SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d)
OF THE SEURITIES EXCHANGE ACT OF 1934
Date of Report: November 24, 1999
SEMCO ENERGY, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 0-8503 38-2144267
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
405 WATER STREET, PORT HURON, MICHIGAN 48060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 810-987-2200
<PAGE>
ITEM 2. ACQUISITION OF ASSETS.
On November 1, 1999, SEMCO Energy, Inc. ("SEMCO Energy") closed on the
previously announced acquisition of the assets and certain liabilities of ENSTAR
Natural Gas Company and the outstanding stock of Alaska Pipeline Company
(together known as "ENSTAR"). Certain financial statements of ENSTAR and pro
forma combined financial statements of SEMCO Energy are filed as exhibits to
this report. A Form 8-K filed on November 12, 1999 gives additional information
regarding the acquisition.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired - Attached as Exhibit 99.1 are
the ENSTAR Combined Financial Statements and Notes to the Combined Financial
Statements for the Years Ended December 31, 1998, 1997 and 1996 as well as the
audit report of KPMG LLP. Exhibit 99.1 also includes ENSTAR's Combined
Financial Statements for the Nine Months Ended September 30, 1999 and 1998.
(b) Pro Forma Financial Information - Attached as Exhibit 99.2 are the SEMCO
Energy Pro Forma Combined Financial Statements (the "Pro Forma Financial
Statements") reflecting the acquisition of ENSTAR as well as the audit report of
Arthur Andersen LLP. The Pro Forma Financial Statements include a Pro Forma
Combined Statement of Financial Position as of September 30, 1999 and Pro Forma
Combined Statements of Income for the Year Ended December 31, 1998 and the Nine
Months Ended September 30, 1999.
(c) Exhibits -
23.1 Consent of KPMG LLP, independent auditors.
23.2 Consent of Arthur Andersen LLP, independent auditors.
99.1 ENSTAR Combined Financial Statements and Notes to the Combined
Financial Statements for the Years Ended December 31, 1998, 1997
and 1996.
99.2 SEMCO Energy Pro Forma Combined Financial Statements reflecting
the acquisition of ENSTAR.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEMCO Energy, Inc.
(Registrant)
Dated: November 24, 1999 By:/s/Sebastian Coppola
_________________________________
Sebastian Coppola
Senior Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Form 8-K
November 24, 1999
<TABLE>
<CAPTION>
Filed
Exhibit -----------------------
No. Description Herewith By Reference
<C> <S> <C> <C>
23.1 Consent of KPMG LLP, independent auditors. . . X
23.2 Consent of Arthur Andersen LLP, independent
auditors.. . . . . . . . . . . . . . . . . . . X
99.1 ENSTAR Combined Financial Statements and
Notes to the Combined Financial Statements
for the Years Ended December 31, 1998, 1997
and 1996.. . . . . . . . . . . . . . . . . . . X
99.2 SEMCO Energy Pro Forma Financial
Statements reflecting the acquisition of
ENSTAR.. . . . . . . . . . . . . . . . . . . . X
</TABLE>
Consent of Independent Public Accountants
The Board of Directors
Ocean Energy, Inc.
We consent to the inclusion in Form 8-K filed by SEMCO Energy, Inc. of our
report dated January 15, 1999, with respect to the combined statements of
financial position of ENSTAR Natural Gas Company (a division of Seagull Energy
Corporation) and Alaska Pipeline Company (a subsidiary of Seagull Energy
Corporation) as of December 31, 1998 and 1997, and the related combined
statements of income and cash flows for each of the years in the three-year
period ended December 31, 1998.
KPMG LLP
Anchorage, Alaska
November 22, 1999
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the inclusion in this
Form 8-K of our report dated November 15, 1999 on our examination of the Pro
Forma Combined Statement of Income for the year ended December 31, 1998.
Arthur Andersen LLP
Detroit, Michigan,
November 22, 1999
Independent Auditors Report
---------------------------
The Board of Directors
Seagull Energy Corporation:
We have audited the accompanying combined statements of financial position of
ENSTAR Natural Gas Company (a division of Seagull Energy Corporation) and Alaska
Pipeline Company (a subsidiary of Seagull Energy Corporation) as of December 31,
1998 and 1997, and the related combined statements of income and cash flows for
each of the years in the three-year period ended December 31, 1998. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of ENSTAR Natural Gas
Company (a division of Seagull Energy Corporation) and Alaska Pipeline Company
(a subsidiary of Seagull Energy Corporation) as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
KPMG LLP
January 15, 1999, except as to note 11,
which is as of March 30, 1999 and
note 13, which is as of November 1, 1999
<TABLE>
<CAPTION>
ENSTAR NATURAL GAS COMPANY
(a division of Seagull Energy Corporation) and
ALASKA PIPELINE COMPANY
(a subsidiary of Seagull Energy Corporation)
COMBINED STATEMENTS OF FINANCIAL POSITION
(Unaudited) December 31,
September 30, ------------------
1999 1998 1997
------------- -------- --------
ASSETS (Dollars in Thousands)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 526 $ 2,246 $ 2,423
Accounts receivable-customers and other . . . 6,239 14,981 15,650
Gas charges recoverable from customers. . . . - 6,541 -
Materials and supplies. . . . . . . . . . . . 3,633 2,881 2,576
Deferred income taxes . . . . . . . . . . . . 2,310 2,163 1,684
Other . . . . . . . . . . . . . . . . . . . . 812 370 384
------------- -------- --------
$ 13,520 $ 29,182 $ 22,717
------------- -------- --------
Property, plant, and equipment. . . . . . . . . $ 164,563 $254,699 $246,670
Accumulated depreciation and amortization . . . 4,210 93,991 86,174
------------- -------- --------
$ 160,353 $160,708 $160,496
------------- -------- --------
Goodwill, net . . . . . . . . . . . . . . . . . 125,927 - -
Other assets. . . . . . . . . . . . . . . . . . 2,292 1,134 1,209
------------- -------- --------
Total assets. . . . . . . . . . . . . . . . . . $ 302,092 $191,024 $184,422
============= ======== ========
LIABILITIES AND CAPITALIZATION
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ 6,023 $ 9,227 $ 9,877
Royalties and taxes . . . . . . . . . . . . . 782 9,716 -
Amounts payable to customers. . . . . . . . . 565 - 2,573
Accrued expenses:
Income taxes. . . . . . . . . . . . . . . . - 1,768 1,697
Interest. . . . . . . . . . . . . . . . . . 1,195 1,957 2,230
Other . . . . . . . . . . . . . . . . . . . 2,165 3,448 2,891
Customer deposits . . . . . . . . . . . . . . 938 553 566
Refundable customer advances for construction 2,095 2,268 1,387
Short-term bank notes payable . . . . . . . . - 2,700 2,500
Current maturities of long-term debt. . . . . 12,202 7,147 7,097
------------- -------- --------
$ 25,965 $ 38,784 $ 30,818
------------- -------- --------
Deferred credits and other:
Refundable customer advances for construction $ 6,673 $ 12,037 $ 11,940
Post-retirement medical obligations . . . . . 2,600 2,446 2,225
Customer deposits and other . . . . . . . . . 731 1,078 1,022
Deferred income taxes . . . . . . . . . . . . 31,617 31,751 30,855
------------- -------- --------
$ 41,621 $ 47,312 $ 46,042
------------- -------- --------
Long-term debt. . . . . . . . . . . . . . . . . 45,002 45,452 45,481
Division equity . . . . . . . . . . . . . . . . 189,504 59,476 62,081
------------- -------- --------
Total liabilities and capitalization. . . . . . $ 302,092 $191,024 $184,422
============= ======== ========
</TABLE>
See accompanying notes to combined financial statements.
<TABLE>
<CAPTION>
ENSTAR NATURAL GAS COMPANY
(a division of Seagull Energy Corporation) and
ALASKA PIPELINE COMPANY
(a subsidiary of Seagull Energy Corporation)
COMBINED STATEMENTS OF INCOME
(Unaudited)
Nine months ended
September 30, Years ended December 31,
------------------ ----------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues:. . . . . . . . . . $68,548 $62,538 $93,592 $95,719 $97,616
Operating expenses
Cost of gas sold . . . . . . . . . . $29,550 $27,127 $41,232 $43,684 $42,600
Operations and maintenance . . . . . 15,732 15,598 20,688 21,079 21,045
Depreciation and amortization. . . . 8,157 6,377 8,529 8,368 7,945
-------- -------- -------- -------- --------
Total operating expenses . . . . $53,439 $49,102 $70,449 $73,131 $71,590
-------- -------- -------- -------- --------
Operating income . . . . . . . . . . . $15,109 $13,436 $23,143 $22,588 $26,026
Other income (expense):
Interest expense . . . . . . . . . . $(4,721) $(3,612) $(4,763) $(5,120) $(5,490)
Interest income and other. . . . . . 331 452 559 564 489
-------- -------- -------- -------- --------
Total other expense. . . . . . . $(4,390) $(3,160) $(4,204) $(4,556) $(5,001)
Income before income taxes . . . . . . 10,719 10,276 18,939 18,032 21,025
Income taxes . . . . . . . . . . . . . 5,337 4,207 7,555 7,276 8,626
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . $ 5,382 $ 6,069 $11,384 $10,756 $12,399
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements
<TABLE>
<CAPTION>
ENSTAR NATURAL GAS COMPANY
(a division of Seagull Energy Corporation) and
ALASKA PIPELINE COMPANY
(a subsidiary of Seagull Energy Corporation)
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30, Years ended December 31,
-------------------- --------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Operating activities
Net income . . . . . . . . . . . . . . . . . . . $ 5,382 $ 6,069 $ 11,384 $ 10,756 $ 12,399
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . 10,057 7,080 9,473 9,277 9,143
Deferred income taxes. . . . . . . . . . . . . (276) (129) (1,171) (334) 721
Changes in operating assets and liabilities:
Decrease in accounts receivable, net . . . . 8,742 9,275 669 651 156
Decrease (increase) in materials
and supplies and other . . . . . . . . . . (862) (1,007) (352) (229) 116
Decrease (increase) in gas charges
recoverable from gas customers . . . . . . 7,106 652 602 (184) (1,707)
Increase in accounts payable . . . . . . . . (3,204) (4,010) (650) (104) (532)
Decrease in royalties and taxes. . . . . . . (8,934) - - - -
Increase (decrease) in accrued
expenses and other . . . . . . . . . . . . (3,564) (2,090) 576 22 1,492
--------- --------- --------- --------- ----------
Net cash provided by operating activities. $ 14,447 $ 15,840 $ 20,531 $ 19,855 $ 21,788
--------- --------- --------- --------- ----------
Investing activities
Capital expenditures . . . . . . . . . . . . . . (6,721) (6,789) (9,430) (9,518) (9,293)
--------- --------- --------- --------- ----------
Net cash used in investing activities. . . $ (6,721) $ (6,789) $ (9,430) $ (9,518) $ (9,293)
--------- --------- --------- --------- ----------
Financing activities
Proceeds from issuance of
long-term debt and other borrowings. . . . . . $ 21,700 $ 12,200 $ 14,900 $ 6,000 $ -
Principal payments on long-term
debt and other borrowings. . . . . . . . . . . (20,561) (14,799) (14,799) (10,727) (1,214)
Dividends paid to Parent . . . . . . . . . . . . (9,600) (9,300) (12,400) (12,000) (9,000)
Refundable deposits and customer
advances for construction. . . . . . . . . . . (985) 926 1,021 770 (763)
--------- --------- --------- --------- ----------
Net cash used in financing activities. . . $ (9,446) $(10,973) $(11,278) $(15,957) $ (10,977)
--------- --------- --------- --------- ----------
Increase (decrease) in
cash and cash equivalents. . . . . . . . $ (1,720) $ (1,922) $ (177) $ (5,620) $ 1,518
Cash and cash equivalents at beginning of year . . 2,246 2,423 2,423 8,043 6,525
--------- --------- --------- --------- ----------
Cash and cash equivalents at end of year . . . . . $ 526 $ 501 $ 2,246 $ 2,423 $ 8,043
========= ========= ========= ========= ==========
Supplemental cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . $ 4,137 $ 4,391 $ 4,670 $ 5,042 $ 5,147
Income taxes paid. . . . . . . . . . . . . . . . $ 6,079 $ 4,435 $ 8,654 $ 7,378 $ 7,004
</TABLE>
See accompanying notes to combined financial statements.
ENSTAR NATURAL GAS COMPANY
(a division of Seagull Energy Corporation) and
ALASKA PIPELINE COMPANY
(a subsidiary of Seagull Energy Corporation)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
nine months ended September 30, 1999 and 1998 is unaudited)
(1) Summary of Significant Accounting Policies
----------------------------------------------
Principles of Combination
- ---------------------------
The combined financial statements include the accounts of ENSTAR Natural Gas
Company (a division of Seagull Energy Corporation) and Alaska Pipeline Company
(a wholly-owned subsidiary of Seagull Energy Corporation). Alaska Pipeline
Company (APC) engages in the intrastate transmission of natural gas in
South-Central Alaska. ENSTAR Natural Gas Company engages in the distribution of
natural gas in Anchorage and other nearby communities. The accompanying
combined financial statements are presented as if APC were a wholly-owned
subsidiary of ENSTAR Natural Gas Company. Intercompany transactions between
ENSTAR Natural Gas Company and APC have been eliminated in combination.
Basis of Presentation for Audited Financial Statements
- ------------------------------------------------------------
On June 17, 1985, ENSTAR Natural Gas Company and APC were purchased by Seagull
Energy Corporation (Seagull). The accompanying financial statements as of
December 31, 1998 and 1997 and for each of the years in the three year period
then ended reflect the basis of accounting established at the date of
acquisition.
Basis of Presentation for Unaudited Quarterly Information
- ---------------------------------------------------------------
The accompanying unaudited financial information at September 30, 1999 and for
the nine months ended September 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
full fiscal year or for any future period. The unaudited quarterly financial
information as of and for the nine months ended September 30, 1999 reflects the
acquisition adjustments resulting from the merger of Seagull with Ocean Energy,
Inc. as described in note 11.
Regulation
- ----------
ENSTAR Natural Gas Company and APC are subject to regulation by the Alaska
Public Utilities Commission (APUC) which has jurisdiction over, among other
things, rates, accounting procedures and standards of service. ENSTAR Natural
Gas Company and APC meet the criteria and accordingly, follow the reporting and
accounting requirements of Statement of Financial Accounting Standards No. 71
(SFAS No. 71), Accounting for the Effects of Certain Types of Regulation.
Cash Equivalents
- -----------------
Cash equivalents include all highly liquid investments with a maturity of three
months or less when purchased.
Materials and Supplies
- ------------------------
Materials and supplies are valued at the lower of average cost or market value
(net realizable value).
Property, Plant and Equipment
- --------------------------------
Utility plant is reflected at cost, net of contributions in aid of construction.
Capitalized costs include costs of funds, payroll costs and certain general and
administrative costs. Depreciation of the utility plant and other property is
computed using the straight-line method over their estimated useful lives, which
vary from four to thirty-three years.
Property, plant and equipment facilities are subject to APUC regulation. When
utility properties are disposed of or otherwise retired, the original cost of
the property, plus cost of retirement, less salvage value, is charged to
accumulated depreciation. Maintenance, repairs and renewals are charged to
operations and maintenance expense except that renewals which extend the life of
the property are capitalized.
Revenue Recognition
- --------------------
Operating revenues are based on rates authorized by the APUC which are applied
to customers' consumption of natural gas. ENSTAR Natural Gas Company records
unbilled revenue at the end of each month. Unbilled revenue included in
customer receivables approximated $6,779,000 and $6,600,000 at December 31, 1998
and 1997, respectively.
Gas Charges Due From Customers (Amounts Payable to Customers)
- ---------------------------------------------------------------------
Gas charges due from customers include amounts to be billed under an automatic
purchase gas adjustment clause which is amended on a quarterly basis. Gas
charges due from customers (amounts payable to customers) represent regulatory
assets (liabilities) established in accordance with SFAS No. 71. Included in
gas charges due from customers at December 31, 1998 is $9,716,000 related to an
assessment of royalties and taxes by Marathon Oil Company, from whom APC
purchases gas. ENSTAR Natural Gas Company is recovering this assessment at the
rate of $.41 per mcf and believes that the assessment will be recovered in full
prior to the end of 1999.
Income Taxes
- -------------
ENSTAR Natural Gas Company and APC use the liability method of accounting for
income taxes (notes 2 and 8). Under this method deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized as part of the provision for income taxes in the period that
includes the enactment date.
Other Assets
- -------------
Unamortized debt expense and deferred charges are being amortized over the life
of the related debt or charge.
Accounting Estimates
- ---------------------
In preparing the combined financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the balance sheet, and revenue and expenses for the period. Actual results
could differ from those estimates.
(2) Related Party Activities
--------------------------
Management Fees
- ----------------
Seagull provides certain services to ENSTAR Natural Gas Company and APC pursuant
to a written management agreement (Management Agreement) including management,
financial reporting, legal, human resources, treasury, investor relations and
administrative services. In consideration for these services, ENSTAR Natural
Gas Company and APC have agreed to pay Seagull an annual management fee equal to
the greater of $1,925,000 or the sum of the direct cost of providing such
services and the allocable portion of Seagull's general and administrative
expenses associated with providing such services, primarily determined by
reference to the relative amount of time spent by Seagull's employees to provide
such services. The Management Agreement may be amended by agreement between
Seagull and ENSTAR Natural Gas Company and APC. Fees paid by ENSTAR Natural Gas
Company and APC pursuant to the Management Agreement totaled $1,925,000 during
each of the years ending December 31, 1998, 1997 and 1996.
Income Taxes
- -------------
Seagull and ENSTAR Natural Gas Company and APC are parties to a tax sharing
agreement (Tax Sharing Agreement) effective January 1, 1986. Pursuant to the
Tax Sharing Agreement, ENSTAR Natural Gas Company and APC generally pay Seagull
an amount equal to the amount of income taxes that would be payable by ENSTAR
Natural Gas Company and APC on a stand-alone basis excluding the effects of
historical purchase accounting adjustments. Amounts paid to Seagull approximated
$8,654,000, $7,378,000 and $7,004,000 in 1998, 1997 and 1996, respectively.
(3) Property, Plant and Equipment
--------------------------------
A summary of property, plant and equipment at December 31 follows (dollars in
thousands):
<TABLE>
<CAPTION>
Cost Annual
----------------- depreciation
1998 1997 rate
-------- -------- -------------
<S> <C> <C> <C>
Land and buildings . . . $ 9,819 $ 10,098 3%-5%
Gas plant. . . . . . . . 232,859 224,950 3%-8%
General plant. . . . . . 11,898 11,297 10%-25%
Construction in progress 123 325 -
-------- --------
$254,699 $246,670
======== ========
</TABLE>
(4) Long-Term Debt
---------------
A summary of long-term debt at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Unsecured industrial development bonds
with final due dates:
7.75%, due in 2003 . . . . . . . . . . . $ 1,670 $ 1,935
8%, due in 2008. . . . . . . . . . . . . 2,600 2,600
7.75%, due in 2004 . . . . . . . . . . . 4,090 4,770
Senior unsecured notes with final due dates:
Series G, 12.8% note, due in 1998. . . . . - 150
Series I, 8.15% note, due in 2001. . . . . 18,000 24,000
Series J, 8.64% note, due in 2004. . . . . 10,000 10,000
Series K, 8.81% note, due in 2009. . . . . 10,000 10,000
Unsecured $30,000,000 line of credit
from Seagull, interest at indexed rate,
due in 2003. . . . . . . . . . . . . . . . 7,000 -
Other. . . . . . . . . . . . . . . . . . . . 4 8
------- -------
Total debt . . . . . . . . . . . . . . $53,364 $53,463
Less current installments. . . . . . . . . . 7,147 7,097
Less unamortized discount. . . . . . . . . . 765 885
------- -------
Long-term debt . . . . . . . . . . . . $45,452 $45,481
======= =======
</TABLE>
The aggregate annual installments of debt are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year ending
December 31 Amount
- ------------ ------
<S> <C>
1999 $ 7,147
2000 9,187
2001 9,221
2002 3,265
2003 10,315
</TABLE>
The unsecured industrial development bonds and senior unsecured notes are issued
by APC. The debt capital requirements of ENSTAR Natural Gas Company are met by
loans from APC pursuant to intercompany notes secured by a mortgage on the
properties, rights and franchises (other than certain excepted properties) of
ENSTAR Natural Gas Company. The senior unsecured notes of APC provide for
restrictions on dividends, additional borrowings and purchase redemptions, or
retirements of shares of capital stock, other than in stock of APC.
Under the provisions of the agreements, $13,923,070 of APC's retained earnings
of $35,751,375 was available for the making of restricted investments,
restricted stock payments and restricted subordinated debt payments as of
December 31, 1998.
APC has a $10,000,000 unsecured line of credit which expires March 31, 1999. It
provides for interest at the bank's base rate. The average outstanding balances
under the line of credit were $159,000 for 1998 and $244,218 for 1997. The
highest outstanding balances were $2,700,000 for 1998 and $2,500,000 for 1997.
The weighted average interest rates were 8.35% and 8.50% for 1998 and 1997,
respectively.
ENSTAR Natural Gas Company entered into a revolving credit agreement with
Seagull on July 1, 1998. Under the terms of the agreement, ENSTAR Natural Gas
Company may borrow up to $30,000,000 at the three month LIBOR rate in effect on
the date of borrowing plus 50 basis points through July 1, 2003. ENSTAR Natural
Gas Company intends to use the proceeds to fund the periodic long term debt
obligations of APC and accordingly, the outstanding balance of the agreement at
December 31, 1998 of $7,000,000 has been classified as long-term debt. Interest
paid to Seagull for the year ended December 31, 1998 was $329,000.
<PAGE>
(5) Fair Value of Financial Instruments
---------------------------------------
The estimated fair values of the financial instruments included in the combined
financial statements are as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 2,246 $ 2,246 $ 2,423 $ 2,423
Liabilities:
Customer deposits . . . . 1,440 1,330 1,487 1,363
Customer advances for
construction. . . . . . 14,305 13,375 13,327 10,517
Debt. . . . . . . . . . . 53,364 52,629 53,463 56,800
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents - The carrying amount approximates fair value because
of the short maturity of these instruments.
Customer Deposits and Advances for Construction - The fair value of customer
deposits is based on a discounted cash flow analysis utilizing discount rates of
7.75% and 8.50% at December 31, 1998 and 1997, respectively, over the estimated
period of deposit or advance refunding.
Long-term Debt - The fair value of long-term debt is estimated based on the
quoted market price for the same or similar issues when available.
Fair value estimates are dependent upon subjective assumptions and involve
significant uncertainties resulting in variability in estimates with changes in
assumptions. Also potential taxes and other expenses that would be incurred in
an actual sale or settlement are not reflected in amounts disclosed.
<PAGE>
(6) Division Equity
----------------
The sources of changes in division equity are as follows (dollars in thousands):
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
September 30, Year Ended December 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
--------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Division equity, beginning of period. $ 59,476 $62,081 $ 62,081 $ 64,738 $62,155
Net earnings. . . . . . . . . . . . . 5,382 6,069 11,384 10,756 12,399
Dividends paid to Seagull . . . . . . (9,600) (9,300) (12,400) (12,000) (9,000)
Net equity transactions with Seagull. (263) (1,121) (1,589) (1,413) (816)
Ocean Energy, Inc.
acquisition adjustment (note 11). . 134,509 - - - -
--------- -------- --------- --------- --------
Division equity, end of period. . . . $189,504 $57,729 $ 59,476 $ 62,081 $64,738
========= ======== ========= ========= ========
</TABLE>
(7) Employee Benefit Plans
------------------------
Retirement Plans
- -----------------
ENSTAR Natural Gas Company has two defined benefit retirement plans which cover
salaried employees (Salaried Retirement Plan) and classified employees
(Operating and Clerical Units' Plan). Determination of benefits for the
salaried employees is based upon a combination of years of service and final
monthly compensation. Benefits for classified employees are based solely on
years of service. The policy of ENSTAR Natural Gas Company is to fund the
minimum contributions required by applicable regulations. The net pension costs
are included in operations and maintenance expenses while the accrued (net of
prepaid) pension cost is included in the combined balance sheets as other
accrued expenses.
<PAGE>
The following table provides reconciliations of the changes in the plans'
benefit obligations and fair value of assets for the years ended December 31,
1998 and 1997, and statements of the plans' funded status as of December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Operating Operating
& Clerical & Clerical
Salaried Units' Salaried Units'
plan Plan plan Plan
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligations:
Benefit obligation at
beginning of year . . . . . . . . . . . $ 9,069 $ 4,554 $ 8,258 $ 3,968
Service cost. . . . . . . . . . . . . . 297 238 271 208
Interest cost . . . . . . . . . . . . . 622 311 601 299
Actuarial loss. . . . . . . . . . . . . 321 132 229 178
Benefit payments. . . . . . . . . . . . (301) (86) (290) (99)
---------- ----------- ---------- -----------
Benefit obligation at end of year . . . . $ 10,008 $ 5,149 $ 9,069 $ 4,554
---------- ----------- ---------- -----------
Reconciliation of fair value
of plan assets:
Fair value of plan assets at
beginning of year . . . . . . . . . . . $ 8,548 $ 5,310 $ 6,565 $ 4,121
Actual return on plan assets. . . . . . 1,991 1,250 1,869 1,173
Employer contributions. . . . . . . . . - - 404 116
Benefit payments. . . . . . . . . . . . (301) (86) (290) (99)
---------- ----------- ---------- -----------
Fair value of plan assets at end of year. $ 10,238 $ 6,474 $ 8,548 $ 5,311
---------- ----------- ---------- -----------
Funded status:
Funded status at December 31. . . . . . . $ 230 $ 1,325 $ (521) $ 757
Unrecognized transition
obligation (asset). . . . . . . . . . . 281 (56) 374 (65)
Unamortized prior service cost. . . . . . 58 11 68 12
Unrecognized gain . . . . . . . . . . . . (1,669) (1,061) (676) (369)
---------- ----------- ---------- -----------
Prepaid (accrued) pension cost. . . . . . $ (1,100) $ 219 $ (755) $ 335
========== =========== ========== ===========
</TABLE>
The following table provides the components of net periodic pension cost for the
plans' for the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
Operating Operating Operating
& Clerical & Clerical & Clerical
Salaried Units' Salaried Units' Salaried Units'
plan Plan plan Plan plan Plan
---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Service cost . . . . . . . . . . . $ 297 $ 238 $ 291 $ 223 $ 274 $ 205
Interest cost. . . . . . . . . . . 622 311 582 284 566 270
Expected return on plan assets . . (678) (426) (515) (322) (439) (277)
Amortization of unrecognized gain. - - - - 40 32
Amortization of transition
(asset) obligation . . . . . . . 93 (9) 93 (9) 93 (9)
Amortization of prior service cost 10 2 10 2 10 2
---------- ------------ ---------- ------------ ---------- ------------
Net periodic pension cost. . . . . $ 344 $ 116 $ 461 $ 178 $ 544 $ 223
========== ============ ========== ============ ========== ============
</TABLE>
The assumed weighted average discount rate for both plans was 6.75%, 7.00%, and
7.25% for December 31, 1998, 1997, and 1996, respectively. The rate of increase
in future compensation for the salaried retirement plan used in determining the
projected benefit obligation was 5% for 1998, 1997 and 1996. The expected
long-term rate of return on plan assets for both plans was 8% for 1998, 1997 and
1996. The unrecognized net obligation (Salaried plan) and asset (Operating and
Clerical Units' plan) which arose from the initial application of SFAS 87 is
being amortized over fifteen years and eighteen years, respectively.
Profit-Sharing Plans
- ---------------------
ENSTAR Natural Gas Company has trusteed profit-sharing plans for salaried
employees and for union employees. Annual contributions to each plan are
determined by Seagull's Board of Directors pursuant to formulae which contain
minimum contribution requirements. Profit-sharing expense approximated
$383,000, $339,000, and $381,000 for 1998, 1997 and 1996, respectively, and is
included in operations and maintenance expense.
Thrift Plan
- ------------
ENSTAR Natural Gas Company has a thrift plan (Thrift Plan) that is a qualified
employee savings plan in accordance with the provisions of Section 401(k) of the
Internal Revenue Code of 1986, as amended. The ENSTAR Natural Gas Company
contributions to the Thrift Plan approximated $370,000, $300,000 and $246,000
for 1998, 1997 and 1996, respectively. The Thrift Plan's costs are included in
operations and maintenance expense.
<PAGE>
Postretirement Medical Benefits
- ---------------------------------
ENSTAR Natural Gas Company has a postretirement medical plan which covers all of
its salaried employees. Determination of benefits is based on a combination of
the retiree's age and years of service at retirement.
The following table provides reconciliations of the changes in the plans'
benefit obligations and fair value of assets for the years ended December 31,
1998 and 1997, and statements of the plans' funded status as of December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Reconciliation of benefit obligations:
Benefit obligation at beginning of year. . . . $ 2,107 $ 2,106
Service cost . . . . . . . . . . . . . . . . 96 89
Interest cost. . . . . . . . . . . . . . . . 145 157
Unrecognized gain. . . . . . . . . . . . . . (37) (240)
Benefit payments and other . . . . . . . . . (21) (5)
-------- --------
Benefit obligation at end of year. . . . . . . $ 2,290 $ 2,107
-------- --------
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year
Employer contributions . . . . . . . . . . . $ 15 $ -
Plan participants' contributions . . . . . . 11 14
Benefit payments . . . . . . . . . . . . . . (26) (14)
-------- --------
Fair value of plan assets at end of year . . . $ - $ -
-------- --------
Funded status:
Funded status at December 31 . . . . . . . . . $(2,290) $(2,107)
Unrecognized gain. . . . . . . . . . . . . . . (156) (118)
-------- --------
Accrued pension cost . . . . . . . . . . . . . $(2,446) $(2,225)
======== ========
</TABLE>
An assumed weighted average discount rate of 6.75%, 7.00% and 7.25% for December
31, 1998, 1997 and 1996, respectively, was used in the measurement of the
benefit obligation.
<PAGE>
The following table provides the components of net periodic benefit cost for the
plans' for the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Service cost. . . . . . . . . . . $ 96 $ 89 $ 96
Interest cost . . . . . . . . . . 145 157 156
Amortization of unrecognized loss - - 15
----- ----- -----
Net periodic benefit cost . . . . $ 241 $ 246 $ 267
===== ===== =====
</TABLE>
For measurement purposes, 10% (1996 and 1997) and 8% (1998) annual rates of
increase in the per capita cost of covered health care benefits were assumed.
The 1998 rate was assumed to decrease gradually each year to a rate of 6% for
2002 and remain at that level thereafter.
Assumed health care cost trend rates significantly impact reported amounts. The
effect of a one-percentage-point change in assumed rates would alter the amounts
of the benefit obligation and the sum of the service cost and interest cost
components of postretirement benefit expense as follows for 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
One-percentage-point
---------------------
Increase Decrease
--------- ----------
<S> <C> <C>
Effect on the postretirement benefit obligation. . $ 367 $ (318)
Effect on the sum of the service cost and interest
cost components. . . . . . . . . . . . . . . . . 43 (38)
</TABLE>
(8) Income Taxes
-------------
Income tax expense consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Intercompany tax allocation:
Federal. . . . . . . . . . . . . . . $ 6,867 $5,958 $6,082
State. . . . . . . . . . . . . . . . 1,859 1,652 1,823
-------- ------- ------
Total intercompany tax allocation $ 8,726 $7,610 $7,905
Deferred:
Federal. . . . . . . . . . . . . . . $(1,049) $ (324) $ 581
State. . . . . . . . . . . . . . . . (122) (10) 140
-------- ------- ------
Total deferred . . . . . . . . . . $(1,171) $ (334) $ 721
-------- ------- ------
Total income tax expense . . . . . $ 7,555 $7,276 $8,626
======== ======= ======
</TABLE>
The actual income tax expense differs from the amounts computed by applying the
U.S. Federal statutory rate of 35% to pretax earnings as a result of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Federal income taxes at statutory rate $6,629 $6,311 $7,359
State income tax, net of federal
income tax benefit . . . . . . . . . 1,157 1,068 1,276
Other. . . . . . . . . . . . . . . . . (231) (103) (9)
------- ------- -------
$7,555 $7,276 $8,626
======= ======= =======
</TABLE>
Deferred income taxes have been provided for all temporary differences between
the carrying amounts of assets and liabilities for financial accounting and tax
purposes.
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and liabilities at December 31 are presented below
(dollars in thousands):
<TABLE>
<CAPTION>
1998
---------------------------------
Current Noncurrent Total
-------- ------------ ---------
<S> <C> <C> <C>
Deferred tax assets:
Customer advances and contributions
in aid of construction. . . . . . . $ - $ 1,597 $ 1,597
Postretirement medical benefits . . . - 1,006 1,006
Purchased gas cost adjustments. . . . 1,305 - 1,305
Various accrued expenses not
deductible for tax purposes . . . . 743 - 743
Allowance for doubtful accounts . . . 115 - 115
-------- ------------ ---------
Total deferred tax assets . . . . . $ 2,163 $ 2,603 $ 4,766
-------- ------------ ---------
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation. . . $ - $ 34,299 $ 34,299
Premium on retirement of long-term
debt and related amortization . . . - 55 55
-------- ------------ ---------
Total deferred tax liabilities. . . $ - $ 34,354 $ 34,354
-------- ------------ ---------
Net deferred tax asset (liability). $ 2,163 $ (31,751) $(29,588)
======== ============ =========
<CAPTION>
1997
---------------------------------
Current Noncurrent Total
-------- ------------ ---------
<S> <C> <C> <C>
Deferred tax assets:
Customer advances and contributions
in aid of construction. . . . . . . $ - $ 1,250 $ 1,250
Postretirement medical benefits . . . - 914 914
Purchased gas cost adjustments. . . . 1,058 - 1,058
Various accrued expenses not
deductible for tax purposes . . . . 518 - 518
Allowance for doubtful accounts . . . 108 - 108
-------- ------------ ---------
Total deferred tax assets . . . . . $ 1,684 $ 2,164 $ 3,848
-------- ------------ ---------
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation. . . $ - $ 32,928 $ 32,928
Premium on retirement of long-term
debt and related amortization . . . - 91 91
-------- ------------ ---------
Total deferred tax liabilities. . . $ - $ 33,019 $ 33,019
-------- ------------ ---------
Net deferred tax asset (liability). $ 1,684 $ (30,855) $(29,171)
======== ============ =========
</TABLE>
A valuation allowance on a deferred tax asset is provided when it is more likely
than not that some portion of the deferred tax asset will not be realized.
ENSTAR Natural Gas Company and APC expect to continue to have taxable income
sufficient to realize deferred tax assets; accordingly, a valuation allowance
was not established in 1998 and 1997.
(9) Gas Supply Contracts
----------------------
ENSTAR Natural Gas Company purchases all of its natural gas under two long-term
contracts - the Marathon and Beluga contracts. Gas reserves committed to ENSTAR
Natural Gas Company under these contracts are sufficient to supply all of ENSTAR
Natural Gas Company's expected gas supply requirements through year 2001. After
that time, supplies will still be available under the Marathon and Beluga
contracts in accordance with their terms, but at least a portion of ENSTAR
Natural Gas Company's requirements are expected to be satisfied outside the
terms of these contracts.
(10) Litigation
----------
ENSTAR Natural Gas Company is party to various legal actions, both for and
against its interests. Management believes that the outcome of any litigation
not provided for in the accompanying combined financial statements will not be
material to its financial condition, results of operations or cash flows.
(11) Sale of Seagull to Ocean Energy, Inc.
-------------------------------------------
Effective March 30, 1999, pursuant to the Agreement and Plan of Merger (the
"merger") dated November 24, 1998, as amended, Ocean Energy, Inc. was merged
with and into Seagull. As a result of this merger, each outstanding share of
Ocean Energy, Inc. common stock was exchanged for one share of Seagull common
stock, and as of March 30, 1999, the stockholders of Ocean Energy, Inc. owned
approximately 61.5% of the outstanding common stock of the merged company with
the shareholders of Seagull owning the remaining 38.5%. The resulting company
assumed the name Ocean Energy, Inc. The merger was accounted for as a purchase.
A portion of the purchase price, $290,200,000, was allocated to ENSTAR Natural
Gas Company and APC.
<PAGE>
The following acquisition adjustments were recorded:
<TABLE>
<S> <C>
Decrease in carrying value of property, plant and equipment. $(96,033)
Increase in goodwill . . . . . . . . . . . . . . . . . . . . 127,521
Decrease in accumulated depreciation and amortization. . . . 96,033
Decrease in pension obligation . . . . . . . . . . . . . . . 2,437
Discount of nonrefundable customer advances for construction 4,551
---------
Total adjustment. . . . . . . . . . . . . . . . . . . . . $134,509
=========
</TABLE>
Concurrent with the merger, Ocean Energy, Inc. acquired the senior unsecured
notes, Series I, J and K from the lender. Repayment terms remain unchanged.
Ocean Energy, Inc. also assumed Seagull's obligations under the revolving line
of credit described in note 4.
(11) Line of Credit and Unsecured Notes with Ocean Energy, Inc.
-------------------------------------------------------------------
At September 30, 1999, the outstanding balance of the line of credit with Ocean
Energy, Inc. and the senior unsecured notes acquired by Ocean Energy, Inc. was
$25,200,000 and $32,000,000, respectively. Interest on the Ocean Energy, Inc.
obligations was approximately $2,300,000 for the nine months ended September 30,
1999.
(12) Sale of ENSTAR Natural Gas Company and APC to SEMCO Energy, Inc.
-----------------------------------------------------------------------
Effective November 1, 1999, ENSTAR Natural Gas Company and APC were acquired by
SEMCO Energy, Inc. (SEMCO). The purchase price aggregated $290,500,000
including a working capital adjustment and the purchase of APC debt held by
Ocean Energy, Inc. for $58,700,000 plus accrued interest thereon.
SEMCO ENERGY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
INTRODUCTION
On November 1, 1999, SEMCO Energy, Inc. ("SEMCO Energy") closed on the
acquisition (the "Acquisition") of the assets and certain liabilities of ENSTAR
Natural Gas Company and the outstanding stock of Alaska Pipeline Company
(together known as "ENSTAR"). The Acquisition will be accounted for using the
purchase method of accounting. SEMCO Energy acquired ENSTAR from Ocean Energy,
Inc. Prior to March of 1999, ENSTAR was owned by Seagull Energy Corporation
("Seagull Energy"). In March of 1999 Ocean Energy, Inc. acquired Seagull Energy
in a transaction accounted for using the purchase method of accounting. As a
result of this acquisition, a portion of the purchase price was allocated by
Ocean Energy, Inc. to ENSTAR and, accordingly, ENSTAR's assets and liabilities
were adjusted to their estimated fair values in March of 1999.
The following Pro Forma Combined Financial Statements (the "Pro Forma
Financial Statements") of SEMCO Energy illustrate the effects of: (1) the
elimination of activities between ENSTAR and Ocean Energy, Inc. or its
predecessor, Seagull Energy, (together referred to herein as "Ocean Energy")
that occurred prior to the closing of the acquisition by SEMCO Energy; (2) the
adjustments resulting from the acquisition by SEMCO Energy; and (3) the assumed
public issuance of $170 million of medium-term notes, $35 million of trust
preferred securities and 6.5 million shares of common stock of SEMCO Energy
producing net proceeds of approximately $91 million to finance the Acquisition
(the "Financing Transactions"). The Financing Transactions represent SEMCO
Energy's current expectations regarding permanent financing for the Acquisition.
The net proceeds from the Financing Transactions will be used to retire a $290
million bridge loan facility of SEMCO Energy which was used initially to finance
the Acquisition and any excess will be used to reduce accounts payable. The Pro
Forma Combined Statement of Financial Position has been prepared as if the
Acquisition and Financing Transactions occurred on September 30, 1999 and the
Pro Forma Combined Statements of Income have been prepared as if such
transactions occurred as of January 1, 1998. The pro forma adjustments do not
reflect any potential cost savings or operating synergies that may be realized
following the Acquisition.
The Pro Forma Financial Statements reflect SEMCO Energy acquiring from
Ocean Energy all of the outstanding stock of Alaska Pipeline Company and all the
assets and certain liabilities of ENSTAR Natural Gas Company (a division of
Ocean Energy) for $231.5 million in cash, with adjustments for working capital.
As part of the Acquisition, SEMCO Energy also agreed to acquire from Ocean
Energy all of ENSTAR's outstanding debt held by Ocean Energy for a price not to
exceed $58.7 million, plus the accrued interest thereon. SEMCO Energy is in the
process of having an independent study performed to determine the fair value of
the assets acquired in the Acquisition in order to properly allocate the
purchase price. Accordingly, the pro forma adjustments made to account for the
Acquisition for purposes of developing the Pro Forma Financial Statements are
preliminary. However, SEMCO Energy believes that the pro forma adjustments and
underlying assumptions reasonably present the significant effects of the
Acquisition. When the independent study is completed, the accounting
adjustments will be revised as necessary on the books of SEMCO Energy.
The Pro Forma Financial Statements may not be indicative of what actual
results would have been, nor do they purport to represent the combined financial
results of SEMCO Energy and ENSTAR for future periods. The actual financial
condition and results of operations of the combined entity will differ, perhaps
significantly, from the pro forma amounts reflected herein due to a variety of
factors including, but not limited to, changes in purchase price allocations,
access to additional information, changes in the amounts, terms and timing of
the proposed financing and changes in operating results. Both SEMCO Energy and
ENSTAR are also seasonal in nature and depend on the winter heating season for
the majority of their operating revenue. As a result, the Pro Forma Combined
Statement of Income for the nine months ended September 30, 1999 is not
indicative of results for a full year.
The significant adjustments required to develop the Pro Forma Combined
Statement of Financial Position include: (1) the elimination of all ENSTAR
outstanding debt; (2) adjustments to certain assets and liabilities to reflect
them at fair market value as part of the purchase price allocations; (3)
recognition of the excess purchase price as goodwill; (4) decreases in certain
deferred taxes applicable to Ocean Energy; and (5) increases in long-term debt,
trust preferred securities and common shareholders' equity as a result of the
Acquisition and Financing Transactions.
The significant adjustments required to develop the Pro Forma Combined
Statements of Income include: (1) the elimination of management fees charged by
Ocean Energy; (2) increases in depreciation and amortization expense due to the
amortization, over a 40 year life, of the goodwill associated with the
acquisition; and (3) increases in interest expense as a result of the assumed
issuance of debt and trust preferred securities in the Financing Transactions
offset partially by the elimination of interest expense on ENSTAR's outstanding
debt.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of both SEMCO Energy and ENSTAR and the Notes to
the Pro Forma Financial Statements included herein.
FORWARD-LOOKING STATEMENTS
The Introduction to the Pro Forma Financial Statements and the Pro Forma
Financial Statements and Notes thereto contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and 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 Company's ability
to accomplish its financing objectives in a timely and cost-effective manner,
including its ability to accomplish the Financing Transactions, in light of
changing conditions in the capital markets.
Report of Independent Public Accountants
----------------------------------------
To SEMCO Energy, Inc.:
We have examined the pro forma adjustments reflecting the transactions described
in the Notes to the Pro Forma Combined Financial Statements (the "Notes") and
the application of those adjustments to the historical amounts in the
accompanying Pro Forma Combined Statement of Income for the year ended December
31, 1998. The historical financial statements are derived from the historical
consolidated financial statements of SEMCO Energy, Inc., which were audited by
us, and of ENSTAR Natural Gas Company, which were audited by other accountants.
Such pro forma adjustments are based upon management's assumptions described in
the Notes. Our examination was made in accordance with standards established by
the American Institute of Certified Public Accountants and, accordingly,
included such procedures as we considered necessary in the circumstances.
We have reviewed the pro forma adjustments reflecting the transactions described
in the Notes and the application of those adjustments to the historical amounts
in the accompanying Pro Forma Combined Statement of Income for the nine months
ended September 30, 1999 and the accompanying Pro Forma Combined Statement of
Financial Position as of September 30, 1999. The historical financial
statements are derived from the historical consolidated financial statements of
SEMCO Energy, Inc., which were reviewed by us, and of ENSTAR Natural Gas
Company, which were reviewed by other accountants. Such pro forma adjustments
are based on management's assumptions as described in the Notes. Our review was
made in accordance with standards established by the American Institute of
Certified Public Accountants and, accordingly, included such procedures as we
considered necessary in the circumstances.
A review is substantially less in scope than an examination, the objective of
which is the expression of an opinion on management's assumptions, the pro forma
adjustments and the application of those adjustments to historical financial
information. Accordingly, we do not express such an opinion.
The objective of the Pro Forma Combined Financial Statements is to show what the
significant effects on the historical financial information might have been had
the transactions described in the Notes occurred at an earlier date. However,
the Pro Forma Combined Financial Statements are not necessarily indicative of
the results of operations or related effects on financial position that would
have been attained had the above-mentioned transactions actually occurred
earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transactions described in the Notes, the related pro forma adjustments give
appropriate effect to those assumptions, and the pro forma columns reflect the
proper application of those adjustments to the historical financial statement
amounts in the Pro Forma Combined Statement of Income for the year ended
December 31, 1998.
Based on our review, nothing came to our attention that caused us to believe
that management's assumptions do not provide a reasonable basis for presenting
the significant effects directly attributable to the above-mentioned
transactions described in the Notes, that the related pro forma adjustments do
not give appropriate effect to those assumptions, or that the pro forma columns
do not reflect the proper application of those adjustments to the historical
financial statement amounts in the Pro Forma Combined Statement of Financial
Position as of September 30, 1999 and the Pro Forma Combined Statement of Income
for the nine months then ended.
Arthur Andersen LLP
Detroit, Michigan,
November 15, 1999
<TABLE>
<CAPTION>
SEMCO ENERGY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
Pro Forma
SEMCO ENSTAR Acquisition SEMCO
Energy and APC and Financing Energy
Historical Historical Adjustments Notes Pro Forma
------------ ------------ ------------- ----- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . $ 637,485 $ 93,592 $ - $ 731,077
OPERATING EXPENSES
Cost of gas sold . . . . . . . . . $ 109,388 $ 41,232 $ - $ 150,620
Cost of gas marketed . . . . . . . 386,691 - - 386,691
Operations and maintenance . . . . 92,696 20,688 (1,925) A 111,459
Depreciation and amortization. . . 15,349 8,529 3,655 B 27,533
Property and other taxes . . . . . 9,166 - - 9,166
------------ ------------ ------------- -----------
$ 613,290 $ 70,449 $ 1,730 $ 685,469
OPERATING INCOME . . . . . . . . . . $ 24,195 $ 23,143 $ (1,730) $ 45,608
OTHER INCOME (DEDUCTIONS)
Business divestitures. . . . . . . $ 5,048 $ - $ - $ 5,048
Interest expense . . . . . . . . . (14,811) (4,763) (12,293) C (31,867)
Other. . . . . . . . . . . . . . . 643 559 - 1,202
------------ ------------ ------------- -----------
$ (9,120) $ (4,204) $ (12,293) $ (25,617)
INCOME BEFORE INCOME TAXES . . . . . $ 15,075 $ 18,939 $ (14,023) $ 19,991
INCOME TAXES . . . . . . . . . . . . 6,320 7,555 (5,609) D 8,266
------------ ------------ ------------- -----------
NET INCOME BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE AND
EXTRAORDINARY CHARGE . . . . . . . $ 8,755 $ 11,384 $ (8,414) $ 11,725
Cumulative effect of change in
accounting method for property
property taxes, net of income
taxes of $960 . . . . . . . . . 1,784 - - 1,784
Extraordinary charge due to
early retirement of debt,
net of income taxes of $269 . . (499) - - (499)
------------ ------------ ------------- -----------
NET INCOME . . . . . . . . . . . . . $ 10,040 $ 11,384 $ (8,414) $ 13,010
============ ============ ============= ===========
EARNINGS PER SHARE - BASIC
AND DILUTED. . . . . . . . . . . . 0.63 0.58
============ ===========
AVERAGE COMMON SHARES
OUTSTANDING. . . . . . . . . . . . 15,906 6,500 22,406
============ ============= ===========
</TABLE>
See the accompanying Notes to the Pro Forma Combined Statements of Income
<TABLE>
<CAPTION>
SEMCO ENERGY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Pro Forma
SEMCO ENSTAR Acquisition SEMCO
Energy and APC and Financing Energy
Historical Historical Adjustments Notes Pro Forma
------------ ------------ ------------- ----- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . $ 275,106 $ 68,548 $ - $ 343,654
OPERATING EXPENSES
Cost of gas sold . . . . . . . $ 73,384 $ 29,550 $ - $ 102,934
Cost of gas marketed . . . . . 95,632 - - 95,632
Operations and maintenance . . 67,281 15,732 (1,444) A 81,569
Depreciation and amortization. 13,236 8,157 1,147 B 22,540
Property and other taxes . . . 6,024 - - 6,024
------------ ------------ ------------- -----------
$ 255,557 $ 53,439 $ (297) $ 308,699
OPERATING INCOME . . . . . . . . $ 19,549 $ 15,109 $ 297 $ 34,955
OTHER INCOME (DEDUCTIONS)
Business divestitures. . . . . $ 1,122 $ - $ - $ 1,122
Interest expense . . . . . . . (11,616) (4,721) (7,984) C (24,321)
Other. . . . . . . . . . . . . 1,473 331 - 1,804
------------ ------------ ------------- -----------
$ (9,021) $ (4,390) $ (7,984) $ (21,395)
INCOME BEFORE INCOME TAXES . . . $ 10,528 $ 10,719 $ (7,687) $ 13,560
INCOME TAXES . . . . . . . . . . 2,168 5,337 (3,075) D 4,430
------------ ------------ ------------- -----------
NET INCOME . . . . . . . . . . . $ 8,360 $ 5,382 $ (4,612) $ 9,130
============ ============ ============= ===========
EARNINGS PER SHARE - BASIC AND
DILUTED. . . . . . . . . . . . $ 0.47 $ 0.38
============ ===========
AVERAGE COMMON SHARES
OUTSTANDING. . . . . . . . . . 17,636 6,500 24,136
============ ============= ===========
</TABLE>
See the accompanying Notes to the Pro Forma Combined Statements of Income
SEMCO ENERGY, INC.
NOTES TO PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE
YEAR ENDED DECEMBER 31, 1998
(A) To reflect the elimination of management fees paid to Ocean Energy. On
a combined basis, SEMCO Energy and ENSTAR will not incur these fees.
(B) To reflect amortization expense associated with the estimated goodwill
recognized in the Acquisition in excess of goodwill amortization expense already
recorded in ENSTAR's results. The goodwill is being amortized over a 40 year
period. This adjustment also reflects depreciation expense on the fair value of
property, plant, and equipment in accordance with the depreciation rates
authorized by the Regulatory Commission of Alaska.
(C) To reflect the increase in interest expense relating to the assumed
issuance of $170 million of medium-term notes and $35 million of trust preferred
securities offset partially by the elimination of interest expense on the
outstanding debt of ENSTAR which was acquired by SEMCO Energy as part of the
Acquisition. This adjustment does not include non-recurring financing fees of
$2.3 million ($1.4 million after-tax) incurred by SEMCO Energy pursuant to the
unsecured bridge loan incurred to finance the acquisition of ENSTAR.
(D) To reflect the income tax expense effects of pro forma adjustments (A)
through (C) at an estimated rate of 40%.
Other disclosure information:
- ------------------------------
The pro forma adjustments do not reflect any potential cost savings or
operating synergies that may be realized following the Acquisition.
The Pro Forma Combined Statements of Income have been prepared as if the
acquisition of ENSTAR occurred as of January 1, 1998 and the Financing
Transactions, not the bridge loan, were in place as of the same date. The
Acquisition was actually financed with a $290 million unsecured bridge loan
bearing an interest rate that can range from 100 to 150 basis points above the
London Interbank Offered Rate (LIBOR). The initial interest rate on the bridge
loan is 6.4%. The bridge loan matures on November 1, 2000. Prepayments of
$56,000,000 will be required on the six and nine month anniversary of the
funding date (November 1, 1999) if the bridge loan is not prepaid.
<TABLE>
<CAPTION>
SEMCO ENERGY, INC.
PRO FORMA COMBINED STATEMENT OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 1999
Pro Forma
SEMCO ENSTAR Acquisition SEMCO
Energy and APC and Financing ENERGY
Historical Historical Adjustments Notes Pro Forma
----------- ----------- ------------- ------ ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and temporary cash investments. . . $ 3,509 $ 526 $ - $ 4,035
Receivables and accrued revenue,
net of allowances . . . . . . . . . . 25,495 6,239 - 31,734
Materials and supplies . . . . . . . . . 1,956 3,633 - 5,589
Gas in underground storage . . . . . . . 49,661 - - 49,661
Other. . . . . . . . . . . . . . . . . . 19,717 3,122 - 22,839
----------- ----------- ------------- ----------
$ 100,338 $ 13,520 $ - $ 113,858
----------- ----------- ------------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET . . . . $ 307,033 $ 160,353 $ 4,647 A $ 472,033
----------- ----------- ------------- ----------
DEFERRED CHARGES AND OTHER
Goodwill of ENSTAR and APC business, net $ - $ 125,927 $ 3,858 B $ 129,785
Deferred retiree medical benefits. . . . 11,914 - - 11,914
Other. . . . . . . . . . . . . . . . . . 37,142 2,292 2,850 B 42,284
----------- ----------- ------------- ----------
$ 49,056 $ 128,219 $ 6,708 $ 183,983
----------- ----------- ------------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . $ 456,427 $ 302,092 $ 11,355 $ 769,874
=========== =========== ============= ==========
CURRENT LIABILITIES
Notes payable. . . . . . . . . . . . . . $ 66,810 $ 12,202 $ (12,202) C $ 66,810
Accounts payable . . . . . . . . . . . . 18,643 6,023 (5,175) B, D 19,491
Customer advance payments. . . . . . . . 9,213 3,033 - 12,246
Accrued interest . . . . . . . . . . . . 4,464 1,195 (1,034) C 4,625
Other. . . . . . . . . . . . . . . . . . 8,189 3,512 (111) B 11,590
----------- ----------- ------------- ----------
$ 107,319 $ 25,965 $ (18,522) $ 114,762
----------- ----------- ------------- ----------
DEFERRED CREDITS AND OTHER
Accumulated deferred income taxes. . . . $ 20,110 $ 31,617 $ (31,617) B 20,110
Customer advances for construction . . . 2,593 7,404 - 9,997
Other. . . . . . . . . . . . . . . . . . 16,764 2,600 - 19,364
----------- ----------- ------------- ----------
$ 39,467 $ 41,621 $ (31,617) $ 49,471
----------- ----------- ------------- ----------
CAPITALIZATION
Long-term debt . . . . . . . . . . . . . $ 170,000 $ 45,002 $ 124,998 C, D $ 340,000
Trust preferred securities . . . . . . . - - 35,000 D 35,000
Preferred stock. . . . . . . . . . . . . 3,254 - - 3,254
Common shareholders' equity. . . . . . . 136,387 189,504 (98,504) D, E 227,387
----------- ----------- ------------- ----------
$ 309,641 $ 234,506 $ 61,494 $ 605,641
----------- ----------- ------------- ----------
TOTAL LIABILITIES AND CAPITALIZATION . . . $ 456,427 $ 302,092 $ 11,355 $ 769,874
=========== =========== ============= ==========
</TABLE>
See the accompanying Notes to the Pro Forma Combined Statement of
Financial Position
SEMCO ENERGY, INC.
NOTES TO PRO FORMA COMBINED STATEMENT
OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 1999
(A) To reflect the adjustment to property, plant, and equipment to record
these assets at their estimated fair values. The adjustment reflects SEMCO
Energy's internal evaluation of the allocation of the purchase price and is
subject to verification by a third party study. If this study does not support
SEMCO Energy's allocation to property, plant, and equipment, an appropriate
adjustment will be made to property, plant, and equipment with a corresponding
adjustment to goodwill.
(B) To reflect the preliminary acquisition adjustments to record the assets
acquired and liabilities assumed at estimated fair value under the purchase
method of accounting. These adjustments include: (1) the preliminary estimate
of additional goodwill; (2) the elimination of certain deferred taxes applicable
to Ocean Energy; (3) an increase in accounts payable to account for expenses
associated with the Acquisition and the Financing Transactions; (4) the
elimination of accrued pension expense; and (5) an increase in unamortized debt
expense to reflect the costs associated with the Financing Transactions.
(C) To reflect the elimination of all outstanding debt plus accrued interest
owed by ENSTAR to SEMCO Energy. This debt plus the accrued interest thereon was
purchased by SEMCO Energy as part of the Acquisition.
(D) To reflect the Financing Transactions which include the assumed issuance
of the following:
- $170 million of medium-term notes
- $35 million of trust preferred securities
- 6.5 million shares of SEMCO Energy common stock producing net
proceeds of approximately $91 million
It is assumed that the amount received from the above issuances in excess of the
purchase price paid for ENSTAR will be used to reduce accounts payable
(E) To reflect the decrease in common equity as a result of pro forma
adjustments (A) through (D).
Other disclosure information:
- ------------------------------
The Pro Forma Combined Statement of Financial Position has been prepared as
if the acquisition of ENSTAR occurred on September 30, 1999 and the Financing
Transactions, not the bridge loan, were in place on the same date. The
Acquisition was actually financed with a $290 million unsecured bridge loan
bearing an interest rate that can range from 100 to 150 basis points above the
London Interbank Offered Rate (LIBOR). The initial interest rate on the bridge
loan is 6.4%. The bridge loan matures on November 1, 2000. Prepayments of
$56,000,000 will be required on the six and nine month anniversary of the
funding date (November 1, 1999) if the bridge loan is not prepaid.
