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SEMCO ENERGY Reports 1998 Earnings

PORT HURON, Mich., Feb. 5 /PRNewswire/ -- SEMCO ENERGY, Inc. (Nasdaq: SMGS) today reported earnings of $10 million or $.63 per share compared to $15.4 million or $1.06 per share for 1997. On a weather normalized basis, earnings would have been $17.2 million ($1.08 per share) for 1998, a 12 percent increase over 1997. The average number of common shares outstanding increased by approximately 9 percent to 15.9 million. The increase in the number of shares was due primarily to the 5% stock dividend, a 1.82 million share public offering in August 1998, and 1.3 million shares issued to finance three acquisitions.

"Despite the materially adverse impact of the weather, which was 20 percent warmer than normal, we have made significant progress in positioning the company for strong future growth," said William L. Johnson, Chairman, President and CEO. "A close evaluation of the operating results for the year shows the strides we are making to increase the financial strength of SEMCO ENERGY."

Johnson also noted that the company has decided to sell its energy marketing business. According to Johnson, "Energy Marketing is a very competitive business with high risks and low returns. It does not fit well with our future business strategies."

Gas Distribution

The gas distribution business had net income of $9.8 million or $.62 per share in 1998 compared to $10.5 million or $.72 per share for the same period a year ago. The decline in earnings was due primarily to the very mild weather which reduced earnings by $7 million or $.44 per share. However, the decline was offset, in part, by revenues from customer growth, cost reduction initiatives implemented during 1998 and a change in accounting for property taxes.

Customer growth in 1998 was 2.6%, reflecting the addition of 6,240 new customers. Volumes of gas sold and transported declined from 63,358 MMcf to 56,038 MMcf reflecting the warmer average temperatures during 1998. Operation and maintenance expenses declined $2.3 million due to cost reduction initiatives implemented throughout 1998, which include a reduction in employee levels, benefit plan changes, closing of a district office, and vendor cost savings.

Diversified Businesses

The diversified businesses had net income of $1.2 million ($.07 per share) in 1998 compared to $5.3 million ($.36 per share) in 1997. Both 1998 and 1997 earnings include adjustments to the reserve for the sale of the investment in the NOARK pipeline, which accounts for $3.3 million of the change in earnings.

Engineering Services

Within the diversified businesses, the engineering service business produced the largest growth. This business consists of Maverick Pipeline Services, acquired in December 1997 and Oilfield Materials Consultants, acquired in November 1998. Revenues increased from $5.7 million to $41.4 million, billed hours worked increased threefold and operating income increased to $2.9 million from $.8 million. The main reason for the significant growth was work performed in a large turnkey project during 1998. The engineering business will seek more turnkey projects in the future. The operating results of Oilfield Materials Consultants were included for the full year in both 1997 and 1998 because the acquisition was treated as a "pooling of interests" for accounting purposes.

Construction Services

The construction business also expanded. This business consists of SubSurface Construction Company, acquired in August 1997, and King Energy & Construction Company, acquired in May 1998. Operating revenues grew from $13.2 million to $25.9 million. However, due to an operating loss from a terminated overhead line operation in Florida ($.9 million) and low construction volume in Tennessee, this line of business had an operating loss of $.1 million for 1998 compared to operating income of $.8 million for 1997.

Propane, Pipeline & Storage

The propane, pipeline & storage business produced operating revenues of $4.9 million, up from $3.0 million for 1997. Operating income grew from $1.5 million to $1.6 million. The acquisition of the first propane company in March 1998 added to revenues but not to operating income. This propane company was acquired after the prime heating season in early 1998 and the mild temperatures during the fourth quarter of 1998 also hurt sales.

Fourth Quarter Results

Earnings for the fourth quarter of 1998 were $6.5 million or $.37 per share compared to $8.4 million or $.57 per share for 1997. On a weather- normalized basis, earnings would have been $9.1 million for 1998, a 2 percent increase over the 1997 earnings of $8.9 million. Earnings per share on a weather normalized basis decreased from $.61 per share in 1997 to $.52 per share because the increased number of shares outstanding.

The gas distribution business produced earnings of $4.8 million or $.28 per share for the quarter, compared to $4.3 million or $.29 per share for the comparable period in 1997. The increase in earnings was due primarily to higher revenues from customer growth and lower operation and maintenance expenses. The mild weather partially offset some of the earnings gains.

The diversified businesses earned $.7 million compared to $.1 million in 1997, which excludes a $5 million adjustment made to the NOARK reserve. The earnings gains came primarily from the engineering and construction businesses, which showed significant growth.

Capital Investments

Capital investments of $47 million made during 1998 and $40 million planned for 1999 reflect the course of SEMCO ENERGY's new strategic direction. In 1998 the gas distribution business spent $23 million, primarily to connect new customers, maintain safety and reliability and to enhance technology to improve operating efficiency. The diversified businesses had capital expenditures of $24 million, which was primarily used for acquisitions ($22 million).

For 1999, it is anticipated that capital expenditures for the gas distribution business will be approximately $20 million. At this level cash flow from operations of the gas distribution business should fund most of these requirements. For the diversified businesses, capital expenditures are expected to be $20 million most of which are expected to go toward acquisitions.

SEMCO ENERGY, INC. is an energy-focused holding company with three subsidiaries: SEMCO ENERGY GAS COMPANY, a regulated natural gas distributor with 248,000 customers in Michigan; SEMCO ENERGY SERVICES which markets gas throughout the United States and; SEMCO ENERGY VENTURES, an asset-based holding company with interests in natural gas construction, pipeline engineering and retail propane distribution, intra-state pipeline and storage fields.

The following is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. This release contains forward-looking statements that involve risk and uncertainties, including but not limited to, operating expenses, operating income, returns on invested assets, regulatory approval processes, success in obtaining new business and other risks detailed from time to time in the Company's Security and Exchange commission filings.

                                SEMCO ENERGY, INC.
                       News Release Statistics (Unaudited)


                                     Three Months Ended         Year Ended
                                      December 31,            December 31,
     Financial Summary             1998         1997(e)     1998      1997(e)
    (in thousands, except
    per share amounts)

    Operating Revenues          $186,659       $273,705   $637,485    $775,932

    Operating Expenses          $175,567       $264,264   $613,290    $746,765

    Operating Income             $11,092         $9,441    $24,195     $29,167

    Other Income and
     (Deductions) (d)             $1,598         $3,901    $(9,120)   $(5,273)

    Income Taxes                  $6,225         $4,944     $6,320      $8,469

    Net Income
     Gas Distribution(a)          $4,804         $4,324     $9,832     $10,457
     Diversified Businesses(b)(d)     681         5,122      1,169       5,263
     Energy Marketing                980         (1,048)      (961)      (295)
          Total Net Income
           (a)(b)(d)              $6,465         $8,398     $10,040   $15,425

    Net Income --
     Weather Normalized           $9,095         $8,898     $17,220   $15,425

    Earnings Per Share - Basic and Diluted(c)

     Gas Distribution(a)           $0.28          $0.29      $0.62      $0.72
     Diversified Businesses
      (b)(d)                         0.04          0.35       0.07       0.36
     Energy Marketing               0.05          (0.07)     (0.06)     (0.02)
          Total Earnings Per Share
           - Basic and Diluted
          (b)(c)(d)                $0.37          $0.57      $0.63      $1.06


    Earnings Per Share - Basic and Diluted(a)(b)(c)(d)

     Weather Normalized            $0.52          $0.61      $1.08      $1.06

    Cash Dividend Per Share(c)     $0.20          $0.18      $0.74      $0.70

    Average Number of Common
     Shares Outstanding(c)        17,340         14,684     15,906     14,608

    Return on Average Common Shareholder's Equity:

     As Reported                                               8.83%    16.97%
     Weather Normalized                                      15.15%     16.97%

    (a) The year ended December 31, 1998 includes income of $1,784 ($0.11 per
        share) from a change in accounting for property taxes.

    (b) The year ended December 31, 1998 includes a charge of $499 ($0.03 per
        share) from an early retirement of long-term debt.

    (c) Adjusted to give retroactive effect to 5% stock dividends in May 1998
        and May 1997.

    (d) The three months ended and year ended December 31, 1997 include income
        of $5,025 ($0.34 per share) after-tax from an adjustment to the NOARK
        reserve.  The year ended December 31, 1998 includes income of $ 1,708
        ($0.11 per share) after-tax from the sale of NOARK.

    (e) Amounts have been restated to account for an acquisition as a pooling
        of interests

                                SEMCO ENERGY, INC.
                       News Release Statistics (Unaudited)

                               Three Months Ended               Year Ended
                                  December 31,                  December 31,
                               1998       1997(e)           1998       1997(e)

    Business Segment Information
    (in thousands)

     Operating Revenues
     Gas Distribution        $54,003      $71,619        $184,221     $232,511
     Engineering Services     19,022        1,495          41,366        5,660
     Construction Services     9,042        8,667          25,904       13,207
     Propane/Pipelines/
      Storage                  1,697          751           4,852        3,027
     Energy Marketing        106,407      204,898         397,888      555,367
     Corporate and
      Other(f)                (3,512)     (13,725)        (16,746)    (33,840)
    Total Operating
     Revenues                $186,659     $273,705       $637,485     $775,932

    Operating Income (Loss)
     Gas Distribution         $10,015       $9,496        $22,363      $26,348
     Engineering Services       1,026          212          2,938          778
     Construction Services        878          885           (102)         762
     Propane/Pipelines/Storage     588         365          1,585        1,458
     Energy Marketing            (200)      (1,383)          (696)         217
     Corporate and Other(f)    (1,215)        (134)        (1,893)       (396)
      Total Operating
       Income                 $11,092        $9,441       $24,195      $29,167


    Operating Statistics

      Gas Distribution:
      Volumes Sold
       (MMcf)                  9,833         13,240        32,247      41,985
      Volumes Transported
       (MMcf)                  7,202          5,803        23,791      21,373
      Number of Customers
       at Year-end                                         247,950    241,710
      Degree Days              2,009          2,402         5,566       6,838
      Percent Colder (Warmer)
       Than Normal            (17.1%)         (1.6%)       (19.7%)      (0.6%)
      Increase (Decrease) From Normal in:
       Net Income
       (in thousands)        $(2,500)         $(500)      $(7,000)        n/a
       Earnings Per Share     $(0.14)         $(0.03)      $(0.44)        n/a

       Engineering Services:
        Billed Hours Worked   170,000         71,000      586,000     180,000

       Construction Services:
        Billed Hours Worked   189,000        181,000      564,000     291,000

       Propane Distribution:
        Volumes Sold
         (Gallons)          1,339,000                   3,783,000
        Degree Days             2,504                       7,142
        Percent Colder
         (Warmer) Than Normal  (15.3%)                     (19.2%)
        Increase (Decrease)
         From Normal in:
         Net Income
          (in thousands)        $(130)                      $(180)
         Earnings Per Share    $(0.01)                      $(0.01)

        (e) Amounts have been restated to account for an acquisition as a
            pooling of interests

        (f) Includes inter-company eliminations

SOURCE SEMCO ENERGY, Inc.
CONTACT: Francis Lieder, media, 810-987-2200, ext. 4186, or fax, 810-989-4098, or Edric Mason, investors, 810-989-4104, or fax, 810-989-4098, both of SEMCO ENERGY, Inc.

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

 
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