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SEMCO ENERGY Reports Third Quarter 2004 Results of Operations

FARMINGTON HILLS, Mich., Nov 5, 2004 /PRNewswire-FirstCall via COMTEX/ -- SEMCO ENERGY, Inc. (NYSE: SEN) today announced its financial results for the quarter ended September 30, 2004. The net loss available to common shareholders for the quarter was $9.6 million, or $0.34 per share, compared to a net loss of $24.8 million, or $1.07 per share, for the third quarter of 2003. The $15.2 million improvement in results is attributable, in part, to a decrease of $17.2 million in losses from discontinued construction services operations. This improvement was partially offset by a decrease in operating income of $2.3 million, or $1.5 million net of income taxes, and an increase in financing costs of $0.2 million, net of income taxes.

For the first nine months of 2004, the Company incurred a net loss available to common shareholders of $8.4 million, or $0.30 per share, compared to a net loss of $34.8 million, or $1.71 per share, for the first nine months of 2003. The $26.4 million improvement in results was due primarily to a $14.7 million decrease in losses from discontinued construction services operations, a $14.6 million decrease in financing costs, net of income taxes, partially offset by a $2.7 million decrease in operating income, net of income taxes.

George A. Schreiber, Jr., Company President and Chief Executive Officer, said, "Financial results for the third quarter were negatively impacted by the discontinued operations at construction services and expenses incurred in connection with the dispute with Atlas Pipeline Partners (Atlas) over the termination of the sale of the Company's Alaska Pipeline Company (APC) subsidiary."

Schreiber continued: "There are positive things to say, however, about the Company's financial picture and future prospects. The Company remains in a strong liquidity position. At quarter end, we had filled our natural gas storage facilities to approximately 95% of capacity without incurring any borrowings from our bank credit facility. Our unprofitable construction services operations have been sold, which should help improve future results. We have begun to redirect our information systems operations to focus them primarily on the Company's internal technology needs, and we will continue to evaluate these operations going forward. We are also evaluating the prospects for rate increases in Michigan."

Schreiber went on to comment on the APC matter: "We look forward to the conclusion of the APC arbitration in the April to May 2005 timeframe, or possibly earlier. We continue to believe that the Company has solid defenses against Atlas's claims." Schreiber continued: "All that said, the timing and outcome in any kind of litigation are difficult to predict."

Schreiber concluded: "All considered, we continue to make progress on improving the Company's future financial integrity and to set the stage for our future growth."

OPERATING INCOME - QUARTER

The Company reported an operating loss of $1.5 million for the third quarter 2004 compared to operating income of $0.8 million for the third quarter 2003. Approximately $1.9 million of the $2.3 million decrease in operating income is attributed to the gas distribution business and the remainder is due primarily to expenses associated with the APC arbitration proceeding. The primary items contributing to the decrease in operating income of the gas distribution business were a $1.6 million increase in operating expenses and a $0.6 million decrease in other operating revenues. These negative factors were partially offset by a $0.5 million increase in gas sales margin.

The increase in operating expenses was primarily caused by employee pension and health care costs, commercial insurance and claims, depreciation and professional fees and expenses (primarily related to Sarbanes-Oxley compliance). The impact of these items was partially offset by a decrease in uncollectible accounts and a decrease in retiree medical costs. The decrease in other operating revenue was due primarily to lower revenues from Norstar, the Company's pipeline management subsidiary. Norstar experienced higher revenues in 2003 due to a large construction management project. The gas sales margin improvement was primarily a result of additional margin from new customers and a decrease in lost and unaccounted for gas when compared to the third quarter of last year.

OPERATING INCOME - YEAR TO DATE

Operating income was $34.7 million for the nine months ended September 30, 2004, or $4.2 million lower than for the same period in 2003. Approximately $2.4 million of the decrease in operating income is attributed to the gas distribution business and the remainder of the decrease is due primarily to corporate expenses incurred in connection with the unsuccessful sale of APC.

The change in operating income between 2004 and 2003 for the gas distribution business was caused by a number of factors. Gas transportation revenue increased by $1.3 million, while gas sales margin decreased by $0.5 million and other operating revenues decreased by approximately $1.0 million. Operating expenses increased by approximately $2.3 million. The increase in operating expenses for the first nine months of 2004 resulted from the previously mentioned items that increased operating expenses for the third quarter.

The increase in gas transportation revenue was primarily the result of an increase in gas deliveries at the Company's ENSTAR Division in Alaska. The decrease in gas sales margin was primarily caused by a decrease in gas sold mostly due to warmer weather when compared to 2003 and gas sales customers at ENSTAR switching to transportation service. In addition, gas sales margin for the first nine months of 2004, when compared to the same period of 2003, was lower as a result of the changes in rate design discussed in more detail below. The impact of these items was partially offset by additional gas sales margins from new customers and a decrease in lost and unaccounted for gas.

IMPACT OF WEATHER

During 2003, the Company's rate design in both Michigan and Alaska was changed. Regulators approved changes, which, among other things, lessen the impact of weather variations by providing for higher monthly fixed fees and lower volumetric fees. These changes produce higher gas sales margins during the non-heating season and lower margins during the heating season. However, these changes in rate design only partially mitigate the impact of deviations from normal temperatures and, as a result, such deviations still have an impact on the Company's gas distribution business.

Temperatures during the first nine months of 2004 were 3.1% warmer than normal in Alaska and essentially normal in Michigan. During the first nine months of 2003, temperatures in Alaska were 10.5% warmer than normal, while in Michigan, temperatures were 10.0% colder than normal. The Company has estimated that the combined variations from normal weather decreased net income by approximately $0.9 million during the first nine months of 2004 and by approximately $0.2 million during the first nine months of 2003. The Company is continuing to explore ways to further mitigate the impact of weather on its financial results.

FINANCING COSTS

Financing costs, net of income taxes, were $8.0 million for the third quarter 2004 compared to $7.8 million for the third quarter of 2003.

Financing costs for the first nine months of 2004 were $23.7 million, net of income taxes. Such costs included $21.6 million of interest expense, net of income taxes, and $2.1 million of non-cash dividends on convertible preference stock. For the first nine months of 2003, financing costs were $38.3 million, consisting of $18.4 million of interest expense, net of income taxes, $15.6 million of debt exchange and extinguishment costs, net of income taxes, and $4.3 million of dividends on trust preferred securities, net of income taxes. The $14.6 million improvement in overall financing costs was due primarily to the $15.6 million of debt exchange and extinguishment costs included in the results for the first nine months of 2003, partially offset by the impact of additional long-term financing and a lower amount of short-term bank financing compared to the prior period.

DISCONTINUED OPERATIONS

The loss from discontinued operations was $1.1 million for the third quarter of 2004 compared to a loss of $18.3 million for the third quarter of 2003. The improvement is due primarily to the $17.4 million write-off of goodwill and long-lived assets in the third quarter of 2003.

The loss from discontinued operations was $8.2 million for the nine months ended September 30, 2004, compared to a loss of $23.0 million for the nine months ended September 30, 2003. The $14.7 million improvement was due primarily to the $17.4 million of goodwill and asset impairment charges included in the loss from discontinued operations for the first nine months of 2003 and improved operating results in 2004. These items were partially offset by a $4.7 million loss on the sale of construction services reflected in the loss from discontinued operations for the first nine months of 2004.

2004 EARNINGS AND CAPITAL EXPENDITURE GUIDANCE

The Company currently expects its 2004 net loss available to common shareholders to be in the range of $0.05 to $0.10 per share. This revised guidance includes a net loss from the Company's discontinued construction operations of $0.29 per share, which is higher than previous estimates but is partially offset by improved estimated results from the Company's continuing operations. These estimates assume normal weather in the Company's gas distribution markets for the remainder of 2004, no adjustments to the loss from the discontinued construction operations during the remainder of 2004, and that the resolution of the APC arbitration will take place in 2005.

The Company's capital expenditures through September 30, 2004 were $26.1 million. The Company still expects its capital expenditures for the full year 2004 to be approximately $40 million.

SEMCO ENERGY, Inc. distributes natural gas to approximately 392,000 customers combined in Michigan, as SEMCO ENERGY GAS COMPANY, and in Alaska, as ENSTAR Natural Gas Company. It owns and operates businesses involved in propane distribution, intrastate pipelines and natural gas storage in various regions of the United States. In addition, it provides information technology 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 statements 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, success in defending claims against the Company, 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  Nine Months Ended
                                          September 30,       September 30,
                                         2004      2003      2004      2003

    Statement of Operations data

      Operating revenues                $54,034   $51,531  $343,580  $329,250

      Operating expenses                 55,526    50,726   308,848   290,347

      Operating income (loss)            (1,492)      805    34,732    38,903

      Other income and (deductions)
        Interest expense                (10,527)  (11,944)  (33,273)  (28,323)
        Debt exchange and
         extinguishment costs                 -         -         -   (24,030)
        Other                               442       472     1,815     1,652
          Total other income and
           (deductions)                 (10,085)  (11,472)  (31,458)  (50,701)

      Income tax (expense) benefit        4,242     4,160    (1,292)    4,265

      Minority interest - dividends on
       trust preferred securities, net
       of income taxes                        -         -         -    (4,300)

      Income (loss) from continuing
       operations                        (7,335)   (6,507)    1,982   (11,833)

      Income (loss) from discontinued
       operations, net of income taxes   (1,129)  (18,334)   (8,249)  (22,965)

      Net income (loss)                  (8,464)  (24,841)   (6,267)  (34,798)

      Dividends on convertible
       preference stock                  (1,153)        -    (2,083)        -

      Net income (loss) available to
       common shareholders              $(9,617) $(24,841)  $(8,350) $(34,798)

      Earnings per share - basic
        Income (loss) from continuing
         operations                      $(0.26)   $(0.28)    $0.07    $(0.58)
        Net income (loss) available to
         common shareholders             $(0.34)   $(1.07)   $(0.30)   $(1.71)

      Earnings per share - diluted
        Income (loss) from continuing
         operations                      $(0.26)   $(0.28)    $0.06    $(0.58)
        Net income (loss) available to
         common shareholders             $(0.34)   $(1.07)   $(0.30)   $(1.71)

      Cash dividends declared per
       share                                 $-        $-    $0.075    $0.200
      Cash dividends paid per share          $-    $0.075    $0.150    $0.325

      Average number of common shares
       outstanding
        Basic                            28,321    23,308    28,226    20,375
        Diluted                          28,321    23,308    32,900    20,375

    Statement of Financial Position
     data at September 30, 2004
        Total assets                   $872,654
        Cash and temporary cash
         investments                      6,917
        Short-term notes payable              -
        Long-term debt                  498,929
        Convertible preference stock     47,291
        Common shareholders' equity     166,413

                                                     Twelve Months Ended
                                                         September 30,
                                                    2004               2003

    Statement of Operations data

      Operating revenues                          $487,285           $454,899

      Operating expenses                           430,759            394,039

      Operating income (loss)                       56,526             60,860

      Other income and (deductions)
        Interest expense                           (44,635)           (36,158)
        Debt exchange and extinguishment
         costs                                           -            (24,030)
        Other                                        2,317              2,192
          Total other income and
           (deductions)                            (42,318)           (57,996)

      Income tax (expense) benefit                  (5,477)            (1,936)

      Minority interest - dividends on
       trust preferred securities, net
       of income taxes                                   -             (6,450)

      Income (loss) from continuing
       operations                                    8,731             (5,522)

      Income (loss) from discontinued
       operations, net of income taxes             (10,155)           (24,688)

      Net income (loss)                             (1,424)           (30,210)

      Dividends on convertible
       preference stock                             (2,083)                 -

      Net income (loss) available to
       common shareholders                         $(3,507)          $(30,210)

      Earnings per share - basic
        Income (loss) from continuing
         operations                                  $0.31             $(0.28)
        Net income (loss) available to
         common shareholders                        $(0.12)            $(1.52)

      Earnings per share - diluted
        Income (loss) from continuing
         operations                                  $0.28             $(0.28)
        Net income (loss) available to
         common shareholders                        $(0.12)            $(1.52)

      Cash dividends declared per share             $0.225             $0.450
      Cash dividends paid per share                 $0.225             $0.450

      Average number of common shares
       outstanding
        Basic                                       28,169             19,933
        Diluted                                     31,669             19,933

    Statement of Financial Position data
     at September 30, 2004
        Total assets
        Cash and temporary cash
         investments
        Short-term notes payable
        Long-term debt
        Convertible preference stock
        Common shareholders' equity



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

                                        Three months ended  Nine months ended
                                          September 30,       September 30,
                                          2004     2003      2004      2003

    Business Segment Information

      Operating revenues
        Gas Distribution                $52,235  $49,848  $336,463  $322,222
        Information Technology Services   2,294    2,253     6,788     6,675
        Propane, Pipelines and Storage    1,254    1,198     5,302     5,439
        Corporate and Other (includes
         intercompany eliminations)      (1,749)  (1,768)   (4,973)   (5,086)
          Total operating revenues      $54,034  $51,531  $343,580  $329,250

      Operating income (loss)
        Gas Distribution                  $(885)    $969   $35,351   $37,782
        Information Technology Services     155       (4)      692       373
        Propane, Pipelines and Storage      192      195     1,136     1,416
        Corporate and Other (includes
         intercompany eliminations)        (954)    (355)   (2,447)     (668)
          Total operating income        $(1,492)    $805   $34,732   $38,903

      Depreciation and amortization
       expense
        Gas Distribution                 $6,507   $6,346   $19,496   $19,168
        Information Technology Services     130      175       439       515
        Propane, Pipelines and Storage      220      218       663       767
        Corporate and Other                  43       65       125       181
          Total depreciation and
           amortization expense          $6,900   $6,804   $20,723   $20,631

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)               5,464    5,471    45,052    46,016
        Volumes transported (MMcf)       13,978   12,815    42,715    38,338
        Number of customers at end of
         period                         391,777  384,930   391,777   384,930
        Weather statistics:
          Degree days
            Alaska                          829      835     6,309     5,811
            Michigan                        194      178     4,421     4,825
          Percent colder (warmer) than
           normal
            Alaska                         (8.2)%   (8.5)%    (3.1)%   (10.5)%
            Michigan                       (1.5)%   (3.8)%      .2%     10.0%


                                                    Twelve months ended
                                                        September 30,
                                                   2004               2003

    Business Segment Information

      Operating revenues
        Gas Distribution                         $477,130           $444,895
        Information Technology Services             9,113              9,205
        Propane, Pipelines and Storage              7,778              7,746
        Corporate and Other (includes
         intercompany eliminations)                (6,736)            (6,947)
          Total operating revenues               $487,285           $454,899

      Operating income (loss)
        Gas Distribution                          $56,791            $58,877
        Information Technology Services               830                608
        Propane, Pipelines and Storage              1,782              2,145
        Corporate and Other (includes
         intercompany eliminations)                (2,877)              (770)
          Total operating income                  $56,526            $60,860

      Depreciation and amortization
       expense
        Gas Distribution                          $25,856            $25,463
        Information Technology Services               608                683
        Propane, Pipelines and Storage                881              1,003
        Corporate and Other                           195                250
          Total depreciation and
           amortization expense                   $27,540            $27,399

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)                        66,308             67,499
        Volumes transported (MMcf)                 55,735             49,073
        Number of customers at end of
         period                                   391,777            384,930
        Weather statistics:
          Degree days
            Alaska                                  9,882              8,711
            Michigan                                6,659              7,353
          Percent colder (warmer) than
           normal
            Alaska                                   (3.3)%            (14.1)%
            Michigan                                 (1.7)%              9.2%


SOURCE SEMCO ENERGY, Inc.

Analysts Contact: Thomas Connelly, Director of Investor
Relations, +1-248-702-6240, or Media Contact: Timothy Lubbers, Director of
Marketing and Corporate Communications, +1-810-966-4208, both of SEMCO ENERGY,
Inc.
http://www.semcoenergy.com
"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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