. The Company also issued 10,000 shares of its common
stock to the Company's primary 401(k) plan during the second quarter of 1999
in accordance with the Company match provisions of the plan.
Starting in May 1999, the Company began purchasing shares of its common
stock on the open market to offset the number of new shares issued through
the DRIP. A total of 14,000 shares were purchased by the Company during the
second quarter.
-9-
<PAGE>
4. EARNINGS PER SHARE
<TABLE>
The computations of basic and diluted earnings (loss) per share for the
three, six and twelve months ended June 30, 1999 and 1998 are as follows (in
thousands except per share amounts):
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------ -------------------
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share Computation
Income (loss) before accounting change and
extraordinary charge $ 121 $(2,141) $10,525 $ 4,647 $14,633 $10,032
Cumulative effect of change in accounting -- -- -- 1,784 -- 1,784
Extraordinary charge -- (499) -- (499) -- (499)
------- ------- ------- ------- ------- -------
Net Income (Loss) $ 121 $(2,640) $10,525 $ 5,932 $14,633 $11,317
======= ======= ======= ======= ======= =======
Weighted average common shares outstanding 17,703 15,185 17,571 15,000 17,183 14,822
Earnings (Loss) Per Share - Basic
Income (loss) before accounting change and
extraordinary charge $ 0.01 $ (0.14) $ 0.60 $ 0.31 $ 0.85 $ 0.67
Cumulative effect of change in accounting -- -- -- 0.12 -- 0.12
Extraordinary charge -- (0.03) -- (0.03) -- (0.03)
------- ------- ------- ------- ------- -------
Net Income (Loss) $ 0.01 $ (0.17) $ 0.60 $ 0.40 $ 0.85 $ 0.76
======= ======= ======= ======= ======= =======
Diluted Earnings (Loss) Per Share Computation
Income (loss) before accounting change and
extraordinary charge $ 121 $(2,141) $10,525 $ 4,647 $14,633 $10,032
Adjustment for effect of assumed conversions:
Preferred convertible stock dividends 4 -- 7 8 14 15
------- ------- ------- ------- ------- -------
Adjusted income (loss) before
accounting change and extraordinary charge $ 125 $(2,141) $10,532 $ 4,655 $14,647 $10,047
Cumulative effect of change in accounting -- -- -- 1,784 -- 1,784
Extraordinary charge -- (499) -- (499) -- (499)
------- ------- ------- ------- ------- -------
Net Income (Loss) $ 125 $(2,640) $10,532 $ 5,940 $14,647 $11,332
======= ======= ======= ======= ======= =======
Weighted average common shares outstanding 17,703 15,185 17,571 15,000 17,183 14,822
Incremental shares from assumed conversions of:
Preferred convertible stock 25 -- 25 27 25 27
Stock options -- -- -- 5 -- 6
------- ------- ------- ------- ------- -------
Diluted weighted average common
shares outstanding 17,728 15,185 17,596 15,032 17,208 14,855
======= ======= ======= ======= ======= =======
Earnings (Loss) Per Share - Diluted
Income (loss) before accounting change and
extraordinary charge $ 0.01 $ (0.14) $ 0.60 $ 0.31 $ 0.85 $ 0.67
Cumulative effect of change in accounting -- -- -- 0.12 -- 0.12
Extraordinary charge -- (0.03) -- (0.03) -- (.03)
------- ------- ------- ------- ------- -------
Net Income (Loss) $ 0.01 $ (0.17) $ 0.60 $ 0.40 $ 0.85 $ 0.76
======= ======= ======= ======= ======= =======
</TABLE>
As a result of the loss for the three months ended June 30, 1998, basic
loss per share was not adjusted because to do so would be antidilutive.
-10-
<PAGE>
5. BUSINESS SEGMENTS
The Company's adoption of SFAS 131 addressing disclosure about business
segments and policies applicable to the disclosure are discussed in Note 12
of the Notes to the Consolidated Financial Statements in the 1998 Form 10-K.
The Company operates four business segments: gas distribution,
engineering services, pipeline construction services and propane, pipelines
and storage. The Company's gas distribution business segment distributes and
transports natural gas to approximately 250,000 customers within the state of
Michigan. The engineering services segment has offices in New Jersey,
Michigan, Louisiana and Texas and provides a variety of energy related
engineering and quality assurance services in several states. The pipeline
construction services segment provides primarily pipeline construction
services in Iowa, Kansas, Michigan, Missouri, Nebraska and Tennessee. The
propane, pipelines and storage segment supplies propane to over 7,500 retail
customers in Michigan's upper peninsula and northeast Wisconsin and operates
natural gas transmission, gathering and storage facilities in Michigan. The
Company sold the subsidiary comprising its energy marketing business segment
effective March 31, 1999.
The accounting policies of the operating segments are the same as those
described in Note 1 except that intercompany transactions have not been
eliminated in determining individual segment results. The following table
provides business segment information as well as a reconciliation ("Corporate
and other") of the segment information to the applicable line in the
consolidated financial statements. Corporate and other includes intercompany
eliminations, corporate related expenses not allocated to segments and
results of other smaller operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------- -------------------
1999 1998 1999 1998 1999 1998
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Gas Distribution $36,708 $ 30,071 $113,688 $105,860 $192,050 $204,465
Engineering Services 3,659 9,244 9,379 12,391 38,354 15,043
Construction Services 12,032 6,507 16,716 9,227 33,394 22,434
Propane, Pipelines and Storage 1,284 1,279 3,228 1,969 6,111 3,479
Energy Marketing -- 68,329 96,904 216,602 278,190 519,446
Corporate and other <F1> (2,454) (4,150) (4,806) (8,299) (13,255) (28,409)
------- -------- -------- -------- -------- --------
Consolidated Operating Revenues $51,229 $111,280 $235,109 $337,750 $534,844 $736,458
======= ======== ======== ======== ======== ========
Operating Income (Loss)
Gas Distribution $ 4,064 $ 1,021 $ 21,931 $ 14,035 $ 30,260 $ 21,700
Engineering Services (544) 733 (92) 1,147 1,698 1,441
Construction Services 321 (127) (925) (1,287) 261 (525)
Propane, Pipelines and Storage 371 375 1,167 748 2,004 1,510
Energy Marketing -- (1,614) (341) (3,305) 2,269 (4,721)
Corporate and other (744) (280) (925) (289) (2,529) (529)
------- -------- -------- -------- -------- --------
Consolidated Operating Income $ 3,468 $ 108 $ 20,815 $ 11,049 $ 33,963 $ 18,876
======= ======== ======== ======== ======== ========
<FN>
<F1>
Includes the elimination of intercompany energy marketing revenues of $49 and $2,420 for the six and
twelve months ended June 30, 1999 and $2,101, $4,700 and $19,281 for the three, six and twelve months
ended June 30, 1998, respectively. Includes the elimination of intercompany engineering services
revenue of $224, $1,398 and $1,735 for the three, six and twelve months ended June 30, 1999 and $92 for
the three, six and twelve months ended June 30, 1998, respectively. Includes the elimination of
intercompany construction services revenue of $2,220, $3,346 and $9,129 for the three, six and twelve
months ended June 30, 1999 and $1,960, $3,501 and $9,224 for the three, six and twelve months ended
June 30, 1998, respectively.
</FN>
</TABLE>
-11-
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
NOARK - In January 1998, the Company sold its entire interest in the
NOARK Pipeline System Partnership ("NOARK") 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. The sale
released the Company from all debt obligations and guarantees related to
NOARK. Pursuant to terms included in the sales agreement, the Company paid
EAPC $9,200,000 and $3,100,000 in April 1998 and 1999, respectively, and will
pay $800,000 in April 2000. The Company will receive annual payments of
$842,000 from EAPC for 17 years beginning in the year 2004.
ENVIRONMENTAL MATTERS - Prior to the construction of major natural gas
pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. The Company owns seven sites which formerly
housed such manufacturing facilities and expects that it will ultimately
incur investigation and remedial action costs at some of these sites, and a
number of other sites. The Company has submitted a plan to the appropriate
environmental regulatory authority in the State of Michigan for work to begin
at one site. The extent of the Company's liabilities and potential costs in
connection with these sites cannot be reasonably estimated at this time. In
accordance with an MPSC accounting order, any environmental investigation and
remedial action costs will be deferred and amortized over ten years. Rate
recognition of the related amortization expense will not begin until after a
prudence review in a general rate case.
7. SUBSEQUENT EVENT
In July 1999, the Company announced that it had signed a definitive
purchase and sale agreement ("PSA") to acquire ENSTAR Natural Gas Company and
Alaska Pipeline Company (together known as "ENSTAR") from Ocean Energy, Inc.
(the "Seller"). The Company has agreed to buy ENSTAR for approximately
$290,000,000 in cash, which includes $58,700,000 (or 100%) of ENSTAR's debt,
all of which is owed to the Seller. The acquisition will be accounted for
using the purchase method of accounting. Based on several assumptions, which
include the price at which the Company can sell new common equity and the
Company's ability to achieve certain synergies, the acquisition of ENSTAR is
expected to be accretive to both earnings and cash flow per share beginning
in the first full year following closing. The acquisition is subject to
regulatory approval, requires the consent of one lender, and is expected to
close by the end of 1999. At the completion of the transaction, the Company
will be reorganized so that ENSTAR and SEMCO Energy Gas Company will be
divisions of SEMCO Energy, Inc. In the event that the Company does not
complete the transaction following all regulatory approvals and such failure
constitutes a breach of the PSA by the Company, payment of $10,000,000 would
have to be paid to the Seller as liquidated damages. Any such payment is
secured by a letter of credit payable to the Seller.
-12-
<PAGE>
ENSTAR Natural Gas Company currently serves more than 100,000 customers
in the Anchorage, Alaska area. Alaska Pipeline Company delivers natural gas
from several producing fields in south central Alaska to ENSTAR Natural Gas
Company's distribution system. The Company has obtained a commitment from a
lender, which is subject to the satisfaction of certain conditions, to
finance the ENSTAR acquisition through an unsecured "bridge" loan facility.
The facility matures within one year following the date that the Company
initially borrows under such facility or, if earlier, 546 days after the
closing of the facility. Prepayments of $56,000,000 will be required on the
six and nine month anniversary of funding. The Company anticipates that
permanent financing to replace the bridge loan facility will include a
combination of equity and debt securities.
-13-
<PAGE>
PART I - FINANCIAL INFORMATION - (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
SEMCO Energy, Inc. and its subsidiaries (the "Company") had net income
of $121,000 (or $0.01 per share) for the quarter ended June 30, 1999 compared
to a net loss of $2,640,000 (or $0.17 per share) for the quarter ended June
30, 1998. On a weather-normalized basis, net income for the quarter ended
June 30, 1999 would have been approximately $1,421,000 (or $0.08 per share)
compared to a net loss of approximately $1,280,000 (or $0.08 per share) for
the same period of the prior year. The net income for the second quarter of
the prior year includes an extraordinary charge of $499,000 after tax (or
$0.03 per share) from the early redemption of a portion of the Company's
long-term debt.
The Company had net income of $10,525,000 (or $0.60 per share) for the
six months ended June 30, 1999 compared to $5,932,000 (or $0.40 per share)
for the same six-month period of 1998. On a weather-normalized basis, net
income for the six months ended June 30, 1999 would have been approximately
$12,492,000 (or $0.71 per share) compared to approximately $9,892,000 (or
$0.66 per share) for the same period of the prior year. The net income for
the six months ended June 30, 1999 includes income of $729,000 after tax (or
$0.04 per share) from the divestiture of the Company's energy marketing
business. The net income for the six months ended June 30, 1998 includes
income of $1,784,000 after tax (or $0.12 per share) from a change in
accounting method for property taxes, income of $1,708,000 after tax (or
$0.11 per share) from the divestiture of the Company's investment in the
NOARK Pipeline System Partnership ("NOARK") and the $499,000 extraordinary
charge discussed in the previous paragraph.
Net income for the twelve months ended June 30, 1999 was $14,633,000 (or
$0.85 per share) compared to $11,317,000 (or $0.76 per share) for the twelve
months ended June 30, 1998. On a weather-normalized basis, net income would
have been approximately $19,820,000 (or $1.15 per share) for the twelve
months ended June 30, 1999 compared to approximately $16,052,000 (or $1.08
per share) for the same period of the prior year. The net income for the
twelve months ended June 30, 1999 includes the income discussed above of
$729,000 after tax (or $0.04 per share) related to the divestiture of the
energy marketing business. The net income for the twelve months ended June
30, 1998 includes income of $1,784,000 after tax (or $0.12 per share) from
the change in accounting method, income of $6,733,000 after tax (or $0.45 per
share) from the divestiture of NOARK and an extraordinary charge of $499,000
after tax (or $0.03 per share) from the early redemption of long-term debt.
-14-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------ -------------------
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- -------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income as reported $ 121 $(2,640) $10,525 $ 5,932 $14,633 $11,317
Impact on net income of the following:
Colder (warmer) than normal weather $(1,300) $(1,360) $(1,967) $(3,960) $(5,187) $(4,735)
Divestiture of NOARK investment $ -- $ -- $ -- $ 1,708 $ -- $ 6,733
Divestiture of marketing business $ -- $ -- $ 729 $ -- $ 729 $ --
Change in accounting method $ -- $ -- $ -- $ 1,784 $ -- $ 1,784
Extraordinary charge $ -- $ (499) $ -- $ (499) $ -- $ (499)
Net income excluding the foregoing items $ 1,421 $ (781) $11,763 $ 6,899 $19,091 $ 8,034
EPS excluding the foregoing items $ 0.08 $ (0.05) $ 0.67 $ 0.46 $ 1.11 $ 0.54
</TABLE>
The business segment analyses on the next several pages provide
additional information regarding the variances in operating results when
comparing the three, six and twelve months ended June 30, 1999 to the same
periods of the prior year.
The Company's largest business segment, natural gas distribution, is
seasonal in nature and depends on the winter months for the majority of its
operating revenue. As a result, a substantial portion of the Company's
annual results of operations is earned during the first and fourth quarters
of the year. Therefore, the Company's results of operations for the three
months and six months ended June 30, 1999 and 1998 are not necessarily
indicative of results for a full year.
SUMMARY OF BUSINESS SEGMENTS
The Company operates four business segments: gas distribution,
engineering services, pipeline construction services and propane, pipelines
and storage. The Company's gas distribution segment distributes and
transports natural gas to approximately 250,000 customers within the state of
Michigan. The engineering services segment has offices in New Jersey,
Michigan, Louisiana and Texas and provides a variety of energy related
engineering and quality assurance services in several states. The pipeline
construction services segment provides primarily pipeline construction
services in Iowa, Kansas, Michigan, Missouri, Nebraska and Tennessee. The
propane, pipelines and storage segment sells approximately 5 million gallons
of propane annually to retail customers in Michigan's upper peninsula and
northeast Wisconsin and operates natural gas transmission, gathering and
storage facilities in Michigan. The Company sold the subsidiary comprising
its energy marketing business effective March 31, 1999.
-15-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
SUMMARY OF BUSINESS SEGMENTS (Continued)
<TABLE>
The following table shows the operating revenues and operating income of
each of the Company's business segments as well as a reconciliation
("Corporate and other") of the segment information to the applicable line in
the consolidated financial statements. Corporate and other includes
intercompany eliminations, corporate related expenses not allocated to the
business segments and the results of other smaller operations.
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------- -------------------
1999 1998 1999 1998 1999 1998
------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Gas Distribution $36,708 $ 30,071 $113,688 $105,860 $192,050 $204,465
Engineering Services 3,659 9,244 9,379 12,391 38,354 15,043
Construction Services 12,032 6,507 16,716 9,227 33,394 22,434
Propane, Pipelines and Storage 1,284 1,279 3,228 1,969 6,111 3,479
Energy Marketing -- 68,329 96,904 216,602 278,190 519,446
Corporate and Other (2,454) (4,150) (4,806) (8,299) (13,255) (28,409)
------- -------- -------- -------- -------- --------
Total Operating Revenues $51,229 $111,280 $235,109 $337,750 $534,844 $736,458
======= ======== ======== ======== ======== ========
Operating Income (Loss)
Gas Distribution $ 4,064 $ 1,021 $ 21,931 $ 14,035 $ 30,260 $ 21,700
Engineering Services (544) 733 (92) 1,147 1,698 1,441
Construction Services 321 (127) (925) (1,287) 261 (525)
Propane, Pipelines and Storage 371 375 1,167 748 2,004 1,510
Energy Marketing -- (1,614) (341) (3,305) 2,269 (4,721)
Corporate and Other (744) (280) (925) (289) (2,529) (529)
------- -------- -------- -------- -------- --------
Total Operating Income $ 3,468 $ 108 $ 20,815 $ 11,049 $ 33,963 $ 18,876
======= ======== ======== ======== ======== ========
</TABLE>
Each business segment is discussed on the following pages. The Company
evaluates the performance of its business segments based on the operating
income generated. Operating income does not include income taxes, interest
expense, extraordinary items, changes in accounting method and other
non-operating income and expense items. A review of the non-operating items
follows the business segment discussions.
GAS DISTRIBUTION
Operating income from the Company's gas distribution business ("Gas
Company") was $4,064,000 for the quarter ended June 30, 1999 compared to
$1,021,000 for the quarter ended June 30, 1998. On a weather-normalized
basis, the Gas Company's operating income would have been approximately
$5,864,000 for the second quarter of 1999 compared to approximately
$2,921,000 for the same quarter of the prior year.
-16-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
GAS DISTRIBUTION (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gas sales revenue $ 32,325 $ 26,480 $101,303 $ 97,317 $170,686 $189,313
Cost of gas sold 19,411 15,626 65,410 64,140 110,658 127,837
-------- -------- -------- -------- -------- --------
Gas sales margin $ 12,914 $ 10,854 $ 35,893 $ 33,177 $ 60,028 $ 61,476
Gas transportation revenue 3,632 3,126 10,261 7,155 17,938 13,409
Other operating revenue 751 465 2,124 1,388 3,426 1,743
-------- -------- -------- -------- -------- --------
Gross margin $ 17,297 $ 14,445 $ 48,278 $ 41,720 $ 81,392 $ 76,628
Operating expenses 13,233 13,424 26,347 27,685 51,132 54,928
-------- -------- -------- -------- -------- --------
Operating income $ 4,064 $ 1,021 $ 21,931 $ 14,035 $ 30,260 $ 21,700
======== ======== ======== ======== ======== ========
Weather-normalized operating income $ 5,864 $ 2,921 $ 24,681 $ 19,985 $ 37,860 $ 28,850
======== ======== ======== ======== ======== ========
Volumes sold (MMcf) 4,319 4,652 20,194 20,222 32,219 36,316
Volumes transported (MMcf) 5,528 5,274 14,573 11,707 26,657 21,900
Number of customers at end of period 249,650 243,550 249,650 243,550 249,650 243,550
Degree days 737 694 3,975 3,478 6,063 6,072
Percent colder (warmer) than normal (25.3%) (28.5%) (7.5%) (18.8%) (12.7%) (12.5%)
<FN>
The amounts in the above table include intercompany transactions.
</FN>
</TABLE>
GAS SALES MARGIN - The Gas Company's gas sales margin for the second
quarter of 1999 increased by $2,060,000 when compared to the second quarter
of 1998. The increase over the prior period was due primarily to additional
gas sales to new customers and gas sales margins from the Company's new
third-party gas supply and storage arrangement, some of which was
non-recurring, offset partially by a decrease of $600,000 due primarily to a
shift in customers to transportation as a result of a new multi-location
aggregation program offered to customers. Temperatures during the quarter
ended June 30, 1999 and 1998 were similar and thus contributed little to the
increase in gas sales margin between quarters. The weather was 25% and 28%
warmer than normal during the second quarter of 1999 and the second quarter
of 1998, respectively. Under normal weather conditions, gas sales margin for
the quarter ended June 30, 1999 and 1998 would have been higher by
approximately $1,800,000 and $1,900,000, respectively.
-17-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
GAS DISTRIBUTION (Continued)
The third-party gas supply and storage arrangement is with TransCanada
Gas Services, Inc. ("TransCanada"). Under the agreement, TransCanada
provides the Gas Company's natural gas requirements and manages the Gas
Company's natural gas supply and the supply aspects of transportation and
storage operations for the three-year period beginning April 1, 1999.
Also effective April 1, and as authorized in a September 1998 Michigan Public
Service Commission ("MPSC") order, the Gas Company reduced and froze its gas
charge at $3.24 per thousand cubic feet ("Mcf") and suspended its gas cost
recovery ("GCR") clause for a period of three years. The suspension of the
GCR clause means that the Gas Company cannot recover from customers any
amounts by which its gas costs exceed a weighted average cost of gas in
excess of $3.24 per Mcf during the three-year period. However, as occurred
in the second quarter of 1999, it also means that the Gas Company is able to
retain a portion of the sales margin on the sale of gas if its gas costs are
below $3.24 per Mcf. See Note 2 in the Notes to the Consolidated Financial
Statements in the Company's 1998 Annual Report on Form 10-K for additional
information on the MPSC order and the gas supply management arrangement with
TransCanada.
The aggregation program, which was effective April 1, 1998, provides all
commercial and industrial customers the opportunity to aggregate multiple
service locations and purchase their gas from a third-party supplier, while
allowing the Gas Company to continue charging the existing distribution fees
and customer fees. The program is referred to as the Aggregated
Transportation Service ("ATS") program. Distribution and customer fees
associated with customers who have switched to third-party gas suppliers are
recorded in gas transportation revenue rather than gas sales revenue because
the Gas Company is now acting as a transporter for those customers. Thus,
the $600,000 decrease in gas sales margin as a result of customers
participating in the ATS program is offset by a corresponding increase in gas
transportation revenue. The aggregation program was approved in the October
1997 Order of the Michigan Public Service Commission ("1997 rate case") (see
Note 2 in the Notes to the Consolidated Financial Statements in the Company's
1998 Annual Report on Form 10-K).
Gas sales margin increased by $2,716,000 during the six months ended
June 30, 1999 compared to the same period of 1998. Sales margins from the
sale of gas under the TransCanada arrangement, some of which is
non-recurring, and additional gas sales resulting from colder weather and the
addition of new customers increased gas sales margin by approximately
$5,800,000 during the six months ended June 30, 1999 compared to the six
months ended June 30, 1998. These increases were offset partially by a
decrease in gas sales margin as a result of customers participating in the
ATS program.
-18-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
GAS DISTRIBUTION (Continued)
During the twelve months ended June 30, 1999, gas sales margin decreased
by $1,448,000 when compared to the twelve months ended June 30, 1998.
Approximately $5,200,000 of the decrease is attributable to customers
participating in the new ATS program. Warmer weather during the twelve
months ended June 30, 1999 caused a decrease of approximately $1,000,000 in
gas sales margin when compared to the prior twelve-month period. These
decreases were offset partially by the impact of additional gas sales to new
customers, sales margins from the sale of gas under the TransCanada
arrangement, some of which is non-recurring, and a rate increase effective in
October 1997. The rate increase was granted in the 1997 rate case to allow
for the recovery of costs related to a change in accounting for retiree
medical costs (see Note 2 in the Notes to the Consolidated Financial
Statements in the Company's 1998 Annual Report on Form 10-K).
GAS TRANSPORTATION REVENUE - For the three, six and twelve months ended
June 30, 1999, gas transportation revenue increased by $506,000, $3,106,000
and $4,529,000, respectively, when compared to the same periods of 1998. The
increase during the three and six months ended June 30, 1999 relates
primarily to customers participating in the new ATS program. As discussed
above, the increase in gas transportation revenue as a result of
participation in the ATS program is generally offset by a corresponding
decrease in gas sales margin. The increase for the twelve months ended
June 30, 1999 is due to new ATS revenues of approximately $5,200,000 offset
partially by 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 Gas Company's regular
transportation rates.
OTHER OPERATING REVENUE - Other operating revenue of the Gas Company
increased by $286,000 during the second quarter of 1999. The increase is due
primarily to additional balancing charges related to the new ATS program and
an increase in various miscellaneous fees. These items also account for the
$736,000 and $1,683,000 increase in other operating revenue during the six
months and twelve months ended June 30, 1999 when compared to the same
periods of 1998.
-19-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
GAS DISTRIBUTION (Continued)
OPERATING EXPENSES - The Gas Company's operating expenses decreased by
$191,000 during the three months ended June 30, 1999 compared to the three
months ended June 30, 1998. The decrease is due primarily to decreases of
$350,000 in employee expenses and $1,150,000 in property taxes offset
partially by increases of approximately $100,000 in uncollectible gas
accounts, $400,000 in information technology expense related primarily to
year 2000 ("Y2K") computer remediation, $600,000 in incentive compensation
and $200,000 in depreciation expense. The $350,000 decrease in employee
expenses such as wages, insurance and benefits, was due primarily to lower
employee levels as a result of the early retirement program in 1998 and
changes to the Company's employee benefit programs (refer to Note 9 in the
Notes to the Consolidated Financial Statements in the Company's 1998 Annual
Report on Form 10-K for information on the early retirement program).
Property taxes were approximately $1,150,000 lower based on pending appeals
of prior years' personal property assessments and a recent study made public
by the State of Michigan. The Gas Company filed appeals over the past two
years claiming that its utility property was over-assessed. The recent study
confirms the Gas Company's claim regarding utility property assessments and
thus significantly increases the likelihood of recovering the overpaid taxes.
Approximately 55% to 60% of the reduction in property tax expense relates to
taxes expensed in prior years and the remainder relates to reductions for the
first six months of 1999. The increase in incentive compensation was due
primarily to the lack of any incentive compensation recorded in the second
quarter of the prior year and the reversal, in the second quarter of the
prior year, of the incentive compensation recorded in the first quarter due
to the lower year-to-date earnings. The $200,000 increase in depreciation
expense was a result of new property, plant and equipment placed in service.
Operating expenses decreased by $1,338,000 during the six months ended
June 30, 1999 compared to the same period of 1998. Approximately $1,100,000
of the decrease is attributable to an overall reduction in general and
administrative expenses due to cost cutting measures initiated during the
past year and reductions in compensation and employee benefit expenses due
primarily to lower employee levels as a result of the Company's early
retirement program and changes to the Company's employee benefit plans.
Approximately $200,000 of the decrease in operating expenses was due to lower
uncollectible gas accounts, $516,000 was due to the absence during the
current period of a one-time expense incurred during the first six months of
the prior year related to the early retirement program, and approximately
$1,150,000 was due to lower property taxes, as discussed above. The
decreases in operating expenses were offset partially by increases of
approximately $700,000 in information technology expense related primarily to
Y2K computer remediation, $500,000 in incentive compensation and $400,000 in
depreciation expense. The increase in incentive compensation was due
primarily to the absence of any incentive compensation in the first six
months of the prior year due to lower earnings.
-20-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
GAS DISTRIBUTION (Continued)
During the twelve months ended June 30, 1999, operating expenses
decreased by $3,796,000 when compared to the twelve months ended June 30,
1998. Approximately $2,500,000 of the decrease is attributable to an overall
reduction in general and administrative expenses due to cost cutting measures
initiated during the past twelve months and reductions in compensation and
employee benefit expenses due primarily to lower employee levels as a result
of the Company's early retirement program and changes to the Company's
employee benefit plans. Approximately $1,450,000 of the decrease is due to
one-time adjustments recorded in the first and third quarter of 1998 related
to the early retirement program. In addition, uncollectible gas accounts
decreased by approximately $650,000 due to increased collection efforts and
property taxes decreased by $1,400,000 due primarily to pending appeals as
discussed above. These decreases in various expenses during the twelve months
ended June 30, 1999 were offset partially by increases of approximately
$1,100,000 in information technology expense related primarily to Y2K
computer remediation and $1,100,000 in depreciation expense as a result of
new property, plant and equipment placed in service.
ENGINEERING SERVICES
The Company's engineering services business ("Engineering Services") had
an operating loss of $544,000 for the second quarter of 1999 compared to
operating income of $733,000 for the second quarter of 1998. Engineering
Services is comprised of two companies, Maverick Pipeline Services, Inc.
("Maverick") and Oilfield Materials Consultants, Inc. ("OMC"). The
acquisition of Maverick, in December 1997, was accounted for as a purchase.
Therefore, the consolidated financial statements and the table below include
the results of Maverick's operations since December 1997. The acquisition of
OMC, in November 1998, was accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and the table below have
been restated to include the financial results of OMC as if it were part of
the Company for all of periods presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------- -------------------
1999 1998 1999 1998 1999 1998
------- ------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 3,659 $ 9,244 $ 9,379 $ 12,391 $ 38,354 $ 15,043
Operating expenses 4,203 8,511 9,471 11,244 36,656 13,602
------- ------- -------- -------- -------- --------
Operating income (loss) $ (544) $ 733 $ (92) $ 1,147 $ 1,698 $ 1,441
======= ======= ======== ======== ======== ========
Billed hours 95,000 181,000 192,000 246,000 532,000 335,000
======= ======= ======== ======== ======== ========
<FN>
The amounts in the above table include intercompany transactions.
</FN>
</TABLE>
-21-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
ENGINEERING SERVICES (Continued)
OPERATING REVENUES - Engineering Services' operating revenues decreased
by $5,585,000 and $3,012,000 during the three and six months ended June 30,
1999, respectively, compared to the same periods of the prior year. The
decrease in operating revenues is due primarily to lower turnkey revenues and
pipeline inspection revenues as a result of a slowdown and deferral of
pipeline projects in various sectors of the energy industry. Given this
decrease in business activity, operating revenues and operating income for
the year ended December 31, 1999 will most likely be significantly lower than
in 1998.
During the twelve months ended June 30, 1999, Engineering Services'
operating revenues increased by $23,311,000 when compared to the twelve
months ended June 30, 1998. Approximately $17,450,000 of the increase
represents the increase in operating revenues of Maverick for the twelve
months ended June 30, 1999 compared to the twelve months ended June 30 1998
(Maverick was acquired in December 1997 and therefore, the operating results
for the twelve months ended June 30, 1998 include only six months of
activity). The increase in Maverick's revenues is attributable primarily to
a major turnkey project worked on during mid to late 1998. The remainder of
the increase in operating revenues, when comparing the twelve-month periods,
is attributable to OMC. The growth in OMC's revenues, most of which occurred
during the last half of 1998, is due to growth in OMC's customer base and
growth in quality assurance and quality control projects worked on during
that period offset partially by a decrease in revenues during the first half
of 1999 due to a slowdown and deferral of projects, as noted above.
OPERATING EXPENSES - During the three and six months ended June 30,
1999, Engineering Services' operating expenses decreased by $4,308,000 and
$1,773,000, respectively, when compared to the same periods of 1998. The
decrease is due primarily to lower project costs as a result of the decrease
in level of projects during the same periods offset somewhat by unanticipated
clean-up expenses related to a pipeline turnkey project completed in 1998.
Operating expenses increased by $23,054,000 during the twelve months
ended June 30, 1999 compared to the same period of the prior year.
Approximately $17,150,000 of the increase represents the increase in
operating expenses of Maverick for the twelve months ended June 30, 1999
compared to the twelve months ended June 30 1998 (Maverick was acquired in
December 1997 and therefore, the operating results for the twelve months
ended June 30, 1998 include only six months of activity). Most of Maverick's
increase is attributable to a major turnkey project worked on during mid to
late 1998. The remainder represents increases in employee and project costs
and overhead to support the increase in OMC's operating revenues during the
twelve months ended June 30, 1999.
-22-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
CONSTRUCTION SERVICES
The Company's construction services business ("Construction Services")
generated operating income of $321,000 during the second quarter of 1999
compared to an operating loss of $127,000 for the second quarter of 1998.
Underground construction businesses generally incur operating losses during
the winter and spring months when underground construction is inhibited and
generate the majority of their operating income during the summer and fall
months.
Construction Services' operating results for the three, six and twelve
months ended June 30, 1999 and 1998 include the results of the following
businesses for the periods subsequent to their acquisition dates:
Company Acquisition Date
--------------------------------------------- ----------------
Sub-Surface Construction Co. ("Sub-Surface") August 1997
King Energy & Construction Co. ("King") May 1998
K&B Construction, Inc. ("K&B") February 1999
Iowa Pipeline Associates, Inc. ("Iowa") April 1999
Construction Services' results also include the operating losses of an
overhead-line construction company it started in Florida in January of 1998.
The operations of this business were halted in mid-1998 in response to lower
than expected business levels and earnings. The operating losses of the
start-up overhead-line business were approximately $600,000 for the second
quarter of 1998 and $800,000 for the six and twelve months ended June 30,
1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
--------------------- --------------------- ---------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 12,032 $ 6,507 $ 16,716 $ 9,227 $ 33,394 $ 22,434
Operating expenses 11,711 6,634 17,641 10,514 33,133 22,959
--------- --------- --------- --------- --------- ---------
Operating income (loss) $ 321 $ (127) $ (925) $ (1,287) $ 261 $ (525)
========= ========= ========= ========= ========= =========
Feet of pipe installed 1,479,000 1,142,000 2,176,000 1,568,000 5,039,000 3,989,000
========= ========= ========= ========= ========= =========
<FN>
The amounts in the above table include intercompany transactions.
</FN>
</TABLE>
OPERATING REVENUES - Construction Services' operating revenues increased
by $5,525,000 during the second quarter of 1999, compared to the second
quarter of 1998. The increase is due primarily to the revenues of King,
which was acquired during the second quarter of 1998, and K&B and Iowa, which
were acquired after the second quarter of 1998. Operating revenues during
the six and twelve months ended June 30, 1999 increased by $7,489,000 and
$10,960,000 when compared to the same periods of the prior year. The
increase in revenues from one period to the next is due primarily to the
timing of business acquisitions because each period includes only the results
of companies subsequent to their acquisition dates.
-23-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
CONSTRUCTION SERVICES (Continued)
OPERATING EXPENSES - The operating expenses of Construction Services for
the three, six and twelve months ended June 30, 1999 increased $5,077,000,
$7,127,000 and $10,174,000 when compared to the same periods ended June 30,
1998. The increase is due primarily to the timing of acquisitions as
discussed in the operating revenues section above.
PROPANE, PIPELINES AND STORAGE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
--------------------- --------------------- ---------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 1,284 $ 1,279 $ 3,228 $ 1,969 $ 6,111 $ 3,479
Operating expenses 913 904 2,061 1,221 4,107 1,969
--------- --------- --------- --------- --------- ---------
Operating income $ 371 $ 375 $ 1,167 $ 748 $ 2,004 $ 1,510
========= ========= ========= ========= ========= =========
Propane volumes sold (gallons) 591,000 554,000 2,235,000 554,000 5,464,000 554,000
========= ========= ========= ========= ========= =========
</TABLE>
OPERATING REVENUES - The operating revenues of the Company's propane,
pipelines and storage business for the second quarter of 1999 were comparable
to those during the second quarter of the prior year. During the six and
twelve months ended June 30, 1999, operating revenues increased by $1,259,000
and $2,632,000, respectively, when compared to the same periods of 1998. The
increases in both the six and twelve month periods are due primarily to the
operating revenues of Hotflame Gas, Inc. ("Hotflame") which was acquired on
March 31, 1998. The acquisition of Hotflame was accounted for as a purchase
and therefore, only the results of operations since April 1998 are included
in the Company's operating results.
OPERATING INCOME - The operating income from propane, pipelines and
storage increased during the six and twelve months ended June 30, 1999 by
$419,000 and $494,000 when compared to the same periods of the prior year.
These increases are due primarily to pipeline expense reductions and the
operations of Hotflame. As discussed above, the six and twelve months ended
June 30, 1998 include the results of Hotflame only since its acquisition on
March 31, 1998.
On a weather-normalized basis, the operating income of the propane,
pipelines and storage business for the three, six and twelve months ended
June 30 1999 would have been higher by approximately $155,000, $258,000 and
$366,000, respectively. Operating income would have been higher by
approximately $169,000 for the three, six and twelve months ended June 30,
1998. The impact of weather on the operating income of the propane,
pipelines and storage segment relates entirely to the propane business.
-24-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
ENERGY MARKETING
The Company sold the subsidiary comprising its gas marketing business
("Energy Services") effective March 31, 1999. The business was sold because
management concluded that it did not fit the Company's new strategic
direction due to the high risks and generally poor returns associated with
the business. The Company recognized a gain on the sale. The gain is
reported in other income (discussed in the subsequent section) and thus, is
not reflected in the operating income shown in the table below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gas marketing revenues $ -- $ 68,329 $ 96,904 $216,602 $278,190 $519,446
Cost of gas marketed -- 68,580 95,681 216,410 273,033 516,714
-------- -------- -------- -------- -------- --------
Gas marketing margin $ -- $ (251) $ 1,223 $ 192 $ 5,157 $ 2,732
Operating expenses -- 1,363 1,564 3,497 2,888 7,453
-------- -------- -------- -------- -------- --------
Operating income (loss) $ -- $ (1,614) $ (341) $ (3,305) $ 2,269 $ (4,721)
======== ======== ======== ======== ======== ========
<FN>
The amounts in the above table include intercompany transactions.
</FN>
</TABLE>
GAS MARKETING MARGIN - Gas marketing margins increased during the six
months and twelve months ended June 30, 1999 by $1,031,000 and $2,425,000,
respectively, when compared to the same periods in 1998. The increase is due
primarily to restructuring activities that occurred in 1998. During 1998,
Energy Services terminated agreements with all of its third-party gas
marketing companies in an effort to reduce risks, eliminate lower margin
transactions and improve profitability.
OPERATING EXPENSES - Energy Services' operating expenses decreased
during the six and twelve months ended June 30, 1999 by $1,933,000 and
$4,565,000, respectively, compared to the same periods of the prior year. The
decreases were due in part to lower incentive payments to the Company's
third-party gas marketers and the termination of gas marketing agreements
with these companies as discussed above. The sale of Energy Services also
contributed to the decrease because the six and twelve month periods ended
June 30, 1999 do not include any operating expenses subsequent to March 31,
1999, the effective date of the sale.
-25-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
OTHER INCOME AND DEDUCTIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------ -------------------
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Divestiture of NOARK investment $ -- $ -- $ -- $ 1,480 $ 3,568 $ 9,210
Divestiture of energy marketing business -- -- 1,122 -- 1,122 --
Interest expense (3,775) (3,541) (7,670) (7,229) (15,252) (14,291)
Dividends on preferred stock (48) (48) (96) (96) (192) (193)
Other income (deductions) 622 528 649 903 581 992
------- ------- ------- ------- -------- --------
Total other income (deductions) $(3,201) $(3,061) $(5,995) $(4,942) $(10,173) $ (4,282)
======= ======= ======= ======= ======== ========
</TABLE>
DIVESTITURE OF NOARK INVESTMENT - The Company sold its investment in
NOARK in January 1998 after a number of write-downs and reserve adjustments
related to the investment. Refer to Management's Discussion and Analysis and
Note 15 in the Notes to the Consolidated Financial Statements in the
Company's 1998 Annual Report on Form 10-K for additional information related
to the NOARK investment.
DIVESTITURE OF ENERGY MARKETING BUSINESS - The Company sold the
subsidiary comprising its energy marketing business effective March 31, 1999.
The divestiture resulted in a gain of $1,122,000 ($729,000 after tax) which
is reflected in the results for the six months and twelve months ended
June 30, 1999. The stock sale agreement contains provisions that could
result in subsequent adjustments to the sale price. If adjustments are
required, management does not believe there would be a material change to the
gain recognized on the sale.
INTEREST EXPENSE - During the second quarter of 1999, interest expense
increased $234,000 compared to the second quarter of 1998. The increase is
due primarily to increases in debt levels to finance the Company's capital
expenditure program offset partially by the repayment of short-term debt with
the proceeds from the Company's sale of 1.82 million shares of its common
stock in August 1998. Interest expense for the six and twelve months ended
June 30, 1999 increased by $441,000 and $961,000, respectively, when compared
to the same periods in 1998. The increases were due generally to the same
items that caused the increases between the quarters.
OTHER INCOME AND DEDUCTIONS - Other income during the six and twelve
months ended June 30, 1999 decreased by $254,000 and $411,000, respectively,
compared to the same periods of 1998. Various miscellaneous income of the
gas distribution business and the gas marketing business account for most of
the decrease. The gas marketing business was sold effective March 31, 1999.
-26-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
INCOME TAXES
Income taxes for the three, six and twelve months ended June 30, 1999
increased by $958,000, $2,835,000 and $4,595,000, respectively, when compared
to the same periods of the prior year. The change in income taxes, when
comparing one period to another is due primarily to changes in pre-tax
earnings and any adjustments necessary for compliance with current tax laws
and regulations.
ACCOUNTING METHOD CHANGE AND EXTRAORDINARY ITEM
The Company changed its method of accounting for property taxes during
the first quarter of 1998. The cumulative effect of the change in accounting
method increased earnings by $1,784,000 after taxes for the six and twelve
months ended June 30, 1998. The Company also incurred an extraordinary
charge of $499,000 after taxes in the second quarter of 1998 for the early
redemption of all of its outstanding 8.625% debentures due April 15, 2017.
Refer to Note 1 of the Notes to the Consolidated Financial Statements in the
Company's 1998 Annual Report on Form 10-K for more information on these
items.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS - Net cash from operating activities for the three and six
month ended June 30, 1999, as compared to the same periods of the prior year,
increased (decreased) by $5,852,000 and ($4,267,000), respectively. 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.
During the three months and six months ended June 30, 1999, the Company
spent approximately $7,725,000 and $13,554,000, respectively, on property
additions and anticipates spending an additional $12,500,000 during the
remainder of 1999. The Company also plans to incur additional expenditures
for business acquisitions during the remainder of 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
CAPITAL INVESTMENTS 1999 1998 1999 1998
------ ------ ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Property additions - gas distribution $4,276 $4,452 $ 8,183 $ 9,483
Property additions - diversified businesses 3,450 873 5,372 1,283
Business acquisitions <F1> 2,099 283 4,024 6,283
------ ------ ------- -------
$9,825 $5,608 $17,579 $17,049
====== ====== ======= =======
<FN>
<F1>
Includes net cash paid, debt incurred and the value of Company stock issued for acquisitions.
</FN>
</TABLE>
-27-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Financing activities contributed $9,497,000 in funds during the second
quarter of 1999, primarily from borrowings on notes payable, offset partially
by the payment of dividends. The notes payable were utilized primarily to
fund capital expenditures and for general corporate purposes. Dividends paid
during the second quarter included a regular cash dividend on common stock of
$.205 per share (a 2.5% increase over the prior quarterly cash dividend paid)
and a special cash dividend of $.05 per share.
In June 1999 the Company's Board of Directors declared a regular
quarterly cash dividend on common stock of $.205 per share payable on
August 15, 1999 to shareholders of record at the close of business on
August 5, 1999. In April 1999, the Company announced it has discontinued the
practice of declaring a five percent stock dividend.
FUTURE FINANCING - The Company's operating cash flow needs, as well as
dividend payments and capital expenditures for the balance of 1999, are
expected to be met primarily through operating activities and the utilization
of short-term lines of credit. At June 30, 1999, the Company had
$110,000,000 of short-term credit facilities, of which $76,100,000 was
unused.
At June 30, 1999, the Company also had $142,700,000 in remaining
authorization on the $200,000,000 universal shelf registration filed in July
1998. The universal shelf registration includes debt securities and common
stock of the Company and trust preferred securities of SEMCO Capital Trust.
The Company expects to acquire additional businesses during the
remainder of 1999 and will likely raise the required capital through a
combination of utilizing short-term lines of credit and issuing long-term
debt or common stock.
In July 1999, the Company announced that it had signed a definitive
purchase and sale agreement to acquire ENSTAR Natural Gas Company and the
Alaska Pipeline Company (together known as "ENSTAR") for approximately
$290,000,000 in cash, which includes $58,700,000 (or 100%) of ENSTAR's debt,
all of which is owed to the seller. The acquisition is subject to regulatory
approval and is expected to close by the end of 1999. The Company has
obtained a commitment from a lender, which is subject to the satisfaction of
certain conditions, to finance the ENSTAR acquisition through an unsecured
"bridge" loan facility. The facility matures within one year following the
date that the Company initially borrows under such facility or, if earlier,
546 days after the closing of the facility. Prepayments of $56,000,000 will
be required on the six and nine month anniversary of funding. The Company
anticipates that permanent financing to replace the bridge loan facility will
include a combination of equity and debt securities.
-28-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company sells new shares of common stock through its Direct Stock
Purchase and Dividend Reinvestment Plan ("DRIP") on a monthly basis. The
Company has determined that it does not need the additional equity capital
being generated through DRIP sales. Therefore, starting in May 1999, the
Company began purchasing shares of its common stock on the open market to
offset the number of shares sold through the DRIP.
See Note 6 of the Notes to the Consolidated Financial Statements for a
discussion of the amounts to be paid in conjunction with the sale of NOARK.
YEAR 2000
STATE OF READINESS - The Company uses computer systems, equipment,
software and related devices ("technology systems") that have date-sensitive
embedded technology that may not be able to distinguish between the year 1900
and the year 2000 ("Y2K"). If not corrected, this could cause the Company
to, among other things, report inaccurate data, issue inaccurate bills or
incur gas delivery problems. The Company has initiated an enterprise-wide
plan to prepare for Y2K (the "Y2K Plan"). The Y2K Plan has four phases: (i)
identification; (ii) remediation; (iii) testing; and (iv) contingency
planning. The identification phase includes identification, inventory,
assessment, and prioritization plan development for all technology systems.
The remediation phase involves the upgrading, modification, or replacement of
technology systems. The testing phase includes testing the remediated
technology systems to ensure that they accurately handle the year 2000 date,
and monitoring the remediated systems to ensure that Y2K problems are not
reintroduced. The contingency planning phase involves the development of
contingency plans to address certain risk scenarios.
The Y2K Plan is being used for traditional information technology ("IT")
which includes essential business systems such as payroll, billing,
accounting systems, wide area networks, local area networks, personal
computers, etc. The Company is also using the Y2K Plan for process control
computers and embedded systems contained in buildings, equipment and the gas
supply and delivery systems.
The Company has completed the identification phase for all significant
internal technology systems. The remediation phase was substantially
complete by the end of July 1999. A significant portion of the testing phase
has been completed and the Company plans to have the remainder of the testing
completed by the end of August 1999, with continuous monitoring of tested
systems through the end of 1999. The Company has substantially completed the
contingency planning phase and the remaining effort, which includes primarily
employee training and implementation, is scheduled to be completed by
November 1999.
-29-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
YEAR 2000 (Continued)
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 Y2K readiness. To date, the Company has not received all of
the responses from these third parties and, therefore, is unable to state
with reasonable assurance the status of their readiness for Y2K. The Company
continues to work with critical vendors, suppliers and customers to gain
assurance of their Y2K readiness, and will develop contingency plans to
mitigate anticipated shortcomings in their readiness.
COST OF REMEDIATION - The Company is expensing the cost of modifications
to technology systems as incurred, while capitalizing and amortizing the cost
of new software over its useful life. The Company estimates that the total
expense of the Y2K Plan is approximately $2.0 to $2.5 million. Expenses
incurred through June 30, 1999 related to the Y2K Plan were approximately
$1.9 million. The Company has incurred an opportunity cost for implementing
the Y2K Plan, thus deferring potentially beneficial IT projects.
RISK ASSESSMENT - The Company has identified what it believes are the
most significant worst case Y2K scenarios. These scenarios are (i)
interference with the Company's ability to receive and deliver gas to
customers and perform services for customers; (ii) interference with the
Company's ability to monitor gas pressure and safety throughout the Company's
gas distribution system; (iii) interference with communications during safety
related emergencies and (iv) interference with the Company's ability to bill
and receive payments from customers. These scenarios could result in the
Company not being able to deliver gas or perform other services for a period
of time, which could have a material adverse effect on the Company's
liquidity, financial condition and results of operations. The Company's Y2K
Plan is being used to address these worse case scenarios. Contingency plans
will be revised and executed to further mitigate the risks associated with
these scenarios.
The Company expects that its Y2K Plan will be adequate to address its
Y2K issues and is developing contingency plans to further assure that vital
functions of the Company dependent on third parties will continue
uninterrupted. Contingency plans will include existence of short-term
in-house capabilities (e.g., back-up power generation) and diversification of
goods and services among multiple suppliers (e.g., 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 Y2K issues, there could be a
material adverse effect on the Company's liquidity, financial condition and
results of operations.
-30-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
SUBSEQUENT EVENTS
In July 1999, the Company announced that it had signed a definitive
purchase and sale agreement ("PSA") to acquire ENSTAR Natural Gas Company and
Alaska Pipeline Company (together known as "ENSTAR") from Ocean Energy, Inc.
(the "Seller"). The Company has agreed to buy ENSTAR for approximately
$290,000,000 in cash, which includes $58,700,000 (or 100%) of ENSTAR's debt,
all of which is owed to the Seller. The acquisition will be accounted for
using the purchase method of accounting. Based on several assumptions, which
include the price at which the Company can sell new common equity and the
Company's ability to achieve certain synergies, the acquisition of ENSTAR is
expected to be accretive to both earnings and cash flow per share beginning
in the first full year following closing. The acquisition is subject to
regulatory approval, requires the consent of one lender, and is expected to
close by the end of 1999. At the completion of the transaction, the Company
will be reorganized so that ENSTAR and SEMCO Energy Gas Company will be
divisions of SEMCO Energy, Inc. In the event that the Company does not
complete the transaction following all regulatory approvals and such failure
constitutes a breach of the PSA by the Company, payment of $10,000,000 would
have to be paid to the Seller as liquidated damages. Any such payment is
secured by a letter of credit payable to the Seller.
ENSTAR Natural Gas Company currently serves more than 100,000 customers
in the Anchorage, Alaska area. Alaska Pipeline Company delivers natural gas
from several producing fields in south central Alaska to ENSTAR Natural Gas
Company's distribution system. The Company has obtained a commitment from a
lender, which is subject to the satisfaction of certain conditions, to
finance the ENSTAR acquisition through an unsecured "bridge" loan facility.
The facility matures within one year following the date that the Company
initially borrows under such facility or, if earlier, 546 days after the
closing of the facility. Prepayments of $56,000,000 will be required on the
six and nine month anniversary of funding. The Company anticipates that
permanent financing to replace the bridge loan facility will include a
combination of equity and debt securities.
Based on an initial due diligence review, the Company believes that
ENSTAR has a plan in place that adequately addresses Y2K issues related to
its critical internal technology systems. ENSTAR has advised the Company
that it has completed the identification and remediation phase of its Y2K
Plan and is currently in the testing phase. While certain vendors supplying
software for ENSTAR's critical systems have represented that their software
is Y2K compliant, ENSTAR is independently verifying this through testing.
The Company believes that ENSTAR will have all critical Y2K testing and
contingency planning done before year end.
-31-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. - (Continued)
NEW ACCOUNTING STANDARD
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
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 fair value. SFAS 133 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.
SFAS 133 is effective for fiscal years beginning after June 15, 2000.
The Company is studying the effects of SFAS 133 but does not expect it to
have a material impact on the Company's liquidity, financial condition and
results of operations.
FORWARD LOOKING STATEMENTS
This document 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 industry as well as from alternative forms of energy; (v) the
timing and extent of changes in commodity prices for natural gas and propane;
(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 construction, engineering and quality
assurance contracts; (viii) the impact of energy prices on the amount of
projects and business available to the engineering business; (ix) the nature,
availability and projected profitability of potential investments available
to the Company; (x) the Company's ability to operate acquired businesses in
accordance with its plans and (xi) the conditions of capital markets and
equity markets.
-32-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
During the second quarter of 1999, the Company issued 3,335 shares
of unregistered common stock to the members of its Board of Directors in
exchange for services rendered, valued at $50,000.
On April 1, 1999 the Company issued 138,525 shares of unregistered
common stock in exchange for 100% of the outstanding stock of Iowa Pipeline
Associates, Inc., valued at $2,099,000. The shares were issued to the
following:
Mr. William E. Mudge 36,940
Mr. Joe H. Wood 36,940
Mr. Steven C. McAreavy 36,940
U.S. Bank Trust National Association, as Escrow Agent 27,705
The preceding transactions are exempt from registration under
Section 4(2) of the 1933 Securities Act.
Item 3. Not applicable.
Item 4. Submission of Matters to a Vote of Securityholders.
At the April 20, 1999 Annual Meeting of Common Shareholders the
following nominees were elected to hold office on the Board of Directors for
a term of three years:
Name Votes For Votes Withheld
---- ---------- --------------
Daniel A. Burkhardt 14,168,073 369,826
Edward J. Curtis 14,072,773 465,126
Marcus Jackson 14,038,390 499,509
Harvey I. Klein 13,988,197 549,702
Also at the April 20, 1999 Annual Meeting of Common Shareholders,
the following proposal was approved:
-- Proposal to increase the authorized number of common shares
from 20,000,000 to 40,000,000.
For Against Abstain
--- ------- -------
12,527,517 1,636,627 373,755
Item 5. Not applicable.
-33-
PART II - OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits - (See page 37 for the Exhibit Index.)
-- Articles of Incorporation of SEMCO Energy, Inc., as restated
June 25, 1999.
-- Bylaws--last revised June 10, 1999.
-- 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.
-- Form of Indenture relating to Senior Debt Securities dated as of
October 23, 1998, with NBD Bank as Trustee.
-- Short-Term Incentive Plan as amended June 10, 1999.
-- 1997 Long-Term Incentive Plan.
-- Stock Option Certificate and Agreement dated October 10, 1996
with William L. Johnson.
-- 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 effective March 20, 1998,
for all officers except Mr. Johnson.
-- 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.
-- Executive Security Agreement.
-- Split-Dollar Agreement.
-- Deferred Compensation and Stock Purchase Agreement for Outside
Directors for 1999.
-- Stock Purchase Agreement dated March 15, 1999 concerning the
sale of the stock in SEMCO Energy Services, Inc.
-34-
<PAGE>
PART II - OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K - (Continued).
(a) List of Exhibits - (Continued)
-- Purchase and Sale Agreement dated as of July 15, 1999, with
Ocean Energy, Inc. for the acquisition of ENSTAR Natural Gas
Company and Alaska Pipeline Company.
-- Ratio of Earnings to Fixed Charges.
-- Financial Data Schedule.
-- Announcement of agreement to sell SEMCO Energy Services, Inc.
-- Announcement of dividend policy change.
(b) Reports on Form 8-K.
On April 22, 1999, the Company filed Form 8-K to report the
declaration of an increase in its regular quarterly cash dividend, the
declaration of a special cash dividend and the discontinuation of the
practice of declaring a 5% stock dividend.
On July 16, 1999, the Company filed Form 8-K to report the
agreement reached for the acquisition of ENSTAR Natural Gas Company and
Alaska Pipeline Company from Ocean Energy, Inc.
-35-
<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: August 13, 1999
By: /s/Sebastian Coppola
-------------------------------------
Sebastian Coppola
Senior Vice President and
Principal Accounting and Financial
Officer
-36-
<PAGE>
EXHIBIT INDEX
Form 10-Q
Second Quarter 1999
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- -------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3.(i) Articles of Incorporation of SEMCO Energy,
Inc., as restated June 25, 1999. x
3.(ii) Bylaws--last revised June 10, 1999. x
4.1 Note Agreement dated as of June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(a) x
4.2 Rights Agreement dated as of April 15, 1997
with Continental Stock Transfer & Trust Company,
as Rights Agent.(c) x
4.3 Note Agreement dated as of October 1, 1997,
relating to issuance of $60,000,000 of
long-term debt.(f) x
4.4 Form of Indenture relating to Senior Debt
Securities dated as of October 23, 1998,
with NBD Bank as Trustee.(h) x
10 Material Contracts.
10.1 Short-Term Incentive Plan as
amended June 10, 1999. x
10.2 1997 Long-Term Incentive Plan.(b) x
10.3 Stock Option Certificate and Agreement
dated October 10, 1996 with
William L. Johnson.(c) x
10.4 Stock Option Certificate and Agreement
dated February 26, 1997 with
William L. Johnson.(c) x
10.5 Employment Agreement dated October 10, 1996,
with William L. Johnson.(d) x
10.6 Change of Control Employment Agreement dated
October 10, 1996, with William L. Johnson.(d) x
10.7 Form of Change in Control Agreement
effective March 20, 1998, for all officers
except Mr. Johnson.(g) x
10.8 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.(e) x
10.9 Purchase Agreement between the Company and
Merrill Lynch & Co., etc., pertaining to an
offering of 1,600,000 Shares of Common Stock.(i) x
-37-
<PAGE>
EXHIBIT INDEX
(Continued)
Form 10-Q
Second Quarter 1999
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- -------- ----------- -------- ---------
10.10 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.(j) x
10.11 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.(k) x
10.12 Executive Security Agreement.(m) x
10.13 Split-Dollar Agreement.(m) x
10.14 Deferred Compensation and Stock Purchase
Agreement for Outside Directors for 1999.(m) x
10.15 Stock Purchase Agreement dated March 15, 1999
concerning the sale of the stock in SEMCO
Energy Services, Inc.(o) x
10.16 Purchase and Sale Agreement dated as of
July 15, 1999, with Ocean Energy, Inc. for
the acquisition of ENSTAR Natural Gas Company
and Alaska Pipeline Company.(p) 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. NA NA
19 Report furnished to security holders. NA NA
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. NA NA
24 Power of Attorney. NA NA
27 Financial Data Schedule. x
99.1 Announcement of agreement to sell
SEMCO Energy Services, Inc.(l) x
99.2 Announcement of dividend policy change.(n) x
-38-
<PAGE>
Key to Exhibits Incorporated by Reference
(a) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
June 30, 1994, File No. 0-8503.
(b) Filed March 6, 1997 as part of SEMCO Energy, Inc.'s 1997 Proxy
Statement, dated March 7, 1997, File No. 0-8503.
(c) Filed with SEMCO Energy, Inc.'s Form 10-K for 1996, dated March 27,
1997, File No. 0-8503.
(d) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
March 31, 1997, File No. 0-8503.
(e) Filed with SEMCO Energy, Inc.'s Form 8-K dated August 13, 1997,
File No. 0-8503.
(f) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
September 30, 1997, File No. 0-8503.
(g) Filed with SEMCO Energy, Inc.'s Form 10-Q/A for the quarter ended
March 31, 1998, File No. 0-8503.
(h) Filed with SEMCO Energy, Inc.'s Registration Statement, Form S-3,
Nos. 333-58715 and 333-58715-01, filed July 8, 1998.
(i) Filed with SEMCO Energy, Inc.'s Form 8-K dated August 13, 1998,
File No. 0-8503.
(j) Filed with SEMCO Energy, Inc.'s Form 8-K dated October 21, 1998,
File No. 0-8503.
(k) Filed with SEMCO Energy, Inc.'s Form 8-K dated November 5, 1998,
File No. 0-8503.
(l) Filed with SEMCO Energy, Inc.'s Form 8-K dated March 23, 1999, File
No. 0-8503.
(m) Filed with SEMCO Energy, Inc.'s Form 10-K for 1998, dated March 26,
1999, File No. 0-8503.
(n) Filed with SEMCO Energy, Inc.'s Form 8-K dated April 22, 1999, File
No. 0-8503.
(o) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
March 31, 1999, File No. 0-8503.
(p) Filed with SEMCO Energy, Inc.'s Form 8-K dated July 16, 1999, File
No. 0-8503.
-39-
Exhibit 3.(i)
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
Date Received (FOR BUREAU USE ONLY)
This document is effective on the date filed,
unless a subsequent effective date within 90
days after received date is stated in the
document.
FILED
JUN 25 1999
Administrator
CORP., SECURITIES &
LAND DEV. BUREAU
Name
Sherry L. Abbott
Address
405 Water Street
City State Zip Code
Port Huron Michigan 48060
Effective Date:
Document will be returned to the name
and address you enter above. If left
blank document will be mailed to the
registered office.
RESTATED ARTICLES OF INCORPORATION
For use by Domestic Profit Corporations
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972, the
undersigned corporation executes the following Articles:
1. The present name of the corporation is: SEMCO Energy, Inc.
2. The identification number assigned by the Bureau is: 065-723
3. All former names of the corporation are:
Southeastern Michigan Gas Enterprises, Inc.
4. The date of filing the original Articles of Incorporation was:
March 3, 1977
The following Restated Articles of Incorporation supersede the Articles
of Incorporation as amended and shall be the Articles of Incorporation
for the corporation:
ARTICLE I
The name of the corporation is
SEE ATTACHED FOR FULL SET OF RESTATED ARTICLES
ARTICLE II
The purpose or purposes for which the corporation is formed are:
ARTICLE VII (Additional provisions, if any, may be inserted here;
attach additional pages if needed.)
5. COMPLETE SECTION (a) IF THE RESTATED ARTICLES WERE ADOPTED BY THE
UNANIMOUS CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE
BOARD OF DIRECTORS; OTHERWISE, COMPLETE SECTION (b). DO NOT COMPLETE
BOTH.
a. [ ] These Restated Articles of Incorporation were duly adopted on
the ______ day of _____________, 19____, in accordance with
the provisions of Section 642 of the Act by the unanimous
consent of the incorporator(s) before the first meeting of the
Board of Directors.
Signed this _____ day of ___________, 19___.
__________________________________ _________________________________
(Signature) (Signature)
__________________________________ _________________________________
(Signatures of Incorporators; Type or Print Name Under Each Signature)
b. [X] These Restated Articles of Incorporation were duly adopted on
the 10th day of June, 1999 in accordance with the provisions
of Section 642 of the Act and: (check one of the following)
[X] were duly adopted by the Board of Directors without a
vote of the shareholders. These Restated Articles of
Incorporation only restate and integrate and do not
further amend the provisions of the Articles of
Incorporation as heretofore amended and there is no
material discrepancy between those provisions and the
provisions of these Restated Articles.
[ ] were duly adopted by the shareholders. The necessary
number of shares as required by statute were voted in
favor of these Restated Articles.
[ ] were duly adopted by the written consent of the
shareholders having not less than the minimum number of
votes required by statute in accordance with Section
407(1) of the Act. Written notice to shareholders who
have not consented in writing has been given. (Note:
Written consent by less than all of the shareholders is
permitted only if such provision appears in the Articles
of Incorporation.)
[ ] were duly adopted by written consent of all the
shareholders entitled to vote in accordance with section
407(2) of the Act.
Signed this 11th day of June, 1999
By /s/William L. Johnson
(Signature of an authorized
officer or agent)
William L. Johnson, Chairman,
President and CEO
(Type or Print Name)
<PAGE>
RESTATED ARTICLES OF INCORPORATION
SEMCO ENERGY, INC.
ARTICLE I.
The name of the corporation is SEMCO Energy, Inc.
ARTICLE II.
The purpose or purposes for which the corporation is organized is to
engage in any activity within the purposes for which corporations may be
organized under the Business Corporation Act of Michigan.
ARTICLE III.
SECTION 1. The total authorized capital stock consists of (a)
500,000 shares of Cumulative Preferred Stock of the par value of $1 per
share, issuable in series as hereinafter provided, designated "Cumulative
Preferred Stock, $1 Par Value", (b) 3,000,000 shares of Preference Stock
designated "Preference Stock, $1 Par Value", and (c) 40,000,000 shares of
stock of the par value of $1 per share, designated "Common Stock, $1 Par
Value."
SECTION 2. The following is a description of each class of shares of
the Corporation, with the voting powers, preferences and rights and
qualifications, limitations or restrictions thereof.
DIVISION A. Cumulative Preferred Stock, $1 Par Value
(1) Issuable in Series: The Cumulative Preferred Stock may be
divided into and issued in series. Each series shall be so designated
as to distinguish the shares thereof from the shares of all other series
and classes of shares. All shares of the Cumulative Preferred Stock
shall be identical except as to the following relative rights and
preferences as to which there may be variations between the series:
(a) The rate of dividends and the extent of further participation
in dividend distribution, if any;
(b) The price at and the terms and conditions on which the shares
are redeemable;
(c) The amount payable upon shares in event of voluntary or
involuntary liquidation;
(d) Sinking fund provisions for the redemption or purchase of
shares;
(e) The terms and conditions on which shares are convertible.
The Board of Directors is hereby expressly vested with
authority and shall have authority by resolution or resolutions from
time to time adopted to divide the shares of the Cumulative Preferred
Stock into series and, with the limitations set forth in the laws of the
State of Michigan and in these articles, fix and determine the relative
rights and preferences of the shares of any series so established.
(2) Dividends: The holders of Cumulative Preferred Stock shall be
entitled to receive out of the surplus of the Corporation, if, when and
as declared by the Board of Directors in its discretion, preferential
dividends at the rate fixed for each series payable quarterly on the
15th day of February, May, August and November in each year (the periods
between such dates, commencing on such dates, are hereby designated as
"dividend periods") before any dividends shall be declared or paid upon
or set apart for, or other distribution shall be ordered or made in
respect of, the Common Stock or Preference Stock. Such dividends on the
Cumulative Preferred Stock, shall commence to accrue and be cumulative
from the first day of the quarterly dividend period in which such
Cumulative Preferred Stock are issued or at such other date in said
quarterly dividend period as shall be fixed in the resolution of the
Board of Directors establishing any series. No dividends shall be
declared on the shares of Cumulative Preferred Stock of any series for
any quarterly dividend period unless for the same quarterly dividend
period there shall likewise be declared upon all shares of Cumulative
Preferred Stock of all other series at the time outstanding like
dividends in proportion to the annual dividend rates fixed for such
series, respectively, to the extent that such shares are entitled to
receive dividends for such quarterly dividend period. If full
cumulative dividends on the outstanding Cumulative Preferred Stock at
the rate aforesaid for all past dividend periods to the end of the then
current dividend period shall not have been paid or declared and a sum
sufficient for the payment thereof set apart, the amount of the
deficiency shall be fully paid, but without interest, or dividends upon
the Cumulative Preferred Stock in such amount shall be declared and a
sum sufficient for the payment thereof set apart, before any dividends
shall be declared or paid upon or set apart, for, or any other
distribution shall be ordered or made in respect of, the Common Stock or
Preference Stock and before any sums shall be paid or set apart for the
redemption of less than all of the Cumulative Preferred Stock then
outstanding or for the purchase or other retirement of any Cumulative
Preferred Stock.
(3) Preference Upon Liquidation: In the event of any liquidation,
dissolution or winding up of the Corporation, or any reduction of its
capital, resulting in any distribution of its assets to its
stockholders, the holders of Cumulative Preferred Stock shall be
entitled to receive, for each share thereof, out of the assets of the
Corporation, whether from capital, surplus or earnings, available for
distribution to its shareholders, an amount fixed for each series as, or
in the manner, hereinabove provided before any distribution of assets of
the Corporation shall be made to the holders of Common Stock or
Preference Stock; but the holders of Cumulative Preferred Stock shall be
entitled to no further participation in such distribution. If, upon any
such liquidation, dissolution, winding up or reduction, the assets of
the Corporation distributable as aforesaid among the holders of
Cumulative Preferred Stock shall be insufficient to permit the payment
to them of the full preferential amounts, then the entire assets of the
Corporation to be so distributed shall be distributed ratably among all
the holders of Cumulative Preferred Stock in proportion to the full
preferential amounts to which they are respectively entitled. Nothing
in this paragraph shall be deemed to prevent the purchase or redemption
of Cumulative Preferred Stock or the purchase of Common Stock or
purchase or redemption of Preference Stock in any manner permitted by
law or herein provided for; provided, however, that anything herein to
the contrary notwithstanding, the Corporation shall not, so long as any
Cumulative Preferred Stock remain outstanding, purchase any of its
Common Stock or purchase or redeem any of its Preference Stock. A
consolidation or merger of the Corporation, or a sale or transfer of
substantially all of its assets as an entirety, shall not be regarded as
a liquidation, dissolution or winding up of the Corporation or as a
reduction of its capital.
(4) Redemption and Purchase: The Corporation may, at its option,
expressed by resolution of its Board of Directors, at any time or from
time to time, redeem the whole or any part of any series of Cumulative
Preferred Stock at the redemption price for each share fixed for such
series. Notice of any proposed redemption of Cumulative Preferred Stock
shall be given by the Corporation, by mailing a copy of such notice at
least 30 days prior to the date fixed for such redemption to the holders
of record of the Cumulative Preferred Stock to be redeemed, at their
respective addresses appearing on the books of the Corporation. If less
than all of any series of the Cumulative Preferred Stock are to be
redeemed as herein provided, the redemption shall be made in such
amount, at such place, by such method, either by lot or pro rata, and
subject to such provisions of convenience as shall from time to time be
provided by bylaws of the Corporation or be determined by resolution of
the Board of Directors. From and after the date fixed in any such
notice as the date of redemption, unless default shall be made by the
Corporation in providing moneys at the time and place specified for the
payment of the redemption price pursuant to said notice, all dividends
on the Cumulative Preferred Stock thereby called for redemption shall
cease to accrue; and from and after the date so fixed (unless the
default be made as aforesaid) or the date of the earlier deposit by the
Corporation, in a special account with a solvent bank or trust company
doing business in the City of Chicago, Illinois, of funds sufficient for
such redemption (a statement of the intention so to deposit having been
included in said notice), all rights of the holders of said Cumulative
Preferred Stock so called for redemption as shareholders of the
Corporation, except only the right to receive the redemption price
without interest, shall cease and determine, and such shares shall be
deemed no longer to be outstanding; but the making of said deposit with
any such bank or trust company shall not relieve the Corporation of
liability for payment of the redemption price. Any moneys so deposited
which shall remain unclaimed by the holders of such Cumulative Preferred
Stock at the end of six (6) years after the redemption date, together
with any interest thereon that shall have been allowed by the bank or
trust company with which the deposit shall have been made, shall be paid
by it to the Corporation. The Corporation may also, from time to time,
purchase any of its Cumulative Preferred Stock with any funds available
for such purpose at not exceeding the price at which the same may be
redeemed. No redemption or purchase of Cumulative Preferred Stock as
herein provided shall be made or ordered (i) unless full cumulative
dividends at the appropriate dividend rate upon all of the Cumulative
Preferred Stock then outstanding which is not to be redeemed or
purchased, from the date from which dividends on such Cumulative
Preferred Stock became cumulative to the end of the then current
dividend period for such Cumulative Preferred Stock, shall have been
paid or declared and a sum sufficient for the payment thereof set apart
and (ii) unless provision shall have been made for the satisfaction of
any obligations then or theretofore matured in respect of any sinking
fund for the benefit of Cumulative Preferred Stock which is then
outstanding and is not to be redeemed or purchased. Any amounts applied
out of the surplus of the Corporation to the purchase or redemption of
any of its Cumulative Preferred Stock shall be charged against paid-in
surplus or earned surplus, as the Board of Directors may in its
discretion determine. The redemption, purchase or acquiring by the
Corporation of any shares of Cumulative Preferred Stock shall not be
deemed to reduce the authorized number of shares of stock of the
Corporation. Any shares of the Cumulative Preferred Stock redeemed,
retired, purchased or otherwise acquired (including shares acquired by
conversion) shall be cancelled and shall assume the status of authorized
but unissued Cumulative Preferred Stock in the same manner as if the
shares had never been issued as shares of any series of the Cumulative
Preferred Stock and be undesignated as to future series.
(5) Restriction on Certain Corporate Action and Voting Power: The
holders of the Cumulative Preferred Stock shall be entitled to vote only
as in this paragraph (5) provided, or as otherwise required by law. In
any case where the holders of the Cumulative Preferred Stock shall not
be entitled to vote, they shall not be entitled to notice of any
shareholders' meeting except as otherwise provided by law.
If at any time the Corporation shall fail to declare and pay
or set apart for payment in full eight quarterly dividends (whether or
not consecutive) on all of the outstanding Cumulative Preferred Stock,
then the holders of the outstanding Cumulative Preferred Stock shall,
thereupon, have the right, voting as a single class irrespective of
series, to elect such number of directors of the Corporation as shall
constitute one less than the smallest number of directors necessary to
constitute a majority of the full Board of Directors, and such right
shall continue (and may be exercised at any annual or other meeting of
shareholders for the election of Directors) until the Corporation shall
have paid or declared and set apart for payment all accrued dividends on
the Cumulative Preferred Stock for all past quarterly dividend periods.
The term of office of all persons who may be Directors of the
Corporation at any time when such right shall accrue to the holders of
the Cumulative Preferred Stock, shall terminate upon the election of
their successors at a special meeting of shareholders of the
Corporation, which shall be held, at any time after the accrual of such
right, upon the notice provided in the bylaws of the Corporation for the
annual meeting of shareholders at the request in writing of the holders
of record of at least 5% of the number of Cumulative Preferred Stock
then outstanding. In default of the calling of said meeting by a proper
officer of the Corporation within five days after the making of such
request, such meeting may be called on like notice by the holders of
record of at least 5% of the number of Cumulative Preferred Stock then
outstanding, for which purpose such holders of the Cumulative Preferred
Stock shall have the right to have access to the stock books of the
Corporation. If such special meeting is not called prior to the next
annual meeting, the holders of the Cumulative Preferred Stock, voting as
a single class irrespective of series, shall elect the minority of the
Board of Directors at such annual meeting, unless previously thereto all
such dividend defaults shall have been cured. Upon the termination at
any time of such right of the holders of the Cumulative Preferred Stock
to elect a minority of the Board of Directors, the term of office of all
Directors then in office shall end upon the election of their
successors, which election may be held on like notice at a special
meeting called at the request in writing of the holders of record of at
least 5% of the number of shares of stock entitled to vote then
outstanding. If such special meeting is not called within five (5) days
after the making of such request by a proper officer of the Corporation,
such meeting may be called on like notice by the holders of record of at
least 5% of such outstanding stock, for which purpose such holders shall
have access to the stock books of the Corporation. If such special
meeting is not called prior to the next annual meeting, a Board of
Directors shall be elected at such annual meeting.
In addition to any other approvals or consents herein
required, the Corporation shall not, without the consent of the holders
of record of at least two-thirds of the Cumulative Preferred Stock, at
the time outstanding, voting as a single class irrespective of series,
given by their affirmative vote at an annual or special meeting called
for that purpose, (i) authorize or issue any other class of stock having
a priority or preference over or ranking on a parity with the Cumulative
Preferred Stock as to dividends or assets, or (ii) amend the provisions
hereof so as to affect adversely any of the powers, preferences or
special rights hereby given to the Cumulative Preferred Stock.
(6) The following resolution was duly adopted by the Directors of
the Corporation on the 1st day of December, 1978, pursuant to Article
III, Section 2, Division A, paragraph (1) of these Articles:
RESOLVED, that 80,000 Shares of Cumulative Preferred Stock are
hereby established as a series of the Cumulative Preferred Stock
and are designated "$2.3125, Series A, Convertible Cumulative
Preferred Stock". All shares of this series shall be identical and
shall possess the preferences, rights and privileges and voting
powers of the Cumulative Preferred Stock and shall have the
following relative rights and preferences:
(a) Dividend Rights. The rate of dividend which the holders of
shares of this series shall be entitled to receive shall be
$2.3125 per share per annum and no more, and such dividends
shall accrue from the date of original issue and be payable
commencing February 15, 1979.
(b) Redemption. The amount per share which the holders of said
shares of this series shall be entitled to receive if said
shares are redeemed shall be $25 per share plus all dividends
accrued or in arrears thereon.
(c) Rights on Liquidation. The preferential amount payable upon
the shares of this series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Company or reduction of capital resulting in the distribution
of assets to the shareholders, shall be equal to $25 per share
together with an amount equal to dividends accrued or in
arrears thereon.
(d) Sinking Fund. There are no sinking fund or purchase fund
provisions provided for the redemption or purchase of shares
of this series.
(e) Conversion Privilege. The holders of shares of this series
shall have the right, at their option, to convert such shares
into shares of Common Stock of the Company at any time subject
to the following terms and conditions:
(1) The shares of this series shall be convertible at the
office of any transfer agent or at the offices of the
Company, and at such other office or offices, if any, as
the Board of Directors may designate, into fully paid and
nonassessable shares (calculated as to each conversion to
the nearest 1/100th of a share) of Common Stock of the
Company, at the Conversion Price, determined as
hereinafter provided, in effect at the time of
conversion, each share of this series being valued at
$25.00 for the purpose of such conversion. The price at
which shares of Common Stock shall be delivered upon
conversion (as adjusted from time to time as herein
provided, herein called the "Conversion Price") shall be
initially $20.00 per share of Common Stock. The
conversion price shall be reduced in certain instances as
provided in paragraphs (3), (9) and (10) below, and shall
be increased in certain instances as provided in
paragraph (10) below.
No payment or adjustment shall be made upon any
conversion on account of any dividends accrued on the
shares of this series surrendered for conversion or on
account of any dividends on the Common Stock issued upon
such conversion.
(2) In order to convert shares of this series into Common
Stock, the holder thereof shall surrender at any office
hereinabove mentioned the certificate or certificates
therefor, duly endorsed to the Company or in blank, and
give written notice to the Company at said office that he
elects to convert such shares. Shares of this series
shall be deemed to have been converted immediately prior
to the close of business on the day of the surrender of
such shares for conversion as provided above, and the
person or persons entitled to receive the Common Stock
issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such Common
Stock at such time. As promptly as practicable on or
after the conversion date, the Company shall issue and
shall deliver at said office a certificate or
certificates for the number of full shares of Common
Stock issuable upon such conversion, together with cash
in lieu of any fraction of a share, as hereinafter
provided, to the person or persons entitled to receive
the same. In case shares of this series are called for
redemption, the right to convert such shares shall cease
and terminate at the close of business on the day
preceding the date fixed for redemption, unless default
shall be made in payment of the redemption price.
(3) In case the Conversion Price in effect immediately prior
to the close of business on any day after November 16,
1978 shall exceed by 25 cents or more the amount
determined at the close of business on such date by
dividing:
(i) a sum equal to (a) 649,683 multiplied by $20.00
(being the initial conversion price), plus (b) the
aggregate of the amounts of all consideration
received by the Company upon the issuance of
Additional Shares of Common Stock (as hereinafter
defined), minus (c) the aggregate of the amounts of
all dividends and other distributions which have
been paid or made after November 16, 1978 on Common
Stock, other than in cash out of its earned surplus
or in Common Stock, by
(ii) the sum of (a) 649,683 and (b) the number of
Additional Shares of Common Stock which shall have
been issued,
the conversion price shall be reduced, effective
immediately prior to the opening of business on the next
succeeding day, to the amount so determined. The
foregoing amount of 25 cents (or such amount as
theretofore adjusted) shall be subject to adjustment as
provided in paragraphs (9) and (10) below, and such
amount (or such amount as theretofore adjusted) is
referred to in such paragraphs as the "Differential
Amount."
(4) The term "Additional Shares of Common Stock" as used
herein shall mean, without duplication, all shares of
Common Stock issued after November 16, 1978 (including
shares deemed to be Additional Shares of Common Stock
pursuant to paragraph (10) below), whether or not
subsequently reacquired or retired by the Company, other
than:
(i) shares issued upon conversion of shares in this
series;
(ii) shares issued by way of dividend or other
distribution on shares of Common Stock excluded
from the definition of Additional Shares of Common
Stock by the foregoing clause (i) or this clause
(ii) or on shares of Common Stock resulting from
any subdivision or combination of shares of Common
Stock so excluded.
The sale or other disposition of any shares of Common
Stock or other securities held in the treasury of the
Company shall not be deemed an issuance thereof.
(5) In case of the issuance of Additional Shares of Common
Stock for a consideration, part or all of which shall be
cash, the amount of the cash consideration therefor shall
be deemed to be the amount of cash received by the
Company for such shares (or, if such Additional Shares of
Common Stock are offered by the Company for subscription,
the subscription price, or, if such Additional Shares of
Common Stock are sold to underwriters or dealers for
public offering without a subscription offering, the
initial public offering price), without deducting
therefrom any compensation or discount in the sale,
underwriting or purchase thereof by underwriters or
dealers or others performing similar services or for any
expenses incurred in connection therewith.
(6) In case of the issuance (otherwise than as a dividend or
other distribution on any stock of the Company or upon
conversion or exchange of other securities of the
Company) of Additional Shares of Common Stock for a
consideration, part or all of which shall be other than
cash, the amount of the consideration therefor other than
cash shall be deemed to be the value of such
consideration as determined by the Board of Directors,
irrespective of the accounting treatment thereof. The
reclassification of securities other than Common Stock
into securities including Common Stock shall be deemed to
involve the issuance for a consideration other than cash
of such Common Stock immediately prior to the close of
business on the date fixed for the determination of
shareholders entitled to receive such Common Stock.
(7) Additional Shares of Common Stock issuable by way of
dividend or other distribution on any class of capital
stock of the Company shall be deemed to have been issued
without consideration, and shall be deemed to have been
issued immediately prior to the close of business on the
date fixed for the determination of shareholders entitled
to receive such dividend or other distribution, except
that if the total number of shares constituting such
dividend or other distribution exceeds five percent of
the total number of shares of Common Stock outstanding at
the close of business on the date fixed for the
determination of shareholders entitled to receive such
dividend or other distribution, such Additional Shares of
Common Stock shall be deemed to have been issued
immediately after the opening of business on the day
following the date fixed for the determination of
shareholders entitled to receive such dividend or other
distribution.
A dividend or other distribution in cash or in property
(including any dividend or other distribution in
securities other than Common Stock) shall be deemed to
have been paid or made immediately prior to the close of
business on the date fixed for the determination of
shareholders entitled to receive such dividend or other
distribution and the amount of such dividend or other
distribution in property shall be deemed to be the value
of such property as of the date of the adoption of the
resolution declaring such dividend or other distribution,
as determined by the Board of Directors at or as of that
date. In the case of any such dividend or other
distribution of Common Stock which consists of securities
which are convertible into or exchangeable for shares of
Common Stock, such securities shall be deemed to have
been issued for a consideration equal to the value
thereof as so determined.
If, upon the payment of any dividend or other
distribution in cash or in property (excluding Common
Stock but including all other securities), outstanding
shares of Common Stock are cancelled or required to be
surrendered for cancellation, on a pro rata basis, the
number of shares of Common Stock outstanding immediately
prior thereto in excess of the number to be outstanding
immediately thereafter (less that portion of such excess
attributable to the cancellation of shares excluded from
the definition of Additional Shares of Common Stock by
clause (i) or (ii) of paragraph (4) above), shall be
deducted from the sum computed pursuant to clause (ii) of
paragraph (3) above for the purpose of all determinations
under such paragraph (3) made immediately prior to the
close of business on the date fixed for the determination
of shareholders entitled to receive such dividend or
other distribution and at any time thereafter.
The reclassification (including any reclassification upon
a consolidation or merger in which the Company is the
continuing corporation) of Common Stock into securities
including other than Common Stock shall be deemed to
involve (a) a distribution on Common Stock of such
securities other than Common Stock made immediately prior
to the close of business on the effective date of the
reclassification, and (b) a combination or subdivision,
as the case may be, of the number of shares of Common
Stock outstanding immediately prior to such
reclassification into the number of shares of Common
Stock outstanding immediately thereafter.
The issuance by the Company of rights or warrants to
subscribe for or purchase securities of the Company shall
not be deemed to be a dividend or distribution of any
kind.
(8) In case of the issuance of Additional Shares of Common
Stock upon conversion or exchange of other securities of
the Company, the amount of the consideration received by
the Company for such Additional Shares of Common Stock
shall be deemed to be the total of (a) the amount of the
consideration, if any, received by the Company upon the
issuance of such other securities, plus (b) the amount of
the consideration, if any, other than such other
securities, received by the Company (except in adjustment
of interest or dividends) upon such conversion or
exchange. In determining the amount of the consideration
received by the Company upon the issuance of such other
securities (i) the amount of the consideration in cash
and other than cash shall be determined pursuant to
paragraphs (5), (6) and (7) above, and (ii) if securities
of the same class or series of a class as such other
securities were issued for different amounts of
consideration, or if some were issued for no
consideration, then the amount of the consideration
received by the Company upon the issuance of each of the
securities of such class or series, as the case may be,
shall be deemed to be the average amount of the
consideration received by the Company upon the issuance
of all the securities of such class or series, as the
case may be.
(9) In case at any time after November 16, 1978 Additional
Shares of Common Stock are issued as a dividend or other
distribution on any class of capital stock of the Company
and the total number of shares constituting such dividend
or other distribution exceeds five per cent of the total
number of shares of Common Stock outstanding at the close
of business on the date fixed for the determination of
shareholders entitled to receive such dividend or other
distribution, the conversion price and the Differential
Amount in effect at the opening of business on the day
following the date fixed for such determination shall be
reduced by multiplying each of them by a fraction of
which the numerator shall be the number of shares of
Common Stock outstanding at the close of business on the
date fixed for such determination and the denominator
shall be the sum of such number of shares and the total
number of shares constituting such dividend or other
distribution, such reductions to become effective
immediately after the opening of business on the day
following the date fixed for such determination. For the
purposes of this paragraph (9), the number of shares of
Common Stock at any time outstanding shall not include
shares held in the treasury of the Company but shall
include any shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of
Common Stock (other than shares of Common Stock which,
upon issuance, would not constitute Additional Shares of
Common Stock). The Company will not pay any dividend or
make any distribution on shares of Common Stock held in
the treasury of the Company.
(10) In case at any time after November 16, 1978 outstanding
shares of Common Stock shall be subdivided into a greater
number of shares of Common Stock, the conversion price
and the Differential Amount in effect at the opening of
business on the day following the day upon which such
subdivision becomes effective shall each be
proportionately reduced, and, conversely, in case at any
time after the above stated date, outstanding shares of
Common Stock shall be combined into a smaller number of
shares of Common Stock, the conversion price and the
Differential Amount in effect at the opening of business
on the day following the day upon which such combination
becomes effective shall each be proportionately
increased, such reductions or increases, as the case may
be, to become effective immediately after the opening of
business on the day following the day upon which such
subdivision or combination becomes effective. In the
event of any such subdivision, the number of shares of
Common Stock outstanding immediately thereafter, to the
extent of the excess thereof over the number outstanding
immediately prior thereto (less that portion of such
excess attributable to the subdivision of shares excluded
from the definition of Additional Shares of Common Stock
by clause (i) or (ii) of paragraph (4) above), shall be
deemed to be Additional Shares of Common Stock and to
have been issued immediately after the opening of
business on the day following the day upon which such
division shall have become effective and without
consideration. In the event of any such combination, the
excess of the number of shares of Common Stock
outstanding immediately prior thereto over the number
outstanding immediately thereafter (less that portion of
such excess attributable to the combination of shares
excluded from the definition of Additional Shares of
Common Stock by clause (i) or (ii) of paragraph (4)
above), shall be deducted from the sum computed pursuant
to clause (ii) of paragraph (3) above for the purposes of
all determinations under such paragraph (3) made on any
day after the day upon which such combination becomes
effective. Shares of Common Stock held in the treasury
of the Company and shares issuable in respect of any
scrip certificates issued in lieu of fractions of shares
of Common Stock (other than shares of Common Stock which,
upon issuance, would not constitute Additional Shares of
Common Stock) shall be considered outstanding for the
purposes of this paragraph (10).
(11) Whenever the conversion price is adjusted as herein
provided:
(a) the Company shall compute the adjusted conversion
price in accordance with this subdivision (e) and
shall prepare a certificate signed by the Secretary
or an Assistant Secretary of the Company setting
forth the adjusted conversion price and showing in
reasonable detail the facts upon which such
adjustment is based, including a statement of the
consideration received or to be received by the
Company for, and the amount of, any Additional
Shares of Common Stock issued since the last such
adjustment, and such certificate shall forthwith be
filed with the transfer agents for this series, if
any; and
(b) a notice stating that the conversion price has been
adjusted and setting forth the adjusted conversion
price shall forthwith be required, and as soon as
practicable after it is required, such notice shall
be mailed to the holders of record, of the
outstanding shares of this series; provided,
however, that if within ten days after the
completion of mailing of such a notice, an
additional notice is required, such additional
notice shall be deemed to be required pursuant to
this clause (b) as of the opening of business on
the tenth day after such completion of mailing and
shall set forth the conversion price as adjusted at
such opening of business, and upon the mailing of
such additional notice no other notice need be
given of any adjustment in the conversion price
occurring at or prior to such opening of business
and after the time that the next preceding notice
given by mail became required.
(12) In case at any time after November 16, 1978:
(a) the Company shall declare a dividend (or any other
distribution) in its Common Stock payable otherwise
than in cash out of its earned surplus; or
(b) the Company shall authorize the granting to the
holders of its Common Stock of rights to subscribe
for or purchase any shares of capital stock of any
class or of any other rights; or
(c) any reclassification of the capital stock of the
Company (other than a subdivision or combination of
its outstanding shares of Common Stock), or any
consolidation or merger to which the Company is a
party and for which approval of any shareholders of
the Company is required, or the sale or transfer of
all or substantially all of the assets of the
Company occurs; or
(d) the voluntary or involuntary dissolution,
liquidation, or winding up of the Company occurs;
then the Company shall cause to be mailed to the transfer
agent or agents for this series, if any, and to the
holders of record of the outstanding shares of this
series, at least twenty days (or ten days in any case
specified in clause (a) or (b) above) prior to the
applicable record date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution or rights, or,
if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such
dividend, distribution or rights are to be determined, or
(y) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution,
liquidation or winding up in expected to become
effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or
other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution,
liquidation or winding up.
(13) The Company shall at all times reserve and keep available
free from preemptive rights, out of its authorized but
unissued Common Stock, for the purpose of effecting the
conversion of the shares of this series, the full number
of shares of Common Stock then deliverable upon the
conversion of all shares of this series then outstanding
and, if at any time the number of authorized but unissued
shares of Common Stock (including shares held in the
treasury) shall be less than the number of shares of
Common Stock into which the shares then outstanding of
this series shall be convertible, the Company shall take
such action as is necessary to increase the number of
shares which the Company is authorized to issue so that
the Company will have a sufficient number of authorized
but unissued shares available for the conversion of the
shares of this series. Under no circumstances will the
Company take any action which could cause the conversion
price to be reduced below the par value, if any, of the
Common Stock unless the Company first restricts a surplus
account or accounts (in an amount at least equal to the
product of the number of shares of Common Stock into
which the shares of this series are convertible, on the
effective date of such action, times the par value of a
share of Common Stock, less the amount in the stated
capital account for the shares of this series) to use
only for the purpose of serving as consideration for
shares of Common Stock issuable upon conversion of shares
of this series.
(14) No fractional shares of Common Stock shall be issued upon
conversion, but instead of any fraction of a share which
would otherwise be issuable, the Company shall pay a cash
adjustment in respect of such fraction in an amount equal
to the same fraction of the conversion price per share of
Common Stock immediately prior to the close of business
on the day of conversion.
(15) The Company will pay any and all taxes, other than any
income taxes, that may be payable in respect of the issue
or delivery of shares of Common Stock on conversion of
shares of this series pursuant hereto. The Company shall
not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue
and delivery of shares of Common Stock in a name other
than that in which the shares of this series so converted
were registered, and no such issue or delivery shall be
made unless and until the person requesting such issue
has paid to the Company the amount of any such tax, or
has established, to the satisfaction of the Company, that
such tax has been paid.
(16) For the purpose of this subdivision (e), the term "Common
Stock" shall include any stock of any class of the
Company which has no preference in respect to dividends
or to amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Company, and which is not subject to redemption by the
Company. However, shares issuable on conversion of
shares of this series shall include only shares of the
class designated as Common Stock of the Company as of
November 16, 1978, or shares of any class or classes
resulting from any reclassification or reclassifications
thereof and which have no preference in respect to
dividends or to amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or
winding up of the Company and which are not subject to
redemption by the Company; provided that if at any time
there shall be more than one such resulting class, the
shares of each such class then so issuable shall be
substantially in the proportion which the total number of
shares of such class resulting from all such
reclassifications bears to the total number of shares of
all such classes resulting from all such
reclassifications.
(17) If any shares issuable upon the conversion of shares of
this series require registration with or approval of any
governmental authority under any Federal or State law
before such shares may be validly issued upon conversion,
then the Company shall in good faith and as expeditiously
as possible endeavor to secure such registration or
approval as the case may be.
(f) Dividends Accrued. The amount of dividends accrued or in
arrears as used in these resolutions as of any date shall mean
an amount equal to simple interest on the sum of $25 at the
rate of 9.25% per annum, from the date on which dividends on
shares of this series first became cumulative (i.e. the date
of original issue) to the date as of which the computation is
made, less the aggregate amount, without interest, of all
dividends theretofore paid or declared and set apart for
payment upon said series. Any shares of said series at any
time owned by the Company shall, for the purpose of this
definition, be deemed to have received in dividends an amount
per share equal to that which, during the time such shares
were so owned, was paid upon or became payable to holders of
record of the outstanding shares of this series then not so
owned by the Company.
DIVISION B. Preference Stock, $1 Par Value
(7) Issuable in Series: The Preference Stock may be divided into
and issued in series. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and
classes of shares.
The Board of Directors is hereby expressly vested with
authority and shall have authority by resolution or resolutions from
time to time adopted to divide the shares of the Preference Stock into
series and, within the limitations set forth in the laws of the State of
Michigan and in these articles, fix and determine the relative rights
and preferences of the shares of any series so established.
(8) Rank: Preference Stock ranks junior to all series of
Preferred Stock as to the payment of dividends and the distribution of
assets, except to the extent that a specific series of Preferred Stock
provides otherwise.
(9) On January 16, 1997, the Board of Directors approved adoption
of the following resolution creating a series of Preference Stock
designated as Series A Preference Stock:
RESOLVED that, immediately following shareholder approval of
an amendment to the Articles providing for a new class of
Preference Stock, a series of Preference Stock be created, with the
following characteristics:
(a) Designation and Amount. The shares of such series shall be
designated as "Series A Preference Stock" and the number of
shares constituting such series shall initially be 2,000,000.
(b) Dividends and Distributions.
(A) Preference Stock is entitled to receive dividends on the
fifteenth day of March, June, September and December each
year (each a "Quarterly Dividend Payment Date") in an
amount per share (rounded to the nearest cent) equal to
the greater of (a) $10.00 or (b) the Adjustment Number
times the per share amount of all cash dividends, and the
Adjustment Number times the per share amount (payable in
kind) of all non-cash dividends or other distributions
(other than a dividend payable in shares of Common Stock
or a subdivision of the shares of Common Stock), declared
on the Common Stock since the preceding Quarterly
Dividend Payment Date, or, if later, since the issuance
of such Series A Preference Stock.
(B) The Corporation shall declare any dividend required by
Paragraph (A) immediately after it declares the
triggering dividend or distribution on the Common Stock.
(C) Dividends shall accrue and be cumulative on Series A
Preference Stock from the Quarterly Dividend Payment Date
next preceding the date of issue. If the date of issue
is prior to the first Quarterly Dividend Payment Date,
dividends shall accrue from the date of issue. However,
if the date of issue is after a record date and before a
Quarterly Dividend Payment Date, dividends shall accrue
from such Quarterly Dividend Payment Date. Unpaid
dividends shall not bear interest. Dividends less than
the total amount payable shall be allocated pro rata.
The Board may fix a record date no more than 30 days
prior to the date fixed for the payment of dividends.
(c) Voting Rights. Series A Preference Stock has the following
voting rights:
(A) Series A Preference Stock are entitled to a number of
votes equal to the Adjustment Number times the number of
votes to which Common Stock is entitled.
(B) Except as otherwise provided herein or by law, Series A
Preference Stock and Common Stock shall vote together as
one class on all matters submitted to a vote of Common
Stockholders.
(C) (i) If dividends on Series A Preference Stock shall be
in arrears by six (6) or more quarterly dividends,
a "default period" shall begin. The default period
shall end when all accrued dividends shall have
been paid or set apart for payment. During a
default period, Series A Preference Stock shall
have the right to elect two (2) Directors. This
vote shall be as a class for all series of
Preference Stock entitled to vote.
(ii) During any default period, such voting right may be
exercised initially at a special meeting or at any
annual meeting of stockholders, and thereafter at
annual meetings of stockholders. Such voting shall
not occur unless ten percent (10%) of Preference
Stock entitled to vote is present in person or by
proxy. A quorum for Common Stock votes need not be
present. At any special meeting, Preference
stockholders shall have the right to increase the
number of Directors to permit their election of two
Directors. In any default period, the number of
Directors shall not otherwise be changed except
pursuant to the rights of any securities ranking
senior to or equal with the Series A Preference
Stock.
(iii) The Board of Directors may order, or any
stockholders owning not less than ten percent (10%)
of the Preference Stock entitled to vote may
request, the calling of a special meeting. The
meeting shall thereupon be called by the President,
a Vice-President or the Secretary. Notice of any
meeting at which Preference Stock is entitled to
vote shall be given to each holder of record of
Preference Stock by mail. Such meeting shall be
called not earlier than 20 days and not later than
60 days after such order or request. In default of
the timely calling of such meeting, such meeting
may be called on similar notice by stockholders
owning not less than ten percent (10%) of the
Preference Stock entitled to vote. No special
meeting shall be called less than 60 days preceding
the date fixed for the next annual meeting of
Common Stockholders.
(iv) In any default period, other classes of stock shall
continue to be entitled to elect the whole number
of Directors if the holders of Preference Stock do
not exercise their right to elect two (2)
Directors. Directors elected by Preference Stock
shall continue in office until their successors are
elected or until the expiration of the default
period. Otherwise, any vacancy in the Board may be
filled by a majority of the remaining Directors
elected by the class of stock which elected the
Director whose office is vacant.
(v) Upon the expiration of a default period, (x) the
right of Preference Stock to elect Directors shall
cease, (y) the term of Directors elected by
Preference Stock shall terminate, and (z) the
number of Directors shall be unaffected by any
increase made pursuant to Paragraph (C)(ii). Any
vacancies in the Board effected by clauses (y) and
(z) may be filled by a majority of the remaining
Directors.
(D) Except as set forth herein or provided by law, Series A
Preference Stock shall have no voting rights or consent
requirement for any corporate action.
(d) Certain Restrictions.
(A) Whenever dividends on Series A Preference Stock are in
arrears, the Corporation shall not
(i) make any distributions on, or acquire for
consideration, any stock ranking junior (either as
to dividends or assets) to the Series A Preference
Stock;
(ii) make any distributions on stock ranking on a parity
(either as to dividends or assets) with the Series
A Preference Stock, except dividends paid ratably
on all such parity stock;
(iii) acquire for consideration any stock ranking on a
parity (either as to dividends or assets) with the
Series A Preference Stock, provided that the
Corporation may acquire stock in exchange for stock
ranking junior (as to dividends and assets) to the
Series A Preference Stock; or
(iv) acquire for consideration Series A Preference
Stock, or any stock ranking on a parity with the
Series A Preference Stock, except in accordance
with a purchase offer made in writing to all
holders of such shares upon such terms as the
Board, after consideration of the respective
dividend rates and other relative rights and
preferences, shall determine in good faith will
result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary to
acquire stock unless the Corporation could, under
Paragraph (A), so acquire such stock.
(e) Reacquired Shares. Series A Preference Stock acquired by the
Corporation in any manner shall be retired and canceled
promptly after its acquisition. All such shares shall be
authorized but unissued shares and may be reissued as part of
any series of Preference Stock.
(f) Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up, no
distribution shall be made for shares ranking junior
(either as to dividends or assets) to the Series A
Preference Stock unless, prior thereto, the Series A
Preference Stockholders shall receive $100 per share,
plus an amount equal to accrued and unpaid dividends to
the date of such payment (the "Series A Liquidation
Preference"). No additional distributions shall be made
for Series A Preference Stock unless, prior thereto,
Common Stockholders sh-all have received an amount per
share (the "Common Adjustment") equal to the quotient
obtained by dividing (i) the Series A Liquidation
Preference by (ii) the Adjustment Number. Series A
Preference Stockholders and Common Stockholders shall
receive their ratable shares of the remaining assets to
be distributed in the ratio of the Adjustment Number
to 1.
(B) If there are not sufficient assets available to permit
payment in full of the liquidation preferences of all
series of Preference Stock ranking on a parity, remaining
assets shall be distributed ratably in proportion to
respective liquidation preferences. If there are not
sufficient assets available to permit payment in full of
the Common Adjustment, then remaining assets shall be
distributed ratably to Common Stockholders.
(g) Consolidation, Merger, etc. If the Corporation shall enter
into any transaction in which the shares of Common Stock are
exchanged for, or changed into, any other property, Series A
Preference Stock shall at the same time be similarly
exchanged, or changed, in an amount per share equal to the
Adjustment Number times the amount of property into which, or
for which, each share of Common Stock is changed or exchanged.
(h) No Redemption. Series A Preference Stock is not redeemable.
(i) Ranking. The Series A Preference Stock ranks junior to all
series of Preferred Stock as to the payment of dividends and
the distribution of assets, unless the terms of any series
shall provide otherwise.
(j) Amendment. The Articles of Incorporation shall not be amended
in any manner which would materially adversely affect the
powers, preferences or special rights of the Series A
Preference Stock without the affirmative vote of a majority of
the Series A Preference Stock.
(k) Fractional Shares. Series A Preference Stock may be issued in
fractions of a share.
(l) Adjustment Number. The Adjustment Number shall be 100
initially. If the Corporation shall, (i) pay any dividend on
Common Stock in shares of Common Stock, (ii) subdivide the
Common Stock, or (iii) combine the Common Stock into a smaller
number of shares, the Adjustment Number shall be modified by
multiplying it by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of
shares of Common Stock outstanding immediately prior to such
event.
DIVISION C. Common Stock, $1 Par Value
(10) Dividends: After full cumulative dividends on the Cumulative
Preferred Stock and Preference Stock shall have been paid or set apart
for payment in accordance with paragraph (2) of Division A above and if
provision has been made for the satisfaction of any obligations then or
theretofore matured in respect of any sinking fund provided for each
series of the Cumulative Preferred Stock and Preference Stock then
outstanding, dividends may be declared and paid upon the Common Stock
if, when and as declared by the Board of Directors in its discretion,
out of the surplus of the Corporation.
(11) Distribution of Assets: In the event of any liquidation,
dissolution or winding up of the Corporation, or any reduction of its
capital, resulting in a distribution of its assets to its shareholders,
whether voluntary or involuntary, after there shall have been paid to or
set apart for the holders of the Cumulative Preferred Stock the full
preferential amounts to which they are respectively entitled under the
provisions of paragraph (3) of Division A above, the holders of the
Common Stock shall be entitled to receive as a class, pro rata, the
remaining assets of the Corporation available for distribution to its
shareholders subject to the rights of holders of Preference Stock.
(12) Voting Power: Except as provided in paragraph (5) of Division
A above, the holders of the Common Stock shall possess full voting power
for the election of directors and for all other purposes subject to the
rights of holders of Preference Stock.
DIVISION D. General Provisions
(13) Preemptive Rights: No holder of shares of capital stock of
any class of the Corporation shall have any preemptive right to
subscribe for or acquire any additional shares of capital stock of the
Corporation of the same or of any other class or any obligations or
securities of any kind which may be convertible into capital stock,
whether such shares of capital stock or obligations or other securities
are authorized or created at the date of filing of these Articles or
thereafter; nor shall any holder of capital stock of any class of the
Corporation have any preemptive right to acquire any shares of capital
stock of the Corporation of the same or of any other class or any
obligations or any securities of any kind of the Corporation which may
be held in the treasury of the Corporation, and all such shares of
capital stock of any class or obligations or other securities, whether
authorized and unissued or held in the treasury of the Corporation may,
with respect to the holders of shares of capital stock of the
Corporation, be sold for such lawful considerations, at such times and
to such persons or entities as the Board of Directors may from time to
time determine.
(14) Issuance of Capital Stock: Except as may be provided herein
and by law, the shares of capital stock of any class or series may be
issued by the Corporation from time to time without action by the
stockholders, for such lawful considerations as may from time to time be
fixed by the Board of Directors to such persons, firms and/or
corporations as the Board of Directors in its discretion may determine.
(15) Cumulative Voting: At all elections of directors of the
Corporation by the stockholders, except as expressly provided herein,
each stockholder of the Corporation entitled to vote thereat shall be
entitled to as many votes as shall equal the number of his shares
multiplied by the number of directors to be elected and for which he is
then entitled to vote, and each such stockholder may cast all of such
votes for a single director or may distribute them among the total
number of directors for which he is then entitled to vote or among any
two or more of such directors, as such stockholder may see fit, which
right, when exercised, shall be termed cumulative voting.
ARTICLE IV.
(1) The street address and mailing address of the current registered
office is 405 Water Street, Port Huron, Michigan 48060.
(2) The name of the current resident agent at the registered office is
William L. Johnson.
ARTICLE V.
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for a violation of Section 551(l) of the
Michigan Business Corporation Act, (iv) for any transaction from which the
director derived an improper personal benefit, or (v) for an act or omission
occurring before March 1, 1987. In the event the Michigan Business
Corporation Act is hereafter amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Michigan Business Corporation Act, as so
amended. Any repeal, amendment or other modification of this section shall
not adversely affect any right or protection of any director of the
Corporation existing at the time of such repeal, amendment or other
modification for or with respect to any act or omission occurring prior to
the time of such repeal, amendment or other modification.
ARTICLE VI.
The Board of Directors of the Corporation shall be divided into three
classes: Class I, Class II and Class III. Such classes shall be as nearly
equal in number as possible. The term of office of the initial Class I
Directors shall expire at the annual meeting of shareholders in 1989; the
term of office of the initial Class II Directors shall expire at the annual
meeting of shareholders in 1990; and the term of office of the initial Class
III Directors shall expire at the annual meeting of shareholders in 1991; or
in each case thereafter when their respective successors are elected and have
qualified. At each annual election held after the initial election of
Directors according to classes, the Directors chosen to succeed those whose
terms then expire, shall be identified as being of the same class as the
Directors they succeed and shall be elected for a term expiring at the third
succeeding annual meeting of shareholders or in each case thereafter when
their respective successors are elected and have qualified. If the number of
Directors is changed, any increase or decrease in Directors shall be
apportioned among the classes so as to maintain all classes as nearly equal
in number as possible, but in no case shall a decrease in number of Directors
shorten the term of any incumbent Director.
A director may be removed by shareholders, but only for cause, at an
annual meeting of shareholders and by the affirmative vote of a majority of
the shares then entitled to vote for the election of directors. For purposes
of this Article, cause for removal shall be construed to exist only if a
director whose removal is proposed has been convicted of a felony by a court
of competent jurisdiction and such conviction is no longer subject to appeal
or has been adjudged by a court of competent jurisdiction to be liable for
willful misconduct in the performance of his or her duty to the Corporation
in a matter of substantial importance to the Corporation and such
adjudication is no longer subject to appeal.
The provisions set forth in this Article may not be repealed or amended
in any respect unless such repeal or amendment is approved by the affirmative
vote or consent of the holders of not less than two-thirds (2/3) of all
shares of stock of the Corporation entitled to vote in elections of
directors, considered for purposes of this Article as one class.
The provisions set forth in this Article are subject to the rights of
Cumulative Preferred Stockholders and Preference Stockholders which may
accrue under Article III.
ARTICLE VII.
In addition to the requirements imposed by Chapter 7A of the Michigan
Business Corporation Act on a "business combination" as therein defined, such
a business combination shall not be effected without first obtaining the
written opinion of an independent investment banker to the effect that the
consideration to be paid to shareholders of this Corporation is fair and
reasonable.
The Board of Directors may by resolution waive the requirement of this
Article as to any particular business combination.
EXHIBIT 3.(ii)
Revised 06/10/99
SEMCO Energy, Inc.
BYLAWS
ARTICLE I
STOCK
Section 1. Capital Stock. The Capital of this
Corporation consists of Forty Million (40,000,000) shares
designated "Common Stock, $1.00 Par Value", Five Hundred Thousand
(500,000) shares designated "Cumulative Preferred Stock, $1 Par
Value" and Three Million (3,000,000) shares designated
"Preference Stock, $1 Par Value".
Section 2. Certificate of Shares. The Certificates for
shares of the Capital Stock of this Corporation shall be in such
form, not inconsistent with the Articles of Incorporation of the
Corporation, as shall be prepared or be approved by the Board of
Directors. The Certificates shall be signed by the President or
a Vice President. The signatures may be facsimiles to the extent
allowed by law.
Section 3. Record Date for Determination of
Shareholders. The Board of Directors may in its discretion for
the purpose of determining shareholders entitled to notice of and
to vote at a meeting of shareholders or any adjournment thereof,
or to express consent or dissent from a proposal without a
meeting, or for the purpose of determining shareholders entitled
to receive payment of a dividend or allotment of a right, or for
the purpose of any other action, fix in advance a date as the
record date for any such determination of shareholders. The
record date shall not be more than sixty (60) nor less than ten
(10) days before the date of the meeting, nor more than sixty
(60) days before any other action. When a determination of
shareholders of record entitled to notice of or to vote at a
meeting of shareholders has been made as provided in this Section
3, the determination applies to any adjournment of the meeting,
unless the Board fixes a new record date under this Section 3 for
the adjourned meeting.
Section 4. Lost Certificates. In case of the loss of
any certificate of shares of stock, upon due proof by the
registered holder or his representatives, by affidavit of such
loss, the transfer agent shall issue a duplicate certificate in
its place, upon the Corporation's being fully indemnified
therefor.
Section 5. Fiscal Year. The fiscal year of the
Corporation shall end on the 31st day of December in each year.
Section 6. Corporate Seal. Each certificate shall
contain the seal of the Corporation or a facsimile thereof.
Section 7. Redemption of Control Shares. Consistent
with the provisions of Section 799 of the Michigan Business
Corporation Act, MCL 450.1799, control shares of the Company
acquired in a control share acquisition, with respect to which no
acquiring person statement has been filed with the Company, are,
at any time during the period ending 60 days after the last
acquisition of control shares or the power to direct the exercise
of voting power of control shares by the acquiring person,
subject to redemption by the Company at the fair value of the
shares pursuant to procedures adopted by the Board of Directors.
After an acquiring person statement has been filed and after
the meeting at which the voting rights of the control shares
acquired in a control share acquisition are submitted to the
shareholders, the shares are subject to redemption by the Company
at the fair value of the shares pursuant to procedures adopted by
the Board of Directors unless the shares are accorded full voting
rights by the shareholders as provided in Section 798 of the
Michigan Business Corporation Act.
ARTICLE II
SHAREHOLDERS' MEETINGS
Section 1. Time, Place and Purpose. Meetings of the
shareholders of the Corporation shall be held annually on the
third Tuesday in April in each year, beginning in the year 1978,
(or if said day be a legal holiday, then on the next succeeding
day not a holiday) at 2:00 o'clock P.M., at the office of the
Corporation in the City of Port Huron, Michigan, or at such other
place within or without the State of Michigan as may be fixed by
the Board of Directors, for the purpose of electing Directors and
for the transaction of such other business as may properly be
brought before the meeting.
Section 2. Special Meetings. Special meetings of the
shareholders may be called by the President and Secretary, and
shall be called by either of them by vote of a majority of the
Board of Directors or at the request in writing of shareholders
of record owning a majority of the entire shares of the
Corporation issued and outstanding and entitled to vote at such
meetings.
Section 3. Notice. Written notice of any shareholders'
meeting shall be mailed to each shareholder of record entitled to
vote at the meeting at his last known address, as the same
appears on the stock book of the Corporation, or otherwise, or
delivered in person, not less than ten (10) nor more than sixty
(60) days before any meeting, and such notice of meeting shall
indicate the object or objects thereof. Nevertheless, if all the
shareholders entitled to vote at the meeting shall waive notice
of the meeting, no notice of the same shall be required and,
whenever all the shareholders entitled to vote at the meeting
shall meet in person or by proxy, such meeting shall be valid for
all purposes, without call or notice, and at such meeting any
corporate action shall not be invalid for want of notice.
Section 4. Quorum. At any meeting of the shareholders,
the holders of the issued and outstanding shares of the
Corporation entitled to cast a majority of the votes at the
meeting, whether present in person or represented by proxy, shall
constitute a quorum. The shareholders present in person or by
proxy at such meeting may continue to do business until
adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum. Whether or not a
quorum is present, meetings may be adjourned from time to time to
a further date without further notice other than the announcement
at such meeting and, when a quorum shall be present upon such
adjourned date, any business may be transacted which might have
been transacted at the meeting as originally called.
Section 5. Voting. Each shareholder entitled to vote at
any meeting shall have one vote in person or by proxy for each
share held by him which has voting power upon the matter in
question at the time, but no proxy shall be voted after three
years from its date unless said proxy provides for a longer
period. In all elections for Directors, each shareholder
entitled to vote shall have the right to vote, in person or by
proxy, the number of voting shares owned by him, for as many
persons as there are Directors to be elected, or to cumulate said
shares and give one candidate as many votes as the number of
Directors multiplied by the number of his voting shares shall
equal, or to distribute them on the same principle among as many
candidates as he shall see fit.
Section 6. Organization. Meetings of the shareholders
shall be presided over by the Chairman of the Board, or the
President, or if neither is present, by any Vice President or, if
no Vice President is present, by a chairman to be chosen at the
meeting. The Secretary of the Corporation or, if he is not
present, an Assistant Secretary of the Corporation, if present,
shall act as Secretary of the meeting, but if no such officer is
present, the presiding officer shall appoint any person to act as
Secretary of the meeting.
Section 7. Inspectors. The Board of Directors, in
advance of a shareholders' meeting, may appoint one or more
inspectors to act at the meeting or any adjournment thereof. The
inspectors shall perform such duties and shall make such
determinations as are prescribed by law.
Section 8. Giving Notice. Any notice required by
statute or by these Bylaws to be given to the shareholders, or to
Directors, or to any officer of the Corporation, shall be deemed
to be sufficient to be given by depositing the same in a post
office box in a sealed, postpaid wrapper, addressed to such
shareholder, Director, or officer at his last known address with
proper postage and such notice shall be deemed to have been given
at the time of such mailing.
Section 9. New Shareholders. Every person becoming a
shareholder in this Corporation shall be deemed to assent to
these Bylaws, and shall designate to the Secretary the address to
which he desires that the notice herein required to be given may
be sent, and all notices mailed to such addresses, with postage
prepaid, shall be considered as duly given at the date of
mailing, and any person failing to so designate his address shall
be deemed to have waived notice of such meeting.
ARTICLE III
DIRECTORS
Section 1. Number, Classification and Term of Office.
The business and the property of the Corporation shall be managed
and controlled by the Board of Directors. The number of
Directors shall be eleven (11). Directors shall hold office for
staggered terms as provided in the Articles of Incorporation.
Section 2. Place of Meeting. The Directors may hold
their meetings in such place or places within or without this
State as a majority of the Board of Directors may, from time to
time, determine.
Section 3. Meetings. Meetings of the Board of Directors
may be called at any time by the Chairman, President or
Secretary, or by a majority of the Board of Directors. Directors
shall be notified in writing of the time, place and purpose of
all meetings of the Board at least three days prior thereto. Any
Director shall, however, be deemed to have waived such notice by
his attendance at any meeting. The Chairman of the Board, or in
his absence the President, shall preside at meetings of the
Board.
Section 4. Quorum. A majority of the Board of Directors
shall constitute a quorum for the transaction of business and, if
at any meeting of the Board of Directors there be less than a
quorum present, a majority of those present may adjourn the
meeting from time to time.
Section 5. Vacancies. Vacancies in the Board of
Directors shall be filled by the remaining members of the Board
and each person so elected shall be a Director until his
successor is elected by the shareholders.
Section 6. Compensation. No Director shall receive any
salary or compensation for his services as Director, unless
otherwise especially ordered by the Board of Directors or by the
Bylaws.
Section 7. Age of Retirement. Notwithstanding anything
above to the contrary, no individual shall serve as a director
past the Retirement Age. Any individual reaching the Retirement
Age while serving as director shall be considered to have
resigned as of that date. No individual who has reached the
Retirement Age shall qualify to run for election, or serve, as a
director. The Retirement Age for individuals serving as
directors on January 1, 1987 shall be 75 years. The Retirement
Age for all other individuals shall be 70 years. The Board of
Directors, however, may waive the provisions of this Section as
to any director in its discretion by majority vote of the
remaining directors in office.
Section 8. Resignation of Employee Director.
Notwithstanding anything above to the contrary, any individual
who is an employee of the Corporation or any majority-owned
subsidiary when elected or appointed as a director, shall cease
to be a director when that employment ends for any reason and
shall be considered to have resigned as a director as of that
date. The Board of Directors, however, may waive the provisions
of this Section as to any director in its discretion by majority
vote of the remaining directors in office.
Section 9. Qualifications. In addition to any other
qualifications for a director imposed by law, these Bylaws, or
the Articles of Incorporation, a person shall not qualify to
serve as a director if that person has previously served
concurrently as a director of the Corporation and an employee of
the Corporation or any majority-owned subsidiary, but is no
longer an employee. The Board of Directors, however, may waive
the provisions of this Section as to any director in its
discretion by majority vote of the remaining directors in office.
Section 10. Lead Director. So long as the positions of
the Chairman of the Board and Chief Executive Officer are held by
the same person, there may be a Lead Director who shall be an
Outside Director of the Company selected by the Outside Directors
to serve a two-year term commencing every other year on the same
date as the annual meeting. As used in this Article III, Section
10, "Outside Director" means a Director who is not and never has
been an officer of the Company or any of its direct or indirect
subsidiaries. The duties of the Lead Director shall be to
convene and chair meetings of the Outside Directors and to assume
other responsibilities which the Outside Directors might
designate from time to time.
ARTICLE IV
OFFICERS
Section 1. Number, Classification and Term of Office.
The Board of Directors shall select a President, a Secretary and
a Treasurer and may select one or more additional Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents, Assistant
Secretaries and Assistant Treasurers, who shall be elected by the
Board of Directors at their regular annual meeting. The term of
office shall be for one year and until their successors are
chosen. No one of such officers, except the President, need be a
Director. Any two of the offices, except those of President and
Vice President, may be held by the same person, but no officer
shall execute, acknowledge, or verify any instrument in more than
one capacity. The Board of Directors shall fix the salaries of
the officers of the Corporation. The Board of Directors may also
fill any vacancy in the foregoing offices at any regular or
special meeting duly called and held.
Section 2. Appointments and Removal of Officers. The
Board of Directors may also appoint such other officers and
agents as they may deem necessary for the transaction of the
business of the Corporation. All officers and agents shall
respectively have such authority and perform such duties in the
management of the property and affairs of the Corporation as may
be designated by the Board of Directors. Without limitation of
any right of an officer or agent to recover damages for breach of
contract, the Board of Directors may remove any officer or agent
whenever, in their judgment, the business interests of the
Corporation will be served thereby.
Section 3. Bonding of Officers. The Board of Directors
may secure the fidelity of any or all of such officers by bond or
otherwise.
ARTICLE V
DUTIES OF OFFICERS
Section 1. President. The President shall be the chief
executive officer of the Company and, as such, shall have
supervision of its policies, business and affairs, and such other
powers and duties as are commonly incident to the office of chief
executive officer. He may sign, execute, and deliver in the name
of the Company powers of attorney, contracts, bonds, and other
obligations and shall perform such other duties as may be
prescribed from time to time by the Board of Directors or by the
Bylaws. He may appoint officers, agents, or employees other than
those appointed by the Board of Directors.
Section 2. Vice President(s). If the Board of Directors
shall have selected one or more additional Executive Vice
Presidents, Senior Vice Presidents or Vice Presidents, any such
Vice President shall do and perform such acts and shall exercise
such powers and have such responsibilities as the Board of
Directors may, from time to time, authorize or direct.
Section 3. Treasurer. The Treasurer shall have custody
and keep account of all money, funds and property of the
Corporation, unless otherwise determined by the Board of
Directors, and he shall render such accounts and present such
statement to the Directors and President as may be required of
him. He shall deposit all funds of the Corporation which may
come into his hands in such bank or banks as the Board of
Directors may designate. He shall keep his bank accounts in the
name of the Corporation, and shall exhibit his books and
accounts, at all reasonable times, to any Director of the
Corporation upon application at the offices of the Corporation
during business hours. He shall pay out money as the business
may require upon the order of the properly constituted officer or
officers of the Corporation, taking proper vouchers therefor;
provided, however, that the Board of Directors shall have power
by resolution to delegate any of the duties of the Treasurer to
other officers, and to provide by what officers, if any, all
bills, notes, checks, vouchers, orders or other instruments shall
be countersigned. He shall perform, in addition, such other
duties as may be delegated to him by the Board of Directors.
Section 4. Secretary. The Secretary of the Corporation
shall keep the minutes of all the meetings of the Shareholders,
Board of Directors and Committees of the Board in books provided
for that purpose; shall attend to the giving and receiving of all
notices of the Corporation; and, in addition, shall perform such
other duties as may be delegated to the Secretary by the Board of
Directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
1. The Corporation shall indemnify any person against
expenses (including attorney fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person by reason of the fact that such person is or was a
director or officer of the Corporation, in connection with any
threatened, pending or completed action, suit or proceeding to
the full extent allowed by Sections 561, 562, 563 and 564 of the
Michigan Business Corporation Act from time to time in effect
(including, where permitted and upon any undertaking required,
payment in advance of expenses); provided, however, that except
with respect to actions, suits or proceedings initiated by any
such person to enforce his or her rights to indemnification or
advancement of expenses under this Article or otherwise, the
Corporation shall indemnify any such person in connection with an
action, suit or proceeding initiated by such person only if such
action, suit or proceeding was authorized or ratified by the
Board of Directors of the Corporation. "Proceeding" as used in
this Article shall include any proceeding within an action or
suit.
2. Without limiting in any way Section 1 of this Article:
(a) The Corporation may, by action of or approval by
its Board of Directors, provide indemnification and/or
advancement of expenses to employees or agents of the Corporation
who are not directors or officers in the same manner and to the
same extent as such rights are provided to directors and officers
pursuant to this Article.
(b) The indemnification and advancement of expenses
provided by or granted pursuant to this Article shall not be
deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under
these Bylaws, the Articles of Incorporation, contractual
agreement, or otherwise by law and shall continue as to a person
who has ceased to be a director or officer of the Corporation and
shall inure to the benefit of the heirs, executors and
administrators of such person.
ARTICLE VII
AMENDMENTS
The shareholders entitled to vote or the Board of Directors
may alter, amend, add to or repeal these Bylaws, including the
fixing and altering of the Board of Directors; provided that the
Board of Directors shall not make or alter any Bylaws fixing
their number, qualifications, classification, or term of office.
Exhibit 10.1
SEMCO Energy, Inc.
Short-Term Incentive Plan
The Compensation Committee is responsible for recommending the compensation
for the top officers. The Board will be kept informed periodically about the
work of the Compensation Committee in order to support its recommendations.
The Board will rely on the Compensation Committee to manage the compensation
process so that these matters can be handled routinely at the full Board
meetings.
The Compensation Committee will meet separately to approve the incentive plan
payouts and establish incentive plan goals. Separate meetings are also
suggested to evaluate the performance of the executives.
The CEO will function as an ad hoc member of the Compensation Committee. This
structure allows the Committee to remain fully independent of management
while at the same time receive input from management on the compensation
program.
STRATEGY:
The following table delineates the total remuneration strategy for the
executives/officers of the Company. The Market is our Peer Group. The total
remuneration strategy is to position all compensation elements at the Peer
Group average.
Compensation Elements Market Comparison (1)
--------------------- ---------------------
Base Salary Average
Short-Term Incentive Average
Long-Term Incentive Average
Benefits Average
Total Remuneration Average - except for
outstanding performance
(1) Based on Peer Group (See Attachment I for list of Peer Group
Companies)
TARGET:
The target for the short-term Incentive Plan will be set and agreed to by the
Compensation Committee with input from Management, and agreed to by
Management and will be reviewed and approved by the Board.
-1-
<PAGE>
INCENTIVE OPPORTUNITY LEVELS:
The threshold for the Short-Term Incentive Plan is 92% of Target. The
maximum for the Short-Term Incentive Plan is 108% of Target. The following
table illustrates the incentive opportunity targets:
Threshold
----------------------------------------
Goal Payout
-------------- ----------
92% of target 20%
Target
----------------------------------------
Goal Payout
-------------- ----------
100% of target 100%
Maximum
----------------------------------------
Goal Payout
-------------- ----------
108% of target 180%
See attached Schedule A.
The graph illustrates the incentive opportunity. See attached Schedule B.
The following table delineates the incentive opportunity levels as a
percentage of base salary for each group:
Group At Theshold Target At Maximum
-------------------------- ----------- ------ ----------
1 (CEO) 8% 40% 72%
2 (Senior Vice President) 6% 30% 54%
3 (Vice President) 5% 25% 45%
4 (Employee Director) 4% 20% 36%
-2-
<PAGE>
PERFORMANCE MEASUREMENT WEIGHTINGS:
The short-term incentive plan measurement components are corporate financial
results, individual goals (as measured by the employee's PMP) and a
discretionary component. The following table delineates the performance
measurement weightings:
Corporate Individual
Group Results Results Discretionary
-------------------------- --------- ---------- -------------
1 (CEO) 80% 20% 0%
2 (Senior Vice President) 70% 20% 10%
3 (Vice President) 50% 40% 10%
4 (Employee Director) 40% 50% 10%
SHORT-TERM PLAN PAYOUTS:
Payouts under the short-term incentive plan will be accrued on the books of
the Company during the Plan year. The performance level for Incentive
Opportunity must reflect all of the appropriate accrued payout. The CEO
shall submit to the Compensation Committee recommedations for payout under
this Short Term Incentive Plan. These recommended payouts may be more or
less than the payouts which otherwise result from the payout formulas, and
shall reflect the CEO's evaluation of the following factors: diff-iculty of
objectives, additional acomplishments and overall contribution to the
performance of the Company. Payouts will be reviewed by the Compensation
Committee and the Board at their February Board meeting following the plan
year and, if approved, will be paid as early as late February, but no later
than April of each year.
PARTICIPANTS:
Participation in the Plan shall be based on job title. Exceptions shall be
approved by the Compensation Committee and the Board of Directors.
Executive who become qualified to participate part way through the Plan year
will have their opportunity level prorated. Executives must be employed at
the time of the Plan payout to be eligible except for the case of death,
total disability or retirement which will be prorated based on the last day
of active employment. Employees who voluntarily leave the Company prior to
the incentive plan payout, or are released for cause are not eligible to
receive any incentive under the plan.
The Compensation Committee will review on an annual basis and adjust the
payout for any unusual or extenuating circumstances.
Approved June 10, 1999
-3-
<PAGE>
Schedule A
SHORT-TERM INCENTIVE
If budgeted Net Income is achieved, 100% of targeted bonus amount is awarded.
NET INCOME ACHIEVEMENT
IN RELATION TO PERCENT OF TARGET BONUS AWARD
---------------------------------------------------------------------
% of % of Target % of % of Target
Net Income Target Bonus Award Net Income Target Bonus Award
Achieved Recommended Achieved Recommended
----------------- ----------- ----------------- -----------
-0% = 100% of 100.0% 0% = 100% of 100.0%
-0.5% 95.0% 0.5% 105.0%
-1.0% 90.0% 1.0% 110.0%
-1.5% 85.0% 1.5% 115.0%
-2.0% 80.0% 2.0% 120.0%
-2.5% 75.0% 2.5% 125.0%
-3.0% 70.0% 3.0% 130.0%
-3.5% 65.0% 3.5% 135.0%
-4.0% 60.0% 4.0% 140.0%
-4.5% 55.0% 4.5% 145.0%
-5.0% 50.0% 5.0% 150.0%
-5.5% 45.0% 5.5% 155.0%
-6.0% 40.0% 6.0% 160.0%
-6.5% 35.0% 6.5% 165.0%
-7.0% 30.0% 7.0% 170.0%
-7.5% 25.0% 7.5% 175.0%
-8.0% 20.0% 8.0% 180.0%
<PAGE>
Schedule B
SHORT-TERM INCENTIVE AWARD
IN RELATION TO NET INCOME TARGET
(Part I of II)
STIP Award
200% --
180% --
160% --
140% --
120% --
100% -- x
x
80% -- x
x
60% -- x
x
40% -- x
x
20% -- x
0% --
------------------------------------------------------------------------
-8.0% -7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0%
% of Net Income Target
(Part I of II)
STIP Award
200% --
180% -- x
x
160% -- x
x
140% -- x
x
120% -- x
x
100% -- x
80% --
60% --
40% --
20% --
0% --
------------------------------------------------------------------------
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
% of Net Income Target
<PAGE>
Attachment I
LIST OF PEER GROUP COMPANIES
OF
SEMCO ENERGY, INC.
Approved by the Compensation Committee 02/26/99
1 Cascade Natural Gas Corp.
2 Connecticut Energy Corporation
3 CTG Resources, Inc.
4 EnergyNorth, Inc.
5 EnergySouth, Inc.
6 Indiana Energy, Inc.
7 Laclede Gas Company
8 NUI Corporation
9 Pennsylvania Enterprises, Inc.
10 Providence Energy Corporation
11 Public Service Company of North Carolina, Incorporated
12 South Jersey Industries, Inc.
13 Southwestern Energy Company
14 Yankee Energy System, Inc.
Exhibit 12
<TABLE>
SEMCO ENERGY, INC.
Ratio of Earnings to Fixed Charges
(Thousands of Dollars)
<CAPTION>
- -------------------------------- ------------------- ---------------------------------------------------
Twelve Months Ended Year Ended
Description June 30, 1999 1998 1997<F3> 1996<F3> 1995 1994
- -------------------------------- ------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings as Defined <F1>
Net Income (Loss) $14,633 $10,040 $15,425 $(12,762) $11,331 $ 9,992
Income taxes 9,156 7,011 8,469 (7,106) 6,151 4,560
Other items (96) 672 (96) (96) (96) 1,882
Fixed charges as defined 15,526 15,085 16,741 14,617 14,402 14,092
------- ------- ------- -------- ------- -------
Earnings as defined $39,219 $32,808 $40,539 $ (5,347) $31,788 $30,526
======= ======= ======= ======== ======= =======
Fixed charges as defined <F1>
Interest on long-term debt $11,892 $11,488 $ 9,389 $ 8,514 $ 8,546 $ 8,605
Amortization of debt expense 492 450 449 431 520 454
Other interest charges 2,868 2,873 6,629 5,398 5,062 4,759
Preferred securities dividends
and distributions 274 274 274 274 274 274
------- ------- ------- -------- ------- -------
Fixed charges as defined $15,526 $15,085 $16,741 $ 14,617 $14,402 $14,092
======= ======= ======= ======== ======= =======
Ratio of earnings to fixed charges 2.53 2.17 2.42 <F2> 2.21 2.17
======= ======= ======= ======== ======= ======
- ------------------
<FN>
Notes:
<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 $20.0 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 1.84.
<F3>
Restated to account for a 1998 acquisition as a pooling of interests. Years prior to 1996 were not
restated for the pooling of interest as the effects were deemed not material.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Income, Consolidated Statements of Financial Position
and 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,372
<SECURITIES> 0
<RECEIVABLES> 34,325
<ALLOWANCES> 784
<INVENTORY> 21,568
<CURRENT-ASSETS> 75,423
<PP&E> 423,850
<DEPRECIATION> 124,476
<TOTAL-ASSETS> 415,343
<CURRENT-LIABILITIES> 60,806
<BONDS> 170,000
0
3,255
<COMMON> 17,750
<OTHER-SE> 122,648
<TOTAL-LIABILITY-AND-EQUITY> 415,343
<SALES> 198,158
<TOTAL-REVENUES> 235,109
<CGS> 161,042
<TOTAL-COSTS> 161,042
<OTHER-EXPENSES> 53,252
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 7,670
<INCOME-PRETAX> 14,820
<INCOME-TAX> 4,295
<INCOME-CONTINUING> 10,525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,525
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.60
</TABLE>
