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SEMCO ENERGY Reports First Quarter 2004 Results

FARMINGTON HILLS, Mich., April 29 /PRNewswire-FirstCall/ -- SEMCO ENERGY, Inc. (NYSE: SEN) today reported net income of $7.9 million, or $0.28 per share, for the first quarter of 2004 compared to net income of $10.7 million, or $0.57 per share, for the first quarter of 2003. During the first quarter of 2004, the Company began accounting for its construction services business as a discontinued operation and has reclassified prior periods accordingly. The Company reported a net loss of $4.8 million during the first quarter of 2004 from the discontinued construction services operation, which includes a net loss from operations of $2.0 million and an estimated net loss on disposal of $2.8 million. The Company's income from continuing operations for the first quarter of 2004 was $12.7 million, or $0.44 per share, compared to $13.5 million, or $0.72 per share, for the first quarter of 2003.

The $0.8 million (or 5.7%) decrease in income from continuing operations during the first quarter of 2004, when compared to the first quarter of 2003, was primarily due to an increase in interest expense and a decrease in operating income, offset partially by a decrease in dividends on trust preferred securities. The increase in interest expense was caused by higher levels of long-term debt, an increase in amortization of debt costs as a result of the issuance of additional long-term debt in 2003, and new accounting pronouncements that require dividends on trust preferred securities incurred after July 1, 2003 to be reflected in interest expense.

Earnings per share from continuing operations for the first quarter of 2004 decreased by $0.28 (or 38.9%) when compared to the first quarter of 2003. This decrease was due primarily to a 53% increase in the average number of outstanding common shares.

George Schreiber, Jr., President and Chief Executive Officer, said, "SEMCO's gas distribution business continues to perform well, providing the Company with stable earnings and cash flow. Operating income from this business was $30.2 million for the first quarter of 2004 compared to $30.5 million for the first quarter of 2003."

Mr. Schreiber also stated, "During the first quarter of 2004, we made considerable progress towards selling our construction services business. We still anticipate that completion of the sale will occur before year-end. With the recently announced private placement of convertible preference stock, we continue to make headway in efforts to strengthen the Company's balance sheet and improve its credit quality in order to achieve an investment-grade profile." Mr. Schreiber concluded by saying, "2004 will be a challenging and pivotal year for the Company. By year-end, the Company intends to be focused on our gas distribution businesses and our financial position should continue to improve. As the year progresses, the Company will be better positioned to pursue growth opportunities in these sectors."

IMPACT OF WEATHER

Temperatures during the quarter ended March 31, 2004 were 0.9% and 2.5% colder than normal in Alaska and Michigan, respectively. During the first quarter of 2003, temperatures in Michigan were 10.9% colder than normal, while in Alaska, temperatures were 13.8% warmer than normal. The Company has estimated that the combined variations from normal temperatures in Alaska and Michigan increased net income by approximately $0.5 million during the first quarter of 2004 and increased net income by approximately $0.2 million during the first quarter of 2003.

2004 EARNINGS GUIDANCE

The Company currently expects earnings per share for 2004 to be in the range of $0.16 to $0.20. Income from continuing operations is essentially unchanged from the estimates included in the Company's prior guidance. However, the above guidance is lower than the Company's previously issued earnings guidance primarily because of the $2.8 million estimated loss on the sale of the Company's construction business, which represents a $0.10 per share decrease in the Company's estimated 2004 EPS. The EPS estimate includes a net loss from the discontinued construction operations of $0.01 per share, which does not include the estimated loss on sale of the construction business, and assumes the sale occurs in the fourth quarter of 2004. The EPS estimate includes non-cash charges of $0.07 per share related to the early retirement of debt. This estimate also assumes normal temperatures in the Company's gas distribution markets for the remainder of the year and assumes that the Company issues the second tranche of its convertible preference stock. Further, the estimate is dependent on the amount and timing of asset sales and debt reductions.

BUSINESS SEGMENT RESULTS

GAS DISTRIBUTION

The Gas Distribution Business reported operating income of $30.2 million for the first quarter of 2004 compared to $30.5 million for the first quarter of 2003. The change in operating income between 2003 and 2004 was caused by a number of offsetting items. Gas transportation revenue increased by approximately $1.1 million while gas sales margin decreased by $0.7 million. Operating expenses also increased by approximately $0.6 million. The increase in operating expenses was generally caused by increases in property tax expense, commercial insurance costs and uncollectible customer accounts.

The increase in gas transportation revenue was primarily due to an increase in gas deliveries at ENSTAR. The decrease in gas sales margin was primarily caused by lower gas costs savings and the impact of recent rate orders and settlements in Michigan and Alaska, whereby rate design was modified to, among other things, lessen the impact of temperature fluctuations. Rates were changed in 2003 to include higher monthly fixed fees and lower volumetric fees. These rate design changes reduce weather risk and, when compared to the previous rate design, generally produce higher gas sales margins during the non-heating season and lower gas sales margins during the high-volume heating season.

INFORMATION TECHNOLOGY

The operating income of the Information Technology Services Business for the first quarter of 2004 and 2003 was $0.4 million and $0.2 million, respectively. The increase in operating income during 2004 was due primarily to increased revenues and a decrease in rent expense as a result of consolidating certain operations in 2003.

Operating revenue was $2.4 million for the three months ended March 31, 2004 and $2.2 million for the three months ended March 31, 2003.

PROPANE, PIPELINES AND STORAGE

The Propane, Pipelines and Storage Business reported operating income of $0.8 million for the first quarter of 2004, compared to $0.9 million for the first quarter of 2003. The decrease was due in part to lower propane sales due to warmer temperatures in Michigan compared to 2003, and business tax refunds recorded in 2003 that did not recur in 2004. These items were offset partially by a decrease in depreciation expense.

Operating revenue was $2.7 million for the three months ended March 31, 2004 and $2.8 million for the three months ended March 31, 2003.

SEMCO ENERGY, Inc. is a diversified energy and infrastructure company that distributes natural gas to approximately 393,000 customers in Michigan and Alaska. It also owns and operates businesses involved in natural gas pipeline construction services, propane distribution and intrastate pipelines and natural gas storage in various regions of the United States. In addition, it provides information technology and outsourcing services, specializing in the mid-range computer market.

The following is a "Safe-Harbor" statement under the Private Securities Litigation Reform Act of 1995. This release contains forward-looking statements that involve risks and uncertainties. Statements that are not historic facts, including statements about the Company's outlook, beliefs, plans, goals and expectations, are forward-looking statements. Factors that may impact forward-looking statement include, but are not limited to, the effects of weather, the economic climate, competition, commodity prices, changing conditions in the capital markets, regulatory approval processes, success in obtaining new business and other risks detailed from time to time in the Company's Securities and Exchange Commission filings.

                                SEMCO ENERGY, INC.
                       News Release Statistics (Unaudited)
                     (in thousands, except per share amounts)

                                       Three Months Ended  Twelve Months Ended
                                           March 31,           March 31,
                                         2004      2003      2004      2003

    Statement of Operations data

      Operating revenues               $207,784  $194,653  $486,086  $434,778

      Operating expenses                176,636   163,166   425,728   372,558

      Operating income (loss)            31,148    31,487    60,358    62,220

      Other income and (deductions)
        Interest expense                (11,620)   (7,647)  (43,658)  (30,226)
        Debt exchange and
         extinguishment costs                 -         -   (24,030)        -
        Other                               767       736     2,185     2,443
          Total other income and
           (deductions)                 (10,853)   (6,911)  (65,503)  (27,783)

      Income tax (expense) benefit       (7,576)   (8,942)    1,446   (13,294)

      Minority interest - dividends on
       trust preferred securities, net
       of income taxes                        -    (2,150)   (2,150)   (8,601)

      Income (loss) from continuing
       operations                        12,719    13,484    (5,849)   12,542

      Income (loss) from discontinued
       operations, net of income taxes   (4,776)   (2,810)  (26,837)   (4,249)

      Net income (loss)                   7,943    10,674   (32,686)    8,293

      Dividends on convertible
       preference stock                     (62)        -       (62)        -

      Net income (loss) available to
       common shareholders               $7,881   $10,674  $(32,748)   $8,293

      Earnings per share - basic
        Net income (loss) from
         continuing operations            $0.45     $0.72    $(0.24)    $0.67
        Net income (loss) available to
         common shareholders              $0.28     $0.57    $(1.33)    $0.45

      Earnings per share - diluted
        Net income (loss) from
         continuing operations            $0.44     $0.72    $(0.24)    $0.67
        Net income (loss) available to
         common shareholders              $0.28     $0.57    $(1.33)    $0.45

      Cash dividends declared per
       share                                 $-        $-    $0.350    $0.500
      Cash dividends paid per share      $0.075    $0.125    $0.350    $0.500

      Average number of common shares
       outstanding
        Basic                            28,167    18,779    24,609    18,587
        Diluted                          28,823    18,779    24,609    18,587

    Statement of Financial Position
     data at March 31, 2004
        Total assets                   $909,243
        Cash and temporary cash
         investments                     20,914
        Short-term notes payable              -
        Long-term debt                  530,259
        Convertible preference stock     27,643
        Common shareholders' equity     183,854



                                SEMCO ENERGY, INC.
                       News Release Statistics (Unaudited)
                 (dollars in thousands, except per share amounts)

                                      Three months ended  Twelve months ended
                                           March 31,           March 31,
                                        2004      2003      2004      2003

    Business Segment Information

      Operating revenues
        Gas Distribution              $204,493  $191,263  $476,119  $425,084
        Information Technology
         Services                        2,350     2,154     9,196     9,511
        Propane, Pipelines and Storage   2,698     2,827     7,786     7,647
        Corporate and Other (includes
         intercompany eliminations)     (1,757)   (1,591)   (7,015)   (7,464)
          Total operating revenues    $207,784  $194,653  $486,086  $434,778

      Operating income (loss)
        Gas Distribution               $30,231   $30,497   $58,956   $59,491
        Information Technology
         Services                          389       220       680       646
        Propane, Pipelines and Storage     775       898     1,939     2,235
        Corporate and Other (includes
         intercompany eliminations)       (247)     (128)   (1,217)     (152)
          Total operating income       $31,148   $31,487   $60,358   $62,220

      Depreciation and amortization
       expense
        Gas Distribution                $6,455    $6,459   $25,524   $25,450
        Information Technology
         Services                          157       168       673       619
        Propane, Pipelines and Storage     219       330       874     1,030
        Corporate and Other                 41        57       235       259
          Total depreciation and
           amortization expense         $6,872    $7,014   $27,306   $27,358

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)             29,894    29,760    67,406    68,255
        Volumes transported (MMcf)      14,828    12,916    53,270    45,786
        Number of customers at end of
         period                        392,831   385,508   392,831   385,508
        Weather statistics:
          Degree days
            Alaska                       4,031     3,431     9,984     9,014
            Michigan                     3,335     3,606     6,792     7,270
          Percent colder (warmer) than
           normal
            Alaska                          .9%    (13.8)%    (2.3)%   (11.3)%
            Michigan                       2.5%     10.9%       .7%      8.3%



SOURCE SEMCO ENERGY, Inc.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding SEMCO Energy's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.

 
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