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 - -------------------------- 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:
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.
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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.
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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.
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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.
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DIVERSIFIED BUSINESSES
The following table shows operating revenues for each of the diversified businesses, including intercompany revenues, for 2000 through 2002:
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.
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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
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.
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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:
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.
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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.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
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.
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
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.
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.
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.
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
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ITEM 9.
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.
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.
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.
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.
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.
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.
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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.
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.
(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.
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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
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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
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SCHEDULE II
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EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE
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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.
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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.
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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.
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