| Investors should carefully consider all of the information contained in this annual report on Form 10-K, as well as the other filings of the Company with the SEC, including the risk factors set forth below, before making an investment in the Company |
| Described below are some of the risk factors currently known to the Company which make an investment in the Company speculative or risky |
| The Company may encounter risks in addition to those described below |
| Investors may lose all or part of their investment in the Company |
| Risks Relating to the Company’s Operations The Company’s natural gas distribution business is subject to rate regulation, and certain actions of these regulatory bodies may reduce the Company’s revenues, earnings and cash flow |
| The Company is currently regulated by the MPSC and the CCBC in Michigan and the RCA in Alaska |
| These regulatory bodies have jurisdiction over, among other things, rates, accounting procedures and standards of service |
| With regard to regulation by the MPSC and the CCBC, in March 2005 and February 2005, respectively, the Company entered into settlements which, upon approval, authorized rate increases for customers in these jurisdictions |
| With certain exceptions, the Company has agreed not to request a further base rate increase with the CCBC to be effective before April 1, 2008, but the Company is not restricted in requesting that the MPSC authorize further base rate increases |
| In addition, on October 5, 2005, the Company and the CCBC announced that they will ask the MPSC to assume jurisdiction over the CCBC 11 _________________________________________________________________ [84]Table of Contents service area |
| The Company and the CCBC plan to file a joint application with the MPSC in 2006 asking for approval of this jurisdictional change |
| The Company cannot predict when the MPSC will assume jurisdiction, if at all |
| The Company believes that this proposed change will not have a material impact on the natural gas rates it charges in its CCBC service area, but the Company cannot assure that this change in jurisdiction will not affect the rates it charges or other aspects of the terms and conditions of service |
| With regard to regulation by the RCA, in June 2005, the RCA issued an order that, among other things, requires ENSTAR and APC to file a depreciation study of their Alaska utility plant by June 1, 2007 (as of December 31, 2006) and a revenue requirement and cost-of-service study (including rate design data) with the RCA by June 6, 2008 (using a test year ended December 31, 2007) |
| Approximately 99prca of the Company’s 2005 consolidated operating revenues were generated by its regulated Gas Distribution Business |
| While the Company currently has settlements with the MPSC and the CCBC setting rates in those jurisdictions, there is no guarantee that the Company would prevail in seeking rate increases in future rate cases |
| The Company also has no guarantee that it will be successful in its rate case to be filed with the RCA after December 31, 2007 |
| The possibility of a rate decrease, the failure to grant any requested rate increase, cost disallowances, the precise timing of any rate increase, decrease or any other action by the Company’s regulators, may reduce the Company’s revenues, earnings and cash flow |
| The increased cost of purchasing natural gas during periods in which natural gas prices are rising significantly could adversely impact the Company’s liquidity and earnings |
| One component of the regulation of the Company’s rates is the ability to recover the cost of purchasing natural gas |
| In general, the costs of natural gas purchased for customers are recovered on a dollar-for-dollar basis (in the absence of disallowances), without a profit component |
| The recovery of these gas costs is accomplished through regulatory body-approved GCR pricing mechanisms whereby customer rates are periodically adjusted for increases and decreases in the cost of gas purchased by the Company for sale to its customers |
| Under the GCR pricing mechanisms, the gas commodity charge portion of customers’ gas rates (which is also referred to as the “GCR rate”) in Alaska and the Company’s Michigan service area regulated by the MPSC is generally adjusted annually to reflect the estimated cost of gas purchased for the upcoming 12-month GCR period |
| The GCR rate may be adjusted more frequently than annually if it is determined that there are significant variances from the estimates used in the annual determination |
| The GCR rate for the Company’s Battle Creek service territory can be adjusted monthly |
| The price of natural gas has increased substantially since mid-2005 and natural gas purchases for customers in the Company’s Michigan gas service areas since then have, and future purchases are expected to, cost significantly more than in the past |
| The price of natural gas purchased under long-term contracts for the Company’s Alaska service area customers has also increased, and future purchases are expected to cost the Company more than in the past, as the indexes used to determine the prices the Company pays for natural gas under these contracts reflect market price increases |
| These increases in natural gas prices and corresponding increases in GCR rates may contribute, in varying amounts, depending on the way in which these costs are recovered in customer rates in each jurisdiction in which the Company does business, to: (i) increased costs associated with lost and unaccounted-for gas; (ii) higher customer bad debt expense for uncollectible accounts; (iii) higher working capital requirements; and (iv) reduced sales volumes and related margins due to lower customer consumption |
| Volatility in the price of natural gas could result in large industrial customers switching to alternative energy sources and reduced revenues, earnings and cash flow |
| The market price of alternative energy sources such as coal, electricity, oil and steam is the primary competitive factor affecting the demand for the Company’s gas transportation services |
| Certain large industrial customers have, or may acquire, the capacity to be able to use one or more alternative energy sources or shift production to facilities outside the Company’s service area if the price of natural gas and delivery services increases significantly |
| Natural gas has typically been less expensive than these alternative energy sources |
| However, generally over the past three years and recently in a more significant way, natural gas prices have 12 _________________________________________________________________ [85]Table of Contents been higher and more volatile, making some of these alternative energy sources more economical or, for other reasons, more attractive than natural gas |
| During this period, certain of the Company’s large Michigan industrial customers have periodically switched to alternative energy sources |
| To lessen the possibility of fuel switching by industrial customers, the Company offers flexible contract terms and additional services, such as gas storage and balancing |
| Partially offsetting the impact of this price sensitivity among certain large industrial customers has been the use of natural gas to reduce emissions from their plants |
| The Company cannot predict the future stability of natural gas prices; nor can the Company make any assurances that the impact of environmental legislation or any special services the Company offers will outweigh the negative effects of natural gas price increases and volatility |
| Should these customers convert their requirements to another form of energy, the Company’s revenues, earnings and cash flow would be adversely affected |
| The Company’s liquidity and earnings could be adversely affected by the MPSC’s disallowance of costs after retrospective reviews of the Company’s gas procurement practices |
| In the Company’s gas distribution area regulated by the MPSC, the Company’s gas procurement practices are subject to an annual retrospective MPSC review |
| If costs are disallowed in this review process, such costs would be expensed in the cost of gas but would not be recovered by the Company in rates |
| The ability of the MPSC to annually retrospectively review the Company’s gas procurement practices creates the potential for the disallowance of the Company’s recovery, through its GCR rates, of some of its costs of purchasing gas |
| Such disallowances could affect the Company’s liquidity and earnings |
| The Company’s earnings and cash flow are sensitive to decreases in customer consumption resulting from warmer than normal temperatures and customer conservation |
| The Company’s gas sales revenue is generated primarily through the sale and delivery of natural gas to residential and commercial customers who use natural gas mainly for space heating |
| Consequently, weather has a significant impact on sales and revenues |
| Given the impact of weather on the Company’s Gas Distribution Business, this segment is a seasonal business |
| Most of the Company’s gas sales revenue is generated in the first and fourth quarters of the calendar year and the Company typically experiences losses in the non-heating season, which occurs in the second and third fiscal quarters of the year |
| In addition, conservation has continued to reduce demand for natural gas from the Company’s customers |
| Warmer than normal weather and conservation over the last several years have adversely affected the earnings and cash flow of the Company’s Gas Distribution Business, which has accounted for more than 98prca of consolidated operating revenues for the last three fiscal years |
| In the Michigan service area, the temperature was approximately 0dtta1prca and 0dtta3prca warmer than normal during 2005 and 2004, respectively, and approximately 4dtta7prca colder than normal during 2003 |
| The temperature was approximately 5dtta7prca, 6dtta0prca and 8dtta0prca warmer than normal in the Alaska service area during 2005, 2004 and 2003, respectively |
| In addition, the average annual natural gas consumption of customers has been decreasing because, among other things, new homes and appliances are typically more energy efficient than older homes and appliances, and customers appear to be continuing a pattern of conserving energy by utilizing energy efficient heating systems, insulation, alternative energy sources, and other energy savings devices and techniques |
| A mild winter, as well as continued or increased conservation, in any of the Company’s service areas can have a significant adverse impact on demand for natural gas and, consequently, earnings and cash flow |
| The Company’s earnings are substantially dependent on its current customers maintaining a certain level of consumption as well as customer growth |
| As discussed above, many of the Company’s customers appear to be continuing a pattern of conserving energy by utilizing energy efficient heating systems, insulation, alternative energy sources, and other energy savings devices and techniques |
| During the past several years, average annual gas consumption has been decreasing |
| In addition, increases in natural gas prices appear to have increased conservation efforts by customers |
| The Company expects this conservation trend to continue as an era of higher and more volatile 13 _________________________________________________________________ [86]Table of Contents natural gas prices influences customer consumption |
| The Company’s rates are currently based on certain levels of consumption by its customers |
| Continued and significant declines in consumption by the Company’s current customers, without an adjustment to its rates or rate design, may negatively impact the Company’s earnings |
| In addition, the Company’s earnings growth is substantially dependent on customer growth |
| The average number of gas sales customers in Michigan and Alaska combined (excluding customers acquired in the acquisition of Peninsular Gas Company (“Peninsular Gas”)) has increased by an average of 2dtta0prca annually during the past three years |
| If the Company is unable to achieve sufficient customer growth within its existing service territories or add additional customers by expanding service territories, the Company’s earnings growth may be negatively impacted |
| The Company’s customers may be able to acquire natural gas without using the Company’s distribution system, which would reduce revenues and earnings |
| There is potential risk that industrial customers and electric generating plants located in close proximity to interstate natural gas pipelines will bypass the Company’s distribution system and connect directly to such pipelines, which would reduce the Company’s revenues and earnings |
| From time to time, customers raise the issue of bypass and the Company attempts to address their concerns |
| The Company can make no assurances that its customers will not bypass the Company’s distribution system or that the Company could successfully retain such customers |
| Declining production from the Cook Inlet gas fields may result in potential deliverability problems in ENSTAR’s service area |
| ENSTAR’s gas distribution system, including the APC pipeline system, is not linked to major interstate and intrastate pipelines or natural gas supplies in the United States or Canada |
| As a result, ENSTAR procures natural gas supplies under long-term RCA-approved contracts from producers in and near the Cook Inlet area |
| Production from the Cook Inlet area gas fields is declining and new discoveries have been modest |
| As of January 1, 2004, the Cook Inlet area had approximately 2dtta1 Tcf of total proven natural gas reserves according to the most recently available information contained in the Alaska Department of Natural Resources Division of Oil and Gas 2004 Annual Report |
| Based on the Department’s reported 2003 net production of 208 Bcf, there was a reserve life at January 1, 2004, of approximately 10 years in the Cook Inlet area, although shortages of daily deliverability have occurred resulting in curtailment of some industrial loads during cold weather periods |
| There is ongoing exploration for natural gas in the Cook Inlet area by several parties, including producers that have supply contracts with ENSTAR The United States Geological Survey and Minerals Management Service has estimated that the Cook Inlet area contains another approximately 2dtta3 Tcf of undiscovered natural gas, but there are no assurances that any of this natural gas will be discovered and, if discovered, can be produced economically and secured by ENSTAR on terms and conditions that would be acceptable to the RCA ENSTAR has been active in efforts to extend its supply of Cook Inlet gas and to find other gas sources |
| In addition, preliminary activity by other energy industry participants is underway to finance, permit and build a natural gas pipeline that would extend from Alaska’s North Slope, through Alaska and Canada, to the lower 48 states of the United States |
| Assuming this pipeline is built, the flow of natural gas through it could not be expected to begin before the middle of the next decade, at the earliest |
| ENSTAR is engaged in an effort to make customers and public officials aware of the importance of the North Slope natural gas pipeline and the need to make North Slope natural gas available in the Cook Inlet area |
| The Company can provide no assurances, however, with respect to the building of this pipeline, when it will be put in service, or whether natural gas supplies transported by the pipeline would be available to ENSTAR customers and secured by ENSTAR on terms and conditions that would be acceptable to the RCA 14 _________________________________________________________________ [87]Table of Contents Changes in the regulatory environment and events in the energy markets that are beyond the Company’s control may reduce the Company’s earnings and limit its access to capital markets |
| The Company’s Gas Distribution Business is subject to regulation by various federal, state and local regulators as well as the actions of federal, state and local legislators |
| As a result of the energy crisis in California during 2000 and 2001, the recent volatility of natural gas prices in North America, the bankruptcy filings by certain energy companies, investigations by governmental authorities into energy trading activities, the collapse in market values of energy companies and the downgrading by rating agencies of a large number of companies in the energy sector, companies in regulated and unregulated energy businesses have generally been under an increased amount of scrutiny by federal, state and local regulators, participants in the capital markets and debt rating agencies |
| In addition, the Financial Accounting Standards Board, or FASB, or the SEC could enact new accounting standards that could impact the way the Company is required to record revenues, expenses, assets and liabilities |
| The Company cannot predict or control what effect these types of events, or future actions of regulatory agencies in response to such events, may have on its earnings or access to the capital markets |
| The Company may be required to recognize additional impairment charges which would reduce its earnings |
| Pursuant to generally accepted accounting principles, the Company is required to perform impairment tests on its goodwill balance annually or at any time when events occur that could impact the value of its business segments |
| The 2005 annual goodwill impairment test for the Company’s propane business was performed during the third quarter of 2005 and showed that there was no impairment of goodwill |
| The 2005 annual impairment test for the Company’s Gas Distribution Business was performed during the fourth quarter of 2005 and showed that there was no impairment of goodwill |
| During the fourth quarter of 2004, it was determined that all of the goodwill associated with the Company’s IT services business (dlra0dtta2 million) was impaired |
| The dlra0dtta2 million before-tax charge for impairment of goodwill is reflected in the Company’s Consolidated Statements of Operations for the year ended December 31, 2004, in operating expenses |
| During the third quarter of 2003, it was determined that all of the goodwill associated with the Company’s construction services business (dlra17dtta6 million) was impaired |
| The dlra17dtta6 million before-tax charge for impairment of goodwill is reflected in the Company’s Consolidated Statements of Operations for the year ended December 31, 2003, as part of the loss from the discontinued construction services business |
| The Company’s determination of whether an impairment has occurred is based on an estimate of discounted cash flows attributable to reporting units that have goodwill |
| The Company must make long-term forecasts of future revenues, expenses and capital expenditures related to the reporting unit in order to make the estimate of discounted cash flows |
| These forecasts require assumptions about future demand, future market conditions, regulatory developments and other factors |
| Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period that could substantially reduce the Company’s earnings in a period of such change, but not have any impact on its cash flow |
| The Company’s ability to use net operating loss carry-forwards may be impaired |
| As of December 31, 2005, the Company had available approximately dlra96 million of net operating losses, or NOLs, with which to offset federal income taxes with respect to the Company’s future taxable income |
| In 2004, the Company underwent an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended |
| In general, an ownership change occurs whenever there is a more than 50prca change in the ownership of the stock of a corporation, taking into account all cumulative changes in ownership over the preceding three years |
| As a result of the ownership change, the Company’s ability to use approximately dlra86 million of its total NOLs in the future is limited |
| However, the Company believes that, based on the size 15 _________________________________________________________________ [88]Table of Contents of the limitation and projections of future taxable income, the Company should be able to utilize all of the NOLs before they expire |
| The issuance of additional shares in the Company’s capital stock could ultimately trigger another ownership change that could further limit the Company’s ability to use such NOLs |
| While the Company’s March 2005 issuance of 5prca Series B Convertible Cumulative Preferred Stock (“Preferred Stock”) and the August 2005 Common Stock offering did not trigger such an ownership change, those offerings when coupled with future capital stock offerings and changes in the ownership of the Company’s capital stock (some of which will be beyond the Company’s control) will probably lead to a future ownership change |
| Any such future ownership change could result in the imposition of lower limits on the Company’s utilization of the NOLs to offset future taxable income as well as the Company’s ability to use certain losses and tax credits |
| The magnitude of such limitations and their effect on the Company is difficult to assess and will depend in part on the value of the Company at the time of any such ownership change and prevailing interest rates at that time |
| The Company’s operations and business are subject to environmental laws and regulations that may increase the Company’s cost of operations, impact or limit the Company’s business plans or expose the Company to environmental liabilities |
| The Company’s operations and business are subject to environmental laws and regulations that relate to the environment and health and safety, including those that impose liability for the costs of investigation and remediation, and for damage to natural resources from, past spills, waste disposal on- and off-site and other releases of hazardous materials or regulated substances |
| In particular, under applicable environmental requirements, the Company may be responsible for the investigation and remediation of environmental conditions at currently owned or leased sites, as well as formerly owned, leased, operated or used sites |
| The Company may be subject to associated liabilities, including liabilities resulting from lawsuits brought by private litigants, related to the operations of the Company’s facilities or the land on which such facilities are located, regardless or whether the Company leases or owns the facility, and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant, or by a third-party or a neighboring facility whose operations may have affected the Company’s facility or land |
| Given the nature of the past operations conducted by the Company and others at the Company’s properties, there can be no assurance that all potential instances of soil or groundwater contamination have been identified, even for those properties where environmental site assessments or other investigations have been conducted |
| Changes in existing laws or policies or their enforcement, future spills or accidents or the discovery of currently unknown contamination may give rise to environmental liabilities which may be material |
| Based upon the information presently available to the Company, the Company expects to incur costs associated with investigatory and remedial actions at seven of its Michigan sites that formerly housed manufactured gas plant operations |
| Because the extent of the soil and groundwater contamination at these sites has not been fully delineated and the scope of the Company’s liability (along with other responsible parties, if any) has not been determined, it is difficult for the Company to estimate its liability at this time |
| However, it is possible that the Company’s share of such liability could be material |
| To the extent not fully recoverable from customers through regulatory proceedings or from insurance, these costs would reduce the Company’s earnings and results of operations |
| Compliance with the requirements and terms and conditions of the environmental licenses, permits and other approvals that are required for the operation of the Company’s business may cause the Company to incur substantial capital costs and operating expenses and may impose restrictions or limitations on the operation of the Company’s business, all of which could be substantial |
| Environmental, health and safety regulations may also require the Company to install new or updated pollution control equipment, modify its operations or perform other corrective actions at its facilities |
| Existing environmental laws and regulations may be revised to become more stringent or new laws or regulations may be adopted or become applicable to the Company which may result in increased compliance costs or additional operating restrictions and could reduce the Company’s earnings and harm the Company’s business, particularly if those costs are not fully recoverable from its customers through regulatory proceedings |
| 16 _________________________________________________________________ [89]Table of Contents Substantial operational risks are involved in operating a natural gas distribution, pipeline and storage system and such operational risks could adversely affect the Company’s revenues, earnings, cash flow and financial condition |
| There are substantial risks associated with the operation of a natural gas distribution, pipeline and storage system, such as operational hazards and unforeseen interruptions caused by events beyond the Company’s control |
| These include adverse weather conditions, accidents, the breakdown or failure of equipment or processes, the performance of pipeline facilities below expected levels of capacity and efficiency and catastrophic events such as explosions, fires, earthquakes, floods, landslides or other similar events beyond the Company’s control |
| These risks could result in injury or loss of life, property damage, business interruption or environmental pollution, which in turn could lead to substantial financial losses to the Company |
| In accordance with customary industry practice, the Company maintains insurance against some, but not all, of these risks |
| Liabilities incurred that were not fully covered by insurance could adversely affect the Company’s earnings, cash flow and financial condition |
| Additionally, interruptions to the operation of the Company’s gas distribution, pipeline or storage system caused by such an event could reduce revenues generated by the Company and, consequently, earnings and cash flow |
| The Company’s ability to grow its businesses will be adversely affected if the Company is not successful in making acquisitions or in integrating the acquisitions it makes |
| One of the Company’s strategies is to grow through acquisitions |
| There is growing and significant competition for acquisitions in the US natural gas industry, and the Company believes that there are numerous potential acquisition candidates, some of which represent opportunities that would be material to the Company |
| The Company cannot assure that it will find attractive acquisition candidates in the future, that it will be able to acquire such candidates on economically acceptable terms, that any acquisitions will not be dilutive to earnings or that any additional debt incurred to finance acquisitions will not impair its capitalization |
| The Company’s amended and restated three-year unsecured revolving bank credit facility for dlra120 million, which expires on September 15, 2008 (the “Bank Credit Agreement”) also limits the consideration the Company may pay in connection with any one acquisition to dlra50 million and in connection with all acquisitions occurring after September 15, 2005, to dlra150 million |
| These limitations will not apply to acquisitions occurring after the Company reaches certain investment grade debt ratings |
| In addition, the restructuring of the energy markets in the US and internationally, including the privatization of government-owned utilities and the sale of utility-owned assets, is creating opportunities for, and competition from, well-capitalized existing competitors as well as new entrants to the markets, which may affect the Company’s ability to achieve this aspect of its business strategy |
| To the extent the Company is successful in making acquisitions, such acquisitions can involve a number of risks, including the assumption of material liabilities, the terms and conditions of any state or federal regulatory approvals required for the acquisitions, the diversion of management’s attention from the management of daily operations to the integration of operations, difficulties in the assimilation and retention of employees and difficulties in the assimilation of different cultures and practices, as well as in the assimilation of broad and geographically dispersed personnel and operations |
| The failure to successfully make and integrate acquisitions could have an adverse effect on the Company’s ability to grow its business |
| Earnings and cash flow may be adversely affected by downturns in the economy |
| The Company’s operations are affected by the conditions and overall strength of the national, regional and local economies, which impact the amount of residential, industrial and commercial growth and actual gas consumption in the Company’s service territories |
| Many of the Company’s commercial and industrial customers use natural gas in the production of their products |
| During economic downturns, these customers may see a decrease in demand for their products, which in turn may lead to a decrease in the amount of natural gas they require for production |
| In addition, during periods of slow or little economic growth, energy conservation efforts often increase and the amount of uncollectible customer accounts often increases |
| These factors may reduce earnings and cash flow |
| 17 _________________________________________________________________ [90]Table of Contents The Company’s debt indentures and Bank Credit Agreement contain restrictive covenants that may reduce the Company’s flexibility, and adversely affect its business, earnings, cash flow, liquidity and financial condition |
| The terms of the indentures relating to certain of the Company’s outstanding debt securities and of the Company’s Bank Credit Agreement impose significant restrictions on the Company’s ability and, in some cases, the ability of the Company’s subsidiaries, to take a number of actions that the Company may otherwise desire to take, including: • requiring the Company to dedicate a substantial portion of its cash flow from operations to the payment of principal and interest on the Company’s indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other business activities; • requiring the Company to meet certain financial tests, which may affect the Company’s flexibility in planning for, or reacting to, changes in the Company’s business and the industries in which the Company operates; • limiting the Company’s ability to sell assets, make investments or acquire assets of, or merge or consolidate with, other companies; • limiting the Company’s ability to repurchase or redeem its stock or enter into transactions with its stockholders or affiliates; and • limiting the Company’s ability to grant liens, incur additional indebtedness or contingent obligations or obtain additional financing for working capital, capital expenditures, acquisitions and general corporate and other activities |
| These covenants place constraints on the Company’s business and may adversely affect its growth, business, earnings, cash flow, liquidity and financial condition |
| The Company’s failure to comply with any of the financial covenants in its Bank Credit Agreement may result in an event of default which, if not cured or waived, could result in the acceleration of the debt under the Company’s Bank Credit Agreement or the indentures governing its outstanding debt issuances that contain cross-acceleration or cross-default provisions |
| In such a case, there can be no assurance that the Company would be able to refinance or otherwise repay such indebtedness, which could result in a material adverse effect on its business, earnings, cash flow, liquidity and financial condition |
| Adverse changes in the Company’s credit ratings may limit the Company’s access to capital, increase the Company’s cost of capital, increase the cost of maintaining certain contractual relationships or otherwise have a material adverse effect on the Company’s business, earnings, cash flow, liquidity and financial condition |
| In March 2003, Moody’s Investors Service, Inc |
| reduced the credit rating on the Company’s senior unsecured debt from Baa3 to Ba2 |
| Since June 2003, Standard & Poor’s Ratings Group has lowered the Company’s corporate credit rating from BBB- to BB- |
| These downgrades have required the Company to pay higher interest rates for financing, increasing the Company’s cost of capital |
| Any additional downgrades could further increase the Company’s capital costs (including the rates for borrowing under the Company’s Bank Credit Agreement) and limit its pool of potential investors and funding sources, possibly increasing the costs of operations or requiring the Company to use a higher percentage of its available borrowing capacity for ordinary course purposes |
| Further credit downgrades could also negatively affect the terms on which the Company can purchase gas and pipeline capacity |
| As a result of the Company’s non-investment grade credit rating noted above, the interstate pipelines the Company utilizes require prepayment for their services |
| In addition, certain of the Company’s gas suppliers may require the Company to prepay or provide letters of credit for gas purchases over and above the levels of credit they may have extended to the Company |
| The Company can provide no assurance that suppliers will not impose additional requirements or restrictions on the conduct of the Company’s business |
| 18 _________________________________________________________________ [91]Table of Contents The Company can provide no assurance that any of its current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency |
| Any downgrade or other adverse action could adversely affect the Company’s business, earnings, cash flow, liquidity and financial condition |
| The Company’s substantial indebtedness may limit its ability to borrow additional funds at all, or on reasonable terms, limit its growth and diminish its ability to respond to changing business and economic conditions and, thereby, may adversely affect its business, earnings, cash flow, liquidity and financial condition |
| The Company’s business is capital intensive and the Company has significant amounts of debt |
| At December 31, 2005, the Company had total short and long-term debt of dlra520dtta6 million |
| The Company’s substantial debt may adversely affect its business, earnings, cash flow, liquidity and financial condition |
| The Company’s substantial debt may, among other things: • limit the Company’s ability to borrow additional funds; • increase the cost of any future debt that the Company incurs; • reduce cash flow from operations available for working capital, capital expenditures and other general corporate purposes; • limit the Company’s flexibility in planning for, or reacting to, changes in its business and the industry in which it operates; • place the Company at a competitive disadvantage as compared to the Company’s competitors that are less highly leveraged; • result in a downgrade in the Company’s credit ratings; or • diminish the Company’s ability to successfully withstand a downturn in its business or the economy generally |
| The Company’s ability to meet its debt service obligations and to reduce its total indebtedness will depend upon its future performance, which will be subject to weather, general economic conditions, industry cycles and financial, business and other factors affecting the Company’s operations, many of which are beyond the Company’s control |
| No assurance can be provided that the Company’s business will generate sufficient cash flow from operations or that future borrowings will be available to the Company in an amount sufficient to enable the Company to pay its indebtedness or to fund its other liquidity needs |
| The Company may need to refinance all or a portion of its indebtedness on or before maturity |
| No assurance can be provided that the Company will be able to refinance any of its indebtedness, including its Bank Credit Agreement and its existing debt and debt securities, on commercially reasonable terms or at all |
| Despite the Company’s substantial indebtedness, the Company may still be able to incur more debt, which could further exacerbate the risks associated with its substantial debt |
| Although the Company is presently limited in incurring additional indebtedness, the Company may be able to incur additional debt in the future |
| Restrictions applicable to the Company on the incurrence of additional debt contained in the indentures and Bank Credit Agreement governing the Company’s existing debt are subject to a number of qualifications and exceptions that allow the Company to incur additional debt |
| An increase in the amount of indebtedness may negatively affect the Company’s capital structure and credit ratings |
| If new debt is added to the Company’s current debt levels, the risks that the Company now faces could intensify |
| 19 _________________________________________________________________ [92]Table of Contents The Company is vulnerable to interest rate risk with respect to its debt which could lead to an increase in interest expense and a corresponding decrease in earnings and cash flow |
| The Company’s ability to finance capital expenditures and to refinance our maturing debt will depend in part on conditions in the capital markets, including rising interest rates |
| The Company’s cost of borrowing under its Bank Credit Agreement is also dependent on interest rates |
| In addition, in order to maintain the Company’s desired mix of fixed-rate and variable-rate debt, the Company may use interest rate swap agreements and exchange fixed and variable-rate interest payment obligations over the life of the arrangements, without exchange of the underlying principal amounts |
| No assurance can be provided that the Company will be successful in structuring such swap agreements to manage its risks effectively |
| If the Company is unable to do so, its earnings and cash flow may be reduced |
| The Company’s Shareholder Rights Plan and other defensive mechanisms could make it more difficult for an acquisition bid for the Company or a change of control transaction to succeed |
| Certain provisions of the Company’s organizational documents, as well as other statutory and regulatory factors, may discourage or prevent acquisition offers that are in the best interests of the Company and its stockholders: • the Company’s Shareholder Rights Plan grants holders of its Common Stock certain rights upon the occurrence of certain triggering events unless a majority of independent directors on the Board of Directors (the “Board”) determines that the takeover offer is fair and otherwise in the best interests of the Company and its stockholders; • the Company’s articles of incorporation divide the Board into three classes that serve staggered terms, and directors may be elected by stockholders only at an annual meeting of stockholders or at a special meeting called for that purpose by the Board; • a director may be removed by stockholders but only for cause and only at an annual meeting of stockholders and by the affirmative vote of a majority of the shares then entitled to vote for the election of directors; • holders of the Preferred Stock have certain rights, including the right to receive a make-whole premium in connection with exercising their conversion rights in connection with a fundamental change, which would include certain acquisition offers; • the Bank Credit Agreement and certain of the Company’s debt indentures include provisions whereby the acquisition of a certain percentage of the Company’s Common Stock would be an event of default and cause the outstanding loans to become due and payable, or would require the Company to make an offer to holders of notes to repurchase outstanding notes at a premium; • unless the Board approves a business combination or the combination meets certain enumerated fairness standards, Michigan law requires the affirmative vote of 90prca of the votes of each class of stock entitled to vote, and not less than two-thirds of the votes of each class of stock entitled to vote, voting as a separate class, to approve a business combination; and • Michigan law provides that control shares of a public company acquired in a control share acquisition have no voting rights except as granted by resolution approved by the stockholders of the company, effectively conditioning the acquisition of voting control of a corporation on the approval of a majority of pre-existing, disinterested stockholders |
| In addition, the acquisition or accumulation of large blocks of the Company’s voting securities may require prior approval of the RCA and may result in the acquiring entity becoming subject to the jurisdiction of and regulation of the RCA and, notwithstanding the repeal of the Public Utility Holding Company Act of 1935, to other state or federal regulation as a public utility holding company |
| These consequences would result in substantial increases in that entity’s administrative, legal and regulatory compliance costs and could have similar adverse consequences for the Company |