SEMCO Energy, Inc.

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SEMCO Energy, Inc.

405 Water Street
Port Huron, Michigan 48060
U.S.A.
Telephone: (810) 987-2200
Toll Free: (800) 624-2019
Fax: (810) 987-7286
Web site: http://www.semcoenergy.com

Public Company
Incorporated: 1951 as the Southeastern Michigan Gas Company
Employees: 1,850
Sales: $422.59 million
Stock Exchanges: New York
Ticker Symbol: SEN
NAIC: 221210 Natural Gas Distribution; 23491 Water, Sewer, and Pipeline Construction

SEMCO Energy, Inc. is a Michigan-based holding company that operates natural gas distribution, infrastructure construction, and information technology subsidiaries, the largest of which is the SEMCO Energy Gas Company, which serves more than 260,000 customers in Michigan. The publicly owned firm, which has been expanding rapidly through internal growth and acquisition, shelved plans to seek new ownership in 2001 when a review concluded that the timing was not right for such a move.

Early Years

SEMCO Energy got its start in February of 1951, when Cecil A. Runyan purchased gas manufacturing and distribution facilities from Detroit Edison and began to run them as the Southeastern Michigan Gas Company. A month later Runyan converted the operation from manufactured gas (produced from heated coal) to natural gas. In 1953, the firm acquired the Albion Gas Light Company, another small Michigan energy provider. Southeastern Michigan Gas continued to operate in this form for the next two decades while steadily growing its customer base.

In 1971, Robert J. Thomson, who had joined the firm as an accountant 13 years earlier, took over as president and CEO. In 1977, the company was restructured, and a new holding company created to serve as parent. This entity was named Southeastern Michigan Gas Enterprises, Inc. Several years later Southeastern Michigan Engine Specialists, Inc. was formed to explore the idea of making automobile engines that ran on natural gas. Eventually, over 200 of the company’s vehicles were converted to run on the cleaner-burning fuel.

By 1985, Southeastern Michigan Gas Enterprises was taking in $100 million in revenues, more than 80 percent of which came from the Southeastern Michigan Gas Co. That same year saw the firm acquire the Battle Creek Gas Company for $25 million. Battle Creek served 31,000 customers in and around its home city. Southeastern Michigan Gas Co. was by this time serving 67,000 customers of its own in southeast and south central Michigan.

In 1987, the company purchased the gas distribution operations of Michigan Power Co. of Three Rivers, Michigan for $38 million, renaming it Michigan Gas Co. The purchase boosted Southeastern Michigan Gas Enterprises to a total of 187,000 customers in 20 Michigan counties. In 1989 annual revenues reached a record of more than $226 million, with net earnings of $7.6 million. The company had by this time changed the name of Southeastern Michigan Engine to Southeastern Michigan Financial Services, Inc., and added subsidiaries SEMCO Energy Services, Inc. and Southeastern Michigan Development Co.

In 1990, the firm was ordered to repay customers $1.4 million by the Michigan Public Service Commission because of rules requiring refunds for earnings above pre-established levels. The figure was a compromise from the $2.6 million originally sought. The following year SEMCO Energy Services unit SEMCO Pipeline Co. partnered with three other firms to build the NoArk pipeline system across northern Arkansas. SEMCO Pipeline owned a third of the venture. The company also began construction of an extension to its Eaton Rapids, Michigan pipeline in conjunction with ANR Eaton Co., and started work on a new 18.5 mile pipeline in St. Clair County, Michigan, which would serve a variety of customers including a Detroit Edison power plant.

Natural Gas-Powered Vehicles

Continuing to pursue the idea of vehicles powered by natural gas, in 1991 the company built the first fueling station for this purpose in Michigan in the small town of Negaunee in the state’s upper peninsula, where the firm’s Michigan Gas Company subsidiary provided service. A second station was soon added in the company’s home city of Port Huron, with more to follow later. Natural gas yielded 100 to 200 miles per gallon, but cost only two-thirds the price of gasoline. Vehicles could be configured to run on both fuels so that when the natural gas ran out, the engine would automatically switch over to gasoline from a separate tank.

In 1993 president and CEO Robert Thomson retired and his place was taken by executive vice president Ward Kirby. Thomson remained with the firm as board chairman. The following year the company joined with 5 other Michigan gas suppliers to form the Michigan Natural Gas Vehicle Association to promote natural gas-fueled vehicle use. In 1996, CEO Kirby left and William L. Johnson was appointed to the top post by the board. Johnson had a long history in the industry, having most recently served as president and CEO of Northern Pipeline Construction Co. of Phoenix and Kansas City. He had received BS and MA degrees from Central Michigan University, and he and his wife had family ties to the state.

By this time the company’s investment in the NoArk pipeline project was proving to be a serious financial drain. The pipeline, which was completed in 1993, had exceeded its original budget of $70 million by almost half and was consistently underutilized. Johnson told securities analysts in September of 1996 that “the dog won’t hunt,” and declared resolution of the NoArk issue his number one priority. Southeastern Michigan Gas Enterprises was otherwise healthy, reaping above-industry-average returns in the highly regulated gas market for a number of years running.

Reorganization and a New Name

In early 1997, the company shortened its name to SEMCO Energy, Inc. It was simultaneously reorganized into three entities: SEMCO Energy Gas Co., which was a regulated company that consisted of the operations of Southeastern Michigan Gas, Battle Creek Gas, and Michigan Gas; SEMCO Energy Services, an unregulated subsidiary which marketed gas in Michigan, Illinois, New York, Kentucky, and West Virginia; and SEMCO Ventures, which was to manage the company’s other capital assets, including production, processing, storage, and transmission facilities. A new marketing agreement was also announced with Itron, Inc., a maker of automated meter reading equipment. Itron products, which were used by gas companies as well as electricity and water providers, would be sold through SEMCO Energy Services in Michigan, Ohio, Illinois, Indiana, and Wisconsin. SEMCO was now focusing on building its brand identity and on pursuing profits from unregulated areas, especially the services sector. CEO Johnson declared his intention to earn $1 billion in revenues or have 1 million gas customers by 2003.

In August the company began implementing a new, aggressive acquisition strategy. The first purchase was Sub-Surface Construction Co. of Comstock Park, Michigan, bought for $15.4 million. Sub-Surface primarily constructed underground natural gas pipelines and related facilities. SEMCO received a favorable ruling from the Michigan Public Service Commission in the fall, when it agreed to allow the company to merge the rate structures and gas cost recovery clauses of Michigan Gas and Southeastern Michigan Gas. The move would raise the bills of its customers by an average of $13 a year. Continuing to focus on services, the company also reached a marketing agreement with General Electric to form SharpService, a repair service for appliances that would be available to SEMCO’s 240,000 customers in Michigan.

At year’s end, SEMCO acquired Maverick Pipeline Services, Inc., a pipeline consulting and engineering design firm. The $500,000 deal complemented the earlier purchase of Sub-Surface, giving SEMCO a turnkey pipeline design and construction service. Early 1998 saw the nettlesome NoArk situation resolved, when SEMCO sold its interest in the pipeline to ENOGEX Arkansas Pipeline Corporation for approximately $4 million and assumption of debt.

During the winter of 1998, the company completed an early retirement program that reduced its payroll ledger by 101 employees, about a fifth of the total, which helped lower operating costs. SEMCO Ventures also acquired a Michigan-based propane gas company, Hot Flame Gas, Inc., in a stock swap. In May, the company acquired King Energy and Construction, a Tennessee water, sewer, and natural gas construction services firm, while in October an agreement was signed with TransCanada PipeLines to manage SEMCO’s pipelines and supply the company with the majority of its gas. The latter move was expected to result in lower costs to consumers.

Company Perspectives:

SEMCO Energy will be a leading diversified energy infrastructure company. We will be a significant regional provider of natural gas services and one of the largest providers of underground engineering and construction services in North America. We will provide high-quality and valued services to our satisfied customers and a total return to our shareholders above the median of our peer group. Our fundamental business is the gas distribution business. The consolidation of gas utility assets occurring in the industry presents opportunities to significantly grow our gas distribution business in attractive areas of the U.S. We will look for opportunities in regions with significant gas consumption or growth, cooperative regulation, and companies offering significant potential cost synergy.

Another acquisition followed in November of 1998 when Oilfield Materials Consultants was purchased for $15 million in stock and the assumption of $1.1 million in debt. Oilfield Materials, which offered consulting and quality control services, would become a subsidiary of SEMCO Energy Ventures. CEO Johnson described the venture unit’s strategy as being “to offer turnkey engineering, design and construction support to a national, if not international, customer base.” He anticipated that half of the company’s revenues would come from these activities by 2003.

Sale of SEMCO Energy Services

In February of 1999, SEMCO put its Energy Services subsidiary up for sale. The unit was a major revenue source, generating $398 million in earnings in 1998, but it no longer fit the company’s business model. A buyer was quickly found in CoEnergy Trading Co., a sister company of Michigan Consolidated Gas Co. In the early summer an accident blamed on human error and incorrect pipeline maps caused high-pressure gas to flow into homes in a Battle Creek, Michigan neighborhood. Two houses burned down and two residents suffered smoke inhalation. Damage was also reported in several dozen other dwellings.

During 1999 SEMCO’s acquisitions continued, with K&B Construction, Inc. of Kansas City purchased in February, Iowa Pipeline Associates, Inc. acquired in April, and ENSTAR Natural Gas Co. bought in July. The first two companies built underground pipelines in Iowa, Kansas, Missouri, and Nebraska, while ENSTAR provided natural gas for the city of Anchorage, Alaska. The ENSTAR purchase cost $290 million, making it SEMCO’s largest acquisition ever. ENSTAR boosted the company’s gas distribution customer base by almost half, to 350,000.

More acquisitions followed in the fall, with Flint Construction Co. of Lawrenceville, Georgia, Long’s Underground Technologies, Inc. of Lufkin, Texas, and Drafting Services, Inc. of Monroe, Louisiana all brought on board in September and Pinpoint Locators Inc. of Fort Necessity, Louisiana purchased a month later. The latter two became part of SEMCO’s Maverick Pipeline Services, Inc. subsidiary, while the former pair would be operated by SEMCO Energy Ventures.

SEMCO began the millennium with a new stock exchange and ticker symbol, moving from the NASDAQ to the NYSE. New initiatives were now underway to aggressively expand the ENSTAR business in Alaska and to install 100,000 more Itron automatic gas meter-reading devices in Alaska and Michigan. In the latter state, the company’s entire customer base would be automated by year’s end. In April of 2000, Aretech Information Services was formed to offer computer application hosting services for small and medium-sized businesses in Michigan. The new unit would utilize the powerful, secure computer systems that had been built to serve the utility’s own needs.

In May, the acquisitions continued when SEMCO bought KLP Construction Co. of East Peoria, Illinois and the construction equipment of a second firm, Lake Area Utilities, Inc. Both would become part of SEMCO Energy Ventures. During the year construction was also started on a $7 million, 7-mile long pipeline in Zeeland, Michigan that would supply natural gas to a Southern Energy electrical plant which was expected to come on line in 2001.

In July of 2000, CEO William Johnson announced that SEMCO was putting itself up for sale, in part because the company’s stock price was not rising at a rate consistent with the progress it had been making, and also because the firm’s modest size put it at a disadvantage in the rapidly consolidating utility industry. The hope was to find a partner with a “similar strategic bent,” but SEMCO was also open to the possibility of separation of assets. After a six month review was conducted by Banc of America Securities, it was concluded that the time was not right for a merger, and the idea was shelved. Johnson subsequently reaffirmed the company’s commitment to its previous strategy of expansion through internal growth and selective acquisitions.

February of 2001 saw SEMCO announce it would not seek to raise gas rates in Michigan until April of 2002, while larger rival suppliers Michigan Consolidated and Consumers Power made plans to do so in the near term. The company instead sought state approval for a three-year fixed rate that would ultimately protect its customers by helping them avoid the pricing volatility inherent in the wholesale gas market. SEMCO sought a rate of $4.99 per thousand cubic feet, a 54 percent increase. The offer allowed a limited number of consumers to switch to a different gas provider if they found a lower rate. Consumers and Michigan Consolidated were both moving toward a system that directly reflected market pricing, rather than holding to predetermined fixed rates. SEMCO estimated that the previous 3-year price freeze had saved its customers $112 million in 2000 alone. In June, a new CEO and president, Marcus Jackson, was appointed. He was a member of the company’s board.

With its plan to seek a buyer on hold, SEMCO continued to make strides toward diversification. The volatile gas market and continued consolidation of the energy industry were both factors that could impact the company’s bottom line, but the continuing need for gas heat in Michigan and Alaska meant there would always be a need for the company’s services.

Principal Subsidiaries

SEMCO Energy Gas Co.; SEMCO Energy Ventures; ENSTAR Natural Gas; Alaska Pipeline Company; Aretech Information Services.

Key Dates:

1951:: Charles Runyan founds the Southeastern Michigan Gas Co.
1953:: Albion Gas Light Co. is purchased.
1977:: Reorganization creates the holding company Southeastern Michigan Gas Enterprises
1985:: Battle Creek Gas Co. is acquired.
1987:: Michigan Power Co. is purchased.
1997:: Firm renamed SEMCO Energy and split into three units; many acquisitions follow.
1998:: The company’s stake in money-losing NoArk Pipeline venture is sold.
1999:: SEMCO Energy Services unit is sold; ENSTAR Natural Gas is acquired.
2000:: Aretech Information Services formed to offer secure computer application hosting.