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, 2002
[ ] 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.)
28470 13 MILE ROAD, SUITE 300, FARMINGTON HILLS, MICHIGAN 48334
(Address of principal executive offices) (Zip Code)
248-702-6000
(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
FELINE PRIDES NEW YORK STOCK EXCHANGE
10 1/4% TRUST PREFERRED SECURITIES 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of June 28, 2002 was $148,663,101 based on 16,426,862 shares
held by non-affiliates and the closing price of $9.05 on that day (New York
Stock Exchange).
Number of outstanding shares of the Registrant's Common Stock as of February 28,
2003: 18,841,758
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to Registrant's April 15, 2003 Annual Meeting of
Common Shareholders are incorporated by reference in Part III. Portions of the
Registrant's 2002 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.
T A B L E O F C O N T E N T S
PAGE
CONTENTS NUMBER
KEY TO ABBREVIATED TERMS . . . . . . . . . . . . . . . . . . . . . . 1
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . 2
PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . 10
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS . . . . . . . . . . . . . . . . . . . . . 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . 15
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . 15
ITEM 14. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . 15
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
KEY TO ABBREVIATED TERMS
APB. . . . . . . . Accounting Principles Board
ATS. . . . . . . . (Aggregated Transportation Service) a 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 quantity of natural gas volumes equivalent to one billion
cubic feet
CCBC . . . . . . . City Commission of Battle Creek, Michigan
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
Dth. . . . . . . . (Dekatherm) a quantity of heat energy equivalent to one
million Britsh Thermal Units (BTU)
FASB . . . . . . . Financial Accounting Standards Board
FERC . . . . . . . Federal Energy Regulatory Commission
GCA. . . . . . . . (Gas Cost 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
GCR. . . . . . . . (Gas Cost Recovery) a process by which the Gas Distribution
Business, through annual gas cost proceedings before the
MPSC or CCBC, can recover the prudent and reasonable cost of
gas sold
Mcf. . . . . . . . A quantity of natural gas volumes equivalent to one thousand
cubic feet
MMcf . . . . . . . A quantity of natural gas volumes equivalent to one million
cubic feet
MPSC . . . . . . . Michigan Public Service Commission
RCA. . . . . . . . Regulatory Commission of Alaska
SFAS . . . . . . . Statement of Financial Accounting Standards
Tcf. . . . . . . . A quantity of natural gas volumes equivalent to one trillion
cubic feet.
- 1 -
INFORMATION ABOUT 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 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.
PART I
ITEM 1. BUSINESS
SEMCO ENERGY, INC.
SEMCO Energy, Inc. is a diversified energy and infrastructure services 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 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". Certain smaller subsidiaries or
divisions of the Company are not part of the four previously mentioned business
segments. Instead, they are included together in a category the Company refers
to as "Corporate and other". For information on what constitutes a business
segment, refer to Note 11 of the Notes to the Consolidated Financial Statements
on page 58 through 59 of the Company's 2002 Annual Report to Shareholders, which
information is incorporated herein by reference from Exhibit 13 to this Form
10-K. The Company had approximately 1,592 employees at December 31, 2002.
In December, 2001, the Company's board of directors approved plans to
redirect the Company's business strategy. The plans involved the restructuring
of the Company's corporate, business unit and operational structures and the
divestiture of the Company's engineering services business. The Company has
accounted for and reported its engineering services segment as a discontinued
operation. In November 2002, the Company sold its engineering services
business. For additional information on the Company's strategic redirection
plans and the divestiture of its engineering services business refer to Note 14
of the Notes to the Consolidated Financial Statements on page 62 of the
Company's 2002 Annual Report to Shareholders, which information is incorporated
herein by reference from Exhibit 13 to this Form 10-K.
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The Company maintains a website on the Internet at address
http://www.semcoenergy.com. The Company makes available free of charge on or
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through its website, its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and any amendments to those reports as soon
as reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission ("SEC"). This reference to the Company's
Internet address shall not, under any circumstances, be deemed to incorporate
the information available at such Internet address into this Form 10-K. The
information available at the Company's Internet address is not part of this Form
10-K or any other report filed by the Company with the SEC. The information the
Company filed with the SEC can also be obtained on the SEC's website on the
Internet at address http://www.sec.gov.
------------------
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".
SEMCO Gas and ENSTAR Natural Gas Company operate as divisions of SEMCO
Energy, Inc. Alaska Pipeline Company operates as a subsidiary of SEMCO Energy,
Inc. and as part of the ENSTAR operations.
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:
Years ended December 31, 2002 2001 2000
- ----------------------------------------- -------- -------- --------
GAS SALES REVENUE (IN THOUSANDS):
Residential . . . . . . . . . . . . . . $227,086 $201,754 $190,221
Commercial. . . . . . . . . . . . . . . 84,480 73,831 62,354
Industrial. . . . . . . . . . . . . . . 24,089 19,812 18,412
-------- -------- --------
Total gas sales revenue (a) . . . . . $335,655 $295,397 $270,987
======== ======== ========
GAS TRANSPORTATION REVENUE (IN THOUSANDS) $ 25,707 $ 25,888 $ 30,783
======== ======== ========
VOLUMES OF GAS SOLD (MMCF):
Residential . . . . . . . . . . . . . . 42,671 41,529 41,397
Commercial. . . . . . . . . . . . . . . 16,970 16,032 14,591
Industrial. . . . . . . . . . . . . . . 5,416 5,566 5,066
-------- -------- --------
Total volumes of gas sold (a) . . . . 65,057 63,127 61,054
VOLUMES OF GAS TRANSPORTED (MMCF) . . . . 44,921 42,992 48,706
-------- -------- --------
TOTAL VOLUMES DELIVERED (a) . . . . . . . 109,978 106,119 109,760
======== ======== ========
(a) Does not include the sale of excess inventory gas to a third party in 2000.
Refer to Note 11 of the Notes to the Consolidated Financial Statements on
pages 58 and 59 of the Company's 2002 Annual Report to Shareholders, which
information is incorporated herein by reference from Exhibit 13 to this Form
10-K, for the operating revenues, operating income, assets and other financial
information of the Gas Distribution Business 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
70%, 66% and 67% of consolidated operating revenues in 2002, 2001 and 2000,
respectively.
- 3 -
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 for Gas Distribution" on pages 21
and 22 of the Company's 2002 Annual Report to Shareholders, which information is
incorporated herein by reference from Exhibit 13 to this Form 10-K.
The Company's aggregated transportation service ("ATS") program, which was
effective April 1, 1998 through March 31, 2002, provided all Michigan 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. In a
Michigan Public Service Commission ("MPSC") order issued in August 2002 the ATS
program was renamed to the Gas Customer Choice Program and expanded over the
years 2002, 2003 and 2004 such that by April of 2004 it will be available to all
customers in the Company's service area regulated by the MPSC. There were no
customers taking service under the Gas Customer Choice Program at December 31,
2002. Refer to the sections titled "Gas Sales Margin" and "Gas Transportation
Revenue" on pages 19 and 20 of the Company's 2002 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 ATS program on
gas sales and transportation revenue during 2002, 2001 and 2000.
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 and 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 services. 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. For more information regarding the impact of
alternative energy sources, refer to the "Outlook for Gas Distribution" section
on pages 21 and 22 of the Company's 2002 Annual Report to Shareholders, which
information is incorporated herein by reference from Exhibit 13 to this Form
10-K.
Consistent with other 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 addressed 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.
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, 2002, SEMCO Gas had approximately 272,000
customers. The largest concentration of customers, approximately 113,000, 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 2.4% annually during the past three years. By comparison, recent
surveys by the American Gas Association indicate that the customer growth rate
for the U.S. gas distribution industry has averaged approximately 1.8% annually
during the past ten years. However, average annual gas usage per customer has
been decreasing slightly because new homes and appliances are much more energy
efficient.
- 4 -
At December 31, 2002, ENSTAR had approximately 111,000 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, on behalf of gas producers and gas
marketers, to power plant sites, a liquified natural gas plant, an ammonia
plant, and hundreds of commercial locations. The average number of customers at
ENSTAR has increased by an average of approximately 2.8% annually during the
past three years.
RATES AND REGULATION The Gas Distribution business is subject to regulation.
The regulatory matters associated with 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 regulatory matters
related to the Company's remaining Michigan customers. Regulatory matters for
gas distribution customers in Alaska are subject to the jurisdiction of the
Regulatory Commission of Alaska ("RCA"). These regulatory bodies have
jurisdiction over, among other things, rates, accounting procedures, and
standards of service.
For information on regulatory matters including recent regulatory orders,
filings and rate cases, refer to Note 2 of the Notes to the Consolidated
Financial Statements on pages 45 through 47 of the Company's 2002 Annual Report
to Shareholders, which information is incorporated herein by reference from
Exhibit 13 to this Form 10-K.
GAS SUPPLY SEMCO Gas entered into new agreements with BP Canada Energy
Marketing Corp. ("BP") effective April 1, 2002. The Company has separate
agreements with BP related to customers in its service area regulated by the
MPSC ("MPSC customers") and customers in its service area regulated by the CCBC
("CCBC customers"). Under the agreements related to the Company's CCBC
customers, BP provides all of the natural gas supply requirements for the CCBC
customers as well as transportation and storage asset management services.
Under the terms of the agreements, the price the Company pays to purchase
natural gas for CCBC customers is fixed for the three-year period covered by the
agreements, which is from April 1, 2002 through March 31, 2005.
Under the new BP agreements covering MPSC customers, BP provides gas supply
portfolio management services as well as transportation and storage asset
management services. The Company no longer purchases gas at a fixed cost over a
number of years. In keeping with the Company's switch back to the gas cost
recovery ("GCR") pricing mechanism for MPSC customers, the Company is required
to solicit bids for all supplies with term lengths longer than three days.
Supplies with term lengths of three days or less are purchased from BP. For
additional information about how these contracts and the GCR pricing mechanism
impact cost of gas, refer to the "Cost of Gas" section within Note 1 of the
Notes to the Consolidated Financial Statements on pages 43 and 44 of the
Company's 2002 Annual Report to Shareholders, which information is incorporated
herein by reference from Exhibit 13 to this Form 10-K.
SEMCO Gas has access to natural gas supplies throughout the United States
and Canada via major interstate pipelines that run through Michigan. SEMCO Gas
has pipeline capacity contracts with ANR Pipeline Company, Great Lakes Gas
Transmission Company, Northern Natural Gas Company, and Panhandle Eastern Pipe
Line Company. SEMCO Gas also owns underground storage facilities in Michigan
with a working capacity of 5 billion cubic feet ("Bcf"). In addition, it leases
6.5 Bcf of storage from Eaton Rapids Gas Storage System and 2.3 Bcf from
non-affiliates in Michigan. The owned and leased storage capacity equals
approximately 32% of the Company's 2002 annual gas sales volumes in Michigan.
SEMCO Gas Storage Company, a subsidiary of the company, is a 50% owner of Eaton
Rapids Gas Storage System.
ENSTAR has a gas purchase contract (the "Marathon Contract") with Marathon
Oil Company ("Marathon") that has been approved by the RCA and is a
"requirements" contract with no specified daily deliverability or annual
take-or-pay quantities. Through 2001, Marathon agreed to deliver all of
ENSTAR's gas requirements in excess of those provided for in other gas supply
contracts in existence as of May 1, 1988, subject to certain exceptions, until
the commitment has been exhausted. For 2002 and subsequent years, ENSTAR's
purchase obligations and Marathon's delivery obligations are set at specified
annual amounts (19 Bcf in 2003). 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.
- 5 -
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 from the Beluga field. The pricing mechanism in the
Beluga Contract is similar to that contained in the Marathon Contract.
In May 2000, ENSTAR signed a gas supply contract with Anadarko Petroleum
and Phillips Alaska (formerly ARCO Alaska) for natural gas deliveries from the
Moquawkie gas field beginning in 2002 ("the Moquawkie Contract"). The agreement
provides that Anadarko and Phillips will supply ENSTAR's additional supply
requirements through 2003, and supply a portion of ENSTAR's needs through 2016.
The contract has a base price, subject to annual adjustment based upon 50% of
the change in certain inflation measures, plus reimbursement for any severance
taxes and other charges. The contract was approved by the RCA in July 2000. In
2002, the Moquawkie field was sold and the gas supply obligations under the
Moquawkie Contract were assigned to the purchaser of the field, Aurora Gas.
In November 2000, ENSTAR signed a gas supply contract with Union Oil
Company of California ("Unocal") for natural gas deliveries beginning in 2004.
The agreement provides that Unocal will supply ENSTAR's additional supply
requirements through 2005, and supply all or a portion of ENSTAR's needs in
years beyond 2005 based upon additional commitments that may be made by Unocal.
Gas supplied under the contract will be priced annually according to a 36-month
daily average price of certain traded natural gas futures contracts, subject to
a floor price provision that is similar to the price of the Moquawkie contract.
The contract also provides for reimbursement to the producer of severance taxes
and certain transportation costs. The contract received final approval by the
RCA in January 2002.
Based on gas purchases during the twelve months ended December 31, 2002,
which are not necessarily indicative of the volume of future purchases, gas
reserves committed to ENSTAR under the Marathon, Beluga, Moquawkie and Unocal
Contracts are sufficient to supply all of ENSTAR's expected gas supply
requirements through the year 2005. After that time supplies will still be
available under these 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.
ENSTAR's gas supply source, primarily though the Marathon, Beluga,
Moquawkie and Unocal 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 2.0 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.
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 is in compliance with State of Michigan
rules which require companies to take "due care" steps to insure that the sites
are safe. The Gas Distribution Business has closed a related site with the
approval of the appropriate regulatory authority in the State of Michigan and
has developed plans and conducted preliminary field investigations at two other
sites. For further information, refer to Note 13 of the Notes to the
Consolidated Financial Statements on pages 60 and 61 of the Company's 2002
Annual Report to Shareholders, which information is incorporated herein by
reference from Exhibit 13 to this Form 10-K.
- 6 -
DIVERSIFIED BUSINESSES
The following table shows operating revenues for each of the diversified
businesses, including intercompany revenues, for 2000 through 2002:
Years Ended December 31, 2002 2001 2000
- -------------------------------- -------- -------- --------
(in thousands)
Operating Revenues
Construction Services. . . . . . $119,254 $126,205 $105,231
Information technology services. 9,618 10,275 5,184
Propane, Pipelines and Storage . 7,058 7,443 6,949
The amounts in the above table include intercompany transactions.
As previously discussed, the Company has accounted for its engineering
services segment as a discontinued operation. Accordingly, its operating
results are segregated and reported as discontinued operations in the
Consolidated Statements of Operations. Refer to Note 11 of the Notes to the
Consolidated Financial Statements on pages 58 and 59 of the Company's 2002
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.
CONSTRUCTION SERVICES
The Company's construction services segment ("Construction Services") operates
in the mid-western, southern and southeastern areas of the United States and has
offices in Georgia, Illinois, Iowa, Michigan and Texas. Its primary service is
the installation and upgrade of compressor stations and underground natural gas
mains and service lines.
Construction Services had operating revenues, excluding intercompany
transactions, of $107.4 million, $117.2 million and $95.5 million in 2002, 2001
and 2000, respectively. These operating revenues accounted for 22%, 26% and 23%
of consolidated operating revenues in 2002, 2001 and 2000, respectively.
Construction Services' business is seasonal in nature. Most of the profits from
this segment are made during the summer and fall months. Construction Services
generally incurs losses during the winter months when underground construction
is inhibited by weather.
Construction Services competes with small, medium and large-sized regional
underground facilities contractors as well as in-house utility construction
operations. The natural gas construction services industry is comprised of a
highly fragmented group of companies focused primarily on regional or local
markets. For more information on competition for Construction Services and the
company's goals and expectations for this business under its redirected
strategy, refer to the section titled "Outlook for Construction Services" on
pages 23 and 24 of the Company's 2002 Annual Report to Shareholders, which
information is incorporated herein by reference from Exhibit 13 to this Form
10-K.
INFORMATION TECHNOLOGY SERVICES
The information technology ("IT") services business, under the Aretech
Information Services name ("Aretech"), began operations in April 2000 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 accounted for approximately 79% of
Aretech's revenues during 2002. However, the Company believes there is a
growing trend by small to mid-sized companies to outsource certain information
technology functions. The Company also believes the trend towards outsourcing
large mainframe computers is now moving to include mid-range computers. The
Company's goal is to capitalize on its internal expertise in this area and
position itself to take advantage of these trends. Aretech's business strategy
is focused on IT infrastructure outsourcing services.
- 7 -
Aretech competes with businesses that range from small local firms to large
international companies, as well as the in-house IT departments of potential
customers. Aretech is an early provider in the mid-range computer outsourcing
market and, as the market expands, it is likely that new competition will arise
from other firms that possess the necessary technical skills.
PROPANE, PIPELINES AND STORAGE
The Company's pipelines and storage business consists of three pipelines and a
gas storage facility, all of which are located in Michigan. The Company has a
partial ownership interest in one of the pipelines and an equity interest in the
gas storage facility. Refer to Item 2 of this Form 10-K for additional
information on each pipeline and storage facility such as its location and
customers. The Company also owns a propane distribution business (known as
"Hotflame"). Hotflame supplies more than 4 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.
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 not economical to build. The Company purchases the
majority of its propane from BP Canada Energy Marketing Corp. The propane
operation competes with other energy sources such as natural gas, fuel oil,
electricity and other regional and national propane providers. The basis of the
competition is generally price and service.
ITEM 2. PROPERTIES
GAS DISTRIBUTION
The gas delivery system of the SEMCO Gas included approximately 160 miles of gas
transmission pipelines and 5,423 miles of gas distribution pipelines at December
31, 2002. The pipelines are located throughout the southern half of Michigan's
lower peninsula (centered in and around the cities of Port Huron, Albion, Battle
Creek, Three Rivers, Niles and Holland) and also in the central and western
areas of Michigan's upper peninsula. At December 31, 2002, ENSTAR's gas
delivery system included approximately 396 miles of gas transmission pipelines
and 2,421 miles of gas distribution pipelines. ENSTAR's pipelines are located
in Anchorage and other communities around the Cook Inlet area of Alaska.
The distribution system and service lines of the Gas Distribution Business
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 three 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 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. In addition, it leases a
significant portion of its transportation equipment.
CONSTRUCTION SERVICES
The tangible properties of Construction Services include equipment required for
the installation, repair or replacement of compressor stations and underground
natural gas mains and service lines. This includes primarily equipment
necessary for excavation such as backhoes, trenchers, directional drills and
dump trucks. This equipment can be driven or carried on trailers from one
worksite to another. The largest concentrations of Construction Services'
equipment at December 31, 2002 was located in Georgia, Illinois, Iowa, Michigan
and Texas.
- 8 -
INFORMATION TECHNOLOGY SERVICES
The properties of this business segment consist of leasehold improvements,
office equipment, telecommunications equipment and computer equipment. These
properties are located in a building located in Marysville, Michigan and an
office building leased in St. Clair, Michigan.
PROPANE, PIPELINES AND STORAGE
The principal properties of this business segment include interests and
operations in propane distribution, natural gas transmission and an underground
gas storage system.
The Company owns a 50% equity interest in the Eaton Rapids Gas Storage
System ("ERGSS"). The Company's equity investment in the ERGSS totaled $4.7
million at December 31, 2002. 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 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 each system, and the Company's
ownership percentage and net property in each system at December 31, 2002:
Total The Company's The Company's
Net Property Percent Ownership Net Property
-------------- ------------------- --------------
(in thousands of dollars)
Litchfield Lateral. . . . $ 8,622 33% $ 2,874
Greenwood Pipeline. . . . 5,677 100% 5,677
Eaton Rapids Pipeline . . 580 100% 580
-------------- --------------
$ 14,879 $ 9,131
============== ==============
The Litchfield Lateral is a 31-mile pipeline located in southwest Michigan.
The line, which is leased entirely to ANR Pipeline Company, links the ERGSS with
interstate pipeline supplies. The Litchfield Lateral began operations in July
1992.
The Greenwood Pipeline, an 18.5-mile pipeline constructed in 1991, connects
an interstate pipeline with the Detroit Edison Greenwood Power Plant located
near Port Huron, Michigan. The pipeline provides transportation services to the
Greenwood Power Plant and to the Gas Distribution Business' service area north
of Port Huron. In 1999, the pipeline received upgrades which allowed the
Company to serve additional peak load generation units at the Greenwood site.
The Greenwood Pipeline has a capacity of 271 million cubic feet (MMcf") per day.
There is an agreement between the Company and Detroit Edison whereby Detroit
Edison has contracted for 259 MMcf per day, of this capacity. The Company also
has an agreement with its Gas Distribution Business for the remainder (12 MMcf
per day) of the pipeline capacity.
The Eaton Rapids Pipeline is a 37-mile pipeline that provides direct
delivery of gas from the ERGSS to the Gas Distribution Business' systems in
Battle Creek and Albion, Michigan. The original 30-mile line was purchased in
1986. The seven-mile extension to the ERGSS was completed in 1990.
- 9 -
CORPORATE AND OTHER
The properties of the Corporate and other segment include leasehold
improvements, office furniture, office equipment, computers and computer
systems. These properties are located in leased office buildings located in
Port Huron and Farmington Hills, Michigan.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
SEMCO Energy, Inc. Common Stock began trading on the New York Stock Exchange on
January 6, 2000 with the trading symbol "SEN". Prior to this date the Company
was traded on the Nasdaq Stock Market with the trading symbol "SMGS." The table
below shows the reported high and low sales prices of the Company's common stock
during 2002 and 2001, as reported on the New York Stock Exchange.
2002 Price Range 2001 Price Range
- ----------------------------------- ----------------------------------
2002 High Low 2001 High Low
- -------------- ------ ----- -------------- -------- --------
First Quarter $11.40 $6.95 First Quarter $15.4375 $13.1875
Second Quarter $10.25 $6.60 Second Quarter $ 15.95 $ 13.61
Third Quarter $10.08 $7.06 Third Quarter $ 15.75 $ 14.05
Fourth Quarter $ 8.15 $5.60 Fourth Quarter $ 14.85 $ 9.45
See the cover page of this Form 10-K for a recent common stock price and
the number of common shares outstanding. 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 9,095 registered common shareholders
at February 28, 2003.
DIVIDENDS
For information regarding dividends, see Notes 4 and 15 of the Notes to the
Consolidated Financial Statements on pages 49 through 51 and 63 of the Company's
2002 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.
- 10 -
UNREGISTERED SECURITIES
During the fourth quarter of 2002, the Company issued an aggregate of 4,951
shares of unregistered common stock, valued at $35,797, to members of the
Company's Board of Directors pursuant to three equity compensation plans for
Board members, which are described below. The transactions were exempt from
registration under Section 4(2) of the Securities Act of 1933. Information
about unregistered common stock is included in the Company's quarterly reports
on Form 10-Q.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2002 with respect to
the shares of the Company's Common Stock that may be issued under the Company's
existing equity compensation plans.
(C)
(A) NUMBER OF
NUMBER OF SECURITIES REMAINING
SECURITIES TO BE (B) AVAILABLE FOR FUTURE
ISSUED UPON WEIGHTED-AVERAGE ISSUANCE UNDER EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
- ---------------------- --------------------- ---------------------- ------------------------
Equity compensation
plans approved by
security holders(1). 286,780 $ 14.48 238,220
Equity compensation
plans not approved
by security holders. 852,438(2) $ 12.44(2) 902,460(3)(4)
--------------------- ---------------------- ------------------------
Total. . . . . . . . . 1,139,218 $ 12.96 1,140,680
(1) Includes the 1997 Long-Term Incentive Plan.
(2) Includes options awarded pursuant to the Stock Option Plan of 2000 and options awarded
pursuant to employment agreements.
(3) Includes 753,222 stock options available pursuant to the Stock Option Plan of 2000, 881
common shares pursuant to the Employee Stock Gift Program, 96,359 common shares
pursuant to the Broad Based Stock Award Plan of SEMCO Energy, Inc. and Subsidiaries,
13,493 common shares pursuant to the Directors' Deferred Compensation and Stock
Purchase Plan for Non-Employee Directors, 18,005 common shares pursuant to the
Compensation in Lieu of Medical Plan Participation for Non-Employee Directors, and
20,500 common shares pursuant to the Stock Grant Plan for Non-Employee Directors.
(4) No stock options pursuant to employment agreements are included as available for future
grant as the number could not be determined as of December 31, 2002. The formula for
such grants is described below under "Stock Options Pursuant to Employment Agreements".
THE 1997 LONG-TERM INCENTIVE PLAN. The Company's Long-Term Incentive Plan
("LTIP") was approved by the shareholders at the Annual Meeting held April 15,
1997 and provided for the issuance of options to purchase up to 500,000 shares
of common stock. The options available under the LTIP were adjusted for
subsequent stock dividends. The purposes of the LTIP are to provide long-term
incentives to those persons with significant responsibility for the success and
growth of the Company and its subsidiaries; to assist the Company in attracting
and retaining key employees and non-employee directors; and to associate the
interests of such employees and directors with those of the Company's
shareholders.
As of December 31, 2002, there were 525,000 shares reserved for issuance
pursuant to the LTIP. As noted in the table above, there were outstanding
options to purchase 286,780 shares of common stock and 238,220 shares remaining
available for grant as of December 31, 2002.
- 11 -
Awards may be in the form of stock options, incentive stock options,
restricted stock, performance units, stock appreciation rights, and other stock
incentives. All awards granted thus far have been in the form of stock options,
which vest over a three-year period. Options granted pursuant to the LTIP must
be granted at fair market or greater value on the date of grant and expire ten
years from the date of grant. Repricing and replacement of underwater stock
options shall not be permitted. The Compensation Committee of the Board of
Directors has the power to determine when options granted under the LTIP shall
become exercisable. Each outstanding stock option or other stock-based award
shall become immediately and fully exercisable for a period of six (6) months
following the date of a "Change of Control" as that term is defined by the LTIP.
An employee may be granted multiple awards under the LTIP, but no one
employee may be granted awards which would result in him or her receiving
options or other awards for more than 30,000 shares under the LTIP in any one
calendar year. Under the LTIP, each non-employee director shall each year be
awarded an option to purchase 1,000 shares.
THE STOCK OPTION PLAN OF 2000. On August 17, 2000, the Company's Board of
Directors ("Board") approved The Stock Option Plan of 2000 ("SOP"). The SOP
allows stock options to be granted in excess of the LTIP maximum number to the
extent deemed appropriate by the Board's Compensation Committee. However, SOP
stock options granted to a single person cannot exceed 1% of the Company's
outstanding stock at the time of grant. In addition, no more than 5% of the
Company's outstanding stock may be issued pursuant to exercises of options
granted under any non-shareholder approved plan. To the extent not otherwise
specified in a Board resolution, SOP stock options will be issued upon the same
terms and conditions as LTIP stock options.
As of December 31, 2002, there were 901,806 shares reserved for issuance
pursuant to the SOP. There were outstanding options to purchase 148,584 shares
of common stock and 753,222 shares remaining available for grant as of December
31, 2002.
EMPLOYEE STOCK GIFT PROGRAM. On December 16, 1999, the Company's Board created
a reserve for the Employee Stock Gift Program, which was established to
encourage employee stock ownership. The first time an employee enrolls in
payroll deduction to make optional payments to the Company's Direct Stock
Purchase and Dividend Reinvestment Plan (the "DRIP"), one share of stock is
added to their account at no charge.
As of December 31, 2002, there were 881 common shares reserved for the
program.
BROAD BASED STOCK AWARD PLAN OF SEMCO ENERGY, INC. AND SUBSIDIARIES. On October
14, 1999, the Company's Board of Directors created a reserve for a Broad Based
Stock Award Plan (the "BBSA Plan") for the Company and its subsidiaries in order
to develop a program to: provide an incentive similar to competitive market
practice; create a mid-term incentive for retention purposes; and increase the
link between individual and corporate success. The BBSA Plan was designed to
grant full value shares of the Company's stock to employees at all levels in the
organization, with participants being given one-time or ongoing restricted stock
awards subject to service-based vesting requirements. The stock restrictions
are subject to three-year cliff vesting requiring continued employment with the
Company and forfeiture of the stock for either voluntary or involuntary
termination of employment.
As of December 31, 2002, there were 96,359 common shares reserved for the
BBSA Plan.
DIRECTORS' DEFERRED COMPENSATION AND STOCK PURCHASE PLAN FOR NON-EMPLOYEE
DIRECTORS. Prior to 1999, the Company offered Directors the opportunity to
defer income earned as a Board member into an interest bearing account or into
phantom stock. Beginning in 1999, the phantom stock alternative was replaced
with Company common stock and any phantom stock allocated to the participants'
accounts was converted to Company stock. Directors can defer income earned as a
Board member by electing to have the Company contribute it to the Directors'
Deferred Compensation and Stock Purchase Plan for Non-Employee Directors (the
"Directors' Deferred Comp. Plan"). Participants in the Directors' Deferred
Comp. Plan must make a distribution election prior to the beginning of the year
when the income is to be deferred. Distribution alternatives are either 1) in a
lump sum within 30 days of: a) the date the Director ceases to be a full-time
member of the Board, b) January 1 of a chosen year, c) the earlier of
alternative 1a or 1b, or d) the later of alternative 1a or 1b; or 2) in three
annual graduated installments beginning within 30 days of the date the Director
ceases to be a full-time member of the Board; or 3) in five annual graduated
installments beginning within 30 days of the date the Directors ceases to be a
full-time member of the Board. If Company common stock is the chosen investment
vehicle, distributions are made in common stock.
- 12 -
As of December 31, 2002, there were 13,493 common shares reserved for the
Directors' Deferred Comp. Plan.
COMPENSATION IN LIEU OF MEDICAL PLAN PARTICIPATION FOR NON-EMPLOYEE DIRECTORS.
In December 1995, the Board determined that it would be in the best interests of
the Company to phase out the participation of non-employee Directors in the
Company's Medical, Dental and Prescription Drug Plan ("the Medical Plan"). Any
Directors joining the Board after 1995 are ineligible to participate in the
Medical Plan and any Directors who withdraw from Medical Plan participation are
not eligible for future participation. A plan was established to provide a form
of stock-based compensation to each non-employee member of the Board who is not
eligible to participate in the Medical Plan. Pursuant to the Compensation in
Lieu of Medical Plan Participation for Non-Employee Directors (the "Non-Medical
Plan"), stock-based compensation in one of the following forms is paid to each
participant based on the annual election of the participant: a) issuance of
common stock to the participant; b) allocation of common stock to the Directors'
Deferred Comp. Plan; or c) payment of cash to the participant's account in the
DRIP. No payment is made to any person who is not a Director at the time of
payment, regardless of the reason.
As of December 31, 2002, there were 18,005 common shares reserved for the
Non-Medical Plan.
STOCK GRANT FOR PLAN FOR NON-EMPLOYEE DIRECTORS. In August 2001, the Board
approved the Stock Grant Plan for Non-Employee Directors (the "Stock Grant
Plan") in order to strengthen the alignment between the interests of each
non-employee member of the Board and the interests of the Company's
shareholders. Pursuant to the Stock Grant Plan, each non-employee Director is
awarded 500 common shares annually.
As of December 31, 2002, there were 20,500 common shares reserved for the
Stock Grant Plan.
STOCK OPTIONS PURSUANT TO EMPLOYMENT AGREEMENTS. The Company has entered into
employment agreements from time to time that included provisions for the grant
of stock options.
Pursuant to the terms of Mr. William Johnson's (former CEO of the Company)
employment agreement, he was granted, as of May 1, 1996 and January 3, 1997,
stock options for the purchase of a total of 45,000 shares of common stock,
which were subsequently adjusted for stock dividends to 49,612. Mr. Johnson's
stock options were amended in 2001 to extend the exercisable period following
Mr. Johnson's retirement to three years from one year in the original
agreements.
In conjunction with the acquisition of Long's Underground Technologies,
Inc. ("Long's"), key employees of Long's were given employment agreements, which
included provisions for the grant of stock options based upon the return on
assets ("ROA") of Long's. The employment agreements were entered into with Mr.
Paul Long and six other key employees. Mr. Long's agreement provided for annual
grants of stock options for three years with the minimum annual option grant
being for 3,500 shares pro-rated for partial periods. Mr. Long's option grants
would increase above the minimum by 500 shares for an increase of 25 basis
points above a 9.75% ROA and by 1,000 shares for each increase of 25 basis
points above a 10% ROA. A pool of 6,000 shares per year in the aggregate was
established for awards pursuant to the agreements with the six other key
employees of Long's. The agreements with the six employees provided for annual
grants of stock options for two years with the minimum annual option grant being
for 385 shares pro-rated for partial periods. The options granted pursuant to
these contracts had graduated three-year vesting periods, were granted at fair
market value at the time of grant and expire ten years from the date of grant.
All of the employment contracts with the Long's employees expired prior to
December 31, 2002.
In conjunction with the acquisition of Flint Construction Company
("Flint"), key employees of Flint were given employment agreements, which
included provisions for the grant of stock options based upon the return on
assets of Flint. The employment agreements were entered into with Mr. Robert
Good, Mr. J. Terry Fuller and Mr. James Eaves. The agreements for Messrs. Good,
Fuller and Eaves provided for annual grants of stock options for three years
based on an ROA of 9.5% or greater, with such awards pro-rated for partial
periods. The agreements for Messrs. Good and Fuller provided for awards of
options for 1,000 shares for a 9.5% ROA and increases of 1,000 shares for each
25 basis points above the 9.5% ROA. The agreement with Mr. Eaves provided for
awards of options for 500 shares at 9.5% ROA and increases of 500 shares for
each 25 basis points above 9.5% ROA. The options granted pursuant to these
- 13 -
contracts had graduated three-year vesting periods, were granted at fair market
value at the time of grant and expire ten years from the date of grant.
Although the Flint contracts expired prior to December 31, 2002, the calculation
for the final grant of options pursuant to the employment agreements was not
completed before year end so the number of the final grant of options made in
2003 is not reflected in the table as the maximum number of options was not
determined as of December 31, 2002.
Pursuant to the terms of Mr. Marcus Jackson's (CEO of the Company)
employment agreement, he was granted, as of June 1, 2001, stock options for the
purchase of 200,000 shares of common stock at fair market value on the date of
grant, with a graduated three-year vesting period, and expiration ten years from
the date of grant.
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 2002 Annual Report to Shareholders,
pages 64 and 65, which information is incorporated herein by reference from
Exhibit 13 to this Form 10-K.
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 2002 Annual Report to Shareholders, pages 16
through 33, which information is incorporated herein by reference from Exhibit
13 to this Form 10-K.
The Company is currently under review by a bond rating agency with a conclusion
of that review expected soon. The Future Financing section of Management's
Discussion and Analysis on page 29 and 30 of the Company's 2002 Annual Report to
Shareholders includes discussions regarding the Company's ability to remain in
compliance with the restrictive financial covenants contained in certain of its
debt agreements. Those discussions assume that the Company would be able to
refinance its long-term debt in accordance with its financing plans. The
Company cannot predict the outcome of the rating agency review. However,
depending on the outcome of this review, the Company's refinancing plans for
2003 may have to be altered, which may result in the Company not remaining in
compliance with one or more of the covenants. In the event the Company is not
able to remain in compliance with these covenants, management plans to negotiate
a modification of the covenants or a waiver of certain covenant provisions.
However, the Company cannot make any assurances about whether modifications or
waivers can be negotiated.
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 page 30 of the Company's 2002 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 2002 Annual Report to Shareholders, which information
is incorporated herein by reference from Exhibit 13 to this Form 10-K:
Reports of Independent Public Accountants, page 34 and 35
Consolidated Statements of Operations, page 36
Consolidated Statements of Financial Position, page 37
Consolidated Statements of Cash Flow, page 38
Consolidated Statements of Capitalization, page 39
Consolidated Statements of Changes in Common Shareholders' Equity, page 40
Notes to the Consolidated Financial Statements, pages 41 through 63
- 14 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In May 2002, the Company's Board of Directors voted to discontinue using Arthur
Andersen LLP ("Andersen") to audit the Company's financial statements for the
year ending December 31, 2002. The Company previously retained Andersen to
review their financial statements for the quarter ended March 31, 2002. In May
2002 the Company engaged PricewaterhouseCoopers LLP to audit its financial
statements for the year ending December 31, 2002. During 1999, 2000 and 2001
there were no disagreements or "reportable events" as described in Items
304(a)(I)(iv) and (v) of Regulation S-K between the Company and Andersen.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions "Information About Nominees,
Directors and Executive Officers" in the Company's definitive Proxy Statement
(filed pursuant to Regulation 14A) with respect to the Company's April 15, 2003
Annual Meeting of Common Shareholders is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Compensation of Executive Officers
and Directors" in the Company's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to Company's April 15, 2003 Annual Meeting of
Common Shareholders is incorporated by reference herein. There are no
compensation committee interlocks or insider participation.
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 15, 2003 Annual Meeting of
Common Shareholders is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Employment and Related Agreements"
in the Company's definitive Proxy Statement (filed pursuant to Regulation 14A)
with respect to the Company's April 15, 2003 Annual Meeting of Common
Shareholders is incorporated by reference herein.
ITEM 14. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES Within the 90 days prior to the date of this
report, the Company carried out an evaluation, under the supervision and with
the participation of management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the review of the
disclosure controls and procedures, the Chief Executive Officer and the Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to the material information
relating to the Company that is required to be included in the periodic SEC
filings.
- 15 -
INTERNAL CONTROLS AND PROCEDURES There were no significant changes in internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the Company's evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. 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 on
Financial Statement Schedules . . . . . . . . . . . 17
Schedule II - Consolidated Valuation and Qualifying
Accounts for the years ended December 31, 2002,
2001 and 2000 . . . . . . . . . . . . . . . . . . . 19
(a) 3 Exhibits, including those incorporated by reference are listed on
pages 20 and 21 of this 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 2002.
(c) The Exhibits, if any, filed herewith are identified in Item 15(a) 3
above.
(d) The financial statement schedules filed are identified under Item 15(a)
2 above.
- 16 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To Semco Energy, Inc.:
Our audit of the consolidated financial statements referred to in our report
dated February 10, 2003 appearing in the 2002 Annual Report to Shareholders of
SEMCO Energy, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule for the year ended December 31, 2002
listed in Item 15(a)(2) of this Form 10-K. In our opinion, the financial
statement schedule for the year ended December 31, 2002 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. The financial statement
schedules of SEMCO Energy, Inc. for the years ended December 30, 2001 and 2000,
were audited by other independent accountants who have ceased operations. Those
independent accountants expressed an unqualified opinion on those financial
statement schedules in their report dated February 7, 2002.
PricewaterhouseCoopers LLP
Detroit, Michigan
February 10, 2003
- 17 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. This report applies to
supplemental Schedule II, Valuation and Qualifying Accounts for the years ended
December 31, 2001 and 2000. This schedule was listed in prior years in Item 14
(a) 2 of the Form 10-K.
To SEMCO Energy, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of SEMCO Energy, Inc.
included in this Form 10-K, and have issued our report thereon dated February 7,
2002. 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,
February 7, 2002
- 18 -
SCHEDULE II
SEMCO ENERGY, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
ADDITIONS FOR DEDUCTIONS
PROVISIONS FROM RESERVE
BALANCE CHARGED OR FOR PURPOSE FOR BALANCE
BEGINNING (CREDITED) WHICH THE RESERVE END
DESCRIPTION OF PERIOD TO INCOME WAS PROVIDED OF PERIOD
- -------------------------------------------- --------- ------------- ----------------- ---------
YEAR ENDED DECEMBER 31, 2002
- ----------------------------
Allowances for doubtful accounts
deducted from receivables in the
Statement of Financial Position . . . . . . $1,849 $ 1,152 $1,092 $1,909
====== ======== ====== ======
Reserves for restructuring costs
included in current liabilities and
deferred credits in the Statement
of Financial Position . . . . . . . . . . $2,338 $ 0 $1,245 $1,093
====== ======== ====== ======
Allowances and reserves for discontinued
operations included in current liabilities
in the Statement of Financial Position. . $7,409 $(1,287) $6,122 $ 0
====== ======== ====== ======
YEAR ENDED DECEMBER 31, 2001
- ----------------------------
Allowances for doubtful accounts
deducted from receivables in the
Statement of Financial Position. . . . . $1,436 $ 1,410 $ 997 $1,849
====== ======== ====== ======
Reserves for restructuring costs
included in current liabilities and
deferred credits in the Statement
of Financial Position . . . . . . . . . . . $ 0 $ 2,338 $ 0 $2,338
====== ======== ====== ======
Allowances and reserves for discontinued
operations included in current liabilities
in the Statement of Financial Position . $ 0 $ 7,409 $ 0 $7,409
====== ======== ====== ======
YEAR ENDED DECEMBER 31, 2000
- ----------------------------
Allowances for doubtful accounts
deducted from receivables in the
Statement of Financial Position. . . . . $1,080 $ 1,186 $ 830 $1,436
====== ======== ====== ======
- 19 -
EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE
Filed
-------------------
Exhibit By
No. Description Herewith Reference
- ------- ---------------------------------------------------------- -------- ---------
3.(i) Articles of Incorporation of SEMCO Energy, Inc., as
restated June 25, 1999.(f) . . . . . . . . . . . . . . . . x
3.(ii) Bylaws--last revised June 20, 2002.(m) . . . . . . . . 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.(d) . . x
4.4 Form of Indenture relating to Senior Debt Securities
dated as of _________1, 1998, with Bank One
Trust Company (formerly NBD Bank) as Trustee.(e) . . x
4.5 First Supplemental Indenture relating to Senior Debt
Securities dated as of June 16, 2000, with Bank One
Trust Company as Trustee.(g). . . . . . . . . . . . . . x
4.6 Second Supplemental Indenture relating to Senior Debt
Securities dated as of June 29, 2000, with Bank One
Trust Company as Trustee.(g). . . . . . . . . . . . . . x
4.7 Indenture relating to Subordinated Debentures dated as of
April 19, 2000, with Bank One Trust Company, Trustee.(h) . x
4.8 First Supplemental Indenture relating to Subordinated
Debentures dated as of April 19, 2000, with Bank One
Trust Company, as Trustee.(h) . . . . . . . . . . . . . x
4.9 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.(m) . . . . . x
10 Material Contracts.
10.1 Short-Term Incentive Plan as amended June 10, 1999.(f). . x
10.2 1997 Long-Term Incentive Plan.(b) . . . . . . . . . . . x
10.3 Amendment (dated August 10, 2001) to Employment
Agreement with William L. Johnson.(k). . . . . . . . . x
10.4 Executive Security Agreement.(i) . . . . . . . . . . . . x
10.5 Split-Dollar Agreement.(i). . . . . . . . . . . . . . . . x
10.6 Form of Change in Control Agreement (for certain
officers).(h). . . . . . . . . . . . . . . . . . . . . . . x
10.7 Form of Change of Control Employment Agreement dated
as of March 1, 2000 (for certain officers).(h). . . x
10.8 Executive Security Trust.(i) . . . . . . . . . . . . . . x
10.9 Stock Option Plan of 2000.(j). . . . . . . . . . . . . x
10.10 Deferred Compensation and Stock Purchase Plan for
Non-Employee Directors revised December 13, 2001.(l). . x
10.11 Stock Grant Plan for Non-Employee Directors
adopted August 23, 2001.(l) . . . . . . . . . . . . . . x
10.12 Employment Agreement dated as of June 1, 2001
with Marcus Jackson.(l). . . . . . . . . . . . . . . . . x
12 Ratio of Earnings to Fixed Charges.. . . . . . . . . . . . x
13 SEMCO Energy, Inc. 2002 Annual Report to Shareholders,
pages 16-65.. . . . . . . . . . . . . . . . . . . . . . . x
21 Subsidiaries of the Registrant. . . . . . . . . . . . . x
23 Consent of Independent Public Accountants. . . . . . . x
24 Power of Attorney. . . . . . . . . . . . . . . . . . . . x
99.1 CEO Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. . . . . . . . . . . . . . . . x
99.2 CFO Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. . . . . . . . . . . . . . . . x
99.3 Proxy Statement dated March 10, 2003.(n). . . . . . . x
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
September 30, 1997, File No. 0-8503.
(e) Filed with SEMCO Energy, Inc.'s Registration Statement, Form S-3, Nos.
333-58715 and 333-58715-01, filed July 8, 1998.
(f) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended June 30,
1999, File No. 0-8503.
(g) Filed with SEMCO Energy, Inc.'s Form 8-K dated July 26, 2000, File No.
001-15565.
(h) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended March
31, 2000, File No. 001-15565.
(i) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
September 30, 2000.
(j) Filed with SEMCO Energy, Inc.'s Form 10-K for 2000, dated March 30,
2001, File No. 001-15565.
(k) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended
September 30, 2001, File No. 001-15565.
(l) Filed with SEMCO Energy, Inc.'s Form 10-K for 2001, dated March 27,
2002, File No. 001-15565.
(m) Filed with SEMCO Energy, Inc.'s Form 10-Q for the quarter ended June 30,
2002, File No. 001-15565.
(n) Filed March 10, 2003, pursuant to Rule 14a-6 of the Exchange Act, File
No. 001-15565.
- 20 & 21 -
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 14, 2003 By /s/Marcus Jackson
-----------------------------------------------
Marcus Jackson
Chairman, President 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/Marcus Jackson Chairman, President and Chief Executive Officer March 14, 2003
- -----------------------------
Marcus Jackson (Director)
/s/John E. Schneider Senior Vice President, Treasurer and March 14, 2003
- -----------------------------
John E. Schneider Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/John M. Albertine* Director March 14, 2003
- -----------------------------
John M. Albertine
/s/Edward J. Curtis* Director March 14, 2003
- -----------------------------
Edward J. Curtis
/s/John T. Ferris* Director March 14, 2003
- -----------------------------
John T. Ferris
/s/Michael O. Frazer* Director March 14, 2003
- -----------------------------
Michael O. Frazer
/s/John R. Hinton* Director March 14, 2003
- -----------------------------
John R. Hinton
/s/Harvey I. Klein* Director March 14, 2003
- -----------------------------
Harvey I. Klein
/s/Frederick S. Moore* Director March 14, 2003
- -----------------------------
Frederick S. Moore
/s/Thomas W. Sherman* Director March 14, 2003
- -----------------------
Thomas W. Sherman
/s/Edith A. Stotler* Director March 14, 2003
- -----------------------------
Edith A. Stotler
/s/Donald W. Thomason* Director March 14, 2003
- -----------------------------
Donald W. Thomason
*By /s/Marcus Jackson March 14, 2003
- -----------------------------
Marcus Jackson
Attorney-in-fact
- 22 -
CERTIFICATIONS
I, Marcus Jackson, certify that:
1. I have reviewed this annual report on Form 10-K of SEMCO Energy, Inc.
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/Marcus Jackson
----------------------------------------------
Chairman of the Board, President and
Chief Executive Officer
SEMCO Energy, Inc.
- 23 -
CERTIFICATIONS (CONTINUED)
I, John E. Schneider, certify that:
1. I have reviewed this annual report on Form 10-K of SEMCO Energy, Inc.
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/John E. Schneider
----------------------------------------------
Senior Vice President and
Chief Financial Officer
SEMCO Energy, Inc.
- 24 -