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SEMCO ENERGY Reports 2002 Results

FARMINGTON HILLS, Mich., Feb. 10 /PRNewswire-FirstCall/ -- SEMCO ENERGY, Inc. (NYSE: SEN) today reported 2002 net income of $8.9 million (or $0.48 per share) compared to a net loss of $6.4 million (or $0.35 per share) for 2001. The prior year's results include losses from discontinued operations, restructuring charges, asset impairments and other unusual items, which amounted to $11.2 million. The Company's 2001 net income from continuing operations and before the unusual items was $4.8 million (or $0.27 per share).

The $4.1 million increase in net income from continuing operations and before unusual items was due primarily to an increase in operating income from the Company's gas distribution business, offset partially by a decrease in operating income from the Company's construction services business. Additionally, in accordance with new accounting standards, the Company did not record goodwill amortization during 2002. By contrast, net income for 2001 includes goodwill amortization of approximately $2.8 million (or $0.15 per share). Warmer than normal weather reduced net income by $3.6 million (or $0.20 per share) during 2002 and $5.4 million (or $0.29 per share) during 2001.

Marcus Jackson, Chairman, President and Chief Executive Officer, said, "The improvement in operating results in the gas distribution business is consistent with our strategy to focus on our core competencies. Operating income from the gas distribution business was up approximately $8.7 million, despite another year of warmer than normal weather. However, as I've mentioned previously, this has been a difficult year for our construction services business. A number of our construction company customers deferred projects due to their own financial management issues and the generally depressed economy. Costs for certain projects were higher than we anticipated and the operating performance in several regions of the country was below our profitability expectations. We have ceased operations in these under- performing regions, which will eliminate from future results the operating losses we incurred in these regions during 2002. We are shoring up our project management skills and maximizing work crew productivity for 2003. We are encouraged that construction revenue for the first quarter of 2003 is expected to be higher than originally forecast due to projects either underway or under contract." Mr. Jackson also said, "We were able to complete the sale of our engineering business as planned during the fourth quarter, which allows us to focus our full attention on improving the operating performance of our remaining businesses." In regard to estimated results for 2003, Mr. Jackson said, "We still expect earnings per share for 2003 to be between $0.55 and $0.65. This estimate assumes normal weather for the year, implementation of our financing plans, and a significant improvement in income from our construction services business."

For the fourth quarter of 2002, net income was $4.6 million (or $0.25 per share). By comparison, net income from continuing operations and before certain unusual items was $5.2 million (or $0.29 per share) for the fourth quarter of 2001. The decrease in net income from continuing operations and before unusual items is due primarily to a decrease in operating income from the Company's construction services business, offset partially by an increase in operating results from the Company's gas distribution business and the impact of discontinuing the amortization of goodwill. Warmer than normal weather decreased net income for the three months ended December 31, 2002 and 2001 by approximately $0.07 per share and $0.09 per share, respectively.

BUSINESS SEGMENT RESULTS

GAS DISTRIBUTION

The Gas Distribution Business reported operating income of $59.0 million in 2002 and $50.3 million for 2001. The improvement was due in part to a $4.8 million improvement in gas sales margin. This increase in margin was due primarily to the addition of new customers, the impact of colder temperatures and increased gas cost savings, offset partially by the impact of a reduction in customer rates at ENSTAR, effective in September 2002. A $3.8 million reduction in operating expenses was the other primary contributor to the increase in operating income during 2002. There were a number of offsetting factors that account for the $3.8 million decrease. First, the 2001 operating expenses included $4.7 million for goodwill amortization and restructuring charges, which are not in 2002 operating expenses. In addition, 2002 operating expenses were lower by $1.2 million as a result of cost reductions associated with the Company's redirected business strategy, offset partially by an increase in employee benefit costs, such as pension expense, health care costs and retiree medical costs. These items were also offset partially by a $2.0 million increase in property taxes and depreciation related to additional property placed in service.

Operating income was $21.0 million for the fourth quarter of 2002 compared to operating income of $19.6 million for the fourth quarter of 2001. The $1.4 million improvement for 2002 is attributed primarily to the addition of new customers, the elimination of goodwill amortization, a decrease in operating expenses, and restructuring expenses of $1.1 million included in 2001 operating income. These items were offset partially by an increase in depreciation on new property, plant and equipment placed in service and a decrease in customer rates at ENSTAR, which took effect in September 2002.

Temperatures in Michigan and Alaska combined were approximately 3% warmer than normal during the fourth quarter of 2002 compared to approximately 7% warmer than normal during the fourth quarter of 2001. Temperatures for the year 2002 were approximately 3% warmer than normal compared to approximately 9% warmer than normal for the year 2001.

The Company realized increased gas cost savings in 2002 under the terms of its third-party natural gas supply and management agreements. The increase in gas cost savings, the majority of which occurred in the first quarter of 2002, was due to improved management of the Company's Michigan gas supply. In addition, savings associated with natural gas costs were lower in 2001 as a result of purchasing gas with a higher than normal thermal content for the Michigan gas distribution operation. A significant portion of the gas cost savings realized during the first quarter of 2002 is non-recurring.

CONSTRUCTION SERVICES

The Construction Services Business reported an operating loss of $3.2 million for the fourth quarter of 2002 compared to an operating loss of $3.9 million for the fourth quarter of 2001. The operating loss for the year 2002 was $2.0 million, compared to an operating loss of $1.4 million for 2001. The 2001 results include $3.3 million of unusual charges, including restructuring charges and asset impairments. The Construction Services Business had 2001 operating income, before the unusual items, of $1.9 million. The $3.9 million decrease in operating results during 2002 is due primarily to lower margin projects and a significant reduction in construction projects, particularly in the northern regions of the country.

In the northern regions of the country, customers delayed construction projects during the year in light of the uncertainty surrounding the economy and their own financial considerations. This eroded most of the margins on work performed in this region because of the time lag to reduce the staffing levels and other fixed costs, which were required for the previously higher level of revenues. In addition, certain fixed costs were not eliminated for a number of reasons including the expectation that work would resume on many of the projects.

During the first half of 2002, construction revenues in the southern region of the country were up significantly due to large projects in that region. Margins on these projects partially offset the decrease in margins in the northern region. However, during the last half of 2002, customers in the southern region also delayed some of these large construction projects for the same reasons discussed above. The effect was reduced margins in the southern region during the latter half of the year.

Competition for the limited supply of available work has also contributed to the reduced margins. In addition, project costs were higher than expected on a number of projects and the operating performance in certain regions of the construction services segment was below the Company's profitability expectations. The Company has ceased operations in a number of the under- performing regions, which will eliminate from future results the operating losses the Construction Services Business incurred in these regions during 2002. In addition, plans are being implemented which the Company believes will improve construction productivity in 2003.

INFORMATION TECHNOLOGY

The operating income of the Information Technology Services Business was $.2 million for the fourth quarter of 2002 compared to $.1 million for the fourth quarter of 2001. For the year 2002, operating income was $.6 million compared to $.4 million for 2001. The increase in operating income during the fourth quarter and the year was due primarily to reduced operating expenses, particularly advertising costs.

PROPANE, PIPELINES AND STORAGE

The Propane, Pipelines and Storage Business reported operating income of $.7 million for the fourth quarter of 2002 compared to $.5 million for the fourth quarter of 2001. The increase was due primarily to colder temperatures, which increased propane sales and margins.

Operating income for the year 2002 was $1.9 million, which was essentially unchanged from operating income for 2001.

SEMCO ENERGY, Inc. is a diversified energy and infrastructure company that distributes natural gas to more than 383,000 customers in Michigan and Alaska. It also owns and operates businesses involved in natural gas pipeline construction services, propane distribution and intrastate pipelines and natural gas storage in various regions of the United States. In addition, it provides information technology and outsourcing services, specializing in the mid-range computer market.

The following is a "Safe-Harbor" statement under the Private Securities Litigation Reform Act of 1995. This release contains forward-looking statements that involve risks and uncertainties. Statements that are not historic facts, including statements about the Company's outlook, beliefs, plans, goals and expectations, are forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, the effects of weather, the economic climate, competition, commodity prices, changing conditions in the capital markets, regulatory approval processes, success in obtaining new business and other risks detailed from time to time in the company's Securities and Exchange Commission filings.

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


                                       Three Months Ended Twelve Months Ended
                                          December 31,        December 31,
                                         2002      2001      2002      2001

    Financial Summary

      Operating revenues               $146,261  $132,528  $480,965  $445,823

      Restructuring and impairment
       charges                                -     6,103         -     6,103
      Other operating expenses          128,166   113,983   424,256   395,329

      Operating income                   18,095    12,442    56,709    44,391

      Other income and (deductions)
        Interest expense                 (8,166)   (7,974)  (31,268)  (31,784)
        Other                               510       626     2,238     2,335
          Total other income and
           (deductions)                  (7,656)   (7,348)  (29,030)  (29,449)

      Income tax provision                3,711     2,810    10,139     6,578

      Income before dividends on trust
       preferred securities
        and discontinued operations       6,728     2,284    17,540     8,364

      Dividends on trust preferred
       securities, net of income taxes   (2,150)   (2,153)   (8,601)   (8,603)

      Income (loss) from continuing
       operations                         4,578       131     8,939      (239)

      Income (loss) from discontinued
       operations, net of income taxes       10    (5,564)       10    (6,122)

      Net income (loss) available to
       common shareholders               $4,588   $(5,433)   $8,949   $(6,361)

      Earnings per share - basic
        Net income (loss) from
         continuing operations            $0.25     $0.01     $0.48    $(0.01)
        Net income (loss) available to
         common shareholders              $0.25    $(0.30)    $0.48    $(0.35)

      Earnings per share - diluted
        Net income (loss) from
         continuing operations            $0.25     $0.01     $0.48    $(0.01)
        Net income (loss) available to
         common shareholders              $0.25    $(0.30)    $0.48    $(0.35)

      Cash dividends per share            $0.13     $0.21     $0.59     $0.84

      Average number of common shares
       outstanding
        Basic                            18,620    18,193    18,472    18,106
        Diluted                          18,620    18,193    18,493    18,106

    Impact of Certain Unusual Items

      Net income (loss) available to
       common shareholders               $4,588   $(5,433)   $8,949   $(6,361)
      Impact on net income of the
       following unusual items:
        Income (loss) from
         discontinued operations            $10   $(5,564)      $10   $(6,122)
        Restructuring charges,
         impairments and other unusual
         items                               $-   $(5,083)       $-   $(5,083)
      Net income, excluding the
       unusual items                     $4,578    $5,214    $8,939    $4,844
      Weather-normalized net income,
       excluding the unusual items       $5,960    $6,836   $12,559   $10,194

      Earnings per share - diluted
        Net income (loss)                 $0.25    $(0.30)    $0.48    $(0.35)
        Impact on earnings per share
         of the following unusual
         items:
          Income (loss) from
           discontinued operations        $0.00    $(0.31)    $0.00    $(0.34)
          Restructuring charges,
           impairments and other
           unusual items                     $-    $(0.28)       $-    $(0.28)
        Net income, excluding the
         unusual items                    $0.25     $0.29     $0.48     $0.27
        Weather-normalized net income,
         excluding the unusual items      $0.32     $0.38     $0.68     $0.56



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


                                    Three Months Ended   Twelve Months Ended
                                       December 31,          December 31,
                                     2002       2001       2002       2001

    Business Segment Information

      Operating revenues
        Gas Distribution            $122,429   $101,286   $364,711   $324,365
        Construction Services         23,281     32,810    119,254    126,205
        Information Technology
         Services                      2,531      2,666      9,618     10,275
        Propane,Pipelines and
         Storage                       2,307      2,036      7,058      7,443
        Corporate and Other
         (includes intercompany
         eliminations)                (4,287)    (6,270)   (19,676)   (22,465)
          Total operating revenues  $146,261   $132,528   $480,965   $445,823

      Operating income (loss)  (a)
        Gas Distribution             $21,039    $19,645    $59,076    $50,337
        Construction Services         (3,206)    (3,932)    (1,999)    (1,374)
        Information Technology
         Services                        236         78        602        431
        Propane, Pipelines and
         Storage                         729        518      1,946      1,871
        Corporate and Other
         (includes intercompany
         eliminations)                  (703)    (3,867)    (2,916)    (6,874)
          Total operating income     $18,095    $12,442    $56,709    $44,391

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)           21,483     20,464     65,057     63,127
        Volumes transported
         (MMcf)                       11,718     11,593     44,921     42,992
        Number of customers at end
         of period                   383,298    374,938    383,298    374,938
        Weather statistics:
          Degree days                  2,632      2,552      7,394      7,037
          Percent colder (warmer)
           than normal                 (2.9)%     (7.1)%     (3.3)%     (8.6)%
          Weather related increase
           (decrease) from normal:
            Net income (in
             thousands)              $(1,435)   $(1,577)   $(3,600)   $(5,262)
            Earnings per share -
             basic                    $(0.07)    $(0.09)    $(0.20)    $(0.29)
            Earnings per share -
             diluted                  $(0.07)    $(0.09)    $(0.20)    $(0.29)

      Construction:
        Feet of pipe installed     1,569,000  2,195,000  5,198,000  7,320,000

      Propane Distribution:
        Volumes sold (gallons)     1,668,000  1,356,000  4,493,000  4,233,000
        Weather related increase
         (decrease) from normal:
          Net income (in
           thousands)                    $53       $(45)      $(20)      $(88)
          Earnings per share -
           basic and diluted              $-         $-         $-         $-


(a) Results for the three and twelve months ended December 31, 2001 include restructuring charges, impairments and other unusual items.

SOURCE 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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