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, 2000
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 001-15565
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 outstanding shares of the Registrant's common stock as of July 31,
2000: 18,034,052.
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INDEX TO FORM 10-Q
------------------
For Quarter Ended June 30, 2000
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Page
Number
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COVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . .. . . . . . . . . . . 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 4. Submission of Matters to a Vote of Securityholders . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 27
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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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 of SEMCO Energy, Inc. and its
subsidiaries (the "Company"). Statements that are not historical facts,
including statements about the Company's outlook, beliefs, plans, goals, 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 Company's engineering
services segment; (ix) the nature, availability and projected profitability of
potential investments available to the Company; (x) the Company's ability to
accomplish its financing objectives in a timely and cost-effective manner in
light of changing conditions in the capital markets, (xi) the Company's ability
to operate and integrate acquired businesses in accordance with its plans and
(xii) the Company's ability to effectively execute its strategic plan and
strategic alternatives.
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<CAPTION>
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Gas sales . . . . . . . . . . . . $42,961 $32,325 $141,893 $101,303 $231,759 $170,686
Gas transportation. . . . . . . . 6,294 3,632 17,791 10,261 29,899 17,938
Construction services . . . . . . 21,384 9,812 34,302 13,369 70,898 36,619
Engineering services. . . . . . . 3,725 3,435 7,390 7,982 14,249 24,265
Gas marketing . . . . . . . . . . - - - 96,855 - 275,770
Other . . . . . . . . . . . . . . 2,114 2,025 5,404 5,339 9,629 9,566
-------- -------- --------- --------- --------- ---------
$76,478 $51,229 $206,780 $235,109 $356,434 $534,844
-------- -------- --------- --------- --------- ---------
OPERATING EXPENSES
Cost of gas sold. . . . . . . . . $22,555 $19,411 $ 83,090 $ 65,410 $135,470 $110,658
Cost of gas marketed. . . . . . . - - - 95,632 - 270,613
Operations and maintenance. . . . 38,103 22,744 70,520 41,053 130,288 95,459
Depreciation and amortization . . 8,219 4,461 16,201 8,697 27,510 16,503
Property and other taxes. . . . . 2,928 1,145 6,027 3,502 11,149 7,648
-------- -------- --------- --------- --------- ---------
$71,805 $47,761 $175,838 $214,294 $304,417 $500,881
-------- -------- --------- --------- --------- ---------
OPERATING INCOME. . . . . . . . . . $ 4,673 $ 3,468 $ 30,942 $ 20,815 $ 52,017 $ 33,963
OTHER INCOME (DEDUCTIONS)
Divestiture of energy
marketing business. . . . . . . $ - $ - $ - $ 1,122 $ - $ 1,122
Divestiture of NOARK investment . - - - - - 3,568
Interest expense. . . . . . . . . (9,405) (3,775) (18,101) (7,670) (31,006) (15,252)
Other . . . . . . . . . . . . . . 608 574 1,668 946 3,349 782
-------- -------- --------- --------- --------- ---------
$(8,797) $(3,201) $(16,433) $ (5,602) $(27,657) $ (9,780)
-------- -------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND DIVIDENDS ON TRUST
PREFERRED SECURITIES. . . . . . . $(4,124) $ 267 $ 14,509 $ 15,213 $ 24,360 $ 24,183
INCOME TAXES. . . . . . . . . . . . $(1,807) $ 146 $ 4,832 $ 4,688 $ 7,549 $ 9,550
-------- -------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE
DIVIDENDS ON TRUST
PREFERRED SECURITIES. . . . . . . $(2,317) $ 121 $ 9,677 $ 10,525 $ 16,811 $ 14,633
Dividends on trust preferred
securities net of income taxes. 757 - 757 - 757 -
-------- -------- --------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS . . . . . . . $(3,074) $ 121 $ 8,920 $ 10,525 $ 16,054 $ 14,633
======== ======== ========= ========= ========= =========
EARNINGS (LOSS) PER
SHARE - BASIC AND DILUTED . . . . $ (0.17) $ 0.01 $ 0.50 $ 0.60 $ 0.90 $ 0.85
======== ======== ========= ========= ========= =========
CASH DIVIDENDS
PAID PER SHARE. . . . . . . . . . $ 0.210 $ 0.255 $ 0.415 $ 0.454 $ 0.824 $ 0.836
======== ======== ========= ========= ========= =========
AVERAGE COMMON
SHARES OUTSTANDING. . . . . . . . 17,992 17,703 17,954 17,571 17,887 17,183
======== ======== ========= ========= ========= =========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
</TABLE>
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<TABLE>
<CAPTION>
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
(In thousands)
June 30, December 31,
2000 1999
--------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and temporary cash investments, at cost . . . $ 228 $ 6,086
Receivables, less allowances of $1,427 and $1,080. 46,755 79,587
Accrued revenue. . . . . . . . . . . . . . . . . . 6,120 25,380
Prepaid expenses . . . . . . . . . . . . . . . . . 11,735 14,231
Gas in underground storage . . . . . . . . . . . . 8,684 11,723
Materials and supplies, at average cost. . . . . . 7,093 6,146
Gas charges recoverable from customers . . . . . . 2,903 3,009
Accumulated deferred income taxes. . . . . . . . . 3,525 3,528
Other. . . . . . . . . . . . . . . . . . . . . . . 90 844
--------- -------------
$ 87,133 $ 150,534
PROPERTY, PLANT AND EQUIPMENT
Gas distribution . . . . . . . . . . . . . . . . . $ 562,531 $ 542,505
Diversified businesses . . . . . . . . . . . . . . 71,285 61,434
--------- -------------
633,816 603,939
Less - accumulated depreciation. . . . . . . . . . 143,739 129,593
--------- -------------
$ 490,077 $ 474,346
DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less amortization of $7,253 and $5,052 . $ 162,354 $ 162,691
Deferred retiree medical benefits. . . . . . . . . 11,239 11,689
Unamortized debt expense . . . . . . . . . . . . . 7,646 7,644
Other. . . . . . . . . . . . . . . . . . . . . . . 9,828 8,279
--------- -------------
$ 191,067 $ 190,303
--------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $ 768,277 $ 815,183
========= =============
<FN>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
</TABLE>
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<TABLE>
<CAPTION>
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND CAPITALIZATION
(In thousands)
June 30, December 31,
2000 1999
--------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable . . . . . . . . . . . . . . . . . . . . . . . $ 96,377 $ 376,629
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 18,379 35,725
Customer advance payments . . . . . . . . . . . . . . . . . 9,599 13,885
Accrued interest. . . . . . . . . . . . . . . . . . . . . . 2,975 4,527
Amounts payable to customers. . . . . . . . . . . . . . . . 2,678 5,715
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,081 11,701
--------- -------------
$ 139,089 $ 448,182
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . $ 25,902 $ 25,774
Customer advances for construction. . . . . . . . . . . . . 13,593 15,045
Unamortized investment tax credit . . . . . . . . . . . . . 1,846 1,980
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,373 11,862
--------- -------------
$ 55,714 $ 54,661
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . $ 308,386 $ 170,000
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
PREFERRED SECURITIES OF SUBSIDIARIES HOLDING
SOLELY DEBT SECURITIES OF SEMCO ENERGY, INC.. . . . . . . . $ 128,606 $ -
COMMON SHAREHOLDERS' EQUITY
Common stock - $1 par value; 40,000,000 shares authorized;
18,027,505 and 17,908,616 shares outstanding. . . . . . . $ 18,028 $ 17,909
Capital surplus . . . . . . . . . . . . . . . . . . . . . . 116,420 123,861
Retained earnings . . . . . . . . . . . . . . . . . . . . . 2,034 570
--------- -------------
$ 136,482 $ 142,340
--------- -------------
TOTAL LIABILITIES AND CAPITALIZATION. . . . . . . . . . . . . $ 768,277 $ 815,183
========= =============
<FN>
The accompanying notes to the consolidated financial statements are an integral part of
these statements.
</TABLE>
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SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2000 1999 2000 1999
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ (3,074) $ 121 $ 8,920 $ 10,525
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . 8,219 4,461 16,201 8,697
Gain on divestiture of energy marketing business. . . - - - (1,122)
Changes in assets and liabilities, net of effects of
acquisitions, divestitures and other changes as
shown below: . . . . . . . . . . . . . . . . . . . 12,489 (5,963) 26,016 31,207
---------- -------- ---------- ---------
NET CASH FROM OPERATING ACTIVITIES. . . . . . . $ 17,634 $(1,381) $ 51,137 $ 49,307
---------- -------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions - gas distribution . . . . . . . . . . . $ (14,333) $(4,276) $ (20,956) $ (8,183)
Property additions - diversified businesses . . . . . . . . (5,753) (3,450) (8,189) (5,372)
Proceeds from property sales, net of retirement costs . . . (487) 24 (202) (7)
Proceeds from business divestiture. . . . . . . . . . . . . - 1,950 - 1,950
Acquisitions of businesses, net of cash acquired. . . . . . (784) - (784) (925)
---------- -------- ---------- ---------
NET CASH FROM INVESTING ACTIVITIES. . . . . . . $ (21,357) $(5,752) $ (30,131) $(12,537)
---------- -------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of expenses . . . . . . . . . $ 225 $ 1,559 $ 443 $ 3,555
Repurchase of common stock and related expenses . . . . . . - (193) - (193)
Issuance of trust preferred securities, net of expenses . . 124,772 - 124,772 -
Issuance of long-term debt, net of expenses . . . . . . . . 136,850 - 136,850 -
Net cash change in notes payable and related expenses . . . (257,681) 7,866 (281,473) (33,632)
Payment of dividends. . . . . . . . . . . . . . . . . . . . (3,784) (4,554) (7,456) (8,081)
---------- -------- ---------- ---------
NET CASH FROM FINANCING ACTIVITIES. . . . . . . $ 382 $ 4,678 $ (26,864) $(38,351)
---------- -------- ---------- ---------
CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease) . . . . . . . . . . . . . . . . . . $ (3,341) $(2,455) $ (5,858) $ (1,581)
Beginning of period . . . . . . . . . . . . . . . . . . . . 3,569 5,827 6,086 4,953
---------- -------- ---------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 228 $ 3,372 $ 228 $ 3,372
========== ======== ========== =========
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS, DIVESTITURES AND OTHER CHANGES:
Receivables, net. . . . . . . . . . . . . . . . . . . $ 7,871 $ 9,996 $ 33,544 $ 7,063
Accrued revenue . . . . . . . . . . . . . . . . . . . 9,813 7,267 19,260 30,201
Materials, supplies and gas in underground storage. . (2,066) (7,036) 2,092 16,546
Gas charges recoverable from customers. . . . . . . . 45 256 106 9,048
Accounts payable. . . . . . . . . . . . . . . . . . . 5,557 (3,855) (17,700) (17,349)
Customer advances and amounts payable to customers. . (433) (31) (8,775) (2,776)
Accrued taxes . . . . . . . . . . . . . . . . . . . . (7,776) (9,646) (2,886) (7,884)
Other . . . . . . . . . . . . . . . . . . . . . . . . (522) (2,914) 375 (3,642)
---------- -------- ---------- ---------
$ 12,489 $(5,963) $ 26,016 $ 31,207
========== ======== ========== =========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these statements.
</TABLE>
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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 1999 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The information in
the accompanying financial statements reflects, in the opinion of the Company's
management, all adjustments (which include only normal recurring adjustments)
necessary for a fair statement of the information shown, subject to year-end and
other adjustments, as later information may require. Certain reclassifications
have been made to the prior periods' financial statements to conform with the
2000 presentation.
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.
SUPPLEMENTAL CASH FLOW INFORMATION - Supplemental cash flow information for
the three and six months ended June 30, 2000 and 1999 is as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . $10,271 $ 5,815 $18,081 $ 7,086
Income taxes . . . . . . . . . . . . . . . . . $ 5,527 $ 6,850 $ 7,884 $12,350
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital stock issued for acquisitions. . . . . $ 1,000 $ 2,099 $ 1,000 $ 2,099
Deferred payments for acquisitions . . . . . . $ - $ - $ - $ 1,000
DETAILS OF ACQUISITIONS:
Fair value of assets acquired. . . . . . . . . $ 3,364 $ 5,226 $ 3,364 $10,378
Fair value of liabilities assumed. . . . . . . (1,576) (3,127) (1,576) (6,279)
Deferred payments. . . . . . . . . . . . . . . - - - (1,000)
Company stock issued . . . . . . . . . . . . . (1,000) (2,099) (1,000) (2,099)
-------- -------- -------- --------
Cash paid. . . . . . . . . . . . . . . . . . . $ 788 $ - $ 788 $ 1,000
Less cash acquired . . . . . . . . . . . . . . 4 - 4 75
-------- -------- -------- --------
Net cash paid for (acquired via) acquisitions. $ 784 $ - $ 784 $ 925
</TABLE>
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SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(2) CAPITALIZATION
REGISTRATION STATEMENT - In March 2000, a registration statement on Form
S-3 ("registration statement") filed by the Company and SEMCO Capital Trust I,
SEMCO Capital Trust II and SEMCO Capital Trust III ("Capital Trusts") with the
Securities and Exchange Commission became effective. The registration statement
was for the registration of debt securities, preferred stock, common stock,
stock purchase contracts and stock purchase units of the Company and trust
preferred securities of the Capital Trusts and related guarantees in any
combination up to $500 million.
LONG-TERM DEBT - In April 2000, the Company sold $30 million of 8% Senior
Notes due 2010 ("Senior Notes") in a public offering. Interest on the Senior
Notes is paid semi-annually.
The Company also sold $105 million of 8.95% Remarketable or Redeemable
Securities ("ROARS") in a public offering in June 2000. The ROARS were issued
at a discount of approximately $.3 million. Interest on the ROARS is payable
semi-annually. The ROARS mature in July 2008; however, the Company may purchase,
or be required to purchase, all of the ROARS in July 2003 if they are not
remarketed as discussed below. In conjunction with the sale of the ROARS, the
Company entered into a remarketing agreement with Banc of America Securities LLC
("BAS") under which BAS has the option to purchase all the ROARS in July 2003 or
any subsequent remarketing date. The Company received an option premium of
approximately $2.5 million for the remarketing option which is included with the
ROARS in long-term debt in the Company's Consolidated Statement of Financial
Position. The option premium is being amortized to income over the life of the
ROARS.
If BAS purchases the ROARS in July 2003, they will remarket the ROARS at a
new interest rate in accordance with the terms of the ROARS. If BAS does not
exercise its option to purchase the ROARS in July 2003 then the Company is
required to redeem all of the ROARS at that time.
The Company used the entire net proceeds from the sale of the Senior Notes
and ROARS to repay a portion of the bridge loan utilized for the acquisition of
ENSTAR Natural Gas Company and Alaska Pipeline Company (together known as
"ENSTAR").
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARIES - The Company's Capital Trusts were established for the sole
purpose of issuing trust preferred securities and lending the gross proceeds to
the Company. The sole assets of the Capital Trusts are debt securities of the
Company with terms similar to the terms of the related trust preferred
securities. The Capital Trusts are subsidiaries of the Company.
In April 2000, SEMCO Capital Trust I issued 1.6 million shares of 10.25%
cumulative trust preferred securities ("10.25% TPS") in a public offering at a
price of $25 per security. SEMCO Capital Trust I used the $40 million in
proceeds from the issuance of the 10.25% TPS to invest in subordinated
debentures of the Company bearing an interest rate of 10.25%. The Company used
the entire net proceeds from the sale of the subordinated debentures to repay a
portion of the bridge loan utilized in the ENSTAR acquisition.
In June 2000, the Company issued 9 million FELINE PRIDES in a public
offering at a price of $10 per security (see Note 8). Each FELINE PRIDES
initially consisted of a stock purchase contract of the Company and a 9% trust
preferred security of SEMCO Capital Trust II with a stated face value per
security of $10 ("9% TPS"). SEMCO Capital Trust II used the $90 million in
proceeds to invest in 9% senior deferrable notes of the Company. The Company
used the entire net proceeds from the sale of the senior deferrable notes to
repay a portion of the bridge loan utilized for the acquisition of ENSTAR.
- 8 -
<PAGE>
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Under the terms of each stock purchase contract (which is a component of a
FELINE PRIDES unit), the FELINE PRIDES holder is obligated to purchase, and the
Company is obligated to sell, between .7794 and .8651 shares of Company common
stock in August 2003. The actual number of shares of common stock to be sold
will depend on the average market value of a share of common stock in August
2003. In addition to payments on the 9% TPS, the Company is also obligated to
pay the FELINE PRIDES holders a quarterly contract adjustment payment on each
stock purchase contract at an annual rate of 2% of $10.
COMMON STOCK EQUITY - On June 15, 2000 the Company's Board of Directors
declared a regular quarterly cash dividend of $.21 per share on the Company's
common stock. The dividend is payable on August 15, 2000 to shareholders of
record at the close of business on August 4, 2000.
In May 2000, the Company paid a quarterly cash dividend of $.21 per share
on its common stock. The total cash dividend was approximately $3.8 million of
which $.7 million was reinvested by shareholders into common stock through
participation in the Direct Stock Purchase and Dividend Reinvestment Plan
("DRIP"). During the second quarter of 2000, the DRIP purchased Company common
stock on the open market to meet the dividend reinvestment and stock purchase
requirements of its participants. Also during the second quarter of 2000, the
Company issued approximately 18,000 shares of its common stock to certain of the
Company's employee benefit plans and approximately 83,000 shares in connection
with a business acquisition.
(3) EARNINGS PER SHARE
The computations of basic and diluted earnings per share for the three
months, six months and twelve months ended June 30, 2000 and 1999 are as follows
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2000 1999 2000 1999 2000 1999
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE COMPUTATION:
Net income (loss). . . . . . . . . . . . . . . $(3,074) $ 121 $ 8,920 $10,525 $16,054 $14,633
Weighted average common shares outstanding . . 17,992 17,703 17,954 17,571 17,887 17,183
Earnings (Loss) Per Share-Basic. . . . . . . . $ (0.17) $ 0.01 $ 0.50 $ 0.60 $ 0.90 $ 0.85
DILUTED EARNINGS (LOSS) PER SHARE COMPUTATION:
Net income (loss). . . . . . . . . . . . . . . $(3,074) $ 121 $ 8,920 $10,525 $16,054 $14,633
Adjustment for effect of assumed conversions:
Preferred convertible stock dividends. . . . - 4 - 7 5 14
-------- ------- ------- ------- ------- -------
Diluted net income (loss). . . . . . . . . . . $(3,074) $ 125 $ 8,920 $10,532 $16,059 $14,647
-------- ------- ------- ------- ------- -------
Weighted average common shares outstanding . . 17,992 17,703 17,954 17,571 17,887 17,183
Incremental shares from assumed
conversions of:
Preferred convertible stock. . . . . . . . - 25 - 25 10 25
Stock options. . . . . . . . . . . . . . . - - 5 - 2 -
-------- ------- ------- ------- ------- -------
Diluted weighted average common
shares outstanding . . . . . . . . . . . . . 17,992 17,728 17,959 17,596 17,899 17,208
-------- ------- ------- ------- ------- -------
Earnings (Loss) Per Share-Diluted. . . . . . . $ (0.17) $ 0.01 $ 0.50 $ 0.60 $ 0.90 $ 0.85
</TABLE>
- 9 -
<PAGE>
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
4) BUSINESS SEGMENTS
The Company operates four business segments: (1) gas distribution; (2)
construction services; (3) engineering services; and (4) propane, pipelines and
storage. The latter three segments are sometimes referred to together as the
"diversified businesses". The Company's gas distribution segment distributes
and transports natural gas to approximately 255,000 customers in the state of
Michigan and approximately 102,000 customers in the state of Alaska. The
construction services segment currently does business in the mid-western,
southern and southeastern areas of the United States. In addition to
constructing underground gas pipelines, the Company is expanding its underground
construction services into other industries such as telecommunications and water
supply. 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 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.
The accounting policies of the operating segments are the same as those
described in Notes 1 and 12 of the Notes to the Consolidated Financial
Statements in the Company's 1999 Annual Report on Form 10-K 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 corporate related expenses not allocated to segments,
intercompany eliminations and results of other smaller operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Gas Distribution. . . . . . . . $49,928 $36,709 $161,616 $113,688 $264,758 $192,050
Construction Services . . . . . 24,391 12,032 38,944 16,716 80,500 33,394
Engineering Services. . . . . . 5,979 3,659 11,528 9,379 19,634 38,354
Propane, Pipelines and Storage. 1,228 1,284 3,289 3,228 6,345 6,111
Energy Marketing. . . . . . . . - - - 96,904 - 278,190
Corporate and Other (a) . . . . (5,048) (2,455) (8,597) (4,806) (14,803) (13,255)
-------- -------- --------- --------- --------- ---------
Total Operating Revenues. . . $76,478 $51,229 $206,780 $235,109 $356,434 $534,844
======== ======== ========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution. . . . . . . . $ 5,348 $ 4,064 $ 34,007 $ 21,931 $ 52,209 $ 30,260
Construction Services . . . . . (567) 321 (2,845) (925) 691 261
Engineering Services. . . . . . 142 (544) 212 (92) (208) 1,698
Propane, Pipelines and Storage. 276 371 748 1,167 1,922 2,004
Energy Marketing. . . . . . . . - - - (341) - 2,269
Corporate and Other (a) . . . . (526) (744) (1,180) (925) (2,597) (2,529)
-------- -------- --------- --------- --------- ---------
Total Operating Income. . . . $ 4,673 $ 3,468 $ 30,942 $ 20,815 $ 52,017 $ 33,963
======== ======== ========= ========= ========= =========
<FN>
(a) Includes the elimination of intercompany energy marketing revenues of $49 and $2,420 for
the six and twelve months ended June 30, 1999, respectively. Includes the elimination
of intercompany construction services revenue of $3,007, $4,642 and $9,603 for the
three, six and twelve months ended June 30, 2000, respectively, and $2,220, $3,346 and
$9,129 for the three, six and twelve months ended June 30, 1999, respectively. Includes
the elimination of intercompany engineering services revenue of $2,254, $4,138 and
$5,385 for the three and twelve months ended June 30, 2000, respectively, and $224,
$1,398 and $1,735 for the three and twelve months ended June 30, 1999, respectively.
</TABLE>
- 10 -
<PAGE>
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(5) PRO FORMA INFORMATION
On November 1, 1999, the Company acquired ENSTAR from Ocean Energy, Inc.
("Ocean Energy") for approximately $290 million in cash, which included
adjustments for working capital and the purchase of $58.7 million of ENSTAR's
debt held by Ocean Energy, plus the accrued interest thereon. The acquisition
has been accounted for using the purchase method of accounting. Accordingly, the
purchase price has been preliminarily allocated to the assets purchased and the
liabilities assumed based on their estimated fair values at the date of the
acquisition, with the $134.4 million of purchase price in excess of these
estimated fair values classified as goodwill, which is being amortized on a
straight-line basis over 40 years.
The following pro forma amounts for operating revenue, consolidated net
income and earnings per share (basic and diluted) have been determined as if the
acquisition of ENSTAR occurred on January 1, 1999, and illustrate the effects
of: (1) the elimination of activities between ENSTAR and Ocean Energy or its
predecessor, Seagull Energy, Inc., that occurred prior to the closing of the
acquisition by the Company; (2) the adjustments resulting from the acquisition
by the Company including increases in depreciation and amortization expense due
primarily to the amortization, over a 40 year period, of the goodwill associated
with the acquisition; and (3) the public issuance of $135 million of debentures,
$40 million of trust preferred securities and $90 million of FELINE PRIDES (Note
2 contains additional information about these issuances), the utilization of
short-term lines of credit to fund the remaining purchase price, and the
resulting adjustments to interest expense and trust preferred dividends from
these issuances and transactions (the "Financing Transactions"). The pro-forma
amounts include the effects of the Financing Transactions as though they were
issued on January 1, 1999 and exclude the effects of the $290 million short-term
bridge loan actually utilized in the ENSTAR acquisition. The net proceeds from
the Financing Transactions have or will be used primarily to retire the bridge
loan.
The pro forma amounts do not reflect any potential cost savings or
operating synergies that may be realized following the acquisition of ENSTAR.
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Actual results:
Operating revenue. . . . . . . . . . . $76,478 $51,229 $206,780 $235,109
Net income (loss). . . . . . . . . . . (3,074) 121 8,920 10,525
Basic EPS. . . . . . . . . . . . . . . (0.17) 0.01 0.50 0.60
Pro-forma results:
Operating revenue. . . . . . . . . . . $76,478 $68,660 $206,780 $291,200
Net income (loss). . . . . . . . . . . (3,209) (2,267) 8,533 12,035
Basic EPS. . . . . . . . . . . . . . . (0.18) (0.13) 0.48 0.68
</TABLE>
(6) MERGERS AND ACQUISITIONS
In May 2000, the Company acquired KLP Construction Co. ("KLP") for
approximately $1.8 million. KLP is based in East Peoria, Illinois and provides
natural gas pipeline and fiber optic construction services primarily for the
utility industry. For financial statement purposes, the acquisition of KLP has
been 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 KLP to
conform with the practices of the Company.
- 11 -
<PAGE>
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(7) COMMITMENTS AND CONTINGENCIES
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 Michigan 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 plans to the appropriate
environmental regulatory authority in the State of Michigan to close one site
and begin work at another site. The extent of the Company's liabilities and
potential costs in connection with these sites cannot reasonably be 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.
(8) SUBSEQUENT EVENTS
During July 2000, the Company offered early retirement programs to certain
employees of the Company. Under the program, eligible employees receive
enhanced benefits if they choose to retire early.
Also during July 2000, Merrill Lynch, the underwriters for the FELINE
PRIDES, exercised their option to purchase additional FELINE PRIDES to cover
over-allotments. An additional 1.1 million FELINE PRIDES were issued bringing
the total number of FELINE PRIDES outstanding to 10.1 million.
- 12 -
<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") incurred a net loss
of $3.1 million (or $0.17 per share) for the quarter ended June 30, 2000
compared to net income of $.1 million (or $0.01 per share) for the quarter ended
June 30, 1999. On a weather-normalized basis, the net loss for the quarter
ended June 30, 2000 would have been approximately $2.4 million (or $0.13 per
share) compared to net income of approximately $1.4 million (or $0.08 per share)
for the same period of the prior year.
Net income for the six months ended June 30, 2000 was $8.9 million (or
$0.50 per share) compared to $10.5 million (or $0.60 per share) for the six
months ended June 30, 1999. On a weather-normalized basis, the net income for
the six months ended June 30, 2000 would have been approximately $12.3 million
(or $0.69 per share) compared to net income of approximately $12.5 million (or
$0.71 per share) for the same period of the prior year.
Net income for the twelve months ended June 30, 2000 was $16.1 million (or
$.90 per share) compared to $14.6 million (or $0.85 per share) for the twelve
months ended June 30, 1999. On a weather-normalized basis, net income would
have been approximately $21.1 million (or $1.18 per share) for the twelve months
ended June 30, 2000 compared to approximately $19.8 million (or $1.15 per share)
for the same period of the prior year. The net income for the six months and
twelve months ended June 30, 1999 includes a gain of $.7 million after tax on
the sale of the energy marketing business.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues (a). . . . . . . . . . $76,478 $51,229 $206,780 $235,109 $356,434 $534,844
Operating expenses (a). . . . . . . . . 71,805 47,761 175,838 214,294 304,417 500,881
-------- -------- --------- --------- --------- ---------
Operating income. . . . . . . . . . . . . $ 4,673 $ 3,468 $ 30,942 $ 20,815 $ 52,017 $ 33,963
Other income and (deductions) . . . . . (8,797) (3,201) (16,433) (5,602) (27,657) (9,780)
Income taxes. . . . . . . . . . . . . . 1,807 (146) (4,832) (4,688) (7,549) (9,550)
-------- -------- --------- --------- --------- ---------
Income before dividends on trust
preferred securities. . . . . . . . . . $(2,317) $ 121 $ 9,677 $ 10,525 $ 16,811 $ 14,633
Dividends on trust preferred
securities, net of income tax . . . . 757 - 757 - 757 -
-------- -------- --------- --------- --------- ---------
Net income (loss) available to common
shareholders. . . . . . . . . . . . . . $(3,074) $ 121 $ 8,920 $ 10,525 $ 16,054 $ 14,633
Earnings per share ("EPS"). . . . . . . . $ (0.17) $ 0.01 $ 0.50 $ 0.60 $ 0.90 $ 0.85
Average common shares outstanding . . . . 17,992 17,703 17,954 17,571 17,887 17,183
Impact on net income of the following:
Colder (warmer) than normal weather . . $ (673) $(1,300) $ (3,405) $ (1,967) $ (5,078) $ (5,187)
Gain on sale of marketing business. . . $ - $ - $ - $ 729 $ - $ 729
Net income excluding the foregoing items. $(2,401) $ 1,421 $ 12,325 $ 11,763 $ 21,132 $ 19,091
EPS excluding the foregoing items . . . . $ (0.13) $ 0.08 $ 0.69 $ 0.67 $ 1.18 $ 1.11
<FN>
(a) The decrease in operating revenues and expenses for the six months and twelve months ended
June 30, 2000 was due primarily to the energy marketing business, which was sold effective
March 31, 1999, offset partially by the results of new business acquisitions.
</TABLE>
- 13 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
RESULTS OF OPERATIONS (CONTINUED)
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. In addition, the Company's construction services business segment is also
seasonal in nature and makes most of its income during the summer and fall
months and incurs losses during the winter and spring months. Therefore, the
Company's results of operations for the three months and six months ended June
30, 2000 and 1999 are not necessarily indicative of results for a full year.
The business segment analyses and other discussions on the next several
pages provide additional information regarding variances in results of
operations when comparing the three, six and twelve month periods ended June 30,
2000 to the same periods of the prior year.
PRO FORMA INFORMATION
On November 1, 1999, the Company acquired the assets and certain
liabilities of ENSTAR Natural Gas Company and the outstanding stock of Alaska
Pipeline Company (together known as "ENSTAR"). Note 5 of the Notes to the
Consolidated Financial Statements includes additional information regarding the
acquisition as well as a discussion of how the following pro forma amounts were
developed.
The pro forma amounts do not reflect any potential cost savings or
operating synergies that may be realized following the acquisition of ENSTAR.
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
ACTUAL RESULTS:
Operating revenue (a). . . . . . . . . $76,478 $51,229 $206,780 $235,109
Net income . . . . . . . . . . . . . . (3,074) 121 8,920 10,525
Basic EPS. . . . . . . . . . . . . . . (0.17) 0.01 0.50 0.60
Weather normalized:
Net income . . . . . . . . . . . . . (2,401) 1,421 12,325 12,492
Basic EPS. . . . . . . . . . . . . . (0.13) 0.08 0.69 0.71
PRO-FORMA RESULTS:
Operating revenue (a). . . . . . . . . $76,478 $68,660 $206,780 $291,200
Net income . . . . . . . . . . . . . . (3,209) (2,267) 8,533 12,035
Basic EPS. . . . . . . . . . . . . . . (0.18) (0.13) 0.48 0.68
Weather normalized:
Net income . . . . . . . . . . . . . (2,536) (967) 11,938 13,302
Basic EPS. . . . . . . . . . . . . . (0.14) (0.05) 0.66 0.76
<FN>
(a) The decrease in operating revenues in the six months ended June 30,
2000 is due primarily to the energy marketing business, which was sold
effective March 31, 1999, offset partially by the results of new
business acquisitions.
</TABLE>
- 14 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
SUMMARY OF BUSINESS SEGMENTS
The Company operates four business segments: (1) gas distribution; (2)
construction services; (3) engineering services; and (4) propane, pipelines and
storage. The latter three segments are sometimes referred to together as the
"diversified businesses". Refer to Note 4 of the Notes to the Consolidated
Financial Statements for further information regarding each business segment.
The Company sold the subsidiary comprising its energy marketing business
effective March 31, 1999.
The following table shows the operating revenues and operating income of
each business segment 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Gas Distribution. . . . . . . . $49,928 $36,709 $161,616 $113,688 $264,758 $192,050
Construction Services . . . . . 24,391 12,032 38,944 16,716 80,500 33,394
Engineering Services. . . . . . 5,979 3,659 11,528 9,379 19,634 38,354
Propane, Pipelines and Storage. 1,228 1,284 3,289 3,228 6,345 6,111
Energy Marketing. . . . . . . . - - - 96,904 - 278,190
Corporate and Other . . . . . . (5,048) (2,455) (8,597) (4,806) (14,803) (13,255)
-------- -------- --------- --------- --------- ---------
Total Operating Revenues. . . $76,478 $51,229 $206,780 $235,109 $356,434 $534,844
======== ======== ========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution. . . . . . . . $ 5,348 $ 4,064 $ 34,007 $ 21,931 $ 52,209 $ 30,260
Construction Services . . . . . (567) 321 (2,845) (925) 691 261
Engineering Services. . . . . . 142 (544) 212 (92) (208) 1,698
Propane, Pipelines and Storage. 276 371 748 1,167 1,922 2,004
Energy Marketing. . . . . . . . - - - (341) - 2,269
Corporate and Other . . . . . . (526) (744) (1,180) (925) (2,597) (2,529)
-------- -------- --------- --------- --------- ---------
Total Operating Income. . . . $ 4,673 $ 3,468 $ 30,942 $ 20,815 $ 52,017 $ 33,963
======== ======== ========= ========= ========= =========
</TABLE>
Each business segment is discussed separately 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 methods or other
non-operating income and expense items. A review of the non-operating items
follows the business segment discussions.
GAS DISTRIBUTION
The Company's gas distribution business segment consists of operations in
Michigan and Alaska. ENSTAR, the Alaska-based operation, was acquired on
November 1, 1999. The acquisition of ENSTAR was accounted for as a purchase and
therefore the consolidated financial statements and the table below include the
results of ENSTAR's operations since November 1, 1999. The Michigan gas
distribution operation and ENSTAR are referred to together as the "Gas
Distribution Business".
- 15 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
Operating income for the Gas Distribution Business was $5.3 million for the
quarter ended June 30, 2000 compared to $4.1 million for the quarter ended June
30, 1999. On a weather-normalized basis, the operating income of the Gas
Distribution Business would have been approximately $6.4 million for the second
quarter of 2000 compared to approximately $5.9 million for the same period of
the prior year.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
-------------------- -------------------- --------------------
2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gas sales revenues. . . . . . . . . . $ 42,961 $ 32,325 $ 141,893 $ 101,303 $ 231,759 $ 170,685
Cost of gas sold. . . . . . . . . . . 22,555 19,411 83,090 65,410 135,470 110,658
--------- --------- --------- --------- --------- ---------
Gas sales margin. . . . . . . . . . $ 20,406 $ 12,914 $ 58,803 $ 35,893 $ 96,289 $ 60,027
Gas transportation revenue. . . . . . 6,294 3,632 17,792 10,261 29,899 17,938
Other operating revenue . . . . . . . 673 752 1,931 2,124 3,100 3,427
--------- --------- --------- --------- --------- ---------
Gross margin. . . . . . . . . . . . $ 27,373 $ 17,298 $ 78,526 $ 48,278 $ 129,288 $ 81,392
Operating expenses. . . . . . . . . . 22,025 13,234 44,519 26,347 77,079 51,132
--------- --------- --------- --------- --------- ---------
Operating income. . . . . . . . . . . $ 5,348 $ 4,064 $ 34,007 $ 21,931 $ 52,209 $ 30,260
========= ========= ========= ========= ========= =========
Weather-normalized operating income . $ 6,363 $ 5,864 $ 39,322 $ 24,681 $ 60,074 $ 37,860
========= ========= ========= ========= ========= =========
Volumes of gas sold (MMcf). . . . . . 9,272 4,319 32,521 20,194 51,572 32,219
Volumes of gas transported (MMcf) . . 10,654 5,527 26,664 14,821 44,260 26,905
Number of customers at end of period. 361,149 249,610 361,149 249,610 361,149 249,610
Degree Days . . . . . . . . . . . . . 1,024 734 4,164 3,973 6,841 6,061
Percent colder (warmer) than normal . (9.5)% (25.3)% (10.4)% (7.5)% (8.6)% (12.7)%
<FN>
The amounts in the above table include intercompany transactions.
</TABLE>
GAS SALES MARGIN - During the second quarter of 2000, gas sales margin
increased by $7.5 million when compared to the second quarter of 1999. The
increase includes approximately $7.1 million of gas sales margin from ENSTAR.
The remaining $.4 million of the increase is attributable to the Michigan gas
distribution operation and is due in part to gas sales margins from new
customers and an increase in gas sales as a result of the cooler weather
compared to the second quarter of 1999 and customers switching from the
Company's aggregated transportation services ("ATS") program back to general gas
sales service. These increases were offset partially by a decrease in sales
margin earned under the Company's gas supply and storage arrangement with
TransCanada Gas Services, Inc. ("TransCanada") as a result of a sale of excess
gas in storage during the second quarter of 1999 that did not recur in 2000.
The gas supply and storage arrangement with TransCanada pertains to the
Michigan gas distribution operations. Under the terms of the agreements,
TransCanada provides the Company's natural gas requirements and manages the
Company's natural gas supply and the supply aspects of transportation and
storage operations in Michigan for the three year period that began April 1,
1999. TransCanada supplies the gas and related services to the Company at a
cost below the $3.24 per Mcf that the Company is authorized to charge its
Michigan customers for gas. As a result, the Michigan gas distribution
operation retains the sales margin on the sale of gas, subject to a customer
profit sharing mechanism. Prior to April 1, 1999, gas sales margin was
generated primarily from distribution fees and
- 16 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
customer fees because the Michigan operation was not allowed to earn profits
from the sale of the gas commodity. For more information on the TransCanada
agreements, the $3.24 authorized gas charge and the customer profit sharing
mechanism, see Note 2 of the Notes to the Consolidated Financial Statements in
the Company's 1999 Annual Report on Form 10-K.
Weather during the second quarter of 2000 was 9.5% warmer than normal in
Michigan and Alaska combined while the weather during the first quarter of 1999
was 25.3% warmer than normal. Under normal weather conditions, gas sales margin
for the quarters ended June 30, 2000 and 1999 would have been higher by
approximately $1.0 million and $1.8 million, respectively.
The ATS program, which was effective April 1, 1998, provides all Michigan
commercial and industrial customers the opportunity to purchase their gas from a
third-party supplier, while allowing the Gas Distribution Business to continue
charging the existing distribution fees and customer fees. Distribution and
customer fees associated with customers who have switched to third-party gas
suppliers are recorded in gas transportation revenue rather than gas sales
revenue because the Company is acting as a transporter for those customers.
During 2000, certain ATS customers switched back to the Company's general gas
sales service because the third-party suppliers they were utilizing stopped
participating in the ATS program primarily due to a significant increase in the
market price of natural gas.
Gas sales margin for the six months ended June 30, 2000 increased by $22.9
million when compared to the same period of 1999. The increase includes
approximately $21.6 million of gas sales margin from ENSTAR. The remaining $1.3
million of the increase is attributable to the Michigan gas distribution
operation and relates to gas sales margins from new customers and sales margins
earned on the sale of the gas commodity. These increases were offset partially
by the impact of warmer weather. Weather during the six months ended June 30,
2000 was 10.4% warmer than normal in Michigan and Alaska combined, while the
weather during the six months ended June 30, 1999 was 7.5% warmer than normal.
Under normal weather conditions, gas sales margin for the twelve months ended
March 31, 2000 and 1999 would have been higher by approximately $5.3 million and
$2.7 million, respectively.
Gas sales margin for the twelve months ended June 30, 2000 increased by
$36.3 million when compared to the twelve months ended June 30, 1999. The
increase includes approximately $33.2 million of gas sales margin from ENSTAR.
The remaining $3.1 million of the increase is attributable to the Michigan gas
distribution operation and relates to gas sales margins from new customers and
sales margins earned on the sale of the gas commodity. These increases were
partially offset by the impact of a shift in customers to transportation as a
result of their participation in the Company's ATS program.
Weather during the twelve months ended June 30, 2000 was 8.6% warmer than
normal in Michigan and Alaska combined, while the weather during the twelve
months ended June 30, 1999 was 12.7% warmer than normal. Under normal weather
conditions, gas sales margin for the twelve months ended June 30, 2000 and 1999
would have been higher by approximately $7.9 million and $7.6 million,
respectively. The impact of weather on gas sales margin during the twelve
months ended June 30, 2000 was larger than during the same period of 1999,
despite the slightly cooler weather, because of the increased customer base as a
result of the ENSTAR acquisition. A significant increase in customer base
causes any variation from normal weather to have a more pronounced impact on gas
sales margin.
GAS TRANSPORTATION REVENUE - For the three months, six months and twelve
months ended June 30, 2000, gas transportation revenue increased by $2.7
million, $7.5 million and $12.0 million, respectively, when compared to the same
periods ended June 30, 1999. The increases are due in part to ENSTAR's
transportation revenues during the three months, six months and twelve months
ended June 30, 2000 of $2.9 million $7.0 million and $10.0 million,
respectively. The remainder of the increases during both the six months and
twelve months ended June 30, 2000 relate primarily to customers participating
in the new ATS program and an increase in general transportation revenue. The
- 17 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
offsetting decrease for the three months ended June 30, 2000 was due primarily
to ATS customers switching from the ATS program back to the Company's general
gas sales service. As discussed above, the ATS program has essentially no
impact on operating income because the Company charges ATS customers the same
distribution fees and customer fees that are charged to general gas sales
service customers.
OPERATING EXPENSES - The operating expenses of the Gas Distribution
Business during the three months, six months and twelve months ended June 30,
2000 increased by $8.8 million, $18.2 million and $25.9 million, respectively,
when compared to the same periods ended June 30, 1999. Operating expenses
attributable to ENSTAR during the three months, six months and twelve months
ended June 30, 2000 accounted for $8.6 million, $17.5 million and 23.5 million
of the increases, respectively. The remainder of the increases relate to the
Michigan operation.
During the three months, six months and twelve months ended June 30, 2000,
depreciation and amortization expense of the Michigan operation increased by $.1
million, $.3 million and $.6 million, respectively, when compared to the same
periods ended June 30, 1999. The increases were primarily due to additional
property, plant and equipment placed in service. General business taxes also
increased during the three months, six months and twelve months ended June 30,
2000 by approximately $1.1 million, $1.2 million and $1.9 million, respectively.
The increases in 2000 were primarily due to a reduction in property taxes that
the Company recorded during the second quarter of 1999 based on pending appeals
of prior years' personal property assessments in Michigan and new property
valuation tables approved by the State of Michigan in 1999. The increase in
general business taxes for the twelve months ended June 30, 2000 is also
partially due to higher Michigan business tax expense.
The above increases in operating expenses for the three months, six months
and twelve months ended June 30, 2000 were offset partially by an overall
decrease in employee benefit expenses primarily due to changes in actuarial
assumptions associated with the employee benefit plans
CONSTRUCTION SERVICES
In May 2000, the Company acquired KLP Construction Co. ("KLP") for approximately
$1.8 million. For financial statement purposes, the acquisition of KLP has been
accounted for as a purchase and, accordingly, its results of operations are
included in the consolidated financial statements and the table below since the
date of acquisition.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- ------------------ -------------------
2000 1999 2000 1999 2000 1999
-------- ------- -------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues. . . $24,391 $12,032 $38,944 $16,716 $80,500 $33,394
Operating expenses. . . 24,958 11,711 41,789 17,641 79,809 33,133
-------- ------- -------- -------- ------- -------
Operating income (loss) $ (567) $ 321 $(2,845) $ (925) $ 691 $ 261
======== ======= ======== ======== ======= =======
Feet of pipe installed. 1,930 1,479 2,927 2,176 6,959 5,039
======== ======= ======== ======== ======= =======
<FN>
The amounts in the above table include intercompany transactions.
</TABLE>
- 18 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
CONSTRUCTION SERVICES (CONTINUED)
OPERATING REVENUES - The operating revenues of the construction services
segment ("Construction Services") for the three months, six months and twelve
months ended June 30, 2000 increased by $12.4 million, $22.2 million and $47.1
million, respectively (approximately 103%, 133% and 141%, respectively) when
compared to the same periods ended June 30, 1999. The increases are primarily
due to the timing of business acquisitions. Several construction business
acquisitions were made during or after the three months, six months and twelve
months ended June 30, 1999. Refer to Note 3 of the Notes to the Consolidated
Financial Statement in the Company's 1999 Annual Report on Form 10-K for the
acquisition dates of all construction businesses acquired during the past three
years. The increases in revenue were also due to an increase in construction
projects.
OPERATING INCOME - Construction Services' incurred an operating loss of $.6
million for the second quarter of 2000 compared to operating income of $.3
million for the second quarter of 1999. During the six months ended June 30,
2000, Construction Services had an operating loss of $2.8 million compared to
$.9 million during the six months ended June 30, 1999. The increased losses in
2000 are partially due to seasonal losses from construction businesses acquired
during or after the second quarter of 1999 and expected higher operating costs
related to revenue growth during the slow construction season in the first half
of the year. Construction Services generally incurs operating losses during the
winter and spring months when underground construction is inhibited by weather
and costs frequently exceed revenues as construction crews and equipment is
staged at worksites and may not be 100 percent productive for a period of time.
In contrast, Construction Services generates the majority of its income during
the summer and fall construction season when crews are fully productive. As the
Company expands its construction business, the seasonal losses and profits
become proportionally larger.
The decrease in operating income during the three and six months ended June
30, 2000 also was due to higher fuel costs and operating costs incurred on
various construction projects delayed by rain or other events. Work has already
begun on many of these projects and management anticipates that all planned
projects will be completed by year-end.
Operating income for the twelve months ended June 30, 2000 increased by $.4
million when compared to the same period of 1999. The increase is due primarily
to the operating income of the businesses acquired since February 1999 offset
partially by the items discussed above, which effected results for the three and
six month periods.
ENGINEERING SERVICES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------- -------------------
2000 1999 2000 1999 2000 1999
------- -------- -------- --------- --------- --------
(in thousands, except billed hours)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues. . . . . . . . . $ 5,979 $ 3,659 $ 11,528 $ 9,379 $ 19,634 $ 38,354
Operating expenses. . . . . . . . . 5,837 4,203 11,316 9,471 19,842 36,656
------- -------- -------- --------- --------- --------
Operating income (loss) . . . . . . $ 142 $ (544) $ 212 $ (92) $ (208) $ 1,698
======= ======== ======== ========= ========= ========
Billed hours. . . . . . . . . . . . 94,000 95,000 188,000 192,000 355,000 532,000
======= ======== ======== ========= ========= ========
<FN>
The amounts in the above table include intercompany transactions.
</TABLE>
- 19 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
ENGINEERING SERVICES (CONTINUED)
OPERATING REVENUES - The engineering services segment ("Engineering
Services") had operating revenues during the three months and six months ended
June 30, 2000 of $6.0 million and $11.5 million, respectively, compared to $3.7
million and $9.3 million, respectively for the same periods of the prior year.
The increase in operating revenues was primarily due to engineering businesses
acquired during the last half of 1999 and to an increase in the number of
available projects compared to 1999 when operating revenues were down because
many pipeline construction and engineering projects were cut back or delayed due
to gas market uncertainty and lower oil prices in 1998 and early 1999.
The decrease in revenues caused by the reduction in available engineering
projects was offset partially by revenues from other lower margin jobs accepted
and performed during the first quarter of 2000. The lower margin jobs covered a
portion of Engineering Services' fixed overhead costs.
During the twelve months ended June 30, 2000, Engineering Services'
operating revenues decreased by approximately $18.7 million from the twelve
months ended June 30, 1999. The decrease was due primarily to the reduction in
available engineering projects, including turn-key projects, caused by lower oil
prices as discussed above. In addition, engineering projects for the gas
distribution industry continue to be delayed due to the cash flow impact on the
industry of warmer weather during the past few years.
OPERATING INCOME - Engineering Services had operating income during the
three and six months ended June 30, 2000 of $.1 million and $.2 million compared
to operating losses of $.5 million and $.1 million during the same periods of
1999. The increase was due primarily to the increase in available engineering
projects discussed above.
Operating income decreased by $1.9 million during the twelve months ended
June 30, 2000 when compared to the twelve months ended June 30, 1999. The
significant decrease in operating income was due primarily to the decrease in
operating revenues and corresponding project costs as a result of the deferral
of engineering projects discussed previously.
PROPANE, PIPELINES AND STORAGE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues. . . $1,228 $1,284 $3,289 $3,228 $6,345 $6,111
Operating expenses. . . 952 913 2,541 2,061 4,423 4,107
------ ------ ------ ------ ------ ------
Operating income (loss) $ 276 $ 371 $ 748 $1,167 $1,922 $2,004
====== ====== ====== ====== ====== ======
</TABLE>
OPERATING REVENUES - The operating revenues of the Company's propane,
pipelines and storage business for the three months ended June 20, 2000
decreased by approximately $.1 million when compared to the three months ended
June 30, 1999 as a result of lower pipeline revenues due to the absence of
revenues from a pipeline that was sold in mid-1999 offset partially by higher
propane revenues. Operating revenues for the six and twelve months ended June
30, 2000 increased by $.1 million and $.2 million, respectively, when compared
to the same periods of 1999. The increases during both periods were due to
higher propane distribution revenues offset partially by slightly lower pipeline
revenues due to the reasons discussed above.
- 20 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
PROPANE, PIPELINES AND STORAGE (CONTINUED)
OPERATING INCOME - The operating income from the propane, pipelines and
storage business decreased during the three, six and twelve months ended June
30, 2000 by $.1 million, $.4 million and $.1 million, respectively, when
compared to the same periods ended June 30, 1999. The decreases were primarily
caused by higher propane costs, which reduced propane margins, and the absence
of operating income from a pipeline that was sold in mid-1999.
OTHER INCOME AND DEDUCTIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Divestiture of energy marketing business. $ - $ - $ - $ 1,122 $ - $ 1,122
Divestiture of NOARK investment . . . . . - - - - - 3,568
Interest expense. . . . . . . . . . . . . (9,405) (3,775) (18,101) (7,670) (31,006) (15,252)
Other income. . . . . . . . . . . . . . . 608 574 1,668 946 3,349 782
-------- -------- --------- -------- --------- ---------
Total other income (deductions) . . . . $(8,797) $(3,201) $(16,433) $(5,602) $(27,657) $ (9,780)
======== ======== ========= ======== ========= =========
</TABLE>
DIVESTITURE OF ENERGY MARKETING BUSINESS - The Company sold its energy
marketing business effective March 31, 1999. The divestiture generated a gain
of $1.1 million ($.7 million after tax) which is reflected in the results for
the six months and twelve months ended June 30, 1999.
DIVESTITURE OF NOARK INVESTMENT - The Company sold its investment in the
NOARK Pipeline System Partnership ("NOARK") in 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 1999 Annual Report on Form
10-K for additional information related to the NOARK investment.
INTEREST EXPENSE - Interest expense for the three months and six months
ended June 30, 2000, when compared to the same periods ended June 30, 1999,
increased by $5.6 million and $10.4 million, respectively. The increase is due
primarily to increases in debt levels to finance the Company's capital
expenditure and business acquisition programs and for general corporate
purposes. The increase during the six months ended June 30, 2000 is also offset
partially by $2.1 million of income recognized on interest rate hedge
instruments during the first quarter of 2000. The Company incurred $290 million
of additional short-term debt on November 1, 1999 to finance the acquisition of
ENSTAR ("bridge loan"). All except $29 million of the bridge loan was repaid
during the second quarter of 2000 with the proceeds of several securities
offerings discussed in Note 2 of the Notes to the Consolidated Financial
Statements. Interest expense related to the bridge loan and these new securities
offerings for the three months and six months ended June 30, 2000 was
approximately $5.0 million and $10.9 million, respectively.
- 21 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
OTHER INCOME AND DEDUCTIONS (CONTINUED)
Interest expense for the twelve months ended June 30, 2000 increased by
$15.8 million when compared to the same period in 1999. The increase between
the twelve-month periods is due generally to the same items that caused the
increase between the three-month and six-month periods, including the $2.1
million of income recognized on interest rate hedge instruments during the first
quarter of 2000. Approximately $15.1 million of interest expense during the
twelve months ended June 30, 2000 relates to the bridge loan and the new
securities offerings.
OTHER INCOME - Other income for the three months ended June 30, 2000 when
compared to the three months ended June 30, 1999 was essentially unchanged at
$.6 million. Other income for the six months ended June 30, 2000 increased by
$.7 million when compared to the first six months of 1999. The increase is due
in part to a $.4 million increase in equity income from a partnership investment
in a gas storage facility, most of which is likely to be non-recurring. The
remainder of the increase is due primarily to an increase in gains on property
sales.
Other income for the twelve months ended June 30, 2000 increased by $2.6
million when compared to the same twelve months of 1999. Approximately $.8
million of the increase between twelve month periods relates to life insurance
proceeds received upon the death of a retired company executive, $.7 million
relates to gains on the sale of various property, $.6 million relates to an
increase in equity income from partnership investments and the remainder is
attributable to higher miscellaneous non-operating income.
INCOME TAXES
Income taxes for the three months, six months and twelve months ended June
30, 2000 increased (decreased) by approximately ($1.9 million), $.1 million and
($2.0 million), respectively, when compared to the same periods ended June 30,
1999. 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 tax laws and regulations.
DIVIDENDS ON TRUST PREFERRED SECURITIES, NET OF INCOME TAX
The Company issued trust preferred securities and FELINE PRIDES during the
second quarter of 2000. These securities are described in Note 2 of the Notes
to the Consolidated Financial Statements. Dividends on these securities for the
second quarter of 2000 were approximately $.8 million, net of income tax.
- 22 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM INVESTING - The following table identifies capital
investments for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
------- ------ ------- -------
<S> <C> <C> <C> <C>
(in thousands)
Capital investments:
Property additions - gas distribution. . . . $14,333 $4,276 $20,956 $ 8,183
Property additions - diversified businesses. 5,753 3,450 8,189 5,372
Business acquistions (a) . . . . . . . . . . 1,784 2,099 1,784 4,024
------- ------ ------- -------
$21,870 $9,825 $30,929 $17,579
======= ====== ======= =======
<FN>
(a) Includes net cash paid, deferred payments and the value, at the time of
issuance, of Company stock issued for acquisitions.
</TABLE>
The Company has spent approximately $29.1 million on property additions
during the first six months of 2000 and anticipates spending approximately $20.9
million on property additions during the remainder of 2000. The increase in
property additions in 2000 is due in large part to additional expenditures
related to ENSTAR and certain construction businesses that were not part of the
Company in early 1999.
In addition, the Company may incur additional expenditures for business
acquisitions during the remainder of 2000.
CASH FLOWS FROM OPERATIONS - Net cash from operating activities for the
three and six months ended June 30, 2000, as compared to the same periods of the
prior year, increased by $19.0 million and $1.8 million, 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 cash receipts and payments.
CASH FLOWS FROM FINANCING - Net cash from financing activities decreased by
$4.3 million for the three months ended June 30, 2000 and increased by $11.5
million for the six months ended June 30, 2000 when compared to the same periods
ended June 30, 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2000 1999 2000 1999
---------- -------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Cash provided by (used in) financing activities:
Issuance (repurchase) of common stock . . . . . $ 225 $ 1,366 $ 443 $ 3,362
Issuance of trust preferred securities. . . . . 124,772 - 124,772 -
Issuance of long-term debt. . . . . . . . . . . 136,850 - 136,850 -
Net cash change in notes payable. . . . . . . . (257,681) 7,866 (281,473) (33,632)
Payment of dividends. . . . . . . . . . . . . . (3,784) (4,554) (7,456) (8,081)
---------- -------- ---------- ---------
$ 382 $ 4,678 $ (26,864) $(38,351)
========== ======== ========== =========
</TABLE>
- 23 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In June 2000 the Company's Board of Directors declared a regular quarterly
cash dividend of $.21 per share on the Company's common stock. The dividend is
payable on August 15, 2000 to shareholders of record at the close of business on
August 4, 2000.
In March 2000, a registration statement on Form S-3 ("registration
statement") filed by the Company and SEMCO Capital Trust I, SEMCO Capital Trust
II and SEMCO Capital Trust III ("Capital Trusts") with the Securities and
Exchange Commission became effective. During the second quarter of 2000 the
Company and two of the capital trusts issued various securities and used the net
proceeds therefrom to repay a portion of the short-term bridge loan utilized for
the acquisition of ENSTAR. Refer to Note 2 of the Notes to the Consolidated
Financial Statements for additional information regarding the registration
statement and securities issued.
FUTURE FINANCING - In general, the Company funds its capital expenditure
program and dividend payments with operating cash flows and the utilization of
short-term lines of credit. When appropriate, the Company will refinance its
short-term lines with long-term debt, common stock or other long-term financing
instruments. At June 30, 2000, the Company had short-term credit facilities of
$110 million, of which $43.6 million was unused. During July 2000, the Company
increased its short-term lines of credit with banks to $160 million, $140
million of which is committed facilities. Also in July 2000 the Company
utilized its short-term lines of credit to repay the remaining balance of the
bridge loan utilized to acquire ENSTAR.
As discussed above and in Note 2 of the Notes to the Consolidated Financial
Statements, the Company has registered up to $500 million of securities under a
registration statement filed in March 2000, of which $265 million was utilized
to issue securities during the second quarter of 2000.
The Company may acquire additional businesses during the remainder of 2000.
If business acquisitions are made, the Company will likely raise the required
capital through a combination of utilizing short-term lines of credit and
issuing long-term debt or equity.
The Company's ratio of earnings to fixed charges was 1.72 for the twelve
months ended June 30, 2000.
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 statement of financial position 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.
- 24 -
<PAGE>
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
OTHER SUBSEQUENT EVENTS
In July 2000, the Company announced that it is exploring strategic
alternatives in an effort to enhance and maximize shareholder value. These
alternatives include evaluation of possible transactions, such as a merger with
a strategic partner.
The Company also offered early retirement programs to certain employees of
the Company in July 2000. Under the programs, eligible employees receive
enhanced benefits if they choose to retire early.
Also during July 2000, Merrill Lynch, the underwriters for the FELINE
PRIDES, exercised their option to purchase additional FELINE PRIDES to cover
over-allotments. An additional 1.1 million FELINE PRIDES were issued which
brings the total number of FELINE PRIDES outstanding to 10.1 million.
- 25 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
During the second quarter of 2000, the Company issued an aggregate of
4,661 shares of unregistered common stock to the members of its Board of
Directors in exchange for services rendered, valued at $59,000.
On May 1, 2000 the Company issued 83,029 shares of unregistered common
stock (valued at $1,000,000) to W. Earl Pogue, Jr. as part of the acquisition of
the outstanding stock of KLP Construction Co., Inc.
The preceding transactions were exempt from registration under Section
4(2) of the Securities Act of 1933.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
At the May 9, 2000 Annual Meeting of Common Shareholders, which had
been adjourned from April 18, 2000, the following nominees were elected as
directors to hold office for a term of three years:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- ---------- ---------------
<S> <C> <C>
John T. Ferris . . . . 13,430,650 1,281,434
Michael O. Frazer. . . 13,293,785 1,418,299
Frederick S. Moore . . 13,309,865 1,402,219
Edith A. Stotler . . . 12,481,453 2,230,631
</TABLE>
Also at the May 9, 2000 Annual Meeting of Common Shareholders, the
following proposal was not approved due to the lack of a majority of the
outstanding shares:
-- Proposal to increase the number of authorized Preferred Shares from
500,000 to 4,500,000 and to amend the Articles of Incorporation.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
<S> <C> <C> <C>
8,495,934 3,090,065 415,199 2,710,886
</TABLE>
ITEM 5. OTHER INFORMATION.
Not applicable.
- 26 -
<PAGE>
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits - (See page 29 for the Exhibit Index.)
12 Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the second quarter of
2000.
The Company filed the following Form 8-K Reports after June 30, 2000:
(1) report filed on July 17, 2000, to announce the resignation of Carl W.
Porter, President and Chief Operating Officer of the Company, for personal
reasons, (2) report filed on July 25, 2000 to report second quarter earnings and
announce that the Company is exploring strategic alternatives to increase
shareholder value, and (3) report filed on July 27, 2000, to file exhibits
relating to the securities offerings recently completed.
- 27 -
<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 11, 2000
By: /s/Sebastian Coppola
Sebastian Coppola
Senior Vice President and Principal
Financial Officer
- 28 -
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Form 10-Q
Second Quarter 2000
Exhibit
No. Description Filed Herewith
------- ------------------------------------- --------------
<C> <S> <C>
12 Ratio of Earnings to Fixed Charges. x
27 Financial Data Schedule.. . . . . . x
</TABLE>
