UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal period from _____________ to _____________
Commission file number 001-15565
SEMCO ENERGY, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2144267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28470 13 MILE ROAD, SUITE 300, FARMINGTON HILLS, MICHIGAN 48334
(Address of principal executive offices)
248-702-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the Registrant's common stock as of July 31,
2002: 18,489,421
INDEX TO FORM 10-Q
------------------
For Quarter Ended June 30, 2002
Page
Number
------
COVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS. . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . .. . . . . . . . . . . 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 4. Submission of Matters to a Vote of Securityholders . . . . . . . . . . 28
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 29
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
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
contracts; (viii) the impact of energy prices on the amount of projects and
business available to the Company's engineering services business and
construction services business; (ix) the nature, availability and projected
profitability of potential investments available to the Company; (x) the
Company's ability to remain in compliance with its debt covenants and accomplish
its financing objectives in a timely and cost-effective manner in light of
changing conditions in the capital markets; (xi) the Company's ability to
operate and integrate acquired businesses in accordance with its plans and (xii)
the Company's ability to effectively execute its strategic plan.
- 2 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- -------------------- --------------------
2002 2001 2002 2001 2002 2001
--------- -------- --------- --------- --------- ---------
OPERATING REVENUES
Gas sales. . . . . . . . . . . . . . . . . . . . $ 63,869 $48,245 $186,092 $170,269 $311,219 $301,688
Gas transportation . . . . . . . . . . . . . . . 5,646 5,344 13,961 13,402 26,447 26,393
Construction services. . . . . . . . . . . . . . 33,906 30,529 55,780 46,731 122,268 107,966
Other. . . . . . . . . . . . . . . . . . . . . . 2,679 2,394 6,178 6,088 11,409 11,377
--------- -------- --------- --------- --------- ---------
106,100 86,512 262,011 236,490 471,343 447,424
--------- -------- --------- --------- --------- ---------
OPERATING EXPENSES
Cost of gas sold . . . . . . . . . . . . . . . . 40,510 28,043 119,292 108,627 195,638 187,482
Operations and maintenance . . . . . . . . . . . 43,354 41,351 79,973 73,180 169,082 149,854
Depreciation and amortization. . . . . . . . . . 8,892 8,967 17,653 17,952 36,206 35,007
Property and other taxes . . . . . . . . . . . . 3,003 2,807 6,133 5,720 11,975 9,567
Restructuring and impairment charges . . . . . . - - - - 6,103 -
--------- -------- --------- --------- --------- ---------
95,759 81,168 223,051 205,479 419,004 381,910
--------- -------- --------- --------- --------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . . 10,341 5,344 38,960 31,011 52,339 65,514
OTHER INCOME (DEDUCTIONS)
Interest expense . . . . . . . . . . . . . . . . (7,477) (7,717) (15,151) (15,719) (31,216) (32,536)
Other. . . . . . . . . . . . . . . . . . . . . . 709 499 1,034 1,366 2,005 2,485
--------- -------- --------- --------- --------- ---------
(6,768) (7,218) (14,117) (14,353) (29,211) (30,051)
--------- -------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND DIVIDENDS ON TRUST
PREFERRED SECURITIES . . . . . . . . . . . . . . 3,573 (1,874) 24,843 16,658 23,128 35,463
INCOME TAX PROVISION . . . . . . . . . . . . . . . 1,378 (679) 9,168 6,225 9,522 12,984
--------- -------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE DIVIDENDS
ON TRUST PREFERRED SECURITIES. . . . . . . . . . 2,195 (1,195) 15,675 10,433 13,606 22,479
Dividends on trust preferred securities, net of
income taxes . . . . . . . . . . . . . . . . . . 2,150 2,150 4,300 4,300 8,603 8,548
--------- -------- --------- --------- --------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS. . . . . . . . . . . . . . 45 (3,345) 11,375 6,133 5,003 13,931
DISCONTINUED OPERATIONS
Loss from engineering services
operations, net of income taxes . . . . . . - 6 - (416) (727) (440)
Estimated loss on divestiture of
engineering services operations, including
provision for losses during phase-out
period, net of income taxes . . . . . . . . - - - - (4,980) -
--------- -------- --------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS. . . . . . . . . . . . . . . $ 45 $(3,339) $ 11,375 $ 5,717 $ (704) $ 13,491
========= ======== ========= ========= ========= =========
EARNINGS PER SHARE - BASIC
Income (loss) from continuing operations . . . . $ - $ (0.18) $ 0.62 $ 0.34 $ 0.27 $ 0.77
Net income (loss) available to
common shareholders. . . . . . . . . . . . . $ - $ (0.18) $ 0.62 $ 0.32 $ (0.04) $ 0.75
EARNINGS PER SHARE - DILUTED
Income (loss) from continuing operations . . . . $ - $ (0.18) $ 0.62 $ 0.32 $ 0.27 $ 0.74
Net income (loss) available to
common shareholders. . . . . . . . . . . . . $ - $ (0.18) $ 0.62 $ 0.30 $ (0.04) $ 0.71
CASH DIVIDENDS PAID PER SHARE. . . . . . . . . . . $ 0.12 $ 0.21 $ 0.33 $ 0.42 $ 0.75 $ 0.84
AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . 18,431 18,062 18,374 18,060 18,261 18,051
The accompanying notes to the consolidated financial statements are an integral part of these statements.
- 3 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
(In thousands)
June 30, December 31,
2002 2001
-------- ------------
(Unaudited)
CURRENT ASSETS
Cash and temporary cash investments, at cost. . . . . . $ 25 $ 1,728
Receivables, less allowances of $2,143 and $1,849 . . . 46,824 64,219
Accrued revenue . . . . . . . . . . . . . . . . . . . . 12,718 33,153
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 19,169 22,276
Gas in underground storage. . . . . . . . . . . . . . . 21,213 12,731
Materials and supplies, at average cost . . . . . . . . 5,820 5,258
Gas charges recoverable from customers. . . . . . . . . 3,348 1,994
Other . . . . . . . . . . . . . . . . . . . . . . . . . 3,719 3,608
-------- -----------
112,836 144,967
PROPERTY, PLANT AND EQUIPMENT
Gas distribution. . . . . . . . . . . . . . . . . . . . 626,931 613,467
Diversified businesses and other. . . . . . . . . . . . 95,748 94,514
-------- -----------
722,679 707,981
Less - accumulated depreciation and impairments . . . . 200,345 183,436
-------- -----------
522,334 524,545
DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less amortization and impairments of $17,764. 161,084 161,084
Deferred retiree medical benefits . . . . . . . . . . . 9,441 9,891
Unamortized debt expense. . . . . . . . . . . . . . . . 7,423 7,831
Other . . . . . . . . . . . . . . . . . . . . . . . . . 16,248 15,230
-------- -----------
194,196 194,036
-------- -----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . $829,366 $ 863,548
======== ===========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
- 4 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND CAPITALIZATION
(In thousands)
June 30, December 31,
2002 2001
-------- ------------
(Unaudited)
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt. . . $116,656 $137,957
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 19,327 30,410
Customer advance payments . . . . . . . . . . . . . . . . . 7,626 13,530
Accrued interest. . . . . . . . . . . . . . . . . . . . . . 8,528 7,665
Amounts payable to customers. . . . . . . . . . . . . . . . 1,620 1,463
Accumulated deferred income taxes . . . . . . . . . . . . . 1,158 912
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,674 17,076
--------- ---------
170,589 209,013
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . 33,223 33,149
Customer advances for construction. . . . . . . . . . . . . 14,589 15,548
Unamortized investment tax credit . . . . . . . . . . . . . 1,312 1,445
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,794 12,223
--------- ---------
59,918 62,365
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . 338,347 338,966
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
PREFERRED SECURITIES OF SUBSIDIARIES HOLDING
SOLELY DEBT SECURITIES OF SEMCO ENERGY, INC.. . . . . . . . 139,415 139,394
COMMON SHAREHOLDERS' EQUITY
Common stock - $1 par value; 40,000,000 shares authorized;
18,468,055 and 18,240,143 shares outstanding. . . . . . . 18,468 18,240
Capital surplus and accumulated other comprehensive income. 116,715 114,895
Retained earnings (deficit) . . . . . . . . . . . . . . . . (14,086) (19,325)
--------- ---------
121,097 113,810
--------- ---------
TOTAL LIABILITIES AND CAPITALIZATION. . . . . . . . . . . . . $829,366 $863,548
========= =========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
- 5 -
SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 45 $ (3,339) $ 11,375 $ 5,717
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . 8,892 9,080 17,653 18,178
Changes in assets and liabilities, net of effects of
acquisitions, divestitures and other changes as
shown below. . . . . . . . . . . . . . . . . . . . 1,604 (11,491) 10,196 22,779
--------- --------- --------- ---------
NET CASH FROM OPERATING ACTIVITIES. . . . . . . 10,541 (5,750) 39,224 46,674
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions - gas distribution . . . . . . . . . . . (6,624) (9,774) (13,631) (17,668)
Property additions - diversified businesses and other . . . (1,871) (6,209) (2,686) (10,643)
Proceeds from property sales, net of retirement costs . . . 324 102 883 (136)
--------- --------- --------- ---------
NET CASH FROM INVESTING ACTIVITIES. . . . . . . (8,171) (15,881) (15,434) (28,447)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of expenses . . . . . . . . . 697 111 1,944 144
Issuance of long-term debt, net of expenses . . . . . . . . - 58,438 - 58,438
Net cash change in notes payable. . . . . . . . . . . . . . (1,470) (32,063) (21,301) (62,791)
Payment of dividends on common stock. . . . . . . . . . . . (2,301) (3,792) (6,136) (7,584)
--------- --------- --------- ---------
NET CASH FROM FINANCING ACTIVITIES. . . . . . . (3,074) 22,694 (25,493) (11,793)
--------- --------- --------- ---------
CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease) . . . . . . . . . . . . . . . . . . (704) 1,063 (1,703) 6,434
Beginning of period . . . . . . . . . . . . . . . . . . . . 729 6,592 1,728 1,221
--------- --------- --------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 25 $ 7,655 $ 25 $ 7,655
========= ========= ========= =========
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS, DIVESTITURES AND OTHER CHANGES:
Receivables, net. . . . . . . . . . . . . . . . . . . $ 16,637 $ (1,101) $ 17,395 $ 24,003
Accrued revenue . . . . . . . . . . . . . . . . . . . 15,170 10,865 20,435 19,491
Materials, supplies and gas in
underground storage. . . . . . . . . . . . . . . . (16,401) (7,281) (9,044) (916)
Gas charges recoverable from customers. . . . . . . . (1,570) 162 (1,354) 388
Accounts payable. . . . . . . . . . . . . . . . . . . (4,316) (3,343) (11,083) (7,992)
Customer advances and amounts payable
to customers . . . . . . . . . . . . . . . . . . . (1,858) (456) (6,706) (8,120)
Other . . . . . . . . . . . . . . . . . . . . . . . . (6,058) (10,337) 553 (4,075)
--------- --------- --------- ---------
$ 1,604 $(11,491) $ 10,196 $ 22,779
========= ========= ========= =========
The accompanying notes to the consolidated financial statements are an integral part of these statements.
- 6 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Under the rules and regulations of the Securities and Exchange Commission
for Form 10-Q Quarterly Reports, certain footnotes and other financial statement
information normally included in the year-end financial statements of SEMCO
Energy, Inc. and its subsidiaries (the "Company") have been condensed or omitted
in the accompanying unaudited financial statements. These financial statements
prepared by the Company should be read in conjunction with the financial
statements and notes thereto included in the Company's 2001 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The information in
the accompanying financial statements reflects, in the opinion of the Company's
management, all adjustments (which include only normal recurring adjustments)
necessary for a fair statement of the information shown, subject to year-end and
other adjustments, as later information may require. Certain reclassifications
have been made to the prior periods' financial statements to conform with the
2002 presentation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
GAS IN UNDERGROUND STORAGE - Effective April 1, 2002, the Battle Creek
Division of the Company's Gas Distribution business changed its method of
accounting for gas inventory from last-in, first-out (LIFO) to average cost.
This change in accounting principles was made in order to provide a better
matching of expenses with revenues and make Battle Creek's accounting for gas
inventory consistent with the Company's other gas distribution divisions and
other Michigan gas distribution companies. This accounting change was not
material to the financial statements, and, accordingly, no retroactive
restatement of prior years' financial statements was made.
COMPREHENSIVE INCOME - The Company's comprehensive income (loss) for the
three, six and twelve months ended June 30, 2002 and June 30, 2001 is summarized
in the following table.
Three months ended Six months ended Twelve months ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2002 2001 2002 2001 2002 2001
-------- -------- ------- ------- -------- -------
(in thousands)
Net income (loss) available to common
shareholders . . . . . . . . . . . . . . $ 45 $(3,339) $11,375 $5,717 $ (704) $13,491
Minimum pension liability adjustment, net
of income tax benefits of $781 . . . . . - - - - (1,452) -
Unrealized derivative gain (loss) on
interest rate hedge from an
investment in an affiliate . . . . . . . 67 - 206 - (538) -
-------- -------- ------- ------- -------- -------
Total other comprehensive income (loss). . $ 112 $(3,339) $11,581 $5,717 $(2,694) $13,491
======== ======== ======= ======= ======== =======
- 7 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS - On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141
addresses financial accounting and reporting for all business combinations and
requires that all business combinations entered into subsequent to June 2001 be
recorded under the purchase method. This Statement also addresses financial
accounting and reporting for goodwill and other intangible assets acquired in a
business combination at acquisition. SFAS 142 addresses financial accounting
and reporting for intangible assets acquired individually or with a group of
other assets at acquisition. This Statement also addresses financial accounting
and reporting for goodwill and other intangible assets subsequent to their
acquisition.
Effective with the date of adoption of these Statements the Company ceased
Goodwill amortization, which has reduced amortization expense for the six months
ended June 30, 2002 by approximately $1.4 million after income taxes (or $0.08
per share based on the current level of outstanding common stock).
The Company is also required to complete a transition impairment test in
the year of adoption, and perform subsequent impairment tests on the remaining
goodwill balance annually or at any time when events occur which could impact
the value of the Company's business segments. If an impairment test of goodwill
shows that the carrying amount of the goodwill is in excess of the fair value, a
corresponding impairment loss would be recorded in the consolidated statements
of income. Initial impairment tests have been performed for the Company's
business units and the results of those tests indicate that no impairment of the
Company's goodwill balances existed as of January 1, 2002. As a result, there
was no change in the carrying amount of goodwill at June 30, 2002 when compared
to December 31, 2001.
- 8 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents what would have been reported as net income
(loss) available to common shareholders and the related per share amounts on a
basic and diluted basis in all periods presented, exclusive of amortization
expense (including any related tax effects) recognized in those periods related
to goodwill.
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2002 2001 2002 2001 2002 2001
-------- -------- ------- ------- -------- ---------
(in thousands, except per share amounts)
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS
Reported income (loss) from
continuing operations . . . . . . . $ 45 $(3,345) $11,375 $6,133 $ 5,003 $ 13,931
Discontinued operations. . . . . . . . . - 6 - (416) (5,707) (440)
-------- -------- ------- ------- -------- ---------
Reported net income (loss) available to
common shareholders . . . . . . . . 45 (3,339) 11,375 5,717 (704) 13,491
Add back: Goodwill amortization, net of
income taxes. . . . . . . . . . . . - 704 - 1,404 1,401 2,785
-------- -------- ------- ------- -------- ---------
Adjusted net income (loss) available to
common shareholders . . . . . . . . $ 45 $(2,635) $11,375 $7,121 $ 697 $ 16,276
-------- -------- ------- ------- -------- ---------
ADJUSTED EARNINGS PER SHARE - BASIC
Reported income (loss) from
continuing operations . . . . . . . $ 0.00 $ (0.18) $ 0.62 $ 0.34 $ 0.27 $ 0.77
Discontinued operations. . . . . . . . . - 0.00 - (0.02) (0.31) (0.02)
-------- -------- ------- ------- -------- ---------
Reported net income (loss) available to
common shareholders . . . . . . . . 0.00 (0.18) 0.62 0.32 (0.04) 0.75
Add back: Goodwill amortization, net of
income taxes. . . . . . . . . . . . - 0.04 - 0.08 0.08 0.15
-------- -------- ------- ------- -------- ---------
Adjusted net income (loss) available to
common shareholders . . . . . . . . $ 0.00 $ (0.14) $ 0.62 $ 0.40 $ 0.04 $ 0.90
-------- -------- ------- ------- -------- ---------
ADJUSTED EARNINGS PER SHARE - DILUTED
Reported income (loss) from
continuing operations . . . . . . . $ 0.00 $ (0.18) $ 0.62 $ 0.32 $ 0.27 $ 0.74
Discontinued operations. . . . . . . . . - 0.00 - (0.02) (0.31) (0.03)
-------- -------- ------- ------- -------- ---------
Reported net income (loss) available to
common shareholders . . . . . . . . 0.00 (0.18) 0.62 0.30 (0.04) 0.71
Add back: Goodwill amortization, net of
income taxes. . . . . . . . . . . . - 0.04 - 0.08 0.08 0.15
-------- -------- ------- ------- -------- ---------
Adjusted net income (loss) available to
common shareholders . . . . . . . . $ 0.00 $ (0.14) $ 0.62 $ 0.38 $ 0.04 $ 0.86
-------- -------- ------- ------- -------- ---------
On January 1, 2002, the Company also adopted SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and Accounting Principles Board ("APB") Opinion 30, "Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
SFAS 144 requires long-lived assets to be measured at the lower of either
the carrying amount or the fair value less the cost to sell the assets, whether
reported in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred.
- 9 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS 144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished from the
rest of the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. The adoption of SFAS 144 will result in
the Company accounting for any future impairment or disposal of long-lived
assets under the provisions of SFAS 144, but has not changed the accounting used
for previous asset impairments or disposals.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. The Standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred.
When the liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded amount
or incurs a gain or loss upon settlement. The Company is currently studying
SFAS 143 but has not quantified the effects of adoption on its financial
statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 eliminates SFAS 4, Reporting Gains and Losses from Extinguishment of
Debt" ("SFAS 4") and thus allows for only those gains or losses on the
extinguishment of debt that meet the criteria of extraordinary items to be
treated as such in the financial statements. SFAS 145 also amends SFAS 13,
Accounting for Leases" ("SFAS 13") to require sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The provisions of this Statement relating to the
rescission of SFAS 4 are effective for fiscal years beginning after May 15,
2002. The provisions of this Statement relating to the amendment of SFAS 13 are
effective for transactions occurring after May 15, 2002. All other provisions
of this Statement are effective for financial statements issued on or after May
15, 2002.
In June 2002, The FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 requires that the liability for
costs associated with exit or disposal activities be recognized when incurred,
rather than at the date of a commitment to an exit or disposal plan. SFAS 146
is to be applied prospectively to exit or disposal activities initiated after
December 31, 2002.
The Company is in the process of evaluating the impact of SFAS 145 and SFAS
146 on its financial statements, and does not expect the impact to be material.
SUPPLEMENTAL CASH FLOW INFORMATION - Supplemental cash flow information for
the three and six month periods ended June 30, 2002 and 2001 is summarized in
the table below.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
------ ------ ------- -------
(in thousands)
CASH PAID DURING THE PERIOD FOR:
Interest. . . . . . . . . . . . $7,538 $8,440 $13,880 $15,591
Income taxes, net of refunds. . $2,500 $4,258 $ 4,100 $ 4,258
- 10 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 2 - SHORT-TERM BORROWINGS AND CAPITALIZATION
SHORT-TERM BORROWINGS - On June 25, 2002, the Company entered into $145
million of credit facilities with a group of banks, replacing $145 million of
bilateral lines, which were due to expire. The new facilities, all of which are
committed, consist of an $80 million three-year revolver and a $65 million
364-day facility, with a one-year term loan option. At June 30, 2002, $59.5
million of these credit facilities were unused.
COMMON STOCK EQUITY - On June 20, 2002, the Company's Board of Directors
declared a quarterly cash dividend of $0.125 per share on the Company's common
stock. The dividend is payable on August 15, 2002 to shareholders of record at
the close of business on August 1, 2002.
In May 2002, the Company paid a quarterly cash dividend of $0.125 per share
on its common stock. The total cash dividend was approximately $2.3 million of
which $.4 million was reinvested by shareholders into common stock through
participation in the Direct Stock Purchase and Dividend Reinvestment Plan
("DRIP"). The cash dividends for the six months ended June 30 2002, were $6.1
million, of which $1.0 million was reinvested by shareholders through
participation in the DRIP. During the three and six months ended June 30, 2002,
the Company issued approximately 69,700 and 215,500 shares of Company common
stock, respectively, to meet the dividend reinvestment and stock purchase
requirements of its DRIP participants. Also during the three and six months
ended June 30, 2002, the Company: a) issued approximately 5,100 and 12,500
shares of its common stock, respectively, to certain of the Company's employee
benefit plans and b) purchased 19,400 and 40,200 shares of its common stock,
respectively, on the open market to contribute to certain of its employee
benefit plans.
NOTE 3 - RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
The Company's business activities expose it to a variety of risks,
including commodity price risk and interest rate risk. The Company's management
identifies risks associated with the Company's business and determines which
risks it wants to manage and which types of instruments it should use to manage
those risks.
The Company records all derivative instruments it enters into under the
provisions of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS 137 and SFAS 138, which were amendments to SFAS 133
(hereinafter collectively referred to as "SFAS 133"). SFAS 133 requires that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the statement of financial position, as
either an asset or liability, measured at its fair value. SFAS 133 also
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.
An affiliate, in which the Company has a 50% investment, uses an interest
rate swap agreement to hedge the variable interest rate payments on its
long-term debt. This agreement qualifies under the provisions of SFAS 133 as a
cash flow hedge. As a result of this interest rate swap agreement, the
Company's Consolidated Statements of Financial Position, at June 30, 2002 and
December 31, 2001, reflected a $.5 million and $.7 million reduction,
respectively, in the Company's equity investment in the affiliate and in
accumulated other comprehensive income.
- 11 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 3 - RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
(CONTINUED)
In August 2001, the Company entered into an interest rate swap agreement in
order to hedge its $55 million 8% Notes due June 1, 2004. This agreement also
qualifies under the provisions of SFAS 133 as a fair value hedge. In accordance
with SFAS 133, the Company's Consolidated Statements of Financial Position, at
June 30, 2002 and December 31, 2001, included an asset of $1.7 million and $1.9
million, respectively, and an increase in long-term debt of $1.7 million and
$1.9 million, respectively, for this interest rate swap.
NOTE 4 - EARNINGS PER SHARE
The computations of basic and diluted earnings per share for the three, six
and twelve months ended June 30, 2002 and 2001 are as follows (in thousands
except per share amounts):
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------ ----------------- -------------------
2002 2001 2002 2001 2002 2001
-------- -------- ------- -------- -------- --------
(in thousands)
BASIC EARNINGS PER SHARE COMPUTATION
Income (loss) from continuing operations . . . . $ 45 $(3,345) $11,375 $ 6,133 $ 5,003 $13,931
Discontinued operations (a). . . . . . . . . . . - 6 - (416) (5,707) (440)
-------- -------- ------- -------- -------- --------
Net income (loss) available to
common shareholders . . . . . . . . . . . . . $ 45 $(3,339) $11,375 $ 5,717 $ (704) $13,491
-------- -------- ------- -------- -------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . . . 18,431 18,062 18,374 18,060 18,261 18,051
-------- -------- ------- -------- -------- --------
EARNINGS PER SHARE - BASIC
Income (loss) from continuing operations . . . . $ 0.00 $ (0.18) $ 0.62 $ 0.34 $ 0.27 $ 0.77
Discontinued operations (a). . . . . . . . . . . - 0.00 - (0.02) (0.31) (0.02)
-------- -------- ------- -------- -------- --------
Net income (loss) available to
common shareholders . . . . . . . . . . . . . $ 0.00 $ (0.18) $ 0.62 $ 0.32 $ (0.04) $ 0.75
-------- -------- ------- -------- -------- --------
DILUTED EARNINGS PER SHARE COMPUTATION
Income (loss) from continuing operations . . . . $ 45 $(3,345) $11,375 $ 6,133 $ 5,003 $13,931
Discontinued operations (a). . . . . . . . . . . - 6 - (416) (5,707) (440)
-------- -------- ------- -------- -------- --------
Net income (loss) available to
common shareholders . . . . . . . . . . . . . $ 45 $(3,339) $11,375 $ 5,717 $ (704) $13,491
-------- -------- ------- -------- -------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . . . 18,431 18,062 18,374 18,060 18,261 18,051
Incremental shares from assumed conversions of:
FELINE PRIDES - stock purchase contracts (b) . . - - - 829 - 805
Stock options (b). . . . . . . . . . . . . . . . 41 - 26 27 - 31
-------- -------- ------- -------- -------- --------
DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING (B). . . . . . . . . . . . . 18,472 18,062 18,400 18,916 18,261 18,887
-------- -------- ------- -------- -------- --------
EARNINGS PER SHARE - DILUTED
Income (loss) from continuing operations . . . . $ 0.00 $ (0.18) $ 0.62 $ 0.32 $ 0.27 $ 0.74
Discontinued operations (a). . . . . . . . . . . - 0.00 - (0.02) (0.31) (0.03)
-------- -------- ------- -------- -------- --------
Net income (loss) available to
common shareholders . . . . . . . . . . . . . $ 0.00 $ (0.18) $ 0.62 $ 0.30 $ (0.04) $ 0.71
-------- -------- ------- -------- -------- --------
(a) Effective December 2001, the Company began accounting for the engineering services business as a discontinued
operation. Accordingly, it's operating results are segregated and reported as discontinued operations in the
Consolidated Statement of Income, with prior years restated.
(b) The stock options and FELINE PRIDES were not included in the computation of diluted earnings per share for
the three months ended June 30, 2001 and the twelve months ended June 30, 2002 because their effect was
antidilutive.
- 12 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 5 - BUSINESS SEGMENTS
The Company operates four reportable business segments: (1) gas
distribution; (2) construction services; (3) information technology services;
and (4) propane, pipelines and storage. The latter three segments are sometimes
referred to together as the "diversified businesses". For information regarding
the determination of reportable business segment, refer to Note 10 of the Notes
to the Consolidated Financial Statements in the Company's 2001 Annual Report on
Form 10-K.
The Company's gas distribution segment distributes and transports natural
gas to approximately 269,000 customers in the state of Michigan and
approximately 109,000 customers in the state of Alaska. The construction
services segment ("Construction Services") currently conducts most of its
business in the midwestern, southern and southeastern areas of the United
States. Its primary service is the installation of underground natural gas
mains and service lines. Other services include the installation and
maintenance of compressor and pipeline stations. The information technology
service segment ("IT Services") is headquartered in Michigan and provides IT
infrastructure outsourcing services, and other IT services with a focus on
mid-range computers, particularly the IBM I-Series (AS-400) platform. The
Company's other business segments currently account for a large portion of IT
Services revenues. The propane, pipelines and storage segment sells more than
four million gallons of propane annually to retail customers in Michigan's upper
peninsula and northeast Wisconsin and operates natural gas transmission and
storage facilities in Michigan.
The accounting policies of the operating segments are the same as those
described in Notes 1 and 10 of the Notes to the Consolidated Financial
Statements in the Company's 2001 Annual Report on Form 10-K, except that
intercompany transactions have not been eliminated in determining individual
segment results. The following table provides business segment information as
well as a reconciliation ("Corporate and other") of the segment information to
the applicable line in the Consolidated Financial Statements. Corporate and
Other includes corporate related expenses not allocated to segments,
intercompany eliminations and results of other smaller operations.
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------- -------------------- --------------------
2002 2001 2002 2001 2002 2001
--------- -------- --------- --------- --------- ---------
(in thousands)
OPERATING REVENUES
Gas Distribution . . . . . . . . $ 70,354 $54,457 $201,807 $185,426 $340,746 $331,661
Construction Services. . . . . . 36,524 34,149 62,105 51,997 136,313 118,283
Information Technology Services. 2,318 2,938 4,578 5,148 9,704 8,729
Propane, Pipelines and Storage . 1,416 1,369 3,654 4,118 6,979 7,778
Corporate and Other (a). . . . . (4,512) (6,401) (10,133) (10,199) (22,399) (19,027)
--------- -------- --------- --------- --------- ---------
Total Operating Revenues . . . $106,100 $86,512 $262,011 $236,490 $471,343 $447,424
========= ======== ========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas Distribution . . . . . . . . $ 8,535 $ 4,886 $ 38,727 $ 32,845 $ 56,219 $ 61,714
Construction Services. . . . . . 1,939 1,076 629 (997) 251 5,524
Information Technology Services. 143 85 319 237 513 591
Propane, Pipelines and Storage . 380 347 990 1,082 1,779 1,864
Corporate and Other. . . . . . . (656) (1,050) (1,705) (2,156) (6,423) (4,179)
--------- -------- --------- --------- --------- ---------
Total Operating Income . . . . $ 10,341 $ 5,344 $ 38,960 $ 31,011 $ 52,339 $ 65,514
========= ======== ========= ========= ========= =========
(a) Includes the elimination of intercompany construction services revenue
of $2,618,000, $6,325,000 and $14,045,000 for the three, six and twelve months
ended June 30, 2002, respectively, and $3,620,000, $5,266,000 and $10,319,000
for the three, six and twelve months ended June 30, 2001, respectively. Also
includes the elimination of intercompany information technology services revenue
of $1,858,000, $3,728,000 and $8,187,000 for the three, six and twelve months
ended June 30, 2002, respectively, and $2,780,000, $4,890,000 and $8,574,000 for
the three, six and twelve months ended June 30, 2001, respectively.
- 13 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS - Prior to the construction of major natural gas
pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. The Company owns seven Michigan sites which
formerly housed such manufacturing facilities and expects that it will
ultimately incur investigation and remedial action costs at some of these sites,
and a number of other sites. The Company has closed a related site with the
approval of the appropriate environmental regulatory authority in the State of
Michigan, and has developed plans and conducted preliminary field investigations
at two other sites. 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.
OTHER - In the normal course of business, the Company may be a party to
certain lawsuits and administrative proceedings before various courts and
government agencies. These lawsuits and proceedings may involve personal
injury, property damage, contractual issues and other matters. Management
cannot predict the ultimate outcome of any pending or threatened litigation or
of actual or possible claims; however, management believes resulting
liabilities, if any, will not have a material adverse impact upon the Company's
financial position or results of operations. Refer to Note 13 of the Notes
to the Consolidated Financial Statements in the Company's 2001 Annual Report on
Form 10-K for further details regarding other commitments and contingencies.
NOTE 7 - DISCONTINUED OPERATIONS
In December 2001, the Company's board of directors approved a plan to redirect
the Company's business strategy, which includes the divestiture of its
engineering services business. The planned divestiture of the Company's
engineering services business has been accounted for as a discontinued operation
and, accordingly, the operating results and the estimated loss on the disposal
of this business segment are segregated and reported as discontinued operations
in the Consolidated Statements of Income, with prior years restated. In the
fourth quarter of 2001, the Company recorded a
loss of $5.0 million, net of income taxes, for the estimated loss the Company
expects to incur on the disposal of its engineering business segment including
estimated losses from operations during the phase-out period. As of June 30,
2002, no adjustments to this estimated loss were required. The Company plans to
divest the engineering business before December 2002, but cannot make any
assurance that it will be able to do so.
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2002 2001 2002 2001 2002 2001
------ ------- ------ ------- -------- --------
(in thousands)
CONSOLIDATED STATEMENTS OF INCOME DATA
Revenues . . . . . . . . . . . . . . . . . . . $ - $2,817 $ - $5,048 $ 7,199 $14,176
Operating expenses . . . . . . . . . . . . . . - 3,120 - 6,038 8,302 15,353
Operating income (loss). . . . . . . . . . . . - (303) - (990) (1,103) (1,177)
Other income (deductions). . . . . . . . . . . - 310 - 313 (58) 490
Income taxes . . . . . . . . . . . . . . . . . - 1 - (261) (434) (247)
------ ------- ------ ------- -------- --------
Income (loss) from discontinued operations . . $ - $ 6 $ - $ (416) $ (727) $ (440)
------ ------- ------ ------- -------- --------
Estimated loss on divestiture of discontinued
operations, including provisions for losses
during phase-out period, net of income
tax benefits of $2,429.. . . . . . . . . . . $ - $ - $ - $ - $(4,980) $ -
------ ------- ------ ------- -------- --------
- 14 -
SEMCO ENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 7 - DISCONTINUED OPERATIONS (Continued)
June 30, December 31,
2002 2001
--------- -------------
(in thousands)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DATA
Current assets . . . . . . . . . . . . . . . . . . $ 3,135 $ 4,050
Property, plant and equipment, net . . . . . . . . 220 250
Deferred charges and other assets, net . . . . . . 2 2
Current liabilities. . . . . . . . . . . . . . . . (4,144) (4,880)
Deferred credits and other liabilities . . . . . . - -
--------- ------------
Net capital deficiency of discontinued operations
held for sale . . . . . . . . . . . . . . . . . $ (787) $ (578)
--------- ------------
- 15 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
SEMCO Energy, Inc. and its subsidiaries (the "Company") had net income of
$45,000 (or breakeven on a per share basis) for the quarter ended June 30, 2002
compared to a net loss of $3.3 million (or $0.18 per share) for the quarter
ended June 30, 2001. All references to earnings per share in the Management's
Discussion and Analysis are on a diluted basis. For information related to the
calculation of diluted earnings per share, refer to Note 4 of the Notes to the
Consolidated Financial Statements. On a weather-normalized basis, the net loss
for the three months ended June 30, 2002 would have been approximately $.8
million (or $.04 per share) compared to a net loss of approximately $2.2 million
(or $0.12 per share) for the same period of the prior year.
The Company had net income of $11.4 million (or $.62 per share) for the six
months ended June 30, 2002 compared to net income of $5.7 million (or $0.30 per
share) for the six months ended June 30, 2001. On a weather-normalized basis,
the net income for the six months ended June 30, 2002 would have been
approximately $12.9 million (or $.70 per share) compared to net income of
approximately $9.1 million (or $0.48 per share) for the same period of the prior
year.
The Company had a net loss of $.7 million (or $.04 per share) for the
twelve months ended June 30, 2002 compared to net income of $13.5 million (or
$0.71 per share) for the twelve months ended June 30, 2001. On a
weather-normalized basis, net income would have been approximately $2.9 million
(or $.16 per share) for the twelve months ended June 30, 2002, compared to net
income of approximately $17.4 million (or $0.92 per share) for the same period
ended June 30, 2001. The results for the twelve months ended June 30, 2002 also
include several unusual items which reduced net income by $10.8 million. The
unusual items include losses from discontinued operations, restructuring
charges, asset impairments and other unusual items. Refer to Management's
Discussion and Analysis and Note 14 of the Notes to the Consolidated Financial
Statements in the Company's 2001 Annual Report on Form 10-K for further
information regarding these unusual items.
The Company's largest business segment, natural gas distribution, is
seasonal in nature and depends on the winter months for the majority of its
operating revenue. As a result, a substantial portion of the Company's annual
income is earned during the first and fourth quarters of the year. In addition,
the Company's construction services business segment is also seasonal in nature
and earns most of its income during the summer and fall months and incurs losses
during the winter and spring months. Therefore, the Company's results of
operations for the three and six months ended June 30, 2002 and 2001 are not
necessarily indicative of results for a full year.
- 16 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- -------------------- --------------------
2002 2001 2002 2001 2002 2001
--------- -------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Operating revenues. . . . . . . . . . . . . $106,100 $86,512 $262,011 $236,490 $471,343 $447,424
Restructuring & impairment charges. . . . - - - - 6,103 -
Other operating expenses. . . . . . . . . 95,759 81,168 223,051 205,479 412,901 381,910
--------- -------- --------- --------- --------- ---------
Operating income. . . . . . . . . . . . . . $ 10,341 $ 5,344 $ 38,960 $ 31,011 $ 52,339 $ 65,514
Other income & (deductions) . . . . . . . (6,768) (7,218) (14,117) (14,353) (29,211) (30,051)
Income tax (provision) credit . . . . . . (1,378) 679 (9,168) (6,225) (9,522) (12,984)
--------- -------- --------- --------- --------- ---------
Income before dividends on trust preferred
securities & discontinued operations. . . $ 2,195 $(1,195) $ 15,675 $ 10,433 $ 13,606 $ 22,479
Dividends on trust preferred
securities, net of income tax . . . . . (2,150) (2,150) (4,300) (4,300) (8,603) (8,548)
--------- -------- --------- --------- --------- ---------
Income (loss) from continuing operations. . $ 45 $(3,345) $ 11,375 $ 6,133 $ 5,003 $ 13,931
Income (loss) from discontinued
operations, net of income taxes . . . . . - 6 - (416) (5,707) (440)
Net income (loss) available to common
shareholders. . . . . . . . . . . . . . . $ 45 $(3,339) $ 11,375 $ 5,717 $ (704) $ 13,491
Earnings per share ("EPS"):
Basic . . . . . . . . . . . . . . . . . . $ - $ (0.18) $ 0.62 $ 0.32 $ (0.04) $ 0.75
Diluted . . . . . . . . . . . . . . . . . $ - $ (0.18) $ 0.62 $ 0.30 $ (0.04) $ 0.71
Average common shares outstanding . . . . . 18,431 18,062 18,374 18,060 18,261 18,051
Impact on net income of the following:
Colder (warmer) than normal weather . . . $ 866 $(1,102) $ (1,573) $ (3,334) $ (3,589) $ (3,924)
Income (loss) from discontinued
operations. . . . . . . . . . . . . . . - 6 - (416) (5,707) (440)
Reorganization charges, impairments
and other unusual items . . . . . . . . - - - - (5,083) -
Net income excluding the foregoing items. . $ (821) $(2,243) $ 12,948 $ 9,467 $ 13,675 $ 17,855
EPS excluding the foregoing items:
Basic . . . . . . . . . . . . . . . . . . $ (0.04) $ (0.12) $ 0.70 $ 0.52 $ 0.75 $ 0.99
Diluted . . . . . . . . . . . . . . . . . $ (0.04) $ (0.12) $ 0.70 $ 0.50 $ 0.75 $ 0.95
The Company operates four reportable business segments: (1) gas
distribution; (2) construction services; (3) information technology services;
and (4) propane, pipelines and storage. The latter three segments are sometimes
referred to together as the "diversified businesses". Refer to Note 5 of the
Notes to the Consolidated Financial Statements for further information regarding
business segments and a summary of operating revenues and operating income by
business segment.
The business segment analyses and other discussions on the next several
pages provide additional information regarding variations in operating results
when comparing the three, six and twelve- month periods ended June 30, 2002 to
the same periods of the prior year. The Company evaluates the performance of
its business segments based on the operating income generated. Operating income
does not include income taxes, interest expense, discontinued operations or
other non-operating income and expense items. A review of the non-operating
items follows the business segment discussions.
- 17 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION
The Company's gas distribution business segment consists of operations in
Michigan and Alaska. The Michigan operation is sometimes referred to as "SEMCO
Gas" and the Alaska operation is sometimes referred to as "ENSTAR". These
operations are referred to together as the "Gas Distribution Business".
Operating income for the Gas Distribution Business was $8.5 million for the
quarter ended June 30, 2002, compared to $4.9 million for the quarter ended June
30, 2001. On a weather-normalized basis, the operating income of the Gas
Distribution Business would have been approximately $7.2 million for the second
quarter of 2002 compared to approximately $6.6 million for the same period of
the prior year.
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
-------------------- -------------------- --------------------
2002 2001 2002 2001 2002 2001
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
Gas sales revenues. . . . . . . . . . $ 63,869 $ 48,245 $ 186,092 $ 170,269 $ 311,219 $ 301,689
Cost of gas sold. . . . . . . . . . . 40,510 28,043 119,292 108,627 195,638 187,482
--------- --------- --------- --------- --------- ---------
Gas sales margin. . . . . . . . . . $ 23,359 $ 20,202 $ 66,800 $ 61,642 $ 115,581 $ 114,207
Gas transportation revenue. . . . . . 5,645 5,344 13,961 13,402 26,448 26,393
Other operating revenue . . . . . . . 840 868 1,754 1,755 3,079 3,579
--------- --------- --------- --------- --------- ---------
Gross margin. . . . . . . . . . . . $ 29,844 $ 26,414 $ 82,515 $ 76,799 $ 145,108 $ 144,179
Restructuring charges . . . . . . . . - - - - 1,051 -
Other operating expenses. . . . . . . 21,309 21,528 43,788 43,954 87,838 82,465
--------- --------- --------- --------- --------- ---------
Operating income. . . . . . . . . . . $ 8,535 $ 4,886 $ 38,727 $ 32,845 $ 56,219 $ 61,714
========= ========= ========= ========= ========= =========
Weather-normalized operating income . $ 7,191 $ 6,631 $ 41,097 $ 38,270 $ 61,559 $ 68,314
========= ========= ========= ========= ========= =========
Volumes of gas sold (MMcf). . . . . . 11,645 9,806 38,207 36,761 64,573 65,294
Volumes of gas transported (MMcf) . . 10,939 9,277 22,990 21,849 44,133 43,891
Number of customers at end of period. 377,480 368,733 377,480 368,733 377,480 368,733
Degree Days . . . . . . . . . . . . . 1,233 885 4,473 4,139 7,386 7,268
Percent colder (warmer) than normal . 12.2% (19.4)% (2.3)% (9.8)% (4.0)% (5.5)%
The amounts in the above table include intercompany transactions.
GAS SALES MARGIN - During the three and six months ended June 30, 2002, gas
sales margin increased by $3.2 million and $5.2 million, respectively, when
compared to the same periods in 2001. The increases were due primarily to
colder weather, increased gas costs savings, the addition of new customers, and
customers switching from the Company's aggregated transportation service ("ATS")
program back to gas sales service.
Under the terms of the Company's third-party natural gas supply and
management agreements for its Michigan operations, certain gas cost savings are
passed through to the Company. The increases in gas cost savings during the
three and six months ended June 30, 2002, the majority of which occurred in the
first quarter of 2002, were due in part to the effective management of the
Company's gas supply under these agreements. In addition gas cost savings were
lower than normal during the first half of 2001 as a result of purchasing gas
with a higher thermal content. A significant portion of the gas cost savings
realized during the first quarter of 2002 is non-recurring. For further
information regarding the Company's natural gas supply and management agreements
refer to Note 2 of the Notes to Consolidated Financial Statements in the
Company's 2001 Annual Report in Form 10-K.
- 18 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
Weather during the second quarter of 2002 was 12% colder than normal in
Michigan and Alaska combined, while the weather during the second quarter of
2001 was 19% warmer than normal. Under normal weather conditions, gas sales
margin for the quarter ended June 30, 2002 would have been lower by
approximately $1.3 million and for the quarter ended June 30, 2001 would have
been higher by approximately $1.7 million.
Weather during the six months ended June 30, 2002 was 2% warmer than normal
in Michigan and Alaska combined, while the weather during the six months ended
June 30, 2001 was 10% warmer than normal. Under normal weather conditions, gas
sales margin for the six months ended June 30, 2002 would have been higher by
approximately $2.4 million and for the six months ended June 30, 2001 would have
been higher by approximately $5.4 million.
The ATS program for residential customers, which was effective from April
1, 1999, through March 31, 2002, provided all Michigan residential customers the
opportunity to purchase their gas from a third-party supplier, while allowing
the Gas Distribution Business to continue charging the existing distribution
fees and customer fees. Distribution and customer fees associated with
customers who switch to third-party gas suppliers are recorded in gas
transportation revenue rather than gas sales revenue, because the Company acts
as a transporter for those customers. During 2001 and 2002 certain ATS
customers switched back to the Company's gas sales service because the
third-party suppliers they were utilizing stopped participating in the ATS
program, primarily due to a significant increase in the market price of natural
gas. Also, when the ATS program for residential customers ended on March 31,
2002, all remaining ATS customers became gas sales customers.
Gas sales margin for the twelve months ended June 30, 2002 increased by
$1.4 million, when compared to the twelve months ended June 30, 2001. The
increase is due primarily to an increase in gas sales as a result of colder
weather compared to the twelve months ended March 31, 2001, the addition of new
customers, and customers switching from the Company's ATS program back to gas
sales service.
Weather during the twelve months ended June 30, 2002 was 4% warmer than
normal in Michigan and Alaska combined, while the weather during the twelve
months ended June 30, 2001 was 5.5% warmer than normal. Under normal weather
conditions, gas sales margin for the twelve months ended June 30, 2002 and 2001
would have been higher by approximately $5.3 million and $6.6 million,
respectively.
GAS TRANSPORTATION REVENUE - For the three and six months ended June 30,
2002, gas transportation revenue increased by $.3 million and $.6 million,
respectively, when compared to the same periods ended June 30, 2001. The
primary cause of these increases was an increase in commercial transportation
volumes, as a result of cooler weather in Alaska for the first and second
quarters of 2002 in comparison to the same periods last year and an increase in
industrial transportation volumes. This was offset partially by a decrease in
transportation volumes for power companies and the impact of ATS customers
switching from the ATS program back to gas sales service during the period. As
discussed above, under the ATS program, the Company charges ATS customers the
same distribution fees and customer fees that are charged to gas sales service
customers.
Transportation revenue for the twelve months ended June 30, 2002 increased
by approximately $.1 million when compared to the same period ended June 30,
2001. This increase consists of two offsetting factors: an increase in
transportation revenues due to the factors discussed above, offset by the impact
of ATS customers switching from the ATS program to gas sales service during the
last 24 months.
- 19 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
GAS DISTRIBUTION (CONTINUED)
OTHER OPERATING REVENUE - Other operating revenue for the three and six
month periods ended June 30, 2002, was essentially unchanged when compared to
the same periods ended June 30, 2001. Other operating revenue for the twelve
months ended June 30, 2002 was $3.1 million compared to $3.6 million for the
twelve months ended June 30, 2001. The $.5 million decrease was due primarily
to a reduction in ATS balancing fees as a result of ATS customers switching back
to gas sales service.
OPERATING EXPENSES - Operating expenses of the Gas Distribution Business
decreased by $.2 million for both the three and six-month periods ended June 30,
2002. The $.2 million decrease was the result of a number of offsetting
factors. Amortization expense decreased by $1.0 million and $2.0 million,
respectively, during the three and six months ended June 30, 2002, when compared
to the same periods in 2001. The decreases were due to the elimination of
goodwill amortization as a result of the adoption of SFAS 142. For further
information on SFAS 142 and its impact on goodwill, see Note 1 of the Notes to
the Consolidated Financial Statements. During the three and six months ended
June 30, 2002, operation and maintenance expense increased by $.2 million and
$.6 million due primarily to higher employee benefit costs, including pension
expense, health care costs and retiree medical costs, offset partially by the
impact of a reduction in workforce related to the Company's redirected business
strategy. During the three and six months ended June 30, 2002, property and
other taxes increased by $.1 million and $.2 million, respectively, due
primarily to property taxes on additional property, plant and equipment placed
in service. Depreciation expense also increased due primarily to additional
property, plant and equipment placed in service.
Operating expenses for the twelve months ended June 30, 2002 increased by
$6.4 million when compared to the twelve months ended June 30, 2001. Included
in this increase is approximately $1.1 million of restructuring charges recorded
in the fourth quarter of 2001. The remainder of the increase was primarily the
result of an increase in operation and maintenance expenses of $4.2 million, an
increase in general business tax expenses of $2.1 million and an increase in
depreciation expense of $1.0 million. The increase in operating expenses is due
largely to higher employee related costs, including pension expense, health care
costs and retiree medical costs. The increase in general business tax expenses
is due primarily to property tax reductions recorded in the second half of 2000
and higher property taxes related to new property placed in service. For
further information regarding the property tax reductions, see Note 13, of the
Notes to Consolidated Financial Statements in the Company's 2001 Annual Report
in Form 10-K. Depreciation expense increased due to additional property, plant
and equipment placed in service. These increases were offset by a decrease in
amortization expense of $2.0 million due to the reasons discussed above.
REGULATORY MATTERS - The Regulatory Commission of Alaska ("RCA") has been
conducting a review of ENSTAR's rates. The Company received an Order dated
August 8, 2002 from the RCA on its review of rates for ENSTAR based on
normalized data for the year 2000. In its Order the RCA established a revenue
requirement of $107.6 million and a 12.55% return on equity. The order
indicates an annual revenue reduction of $2.1 million, which would be 1.96% of
ENSTAR's revenue in the normalized 2000 test year. The RCA has required ENSTAR
to file an updated cost of service study and rate design to reflect the results
of the Order by September 9, 2002.
- 20 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
CONSTRUCTION SERVICES
The Company's Construction Services business ("Construction Services") is
seasonal. As a result, it generally incurs operating losses during the winter
and spring months when underground construction and related services are
inhibited by weather, and generates the majority of its operating income during
the summer and fall months.
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ----------------- -------------------
2002 2001 2002 2001 2002 2001
------- ------- ------- -------- -------- --------
(in thousands)
Operating revenues. . . . . . . . . $36,524 $34,149 $62,105 $51,997 $136,313 $118,283
Restructuring & impairment charges. - - - - 3,098 -
Other operating expenses. . . . . . 34,585 33,073 61,476 52,994 132,964 112,759
------- ------- ------- -------- -------- --------
Operating income. . . . . . . . . . $ 1,939 $ 1,076 $ 629 $ (997) $ 251 $ 5,524
======= ======= ======= ======== ======== ========
Feet of pipe installed. . . . . . . 1,189 1,652 2,244 2,581 6,983 7,617
======= ======= ======= ======== ======== ========
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - The operating revenues of Construction Services for
the three, six and twelve month periods ended June 30, 2002 were $36.5 million,
$62.1 million and $136.3 million, respectively, which represent a $2.4 million,
$10.1 million, and $18.0 million increase, respectively, over the same periods
ended June 30, 2001. These increases are due primarily to an increase in
construction projects in the southern regions of the United States. This was
offset partially by reduced construction activity in the northern regions of the
country.
OPERATING INCOME - Construction Services operating income increased by $.9
million and $1.6 million, respectively, for the three and six-month periods
ended June 30, 2002 compared to the same periods ended June 30, 2001. These
increases are due primarily to an increase in construction projects in the
southern region of the country, offset partially by reduced construction
activity and lower than expected margins on construction projects in the
northern regions of the country.
Construction Services had operating income of $.3 million for the twelve
months ended June 30, 2002, compared to operating income of $5.5 million for the
twelve months ended June 30, 2001. The decrease of $5.2 million is due largely
to restructuring and impairment charges of $3.1 million recorded in the fourth
quarter of 2001. Other factors contributing to the decrease are the mix of work
and the softening economy during this period. The Company believes that the
softening economy has caused many customers to delay or cancel certain
construction projects which has changed the mix of work available to
Construction Services. The mix of work has included more lower margin work at
certain business units. These factors causing the decrease were offset
partially by an increase in construction projects in the southern regions of the
United States.
INFORMATION TECHNOLOGY SERVICES
The information technology services business ("IT Services"), under the Aretech
Information Services name, provides IT infrastructure outsourcing services and
other IT services with a focus on mid-range computers, particularly the IBM
I-Series (AS-400) platform.
- 21 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
INFORMATION TECHNOLOGY SERVICES (CONTINUED)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- ---------------- -------------------
2002 2001 2002 2001 2002 2001
------ ------ ------ ------ ------ ------
(in thousands)
Operating revenues. . . . $2,318 $2,938 $4,578 $5,148 $9,704 $8,729
Restructuring charges . . - - - - 20 -
Other operating expenses. 2,175 2,853 4,259 4,911 9,171 8,138
------ ------ ------ ------ ------ ------
Operating income. . . . . $ 143 $ 85 $ 319 $ 237 $ 513 $ 591
====== ====== ====== ====== ====== ======
The amounts in the above table include intercompany transactions.
OPERATING REVENUES - Operating revenues for IT Services for the three
months ended June 30, 2002 were $2.3 million compared to $2.9 million in 2001.
Of these amounts, $1.9 million and $2.8 million for these same periods,
respectively, represent sales to affiliates. Operating revenues for IT Services
for the six months ended June 30, 2002 were $4.6 million compared to $5.1
million in 2001. Of these amounts, $3.7 million and $4.9 million for these same
periods, respectively, represent sales to affiliates. The decrease in operating
revenues of $.6 million and $.5 million, respectively, for the three and
six-month periods ended June 30, 2002 is due primarily to fewer special projects
with affiliate customers offset partially by an increase in business with
non-affiliate customers.
Operating revenues for the twelve months ended June 30, 2002 were $9.7
million, compared to $8.7 million for the twelve months ended June 30, 2001. Of
these amounts, $8.2 million and $8.6 million for these same periods,
respectively, represent sales to affiliates. The increase in operating revenues
of $1.0 million for the twelve-month period ended June 30, 2002 is due primarily
to the addition of affiliate and non-affiliate customers offset partially by
less special projects with affiliate customers.
OPERATING INCOME - Operating income for IT Services for the second quarter
of 2002 was $.1 million, which is essentially unchanged from the second quarter
of 2001. Operating income for the six months ended June 30, 2002, when compared
to the same period ending June 30, 2001, increased by $.1 million. The increase
is was due primarily to lower administrative expenses and additional
non-affiliate revenue. Operating income for the twelve months ended June 30,
2002 decreased by $.1 million, compared to same period ended June 30, 2001.
This decrease is due primarily to more special project services performed during
the twelve-month period ended June 30, 2001. Special project services typically
provide higher margins.
PROPANE, PIPELINES AND STORAGE
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2002 2001 2002 2001 2002 2001
------ ------ ------ ------ ------ ------
(in thousands)
Operating revenues. $1,416 $1,369 $3,654 $4,118 $6,979 $7,778
Operating expenses. 1,036 1,022 2,664 3,036 5,200 5,914
------ ------ ------ ------ ------ ------
Operating income. . $ 380 $ 347 $ 990 $1,082 $1,779 $1,864
====== ====== ====== ====== ====== ======
- 22 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
PROPANE, PIPELINES AND STORAGE (CONTINUED)
OPERATING REVENUES - The operating revenues of the Company's propane,
pipelines and storage business for the three, six and twelve months ended June
30, 2002 were $1.4 million, $3.7 million and $7.0 million, respectively,
compared to $1.4 million, $4.1 million and $7.8 million, respectively, for the
same periods ended June 30, 2001. The decreases for the six and twelve-month
periods were due primarily to lower propane distribution revenues resulting from
warmer weather in the Company's propane distribution service area.
OPERATING INCOME - Operating income from the propane, pipelines and storage
business for the second quarter of 2002 increased by less than $.1 million when
compared to the same period in 2001. The increase was due primarily to higher
propane sales and related margins resulting from colder weather during the
second quarter of 2002. Operating income for the six and twelve month periods
ended June 30, 2002, when compared to the same periods in 2001, decreased by $.1
million. The decrease was due primarily to warmer weather during the first
quarter of 2002 and the second half of 2001, which reduced propane sales and
margins. This was offset partially by the impact of colder weather during the
second quarter of 2002.
OTHER INCOME AND DEDUCTIONS
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ -------------------- --------------------
2002 2001 2002 2001 2002 2001
-------- -------- --------- --------- --------- ---------
(in thousands)
Interest expense. . . . . . . . . $(7,477) $(7,717) $(15,151) $(15,719) $(31,216) $(32,536)
Other income. . . . . . . . . . . 709 499 1,034 1,366 2,005 2,485
-------- -------- --------- --------- --------- ---------
Total other income (deductions) $(6,768) $(7,218) $(14,117) $(14,353) $(29,211) $(30,051)
======== ======== ========= ========= ========= =========
INTEREST EXPENSE - Interest expense for the three, six and twelve months
ended June 30, 2002 decreased by $.2 million, $.6 million, and $1.3 million,
respectively, when compared to the same periods ended June 30, 2001. Interest
expense was less due primarily to lower short-term interest rates.
OTHER INCOME - Other income for the three months ended June 30, 2002
increased by $.2 million when compared to the same period ended June 30, 2001.
The increase was due primarily to gains on the sale of equipment in the second
quarter of 2002.
Other income for the six months ended June 30, 2002 decreased by $.3
million when compared to the same period ended June 30, 2001. The decrease was
due primarily to losses on the sale of equipment and lower interest income.
The decrease of $.5 million during the twelve months ended June 30, 2002,
when compared to the same period of 2001, was due to the previously discussed
factors affecting the first two quarters of 2002, along with a write-off of
certain assets in the fourth quarter of 2001.
- 23 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
INCOME TAXES
Income taxes for the three and six months ended June 30, 2002 increased by
$2.1 million and $2.9 million when compared to the same periods ended June 30,
2001. Income taxes for the twelve months ended June 30, 2002 decreased by
approximately $3.5 million when compared to the same period ended June 30, 2001.
The change in income taxes, when comparing one period to another, is due
primarily to changes in earnings before income taxes and dividends on trust
preferred securities and any adjustments necessary for compliance with tax laws
and regulations.
DIVIDENDS ON TRUST PREFERRED SECURITIES, NET OF INCOME TAX
Dividends on Trust Preferred Securities, net of Income taxes, for the
three, six and twelve months ended June 30, 2002 were essentially unchanged at
$2.1 million, $4.3 million and $8.6 million when compared to the same periods
ended June 30, 2001.
DISCONTINUED OPERATIONS
In December 2001, the Company began accounting for its engineering business as a
discontinued operation. Refer to Note 7 of the Notes to the Consolidated
Financial Statements for more information.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM INVESTING - The following table identifies capital
investments for the three and six months ended June 30, 2002 and 2001:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
------ ------- ------- -------
(in thousands)
Capital investments:
Property additions - gas distribution. . . . . . . . . $6,624 $ 9,774 $13,631 $17,668
Property additions - diversified businesses and other. 1,871 6,209 2,686 10,643
------ ------- ------- -------
$8,495 $15,983 $16,317 $28,311
====== ======= ======= =======
The Company's expenditures for property additions were approximately $16.3
million for the first six months of 2002. Expenditures for property additions
during the remainder of 2002 are anticipated to be approximately $20 million.
CASH FLOWS FROM OPERATIONS - Net cash from operating activities for the
three and six months ended June 30, 2002, when compared to the same periods of
the prior year, increased by $16.2 million and decreased by $7.4 million,
respectively. The change in operating cash flows is influenced significantly by
changes in the level and cost of gas in underground storage, changes in accounts
receivable and accrued revenue and other working capital changes. The changes
in these accounts are largely the result of the timing of cash receipts and
payments.
CASH FLOWS FROM FINANCING - Net cash used for financing activities during
the three and six months ended June 30, 2002 increased by $25.8 million and
$13.7 million, respectively, when compared to the same periods ended June 30,
2001.
- 24 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2002 2001 2002 2001
-------- --------- --------- ---------
(in thousands)
Cash provided by (used in) financing activities:
Issuance of common stock. . . . . . . . . . . . $ 697 $ 111 $ 1,944 $ 144
Issuance of long-term debt, net of redemptions. - 58,438 - 58,438
Net cash change in notes payable. . . . . . . . (1,470) (32,063) (21,301) (62,791)
Payment of dividends. . . . . . . . . . . . . . (2,301) (3,792) (6,136) (7,584)
-------- --------- --------- ---------
$(3,074) $ 22,694 $(25,493) $(11,793)
======== ========= ========= =========
In June 2002, the Company's Board of Directors declared a regular quarterly
cash dividend of $0.125 per share on the Company's common stock. The dividend
is payable on August 15, 2002 to shareholders of record at the close of business
on August 1, 2002.
FUTURE FINANCING - In general, the Company funds its capital expenditure
program and dividend payments with operating cash flows and the utilization of
its short-term credit facilities. When appropriate, the Company will refinance
its short-term debt with long-term debt, common stock or other long-term
financing instruments. On June 25, 2002, the Company entered into $145 million
of credit facilities with a group of banks, replacing $145 million of bilateral
lines, which were due to expire. The new facilities, all of which are
committed, consist of an $80 million three-year revolver and a $65 million
364-day facility, with a one-year term loan option. At June 30, 2002, $59.5
million of the Company's credit facilities were unused.
In March 2000, a registration statement on Form S-3 ("registration
statement") filed by the Company and SEMCO Capital Trust I, SEMCO Capital Trust
II and SEMCO Capital Trust III ("Capital Trusts") with the Securities and
Exchange Commission became effective. At June 30, 2002, there was $164 million
available under the Company's registration statement for any future issuances of
common stock, preferred stock, trust preferred securities and long term debt.
The Company's long-term and short-term debt agreements contain restrictive
financial covenants including, among others, maintaining a Fixed Charges
Coverage Ratio (as defined in the agreements) of at least 1.50 and placing
limits on the payment of dividends beyond certain levels. Non-compliance with
these covenants could result in an acceleration of the due dates for the debt
obligations under the agreements. As of June 30, 2002, the Fixed Charges
Coverage Ratio was 1.82 and the Company was in compliance with all of the
covenants in these agreements. The Company has currently projected its
financial covenants for the remaining two quarters during 2002, based on the
Company's forecasted operating results for the year, and these forecasted
results indicate that the Company will be able to remain in compliance with all
of its covenants during 2002. However, these projected results are based on a
number of assumptions and factors. If actual results differ from management's
current expectations, they could have an adverse impact on the Company's ability
to remain in compliance with its covenants during 2002. In the event the
Company is not able to remain in compliance with these covenants, management
plans to request a modification of the covenants or a waiver of certain covenant
provisions. For additional information concerning the factors impacting
compliance with the Company's debt covenants refer to the Management Discussion
and Analysis - Liquidity and Capital Resources section in the Company's 2001
Annual Report on Form 10-K.
- 25 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's ratio of earnings to fixed charges, as defined under Item 502
of SEC regulations S-K, was 1.22 for the twelve months ended June 30, 2002. If
common stock of the Company had been issued in place of the FELINE PRIDES, the
ratio of earnings to fixed charges would have been 1.54. This ratio is more
strictly defined than the Fixed Charges Coverage Ratio used to determine
compliance with the Company's previously discussed debt covenants.
CRITICAL ACCOUNTING POLICIES
The results of operations, as presented in this report, are based on the
application of generally accepted U.S. accounting principles. The application
of these principles often requires management to make certain judgments,
assumptions and estimates that may result in different financial presentations.
The Company believes that certain accounting principles are critical in terms of
understanding its financial statements.
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.
RATE REGULATION - The 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 ("CCBC"). The Michigan
Public Service Commission ("MPSC") has jurisdiction over the remaining Michigan
customers. ENSTAR is subject to regulation by the Regulatory Commission of
Alaska ("RCA"). These regulatory bodies have jurisdiction over, among other
things, rates, accounting procedures, and standards of service.
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.
Construction Services accounts for its long-term projects using the percentage
of completion method. For all other services, Construction Services recognizes
revenues as services are rendered and recognizes 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.
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 CCBC, 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 and CCBC authorized the Company to suspend its GCR
clause and freeze for three years in base rates a fixed gas charge of $3.24 per
Mcf. The suspension period for the GCR pricing mechanism expired on March 31,
2002, after which the Company reinstated its GCR pricing mechanism for customers
subject to the jurisdiction of the MPSC. The Company received approval from the
CCBC to extend the fixed gas charge program and GCR suspension period until
March 31, 2005.
- 26 -
PART I - FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
CRITICAL ACCOUNTING POLICIES (CONTINUED)
The Alaska-based gas distribution operation also has a regulator-approved
gas cost adjustment ("GCA") 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 GCA 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 GCA.
RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS - The Company's
business activities expose it to a variety of risks, including commodity price
risk and interest rate risk. The Company's management identifies risks
associated with the Company's business and determines which risks it wants to
manage and which types of instruments it should use to manage those risks.
The Company records all derivative instruments it enters into under the
provisions of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS 137 and SFAS 138, which were amendments to SFAS 133
(hereinafter collectively referred to as "SFAS 133"). SFAS 133 requires that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the statement of financial position, as
either an asset or liability, measured at its fair value. SFAS 133 also
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.
NEW ACCOUNTING STANDARDS
See Note 1 of the Notes to the Financial Statements, which is incorporated
herein by reference.
- 27 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the second quarter of 2002, the Company issued an aggregate of
5,159 shares of unregistered common stock to the members of its Board of
Directors in exchange for services rendered, valued at $46,044.
The preceding transaction was exempt from registration under Section
4(2) of the Securities Act of 1933.
On June 25, 2002, the Registrant entered into a Credit Agreement
("Credit Agreement") with various financial institutions and Standard Federal
Bank N.A. as Agent and Arranger under which a line of credit (with a term loan
option) and a revolving credit facility (which includes letters of credit) were
made available to the Registrant. The Credit Agreement contains various
financial covenants including a minimum fixed charge coverage ratio, a maximum
leverage ratio, a minimum consolidated total capital amount, and a limitation on
the payment of dividends.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
At the April 16, 2002 Annual Meeting of Common Shareholders, the
following nominees were elected as directors to hold office for a term of three
years:
Name Votes For Votes Withheld
---------- --------- --------------
Edward J. Curtis. 11,871,317 2,667,764
Marcus Jackson. . 12,969,502 1,569,579
Harvey I. Klein . 12,014,656 2,524,425
Thomas W. Sherman 12,141,545 2,397,536
A nomination was received from the floor for Karl Herzer; 892,946
votes were received for Mr. Herzer and 0 votes were withheld.
A proposal was received from the floor to postpone the meeting;
228,632 votes were received for the motion and 14,310,449 votes were received
against the motion, with no abstentions and no broker non-votes.
ITEM 5. OTHER INFORMATION.
Not applicable.
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PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits - (See page 31 for the Exhibit Index.)
3.(ii) Bylaws--last revised June 20, 2002.
4 Credit Agreement dated as of June 25, 2002, among
SEMCO Energy, Inc. as Borrower, various financial
institutions, Standard Federal Bank N.A. as Agent and
Arranger, Keybank National Association as Syndication
Agent and U.S. Bank, N.A. and National City Bank of
Michigan/Illinois as Documentation Agents.
12 Ratio of Earnings to Fixed Charges.
99 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(b) Reports on Form 8-K.
The Company filed the following Form 8-K Reports during the
second quarter of 2002: (1) report filed on May 2, 2002, to announce that the
Company had notified its principal accountant, Arthur Andersen, LLP, that it
would be engaging other principal accountants for future financial statement
audits, (2) report filed on May 31, 2002, to announce that the Company had
engaged PricewaterhouseCoopers LLP as its principal independent auditors to
replace Arthur Andersen, LLP, and (3) report filed on June 26, 2002, to report
the Company's successful closing of $145 million of syndicated credit
facilities.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEMCO ENERGY, INC.
(Registrant)
Dated: August 14, 2002
By: /s/John E. Schneider
-------------------------------------
Senior Vice President and Principal
Financial Officer
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EXHIBIT INDEX
Form 10-Q
Second Quarter 2002
Exhibit
No. Description Filed Herewith
- -------- ----------- ---------------
3.(ii) Bylaws--last revised June 20, 2002. x
4 Credit Agreement dated as of June 25, 2002,
among SEMCO Energy, Inc. as Borrower, various
financial institutions, Standard Federal Bank N.A.
as Agent and Arranger, Keybank National
Association as Syndication Agent and U.S. Bank,
N.A. and National City Bank of Michigan/Illinois
as Documentation Agents. x
12 Ratio of Earnings to Fixed Charges. x
99 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. x
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