UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 001-15565
SEMCO Energy, Inc.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2144267
(State of incorporation) (I.R.S. Employer
Identification No.)
405 WATER STREET, PORT HURON, MICHIGAN 48060
(Address of principal executive offices) (Zip Code)
810-987-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
---------------------- -----------------
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of February 29, 2000 was $188,902,548 based on 15,741,879
shares held by non-affiliates and the closing price on that day (New York Stock
Exchange).
Number of outstanding shares of the Registrant's Common Stock as of February 29,
2000: 17,918,619
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to Registrant's April 18, 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III. Portions of the
Registrant's 1999 Annual Report to Shareholders (filed as exhibit 13 to this
Form 10-K) are incorporated by reference in Part I, Item 1 and Part II, Items
5,6, 7, 7A and 8, from such exhibits as noted herein.
<PAGE>
T A B L E O F C O N T E N T S
PAGE
CONTENTS NUMBER
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 9
ITEM 6. SELECTED FINANCIAL DATA 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 10
ITEM 11. EXECUTIVE COMPENSATION 11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 12
SIGNATURES 17
<PAGE>
KEY TO ABBREVIATED TERMS
AMR (Automated Meter Reading) a meter reading system that employs
radio waves to collect natural gas consumption data
ATS (Aggregated Transportation Service) program that allows commercial
and industrial gas distribution customers in Michigan to purchase
their gas from third-party gas suppliers with the Company
transporting the gas
Bcf A measure of natural gas volumes equivalent to one billion cubic
feet
Degree Day A measure of coldness computed by the number of degrees the
average daily temperature falls below 65 degrees Fahrenheit
DRIP Direct Stock Purchase and Dividend Reinvestment Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FOS (Field Order System) a computerized dispatching system for field
service calls
GCR (Gas Cost Recovery) a process by which the Gas Distribution
Business, through annual gas cost proceedings before the MPSC, can
recover the prudent and reasonable cost of gas sold
Mcf A measure of natural gas volumes equivalent to one thousand cubic
feet
MMcf A measure of natural gas volumes equivalent to one million cubic
feet
MPSC Michigan Public Service Commission
PGA (Purchased Gas Adjustment) a process by which the Gas Distribution
business, through annual gas cost proceedings before the RCA, can
recover the prudent and reasonable cost of gas sold
RCA Regulatory Commission of Alaska
SFAS Statement of Financial Accounting Standards
Tcf A measure of natural gas volumes equivalent to one trillion cubic
feet
-i-
<PAGE>
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, and in particular, the
Company's ability to refinance, in a timely and cost-effective manner, the
$290,000,000 short-term bridge loan obtained to finance the acquisition of
ENSTAR Natural Gas Company and Alaska Pipeline Company, and (xi) the Company's
ability to operate and integrate acquired businesses in accordance with its
plans.
PART I
ITEM 1. BUSINESS
SEMCO ENERGY, INC.
SEMCO Energy, Inc. is a diversified energy services and infrastructure holding
company headquartered in southeastern Michigan. It was founded in 1950 as
Southeastern Michigan Gas Company. SEMCO Energy, Inc. and its subsidiaries (the
"Company") operate four business segments: (1) gas distribution; (2) pipeline
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 sold the subsidiary comprising its energy
marketing business effective March 31, 1999. In addition, several business
acquisitions were made during 1999. These acquisitions are discussed in the
following business segment sections. The Company had approximately 1,632
employees at December 31, 1999.
GAS DISTRIBUTION
The Company's gas distribution business segment operates in Michigan and Alaska.
The Alaska-based operation, which consists of ENSTAR Natural Gas Company and
Alaska Pipeline Company (together known as "ENSTAR"), was acquired on November
1, 1999 for approximately $290,000,000. 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 success of the ENSTAR acquisition is, in part, dependent on the synergies
obtained in combining ENSTAR with the Company's other gas distribution
operations, the Company's ability to operate ENSTAR in accordance with its plans
and the Company's ability to accomplish its permanent financing related to the
ENSTAR acquisition in a timely and cost-effective manner in light of changing
conditions in the capital markets.
- 1 -
<PAGE>
The Michigan gas distribution operation and ENSTAR are referred to together
as the "Gas Distribution Business". The Michigan gas distribution operation and
ENSTAR Natural Gas Company operate as divisions of SEMCO Energy, Inc.
SEMCO Energy Gas Company, which had conducted the Michigan gas distribution
operation, was merged into SEMCO Energy, Inc. on December 31, 1999. Alaska
Pipeline Company operates as a subsidiary of SEMCO Energy, Inc.
The Gas Distribution Business distributes and transports natural gas to
residential, commercial and industrial customers and is the Company's largest
business segment. Set forth in the table below is gas sales and transportation
information for the past three years:
<TABLE>
<CAPTION>
Years ended December 31, 1999(b) 1998 1997
- ----------------------------------------- --------- -------- --------
<S> <C> <C> <C>
GAS SALES REVENUE (IN THOUSANDS):
Residential . . . . . . . . . . . . . . $ 137,407 $118,220 $139,538
Commercial. . . . . . . . . . . . . . . 38,451 42,041 66,577
Industrial. . . . . . . . . . . . . . . 6,763 6,439 12,065
--------- -------- --------
Total gas sales revenue (a) . . . . . $ 182,621 $166,700 $218,180
========= ======== ========
GAS TRANSPORTATION REVENUE (IN THOUSANDS) $ 22,369 $ 14,832 $ 13,243
========= ======== ========
VOLUMES OF GAS SOLD (MMCF):
Residential . . . . . . . . . . . . . . 28,583 21,946 25,968
Commercial. . . . . . . . . . . . . . . 8,882 8,840 13,483
Industrial. . . . . . . . . . . . . . . 1,780 1,461 2,534
--------- -------- --------
Total volumes of gas sold (a) . . . . 39,245 32,247 41,985
VOLUMES OF GAS TRANSPORTED (MMCF) . . . . 32,417 23,791 21,373
--------- -------- --------
TOTAL VOLUMES DELIVERED (a) . . . . . . . 71,662 56,038 63,358
========= ======== ========
<FN>
(a) Does not include the sale of excess inventory gas to a third party in
1999.
(b) 1999 results include two months of activity from ENSTAR.
</TABLE>
Refer to Note 12 of the Notes to the Consolidated Financial Statements on
pages 60 and 61 of the Company's 1999 Annual Report to Shareholders, which
information is incorporated herein by reference from exhibit 13 to this Form
10-K, for the Gas Distribution Business' operating revenues, operating income,
assets and other financial information for the past three years.
GAS SALES - Gas sales revenue is generated primarily through the sale and
delivery of natural gas to residential and commercial customers. These
customers use natural gas mainly for space heating purposes. Consequently,
weather has a significant impact on sales. Given the impact of weather on this
business segment, most of its gas sales revenue is earned in the first and
fourth quarters of the calendar year. Revenues from gas sales accounted for
50%, 26% and 28% of consolidated operating revenues in 1999, 1998 and 1997,
respectively. If operating revenues from the Company's energy marketing
business, which was sold effective March 31, 1999, are excluded, gas sales by
the Gas Distribution Business would have accounted for 66%, 68% and 88% of
consolidated operating revenues for those three years.
Competition in the gas sales market arises from alternative energy sources
such as electricity, propane and oil. However, this competition is inhibited
because of the time, inconvenience and investment for residential and commercial
customers to convert to an alternate energy source when the price of natural gas
fluctuates. For more information on competition for the Gas Distribution
Business, refer to the section titled "Outlook" on pages 29 and 30 of the
Company's 1999 Annual Report to Shareholders, which information is incorporated
herein by reference from exhibit 13 to this Form 10-K.
An aggregation tariff, 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 plus a gas
load balancing fee. Refer to the sections titled "Gas Sales Margin" and "Gas
Transportation Revenue" on pages 26 and 27 of the Company's 1999 Annual Report
to Shareholders, which information is incorporated herein by reference from
exhibit 13 to this Form 10-K, for further information regarding the impact of
the aggregation tariff on gas sales and transportation revenue.
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<PAGE>
TRANSPORTATION - The Gas Distribution Business provides transportation services
to its large-volume commercial and industrial customers. This service offers
those customers the option of purchasing natural gas directly from producers or
marketing companies while utilizing the Gas Distribution Business' distribution
network to transport the gas to their facilities.
Alaska Pipeline Company ("APC") owns and operates the only natural gas
transmission lines in its service area that are operated for utility purposes.
APC's transmission system delivers natural gas from producing fields in
southcentral Alaska to ENSTAR's Anchorage-based gas distribution system. APC's
only customer is ENSTAR Natural Gas Company.
The market price of alternate energy sources such as coal, electricity, oil
and steam is the primary competitive factor affecting the demand for
transportation. Certain large industrial customers have some ability to convert
to another form of energy if the price of natural gas increases significantly.
Partially offsetting the impact of price sensitivity has been the use of natural
gas as an industrial fuel because of clean air legislation and the resultant
pressures on industry and electric utilities to reduce emissions from their
plants.
As is the case with many gas distribution utilities, there has been
downward pressure on transportation rates due to the potential risk for
industrial customers and electric generating plants located in close proximity
to interstate natural gas pipelines to bypass the Company and connect directly
to such pipelines. However, management is currently unaware of any significant
bypass efforts by the Company's customers. The Company has and would continue
to address any such efforts by offering special services and contractual
arrangements designed to retain these customers on the Company's system.
Customers in ENSTAR's service territory are currently precluded from bypassing
ENSTAR's transportation and distribution system due to the limited availability
of gas transmission systems and the large distances between producing fields and
the locations of current customers.
CUSTOMER BASE - At December 31, 1999, the Michigan gas distribution operation
had approximately 255,000 customers. The largest concentration of customers,
approximately 100,000, is located in southeastern Michigan. The remaining
Michigan customers are located in and around the following communities: Battle
Creek, Albion, Holland, Three Rivers, Niles, Marquette and Houghton. The
Michigan customer base is diverse and includes residential, commercial and
industrial customers. The largest customers include power plants, food
production facilities, paper processing plants, furniture manufacturers and
others in a variety of other industries. The average number of customers in
Michigan has increased by an average of approximately 3% annually during the
past three years. By contrast, the customer growth rate for the U.S. gas
distribution industry has averaged approximately 1% annually during the past
three years.
At December 31, 1999, ENSTAR had approximately 102,000 customers in and
around the Anchorage, Alaska area including the communities of Big Lake, Bird
Creek, Butte, Chugiak, Eagle River, Eklutna, Girdwood, Houston, Indian, Kenai,
Knik, Nikiski, Palmer, Peters Creek, Portage, Sterling, Soldotna, Wasilla and
Whittier. ENSTAR is the sole distributor of natural gas to the greater
Anchorage metropolitan area, and its service area encompasses approximately 50%
of the population of Alaska. ENSTAR has two types of customers: gas sales and
transportation. Gas sales customers are primarily residential and commercial.
ENSTAR provides transportation service to power plant sites, a liquified natural
gas plant, an ammonia plant, and hundreds of commercial locations on behalf of
gas producers and gas marketers. The average number of customers at ENSTAR has
increased by an average of approximately 3% annually during the past three
years.
GAS SUPPLY - The Gas Distribution Business has agreements with TransCanada Gas
Services, Inc. ("TransCanada"), under which 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. For additional information about
this agreement, refer to Note 2 of the Notes to the Consolidated Financial
Statements on pages 47 and 48 of the Company's 1999 Annual Report to
Shareholders, which information is incorporated herein by reference from exhibit
13 to this Form 10-K. The Gas Distribution Business owns underground storage
facilities in Michigan with a working capacity of 5.0 billion cubic feet
("Bcf"). In addition, it leases 6.5 Bcf of storage from Eaton Rapids Gas
Storage System and 4.5 Bcf from non-affiliates in Michigan. The owned and
leased storage capacity equals 35% to 40% of the Company's average annual gas
sales volumes in Michigan. SEMCO Gas Storage Company (an affiliated company) is
a 50% owner of Eaton Rapids Gas Storage System.
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<PAGE>
ENSTAR has a gas purchase contract (the "Marathon Contract") with Marathon
Oil Company ("Marathon") that has been approved by the Regulatory Commission of
Alaska ("RCA") and is a "requirements" contract with no specified daily
deliverability or annual take-or-pay quantities. Marathon has agreed to deliver
all of ENSTAR's gas requirements in excess of those provided for in other
presently existing gas supply contracts, subject to certain exceptions, until
the commitment has been exhausted. However, ENSTAR's purchase obligations and
Marathon's delivery obligations are set at specified annual amounts after 2001.
The contract has a base price and is subject to an annual adjustment based on
changes in the price of certain traded oil futures contracts plus reimbursement
for any severance taxes and other charges.
ENSTAR also has an RCA-approved gas purchase contract with the Municipality
of Anchorage, Chevron U.S.A., Inc. and ARCO Alaska, Inc. (the "Beluga Contract")
which provides for the delivery of up to approximately 220 Bcf of gas through
the year 2009. The pricing mechanism in the Beluga Contract is similar to that
contained in the Marathon Contract.
Based on gas purchases during the twelve months ended December 31, 1999,
which are not necessarily indicative of the volume of future purchases, gas
reserves committed to ENSTAR under the Marathon and Beluga Contracts are
sufficient to supply all of ENSTAR's expected gas supply requirements through
the 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's requirements are expected to be satisfied outside the terms
of these contracts, as currently in effect.
The Michigan-based gas distribution operation is served by four major
interstate pipelines: (1) Panhandle Eastern Pipe Line Company; (2) Northern
Natural Gas Company; (3) Great Lakes Gas Transmission Company and (4) ANR
Pipeline Company. Currently, ENSTAR's supply source, primarily though the
Marathon and Beluga Contracts, is confined to the Cook Inlet area with no direct
access to other natural gas pipelines. However, the Cook Inlet area is home to
major gas producing fields, with proven and producing reserves of approximately
2.6 trillion cubic feet ("Tcf"). An additional 2.3 Tcf of undiscovered gas in
the Cook Inlet area has been estimated by the United States Geological Survey
and Minerals Management Service.
RATES AND REGULATION - The rates of gas distribution customers located in the
City of Battle Creek, Michigan and surrounding communities are subject to the
jurisdiction of the City Commission of Battle Creek. The Michigan Public
Service Commission ("MPSC") authorizes the rates charged to all of the remaining
Michigan customers. ENSTAR is subject to regulation by the RCA which has
jurisdiction over, among other things, rates, accounting procedures, and
standards of service. The RCA order approving the Company's acquisition of
ENSTAR provides that ENSTAR's existing rates remain in effect on an interim
basis and requires the Company to file revenue requirement and cost of service
information by July 1, 2000.
Management periodically reviews the adequacy of the Gas Distribution
Business' rates and files requests for rate increases whenever it is deemed
necessary and appropriate. However, a recent rate case includes provisions
limiting the Company's ability to request a rate increase in Michigan during the
three year period that began April 1, 1999. Refer to Note 2 of the Notes to the
Consolidated Financial Statements on pages 47 through 49 of the Company's 1999
Annual Report to Shareholders, which information is incorporated herein by
reference from exhibit 13 to this Form 10-K, for further information on
regulatory matters including recent regulatory orders and rate cases.
ENVIRONMENTAL MATTERS - The Gas Distribution Business currently owns seven
Michigan sites which formerly housed manufactured gas plants. In the earlier
part of the 20th century, gas was manufactured from processes using coal, coke
or oil. By-products of this process have left some contamination at these
sites. The Gas Distribution Business has submitted plans to the appropriate
regulatory authority in the State of Michigan to close one site and begin work
at another site. For further information, refer to Note 14 of the Notes to the
Consolidated Financial Statements on pages 62 and 63 of the Company's 1999
Annual Report to Shareholders, which information is incorporated herein by
reference from exhibit 13 to this Form 10-K.
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<PAGE>
DIVERSIFIED BUSINESSES
The Company's diversified businesses have grown during the past three years
primarily through acquisitions. The following table shows operating revenues
for each of the diversified businesses, including intercompany revenues, for
1997 through 1999:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- --------------------------------- ------- ------- -------
(in thousands)
<S> <C> <C> <C>
Operating Revenues
Pipeline Construction Services. $58,272 $25,904 $13,207
Engineering Services. . . . . . 17,486 41,366 5,660
Propane, Pipelines and Storage. 6,284 4,852 3,027
<FN>
The amounts in the above table include intercompany transactions.
</TABLE>
Refer to Note 12 of the Notes to the Consolidated Financial Statements on
pages 60 and 61 of the Company's 1999 Annual Report to Shareholders, which
information is incorporated herein by reference from exhibit 13 to this Form
10-K, for each of the diversified business' operating revenues, operating
income, assets and other financial information for the past three years.
PIPELINE CONSTRUCTION SERVICES
The Company's pipeline construction services segment ("Construction Services")
operates in the mid-western and southeastern areas of the United States and has
offices in Michigan, Tennessee, Kansas, Iowa, Georgia, and Texas as of December
31, 1999. Its primary service is underground pipeline installation and
replacement for the natural gas distribution industry. During 1999, the Company
made four business acquisitions that not only expanded the geographic reach of
Construction Services but also expanded underground construction service
offerings in new industries such as telecommunications and water supply. As of
December 31, 1999, Construction Services was comprised of six companies that
were all acquired during the past three years: (1) Sub-Surface Construction Co.;
(2) King Energy & Construction Co.; (3) K&B Construction, Inc.; (4) Iowa
Pipeline Associates, Inc.; (5) Flint Construction Co.; and (6) Long's
Underground Technologies, Inc. On December 31, 1999, King Energy & Construction
Co. was merged into Flint Construction Co. There is additional information
regarding these acquisitions in Note 3 of the Notes to the Consolidated
Financial Statements on pages 49 through 51 of the Company's 1999 Annual Report
to Shareholders, which information is incorporated herein by reference from
exhibit 13 to this Form 10-K.
Construction Services had operating revenues, excluding intercompany
transactions, of $49,965,000, $16,621,000, and $7,484,000 in 1999, 1998 and
1997, respectively. These operating revenues accounted for 17%, 7% and 3% of
consolidated operating revenues, excluding energy marketing operating revenues,
during those years.
The natural gas construction services industry is comprised of a highly
fragmented group of companies focused primarily on regional or local markets.
The top six construction companies in the United States have less than 10% of
the market. Approximately 30% of the market represents work done by utility
companies' in-house construction operations with the remainder of the market
being served by a large number of small and medium-size companies. For more
information on competition for Construction Services, refer to the section
titled "Outlook" on page 31 of the Company's 1999 Annual Report to Shareholders,
which information is incorporated herein by reference from exhibit 13 to this
Form 10-K.
Construction Services' business is seasonal in nature. Most of this
segment's annual profits are made during the summer and fall months.
Construction Services generally incurs losses during the winter months when
underground construction is inhibited.
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<PAGE>
ENGINEERING SERVICES
The Company's engineering services business segment ("Engineering Services") is
comprised of two companies, Maverick Pipeline Services, Inc. ("Maverick") and
Oilfield Materials Consultants, Inc. ("OMC"). Maverick was acquired in December
1997 and OMC was acquired in November 1998. Maverick purchased the assets and
certain liabilities of Drafting Services, Inc. in September 1999 and Pinpoint
Locators, Inc. in October 1999. These two businesses are being operated as
divisions of Maverick. See Note 3 of the Notes to the Consolidated Financial
Statements on pages 49 through 51 of the Company's 1999 Annual Report to
Shareholders, which information is incorporated herein by reference from exhibit
13 to this Form 10-K, for information regarding acquisitions. Engineering
Services has offices in New Jersey, Michigan, Louisiana and Texas and provides a
variety of energy related engineering and quality assurance services in several
states.
Engineering Services had operating revenues, excluding intercompany
transactions, of $14,841,000, $40,937,000, and $5,660,000 in 1999, 1998 and
1997, respectively. These operating revenues accounted for 5%, 17% and 2% of
consolidated operating revenues, excluding energy marketing operating revenues,
during those years.
Engineering Services serves the natural gas distribution and transmission,
oil products, exploration/production and telecommunication industries. The
primary services provided include engineering design, distribution system
design, construction project management, field surveys, global positioning
surveys, inspection, testing, pipeline-mill quality assurance and full turn-key
service. Engineering Services competes with regional, national and
international firms as well as in-house engineering and field service
departments. Refer to the section titled "Outlook" on page 32 of the Company's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference from exhibit 13 to this Form 10-K, for further discussion concerning
competition in the engineering services industry.
There has been a reduction in oil and gas production and related activities
due to the downturn in oil prices in late 1998 and early 1999. There has also
been a reduction or deferral of new engineering projects for the gas
distribution industry due to the cash flow impact on the industry of the warm
weather during the past two years. As a result, Engineering Services has
experienced a reduction in the level of available projects. Management believes
that the level of available projects will increase as gas distribution companies
start releasing new engineering projects and as pipeline construction and
inspection projects become available as a result of the recovery in oil prices
in late 1999.
PROPANE, PIPELINES AND STORAGE
The Company's pipelines and storage operations consist of several pipelines and
a gas storage facility. The Company has partial ownership interests or equity
interests in certain of these operations. The pipelines and storage operations
are all located in Michigan. Refer to Item 2 of this Form 10-K, which is
incorporated herein by reference, for additional information on each pipeline
and storage facility such as its location and customers. In March 1998, the
Company entered the propane distribution business with the acquisition of
Hotflame Gas, Inc. and Hotflame Transport Co., Inc. (together known as
"Hotflame"). Hotflame supplies approximately 5 million gallons of propane
annually to retail customers in Michigan's upper peninsula and northeast
Wisconsin. Because propane is used principally for heating, most of the
operating income for the propane business is generated in the first and fourth
quarters of the calendar year.
The retail propane industry is highly fragmented with the largest firm in
the industry serving less than 10% of the national market and the vast majority
of propane companies individually having less than one percent market share.
Propane is transported easily in pressurized containers and is generally the
fuel used in rural areas where natural gas pipelines and distribution systems do
not exist or are uneconomical to build. The Company purchases the majority of
its propane from BP Amoco PLC. The propane operation competes with other energy
sources such as natural gas, fuel oil, electricity and other regional propane
providers. The basis of the competition is generally price and service. The
propane business has become increasingly competitive and less profitable, which
necessitates large-scale operations to be successful in the long term. The
Company will continue to assess regional growth opportunities and the strategic
fit of the propane business over the coming year.
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<PAGE>
ITEM 2. PROPERTIES
SEMCO ENERGY, INC.
The properties of SEMCO Energy, Inc. consist of the net assets of the Michigan
gas distribution operation and ENSTAR Natural Gas Company (both of which are
divisions of SEMCO Energy, Inc.), equity investments in its subsidiaries,
leasehold improvements and office equipment.
GAS DISTRIBUTION
The gas delivery system of the Michigan gas distribution operation included
approximately 153 miles of gas transmission pipelines and 5,222 miles of gas
distribution pipelines at December 31, 1999. The pipelines are located
throughout the southern half of Michigan's lower peninsula (centered around the
cities of Port Huron, Albion, Battle Creek and Holland) and also in the central
and western areas of Michigan's upper peninsula. At December 31, 1999, ENSTAR's
gas delivery system included approximately 394 miles of gas transmission
pipelines and 2,244 miles of gas distribution pipelines. ENSTAR's pipelines are
located in Anchorage and other communities around the Cook Inlet area of Alaska.
The Gas Distribution Business' distribution system and service lines are,
for the most part, located on or under public streets, alleys, highways and
other public places, or on private property not owned by the Company with
permission or consent, except to an inconsequential extent, of the individual
owners. The distribution systems and service lines located on or under public
streets, alleys, highways and other public places were all installed under valid
rights and consents granted by appropriate local authorities.
The Gas Distribution Business owns underground gas storage facilities in
eight depleted salt caverns and two depleted gas fields together with measuring,
compressor and transmission facilities. The storage facilities are all located
in Michigan. The aggregate working capacity of the storage system is
approximately 5.0 Bcf.
The Gas Distribution Business also owns meters and service lines, gas
regulating and metering stations, garages, warehouses and other buildings
necessary and useful in conducting its business. It also leases a significant
portion of its computer and transportation equipment.
PIPELINE CONSTRUCTION SERVICES
The tangible properties of Construction Services include equipment required for
the installation, repair or replacement of underground pipelines or similar
items. This includes primarily equipment necessary for excavation such as
backhoes, trenchers, directional drills and dumptrucks. This equipment can be
driven or carried on trailers from one worksite to another. Substantially all
of Construction Services' equipment at December 31, 1999 was located in Georgia,
Iowa, Kansas, Michigan, Tennessee and Texas.
ENGINEERING SERVICES
Engineering Services' properties include primarily computers, trucks, testing
equipment and related devices required to perform engineering and related
services. Much of the equipment is portable and is used by the Company's
employees at customer worksites throughout several states.
PROPANE, PIPELINES AND STORAGE
The principal properties of this business segment include interests and
operations in propane distribution, natural gas transmission and gathering and
an underground gas storage system.
- 7 -
<PAGE>
Set forth in the following table are the equity investments of the propane,
pipelines and storage business segment and its ownership percentage and equity
investment at December 31, 1999:
<TABLE>
<CAPTION>
Percent Equity
Ownership Investment
----------- -----------
(in thousands of dollars)
<S> <C> <C>
Eaton Rapids Gas Storage System. . . 50% $ 4,165
Michigan Intrastate Pipeline System. 50% 0
Michigan Intrastate Lateral System . 50% 42
-----------
$ 4,207
===========
</TABLE>
The Company owns a 50% equity interest in the Eaton Rapids Gas Storage
System. This system, located near Eaton Rapids, Michigan, became operational in
March 1990 and consists of approximately 12.8 Bcf of underground storage
capacity. The Gas Distribution Business leases 6.5 Bcf of the capacity.
The Company also owns 50% of the Michigan Intrastate Pipeline System
(MIPS") and the Michigan Intrastate Lateral System partnerships. The sole
purpose of these partnerships is to hold a 10% ownership of the Saginaw Bay
Pipeline Project, a 126-mile pipeline from Michigan's Saginaw Bay area to
processing plants in Kalkaska, Michigan. The Company sold its MIPS investment
effective January 1, 2000.
The property of the propane distribution operation consists primarily of
pressurized propane storage tanks used by customers to store propane purchased
from the Company and trucks for transporting propane. The Company also owns
large propane storage tanks that allow the Company to store up to 258,000
gallons of propane inventory. The propane distribution property is all located
in Michigan's upper peninsula and northeast Wisconsin.
The following table sets forth the pipeline operations wholly or partially
owned by the Company, the total net property of the project, the Company's
ownership percentage and net property at December 31, 1999:
<TABLE>
<CAPTION>
Total The Company's The Company's
Net Property Percent Ownership Net Property
------------- ------------------- --------------
(in thousands of dollars)
<S> <C> <C> <C>
Litchfield Lateral. . . . $ 10,118 33% $ 3,339
Greenwood Pipeline. . . . 6,800 100% 6,800
Eaton Rapids Pipeline . . 853 100% 853
------------- --------------
$ 17,771 $ 10,992
============= ==============
</TABLE>
The Litchfield Lateral is a 31-mile pipeline located in southwest Michigan.
The line, which is leased entirely to ANR Pipeline Company, links the Eaton
Rapids Gas Storage System with interstate pipeline supplies. The Litchfield
Lateral began operations in February 1993.
The Greenwood Pipeline, an 18-mile pipeline, was constructed in 1991, to
serve Detroit Edison's Greenwood power plant located in Michigan's thumb area.
The Company and Detroit Edison have entered into an agreement whereby Detroit
Edison has contracted for the entire capacity of the line which amounts to 240
million cubic feet ("MMcf") per day.
The Eaton Rapids Pipeline is a 7.1 mile pipeline constructed in 1990. It
provides direct delivery of gas from the Eaton Rapids Gas Storage System to the
Gas Distribution Business' systems in Battle Creek and Albion, Michigan.
The Company previously owned a 40% interest in the Iosco-Reno System, which
consisted of the Iosco County Pipeline and Reno Gas Processing Plant. The
Company sold its interest during 1999.
ITEM 3. LEGAL PROCEEDINGS
None.
- 8 -
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION AND NYSE LISTING
SEMCO Energy, Inc. Common Stock began trading on the New York Stock Exchange on
January 6, 2000 under the trading symbol "SEN". Prior to this date the Company
was traded on The Nasdaq Stock Market under the symbol "SMGS." The table below
shows high and low quotations of the Company's common stock in the
over-the-counter market (as reported in the Wall Street Journal) adjusted to
reflect a 5% stock dividend in May 1998.
<TABLE>
<CAPTION>
1999 Price Range 1998 Price Range
- -------------------------------------- -------------------------------------
1999 High Low 1998 High Low
- -------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
First Quarter $17-1/2 $14-1/4 First Quarter $17-7/8 $15-1/4
Second Quarter $16-7/8 $13-1/4 Second Quarter $18-3/8 $15-1/4
Third Quarter $16 $13 Third Quarter $18 $13-1/8
Fourth Quarter $15-3/8 $11-5/16 Fourth Quarter $17-1/2 $14-1/2
</TABLE>
See the cover page for a recent stock price and the number of shares
outstanding. The Company issued unregistered shares of its common stock in
connection with certain acquisition transactions during the past three years
(for additional information, refer to Notes 3 and 5 of the Notes to the
Consolidated Financial Statements on page 49, 50, 52 and 53 of the Company's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference from exhibit 13 to this Form 10-K). See Selected Financial Data in
Item 6 of this Form 10-K for the number of registered common shareholders at
year end for the past five years. The Company had 9,214 registered common
shareholders at February 29, 2000.
DIVIDENDS
For information regarding dividends, see Notes 5 and 16 of the Notes to the
Consolidated Financial Statements on pages 52, 53 and 64 of the Company's 1999
Annual Report to Shareholders, which information is incorporated herein by
reference from exhibit 13 to this Form 10-K, and Selected Financial Data in item
6 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
For the information required pursuant to this item, refer to the section titled
"Selected Financial Data" in the Company's 1999 Annual Report to Shareholders,
pages 66 and 67, which information is incorporated herein by reference from
exhibit 13 to this Form 10-K.
- 9 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the information required pursuant to this item, refer to the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1999 Annual Report to Shareholders, pages 24
through 39, which information is incorporated herein by reference from exhibit
13 to this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the information required pursuant to this item, refer to the section titled
"Market Risk Information" on pages 37 and 38 of the Company's 1999 Annual Report
to Shareholders, which information is incorporated herein by reference from
exhibit 13 to this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the information required pursuant to this item, refer to the following
sections of the Company's 1999 Annual Report to Shareholders, which information
is incorporated herein by reference from exhibit 13 to this Form 10-K:
Consolidated Statements of Income, page 40
Consolidated Statements of Cash Flows, page 41
Consolidated Statements of Financial Position, page 42
Consolidated Statements of Capitalization, page 43
Consolidated Statements of Changes in Shareholders' Investment, page 44
Notes to the Consolidated Financial Statements, pages 45 through 64
Report of Independent Public Accountants, page 65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Information About Directors" in the
Company's definitive Proxy Statement (filed pursuant to Regulation 14A) with
respect to the Company's April 18, 2000 Annual Meeting of Shareholders is
incorporated by reference herein. Information about the executive officers of
SEMCO Energy, Inc. follows:
William L. Johnson (age 57) has been Chairman of the Board of Directors
since December 1997 and Chief Executive Officer since May 1996. He was also
President from May 1996 to September 1999. From 1994 to May 1996 he was Chief
Executive Officer of Northern Pipeline Construction Company of Kansas City,
Missouri, and from 1990 to 1994 he was President, Gas Service Division of
Western Resources, Inc. of Topeka, Kansas.
- 10 -
<PAGE>
Carl W. Porter (age 50) has been President since September 1999 and Chief
Operating Officer since July 1996. He was also a Senior Vice President from
July 1996 to September 1999. Prior to joining SEMCO Energy, Inc., he was Vice
President-Gas Utilities of Itron, Inc., Spokane, Washington, from August 1995 to
July 1996. From 1992 to 1995 he was Senior Vice President of Operations of New
Jersey Natural Gas, Wall, New Jersey, and from 1990 to 1992 he was Vice
President of Operations of Western Resources, Inc., Topeka, Kansas.
Sebastian Coppola (age 48) has been Senior Vice President and Chief
Financial Officer since January 1999. Prior to joining SEMCO Energy, Inc., he
was Senior Vice President of Finance, Treasurer and Investor Relations Officer
of MCN Energy Group, Inc., Detroit, Michigan, from September 1994 to December
1998. While at MCN Energy Group, Inc., he was also Director of Accounting
Services and Investor Relations from October 1988 to August 1994.
Rudolfo D. Cifolelli (age 59) has been Senior Vice President and Chief
Information Officer of SEMCO Energy, Inc. since November 1998. He was President
and Owner of OACIS, Inc., Bloomfield, Michigan from June 1996 to October 1998.
He was also employed by the GENIX Group, a subsidiary of MCN Energy Group, Inc.,
Detroit, Michigan, as President and Chief Executive Officer from 1994 to 1996
and President and Chief Operating Officer from 1990 to 1994.
Barrett Hatches (age 44) became President of ENSTAR Natural Gas Co. (a
division of SEMCO Energy, Inc.) in January 2000. He had been Senior Vice
President of Human Resources and Public Affairs for SEMCO Energy, Inc. from
February 1999 to December 1999, and Vice President of Human Resources and Public
Affairs from February 1997 to February 1999. He was Vice President of V.
Robinson & Company, Inc., Kansas City, Missouri, from 1996 to February 1997. He
was Director of Logistics and Chief Operating Officer - H & N Railroad of North
American Salt Company, Overland Park, Kansas, from 1995 to 1996. He worked at
Missouri Gas Energy, Kansas City, Missouri, as Director of Field Services from
May 1994 to January 1995 and Director of Customer Information from July 1992 to
May 1994.
John E. Schneider (age 51) has been Senior Vice President of Corporate
Development for SEMCO Energy, Inc. since September 1999. He was Senior Vice
President of SEMCO Energy Ventures, Inc. (a subsidiary of SEMCO Energy, Inc.)
from May 1998 to September 1999. Prior to joining the Company, he was
self-employed as a management and business consultant from 1994 to May 1998.
From 1984 to 1994, Mr. Schneider was President and Chief Executive Officer of
Westmark Mortgage Corporation and Westmark Insurance Company, Costa Mesa,
California.
Lila R. Bradley (age 55) has been Vice President of Human Resources and
Public Affairs for SEMCO Energy, Inc. since January 2000. She was Director of
Human Resources for SEMCO Energy Gas Company from March 1998 to January 2000.
Prior to joining SEMCO Energy, Inc., she was Manager of Labor Relations for
Burlington Northern Santa Fe Railway from 1988 to March 1998.
Samuel B. Dallas (age 49) has been Vice President of Finance for SEMCO
Energy, Inc. since May 1999. He was Director, Trust Investments at MCN Energy
Group, Inc. from 1990 to 1999. Prior to 1990, he held other management
positions at MCN Energy Group, Inc. and its affiliate companies including
Director of Investor Relations and Director of Corporate Finance.
Edric R. Mason, Jr. (age 54) has been Treasurer of SEMCO Energy, Inc. since
September 1999 and Director of Investor Relations since October 1997. He was
also Treasurer of SEMCO Energy Gas Company (a subsidiary of SEMCO Energy, Inc.)
from October 1997 to September 1999. From 1987 to October 1997, he was
Assistant Treasurer and Manager of Treasury Operations at Delmarva Power & Light
Company in Wilmington, Delaware.
Steven W. Warsinske (age 44) will become Vice President and Controller of
SEMCO Energy, Inc. effective April 2000. He has been Vice President and Chief
Accounting Officer of SEMCO Energy Gas Company since February 1998. Mr.
Warsinske was Vice President of Accounting and Controller of SEMCO Energy Gas
Company from 1996 to February 1998 and Secretary and Treasurer from 1988 to
1996. Prior to 1988, he held various positions with the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions "Compensation of Directors and
Executive Officers" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to Registrant's April 18, 2000 Annual Meeting of
Shareholders is incorporated by reference herein.
- 11 -
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Stock Outstanding and Voting
Rights" in the Company's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to the Company's April 18, 2000 Annual Meeting of
Shareholders is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the captions "Certain Business Relationships of
Directors" and "Employment and Related Agreements" in the Company's definitive
Proxy Statement (filed pursuant to Regulation 14A) with respect to the Company's
April 18, 2000 Annual Meeting of Shareholders is incorporated by reference
herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 All Financial Statements. For a list of financial statements
incorporated by reference, see the Part II, Item 8 of this 10-K.
(a) 2 Financial Statement Schedules. The following additional data and
schedule should be read in conjunction with the Consolidated
Financial Statements in Part II, item 8 of this 10-K. Schedules
not included herein have been omitted because they are not
applicable or the required information is shown in such financial
statements or notes thereto.
Pages in 10-K
-------------
Report of Independent Public Accountants. . . . . . 13
Schedule II - Consolidated Valuation and Qualifying
Accounts for the years ended December 31, 1999,
1998 and 1997 . . . . . . . . . . . . . . . . . . . 14
(a) 3 Exhibits, including those incorporated by reference are on pages
15 and 16 of this 10-K.
(b) On November 12, 1999, the Company filed Form 8-K to disclose
certain information regarding the acquisition of ENSTAR and to
file the Regulatory Commission of Alaska order entitled "Order
Approving Applications, Subject to Conditions; and Requiring
Filings."
The Company filed Form 8-K on November 24, 1999, to file (1) the
ENSTAR Financial Statements and Notes Thereto for the Years Ended
December 31, 1998, 1997 and 1996 and (2) the Company's Pro Forma
Financial Statements reflecting the acquisition of ENSTAR.
(c) The Exhibits, if any, filed herewith are identified in Item
14(a) 3 above.
(d) The financial statement schedules filed are identified under Item
14(a) 2 above.
- 12 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SEMCO Energy, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of SEMCO Energy, Inc. included in this Form
10-K, and have issued our report thereon dated January 24, 2000. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in item 14 (a) 2 is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. The schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 2000
- 13 -
<PAGE>
SCHEDULE II
SEMCO ENERGY, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DEDUCTIONS
ADDITIONS FOR FROM RESERVE
BALANCE PROVISIONS FOR PURPOSE FOR BALANCE
BEGINNING CHARGED WHICH THE RESERVE END
DESCRIPTION OF PERIOD TO INCOME WAS PROVIDED OF PERIOD
- ------------------------------------ -------------- ------------- ------------------ -------------
YEAR ENDED DECEMBER 31, 1999
- ----------------------------
<S> <C> <C> <C> <C>
Reserves deducted from receivables
in the Statement of
Financial Position:
Allowances for doubtful accounts $ 632 $ 1,115 $ 667 $ 1,080
============== ============= ================== =============
Reserves deducted from net property,
Plant and equipment in the
Statement of Financial Position $ 1,401 $ 241 $ 0 $ 1,642
============== ============= ================== =============
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
Reserves deducted from receivables
in the Statement of
Financial Position:
Allowances for doubtful accounts $ 1,498 $ 742 $ 1,608 $ 632
============== ============= ================== =============
Reserves deducted from net property,
Plant and equipment in the
Statement of Financial Position $ 2,401 $ 100 $ 1,100 $ 1,401
============== ============= ================== =============
Reserves deducted from deferred
credits and other liabilities in
the Statement of
Financial Position:
Reserve for NOARK investment $ 25,212 $ 0 $ 25,212 $ 0
============== ============= ================== =============
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
Reserves deducted from receivables
in the Statement of
Financial Position:
Allowances for doubtful accounts $ 1,247 $ 2,199 $ 1,948 $ 1,489
============== ============= ================== =============
Reserves deducted from net property,
Plant and equipment in the
Statement of Financial Position $ 2,401 $ 0 $ 0 $ 2,401
============== ============= ================== =============
Reserves deducted from deferred
credits and other liabilities in
the Statement of
Financial Position:
Reserve for NOARK investment $ 32,942 $ 0 $ 7,730 $ 25,212
============== ============= ================== =============
</TABLE>
- 14 -
<PAGE>
EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Filed
----------------------
Exhibit By
No. Description Herewith Reference
- ------ ----------- -------- ---------
<C> <S> <C> <C>
2 Plan of Acquisition, etc. NA NA
3.(i) Articles of Incorporation of SEMCO Energy, Inc., as
restated June 25, 1999.(q) x
3.(ii) Bylaws--last revised October 14, 1999.(r) x
4.1 Note Agreement dated as of June 1, 1994, relating to
issuance of $80,000,000 of long-term debt.(a) x
4.2 Rights Agreement dated as of April 15, 1997 with
Continental Stock Transfer & Trust Company, as Rights
Agent.(c) x
4.3 Note Agreement dated as of October 1, 1997, relating to
issuance of $60,000,000 of long-term debt.(f) x
4.4 Form of Indenture relating to Senior Debt Securities
dated as of October 23, 1998, with NBD Bank as
Trustee.(h) x
4.5 Credit Agreement dated as of October 7, 1999 Among
SEMCO Energy, Inc. as Borrower, the Banks named in the
Credit Agreement as Banks, Banc of America
Securities LLC as Arranger, and Bank of America, N.A.
as Administrative Agent. x
9 Voting Trust Agreement. NA NA
10 Material Contracts.
10.1 Short-Term Incentive Plan as amended June 10, 1999.(q) x
10.2 1997 Long-Term Incentive Plan.(b) x
10.3 Stock Option Certificate and Agreement dated October 10,
1996 with William L. Johnson.(c) x
10.4 Stock Option Certificate and Agreement dated
February 26, 1997 with William L. Johnson.(c) x
10.5 Employment Agreement dated October 10, 1996, with
William L. Johnson.(d) x
10.6 Change of Control Employment Agreement dated October 10,
1996, with William L. Johnson.(d) x
10.7 Form of Change in Control Agreement effective March 20,
1998, for all officers except Mr. Johnson.(g) x
10.8 Asset Purchase Agreement dated August 9, 1997 between
Sub-Surface Construction Co., Stewart Kniff and SEMCO
Energy Construction Co., First Amendment to Asset
Purchase Agreement, Amendment to Leased Equipment
Purchase Agreements and Asset Purchase Agreement, List
of Schedules and Exhibits and Agreement to Furnish
Schedules and Exhibits.(e) x
10.9 Purchase Agreement between the Company and Merrill
Lynch & Co., etc., pertaining to an offering of
1,600,000 Shares of Common Stock.(i) x
10.10 Distribution Agreement between the Company and Merrill
Lynch & Co., etc., pertaining to an offering of
$150,000,000 Medium-Term Notes and Form of Medium Term
Note.(j) x
10.11 Agreement and Plan of Merger dated as of October 30,
1998, between the Company, SEMCO Consultants, Inc. and
Jimmy C. Foster and the Press Release announcing the
merger.(k) x
10.12 Executive Security Agreement.(m) x
10.13 Split-Dollar Agreement.(m) x
10.14 Deferred Compensation and Stock Purchase Agreement
for Outside Directors for 1999.(m) x
10.15 Stock Purchase Agreement dated March 15, 1999
concerning the sale of the stock in SEMCO Energy
Services, Inc.(o) x
10.16 Purchase and Sale Agreement dated as of July 15,
1999, with Ocean Energy, Inc. for the acquisition of
ENSTAR Natural Gas Company and Alaska Pipeline
Company.(p) x
10.17 SEMCO Energy, Inc. Deferred Compensation Plan (for
certain executive and management employees). x
11 Statement re computation of per share earnings. NA NA
12 Ratio of Earnings to Fixed Charges. x
13 SEMCO Energy, Inc. 1999 Annual Report to Shareholders,
pages 24-67. x
16 Letter re change in certifying accountant. NA NA
18 Letter re change in accounting principle. x
21 Subsidiaries of the Registrant. x
22 Published report regarding matters submitted to a vote
of security holders. NA NA
23 Consent of Independent Public Accountants. x
24 Power of Attorney. x
27 Financial Data Schedule. x
99.1 Announcement of agreement to sell SEMCO Energy
Services, Inc.(l) x
99.2 Announcement of dividend policy change.(n) x
99.3 Proxy Statement dated March 3, 2000.(s) x
<FN>
Key to Exhibits Incorporated by Reference
(a) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(b) Filed March 6, 1997 as part of SEMCO Energy, Inc.'s 1997 Proxy
Statement, dated March 7, 1997, File No. 0-8503.
(c) Filed with SEMCO Energy, Inc.'s Form 10-K for 1996, dated March 27,
1997, File No. 0-8503.
(d) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended March
31, 1997, File No. 0-8503.
(e) Filed with SEMCO Energy, Inc.'s Form 8-K dated August 13, 1997, File No.
0-8503.
(f) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
September 30, 1997, File No. 0-8503.
(g) Filed with SEMCO Energy, Inc.'s Form 10-Q/A for the quarter ended March
31, 1998, File No. 0-8503.
(h) Filed with SEMCO Energy, Inc.'s Registration Statement, Form S-3, Nos.
333-58715 and 333-58715-01, filed July 8, 1998.
(i) Filed with SEMCO Energy, Inc.'s Form 8-K dated August 13, 1998, File No.
0-8503.
(j) Filed with SEMCO Energy, Inc.'s Form 8-K dated October 21, 1998, File
No. 0-8503.
(k) Filed with SEMCO Energy, Inc.'s Form 8-K dated November 5, 1998, File
No. 0-8503.
(l) Filed with SEMCO Energy, Inc.'s Form 8-K dated March 23, 1999, File No.
0-8503.
(m) Filed with SEMCO Energy, Inc.'s Form 10-K for 1998, dated March 26,
1999, File No. 0-8503.
(n) Filed with SEMCO Energy, Inc.'s Form 8-K dated April 22, 1999, File No.
0-8503.
(o) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended March
31, 1999, File No. 0-8503.
(p) Filed with SEMCO Energy, Inc.'s Form 8-K dated July 16, 1999, File No.
0-8503.
(q) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended June 30,
1999, File No. 0-8503.
(r) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
September 30, 1999, File No. 0-8503.
(s) Filed March 1, 2000, pursuant to Rule 14a-6 of the Exchange Act, File
No. 0001-15565.
</TABLE>
- 15-16 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SEMCO ENERGY, INC.
Date: March 20, 2000 By /s/William L. Johnson
------------------------------------
William L. Johnson
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/William L. Johnson Chairman and March 20, 2000
- ---------------------
William L. Johnson Chief Executive Officer (Director)
/s/Sebastian Coppola Senior Vice President and March 20, 2000
- --------------------
Sebastian Coppola Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/John M. Albertine* Director March 20, 2000
- --------------------
John M. Albertine
/s/Daniel A. Burkhardt* Director March 20, 2000
- ----------------------
Daniel A. Burkhardt
/s/Edward J. Curtis* Director March 20, 2000
- --------------------
Edward J. Curtis
/s/John T. Ferris* Director March 20, 2000
- ------------------
John T. Ferris
/s/Michael O. Frazer Director March 20, 2000
- --------------------
Michael O. Frazer
/s/Marcus Jackson* Director March 20, 2000
- ------------------
Marcus Jackson
/s/Harvey I. Klein* Director March 20, 2000
- -------------------
Harvey I. Klein
/s/Frederick S. Moore* Director March 20, 2000
- ----------------------
Frederick S. Moore
/s/Edith A. Stotler* Director March 20, 2000
- --------------------
Edith A. Stotler
/s/Donald W. Thomason* Director March 20, 2000
- ----------------------
Donald W. Thomason
*By /s/William L. Johnson March 20, 2000
-----------------------
William L. Johnson
Attorney-in-fact
- 17 -
SEMCO ENERGY, INC. DEFERRED COMPENSATION PLAN
ARTICLE I
PURPOSE
The purpose of the SEMCO Energy, Inc. Deferred Compensation Plan
(hereinafter referred to as the "Plan") is to provide funds for retirement or
death for certain executive and management employees (and their beneficiaries)
of SEMCO Energy, Inc. It is intended that the Plan will aid in retaining and
attracting employees of exceptional ability by providing such employees with a
means to supplement their standard of living at retirement. This Plan is
intended to qualify for the exemptions described in sections 201(2), 301(a)(3),
and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as
amended.
ARTICLE II
DEFINITIONS
For the purpose of this Plan, the following words and phrases shall have
the meanings indicated, unless the context clearly indicates otherwise:
2.1 BENEFICIARY. "Beneficiary" means the person, persons, or entity
designated by the Participant, or as provided in Article VIII, to receive any
benefits payable under the Plan. Any Participant Beneficiary designation shall
be made in a written instrument filed with the Committee and shall become
effective only when received in writing by the Committee.
2.2 BOARD. "Board" means the Board of Directors of SEMCO Energy, Inc.
2.3 COMMITTEE. "Committee" means the Deferred Compensation Committee
appointed by the Compensation Committee of the Board.
2.4 COMPANY. "Company" means SEMCO Energy, Inc., and its subsidiaries.
2.5 COMPENSATION. "Compensation" or "Total Compensation" means the Base
Salary and Incentive Compensation payable to a Participant during the Plan Year.
(a) BASE SALARY. "Base Salary" means all regular remuneration for
services, other than such items as Incentive Compensation, payable by the
Company to a Participant in cash during a Plan Year, but before reduction for
amounts deferred pursuant to this Plan or any other Plan of the Company. The
Committee shall determine whether a particular item of income consti-tutes Base
Salary if a question arises.
(b) INCENTIVE COMPENSATION. "Incentive Compensation" means any cash
bonus paid to a Participant in a Plan Year.
<PAGE>
2.6 DECLARED RATE. "Declared Rate" means the rate of interest or earnings
(positive or negative) to be credited to the Participant's deferral account.
The participant shall choose, and indicate in his Participation Agreement, one
of the four following investment indexes prior to the beginning of each Plan
Year, and his deferral account shall be credited with interest or earnings
(positive or negative) based on that index for the subsequent Plan Year.
(a) Choice One: S&P 500 RETURN INDEX. A monthly return equal to the return
of the Standard & Poors 500 stock index, including dividends, for the applicable
month as published by Callan Associates or other such source as determined by
the Committee.
(b) Choice Two: STABLE VALUE RETURN INDEX. A monthly return equal to 115%
of the return on short-term Treasury Bills for the applicable month as published
by Callan Associates or other such source as determined by the Committee.
(c) Choice Three: BALANCED RETURN INDEX. A monthly return derived from the
simple average of (1) the S&P 500 Return Index, and (2) the Stable Value Return
Index.
(d) Choice Four: SEMCO PHANTOM STOCK INDEX. This "Index" is much different
from the above 3 indices because earnings or losses in this Phantom Stock Index
are based on the return that an investor would receive by purchasing only one
kind of stock: being Common Stock of SEMCO Energy, Inc.
Actual shares of Common Stock are not purchased. Instead, earnings and losses
are determined as though all deferred Compensation credited to your deferral
account were used to purchase Common Stock at the price, at the time and
otherwise in the manner consistent with the Company's Direct Stock Purchase and
Dividend Reinvestment Plan ("DRIP"). This phantom purchase will occur at the
earliest DRIP investment date after the amount is credited to your account.
Thus, your account will be invested in "Phantom Stock".
Further, your deferral account will be credited with additional shares of
Phantom Stock at the time and otherwise in the manner that an equal number of
actual shares of Common Stock would be credited to your account if your account
held actual Common Stock reinvesting dividends in the DRIP.
2.7 DEFERRAL BENEFIT. "Deferral Benefit" means the benefit payable to a
Participant or Participant's Beneficiary on Participant's retirement, death,
disability, or termination of employment as calculated in Article VII hereof.
2.8 DEFERRED BENEFIT ACCOUNT. "Deferred Benefit Account" means the accounts
maintained on the books of account of the Company for each Participant pursuant
to Article VI. A separate Deferred Benefit Account shall be maintained for each
Participant. A Participant's Deferred Benefit Account shall be utilized solely
as a device for the measurement and determination of the amounts to be paid to
the Participant pursuant to the Plan. A Participant's Deferred Benefit Account
shall not constitute or be treated as a trust fund of any kind.
2.9 DETERMINATION DATE. "Determination Date" means the date as of which the
amount of a Participant's Deferred Benefit Account is determined as provided in
Article VI hereof. The last day of each calendar month shall be a Determination
Date.
2.10 DISABILITY. "Disability" or "Disabled Participant" means a physical or
mental condition of a Participant resulting in a determination of disability for
purposes of receiving benefits under the Company's Long Term Disability Plan.
2.11 PARTICIPANT. "Participant" means any individual who is deemed eligible
by the Committee to participate in this Plan and who elects to participate by
filing a Participation Agreement as provided in Article IV.
2.12 PARTICIPATION AGREEMENT. "Participation Agreement" means the agreement
filed by a Participant prior to the beginning of the first period for which any
of the Participant's Compensation is to be deferred pursuant to the Plan. A
form of such Participation Agreement is attached hereto.
2.13 PLAN YEAR. "Plan Year" means a twelve month period commencing January
1 and ending the following December 31. The first Plan Year shall commence on
October 1, 1999 and terminate on December 31, 1999.
2.14 RETIREMENT DATE. "Retirement Date" means the first day of the month
coincidental with or next following a Participant's actual retirement under the
SEMCO Energy, Inc. Non-Union Retirement Plan.
2.15 SPOUSE. "Spouse" means a Participant's wife or husband who was
lawfully married to the Participant at the time of the Participant's death or a
determination of Participant's incompetency under paragraph 10.8.
ARTICLE III
ADMINISTRATION
3.1 DEFERRED COMPENSATION COMMITTEE: DUTIES. This plan shall be
administered by the Committee. Members of the Committee may be Participants
under this Plan. The Committee shall also have the authority to make, amend,
interpret, and enforce all appropriate rules and regulations for the
administration of this Plan and decide or resolve any and all questions,
including interpretation of this Plan, as may arise in connection with the Plan.
3.2 BINDING EFFECT OF DECISION. The decision or action of the Committee
with respect to any question arising out of or in connection with the
administration, interpretation, and application of the Plan and the rules and
regulations promulgated hereunder shall be final, conclusive, and binding upon
all persons having any interest in the Plan, unless a written appeal is received
by the Committee within sixty days of the disputed action. The appeal will be
reviewed by the Committee and the decision of the Committee shall be final,
conclusive, and binding on the Participant and all persons claiming by, through,
or under the Participant.
ARTICLE IV
PARTICIPATION
4.1 PARTICIPATION. Participation in the Plan shall be limited to the class
of those key employees selected by the Committee who elect to participate in the
Plan by filing a Participation Agreement with the Committee. A Participation
Agreement must be filed prior to December 15 immediately preceding the Plan Year
in which the Participant's participation under the Agreement will commence;
provided, however, that the Committee may establish a later date in December for
filing a Participation Agreement when a change to the form of that Agreement
makes a later date appropriate. The election to participate shall be effective
on the first day of the Plan Year following receipt by the Committee of a
properly completed and executed Participation Agreement.
With respect to the first Plan Year of the Plan or with respect to an
individual hired or promoted during a Plan Year who thereby becomes eligible to
participate herein, an initial Participation Agreement may be filed within
thirty days of the Committee's notification to Participant of eligibility to
participate. Such election to participate shall be effective no earlier than
the first day of the pay period following the Committee's receipt thereof.
4.2 MINIMUM AND MAXIMUM DEFERRAL AND LENGTH OF PARTICIPATION. A Participant
may elect in a Participation Agreement to defer a portion of Participant's Base
Salary or Incentive Compensation. The minimum and maximum amounts that may be
deferred under a Participa-tion Agreement shall be as follows:
Minimum Deferral Maximum Deferral
----------------- -----------------
With respect to Base 2% of Base Salary 50% of Base Salary
Salary Deferrals
With respect to 25% of Incentive 100% of Incentive
Incentive Compensation Compensation Compensation
(a) With respect to Base Salary deferrals, the deferral percentage
elected in a Participation Agreement shall be applied to the Participant's Base
Salary as established for the first pay period of the Plan Year to which the
Participation Agreement applies, and the resulting dollar amount shall be the
amount of Base Salary that will be deferred in each pay period over the Plan
Year.
Deferrals shall commence with the Plan Year immediately following the
Plan Year in which the respective Participation Agreement is filed; provided,
however, that an initial Participation Agreement which is effective other than
on January 1 of a Plan Year shall apply to the remainder of the Plan Year and to
the following Plan Year as set forth above.
(b) With respect to Incentive Compensation deferrals, the deferral
percentage selected in a Participation Agreement shall apply to the
Participant's Incentive Compensation to be paid in the Plan Year immediately
following receipt of the Participation Agreement.
(c) A Participant's election to defer Compensation shall be irrevocable
upon the filing of the respective Participation Agreement; provided, however,
that the deferral of Compensation under any Participation Agreement may be
suspended or amended as provided in paragraphs 7.4, 7.8, 9.1, or as further
described in this paragraph.
4.3 ADDITIONAL PARTICIPATION AGREEMENT. A Participant may enter into a new
Participation Agreement by filing a Participation Agreement with the Committee
prior to December 15 of any calendar year, stating the amount that the
Participant elects to have deferred. The new agreement shall be effective only
as to Compensation paid in Plan Years beginning after the last day of the Plan
Year in which the respective agreement is filed with the Committee. A new
Participation Agreement is subject to all of the provisions and requirements set
forth in paragraph 4.2.
ARTICLE V
DEFERRED COMPENSATION
5.1 ELECTIVE DEFERRED COMPENSATION. The amount of Compensation that a
Participant elects to defer in a Participation Agreement executed by the
Participant with respect to each Plan Year of participation in the Plan shall be
credited by the Company to the Participant's Deferred Benefit Account throughout
each Plan Year as the Participant is paid the non-deferred portion of
Compensation for such Plan Year. The amount credited to a Participant's
Deferred Benefit Account shall equal the amount deferred. To the extent that
the Company is required to withhold any taxes or other amounts from an
employee's deferred wages pursuant to any state, federal, or local law, such
amounts shall be taken out of the Participant's Compensation which is not
deferred under this Plan.
5.2 EFFECT ON OTHER PLANS. To the extent to which deferrals by a
Participant under this Plan cause a reduction in pension benefits for a
Participant under the SEMCO, Inc. Non-Union Retirement Plan, the Company shall
provide supplementary benefits to the extent of such reduction. The amount of
such reduction shall be determined, as of the time of the Participant's
termination of employment or retirement under said Retirement Plan, by said
Plan's administrator based upon the form of pension benefit applicable to such
Participant, which determination shall be binding and conclusive on such
participant.
To the extent to which deferrals by a Participant under this Plan cause a
reduction in matching contributions made by the Company on behalf of the
Participant under the SEMCO Energy, Inc. 401(k) Plan, the Company shall credit
the amount of any such reduction to the Participant's Deferred Benefit Account
under this Plan. Such amount will be credited as of the December 31 of the year
in which such reduction of contributions occurs, or upon termination of
employment, if earlier.
The Company shall compute life insurance and disability benefits under any
Company plan based on Compensation without reduction for amounts deferred under
this Plan.
5.3 Vesting of Deferred Benefit Account. A Participant shall be 100% vested
in the Participant's Deferred Benefit Account.
ARTICLE VI
DEFERRED BENEFIT ACCOUNT
6.1 DETERMINATION OF ACCOUNT. Each Participant's Deferred Benefit Account
as of each Determination Date shall consist of (1) the balance of the
Participant's Deferred Benefit Account as of the immediately preceding
Determination Date, plus (2) the Participant's elective deferred Compensation
withheld since the immediately preceding Determination Date pursuant to
paragraph 5.1, less (3) the amount of all distributions, if any, made from such
Deferred Benefit Account since the preceding Determination Date, plus or minus
(4) any interest or earnings adjustment as determined under paragraph 6.2, plus
(5) a credit for any reduced 401(k) plan matching contributions as described
under paragraph 5.2. In addition, the amount of any benefits foregone under the
Retirement Plan as described in paragraph 5.2 shall also be included in
determining the value of the Deferred Benefit Account upon termination of
employment.
6.2 CREDITING OF ACCOUNT. As of each Determination Date, the Participant's
Deferred Benefit Account shall be adjusted by the amount of interest or earnings
computed since the preceding Determination Date. This adjustment shall be based
on the Declared Rate as defined in paragraph 2.6 or as determined under
paragraph 7.5(a)(2) as applicable. Any such adjustment shall be based on the
average of the month end and month beginning balances excluding this adjustment.
6.3 STATEMENT OF ACCOUNTS. The Company shall submit to each Participant,
within 120 days after the close of each Plan Year, a statement in such form as
the Company deems desirable, setting forth the balance to the credit of each
Participant's Deferred Benefit Account as of the last day of such Plan Year.
ARTICLE VII
BENEFITS
7.1 BENEFIT FOR RETIREMENT OR TERMINATION OF EMPLOYMENT. Subject to
paragraph 7.6 below, upon a Participant's retirement after reaching the
Retirement Date, or any termination of employment for reasons other than death
or disability, the Participant shall be entitled to a Deferral Benefit equal to
the amount of Participant's Deferred Benefit Account determined under paragraphs
6.1 and 6.2 hereof as of the Determination Date coincidental with or immediately
following such event.
7.2 DEATH. Upon the death of a Participant, such Participant's Beneficiary
shall receive a Deferral Benefit equal to the remaining balance in such
Participant's Deferred Benefit Account.
The Deferral Benefit shall be payable as provided for in paragraph 7.5(a).
The Deferral Benefit provided above shall be in lieu of all other benefits
under this Plan.
7.3 DISABILITY. In the event of Disability, as defined in paragraph 2.10,
while employed by the Company, payments shall commence upon attainment of the
Participant's Normal Retirement Date in the form specified in paragraph
7.5(a)(2) over a period from 2 to 360 months. Before payments commence under
the preceding sentence, a Disabled Participant may elect: (i) to accelerate
commencement of the payments until the date not earlier than 60 days after the
onset of Disability, and/or (ii) to change the form of payment to another form
permitted under paragraph 7.5(a).
7.4 SUSPENSION OF PARTICIPATION/DISTRIBUTION/FAILURE TO CONTINUE
PARTICIPATION. The Committee, in its sole discretion, may suspend the deferral
of a Participant's Base Salary during a Plan Year, and may also authorize a lump
sum distribution from the Participant's Deferred Benefit Account, upon the
advance written request of a Participant on account of financial hardship
suffered by that Participant. A Participant must file any request for such
suspension or distribution on or before the 15th day preceding the regular
payday on which the suspension or distribution is to take effect. Incentive
Compensation deferrals may not be suspended during the Plan Year.
Financial hardship shall mean an unexpected need for cash resulting from
conditions in the nature of any of the following:
(a) An accident, illness, or disability suffered by a Participant or a
family member or dependent;
(b) A casualty or theft loss suffered by a Participant or a family
member or dependent;
(c) The rendering of a judgment against a Participant or a family
member or dependent;
(d) A sudden financial reversal or curtailment of income experienced by
a Participant or a family member or dependent; or,
(e) The transfer of a Participant's place of employment.
The suspension of any deferrals under this paragraph shall not affect
amounts deferred with respect to periods prior to the effective date of the
suspension except as otherwise permitted by the Committee.
In the event the Participant ceases to remain a member of the class of
employees who are eligible to participate in the Plan, the Participant may elect
to suspend the amount of any remaining deferral commitment in the same manner as
described for other suspensions in the paragraph, except that Committee approval
shall not be required.
7.5 FORM OF BENEFIT PAYMENT.
(a) Upon retirement, death, or termination of employment, the Company
shall pay to the Participant or Participant's Beneficiary the balance in the
Participant's Deferred Benefit Account in one of the following forms, as elected
in the Participation Agreement filed by the Participant:
(1) A lump sum payment.
(2) A monthly payment of a fixed amount which shall amortize the
Deferred Benefit Account balance in equal monthly payments of principal and
interest over a period from 2 to 360 months. For purposes of determining the
amount of the monthly payment, the rate of interest shall be the average of the
Stable Value Return Index for the shorter of (i) the last five (5) Plan Years
preceding the initial monthly installment payment, or (ii) the actual number of
Plan Years of participation by the Participant.
(b) A Participant may change the form in which benefits shall be paid
by filing a new Participation Agreement indicating such change any time prior to
the date payments are to commence. Such new Participation Agreement may not
change the provisions of any previous Participation Agreement to which it
related for purposes of complying with the provisions of paragraphs 4.2 and 4.3
relating to the minimum and maximum deferrals and duration of the Participation
Agreement. No such new Participation Agreement shall change the amount elected
to be deferred in a prior Participation Agreement.
(c) In the absence of a Participant's election under subparagraph
7.5(a), benefits shall be paid in the form specified in subparagraph 7.5(a)(2)
over a 180-month period. In the event of a Disabled Participant, payment shall
be in the form described in paragraph 7.3.
7.6 WITHHOLDING: PAYROLL TAXES. To the extent required by the law in
effect at the time payments are made, the Company shall withhold from payments
made hereunder any taxes required to be withheld from any employee's wages for
the federal or any state or local government.
7.7 COMMENCEMENT OF PAYMENTS. Commencement of payments under this Plan
shall begin within sixty days following receipt of notice by the Committee of
any event which entitles a Participant (or a Beneficiary) to payments under this
Plan, or at such earlier date as may be determined by the Company. All payments
shall be made as of the first day of the month.
7.8 EARLY DISTRIBUTION OF DEFERRED ACCOUNT BALANCE. A participant who
remains employed by the Company may elect to receive a distribution of all or
any part of the Participant's Account Balance prior to the date(s) of
distribution specified in the Participant's Participation Agreement(s). Each
Participant shall be limited to one such distribution per calendar year. Such
election, however, will involve a substantial penalty, as each such distribution
from the Participant's Deferred Benefit Account made under this provision shall
be reduced by a penalty equal to six percent (6%) of the total amount of the
distribution. The amount of the penalty shall be forfeited by the Participant.
In addition, the Participant must continue to defer Compensation subsequent to
such withdrawal in accordance with the Participant's election and will not be
permitted to elect to defer Compensation attributable to the calendar year
subsequent to the calendar year of the distribution.
ARTICLE VIII
BENEFICIARY DESIGNATION
8.1 BENEFICIARY DESIGNATION. Each Participant shall have the right, at any
time, to designate any person or persons as Beneficiary or Beneficiaries (both
principal as well as contingent) to whom payment under this Plan shall be made
in the event of Participant's death prior to complete distribution of the
benefits due to the Participant under the Plan. In any beneficiary dies while
receiving payments, the remaining value of future payments will be paid in a
lump sum to the decedent's estate.
8.2 AMENDMENTS. Any Beneficiary designation may be changed by a Participant
by the written filing of such change on a form prescribed by the Committee. The
filing of a new Beneficiary Designation form will cancel all Beneficiary
designations previously filed.
8.3 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a
Beneficiary as provided above, or if all designated Beneficiaries predecease the
participant, then the Participant's designated Beneficiary shall be deemed to be
the surviving Spouse. Otherwise, the value of the Participant's account shall
be paid as a lump sum to the Participant's personal representative (executor or
administrator).
8.4 EFFECT OF PAYMENT. The payment to the deemed Beneficiary shall
completely discharge the Company's obligations under this Plan.
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
9.1 AMENDMENT. The Board may at any time amend the Plan in whole or in
part; provided, however, that no amendment shall be effective to decrease or
restrict any Deferred Benefit Account at the time of such amendment or reduce
any additional benefits provided under paragraph 5.2. In the event the Plan is
amended, the Participation Agreement shall be subject to the provisions of such
amendment as if set forth in full therein, without further action or amendment
to the Participation Agreement. The parties shall be bound by, and have the
benefit of, each and every provision of the Plan, as amended from time to time.
9.2 COMPANY'S RIGHT TO TERMINATE. The Board may at any time terminate the
Plan with respect to new elections to defer if, in its judgment, the continuance
of the Plan, the tax, accounting, or other effects thereof, or potential
payments thereunder would not be in the best interests of the Company. The
Board may also terminate the Plan in its entirety at any time, and upon any such
termination, all Participants under the Plan shall be paid the balance in their
Deferred Benefit Accounts in a lump sum, or over such period of time as
determined by the Board.
9.3 PREMATURE PLAN TERMINATIONS AND PREMATURE DISTRIBUTIONS. The Committee
shall have the right (but shall not be obligated) to require premature Plan
termination and premature Plan distributions to Participants, as outlined in
paragraph 9.2, upon the occurrence of any of the following conditions or events:
(a) If any rating on any debt securities of the Company, as rated by
Moody's or Standard & Poor's, is downgraded to a rating lower than that rating
as of the date of this Plan;
(b) If the shareholders of the Company approve the merger or
consolidation of the Company with or into any other corporation (other than a
corporation wholly-owned by the Company immediately prior to such event) or the
acquisition of substantially all of the business or assets of the Company by any
other person or entity (other than a corporation wholly-owned by the Company
immediately prior to such event);
(c) If a change occurs in the Board of Directors of the Company whereby
Directors comprising a majority of the Board of Directors immediately prior to
such change do not continue to comprise such a majority immediately after such
change, provided that incremental and/or related changes (including but not
limited to resignations from the Board of Directors) which occur within a
relatively brief period of time shall be considered to be but a single change
for purposes of this Subparagraph;
(d) If, as a result of any tender offer or otherwise, any person or
entity or affiliated group becomes the beneficial or record owner of more than
10% of the outstanding voting securities of the Company; or
(e) If, in the Board's sole judgment and discretion, a change in
circumstances has occurred (including but not limited to a change in taxation
laws or regulations, securities laws or regulations, accounting requirements or
the events in Subparagraphs (a), (b), (c), and (d) of this Paragraph 9.3) which
causes the Plan to be undesirable to a significant portion of the Participants.
ARTICLE X
MISCELLANEOUS
10.1 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries shall
have no legal or equitable rights, interest, or claims in any property or assets
of the Company. The Company's obligation under the Plan shall be merely that of
an unfunded and unsecured promise of the Company to pay money in the future.
10.2 NON-ASSIGNABILITY. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage,
or otherwise encumber, transfer, hypothecate, or convey in advance of actual
receipt the amounts, if any, payable hereunder, or any part thereof, which are,
and all rights to which are, expressly declared to be unassignable and
non-transferable. No part of the amounts payable shall, prior to actual
payment, be subject to seizure or sequestration for the payment of any debts,
judgments, alimony, or separate maintenance owed by a Participant or any other
person, nor be transferable by operation of law in the event of a Participant's
or any other person's bankruptcy or insolvency.
10.3 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between the Company
and the Participant, and the Participant (or Participant's Beneficiary) shall
have no rights against the Company except as may otherwise be specifically
provided herein. Moreover, nothing in this Plan shall be deemed to give a
Participant the right to be retained in the service of the Company or to
interfere with the right of the Company to discipline or discharge Participant
at any time.
10.4 PROTECTIVE PROVISIONS. A Participant will cooperate with the Company
by furnishing any and all information requested by the Company in order to
facilitate the payment of benefits hereunder.
10.5 GOVERNING LAW. The provisions of this Plan shall be construed and
interpreted according to the laws of the State of Michigan.
10.6 SUCCESSORS. The provisions of this Plan shall bind and inure to the
benefit of the Company and its successors and assigns.
10.7 EFFECTIVE DATE. This Plan shall become effective as of October 1,
1999.
10.8 INCOMPETENT. In the event that it shall be found upon evidence
satisfactory to the Committee that any Participant or Beneficiary to whom a
benefit is payable under this Plan is unable to care for such Participant's or
such Beneficiary's affairs because of illness or accident, any payment due
(unless prior claim therefor shall have been made by a duly authorized guardian
or other legal representative) may be paid, upon appropriate indemnification of
the Company, to the Spouse or other person deemed by the Committee to have
incurred any expense for such Participant or a Beneficiary. Any such payment
shall be a payment for the account of the Participant or a Beneficiary and shall
be a complete discharge of any liability of the Company therefor.
- ---------------------------------- ----------------------------------
Participant's Signature Date
- ---------------------------------- ----------------------------------
Committee Acknowledgement Date
<TABLE>
<CAPTION>
Exhibit 12
SEMCO ENERGY, Inc.
Ratio of Earnings to Fixed Charges
(Thousands of Dollars)
- ----------------------------------- ------------------------------------------------------
Year Ended
------------------------------------------------------
Description 1999 1998 1997 (c) 1996 (c) 1995
- ----------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earning as Defined (a)
Net Income (loss) . . . . . . . . . $ 17,659 $10,040 $ 15,425 ($12,762) $11,331
Income taxes. . . . . . . . . . . . 7,013 7,011 8,469 (7,106) 6,151
Other items . . . . . . . . . . . . (85) 672 (96) (96) (96)
Fixed charges as defined. . . . . . 20,817 15,085 16,741 14,617 14,402
------------ ------- --------- ---------- --------
Earnings as defined . . . . . . . . $ 45,405 $32,808 $ 40,539 ($5,347) $31,788
============ ======= ========= ========== ========
Fixed charges as defined (a)
Interest on long-term debt. . . . . $ 12,685 $11,488 $ 9,389 $ 8,514 $ 8,546
Amortization of debt expense. . . . 1,297 450 449 431 520
Other interest charges. . . . . . . 6,593 2,873 6,629 5,398 5,062
Preferred securities dividends
and distributions . . . . . . . 242 274 274 274 274
------------ ------- --------- ---------- --------
Fixed charges as defined. . . . . . $ 20,817 $15,085 $ 16,741 $ 14,617 $14,402
============ ======= ========= ========== ========
Ratio of earnings to fixed charges. 2.18 2.17 2.42 (b) 2.21
============ ======= ========= ========== ========
<FN>
Notes:
(a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K.
(b) For the year ended December 31, 1996, fixed charges exceeded earnings by $20.0 million.
Earnings as defined include a $32.3 million non-cash pretax write-down of the NOARK
investment. Excluding the NOARK write-down the ratio of earnings to fixed charges
would have been 1.84.
(c) Restated to account for a 1998 acquisition as a pooling of interests. Years prior
to 1996 were not restated for the pooling of interest as the effects were deemed
not material.
</TABLE>
SEMCO Energy, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
NET INCOME - SEMCO Energy, Inc. and its subsidiaries (the "Company") had
consolidated net income of $17.7 million (or $1.00 per share) in 1999, $10.0
million (or $0.63 per share) in 1998 and $15.4 million (or $1.06 per share) in
1997. Warmer than normal weather had a significant impact on earnings during
1999 and 1998. On a weather-normalized basis, net income would have been
approximately $21.3 million in 1999 compared to approximately $17.2 million in
1998.
The following table shows the impact of warmer than normal weather, the
divestiture of the energy marketing business, the divestiture of the NOARK
investment, a change in accounting method and an extraordinary charge on net
income and earnings per share for the past three years.
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income. . . . . . . . . . . . . . . . . . $17,659 $10,040 $15,425
Earnings per share ("EPS"). . . . . . . . . . $ 1.00 $ 0.63 $ 1.06
Average common shares outstanding . . . . . . 17,697 15,906 14,608
Impact on net income of the following items:
Colder (warmer) than normal weather(a). . . $(3,640) $(7,180) $ -
Divestiture of energy marketing business. . $ 729 $ - $ -
Divestiture of NOARK investment . . . . . . $ - $ 1,708 $ 5,025
Impact of change in accounting method and
extraordinary charge . . . . . . . . . . $ - $ 1,285 $ -
Impact on EPS of the foregoing items. . . . . $ (0.16) $ (0.26) $ 0.35
Net income excluding the foregoing items. . . $20,570 $14,227 $10,400
EPS excluding the foregoing items . . . . . . $ 1.16 $ 0.89 $ 0.71
<FN>
(a) The Company determines the impact of weather on its operating results by
comparing actual gas usage per customer during a year to the average of
weather-normalized customer gas usage during previous years. The
weather-normalized customer gas usage is determined by adjusting actual customer
gas usage during a particular year by a ratio, the numerator of which is an
average of degree days during the prior fifteen years, and the denominator of
which is the actual degree days for that year. The Company determines the
percent (%) that weather is warmer or colder than normal for a particular year
by computing the deviation of actual degree days for that year from the average
of degree days during the prior fifteen years and dividing the deviation by such
fifteen year average.
</TABLE>
Also, the 1999 results include approximately $2.6 million of net income
from ENSTAR Natural Gas Company and Alaska Pipeline Company, which were acquired
on November 1, 1999. The business segment analyses on the next several pages
provide additional information regarding the variances in operating results when
comparing 1999, 1998 and 1997.
PRO FORMA INFORMATION - As previously mentioned, 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"). 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 and 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, 1998, 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
Page 24
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
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 assumed public issuance of $170 million of medium-term
notes, $35 million of trust preferred securities and approximately 7.1 million
shares of common stock of the Company producing net proceeds of approximately
$85 million and the resulting adjustments to interest expense from these
issuances (the "Financing Transactions"). The Financing Transactions represent
the Company's current expectations regarding permanent financing for the ENSTAR
acquisition. The net proceeds from the Financing Transactions will be used
primarily to retire a $290 million bridge loan facility of the Company which was
used to finance the ENSTAR acquisition.
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>
Actual Pro Forma
-------------------- ------------------
Years Ended December 31, 1999 1998 1999 1998
- ----------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenue. . . . . . . . . . . . $384,763 $ 637,485 $461,705 $731,077
Consolidated net income. . . . . . . . . 17,659 10,040 19,707 12,943
Basic and diluted EPS. . . . . . . . . . 1.00 0.63 0.80 0.56
</TABLE>
SUMMARY OF BUSINESS SEGMENTS
The Company operates four business segments: (1) gas distribution; (2) pipeline
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
pipeline construction services segment currently does business in the
mid-western 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.
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Operating revenues
Gas distribution . . . . . . . . . $216,831 $184,221 $232,511
Pipeline construction services . . 58,272 25,904 13,207
Engineering services . . . . . . . 17,486 41,366 5,660
Propane, pipelines and storage . . 6,284 4,852 3,027
Energy marketing . . . . . . . . . 96,904 397,888 555,367
Corporate and other. . . . . . . . (11,014) (16,746) (33,840)
-------- -------- --------
Consolidated operating revenues. $384,763 $637,485 $775,932
======== ======== ========
Operating income (loss)
Gas distribution . . . . . . . . . $ 40,134 $ 22,363 $ 26,348
Pipeline construction services . . 2,611 (102) 762
Engineering services . . . . . . . (513) 2,938 778
Propane, pipelines and storage . . 2,341 1,585 1,458
Energy marketing . . . . . . . . . (341) (696) 217
Corporate and other. . . . . . . . (2,342) (1,893) (396)
-------- -------- --------
Consolidated operating income. . $ 41,890 $ 24,195 $ 29,167
======== ======== ========
</TABLE>
Page 25
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The previous 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.
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".
The operating income of the Gas Distribution Business increased in 1999 due
primarily to the impact of cooler weather in 1999 when compared to 1998 and
operating income attributable to ENSTAR. Weather was approximately 7% warmer
than normal in 1999 compared to approximately 20% warmer than normal in 1998. On
a weather-normalized basis, the operating income of the Gas Distribution
Business would have increased by $12.3 million in 1999 compared to 1998 and by
$6.8 million in 1998 when compared to 1997. Approximately $7.9 million of the
$12.3 million increase in weather-normalized operating income in 1999 represents
the weather-normalized operating income of ENSTAR for the months of November and
December 1999.
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Gas distribution
Gas sales revenue. . . . . . . . . . $191,169 $166,700 $218,180
Cost of gas sold . . . . . . . . . . 117,789 109,388 150,967
-------- -------- --------
Gas sales margin . . . . . . . . . . $ 73,380 $ 57,312 $ 67,213
Gas transportation revenue . . . . . 22,369 14,832 13,243
Other operating revenue. . . . . . . 3,293 2,689 1,088
-------- -------- --------
Gross margin . . . . . . . . . . . . $ 99,042 $ 74,833 $ 81,544
Operating expenses . . . . . . . . . 58,908 52,470 55,196
-------- -------- --------
Operating income . . . . . . . . . . $ 40,134 $ 22,363 $ 26,348
======== ======== ========
Weather-normalized operating income. $ 45,434 $ 33,163 $ 26,348
======== ======== ========
<FN>
The amounts in the table above include intercompany transactions
</TABLE>
GAS SALES MARGIN - In 1999, gas sales margin increased by $16.1 million (or 28%)
when compared to 1998. $11.6 million of the increase was attributable to ENSTAR.
The remainder of the increase was due primarily to sales margins from the sale
of gas under a new third-party gas supply and storage arrangement, a portion of
which may be non-recurring, and to additional gas sales, which resulted from
cooler weather and the addition of new customers, offset partially by a decrease
in gas sales margin of approximately $4.2 million due primarily to a shift in
customers to transportation as a result of a multi-location aggregation program
offered to Michigan customers.
The third-party gas supply and storage arrangement is with TransCanada Gas
Services, Inc. ("TransCanada") and pertains to the Michigan-based gas
distribution operations. Under this agreement, 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. Also effective April 1, 1999,
the Michigan-based operation reduced and froze in its base rates a gas charge of
$3.24 per thousand cubic feet ("Mcf") and suspended its
Page 26
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
gas cost recovery ("GCR") clause for a period of three years as authorized in a
September 1998 Michigan Public Service Commission ("MPSC") order. Under the
terms of the TransCanada agreements, the Company's gas costs are fixed at an
amount below the $3.24 per Mcf. As a result of suspending the GCR clause and
contractually fixing the cost of gas below the $3.24 charged to customers, the
Michigan gas distribution operation retains the sales margin on the sale of gas,
subject to a customer profit sharing mechanism also approved in the MPSC order.
Prior to the suspension of the GCR clause on April 1, 1999, gas sales margin was
generated primarily from distribution and customer fees because the Michigan
operation was not allowed to earn profits from the sale of the gas commodity.
See Note 2 in the Notes to the Consolidated Financial Statements for additional
information on the MPSC order and the gas supply management arrangement with
TransCanada.
The aggregation tariff, 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. The program
is referred to as the aggregated transportation service ("ATS") program.
Distribution and customer fees associated with customers who have switched to
third-party gas suppliers are recorded in gas transportation revenue rather than
gas sales revenue because the Company is now acting as a transporter for those
customers.
The addition of new customers in Michigan increased gas sales margin by
approximately $1.5 million in 1999, when compared to 1998. The Company's average
number of gas sales customers increased by 17,336 in 1999. A portion of the
increase was due to the addition of an average of 6,363 new gas sales customers
in Michigan, offset partially by an average of 5,932 gas sales customers who
switched from gas sales service to the ATS program. The remainder of the
increase relates to owning ENSTAR for two months in 1999.
Gas sales margin in 1998 decreased by $9.9 million (or 15%) compared to
1997. This was due primarily to lower gas sales resulting from the unseasonably
warm weather during 1998 and customers switching from gas sales service to the
ATS program, offset partially by the addition of new gas sales customers and a
rate increase in October 1997. The weather during 1998 was approximately 20%
warmer than normal. $10.8 million of the decrease in gas sales margin is
attributable to the warm temperatures and $2.5 million of the decrease is
attributable to customers switching to the ATS program. The addition of new
customers increased gas sales margin by $1.8 million in 1998. The Gas
Distribution Business added an average of 7,359 new gas sales customers in 1998.
During the same period, an average of 2,900 gas sales customers switched from
gas sales service to the ATS program.
The October 1997 rate increase referred to above was granted primarily to
allow for the recovery of costs related to a change in accounting for retiree
medical benefits. The rate increase was approved in the October 1997 Order of
the MPSC ("1997 rate case") (see Note 2 in the Notes to the Consolidated
Financial Statements).
GAS TRANSPORTATION REVENUE - The gas transportation revenue of the Gas
Distribution Business increased by $7.5 million in 1999 when compared to 1998.
$4.2 million of the increase is due to revenues from customers participating in
the ATS program as discussed previously and the remainder is attributable
primarily to gas transportation revenues of ENSTAR. In 1998, gas transportation
revenue increased by $1.6 million when compared to 1997, due primarily to
revenues of approximately $2.5 million from the ATS program offset partially by
lower off-peak Michigan transportation rates approved in the 1997 rate case.
Page 27
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OTHER OPERATING REVENUE - During 1999 and 1998, other operating revenue
increased by $.6 million and $1.6 million, respectively, over the prior year.
The increase is due primarily to an increase in balancing charges and various
miscellaneous fees charged to customers.
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Volumes:
Gas sold (MMcf). . . . . . . . . . . 39,245 32,247 41,985
Gas transported (MMcf) . . . . . . . 32,417 23,791 21,373
------- ------- -------
Total (MMcf) . . . . . . . . . . . 71,662 56,038 63,358
======= ======= =======
Average number of customers:(a)
Gas sales customers. . . . . . . . . 258,406 241,070 236,611
Transportation and ATS customers . . 9,183 3,105 183
------- ------- -------
Average number of total customers. 267,589 244,175 236,794
======= ======= =======
Weather statistics:
Degree days. . . . . . . . . . . . . 6,650 5,566 6,838
Percent colder (warmer) than normal. (6.7%) (19.7%) (0.6%)
<FN>
(a) The average number of customers during a year is determined by adding the
number of customers at the end of each month during such year and dividing the
result by twelve.
</TABLE>
OPERATING EXPENSES - In 1999, the operating expenses of the Gas Distribution
Business increased by $6.4 million (or 12.3%) when compared to 1998. Operating
expenses attributable to ENSTAR for November and December of 1999 account for
$6.0 million of the increase. The operating expenses of the Michigan operations
increased by $.4 million (or less than 1%) when compared to 1998.
The $.4 million increase in the Michigan operation's 1999 operating
expenses includes a number of offsetting increases and decreases. The decreases
include approximately $1.0 million attributable to an overall reduction in
general and administrative expenses due to cost cutting measures undertaken
during the past year and reductions in compensation and employee benefit
expenses due primarily to lower employee levels as a result of the 1998 early
retirement program and changes to the Company's employee benefit plans. See Note
9 in the Notes to the Consolidated Financial Statements for more information on
the early retirement program. The decreases also include approximately $.4
million due to lower uncollectible gas accounts and approximately $.4 million
relating to general taxes. The decrease in general taxes is made up of a
reduction of $1.3 million in property taxes 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, offset partially by an
increase in property taxes associated with additional property, plant and
equipment placed in service and an increase in Michigan business tax. The
Company filed the appeals over the past three years claiming that its Michigan
utility property was over-assessed. The new valuation tables approved by the
state of Michigan are consistent with the Company's claim regarding utility
property assessments and thus significantly increases the likelihood of
recovering the overpaid property taxes. Approximately 38% of the $1.3 million
reduction in property tax expense relates to taxes expensed in prior years and
the remainder relates to 1999.
The above decreases in operating expenses of the Michigan operation were
offset by a number of increases. Information technology expense, primarily
year-2000 (or "Y2K") computer remediation, increased in 1999 when compared to
1998 by approximately $1.0 million and incentive compensation increased by
approximately $.4 million due primarily to lower incentive compensation in the
prior year as a result of lower Company earnings. Depreciation expense also
increased in 1999 by $.8 million as a result of additional property, plant and
equipment placed in service.
The Gas Distribution Business' operating expenses decreased by $2.7 million
(or 5%) in 1998 when compared to 1997. Approximately $1.9 million of the
decrease is attributable to an overall reduction in general and administrative
expenses due to cost cutting measures undertaken during 1998, lower incentive
compensation due to the decrease in Company earnings, and reductions in
compensation and pension expenses due primarily to lower employee levels as a
result of the
Page 28
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
Company's early retirement program and changes to the Company's employee pension
plans. The remainder of the decrease was due to lower uncollectible gas
accounts, regulatory expenses, insurance costs and a one-time reduction in
employee benefit expenses related to the early retirement program, offset
partially by an increase in depreciation expense as a result of new property,
plant and equipment placed in service and an increase in retiree medical
expense. The 1997 rate case authorized a customer rate increase to offset the
impact of the additional retiree medical expense.
OUTLOOK - The Company's strategy for its Gas Distribution Business is to
increase its earnings potential and expand through market growth and
acquisitions that are expected by the Company to provide incremental revenue,
cost synergies and additional business opportunities. In 1999, the Company
acquired ENSTAR pursuant to this strategy. Management is evaluating ways to
offer new products and services in ENSTAR's service territory. The acquisition
of ENSTAR increased the Gas Distribution Business' customer base by
approximately 102,000 (or approximately 40%) and is expected to increase the Gas
Distribution Business' revenues, expenses, operating income and net income in
2000. Based on several factors and assumptions, management currently expects the
acquisition of ENSTAR to be accretive to both earnings and cash flow per share
in 2000. The factors and assumptions considered by management include, but are
not limited to, the price at which the Company can sell new common equity, the
timing of the sale of such new common equity, ENSTAR's revenue growth, and the
Company's ability to achieve certain synergies. For years after 2000, earnings
and cash flow per share may or may not be accretive depending on how actual
events compare to such factors and assumptions.
With the approval of profit incentive and sharing mechanisms by the MPSC in
1998, the Michigan operation is allowed to retain a portion of its earnings in
excess of its authorized return, if any, and credit the remainder to customers.
Specifically, if the Company's return on equity for its Michigan-based natural
gas distribution business exceeds 12.75%, amounts equal to 50% of the excess
return between 12.76% and 16.75%, plus amounts equal to 75% of the excess over
16.75%, would be credited to customers, i.e., would be reflected prospectively
in reduced rates. In 1999, the Company was not required to credit any amounts to
its customers.
In 1998, the MPSC also authorized the Company to, among other things,
suspend its GCR clause and freeze for three years in its base rates a gas charge
of $3.24 per Mcf. The GCR suspension and new rates took effect in April 1999 and
generally extend through March 2002. The $3.24 gas charge represents a reduction
of approximately $.33 per Mcf from rates prior to April 1999. The Gas
Distribution Business was able to offer this GCR suspension and rate freeze
partly as a result of agreements reached with TransCanada. Under 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 same three year period at a cost below
the $3.24 charged to customers. As a result of the MPSC order and the
TransCanada agreements, Michigan customers have lower rates and the Michigan gas
distribution operation retains the sales margin on the sale of gas, subject to
the customer profit sharing mechanism described previously. See Note 2 of the
Notes to the Consolidated Financial Statements for additional information on the
MPSC order and the TransCanada agreements.
In 1999, the number of customers in Michigan and at ENSTAR increased by
approximately 2.7%. The customer growth rate for the U.S. gas distribution
industry has averaged approximately 1% annually during the last three years.
Operating expenses have been reduced through the early retirement program
offered during 1998, the redesign of employee benefits during 1998 and increased
use of technology to achieve operating efficiencies. The Gas Distribution
Business will continue its efforts to control or reduce operating expenses.
The Michigan gas distribution operation competes with suppliers of
alternative energy sources such as coal and #6 fuel oil to meet the energy
requirements of its industrial customers. This competition did not have a
material impact on the financial results of the Company in 1999. To lessen the
possibility of a fuel switch by industrial customers, the Company offers
flexible contract terms and additional services, such as gas storage and
balancing, in addition to a more environmentally friendly fuel. ENSTAR supplies
natural gas in its service territory at prices that currently preclude
substitution of alternate energy sources. At present, the residential energy
cost of natural gas in Alaska is more than 40% less than fuel oil, the next most
economical energy choice.
As is the case with many gas distribution utilities, there is the potential
risk for industrial and electric generating plants on the Company's gas
distribution system and also located in close proximity to interstate natural
gas pipelines to bypass the Company and connect directly to such pipelines.
However, management is currently unaware of any significant
Page 29
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
bypass efforts by the Company's customers. The Company has and would continue to
address any such efforts by offering special services and rate arrangements
designed to retain these customers on the Company's system.
For information on environmental matters, regulatory matters and the
application of SFAS 71, "Accounting for the Effects of Certain Types of
Regulation", refer to Notes 2 and 14 of the Notes to the Consolidated Financial
Statements.
PIPELINE CONSTRUCTION SERVICES
During 1999, the pipeline construction services segment ("Construction
Services") made four business acquisitions that together do business in the
mid-western and the southeastern areas of the United States. In addition to
expanding the geographic reach of Construction Services, these acquisitions have
also expanded underground construction service offerings in new industries such
as telecommunications and water supply. The acquisitions also included two
non-union businesses that can provide more competitive services to customers in
certain regions of the country.
The businesses in the Company's construction services segment have all been
acquired since mid-1997 and each acquisition has been accounted for using the
purchase method of accounting. As a result, Construction Services' operating
results for 1999, 1998 and 1997 include the results of each of the acquired
businesses for the periods subsequent to their acquisition dates.
<TABLE>
<CAPTION>
Company Acquisition Date
- ----------------------------------------------------------------
<S> <C>
Sub-Surface Construction Co. ("Sub-Surface") . August 1997
King Energy & Construction Co. ("King"). . . . May 1998
K&B Construction, Inc. ("K&B") . . . . . . . . February 1999
Iowa Pipeline Associates, Inc. ("Iowa"). . . . April 1999
Flint Construction Co. ("Flint") . . . . . . . September 1999
Long's Underground Technologies, Inc. ("Long") September 1999
</TABLE>
Construction Services also started an overhead-line construction company in
Florida in January 1998. However, the operations of this start-up business were
halted in mid-1998 in response to lower than expected business levels and
earnings. The start-up business generated an operating loss of $.9 million
during 1998.
Construction Services' primary business is underground pipeline
construction which is seasonal in nature. Construction Services generally incurs
operating losses during the winter and spring months when underground
construction is inhibited and generates the majority of its operating income
during the summer and fall months.
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Construction services
Operating revenues. . . . $58,272 $25,904 $13,207
Operating expenses. . . . $55,661 $26,006 $12,445
------- ------- -------
Operating income (loss) . $ 2,611 $ (102) $ 762
======= ======= =======
Feet of pipe installed. . 6,208 4,531 2,421
======= ======= =======
<FN>
The amounts in the table above include intercompany transactions
</TABLE>
OPERATING REVENUES - Construction Services' operating revenues increased to
$58.3 million during 1999, a $32.4 million (or 125%) increase over 1998. The
increase is due primarily to the revenues of K&B, Iowa, Flint and Long, which
were all acquired during 1999, and a $3.9 million increase in the revenues of
Sub-Surface. Operating revenues during 1998 increased by $12.7 million when
compared to 1997. The $12.7 million increase is due primarily to the timing of
the acquisitions of Sub-Surface and King.
Page 30
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
OPERATING INCOME - Construction Services' operating income for 1999 was $2.6
million compared to an operating loss of $.1 million in 1998 and operating
income of $.8 million in 1997. Construction Services' operating income for 1998,
excluding the start-up business mentioned above, would have been $.8 million.
The increase in operating income in 1999, when compared to 1998, is due
primarily to operating income attributable to the businesses acquired in 1999
and the increase in operating revenues of Sub-Surface, offset partially by an
increase in Sub-Surface's operating expenses. The 1997 results reflect the
operations of Sub-Surface for the period subsequent to its acquisition in August
1997, which excludes the seasonal losses which are typical during the first half
of the year. The doubling of operating expenses in each of 1998 and 1999 was due
primarily to the operating expenses associated with the businesses acquired in
these periods plus an increase in Sub-Surface's expenses in 1999 as noted
previously.
OUTLOOK - Management believes there are opportunities for growth in the pipeline
construction industry. Management views the industry as large but highly
fragmented and believes that customer preference is shifting from smaller
construction companies to much larger contractors. Management also believes
there is a trend in the utility industry towards outsourcing services such as
those provided by Construction Services, and management's goal is to position
Construction Services to take advantage of this trend.
Construction Services competes with small- and medium-size regional
underground facilities contractors who provide similar services and utilize
comparable equipment and installation techniques. There is also competition from
in-house construction operations of existing or prospective customers. The
Company's goal is to expand Construction Services' market share by acquiring
established construction companies that have a strong customer base. Achieving
these goals is dependent upon the availability of good acquisition candidates
and, among other things, the Company's ability to successfully integrate such
acquisitions.
ENGINEERING SERVICES
The Company's engineering services business ("Engineering Services") is
comprised of two companies, Maverick Pipeline Services, Inc. ("Maverick") and
Oilfield Materials Consultants, Inc. ("OMC"). The acquisition of Maverick, in
December 1997, was accounted for as a purchase. Therefore, the consolidated
financial statements and the table below include the results of Maverick's
operations since December 1997. The acquisition of OMC, in November 1998, was
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements and the table below have been restated to include the
financial results of OMC as if it were part of the Company for all of periods
presented.
Maverick purchased the assets and certain liabilities of Drafting Services,
Inc. ("DSI") in September 1999 and Pinpoint Locators, Inc. ("Pinpoint") in
October 1999. DSI specializes in surveying and drafting services for interstate
pipeline companies while Pinpoint performs conventional and global positioning
system (GPS) surveys of both interstate pipelines and fiber optic communication
routes. Both acquisitions were accounted for using the purchase method of
accounting and will be operated as divisions of Maverick.
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------
(in thousands, except billed hours)
<S> <C> <C> <C>
Engineering services
Operating revenues. . . . . . . . . $ 17,486 $ 41,366 $ 5,660
Operating expenses. . . . . . . . . $ 17,999 $ 38,428 $ 4,882
-------- -------- --------
Operating income. . . . . . . . . . $ (513) $ 2,938 $ 778
======== ======== ========
Billed hours. . . . . . . . . . . . 359,000 586,000 180,000
======== ======== ========
<FN>
The amounts in the table above include intercompany transactions
</TABLE>
OPERATING REVENUES - The operating revenues of Engineering Services were $17.5
million in 1999 compared to $41.3 million in 1998. The decrease in 1999 is due
primarily to lower revenues from turn-key projects and lower pipeline inspection
revenues as a result of a slowdown and deferral of pipeline projects and
engineering work in various sectors of the energy industry. The downturn in oil
prices in late 1998 and early 1999 led to the reduction in pipeline construction
and inspection
Page 31
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
projects in 1999. There has also been a reduction or deferral of new engineering
projects for the gas distribution industry due to the cash flow impact on the
industry of the warm weather during the past two years.
Engineering Services' operating revenues in 1998 increased $35.7 million or
nearly eight-fold from 1997. Approximately $24.5 million of the increase
represents the 1998 revenues of Maverick, which was acquired in December 1997.
Maverick's 1998 revenues reflect a $20 million turn-key project it completed in
Vineland, New Jersey. Maverick performed the engineering and design work and
also managed construction of the project (this type of project is referred to as
a "turn-key" project). The remainder of the increase in 1998 engineering
revenues ($11.2 million), when compared to 1997, is attributable to OMC. OMC's
200% increase in revenues was due to growth in OMC's customer base and growth in
quality assurance and quality control projects.
OPERATING INCOME - Engineering Services incurred an operating loss of $.5
million in 1999 compared to operating income of $2.9 million and $.8 million in
1998 and 1997, respectively. The significant decrease in operating income in
1999 was due primarily to decreases in operating revenues and corresponding
project costs as a result of the slowdown and deferral of projects as noted
previously and unanticipated ground restoration and clean-up costs incurred in
1999 associated with a large pipeline turn-key project completed in 1998. The
$2.1 million increase in operating income in 1998, when compared to 1997, was
attributable primarily to the operating income of Maverick, which was acquired
in December 1997, and growth in OMC's business as noted previously.
OUTLOOK - The Company's goal is to expand Engineering Services in North America
and select foreign countries through the growth of its existing operations and
through acquisitions. Management believes there is a trend in the utility
industry towards outsourcing services such as those provided by Engineering
Services, and management's goal is to position Engineering Services to take
advantage of this trend. It is also anticipated that the demand for turn-key
services will increase and the Company plans to aggressively pursue such
projects. In addition to providing services to the gas and petroleum industries,
Engineering Services also plans to market its services to customers in
telecommunications and other industries.
Engineering Services competes with regional, national and international
firms as well as in-house engineering and field service departments. Because of
the minimal initial capital requirements, it is likely that new competition will
arise from other firms that possess the professional requirements and
qualifications. The Company's strategic objective is to build a sizable
underground facilities engineering business that provides a wide array of
services to utilities and other companies installing underground pipe, cable and
facilities in North America. Achieving these goals and objectives is dependent
upon the availability of good acquisition candidates and, among other things,
the Company's ability to successfully integrate such acquisitions.
There has been a reduction in oil and gas production and related activities
due to the downturn in oil prices in late 1998 and early 1999. There has also
been a reduction or deferral of new engineering projects for the gas
distribution industry due to the cash flow impact of the warm weather during the
past two years. As a result, Engineering Services has experienced a reduction in
the level of available projects. Management believes that the level of available
projects will increase as gas distribution companies start releasing new
engineering projects and as pipeline construction and inspection projects become
available as a result of the recovery in oil prices in late 1999.
PROPANE, PIPELINES AND STORAGE
The Company completed its first full calendar year in the propane distribution
business in 1999. The Company entered the propane distribution business with the
acquisition of Hotflame Gas, Inc. and Hotflame Transport Co., Inc. (together
known as "Hotflame") on March 31, 1998. The acquisition of Hotflame was
accounted for as a purchase and, therefore, only the results of operations since
April 1998 are included in the consolidated financial statements and the table
below. Hotflame's 1998 operating results do not include the winter heating
months of January through March.
The Company's pipeline and storage operations consist of several pipelines
and an ownership interest in a gas storage facility, all of which are located in
Michigan.
Page 32
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Propane, pipelines and storage
Operating revenues. . . . . . . $6,284 $4,852 $3,027
Operating expenses. . . . . . . $3,943 $3,267 $1,569
------ ------ ------
Operating income. . . . . . . . $2,341 $1,585 $1,458
====== ====== ======
</TABLE>
OPERATING REVENUES - Operating revenues were $6.3 million in 1999 compared to
$4.9 million in 1998 and $3.0 million in 1997. The increases in 1999 and 1998
were due primarily to the operating revenue of Hotflame, which was acquired on
March 31, 1998.
OPERATING INCOME - The Company's Propane, Pipelines and Storage segment had
operating income of $2.3 million in 1999 compared to $1.6 million in 1998. The
increase was due primarily to pipeline expense reductions and the operations of
Hotflame. As discussed above, the operating results for 1998 include the
operating income of Hotflame earned after its acquisition on March 31, 1998.
Weather in Hotflame's market area was 10% warmer than normal in 1999
compared to 22% warmer than normal in 1998. Operating income on a
weather-normalized basis would have been higher by $.3 million for both 1999 and
the period of April through December of 1998. The impact of weather on the
operating income of the propane, pipelines and storage segment relates entirely
to the propane business. In addition to the impact of weather, Hotflame's 1999
profit margins were slightly lower as a result of price reductions caused by
increased competition in the propane industry.
Operating income in 1998, when compared to 1997, was generally unchanged
with nearly all income coming from the pipeline and storage operations. The
propane operation did not contribute any operating income in 1998 due to the
combination of the warm weather and the fact that the operating results did not
include operating income from the profitable winter heating months of January
through March.
OUTLOOK - Management believes that the gas pipeline and storage operations could
experience opportunities for growth with the increased deregulation of gas
markets. As gas markets expand or are deregulated, management feels that the
quantity of gas moving through the Great Lakes Region will increase, thereby
creating additional pipeline and storage opportunities.
The Company's propane business competes with other regional propane
providers and with other energy sources such as natural gas, fuel oil and
electricity. The propane business has become increasingly competitive and less
profitable, which necessitates large scale operations to be successful in the
long term. The Company will continue to assess regional growth opportunities and
the strategic fit of this business over the coming year.
ENERGY MARKETING
The Company sold the subsidiary comprising its gas marketing business ("Energy
Services") effective March 31, 1999.
The business was sold because management concluded that it did not fit the
Company's new strategic direction due to the high risks and generally poor
returns associated with the business. The Company recognized a gain on the sale.
The gain
is reported in other income (discussed in the subsequent section) and thus, is
not reflected in operating income in the following table.
<TABLE>
<CAPTION>
Years Ended December 31, 1999(a) 1998 1997
- ----------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Energy marketing
Gas marketing revenues. . $96,904 $397,888 $555,367
Cost of gas marketed. . . 95,681 393,762 546,562
------- -------- --------
Gas marketing margin. . . $ 1,223 $ 4,126 $ 8,805
Operating expenses. . . . 1,564 4,822 8,588
------- -------- --------
Operating income (loss) . $ (341) $ (696) $ 217
======= ======== ========
<FN>
The amounts in the table above include intercompany transactions
(a) Energy Services was sold effective March 31, 1999
</TABLE>
Page 33
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GAS MARKETING MARGIN - Gas marketing margin for 1999, when compared to 1998,
decreased by $2.9 million. There were no gas marketing revenues subsequent to
March 31, 1999, the effective date of the sale of Energy Services, which is the
primary reason for the decrease in margin.
Gas marketing margin for 1998 decreased by $4.7 million when compared to
1997 due primarily to the impact of warm weather on market demand, increased
competition, restructuring activities at Energy Services and a decrease in gas
marketing volumes. The warm weather reduced prices which decreased gas marketing
margins. During 1998, Energy Services terminated agreements with all of its
third-party gas marketing companies in an effort to reduce risks, eliminate
lower margin transactions and improve profitability.
OPERATING INCOME - Energy Services had an operating loss of $.3 million in 1999
compared to an operating loss of $.7 million in 1998 and operating income of $.2
million in 1997. The smaller operating loss in 1999 was due primarily to the
results of restructuring activities undertaken in 1998 (discussed previously)
and the timing of the sale of Energy Services. Energy Services was sold
effective March 31, 1999 and therefore the 1999 operating loss of $.3 million
includes results from January through March only.
The decrease in operating income in 1998, compared to 1997, was due to
additional overhead and administrative expenses incurred to properly manage the
gas marketing business and the decrease in gas marketing margin discussed
previously, offset partially by a corresponding decrease in third-party marketer
incentive payments.
OTHER INCOME AND DEDUCTIONS
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Divestiture of energy marketing business. $ 1,122 $ - $ -
Divestiture of NOARK investment . . . . . - 5,048 7,730
Interest expense. . . . . . . . . . . . . (20,575) (14,811) (13,059)
Dividends on preferred stock. . . . . . . (325) (193) (194)
Other . . . . . . . . . . . . . . . . . . 2,559 836 250
-------- -------- --------
$(17,219) $ (9,120) $ (5,273)
======== ======== ========
</TABLE>
DIVESTITURE OF ENERGY MARKETING BUSINESS - The Company sold the subsidiary
comprising its energy marketing business effective March 31, 1999. The
divestiture resulted in a gain of $1.1 million ($.7 million after tax).
DIVESTITURE OF NOARK INVESTMENT - On January 14, 1998, the Company sold its
entire interest in the NOARK Pipeline System Partnership ("NOARK"). Refer to
Note 15 of the Notes to the Consolidated Financial Statements for additional
information regarding NOARK.
In December 1997, the Company reduced its reserve for NOARK by $5.0 million
(after-tax) based on the terms of the pending sale. The sale occurred in January
1998 and, including subsequent adjustments, resulted in a final gain on the sale
of NOARK of $1.7 million (after-tax). The adjustments to the gain included
income tax benefits related to tax losses generated by the partnership and
adjustments to discount rates used to compute the present value of future cash
flows pursuant to the terms of the sale. The discount rates were adjusted to
better reflect actual market rates at the time of the sale.
INTEREST EXPENSE - Interest expense increased by $5.8 million (or 39%) in 1999,
when compared to 1998, due to an increase in the level of debt outstanding from
1998 to 1999. The Company incurred the additional debt to finance its ongoing
capital expenditure and business acquisition programs and for general corporate
purposes. The Company incurred $290 million of additional short-term debt on
November 1, 1999 to finance the acquisition of ENSTAR. Approximately $3.3
million of the increase in interest expense in 1999 relates to this $290 million
of debt.
Interest expense increased by $1.8 million (or 13%) in 1998 compared to
1997 due to the higher levels of debt outstanding during the first half of 1998.
The additional debt had been incurred to finance the Company's ongoing capital
expenditure and business acquisition programs and for general corporate
purposes. During August 1998 the Company sold 1.82 million shares of its common
stock and used a significant portion of the net proceeds to repay short-term
debt.
Page 34
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
See Note 5 of the Notes to the Consolidated Financial Statements for more
information on debt issuances and refinancings.
OTHER - In 1999, other income increased by $1.7 million when compared to 1998.
Approximately $.8 million of the increase relates to life insurance proceeds
received upon the death of a retired Company executive, $.4 million relates to
gains on the sale of pipeline property and other equipment, $.2 million relates
to an increase in equity income from partnership investments and the remainder
is attributable to higher miscellaneous non-operating income.
Other income increased by $.6 million in 1998 when compared to 1997. The
increase was due primarily to the impact of discontinuing the Company's
unprofitable appliance merchandising programs in 1997 and an increase in equity
income from partnership investments in gas pipeline and gas storage facilities.
ACCOUNTING METHOD CHANGE AND EXTRAORDINARY ITEM
The Company changed its method of accounting for property taxes during 1998. The
cumulative effect of the change in accounting method increased 1998 earnings by
$1.8 million. The Company also incurred an extraordinary charge of $.5 million
after-tax during 1998 for the early redemption of all of its outstanding 8.625%
debentures due April 15, 2017. Refer to Note 1 of the Notes to the Consolidated
Financial Statements for more information on these items.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM INVESTING - The Company's single largest use of cash is capital
investments. The following table identifies investments for the past three
years:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Capital investments
Property additions - gas distribution. . . . $ 22,761 $23,029 $28,201
Property additions - diversified businesses. 12,258 2,246 1,272
Business acquisitions(a) . . . . . . . . . . 305,142 20,356 15,567
-------- ------- -------
$340,161 $45,631 $45,040
======== ======= =======
<FN>
(a) Includes net cash paid, deferred payments and the value, at the time of
issuance, of Company stock issued for acquisitions. Also, 1998 includes $14,073
of Company stock issued for the acquisition of OMC. The acquisition of OMC was
accounted for as a pooling of interests.
</TABLE>
Property additions for the Gas Distribution Business represent primarily
new customer service lines and, to a lesser extent, gas main and service line
replacements. In addition, the Company invested approximately $2.4 million, $4.5
million and $8 million in technology in 1999, 1998 and 1997, respectively. This
technology consists of automated meter reading, automated dispatch and
scheduling, in-truck computer terminals and other computer infrastructure
improvements which have increased customer service and operational efficiency.
Business acquisitions were approximately $305.1 million, $20.4 million and
$15.6 million in 1999, 1998 and 1997, respectively. The significant increase in
1999 was due to the acquisition of ENSTAR for approximately $290 million.
In 2000, the Company plans to spend approximately $50 million on property
additions for the Gas Distribution and Diversified Businesses. In addition, the
Company plans to incur additional expenditures for business acquisitions during
2000.
CASH FLOWS FROM OPERATIONS - The Company's net cash provided from operating
activities totaled $41.2 million in 1999, $24.7 million in 1998 and $9.0 million
in 1997. 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 how the Company manages the timing of
cash receipts and payments.
The Company uses significant amounts of short-term borrowings to finance
natural gas purchases for storage during the non-heating season. The Company
owns and leases natural gas storage facilities with available capacity
Page 35
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
approximating 35% to 40% of average annual gas sales. Generally, gas is stored
during the months of April through October and withdrawn for sale from November
through March.
CASH FLOWS FROM FINANCING - The Company received net cash from financing
activities of $287.4 million, $4.9 million and $32.4 million in 1999, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Financing activities
Issuance (repurchase) of common stock . $ 3,726 $ 32,570 $ 2,803
Repurchase of preferred stock . . . . . (3,281) - -
Net cash change in notes payable. . . . 302,347 (20,561) (19,976)
Issuance (repayment) of long-term debt. - 4,887 59,975
Payment of dividends. . . . . . . . . . (15,442) (12,029) (10,419)
-------- -------- --------
Net cash from financing activities. . . $287,350 $ 4,867 $ 32,383
======== ======== ========
</TABLE>
The Company issued 374,000 shares, 367,000 shares and 298,000 shares of its
common stock in 1999, 1998 and 1997, respectively, to meet the dividend
reinvestment and stock purchase requirements of the Company's Direct Stock
Purchase and Dividend Reinvestment Plan ("DRIP"). Since May 1999 the Company
purchased 159,000 shares of its common stock on the open market. The Company
also purchased 162,000 shares of its common stock on the open market in 1997.
In August 1998, the Company sold 1.82 million shares of its common stock in
a public offering. The proceeds of the offering were $26.2 million after
underwriting discounts but before expenses. The Company used the net proceeds
from the stock issuance to repay short-term debt and for general corporate
purposes.
In November 1999, the Company called for redemption all outstanding shares
of its $2.3125, Series A Convertible Cumulative Preferred Stock and Series A, B,
C, and D Cumulative Preferred Stock of its subsidiary, SEMCO Energy Gas Company.
Holders of the 6,168 outstanding shares of $2.3125, Series A Convertible
Cumulative Preferred Stock had the option of receiving $25 in cash for each
share redeemed or converting each share into 4.11 shares of the Company's common
stock. 1,055 shares were redeemed for cash and 5,113 shares were converted to
common stock. The Company paid cash of $105 per share to holders of the 31,000
outstanding shares of Series A, B, C, and D Cumulative Preferred Stock. A small
premium was paid as part of the redemption of the Series A, B, C, and D
Cumulative Preferred Stock and is reflected in dividends on preferred stock in
the Consolidated Statement of Income for 1999.
In April 1998 the Company redeemed all of its outstanding 8.625% debentures
due April 15, 2017. The redemption was accomplished using short-term debt. The
Company issued, in November 1998, $5 million of 6.40% medium-term notes due
November 2008, $15 million of 6.50% medium-term notes due November 2005, and $10
million of 7.03% medium-term notes due November 2013. In October 1997, the
Company issued $30 million of 6.83% notes due October 2002 and $30 million of
7.20% notes due October 2007. The net proceeds from the issuance of the notes
were used to repay short-term debt and for general corporate purposes.
The Company's net funds borrowed (paid) on notes payable were $302.3
million, ($20.6 million) and ($20.0 million) in 1999, 1998 and 1997,
respectively. On November 1, 1999, the Company financed the acquisition of
ENSTAR with a $290 million unsecured bridge loan facility ("ENSTAR bridge
loan"). The Company made payments of $3.1 million and $9.2 million during 1999
and 1998, respectively, on a note payable associated with the sale of NOARK
("NOARK note") (See Note 15 of the Notes to the Consolidated Financial
Statements). The net change in notes payable includes the combined cash borrowed
or paid on the Company's short-term lines of credit with banks, the ENSTAR
bridge loan and the NOARK note.
Cash dividends paid per share for common shareholders were $.863, $.744 and
$.70 in 1999, 1998 and 1997, respectively. The 1999 dividends include a one-time
special cash dividend of $.05 per share.
Page 36
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NON-CASH FINANCING ACTIVITIES - The Company issued .2 million shares, 1.3
million shares and less than .1 million shares of its common stock to the
shareholders of businesses acquired during 1999, 1998 and 1997, respectively. Of
the shares issued in 1998, .9 million were for the acquisition of OMC which was
accounted for using the pooling of interests method of accounting. See Note 3 of
the Notes to the Consolidated Financial Statements for more information on the
OMC acquisition. As part of a business acquisition in 1999, the Company owes $.8
million to the shareholder of the business acquired. The $.8 million plus
interest must be paid on or before April 2002.
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 December 31, 1999, the Company had $110 million of short-term
credit facilities, of which $25.4 million was unused.
The Company expects to acquire additional businesses in 2000 and 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 also plans to
refinance the ENSTAR bridge loan in 2000 with a combination of long-term debt,
equity or trust preferred securities. The bridge loan matures on October 30,
2000. Prepayments of $56,000,000 will be required on the six and nine month
anniversaries of the funding date (November 1, 1999) if the bridge loan is not
prepaid prior to such dates.
In November 1999, the Company and SEMCO Capital Trust I, SEMCO Capital
Trust II and SEMCO Capital Trust III ("Capital Trusts") filed a registration
statement on Form S-3 ("1999 registration statement") with the Securities and
Exchange Commission 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. The $500 million registered in the 1999
registration statement includes an aggregate principal amount of $142.4 million
of unsold securities registered by the Company on a registration statement
declared effective in
July 1998.
During 2000, the Company will make the final payment of $.8 million on the
NOARK note. See Note 15 of the Notes to the Consolidated Financial Statements
for a discussion of the amounts to be paid in conjunction with the sale of
NOARK.
The Company's ratio of earnings to fixed charges was 2.18, 2.17 and 2.42
for 1999, 1998 and 1997, respectively.
MARKET RISK INFORMATION
The Company's primary market risk arises from fluctuations in commodity prices
and interest rates. The Company manages interest rate risk through the use of
derivative instruments and limits the use of such instruments to hedging
activities. If the Company did not use derivative instruments, its exposure to
such risk would be higher. See Note 8 of the Notes to the Consolidated Financial
Statements for additional information on the Company's risk management
activities.
The Company is subject to interest rate risk in connection with the
issuance of variable- and fixed-rate debt. In order to manage interest costs,
the Company uses interest rate swap agreements and exchanges fixed- and
variable-rate interest payment obligations over the life of the agreements
without exchange of the underlying principal amounts. A sensitivity analysis
model was used to calculate the fair values of the Company's interest rate
swaps, utilizing applicable forward interest rates in effect at December 31,
1999. The sensitivity analysis involved increasing or decreasing the forward
rates by a hypothetical 10% and calculating the resulting unfavorable change in
the fair values of the interest rate sensitive instruments. The results of this
analysis, which may differ from actual results, showed this type of change would
reduce the fair values by approximately $2.4 million. Losses in excess of the
amounts determined in the sensitivity analysis could occur if market rates or
prices exceed the 10% shift used for the analysis. The analysis also does not
quantify short-term exposure to hypothetically adverse price fluctuations in
inventories. See Note 8 of the Notes to the Consolidated Financial Statements
for additional information on the Company's accounting policies for derivative
instruments.
The Company's exposure to commodity price risk arises from changes in
natural gas and propane prices throughout the United States and in eastern
Canada where the Company conducts sales and purchase transactions. The Company
does not currently use derivative instruments to manage its exposure to
commodity price risk since all of the natural gas requirements of the Company's
Michigan gas distribution operations are covered under the TransCanada supply
arrangement
Page 37
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
and ENSTAR's natural gas requirements are primarily covered by two long-term
supply arrangements and an RCA-approved commodity cost pass through mechanism to
its customers.
Prior to the sale of Energy Services on March 31, 1999, the Company entered
into various long-term sales commitments which extended up to 60 months into the
future. The Company also utilized derivative financial and commodity
instruments, including futures contracts, options and swaps, to reduce market
risk associated with fluctuations in the price of gas. Since the sale of Energy
Services, the Company no longer uses these types of instruments.
IMPACT OF INFLATION
The cost of gas sold by ENSTAR is recovered from natural gas distribution
customers on a current basis through its purchased gas adjustment ("PGA")
clause. Prior to April 1, 1999, the cost of gas sold by the Michigan gas
distribution operations was recovered from natural gas distribution customers on
a current basis through its GCR clause. The MPSC authorized the Company to
suspend its GCR clause and freeze for three years in its base rates a gas charge
of $3.24 per Mcf. The GCR suspension and rate freeze took effect in April 1999
and generally extend through March 2002. See Note 2 of the Notes to the
Consolidated Financial Statements for more information regarding the Michigan
rate freeze.
Increases in other utility operating costs are recovered through the
regulatory process of a rate case and, therefore, may adversely affect the
results of operations in inflationary periods due to the time lag involved in
this process. The Company attempts to minimize the impact of inflation by
controlling costs, increasing productivity and filing rate cases on a timely
basis.
YEAR 2000
STATE OF READINESS - The Company uses computer systems, equipment, software and
related devices ("technology systems") that have date-sensitive embedded
technology that previously could not distinguish between the year 1900 and the
year 2000 ("Y2K"). If not corrected, this could have caused the Company to,
among other things, report inaccurate data, issue inaccurate bills or incur gas
delivery problems. The Company initiated an enterprise-wide plan to prepare for
Y2K (the "Y2K Plan"). The Y2K Plan had four phases: (i) identification; (ii)
remediation; (iii) testing; and (iv) contingency planning. The identification
phase included identification, inventory, assessment, and prioritization plan
development for all technology systems. The remediation phase involved the
upgrading, modification, or replacement of technology systems. The testing phase
included testing the remediated technology systems to ensure that they
accurately handle the year 2000 date and monitoring the remediated systems to
ensure that Y2K problems were not reintroduced. The contingency planning phase
involved the development of contingency plans to address certain risk scenarios.
The Y2K Plan was used for traditional information technology ("IT") which
includes essential business systems such as payroll, billing, accounting
systems, wide area networks, local area networks, personal computers, etc. The
Company also used the Y2K Plan for process control computers and embedded
systems contained in buildings, equipment and the gas supply and delivery
systems.
The Company completed all four phases of its Y2K Plan during 1999. The
Company has been operating in 2000 and has experienced no significant Y2K
related problems with its internal systems or with any critical vendors,
suppliers or customers. However, the Company continues to monitor internal
systems as well as vital functions of the Company dependent on third parties.
Contingency plans are still in place if any Y2K issues surface in the upcoming
months. Of course, there can be no assurance as to whether the contingency plans
will successfully address all contingencies that may arise in the future. In the
event that the Company is unsuccessful in addressing any future Y2K issues,
there could be a material adverse effect on the Company's liquidity, financial
condition and results of operations.
COST OF REMEDIATION - The Company expensed the cost of modifications to
technology systems as incurred, while capitalizing and amortizing the cost of
new software over its useful life. Expenses incurred through December 31, 1999
related to the Y2K Plan were approximately $2.3 million. The Company has
incurred an opportunity cost for implementing the Y2K Plan by deferring
potentially beneficial IT projects.
Page 38
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
RISK ASSESSMENT - The Company identified what it believed were the most
significant worst case Y2K scenarios. These scenarios were (i) interference with
the Company's ability to receive and deliver gas to customers and perform
services for customers; (ii) interference with the Company's ability to monitor
gas pressure and safety throughout the Company's gas distribution system; (iii)
interference with communications during safety related emergencies and (iv)
interference with the Company's ability to bill and receive payments from
customers. These scenarios could have resulted in the Company not being able to
deliver gas or perform other services for a period of time, which could have had
a material adverse effect on the Company's liquidity, financial condition and
results of operations. The Company's Y2K Plan was used to address these worst
case scenarios and, as a result, none of the scenarios have materialized.
NEW ACCOUNTING STANDARDS
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. The
Company is studying the effects of SFAS 133 but does not expect it to have a
material impact on the Company's liquidity, financial condition and results of
operations.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are based on current
expectations, estimates and projections. Statements that are not historical
facts, including statements about the Company's 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 Engineering Services; (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 and (xi) the Company's ability to operate and integrate
acquired businesses in accordance with its plans.
Page 39
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Operating revenues
Gas sales . . . . . . . . . . . . . . . . . . . . . . $191,169 $166,700 $218,180
Gas transportation. . . . . . . . . . . . . . . . . . 22,369 14,832 13,243
Construction services . . . . . . . . . . . . . . . . 49,965 16,621 7,484
Engineering services. . . . . . . . . . . . . . . . . 14,841 40,937 5,660
Gas marketing . . . . . . . . . . . . . . . . . . . . 96,855 390,817 526,962
Other . . . . . . . . . . . . . . . . . . . . . . . . 9,564 7,578 4,403
-------- -------- --------
$384,763 $637,485 $775,932
-------- -------- --------
Operating expenses
Cost of gas sold. . . . . . . . . . . . . . . . . . . $117,789 $109,388 $150,967
Cost of gas marketed. . . . . . . . . . . . . . . . . 95,632 386,691 518,157
Operations and maintenance. . . . . . . . . . . . . . 100,822 92,696 55,209
Depreciation and amortization . . . . . . . . . . . . 20,006 15,349 12,877
Property and other taxes. . . . . . . . . . . . . . . 8,624 9,166 9,555
-------- -------- --------
$342,873 $613,290 $746,765
-------- -------- --------
Operating income. . . . . . . . . . . . . . . . . . . . $ 41,890 $ 24,195 $ 29,167
-------- -------- --------
Other income (deductions)
Divestiture of energy marketing business. . . . . . . $ 1,122 $ - $ -
Divestiture of NOARK investment . . . . . . . . . . . - 5,048 7,730
Interest expense. . . . . . . . . . . . . . . . . . . (20,575) (14,811) (13,059)
Dividends on preferred stock. . . . . . . . . . . . . (325) (193) (194)
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,559 836 250
-------- -------- --------
$(17,219) $ (9,120) $ (5,273)
-------- -------- --------
Income before income taxes. . . . . . . . . . . . . . . $ 24,671 $ 15,075 $ 23,894
Income taxes. . . . . . . . . . . . . . . . . . . . . . $ 7,012 $ 6,320 $ 8,469
-------- -------- --------
Net income before cumulative effect of accounting
method change and extraordinary charge. . . . . . . . $ 17,659 $ 8,755 $ 15,425
Cumulative effect of change in accounting method for
property taxes, net of income taxes of $960 . . . . . - 1,784 -
Extraordinary charge due to early retirement
of debt, net of income taxes of $269. . . . . . . . . - (499) -
-------- -------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 17,659 $ 10,040 $ 15,425
======== ======== ========
Earnings per share - basic and diluted. . . . . . . . . $ 1.00 $ 0.63 $ 1.06
Cash dividends paid per share . . . . . . . . . . . . . $ 0.863 $ 0.744 $ 0.700
Average common shares outstanding . . . . . . . . . . . 17,697 15,906 14,608
<FN>
The accompanying notes to the consolidated financial statements are an integral part
of these statements.
</TABLE>
Page 40
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C>
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 17,659 $ 10,040 $ 15,425
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization . . . . . . . . . . . . 20,006 15,349 12,877
Extraordinary charge. . . . . . . . . . . . . . . . . - 499 -
Divestiture of energy marketing business. . . . . . . (1,122) - -
Divestiture of NOARK investment . . . . . . . . . . . - (5,048) (7,730)
Changes in assets and liabilities, net of effects
of acquisitions, divestitures and other changes
as shown below:. . . . . . . . . . . . . . . . . . 4,661 3,848 (11,603)
--------- -------- --------
Net cash from operating activities . . . . . . . . . . . $ 41,204 $ 24,688 $ 8,969
--------- -------- --------
Cash flows from investing activities
Property additions - gas distribution. . . . . . . . . . $ (22,761) $(23,029) $(28,201)
Property additions - diversified businesses. . . . . . . (12,258) (2,246) (1,272)
Proceeds from property sales, net of retirement costs. . 1,657 871 373
Proceeds from business divestiture . . . . . . . . . . . 6,579 - -
Acquisitions of businesses, net of cash acquired . . . . (300,638) 26 (15,117)
Advances to equity investees . . . . . . . . . . . . . . - (4,284) (3,308)
--------- -------- --------
Net cash from investing activities . . . . . . . . . . . $(327,421) $(28,662) $(47,525)
--------- -------- --------
Cash flows from financing activities
Issuance of common stock, net of expenses. . . . . . . . $ 6,110 $ 32,570 $ 5,874
Repurchase of common stock and related expenses. . . . . (2,384) - (3,071)
Repurchase of preferred stock. . . . . . . . . . . . . . (3,281) - -
Net cash change in notes payable . . . . . . . . . . . . 302,347 (20,561) (19,976)
Issuance of long-term debt, net of expenses. . . . . . . - 29,390 60,000
Repayment of long-term debt and related expenses . . . . - (24,503) (25)
Payment of dividends . . . . . . . . . . . . . . . . . . (15,442) (12,029) (10,419)
--------- -------- --------
Net cash from financing activities . . . . . . . . . . . $ 287,350 $ 4,867 $ 32,383
--------- -------- --------
Cash and temporary cash investments
Net increase (decrease). . . . . . . . . . . . . . . . . $ 1,133 $ 893 $ (6,173)
Beginning of year. . . . . . . . . . . . . . . . . . . . 4,953 4,060 10,233
--------- -------- --------
End of year. . . . . . . . . . . . . . . . . . . . . . . $ 6,086 $ 4,953 $ 4,060
========= ======== ========
Changes in assets and liabilities, net of effects
of acquisitions, divestitures and other changes:
Receivables, net. . . . . . . . . . . . . . . . . . . $ (39,488) $ 21,095 $ (3,836)
Accrued revenue . . . . . . . . . . . . . . . . . . . 13,497 6,083 9,551
Materials, supplies and gas in underground storage. . 23,349 (1,710) (3,175)
Gas charges recoverable from customers. . . . . . . . 8,547 8,375 (6,140)
Accounts payable. . . . . . . . . . . . . . . . . . . (2,143) (24,449) (20,439)
Customer advances and amounts payable to customers. . 4,189 1,594 (2,263)
Deferred taxes and investment tax credit. . . . . . . 1,651 1,832 6,388
Other . . . . . . . . . . . . . . . . . . . . . . . . (4,941) (8,972) 8,311
--------- -------- --------
$ 4,661 $ 3,848 $(11,603)
========= ======== ========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of
these statements.
</TABLE>
Page 41
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At December 31, 1999 1998
- -----------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Current assets
Cash and temporary cash investments, at cost. . . $ 6,086 $ 4,953
Receivables, less allowances of $1,080 and $632 . 79,587 31,003
Accrued revenue . . . . . . . . . . . . . . . . . 25,380 60,915
Prepaid expenses. . . . . . . . . . . . . . . . . 14,231 6,732
Gas in underground storage. . . . . . . . . . . . 11,723 38,526
Materials and supplies, at average cost . . . . . 6,146 2,191
Gas charges recoverable from customers. . . . . . 3,009 11,556
Accumulated deferred income taxes . . . . . . . . 3,528 -
Other . . . . . . . . . . . . . . . . . . . . . . 844 7,174
-------- --------
$150,534 $163,050
-------- --------
Property, plant and equipment
Gas distribution. . . . . . . . . . . . . . . . . $542,505 $356,194
Diversified businesses. . . . . . . . . . . . . . 61,434 43,857
-------- --------
$603,939 $400,051
Less - accumulated depreciation . . . . . . . . . 129,593 114,975
-------- --------
$474,346 $285,076
-------- --------
Deferred charges and other assets
Goodwill, less amortization of $5,052 and $3,459. $162,691 $ 15,345
Unamortized debt expense. . . . . . . . . . . . . 7,644 5,619
Deferred retiree medical benefits . . . . . . . . 11,689 12,588
Other . . . . . . . . . . . . . . . . . . . . . . 8,279 7,984
-------- --------
$190,303 $ 41,536
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . . $815,183 $489,662
======== ========
Current liabilities
Notes payable . . . . . . . . . . . . . . . . . . $376,629 $ 63,576
Accounts payable. . . . . . . . . . . . . . . . . 35,725 57,498
Customer advance payments . . . . . . . . . . . . 13,885 10,417
Accrued interest. . . . . . . . . . . . . . . . . 4,527 1,935
Amounts payable to customers. . . . . . . . . . . 5,715 -
Accumulated deferred income taxes . . . . . . . . - 2,344
Other . . . . . . . . . . . . . . . . . . . . . . 11,701 7,270
-------- --------
$448,182 $143,040
-------- --------
Deferred credits and other liabilities
Accumulated deferred income taxes . . . . . . . . $ 25,774 $ 17,985
Unamortized investment tax credit . . . . . . . . 1,980 2,247
Customer advances for construction. . . . . . . . 15,045 3,147
Other . . . . . . . . . . . . . . . . . . . . . . 11,862 17,760
-------- --------
$ 54,661 $ 41,139
-------- --------
Capitalization
Long-term debt. . . . . . . . . . . . . . . . . . $170,000 $170,000
Cumulative preferred stock of subsidiary. . . . . - 3,100
Cumulative convertible preferred stock. . . . . . - 155
Common shareholders' equity . . . . . . . . . . . 142,340 132,228
-------- --------
$312,340 $305,483
-------- --------
Total liabilities and capitalization. . . . . . . . $815,183 $489,662
======== ========
<FN>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
</TABLE>
Page 42
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1999 1998
- -----------------------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C>
Long-term debt
6.83% notes due 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000 $ 30,000
8.00% notes due 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 55,000
7.20% notes due 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 30,000
8.32% notes due 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
6.50% medium-term notes due 2005. . . . . . . . . . . . . . . . . . . . . 15,000 15,000
6.40% medium-term notes due 2008. . . . . . . . . . . . . . . . . . . . . 5,000 5,000
7.03% medium-term notes due 2013. . . . . . . . . . . . . . . . . . . . . 10,000 10,000
-------- --------
$170,000 $170,000
-------- --------
Cumulative preferred stock of subsidiary
100 par value (callable at option of subsidiary)
6.0% series A-authorized 15,000 shares; 0 and 15,000 shares outstanding . $ - $ 1,500
5.5% series B-authorized 10,000 shares; 0 and 10,000 shares outstanding . - 1,000
5.5% series C-authorized 5,000 shares; 0 and 4,000 outstanding. . . . . . - 400
5.5% series D-authorized 2,000 shares; 0 and 2,000 outstanding. . . . . . - 200
-------- --------
$ - $ 3,100
-------- --------
Cumulative convertible preferred stock
Convertible preferred stock - par value $1 per share;
authorized 500,000 shares issuable in series;
0 and 6,218 shares outstanding. . . . . . . . . . . . . . . . . . . . . $ - $ 6
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 149
-------- --------
$ - $ 155
-------- --------
Common shareholders' equity
Common stock, par value $1 per share-authorized 40,000,000 shares;
17,908,616 and 17,382,229 shares outstanding. . . . . . . . . . . . . . $ 17,909 $ 17,382
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,861 116,663
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . 570 (1,817)
-------- --------
$142,340 $132,228
-------- --------
Total capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . $312,340 $305,483
======== ========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
</TABLE>
Page 43
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C>
Cumulative convertible preferred stock
Beginning of year . . . . . . . . . . . . . . . . . . . $ 6 $ 7 $ 7
Conversion and repurchase of preferred stock . . . . (6) (1) -
-------- -------- --------
End of year . . . . . . . . . . . . . . . . . . . . . . $ - $ 6 $ 7
======== ======== ========
Cumulative convertible preferred stock capital surplus
Beginning of year . . . . . . . . . . . . . . . . . . . $ 149 $ 162 $ 162
Conversion and repurchase of preferred stock . . . . (149) (13) -
-------- -------- --------
End of year . . . . . . . . . . . . . . . . . . . . . . $ - $ 149 $ 162
======== ======== ========
Common stock
Beginning of year . . . . . . . . . . . . . . . . . . . $ 17,382 $ 14,066 $ 13,221
5% stock dividends in May 1998 and May 1997. . . . . - 726 661
Issuance of common stock for acquisitions,
the DRIP and other. . . . . . . . . . . . . . . . 686 770 346
Issuance of common stock through public offering . . - 1,820 -
Repurchase of common stock . . . . . . . . . . . . . (159) - (162)
-------- -------- --------
End of year . . . . . . . . . . . . . . . . . . . . . . $ 17,909 $ 17,382 $ 14,066
======== ======== ========
Common stock capital surplus
Beginning of year . . . . . . . . . . . . . . . . . . . $116,663 $ 81,086 $ 78,678
5% stock dividends in May 1998 and May 1997. . . . . - (726) (661)
Issuance of common stock for acquisitions,
the DRIP and other. . . . . . . . . . . . . . . . 9,423 12,243 5,978
Issuance of common stock through public offering . . - 24,060 -
Repurchase of common stock . . . . . . . . . . . . . (2,225) - (2,909)
-------- -------- --------
End of year . . . . . . . . . . . . . . . . . . . . . . $123,861 $116,663 $ 81,086
======== ======== ========
Retained earnings (deficit)
Beginning of year . . . . . . . . . . . . . . . . . . . $ (1,817) $ (21) $ (5,221)
Net income . . . . . . . . . . . . . . . . . . . . . 17,659 10,040 15,425
Cash dividends on common stock . . . . . . . . . . . (15,272) (11,836) (10,225)
-------- -------- --------
End of year . . . . . . . . . . . . . . . . . . . . . . $ 570 $ (1,817) $ (21)
======== ======== ========
<FN>
The accompanying notes to the consolidated financial statements are an integral part of
these statements.
</TABLE>
Page 44
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
COMPANY DESCRIPTION - SEMCO Energy, Inc., is an investor-owned holding company.
SEMCO Energy, Inc. and its subsidiaries (the "Company") operate four business
segments: (1) gas distribution; (2) pipeline 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 business 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 Alaska-based
operation and the Michigan-based operation are known together as the "Gas
Distribution Business" and operate as divisions of SEMCO Energy, Inc. SEMCO
Energy Gas Company, which had conducted the Michigan gas distribution operation,
was merged into SEMCO Energy, Inc. on December 31, 1999. The pipeline
construction services segment ("Construction Services") currently does business
in the mid-western and southeastern areas of the United States. In addition to
constructing underground gas pipelines, Construction Services is expanding its
underground construction services into other industries such as
telecommunications and water supply. The engineering services segment
("Engineering Services") 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 ("Energy Services")
effective March 31, 1999.
BASIS OF PRESENTATION - The financial statements of the Company were prepared in
conformity with generally accepted accounting principles. In connection with the
preparation of the financial statements, management was required 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.
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1999 presentation.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of SEMCO Energy, Inc. and its wholly-owned subsidiaries. Investments in
unconsolidated companies at least 20% owned, but not greater than 50% owned, are
reported using the equity method of accounting.
Certain of the Company's diversified businesses, primarily Construction
Services and Engineering Services, supply services at a profit to the Company's
regulated gas distribution business. In these situations, intercompany profits
remaining in the assets of the regulated business at a particular date are not
eliminated since it is probable that, through the ratemaking process, the cost
will be recovered through future revenue. As a result, $400,690, $595,000 and
$437,000 of profit on revenues earned from the Company's regulated business by
the Company's diversified businesses was not eliminated during consolidation in
1999, 1998 and 1997, respectively. All other significant intercompany
transactions have been eliminated.
RATE REGULATION - The rates of gas distribution customers located in the City of
Battle Creek, Michigan and surrounding communities are subject to the
jurisdiction of the City Commission of Battle Creek. The Michigan Public Service
Commission ("MPSC") authorizes the rates charged to all of the remaining
Michigan customers. The gas distribution operation in Alaska is subject to
regulation by the Regulatory Commission of Alaska ("RCA") which has jurisdiction
over, among other things, rates, accounting procedures, and standards of
service.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION - The Company's property, plant and
equipment ("property") is recorded at cost. The Company provides for
depreciation on a straight-line basis over the estimated useful lives of the
related property. The ratio of depreciation to the average balance of property
approximated 4.0%, 3.9% and 3.6% for the years 1999, 1998 and 1997,
respectively. Certain investments in unconsolidated companies recorded using the
equity method are reported in the property of the diversified businesses. See
Note 13 for further discussion.
GAS IN UNDERGROUND STORAGE - The gas inventory held by the Battle Creek division
of the Gas Distribution Business is stated at last-in, first-out ("LIFO") cost.
At December 31, 1999 and 1998, the replacement cost of the Battle Creek
division's gas
Page 45
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
inventory did not exceed the LIFO cost. The remainder of gas inventory in
Michigan is reported at average cost.
In general, commodity costs and variable transportation costs are
capitalized as gas in underground storage. Fixed costs, primarily pipeline
demand charges and storage charges, are expensed as incurred through cost of
gas.
GOODWILL - Goodwill represents the excess of purchase price and related costs
over the value assigned to the net tangible assets of businesses acquired.
Goodwill is amortized on a straight-line basis over periods of up to 40 years.
Periodically, the Company reviews the recoverability of goodwill. The
measurement of possible impairment is based primarily on the ability to recover
the balance of the goodwill from expected future operating cash flows on an
undiscounted basis. In management's opinion, no impairment existed at December
31, 1999. Amortization expense was $1,593,121 in 1999, $515,444 in 1998, and
$339,347 in 1997. Amortization expense in 1999 included two months of
amortization attributable to the acquisition of the Alaska-based gas
distribution operation. See Note 3 for further discussion.
REVENUE RECOGNITION - The Gas Distribution Business bills monthly on a cycle
basis and follows the industry practice of recognizing accrued revenue for gas
services rendered to its customers but not billed at month end. Engineering
Services and Construction Services recognize revenues as services are rendered
and recognize accrued revenue for services rendered but not billed at month end.
The propane business recognizes propane sales in the same period that the
propane is delivered to customers. Prior to its sale, Energy Services recognized
marketing revenues, and any related hedging gains or losses, in the same period
natural gas was delivered to customers. See Note 8 for further discussion about
Energy Services' hedging activities.
COST OF GAS - Prior to April 1, 1999, the Company's Michigan-based gas
distribution operation had a regulator approved gas cost recovery ("GCR")
mechanism for the geographic areas subject to the regulatory jurisdiction of the
MPSC, and a purchased gas adjustment ("PGA") mechanism for the geographic areas
subject to the jurisdiction of the City Commission of Battle Creek, which
allowed for the adjustment of rates charged to customers in response to
increases and decreases in the cost of gas purchased. Effective April 1, 1999,
the MPSC authorized the Company to suspend its GCR clause and freeze for three
years in its base rates a gas charge of $3.24 per Mcf. The GCR freeze and new
rates generally extend through March 2002. As a result of the GCR suspension,
customer rates in Michigan will not be adjusted during the three year period.
See Note 2 for more information.
The Alaska-based gas distribution operation also has a regulator approved
PGA mechanism which allows for the adjustment of rates charged to customers for
increases and decreases in the cost of gas purchased. All gas sales rates are
adjusted annually to reflect changes in the operation's cost of purchased gas
based on estimated costs for the upcoming
12-month period. The PGA may be adjusted quarterly if it is determined that
there are significant variances from the estimates used in the annual
determination. Any difference between actual cost of gas purchased and the RCA's
approved rate adjustment is deferred and included with applicable carrying
charges in the next PGA.
In accordance with the GCR and PGA mechanisms, the Company had $3,009,000
recorded in current assets at December 31, 1999 for gas charges recoverable from
customers. Also at December 31, 1999, the Company had $5,715,000 recorded in
current liabilities for amounts payable to customers in accordance with these
mechanisms.
INCOME TAXES - Investment tax credits ("ITC") utilized in prior years for income
tax purposes are deferred for financial accounting purposes and are amortized
through credits to the income tax provision over the lives of the related
property. The Company files a consolidated federal income tax return and income
taxes are allocated among the subsidiaries within each business segment based on
their separate taxable income.
EXTRAORDINARY CHARGE - During 1998, the Company redeemed all of its outstanding
8.625% debentures due April 15, 2017 at a redemption price of 104% of the
principle amount of $23,548,000. The payment of the call premium and the
unamortized debt expense associated with the diversified businesses of the
Company is reflected in the consolidated statement of income for 1998 as an
extraordinary charge of $499,000 after-tax.
CHANGE IN METHOD OF ACCOUNTING - During 1998, the Company implemented a change
in its method of accounting for property taxes so that such taxes are expensed
monthly during the fiscal period of the taxing authority for which the taxes are
levied. This change provides a better matching of property tax expense with both
the payment of services and those services provided by the taxing authority.
Prior to 1998, the Company expensed property taxes monthly during the year
following the assessment date. The cumulative effect of this change in
accounting for property taxes increased 1998 earnings by $1,784,000 after-tax.
The pro forma effect on prior years' consolidated net income of retroactively
recording property taxes as if the new method of accounting had been in effect
for all periods presented is not material.
Page 46
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
STATEMENTS OF CASH FLOWS - For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash and temporary cash
investments. Supplemental cash flow information for the years ended December 31,
1999, 1998 and 1997, is summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . $ 16,686 $14,423 $11,949
Income taxes, net of refunds. . . . . . . . . $ 7,479 $ 2,100 $ 3,153
Non-cash investing and financing activities:
Capital stock issued for acquisitions . . . . $ 3,699 $ 6,309 (a) $ 450
Deferred payments for acquisitions. . . . . . $ 805 $ - $ -
Property purchased under capital leases . . . $ - $ - $ 360
Capital leases amortized and retired. . . . . $ - $ - $ 4,899
Details of acquisitions:
Fair value of assets acquired . . . . . . . . $346,103 $10,301 $22,464
Fair value of liabilities assumed . . . . . . (37,250) (3,992) (6,330)
Deferred payments . . . . . . . . . . . . . . (805) - -
Company stock issued. . . . . . . . . . . . . (3,699) (6,309) (450)
-------- ------- -------
Cash paid . . . . . . . . . . . . . . . . . . $304,349 $ - $15,684
Less cash acquired. . . . . . . . . . . . . . 3,711 26 567
-------- ------- -------
Net cash paid for (acquired via) acquisitions $300,638 $ (26) $15,117
======== ======= =======
<FN>
(a) Does not include $14,073 of Company stock issued for the acquisition of
Oilfield Materials Consultants, Inc. because the acquisition was accounted for
as a pooling of interests. Refer to Note 3 for more information.
</TABLE>
2. REGULATORY MATTERS
1999 RCA ORDER - In July 1999, the Company announced that it had signed a
definitive purchase and sale agreement to acquire the assets and certain
liabilities of ENSTAR Natural Gas Company and the outstanding stock of Alaska
Pipeline Company (together known as "ENSTAR") from Ocean Energy, Inc ("Ocean
Energy"). In October 1999, the Company received an order from the RCA approving
a joint application for the transfer of the Certificate of Public Convenience
and Necessity held by ENSTAR Natural Gas Company and for a transfer of
controlling interest in Alaska Pipeline Company. The RCA's order contained
certain conditions, including the obligation to file by July 1, 2000 certain
revenue requirement and cost of service information and the prohibition from
encumbering ENSTAR's assets for financing of non-utility business activities.
1998 MPSC ORDER - In September 1998, the division of the Gas Distribution
Business subject to the jurisdiction of the MPSC received authority from the
MPSC to: (1) implement an experimental residential gas customer choice program;
(2) suspend its GCR clause; (3) roll into its base rates and freeze for three
years a gas charge of $3.24 per thousand cubic feet ("Mcf"); (4) freeze
distribution rate adjustments for the same three year period, with exceptions;
(5) suspend the income sharing mechanism adopted in October 1997 and adopt a new
income sharing mechanism for use during the 1999, 2000 and 2001 calendar years;
and (6) establish gas service performance criteria. The new rates took effect in
April 1999 and generally extend through March 2002.
Under the experimental residential gas customer-choice program and a
similar program in Battle Creek, up to approximately 8,300 residential customers
per year will be allowed to choose their own gas supplier during the three year
period that began April 1, 1999. As a result, up to 25,000 residential
customers, 10% of the Michigan residential customer base, will be allowed to
choose their own gas supplier by the third year of the programs. The
customer-choice gas is delivered
Page 47
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
under a tariff similar to an existing tariff used to provide such service to
Commercial and industrial customers. The program has not, and is not expected
to, significantly affect the income of the Gas Distribution Business because the
approved rates for transportation service are designed to recover all costs
other than the cost of gas and provide a return in approximately the same
amounts as from Michigan residential customers for whom the Company is the
natural gas supplier.
Several of the changes in the MPSC order are interrelated. The $3.24 gas
charge represents a reduction of approximately $.33 per Mcf from the rates prior
to April 1999. The suspension of the GCR clause means that customers will pay
$3.24 per Mcf regardless of the Company's actual cost of gas. The Gas
Distribution Business was able to offer this Michigan GCR suspension and rate
freeze mainly as a result of agreements reached with TransCanada Gas Services,
Inc. ("TransCanada"). Under 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 at a cost below the $3.24 price
charged to customers. As a result, the Michigan gas distribution operation
retains the sales margin on the sale of gas, subject to a customer profit
sharing mechanism described below. Included in receivables at December 31, 1999
is approximately $38 million representing amounts ultimately due the Company
under the terms of the TransCanada agreements. Under the agreements, the Company
does not have title to gas in its leased storage facilities and it must remit
payments to TransCanada in accordance with a contractual delivery schedule that
is designed to include the gas delivered to the leased storage facilities.
Differences between these scheduled deliveries and actual deliveries to the
Company's distribution system or Company-owned storage facilities result in an
amount due the Company. This amount is settled between TransCanada and the
Company after each anniversary date (April 1) of the agreements.
The MPSC order is applicable only in the geographic areas subject to the
regulatory jurisdiction of the MPSC, and, therefore, does not govern rates
regulated by the City of Battle Creek, Michigan. However, the Gas Distribution
Business voluntarily reduced its Battle Creek gas charge to the $3.24 level to
correspond with its gas charge under the MPSC order.
There are two exceptions to the three year distribution rate freeze: first,
the profit incentive and sharing mechanism described in the following paragraph,
and second, rate revisions arising in response to unanticipated legislative or
accounting actions.
The new profit incentive and sharing mechanism substantially matches
mechanisms approved by the MPSC for two other major natural gas utilities in
Michigan and provides for a higher threshold than was previously applicable
(i.e. 12.75% return on equity). Under the mechanism, if the Company's return on
equity for its Michigan-based natural gas distribution business exceeds 12.75%,
amounts equal to 50% of the excess return between 12.76% and 16.75%, plus
amounts equal to 75% of the excess over 16.75% would be credited to customers,
i.e., would be reflected prospectively in reduced rates. Four safety and
reliability performance measures need to be met in order not to reduce the
return on equity threshold used in the income sharing mechanism.
1997 GENERAL RATE CASE - In October 1997, the MPSC approved the merger of the
Company's two MPCS regulated gas distribution subsidiaries, Southeastern
Michigan Gas Company and Michigan Gas Company, in a general rate case. The
approval of the merger allowed the Company to combine the rate structures, GCR
clauses, tariffs, and rules and regulations for those two companies. It
additionally granted a rate increase to the combined companies, which included
the recovery of costs related to a change in accounting for retiree medical
benefits. There were also adjustments to other fees and rates as a result of the
rate case. Overall, the adjustments offset one another and the rate case did not
have a material impact on the Company's results of operations. The MPSC also
granted the Company the ability to offer its commercial and industrial customers
the option to aggregate their demand for gas into a pool and choose a supplier.
Finally, the MPSC approved an incentive regulation, where profits generated in
excess of the authorized rate of return would be shared with the customers. As
discussed previously, a 1998 MPSC order suspended this incentive regulation and
adopted a new profit incentive and sharing mechanism for use during the 1999,
2000 and 2001 calendar years.
REGULATORY ASSETS AND LIABILITIES - The Gas Distribution Business is subject to
the provisions of Statements of Financial Accounting Standards ("SFAS") 71,
"Accounting for the Effects of Certain Types of Regulation." As a result, the
actions of regulators affect when revenues and expenses are recognized.
Regulatory assets represent incurred costs to be recovered from customers
through the ratemaking process. Regulatory liabilities represent benefits to be
refunded to customers. The following regulatory assets and liabilities were
recorded in the consolidated statements of financial position as of December 31
(in thousands of dollars):
Page 48
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Regulatory assets
Deferred retiree medical benefits. . . . . . . . . . $11,689 $12,588
Gas charges recoverable from customers . . . . . . . 3,009 11,556
Unamortized loss on retirement of debt . . . . . . . 2,664 2,862
Other. . . . . . . . . . . . . . . . . . . . . . . . 2,028 1,827
------- -------
$19,390 $28,833
======= =======
Regulatory liabilities
Unamortized investment tax credit. . . . . . . . . . $ 2,323 $ 2,687
Tax benefits amortizable to customers. . . . . . . . 4,222 4,179
Amounts payable to customers (gas cost overrecovery) 5,715 -
------- -------
$12,260 $ 6,866
======= =======
</TABLE>
In the event the Company determines that the Gas Distribution Business no
longer meets the criteria for following SFAS 71, the accounting impact would be
an extraordinary, non-cash charge to operations of an amount that could be
material. Criteria that give rise to the discontinuance of SFAS 71 include (1)
increasing competition that restricts the ability of the Gas Distribution
Business to establish prices to recover specific costs, and (2) a significant
change in the manner in which rates are set by regulators from cost-based
regulation to another form of regulation. The Company's periodic review of these
criteria currently supports the continuing application of SFAS 71.
3. MERGERS AND ACQUISITIONS
ENSTAR ACQUISITION AND 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. The Company acquired ENSTAR
from Ocean Energy for approximately $290,000,000 in cash, which included
adjustments for working capital and the purchase of $58,700,000 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 amount of purchase price in excess of these estimated fair
values classified as goodwill. The goodwill was approximately $134,400,000 and
is being amortized on a straight-line basis over 40 years. The preliminary
allocation of the purchase price is subject to adjustment based on the results
of an independent study being conducted to determine actual fair values.
However, the Company believes that the preliminary determination of fair values
reasonably present the significant effects of the acquisition of ENSTAR.
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, 1998, 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 assumed public issuance of $170,000,000 of
medium-term notes, $35,000,000 of trust preferred securities and 7,084,000
shares of common stock of the Company producing net proceeds of approximately
$85,000,000 and the resulting adjustments to interest expense from these
issuances (the "Financing Transactions"). The Financing Transactions represent
the Company's current expectations regarding permanent financing for the ENSTAR
acquisition. The net proceeds from the Financing Transactions will be used
primarily to retire a $290,000,000 bridge loan facility of the Company which was
used to finance the ENSTAR acquisition.
The pro forma amounts do not reflect any potential cost savings or
operating synergies that may be realized following the acquisition of ENSTAR.
Page 49
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Actual Pro Forma
Years Ended December 31, 1999 1998 1999 1998
- ---------------------------------------------------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Operating revenue . . . . . . . . . . . $384,763 $ 637,485 $461,705 $731,077
Consolidated net income . . . . . . . . 17,659 10,040 19,707 12,943
Basic and diluted earnings per share. . 1.00 0.63 0.80 0.56
</TABLE>
DIVERSIFIED BUSINESS ACQUISITIONS - The Company has expanded in recent years
with several diversified business acquisitions:
<TABLE>
<CAPTION>
Company Business Segment Acquisition Date
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Sub-Surface Construction Co. ("Sub-Surface") . Construction Services August 1997
Maverick Pipeline Services, Inc. ("Maverick"). Engineering Services December 1997
Hotflame Gas, Inc. ("Hotflame"). . . . . . . . Propane, Pipeline & Storage March 1998
King Energy and Construction Co. ("King"). . . Construction Services May 1998
Oilfield Materials Consultants, Inc. ("OMC") . Engineering Services November 1998
K&B Construction, Inc. ("K&B") . . . . . . . . Construction Services February 1999
Iowa Pipeline Associates, Inc. ("Iowa"). . . . Construction Services April 1999
Flint Construction Co. ("Flint") . . . . . . . Construction Services September 1999
Long's Underground Technologies, Inc. ("Long") Construction Services September 1999
Drafting Services, Inc. ("DSI"). . . . . . . . Engineering Services September 1999
Pinpoint Locators, Inc. ("Pinpoint") . . . . . Engineering Services October 1999
</TABLE>
The acquisition of OMC was accounted for under the pooling of interests
accounting method, and accordingly, the consolidated financial statements for
the periods prior to the merger were restated to include the financial results
of OMC. For the periods preceding the merger of the Company and OMC, there were
no intercompany transactions which required elimination from the combined
results of operations and there were no adjustments necessary to conform the
accounting practices of the two companies.
The remainder of the diversified business acquisitions have been accounted
for using the purchase method of accounting. As a result, the Company's
operating results for 1999, 1998, and 1997 include the results of these
businesses for the period subsequent to their acquisition dates. Any goodwill
associated with these acquisitions is being amortized on a straight line method
over a period of up to 40 years. There were no adjustments necessary to the
accounting practices of these companies to conform with the practices of the
Company.
<TABLE>
<CAPTION>
Consideration issued to the prior
owners of the acquired businesses
---------------------------------
Common
shares of the Deferred
Company Cash Company Payments
- -------------- ------- ------------- ---------
(in thousands)
<S> <C> <C> <C>
Sub-Surface. . $15,634 - $ -
Maverick . . . 50 26 -
Hotflame . . . - 353 -
King . . . . . - 18 -
OMC. . . . . . - 905 -
K&B. . . . . . 1,000 - 805
Iowa . . . . . - 138 -
Flint. . . . . 6,500 - -
Long . . . . . 1,889 108 -
DSI. . . . . . 1,000 - -
Pinpoint . . . 154 - -
</TABLE>
Page 50
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
In addition to the consideration shown above, the acquisition of
Sub-Surface included non-compete agreements requiring payments of $235,000 per
year during the two years following the acquisition and $160,000 per year during
the third through fifth year following the acquisition. The Hotflame acquisition
also included non-compete agreements requiring payments of approximately $67,000
per year during the three years following the acquistion. In addition to the
consideration shown above, the acquisitions of K&B and Pinpoint provide for
additional amounts to be paid if certain post-acquisition operating results are
achieved. See Note 14 for further information.
4. INCOME TAXES
SFAS NO. 109 - The Company accounts for income taxes in accordance with SFAS
109, "Accounting For Income Taxes." SFAS 109 requires an annual measurement of
deferred tax assets and deferred tax liabilities based upon the estimated future
tax effects of temporary differences and carry forwards.
PROVISION FOR INCOME TAXES - The components of the provision for income taxes
are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes:
Currently payable . . . . . . . . . . . . . . . . $5,356 $5,511 $2,259
Deferred to future periods. . . . . . . . . . . . 1,529 1,767 6,477
Investment tax credits ("ITC"). . . . . . . . . . (267) (267) (267)
State income taxes:
Currently payable . . . . . . . . . . . . . . . . 466 - -
Deferred to future periods. . . . . . . . . . . . (72) - -
------ ------ ------
Total income taxes. . . . . . . . . . . . . . . . . $7,012 $7,011 $8,469
Less amounts included in:
Cumulative effect of change in accounting method. - 960 -
Extraordinary charge. . . . . . . . . . . . . . . - (269) -
------ ------ ------
Income taxes, excluding amounts shown separately. . $7,012 $6,320 $8,469
====== ====== ======
</TABLE>
RECONCILIATION OF STATUTORY RATE TO EFFECTIVE RATE - A reconciliation of the
difference between the Company's provision for income taxes and income taxes
computed at the statutory rate follows (in thousands of dollars):
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net income . . . . . . . . . . . . . . . $17,659 $10,040 $15,425
Add back:
Preferred dividends. . . . . . . . . . 325 193 194
Income taxes . . . . . . . . . . . . . 7,012 7,011 8,469
------- ------- -------
Pre-tax income . . . . . . . . . . . . . $24,996 $17,244 $24,088
------- ------- -------
Computed federal income taxes. . . . . . $ 8,749 $ 6,035 $ 8,431
Amortization of deferred ITC . . . . . . (267) (267) (267)
Amortization of non-deductible amounts
resulting from acquisitions. . . . . . 221 216 216
State income tax expense, net of
federal tax benefit. . . . . . . . . . 256 - -
Other. . . . . . . . . . . . . . . . . . (1,947) 1,027 89
------- ------- -------
Total income taxes . . . . . . . . . . . $ 7,012 $ 7,011 $ 8,469
======= ======= =======
</TABLE>
DEFERRED INCOME TAXES - Deferred income taxes arise from temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements. At December 31, 1999 and 1998 there was no
Page 51
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
valuation allowance recorded against deferred tax assets. The principal
components of the Company's deferred tax assets (liabilities) were as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
At December 31, 1999 1998
- ---------------------------------------------------------------
<S> <C> <C>
Property . . . . . . . . . . . . . . . . . $(21,962) $(19,430)
Retiree medical benefit obligation . . . . 3,245 4,480
Retiree medical benefit regulatory assets. (4,091) (4,406)
Gas in underground storage . . . . . . . . 2,530 3,789
ITC. . . . . . . . . . . . . . . . . . . . 1,131 1,176
Unamortized debt expense . . . . . . . . . (1,275) (989)
Gas cost overrecovery (underrecovery). . . 846 (3,707)
Other. . . . . . . . . . . . . . . . . . . (2,670) (1,242)
-------- --------
Total deferred taxes . . . . . . . . . . . $(22,246) $(20,329)
======== ========
Gross deferred tax liabilities . . . . . . $(44,714) $(42,129)
Gross deferred tax assets. . . . . . . . . 22,468 21,800
-------- --------
Total deferred taxes . . . . . . . . . . . $(22,246) $(20,329)
======== ========
</TABLE>
5. CAPITALIZATION
REGISTRATION STATEMENT - In November 1999, the Company and SEMCO Capital Trust
I, SEMCO Capital Trust II and SEMCO Capital Trust III ("Capital Trusts") filed a
registration statement on Form S-3 ("1999 registration statement") with the
Securities and Exchange Commission 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 $500,000,000. The $500,000,000 registered in
the 1999 registration statement includes an aggregate principal amount of
$142,400,000 of unsold securities registered by the Company on a registration
statement declared effective in July 1998.
COMMON STOCK EQUITY - The Company issued 374,000 shares, 367,000 shares and
298,000 shares of it common stock in 1999, 1998 and 1997, respectively, to meet
the dividend reinvestment and stock purchase requirements of the Company's
Direct Stock Purchase and Dividend Reinvestment Plan ("DRIP"). Since May 1999
the Company purchased 159,000 shares of its common stock on the open market to
offset the number of shares sold through the DRIP during the same period. The
Company also purchased 162,000 shares of its common stock on the open market in
1997.
The Company issued 246,000 shares, 1,276,000 shares and 26,000 shares of
its common stock to the shareholders of businesses acquired during 1999, 1998
and 1997, respectively. Of the shares issued in 1998, 905,000 were for the
acquisition of OMC which was accounted for using the pooling of interests method
of accounting. See Note 3 of the Notes to the Consolidated Financial Statements
for more information on the OMC acquisition.
The Company contributed 44,000 and 30,000 shares of Company common stock to
one of the Company's 401(k) plans in 1999 and 1998, respectively.
In August 1998, the Company sold 1,820,000 shares of its common stock in a
public offering. The proceeds of the offering were $26,153,000 after
underwriting discounts but before expenses. The Company used the net proceeds
from the stock issuance to repay short-term debt and for general corporate
purposes.
The Company issued five percent stock dividends in May 1998 and May 1997.
Earnings per share of common stock, cash dividends per share of common stock and
average number of common shares outstanding were restated to reflect the stock
dividends.
CUMULATIVE CONVERTIBLE PREFERRED STOCK - In November 1999, the Company called
for redemption all outstanding shares of its $2.3125, Series A Convertible
Cumulative Preferred Stock. Holders of the 6,168 outstanding shares of $2.3125,
Series A Convertible Cumulative Preferred Stock had the option of receiving $25
in cash for each share redeemed or converting each
Page 52
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
share into 4.11 shares of the Company's common stock. 1,055 shares were redeemed
for cash and 5,113 shares were converted to common stock.
There were 6,218 shares of the Company's $2.3125 cumulative convertible
preferred shares outstanding at December 31, 1998.
CUMULATIVE PREFERRED STOCK OF SUBSIDIARY - In November 1999, the Company
redeemed all outstanding shares of the Series A, B, C, and D Cumulative
Preferred Stock of its subsidiary, SEMCO Energy Gas Company. The Company paid
cash of $105 per share to holders of the 31,000 outstanding shares of Series A,
B, C, and D Cumulative Preferred Stock. A premium of $155,000 was paid as part
of the redemption of the Cumulative Preferred Stock and is reflected in
dividends on preferred stock in the Consolidated Statement of Income for 1999.
LONG-TERM DEBT - In April 1998, the Company redeemed all of its outstanding
8.625% debentures due April 15, 2017 at a redemption price of 104% of the
principle amount of $23,548,000. The redemption was accomplished using
short-term debt. Later in 1998, the Company issued $30,000,000 of medium-term
notes with interest rates ranging from 6.40% to 7.03%. In 1997, the Company
issued $60,000,000 of notes, half of which had an interest rate of 6.83% and the
other half of which had an interest rate of 7.2%. The net proceeds from the
issuance of the notes were used to repay short-term debt and for general
corporate purposes.
The Company has long-term and short-term debt arrangements which contain
restrictive financial covenants including, among others, limits on the payment
of dividends beyond certain levels. The Company is currently in compliance with
all of the covenants in these agreements.
There are no annual maturities or sinking fund requirements for the
Company's existing debt over the next five years, except for the maturity of
$30,000,000 of 6.83% notes in 2002 and $55,000,000 of 8.0% notes due in 2004.
6. SHORT-TERM BORROWINGS
The Company maintains unsecured lines of credit at two banks totaling
$110,000,000. The outstanding balances owed by the Company on these lines of
credit at December 31, 1999, 1998 and 1997 were $84,600,000, $59,800,000, and
$71,000,000, respectively. Interest on all such lines are at variable rates,
which do not exceed the banks' prime lending rates. These arrangements are set
to expire during 2000 and the Company expects they will be renegotiated at
comparable terms. In addition, the Company has a $290,000,000 short-term
unsecured bridge loan which was used to acquire ENSTAR. The
interest rate on the bridge loan can range from 100 to 150 basis points above
the London Interbank Offered Rate ("LIBOR"). The bridge loan matures on October
30, 2000. Payments of $56,000,000 will be required on the six and nine month
anniversaries of the funding date (November 1, 1999) if the bridge loan is not
prepaid prior to such dates. The Company
also has a note payable in connection with the sale of its investment in the
NOARK Pipeline System Partnership ("NOARK") (see Note 15).
Information regarding these borrowings for each of the last three years is
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Notes payable balance at year end . . . $376,629 $63,576 $71,406
Unused lines of credit at year end. . . $ 25,400 $50,200 $39,363
Average interest rate at year end . . . 7.1% 5.6% 6.4%
Maximum borrowings at any month-end . . $377,585 $78,668 $99,037
Average borrowings. . . . . . . . . . . $ 91,279 $49,418 $60,784
Weighted average cost of borrowings . . 6.5% 6.5% 6.2%
</TABLE>
Page 53
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS - The following methods and assumptions were used to
estimate the fair value of each significant class of financial instruments:
CASH, TEMPORARY CASH INVESTMENTS, ACCOUNTS RECEIVABLES, PAYABLES, AND NOTES
PAYABLE - The carrying amount approximates fair value because of the short
maturity of those instruments.
LONG-TERM DEBT - The fair values of the Company's long-term debt are estimated
based on quoted market prices for the same or similar issues or, where no market
quotes are available, based on discounted future cash flows using current
interest rates at which similar loans would be made to borrowers with similar
credit ratings and remaining maturities. Although the current fair value of the
long-term debt may differ from the current carrying amount, settlement of the
reported debt is generally not expected until maturity.
The estimated fair values of the Company's long-term debt as of December
31, 1999 and 1998 are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------
<S> <C> <C>
Long-term debt
Carrying amount . . $170,000 $170,000
Fair value. . . . . 167,972 187,737
</TABLE>
HEDGING ARRANGEMENTS - Refer to Note 8 for a description of hedging arrangements
and their fair values.
8. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
The Company's primary market risk arises from fluctuations in commodity prices
and interest rates. The Company manages this risk through the use of derivative
instruments and limits the use of such instruments to hedging activities. The
Company's risk management policy expressly prohibits the utilization of
derivatives for trading purposes. A derivative transaction is considered to be a
hedge if it meets the hedging criteria as outlined in SFAS 80, "Accounting for
Futures Contracts." Any changes in market value and gains and losses resulting
from settlements are deferred for these hedges until the hedged transaction is
complete. If a loss of correlation occurs in one of these derivative financial
instruments, such as (i) the market value of the hedge and (ii) the market price
ultimately received for the hedged item are significantly different, the open
hedge position would be marked to market and gains and losses would be
recognized in the statement of income currently. All derivative instruments are
marked to market on the date of their termination, consistent with the guidance
for hedge activities. If the Company did not use these derivative instruments,
its exposure to risk would be greater.
The Company is subject to interest rate risk in connection with the
issuance of variable and fixed-rate debt. In order to manage interest costs, the
Company uses interest rate swap agreements and exchanges fixed and variable-rate
interest payment obligations over the life of the agreements without exchange of
the underlying principal amounts. The notional amount of the Company's interest
rate swaps was $85,000,000 at December 31, 1999. The fair value of these
interest rate swaps at December 31, 1999 was approximately $2,720,000,
representing the net amount that the Company would receive if these agreements
were terminated on December 31, 1999.
The Company currently does not use derivative instruments to manage its
exposure to commodity price risk since all of the natural gas requirements of
the Company's Michigan gas distribution operations are covered under the
TransCanada supply arrangement and ENSTAR's natural gas requirements are
primarily covered by two long-term supply arrangements and an RCA-approved
commodity cost pass through mechanism to its customers.
Prior to the sale of Energy Services in March of 1999 (see Note 1), the
Company entered into sales commitments which extended up to 60 months into the
future. The Company also utilized derivative financial and commodity
instruments, including futures contracts, options and swaps, to reduce market
risk associated with fluctuations in the price of natural gas. As of December
31, 1998 the Company had approximately $14,990,000 of futures contracts with a
fair value of ($4,798,000), and $2,085,000 in commodity price swaps with a fair
value of ($654,000). The Company also had approximately $2,202,000 in
Page 54
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
net deferred gains, on contracts closed prior to December 31, 1998, related to
sales commitments in the following month. The deferred gains and losses on both
the open and closed contracts are included in other current assets.
The Company also hedged certain of its sales commitments with gas held in
storage. At December 31, 1998, the Company held approximately 3,829,000 Mcf in
storage with a carrying value of $8,879,000, and approximately 888,000 Mcf of
outstanding gas loans owed to third parties with a carrying value of $2,286,000.
9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
PENSIONS - The Company has defined benefit pension plans that cover the
employees of certain companies in the consolidated group. Pension plan benefits
are generally based upon years of service or a combination of years of service
and compensation during the final years of employment. The Company's funding
policy is to contribute amounts annually to the plans based upon actuarial and
economic assumptions designed to achieve adequate funding of projected benefit
obligations. The Company also has a supplemental executive retirement plan
("SERP"), which is an unfunded defined benefit pension plan. The Company's
prepaid pension benefit cost at December 31, 1999 is net of an accrued benefit
cost of $788,000 related to the SERP.
On December 31, 1997, the pension plans that cover primarily the employees
of the Company's Michigan-based gas distribution business were amended to
provide a special frozen benefit to all employees with at least two years of
service on December 31, 1997. This special frozen benefit added both three years
of service and three years of age to all eligible employees for purposes of
computing accrued pension benefits at December 31, 1997. In conjunction with the
amendment, the Company offered an early retirement program to all eligible
employees with at least two years of service on December 31, 1997. The program
was open from January 14, 1998 through February 27, 1998 and offered employees
the additional options of receiving either a lump-sum pension benefit payment or
an immediate annuity commencing April 1, 1998. One hundred and one employees
accepted the early retirement offer. As a result of the early retirement program
and in accordance with the provisions of SFAS 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", the Company incurred a one-time gain which reduced 1998
net periodic pension costs by $1,641,000. This reduction was partially offset by
a one-time charge in the net retiree medical costs discussed below. In 1999, the
Company also changed certain actuarial assumptions and methods for its pension
plans.
OTHER POSTRETIREMENT BENEFITS - The Company has postretirement benefit plans
that provide certain medical and prescription drug benefits to qualified retired
employees, their spouses and covered dependents. Determination of benefits is
based on a combination of the retiree's age and years of service at retirement.
The Company accounts for retiree medical benefits in accordance with SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
standard requires the full accrual of such costs during the years that the
employee renders service to the Company until the date of full eligibility.
In 1992, the MPSC issued a generic order addressing the adoption of SFAS
106 by utilities under its jurisdiction. The order allowed Michigan utilities to
adopt SFAS 106 for accounting and ratemaking purposes, subject to a final order
in a general rate case and required the external funding for amounts recovered
in rates. The general rate case approved by the MPSC in October 1997 allowed for
such recovery of retiree medical benefits, as discussed in Note 2. Prior to
getting rate approval in October 1997, the Company deferred, as a regulatory
asset, any portion of retiree medical expense that was not yet provided for in
customer rates. After receiving rate approval for recovery of such costs, the
Company began amortizing, as retiree medical expense, the amounts previously
deferred. The division of the Gas Distribution Business under the jurisdiction
of the City Commission of Battle Creek was allowed a rate increase in December
1995 to recover its retiree medical costs. In 1999, the Company changed certain
actuarial assumptions and methods for its retiree medical plans.
In 1999, 1998 and 1997, the Company expensed retiree medical costs of
$1,396,000, $3,897,000 and $2,471,000, respectively. The 1999 retiree medical
expense includes $899,000 of amortization of previously deferred retiree medical
costs. The 1998 retiree medical expense includes a one-time charge of $1,298,000
related to the early retirement program and $899,000 of amortization of
previously deferred retiree medical costs. The 1997 expense excludes $304,000 of
retiree medical costs which the Company deferred and recorded as a regulatory
asset in accordance with the MPSC's order discussed previously.
Page 55
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company established certain Voluntary Employee Benefit Association
("VEBA") trusts in 1997 to fund its retiree medical benefits and contributed
$2,500,000, $2,339,000 and $2,023,000 to the trusts in 1999, 1998 and 1997,
respectively. The Company also partially funds retiree medical benefits on a
discretionary basis through an Internal Revenue Code Section 401(h) account. In
1998 and 1997, the Company made cash contributions to the 401(h) account of
$124,000 and $508,000, respectively. No cash contributions were made in 1999.
The following two tables provide reconciliations of the plan benefit
obligations, plan assets, funded status of the plans and components of net
periodic benefit costs (in thousands of dollars):
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
---------------------- -----------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January 1 . . . . . . . . . $ 44,837 $ 54,193 $ 31,312 $ 26,053
Acquisition of ENSTAR . . . . . . . . . . . . . . 14,512 - 2,133 -
Service cost. . . . . . . . . . . . . . . . . . . 1,514 738 358 447
Interest cost . . . . . . . . . . . . . . . . . . 3,157 3,070 2,137 2,004
Actuarial (gain) loss . . . . . . . . . . . . . . (4,021) 2,537 (1,102) 1,034
Contributions by plan participants. . . . . . . . - - - 64
Benefits paid from plan assets. . . . . . . . . . (2,781) (2,558) - -
Benefits paid from corporate assets . . . . . . . - - (1,488) (1,547)
Plan amendments . . . . . . . . . . . . . . . . . - 180 - 1,017
(Gain) loss from reduction in workforce . . . . . - 1,840 - 2,240
Lump sums paid for reduction in workforce . . . . - (16,981) - -
Special termination benefits. . . . . . . . . . . - 1,818 - -
---------- --------- ---------- ---------
Benefit obligation at December 31 . . . . . . . . $ 57,218 $ 44,837 $ 33,350 $ 31,312
========== ========= ========== =========
Change in plan assets
Fair value of plan assets at January 1. . . . . . $ 51,821 $ 60,403 $ 15,940 $ 11,737
Acquisition of ENSTAR . . . . . . . . . . . . . . 19,293 - - -
Actual return on plan assets. . . . . . . . . . . 7,703 9,875 2,551 1,740
Company contributions . . . . . . . . . . . . . . - 1,082 2,500 2,463
Benefits paid from plan assets. . . . . . . . . . (2,781) (2,558) - -
Lump sums paid for reduction in workforce . . . . - (16,981) - -
---------- --------- ---------- ---------
Fair value of plan assets at December 31. . . . . $ 76,036 $ 51,821 $ 20,991 $ 15,940
========== ========= ========== =========
Reconciliation of funded status of the plans
Funded (unfunded) status. . . . . . . . . . . . . $ 18,818 $ 6,984 $ (12,359) $ (15,372)
Unrecognized net (gain) loss. . . . . . . . . . . (13,771) (7,321) (15,370) (14,943)
Unrecognized prior service cost (benefit) . . . . 146 219 - -
Unrecognized net transition obligation. . . . . . 171 332 15,970 17,199
---------- --------- ---------- ---------
Prepaid (accrued) benefit cost. . . . . . . . . . $ 5,364 $ 214 $ (11,759) $ (13,116)
========== ========= ========== =========
Weighted average assumptions as of December 31
Discount rate . . . . . . . . . . . . . . . . . . 7.50% 6.75% 7.50% 6.75%
Expected long-term rate of return on plan assets. 9.50% 9.00% 9.50% 9.00%
Rate of compensation increase . . . . . . . . . . 4.00-5.00% 4.00% 4.00-5.00% 4.00%
</TABLE>
Page 56
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
--------------------------------- ---------------------------------
Years ended December 31, 1999 1998 1997 1999 1998 1997
- ---------------------------------------- --------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net benefit cost
Service cost . . . . . . . . . . . . . $ 1,514 $ 738 $ 1,371 $ 358 $ 447 $ 862
Interest cost. . . . . . . . . . . . . 3,157 3,070 3,716 2,137 2,004 2,212
Expected return on plan assets . . . . (4,547) (3,775) (4,119) (1,514) (1,055) (693)
Amortization of transition obligation. 161 77 79 1,228 1,250 1,680
Amortization of prior service costs. . 73 51 471 - - -
Amortization of net (gain) or loss . . (727) (24) (436) (1,712) (946) (1,286)
Net (gain) loss due to settlements,
curtailments and special
termination benefits . . . . . . . . - (1,641) - - 1,298 -
--------- --------- --------- --------- --------- ---------
Net benefit cost (credit). . . . . . . $ (369) $ (1,504) $ 1,082 $ 497 $ 2,998 $ 2,775
========= ========= ========= ========= ========= =========
</TABLE>
The 1999 postretirement medical costs were developed based on the health
care plan in effect at January 1, 1999. As of December 31, 1999, the actuary
assumed that retiree medical cost increases in 2000 would be 7.0% for ENSTAR and
7.4% for the Company's other businesses and prescription drug cost increases in
2000 would be 7.0% for ENSTAR and 9.6% for the Company's other businesses. The
actuary also assumed that retiree medical costs and prescription drug costs at
ENSTAR would decrease uniformly to 6.0% in 2002 and thereafter, and that such
costs for the Company's other businesses would decrease uniformly to 5.5% in
2005 and thereafter. The health care cost trend rate assumption significantly
affects the amounts reported. For example, a one percentage point increase in
each year would increase the accumulated retiree medical obligation as of
December 31, 1999 by $4,862,000 and the aggregate of the service and interest
cost components of net periodic retiree medical costs for 1999 by $391,000.
401(K) PLANS, PROFIT SHARING PLANS AND THE EMPLOYEE STOCK OWNERSHIP TRUST - The
Company has defined contribution plans, commonly referred to as 401(k) plans,
covering the employees of certain of its businesses or divisions. Prior to 1998,
the Company also had an Employee Stock Ownership Trust ("ESOT"). During 1998,
the Company merged the assets of the ESOT into a 401(k) plan that covered
approximately the same group of employees. Under the provisions of the ESOT
prior to the merger, Company contributions were discretionary. In 1997, the
Company contributed $400,000 in Company stock to the ESOT. Certain of the 401(k)
plans contain provisions for Company matching contributions. The amount expensed
for the Company match provisions was $716,315 and $491,000 in 1999 and 1998,
respectively. Company matching contributions were not required in 1997.
The Company has profit sharing plans, covering the employees of certain of
its businesses or divisions. Annual contributions are generally determined by a
formula which contains minimum contribution requirements. Profit sharing expense
was $147,713 for 1999. There was no profit sharing expense in 1998 and 1997.
10. STOCK-BASED COMPENSATION
At the Company's 1997 annual meeting, the shareholders approved a long-term
incentive plan providing for the issuance of up to 500,000 shares of
non-qualified common stock options over the next ten years adjusted for any
subsequent stock dividends and stock splits. The options are reserved for the
executives and directors of the Company and are awarded based upon both the
Company's and individual's performance. The options vest at the rate of 33 1/3%
per year beginning one year after the date of grant and expire ten years after
the grant date. Additionally, pursuant to an executive employment agreement, the
Company granted 30,000 common stock options during 1997. These options vest
three years after the grant date and expire ten years after the grant date.
The exercise price of all the options granted is equal to the average of
the high and low market price on the options' grant date. Both the number of
options granted and the exercise price are adjusted accordingly for any stock
dividends and stock splits occurring during the options' life. Fair value of the
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
Page 57
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate. . . . . 5.28% 5.55% 6.54%
Dividend yield . . . . . . . . . 5.29% 6.11% 5.67%
Volatility . . . . . . . . . . . 20.84% 22.97% 19.13%
Average expected term (years). . 5 5 5
Fair value of options granted. . $ 2.20 $ 2.26 $ 2.61
</TABLE>
The status of the options granted under the long-term stock incentive plan
and the employment agreement are as follows:
<TABLE>
<CAPTION>
Number Average Price
of Shares* Per Share*
- -----------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1996 . . 16,537 $ 14.97
Granted. . . . . . . . . . . . . . . 131,925 $ 17.07
Exercised. . . . . . . . . . . . . . - -
Canceled . . . . . . . . . . . . . . (18,000) $ 18.00
Outstanding at December 31, 1997 . . 130,462 $ 16.68
Granted. . . . . . . . . . . . . . . 102,948 $ 16.01
Exercised. . . . . . . . . . . . . . - -
Canceled . . . . . . . . . . . . . . (15,780) $ 16.11
Outstanding at December 31, 1998 . . 217,630 $ 16.40
Granted. . . . . . . . . . . . . . . 111,501 $ 15.54
Exercised. . . . . . . . . . . . . . - -
Canceled . . . . . . . . . . . . . . (11,345) $ 16.11
Outstanding at December 31, 1999 . . 317,786 $ 16.16
<FN>
*Adjusted to give retroactive effect to the 5% stock dividends of May 1997 and
1998.
</TABLE>
Employee stock options available for grant were 257,000 and 357,000 at
December 31, 1999 and 1998, respectively. Employee stock options exercisable
under these plans are as follows:
<TABLE>
<CAPTION>
Number Average Price
of Shares Per Share
- ------------------------------------------------------------------------
<S> <C> <C>
Options exercisable at December 31, 1997 . . 1,050 $ 17.14
Options exercisable at December 31, 1998 . . 29,394 $ 16.97
Options exercisable at December 31, 1999 . . 95,088 $ 16.39
</TABLE>
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS 123, "Accounting for Stock-Based Compensation." In general, SFAS 123
recommends that all stock-based compensation given to employees in exchange for
their services be expensed based on the fair value of the options granted. The
Company has chosen to continue accounting for these transactions under
previously existing accounting standards as allowed in SFAS 123. However, if
expense had been determined in a manner consistent with the provisions of SFAS
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below (in thousands of dollars, except for per
share amounts):
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported. . . . . . . . . . . . . $17,659 $10,040 $15,425
Pro forma. . . . . . . . . . . . . . $17,501 $ 9,940 $15,374
Earnings per share - basic and diluted
As reported. . . . . . . . . . . . . $ 1.00 $ .63 $ 1.06
Pro forma. . . . . . . . . . . . . . $ .99 $ .62 $ 1.05
</TABLE>
Page 58
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
11. EARNINGS PER SHARE
The Company computes earnings per share ("EPS") in accordance with SFAS 128,
"Earnings per Share." SFAS 128 requires the computation and presentation of two
EPS amounts, basic and diluted. Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the period. The computation of diluted EPS is similar to that
of basic EPS except that the weighted average number of common shares
outstanding is increased to include any shares that would be available if
outstanding stock options, warrants, or convertible securities ("dilutive
securities") were exercised. Accordingly, income available to common
shareholders is also adjusted for any changes to income that would result from
the assumed conversion of the dilutive securities. The diluted EPS calculation
excludes the effect of stock options when their exercise prices exceed the
average market price over the period.
The computations of basic and diluted earnings per share for the years
ended December 31, 1999, 1998 and 1997 are as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share computation
Income before accounting change and
extraordinary charge. . . . . . . . . . . . . . . . $17,659 $ 8,755 $15,425
Cumulative effect of change in accounting . . . . . . - 1,784 -
Extraordinary charge. . . . . . . . . . . . . . . . . - (499) -
------- ------- -------
Net income. . . . . . . . . . . . . . . . . . . . . . $17,659 $10,040 $15,425
======= ======= =======
Weighted average common shares outstanding. . . . . . 17,697 15,906 14,608
Earnings per share - basic
Income before accounting change and
extraordinary charge . . . . . . . . . . . . . . $ 1.00 $ 0.55 $ 1.06
Cumulative effect of change in accounting . . . . . - 0.11 -
Extraordinary charge. . . . . . . . . . . . . . . . - (0.03) -
------- ------- -------
Net income. . . . . . . . . . . . . . . . . . . . . $ 1.00 $ 0.63 $ 1.06
======= ======= =======
Diluted earnings per share computation
Income before accounting change and
extraordinary charge. . . . . . . . . . . . . . . . $17,659 $ 8,755 $15,425
Adjustment for effect of assumed conversions:
Preferred convertible stock dividends . . . . . . . 13 15 16
------- ------- -------
Adjusted income before accounting change and
extraordinary charge. . . . . . . . . . . . . . . . 17,672 8,770 15,441
Cumulative effect of change in accounting . . . . . . - 1,784 -
Extraordinary charge. . . . . . . . . . . . . . . . . - (499) -
------- ------- -------
Net income. . . . . . . . . . . . . . . . . . . . . . $17,672 $10,055 $15,441
======= ======= =======
Weighted average common shares outstanding. . . . . . 17,697 15,906 14,608
Incremental shares from assumed conversions of:
Preferred convertible stock . . . . . . . . . . . . 22 26 28
Stock options . . . . . . . . . . . . . . . . . . . 1 3 3
------- ------- -------
Diluted weighted average common shares outstanding . 17,720 15,935 14,639
======= ======= =======
Earnings per share - diluted
Income before accounting change and
extraordinary charge. . . . . . . . . . . . . . . $ 1.00 $ 0.55 $ 1.06
Cumulative effect of change in accounting. . . . . . - 0.11 -
Extraordinary charge . . . . . . . . . . . . . . . . - (0.03) -
------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . $ 1.00 $ 0.63 $ 1.06
======= ======= =======
</TABLE>
Page 59
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. BUSINESS SEGMENTS
The Company adopted SFAS 131, "Disclosure about Segments of an Enterprise and
Related Information," during 1998. SFAS 131 established standards for reporting
information about operating segments ("business segments") in annual financial
statements and requires selected information in interim financial statements.
Business segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, to make decisions on
how to allocate resources and to assess performance. The Company's chief
operating decision making group is the Chief Executive Officer ("CEO") and
certain other executive officers that report directly to the CEO. The operating
segments are organized and managed separately because each segment offers
different products or services. 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 charges, changes in
accounting method and non-operating income and expense items.
Under SFAS 131, an operating segment that does not exceed certain
quantitative levels is not considered a reportable segment. Instead, the results
of all segments that do not exceed the quantitative thresholds are combined and
reported as one segment and referred to as "all other." The Company's propane,
pipelines and storage business segment did not meet these quantitative
thresholds and could have been grouped into the "all other" category. However,
the Company has decided to voluntarily disclose information on this business
segment.
The Company currently operates four business segments. They are gas
distribution, pipeline construction services, engineering services, and propane,
pipelines and storage. The Company sold the subsidiary comprising its energy
marketing business effective March 31, 1999. Refer to Note 1 for a brief
description of each business segment.
The accounting policies of the operating segments are the same as those
described in Note 1 except that intercompany transactions have not been
eliminated in determining individual segment results. The following table
provides business segment information as well as a reconciliation ("Corporate
and other") of the segment information to the applicable line in the
consolidated financial statements. Corporate and other includes corporate
related expenses not allocated to segments, intercompany eliminations and
results of other smaller operations.
Page 60
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C>
Operating revenues
Gas distribution. . . . . . . . . . . . . . $216,831 $184,221 $232,511
Pipeline construction services. . . . . . . 58,272 25,904 13,207
Engineering services. . . . . . . . . . . . 17,486 41,366 5,660
Propane, pipelines and storage. . . . . . . 6,284 4,852 3,027
Energy marketing. . . . . . . . . . . . . . 96,904 397,888 555,367
Corporate and other(a). . . . . . . . . . . (11,014) (16,746) (33,840)
-------- -------- --------
Total consolidated revenues . . . . . . . $384,763 $637,485 $775,932
======== ======== ========
Depreciation and amortization
Gas distribution. . . . . . . . . . . . . . $ 14,955 $ 12,110 $ 11,112
Pipeline construction services. . . . . . . 3,076 1,903 743
Engineering services. . . . . . . . . . . . 421 182 14
Propane, pipelines and storage. . . . . . . 1,092 793 622
Energy marketing. . . . . . . . . . . . . . 36 44 60
Corporate and other . . . . . . . . . . . . 426 317 326
-------- -------- --------
Total consolidated depreciation . . . . . $ 20,006 $ 15,349 $ 12,877
======== ======== ========
Operating income (loss)
Gas distribution. . . . . . . . . . . . . . $ 40,134 $ 22,363 $ 26,348
Pipeline construction services. . . . . . . 2,611 (102) 762
Engineering services. . . . . . . . . . . . (513) 2,938 778
Propane, pipelines and storage. . . . . . . 2,341 1,585 1,458
Energy marketing. . . . . . . . . . . . . . (341) (696) 217
Corporate and other . . . . . . . . . . . . (2,342) (1,893) (396)
-------- -------- --------
Total consolidated operating income . . . $ 41,890 $ 24,195 $ 29,167
======== ======== ========
Assets
Gas distribution. . . . . . . . . . . . . . $713,900 $359,592 $362,906
Pipeline construction services. . . . . . . 52,620 20,471 21,028
Engineering services. . . . . . . . . . . . 9,477 8,897 2,618
Propane, pipelines and storage. . . . . . . 28,399 27,175 18,110
Energy marketing. . . . . . . . . . . . . . - 65,017 89,653
Corporate and other . . . . . . . . . . . . 10,787 8,510 12,845
-------- -------- --------
Total consolidated assets . . . . . . . . $815,183 $489,662 $507,160
======== ======== ========
Capital investments(b)
Gas distribution. . . . . . . . . . . . . . $312,653 $ 23,029 $ 28,201
Pipeline construction services. . . . . . . 21,720 1,076 15,990
Engineering services(c) . . . . . . . . . . 2,499 14,586 459
Propane, pipelines and storage. . . . . . . 1,318 6,285 -
Energy marketing. . . . . . . . . . . . . . - - 156
Corporate and other . . . . . . . . . . . . 1,971 655 234
-------- -------- --------
Total consolidated capital investments(c) $340,161 $ 45,631 $ 45,040
======== ======== ========
<FN>
(a) Includes the eliminations of intercompany energy marketing revenues of
$49, $7,071 and $28,405 for 1999, 1998 and 1997, respectively. Includes the
elimination of intercompany engineering services revenue of $2,645 and $429 for
1999 and 1998, respectively. Includes the elimination of intercompany pipeline
construction services revenue of $8,307, $9,283 and $5,723 for 1999, 1998
and 1997, respectively.
(b) Capital investments include net amounts paid for business acquisitions,
including non-cash amounts such as deferred payments and Company stock issued as
part of the acquisitions.
(c) The 1998 capital investments, shown in the above table, include $14,073
of Company stock issued as part of the acquisition of OMC. The acquisition of
OMC was accounted for as a pooling of interests, therefore, the supplemental
cash flow information in Note 1 does not include the stock issued for the OMC
acquisition.
</TABLE>
Page 61
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. INVESTMENTS IN AFFILIATES
The equity method of accounting is used for interests in affiliates 20% to 50%
owned. These affiliate companies are generally involved in natural gas
transmission, storage or associated operations. The Company records income taxes
on its share of undistributed earnings of these affiliates at the time the
earnings are included in consolidated income. At December 31, 1999, the Company
held the following interests in these affiliates:
<TABLE>
<CAPTION>
Percent Ownership
- --------------------------------------------------------------
<S> <C>
Eaton Rapids Gas Storage System . . . . . 50%
Michigan Intrastate Lateral System. . . . 50%
Michigan Intrastate Pipeline System . . . 50%
</TABLE>
Summarized combined financial information for investments in affiliates for
the years ended December 31, 1999, 1998 and 1997 is as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $ 6,071 $ 8,199 $ 13,368
Operating income. . . . . . . . . . . . . . $ 3,486 $ 2,100 $ 3,568
Net income (loss) . . . . . . . . . . . . . $ 1,956 $ 285 $ (7,107)
The Company's share of net income (loss). . $ 978 $ 160 $ (1,967)
------- ------- --------
Current assets. . . . . . . . . . . . . . . $ 1,637 $ 2,796 $ 2,843
Non-current assets. . . . . . . . . . . . . 26,903 28,092 125,455
------- ------- --------
Total assets. . . . . . . . . . . . . . . . $28,540 $30,888 $128,298
======= ======= ========
Current liabilities . . . . . . . . . . . . $ 4,266 $ 2,784 $ 42,745
Non-current liabilities . . . . . . . . . . 15,274 15,942 88,348
Equity. . . . . . . . . . . . . . . . . . . 9,000 12,162 (2,795)
------- ------- --------
Total liabilities and equity. . . . . . . . $28,540 $30,888 $128,298
======= ======= ========
The Company's equity investment . . . . . . $ 4,207 $ 4,522 $ 4,710
The Company's share of undistributed gains. $ - $ - $ 475
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
CAPITAL INVESTMENTS - The Company's plans for expansion and improvement of its
natural gas delivery system and its other diversified business properties are
continually reviewed. Aggregate capital expenditures for property in 2000 are
projected at approximately $50,000,000. In addition, the Company is planning to
incur additional expenditures for business acquisitions in 2000.
GUARANTEES - On January 14, 1998, the Company sold its entire 32% interest in
NOARK. The sale released the Company from all its NOARK guarantees, which
related to 40% of NOARK's debt. See Note 15 for more information on NOARK.
LEASE COMMITMENTS - The Company leases buildings, vehicles and equipment. The
resulting leases are classified as operating leases in accordance with SFAS 13,
"Accounting for Leases." Vehicle leases comprise a significant portion of total
lease expense. Leases on new vehicles are for a minimum of twelve months. The
Company has the right to extend each vehicle lease annually and to cancel the
extended lease at any time.
The following is a schedule by year of future minimum lease payments that
have initial or remaining noncancelable lease terms in excess of one year at
December 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2000 $1,053,000 2003 $ 458,000
2001 578,000 2004 381,000
2002 518,000 Thereafter 1,060,000
</TABLE>
Page 62
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
Total lease expense approximated $2,253,000, $2,164,000 and $2,092,000 in
1999, 1998 and 1997, respectively. The annual future minimum lease payments
shown in the previous schedule are substantially less than the lease expense
incurred in 1997 through 1999 because most of the vehicle leases at December 31,
1999 were on a month-to-month basis and were cancelable at any time. However,
management expects to renew or replace substantially all leases.
ENVIRONMENTAL ISSUES - 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 Gas Distribution Business 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 Gas Distribution Business 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 be
reasonably estimated at this time. In accordance with an MPSC accounting order,
any environmental investigation and remedial action costs will be deferred and
amortized over ten years. Rate recognition of the related amortization expense
will not begin until after a prudence review in a general rate case.
CONTINGENCIES - The terms of certain of the Company's acquisition agreements in
1999 provided for additional consideration to be paid if certain results were
achieved. The former owners of PinPoint Locators, Inc. were given the
opportunity to receive additional consideration based upon the future
profitability of the PinPoint division. The former owners of K&B Construction,
Inc. were given the right to receive from the Company an additional sum of money
provided the future results of operations exceed certain targeted levels. No
additional consideration was paid in 1999.
15. DIVESTITURE OF NOARK INVESTMENT
The Company sold its entire interest in NOARK to ENOGEX Arkansas Pipeline
Corporation ("EAPC") in 1998. NOARK is a 302-mile intrastate natural gas
pipeline which experienced significant cost overruns during construction,
resulting in higher than expected financing costs. In addition, competition from
two interstate pipelines required NOARK to discount its transportation charges
to attract volumes to the pipeline. Even with discounted rates, NOARK had
operated at less than 65% capacity since its inception in 1992. As a result,
NOARK continued to generate losses and its operating cash flows were
insufficient to meet principal and interest payments on its debt.
In 1996, the Company recorded a $21,000,000 after-tax non-cash write-down
of its general partnership interest in NOARK. In 1997, the Company reduced its
reserve for NOARK by $5,025,000 after-tax based on the terms of the pending
sale. When the sale was finalized in 1998, the Company incurred a gain of
$1,708,000 after-tax.
Pursuant to terms included in the sales agreement, the Company paid EAPC
$3,100,000 and $9,200,000 in April 1999 and 1998, respectively, and will pay
$800,000 in April 2000. The sale released the Company from all debt obligations
and guarantees related to NOARK. The Company will receive annual payments of
$842,000 from EAPC for 17 years beginning in the year 2004.
Page 63
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the opinion of the Company, the following quarterly information includes all
adjustments necessary for a fair statement of the results of operations for such
periods. Earnings and dividends per share for each quarter are calculated based
upon the weighted average number of shares outstanding during each quarter. As a
result, adding the earnings or dividends per share for each quarter of a year
may not equal annual earnings or dividends per share due to changes in shares
outstanding throughout the year. Due to the seasonal nature of the Company's gas
distribution business, the results of operations reported on a quarterly basis
show substantial variations.
<TABLE>
<CAPTION>
Quarters First Second Third Fourth
- ------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1999
Operating revenue. . . . . . . . . . . $183,880 $ 51,229 $ 39,997 $109,657
Operating income (loss). . . . . . . . 17,347 3,468 (1,266) 22,341
Net income (loss). . . . . . . . . . . 10,403 121 (2,165) 9,300
Earnings (loss) per share. . . . . . . 0.60 0.01 (0.12) 0.52
Cash dividends per share . . . . . . . 0.200 0.255(a) 0.205 0.204
1998
Operating revenue. . . . . . . . . . . $226,471 $111,280 $113,075 $186,659
Operating income (loss). . . . . . . . 10,940 108 1 13,146
Net income (loss). . . . . . . . . . . 8,571 (2,639) (2,357) 6,465
Earnings (loss) per share. . . . . . . 0.58 (0.17) (0.14) 0.37
Cash dividends per share . . . . . . . 0.178 0.185 0.179 0.200
<FN>
(a) Includes a special one-time dividend of $0.05 per share.
</TABLE>
Page 64
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SEMCO Energy, Inc.:
We have audited the accompanying consolidated statements of financial position
and capitalization of SEMCO Energy, Inc. (a Michigan corporation) and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in shareholders' investment and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SEMCO
Energy, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 1 of the consolidated financial statements, effective
January 1, 1998, the Company changed its method of accounting for property
taxes.
ARTHUR ANDERSEN LLP
Detroit, Michigan
January 24, 2000
Page 65
<PAGE>
SEMCO Energy, Inc. and Subsidiaries
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income statement data (000's)
Operating revenue . . . . . . . . . . . . $384,763 $637,485 $775,932 $547,910 $335,538 $372,430
-------- -------- -------- -------- -------- --------
Operating expenses
Cost of gas and propane sold . . . . . $117,789 $109,388 $150,967 $151,135 $120,619 $135,669
Cost of gas marketed . . . . . . . . . 95,632 386,691 518,157 308,619 130,087 153,973
Operations and maintenance . . . . . . 100,822 92,696 55,209 43,211 36,217 35,558
Depreciation . . . . . . . . . . . . . 20,006 15,349 12,877 11,334 12,035 11,549
Property and other taxes . . . . . . . 8,624 9,166 9,555 8,777 7,966 8,186
-------- -------- -------- -------- -------- --------
$342,873 $613,290 $746,765 $523,076 $306,924 $344,935
-------- -------- -------- -------- -------- --------
Operating income. . . . . . . . . . . . . $ 41,890 $ 24,195 $ 29,167 $ 24,834 $ 28,614 $ 27,495
Other income (deductions) . . . . . . . . (17,219) (7,835)(e)(f) (5,273)(g) (44,702)(i) (11,132) (12,944)(e)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes . . . . $ 24,671 $ 16,360 $ 23,894 $(19,868) $ 17,482 $ 14,551
Income taxes. . . . . . . . . . . . . . . 7,012 6,320 8,469 (7,106) 6,151 4,559
-------- -------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . $ 17,659 $ 10,040 (e)(f) $ 15,425 (g) $(12,762)(i) $ 11,331 $ 9,992 (e)
Common dividends. . . . . . . . . . . . . 15,272 11,836 10,225 9,814 9,230 8,656
-------- -------- -------- -------- -------- --------
Earnings (deficit) reinvested
in the business. . . . . . . . . . . . $ 2,387 $ (1,796) $ 5,200 $(22,576) $ 2,101 $ 1,336
======== ======== ======== ======== ======== ========
Common stock data
Average shares outstanding (000's) (a). . 17,697 15,906 14,608 14,573 13,696 13,440
Earnings (loss) per share -
basic and diluted (a) . . . . . . . . . $ 1.00 $ 0.63 (e)(f) $ 1.06 (g) $ (0.88)(i) $ 0.83 $ 0.74 (e)
Dividends paid per share (a). . . . . . . $ 0.863 (k) $ 0.744 $ 0.700 $ 0.673 $ 0.674 $ 0.644
Dividends payout ratio. . . . . . . . . . 86.5% 117.9% 66.0% N/A 81.5% 86.6%
Book value per share (a) (b). . . . . . . $ 7.95 $ 7.61 $ 6.44 $ 5.95 $ 7.99 $ 7.86
Market value per share (a) (b) (c). . . . $ 11.81 $ 16.31 $ 17.26 $ 16.78 $ 15.54 $ 14.80
Number of registered
common shareholders (b) . . . . . . . . 9,217 9,336 8,755 8,509 8,334 8,149
Balance sheet data (000's) (b)
Total assets. . . . . . . . . . . . . . . $815,183 $489,662 $507,160 $479,037 $378,523 $368,498
-------- -------- -------- -------- -------- --------
Capitalization
Long-term debt (d) . . . . . . . . . . $170,000 $170,000 $163,548 $108,112 $107,325 $104,910
Preferred stock. . . . . . . . . . . . - 3,255 3,269 3,269 3,272 3,288
Common equity. . . . . . . . . . . . . 142,340 132,228 95,131 86,678 109,511 107,379
-------- -------- -------- -------- -------- --------
$312,340 $305,483 $261,948 $198,059 $220,108 $215,577
======== ======== ======== ======== ======== ========
Financial ratios
Capitalization
Long-term debt (d) . . . . . . . . . . 54.4% 55.6% 62.4% 54.6% 48.8% 48.7%
Preferred stock. . . . . . . . . . . . - 1.1% 1.3% 1.6% 1.5% 1.5%
Common equity. . . . . . . . . . . . . 45.6% 43.3% 36.3% 43.8% 49.7% 49.8%
-------- -------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ======== ========
Return on average common equity . . . . . 12.9% 8.8% 17.0%(h) (13.0%)(j) 10.4% 9.5%
Years Ended December 31, 1993 1992 1991 1990 1989
- ------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income statement data (000's)
Operating revenue . . . . . . . . . . . . $288,963 $251,526 $231,522 $228,339 $226,753
-------- -------- -------- -------- --------
Operating expenses
Cost of gas and propane sold . . . . . $139,051 $121,643 $111,005 $110,705 $122,684
Cost of gas marketed . . . . . . . . . 67,474 52,347 46,237 47,703 33,786
Operations and maintenance . . . . . . 34,496 33,590 33,425 34,149 33,504
Depreciation . . . . . . . . . . . . . 12,468 12,344 12,138 10,729 9,807
Property and other taxes . . . . . . . 8,446 7,729 7,193 6,798 6,245
-------- -------- -------- -------- --------
$261,935 $227,653 $209,998 $210,084 $206,026
-------- -------- -------- -------- --------
Operating income. . . . . . . . . . . . . $ 27,028 $ 23,873 $ 21,524 $ 18,255 $ 20,727
Other income (deductions) . . . . . . . . (11,789)(e) (11,923)(e) (10,791) (9,856) (10,371)
-------- -------- -------- -------- --------
Income (loss) before income taxes . . . . $ 15,239 $ 11,950 $ 10,733 $ 8,399 $ 10,356
Income taxes. . . . . . . . . . . . . . . 5,676 3,640 3,432 2,372 3,078
-------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . $ 9,563 (e) $ 8,310 (e) $ 7,301 $ 6,027 $ 7,278
Common dividends. . . . . . . . . . . . . 7,419 6,875 6,385 5,940 5,535
-------- -------- -------- -------- --------
Earnings (deficit) reinvested
in the business. . . . . . . . . . . . $ 2,144 $ 1,435 $ 916 $ 87 $ 1,743
======== ======== ======== ======== ========
Common stock data
Average shares outstanding (000's) (a). . 12,155 11,835 11,533 11,261 11,019
Earnings (loss) per share -
basic and diluted (a) . . . . . . . . . $ 0.79 (e) $ 0.70 (e) $ 0.63 $ 0.54 $ 0.66
Dividends paid per share (a). . . . . . . $ 0.610 $ 0.581 $ 0.554 $ 0.527 $ 0.502
Dividends payout ratio. . . . . . . . . . 77.6% 82.7% 87.5% 98.6% 76.1%
Book value per share (a) (b). . . . . . . $ 6.94 $ 6.45 $ 6.07 $ 5.76 $ 5.54
Market value per share (a) (b) (c). . . . $ 17.24 $ 14.19 $ 10.84 $ 9.49 $ 12.26
Number of registered
common shareholders (b) . . . . . . . . 7,261 6,892 6,594 6,369 6,082
Balance sheet data (000's) (b)
Total assets. . . . . . . . . . . . . . . $348,813 $319,548 $294,933 $278,018 $267,273
-------- -------- -------- -------- --------
Capitalization
Long-term debt (d) . . . . . . . . . . $117,022 $102,728 $ 95,656 $ 99,040 $102,368
Preferred stock. . . . . . . . . . . . 3,290 3,320 3,332 3,350 3,364
Common equity. . . . . . . . . . . . . 85,657 77,353 70,758 65,608 61,766
-------- -------- -------- -------- --------
$205,969 $183,401 $169,746 $167,998 $167,498
======== ======== ======== ======== ========
Financial ratios
Capitalization
Long-term debt (d) . . . . . . . . . . 56.8% 56.0% 56.4% 59.0% 61.1%
Preferred stock. . . . . . . . . . . . 1.6% 1.8% 2.0% 2.0% 2.0%
Common equity. . . . . . . . . . . . . 41.6% 42.2% 41.6% 39.0% 36.9%
-------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Return on average common equity . . . . . 11.6% 11.1% 10.6% 9.4% 12.1%
<FN>
(a) Adjusted to give effect to 5 percent stock dividends in May each year, 1989 through 1998.
(b) At year end.
(c) Based on NASDAQ closing price, except for years prior to 1997 which are based on NASDAQ closing bid price.
(d) Includes current maturities of long-term debt.
(e) Includes $499 (net of tax) or $.03 per share, $1,286 (net of tax) or $.10 per share, $177 (net of tax) or $.01 per share,
and $901 (net of tax) or $.08 per share in 1998, 1994, 1993 and 1992, respectively, attributable to extraordinary losses
on the early extinguishment of debt.
(f) Includes income at $1,784 (net of tax) or $.11 per share attributable to a change in accounting method, and a gain of
$1,708 (net of tax) or $.11 per share from the sale of the NOARK Investment.
(g) Includes income due to an adjustment to the reserve for the NOARK investment - $5,025 (net of tax) or $.34 per share.
(h) Excluding the adjustment to the reserve for the NOARK investment, return on average common equity was 11.8%.
(i) Includes the write-down of the NOARK investment - $21,000 (net of tax) or $1.44 per share.
(j) Excluding the write-down of the NOARK investment, return on average common equity was 7.6%.
(k) Includes a special one-time dividend of $0.05 per share.
</TABLE>
Pages 66 and 67
January 24, 2000
SEMCO Energy, Inc.
405 Water Street
Port Huron, Michigan 48060
RE: Form 10-K Report for the Year Ended December 31, 1999
To the Board of Directors:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant 's independent accountants whenever there has been a
change in accounting principle or practice.
We have been informed that, as of January 1, 1999, SEMCO Energy, Inc. (the
"Company") changed its method of amortizing unrecognized gains (losses) on its
pension plans and postretirement medical plans. According to the management of
the Company, this change was made to provide a better means to recognize the
gains (losses) that are currently being deferred and recognized over several
years.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we
have reviewed the pertinent factors, including those related to financial
reporting, in this particular case on a subjective basis, and our opinion stated
below is based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial statements
of any period subsequent to December 31, 1999.
Very truly yours,
Arthur Andersen LLP
EXHIBIT 21
SEMCO ENERGY, INC.
List of Subsidiaries
Exhibit 21 to Form 10-K (1999)
As of December 31, 1999, the subsidiaries of SEMCO Energy, Inc. (the Registrant)
were:
- -- Alaska Pipeline Company, an Alaska corporation
- -- Aretech Information Services, Inc., a Michigan corporation
- -- SEMCO Energy Gas Company, a Michigan corporation
- -- SEMCO Energy Ventures, Inc., a Michigan corporation
- -- Flint Construction Company, a Georgia corporation (a subsidiary of SEMCO
Energy Ventures, Inc.)
- -- F & G Holding, Inc., a Georgia corporation (a subsidiary of Flint
Construction Company)
- -- Flint Paving Company, Inc., a Georgia corporation (a subsidiary of Flint
Construction Company)
- -- Hotflame Gas, Inc., a Michigan corporation (a subsidiary of SEMCO Energy
Ventures, Inc.)
- -- King Energy & Construction Co., a Michigan corporation (a subsidiary of
SEMCO Energy Ventures, Inc.)
- -- Long's Underground Technologies, Inc., a Michigan corporation (a subsidiary
of SEMCO Energy Ventures, Inc.)
- -- Maverick Pipeline Services, Inc., a Michigan corporation (a subsidiary of
SEMCO Energy Ventures, Inc.)
- -- Oilfield Materials Consultants, Inc., a Michigan corporation (a subsidiary
of SEMCO Energy Ventures, Inc.)
- -- SEMCO Arkansas Pipeline Company, a Michigan corporation (a subsidiary of
SEMCO Energy Ventures, Inc.)
- -- SEMCO Energy Construction Co., a Michigan corporation (a subsidiary of
SEMCO Energy Ventures, Inc.)
- -- SEMCO Gas Storage Company, a Michigan corporation (a subsidiary of SEMCO
Energy Ventures, Inc.)
- -- SEMCO Gathering Company, a Michigan corporation (a subsidiary of SEMCO
Energy Ventures, Inc.)
- -- SEMCO Pipeline Company, a Michigan corporation (a subsidiary of SEMCO
Energy Ventures, Inc.)
- -- Southeastern Development Company, a Michigan corporation (a subsidiary of
SEMCO Energy Ventures, Inc.)
- -- Southeastern Financial Services, Inc., a Michigan corporation (a subsidiary
of SEMCO Energy Ventures, Inc.)
- -- Sub-Surface Construction Co., a Michigan corporation (a subsidiary of SEMCO
Energy Ventures, Inc.)
- -- Iowa Pipeline Associates, Inc., a Michigan corporation (a subsidiary of
Sub-Surface Construction Co.)
- -- K & B Construction, Inc., a Kansas corporation (a subsidiary of Sub-Surface
Construction Co.)
Each of the subsidiaries business only under its respective corporate name
indicated above. SEMCO Energy, Inc. does business in Alaska under the name
ENSTAR Natural Gas Company.
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
report dated January 24, 2000, included in this Form 10-K for the year ended
December 31, 1999, into SEMCO Energy Inc.'s previously filed Registration
Statements No. 333-18927, 333-58715, 333-60391 and 333-91815.
Arthur Andersen LLP
Detroit, Michigan,
March 15, 2000
SEMCO ENERGY, INC.
POWER OF ATTORNEY
Whereas, the Board of Directors of SEMCO Energy, Inc., a Michigan
corporation, at a meeting held on February 19, 2000, authorized and approved the
execution of Form 10-K Annual Report for 1999 pursuant to Section 13 of the
Securities Exchange Act of 1934 and the filing of said Form 10-K with the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
NOW, THEREFORE, each of the undersigned in his capacity as a Director or
officer, or both, as the case may be, of said Corporation, does hereby appoint
William L. Johnson and Sebastian Coppola, and each of them severally, his true
and lawful attorneys or attorney to execute in his name, place and stead, in his
capacity as a Director or officer or both, as the case may be, of said
Corporation, the Form 10-K for the year ended December 31, 1999, and any and all
amendments thereto and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission.
Each of said attorneys shall have full power of substitution and resubstitution.
Each of said attorneys shall have full power and authority to do and perform in
the name and on behalf of each of the undersigned, in any and all capacities,
each act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as each of the undersigned might or could do in
person, and each of the undersigned hereby ratifies and approves the acts of
said attorneys and each of them.
IN WITNESS WHEREOF, we have hereunto set our hands as of the 19th day of
February, 2000.
/s/John M. Albertine /s/Marcus Jackson
- ------------------------------------ ---------------------------------------
John M. Albertine, Director Marcus Jackson, Director
/s/Daniel A. Burkhardt /s/William L. Johnson
- ------------------------------------ ---------------------------------------
Daniel A. Burkhardt, Director William L. Johnson, Chairman and
Chief Executive Officer and Director
/s/Sebastian Coppola /s/Harvey I. Klein
- ------------------------------------ ---------------------------------------
Sebastian Coppola, Senior Vice Harvey I. Klein, Director
President and Principal Financial
and Accounting Officer
/s/Edward J. Curtis /s/Frederick S. Moore
- ------------------------------------ ---------------------------------------
Edward J. Curtis, Director Frederick S. Moore, Director
/s/John T. Ferris /s/Edith A. Stotler
- ------------------------------------ ---------------------------------------
John T. Ferris, Director Edith A. Stotler, Director
/s/Michael O. Frazer /s/Donald W. Thomason
- ------------------------------------ ---------------------------------------
Michael O. Frazer, Director Donald W. Thomason, Director
POA10K.DOC(sla)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Income, Consolidated Statements of Financial
Position, Consolidated Statements of Capitalization, and Consolidated Statements
of Cash Flows and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,086
<SECURITIES> 0
<RECEIVABLES> 106,047
<ALLOWANCES> 1,080
<INVENTORY> 17,869
<CURRENT-ASSETS> 150,534
<PP&E> 603,939
<DEPRECIATION> 129,593
<TOTAL-ASSETS> 815,183
<CURRENT-LIABILITIES> 448,182
<BONDS> 170,000
0
0
<COMMON> 17,909
<OTHER-SE> 124,431
<TOTAL-LIABILITY-AND-EQUITY> 815,183
<SALES> 288,024
<TOTAL-REVENUES> 384,763
<CGS> 213,421
<TOTAL-COSTS> 213,421
<OTHER-EXPENSES> 129,452
<LOSS-PROVISION> 1,115
<INTEREST-EXPENSE> 20,575
<INCOME-PRETAX> 24,671
<INCOME-TAX> 7,012
<INCOME-CONTINUING> 17,659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,659
<EPS-BASIC> 1.00
<EPS-DILUTED> 1.00
</TABLE>
