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SEMCO ENERGY Reports Second Quarter 2003 Results

FARMINGTON HILLS, Mich., Aug. 5 /PRNewswire-FirstCall/ -- SEMCO ENERGY, Inc. (NYSE: SEN) today reported a net loss of $20.6 million, or $1.09 per share, for the second quarter of 2003 compared to net income of $45,000, or breakeven on a per share basis, for the second quarter of 2002. The most significant item contributing to the decrease in earnings was $24.0 million of debt exchange and extinguishments costs, which after adjusting for income taxes, decreased net income by approximately $15.6 million, or $0.82 per share. These costs primarily represent premiums and other expenses the Company was required to pay in order to retire certain debt obligations. The remainder of the decrease in earnings is due to an increase in interest expense and a decrease in operating income. The increase in interest expense was due primarily to an increase in debt levels and the mix of long and short- term debt outstanding. During the second quarter of 2003, when compared to the second quarter of 2002, a larger portion of the Company's outstanding debt was long-term, which has a higher rate of interest than the Company's short- term debt.

Marcus Jackson, Chairman, President and Chief Executive Officer, said, "The Company's construction business continues to experience intense competition as many companies aggressively bid to secure contracts. This segment incurred an operating loss of $1.9 million for the second quarter of 2003 compared to operating income of $1.9 million for the second quarter of last year. During the second quarter of last year, the southern division of our construction business experienced an acceleration of work on projects that had been scheduled for the second half of 2002, which caused a significant increase in workloads and profits during that quarter. We did not see similar work levels during the second quarter of this year." Mr. Jackson also said, "The underground gas distribution construction industry continues to produce weak results due to generally suppressed economic conditions and intense competition. Despite these short-term issues, we continue to believe that over the long term our construction business is positioned to realize increased profitability and market share as the activity in this sector returns to more normal levels."

Mr. Jackson went on to say, "The Company's gas distribution business had operating income of $6.1 million during the second quarter of 2003, compared to $8.5 million for the second quarter of 2002. The decrease was due primarily to an increase in operating expenses and a decrease in gas sales margin due in part to warmer temperatures during this past quarter compared to the second quarter of last year."

Mr. Jackson concluded by saying, "Two key accomplishments occurred during the second quarter. First, the Company settled its rate case with the Michigan Public Service Commission (MPSC) and we expect the new authorized customer rates, which became effective May 3, 2003, to increase annual revenues by $3.4 million and decrease annual depreciation expense by $1.4 million. The new rates were structured in a way that helps reduce the impact to the Company and its customers of colder or warmer than normal weather. The Company also completed a $300 million debt issuance with favorable interest terms. The majority of the proceeds were used to refinance and repurchase a portion of the Company's long-term debt and to repay short-term debt."

For the six months ended June 30, 2003, the Company had a net loss of $10.0 million, or $0.53 per share, compared to net income of $11.4 million, or $0.62 per share, for the six months ended June 30, 2002. The decrease in results was due primarily to the same items that contributed to the decrease in quarterly results.

For the twelve months ended June 30, 2003, the Company had a net loss of $12.4 million, or $0.66 per share, compared to a net loss of $.7 million, or $0.04 per share, for the twelve months ended June 30, 2002. Results for the twelve months ended June 30, 2003, include debt exchange and extinguishments costs, which reduced net income by $15.6 million. Results for the twelve months ended June 30, 2002, include losses from discontinued operations, restructuring charges, asset impairments and other unusual items, which amounted to $10.8 million. A significant decrease in operating results for the Company's construction business contributed to the reduction in earnings for the twelve months ended June 30, 2003, when compared to the same period of the prior year.

Temperatures during the three and six-month periods ended June 30, 2003 were warmer than normal in Alaska and colder than normal in Michigan. The Company has estimated that the impact of the warmer than normal temperatures in Alaska and the colder than normal temperatures in Michigan offset one another and thus had little impact on net income for the three months and six months ended June 30, 2003. By comparison, during the second quarter of 2002, temperatures were colder than normal in both Alaska and Michigan. During the first six months of 2002, temperatures were slightly colder than normal in Alaska and warmer than normal in Michigan. The Company has estimated that variations from normal temperatures in Alaska and Michigan combined increased net income by approximately $.8 million during the second quarter of 2002 and decreased net income by approximately $1.5 million during the six months ended June 30, 2002.

BUSINESS SEGMENT RESULTS

GAS DISTRIBUTION

The Gas Distribution Business reported operating income of $6.1 million during the second quarter of 2003 compared to $8.5 million during the second quarter of 2002. The decrease was due primarily to increases in commercial insurance costs and employee benefit costs, including health care expense, pension expense and retiree medical expense. In addition, gas sales margin decreased, when compared to the second quarter of 2002, due primarily to warmer temperatures during the second quarter of 2003, a decrease in gas cost savings realized, and the impact of a reduction in customer rates at ENSTAR effective in September 2002. These items were partially offset by the impact of an increase in customer rates for the Company's MPSC customers in Michigan effective in May 2003 and the addition of new customers.

Operating income for the six months ended June 30, 2003 was $36.6 million compared to $38.7 million during the six months ended June 30, 2002. The items discussed above that contributed to the decrease in quarterly results also contributed to the decrease in six-month results, with the exception of temperatures, which were colder during the six months ended June 30, 2003 and, therefore, partially offset the other items that contributed to the decrease in operating income.

The Gas Distribution Business had 384,980 customers at June 30, 2003 compared to 377,480 at June 30, 2002. The volume of gas sold and transported during the three months ended June 30, 2003 and 2002 was 20.5 Bcf and 22.6 Bcf, respectively. During the six months ended June 30, 2003 and 2002, the volume of gas sold and transported was 63.1 Bcf and 61.2 Bcf, respectively.

CONSTRUCTION SERVICES

The Construction Services Business reported an operating loss of $1.9 million for the second quarter of 2003 compared to operating income of $1.9 million for the second quarter of 2002. Operating revenue for the second quarter of 2003 and 2002 was $19.9 million and $36.5 million, respectively. The decrease in revenues and operating results is due primarily to a significant reduction in work levels when compared to last year. During the second quarter of last year, the southern division of the construction business experienced an acceleration of work on projects that had been scheduled for the second half of 2002, which caused a significant increase in workloads and profits during the second quarter. The Company did not see similar work levels during the second quarter of this year. In addition, the construction services business has bid on numerous projects in 2003 but has not experienced the expected level of success in being awarded these projects due to the intense competition in the industry. The southern division also experienced unprecedented rainfall during the second quarter of 2003, which interrupted work execution for extended periods of time.

The Construction Services Business reported an operating loss of $5.5 million for the first six months of 2003 compared to operating income of $.6 million for the six months ended June 30, 2002. Operating revenue for the first six months of 2003 and 2002 was $35.0 million and $62.1 million, respectively. The factors contributing to the decrease in second quarter results were also the primary contributor to the decrease in the six-month results. In addition, temperatures were colder than normal in the northern regions of the United States during the first quarter of 2003. As a result, frost conditions inhibited construction activity during the entire first quarter of 2003, which also contributed to the decrease in operating results during the six months ended June 30, 2003.

The decrease in operating revenue was due primarily to the reduction in projects in the southern division and the ceasing of construction operations in certain regions of the northern division.

INFORMATION TECHNOLOGY

The operating income of the Information Technology Services Business for the second quarter of 2003 was $.2 million, which was essentially unchanged from the second quarter of 2002. Operating income for the first six months of 2003 and 2002 was $.4 million and $.3 million, respectively. The increase in operating income was due primarily to reductions in overhead and marketing costs.

Operating revenue was $2.3 million during the second quarter of 2003 and during the second quarter of 2002. Operating revenue for the first six months of 2003 and 2002 was $4.4 million and $4.6 million, respectively.

PROPANE, PIPELINES AND STORAGE

The Propane, Pipelines and Storage Business reported operating income of $.3 million for the second quarter of 2003 compared to $.4 million for the second quarter of 2002. Operating income for the six months ended June 30, 2003 was $1.2 million compared to $1.0 million for the six months ended June 30, 2002. The increase was due primarily to colder temperatures, which increased propane sales and margins, and a decrease in operating expenses and business taxes.

Operating revenue was $1.4 million for the three months ended June 30, 2003 and the three months ended June 30, 2002. Operating revenue during the first six months of 2003 and 2002 was $4.2 million and $3.7 million, respectively.

SEMCO ENERGY, Inc. is a diversified energy and infrastructure company that distributes natural gas to approximately 385,000 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   Six Months Ended
                                            June 30,            June 30,
                                         2003      2002      2003      2002

    Financial Summary

      Operating revenues                $99,525  $106,100  $306,629  $262,011

      Restructuring and impairment
       charges                                -         -         -         -
      Other operating expenses           95,738    95,759   275,363   223,051

      Operating income                    3,787    10,341    31,266    38,960

      Other income and (deductions)
        Interest expense                 (9,052)   (7,477)  (17,009)  (15,151)
        Debt exchange and
         extinguishment costs           (24,030)        -   (24,030)        -
        Other                               781       709     1,479     1,034
          Total other income and
           (deductions)                 (32,301)   (6,768)  (39,560)  (14,117)

      Income tax expense                (10,033)    1,378    (2,637)    9,168

      Income before dividends on trust
       preferred securities and
       discontinued operations          (18,481)    2,195    (5,657)   15,675

      Dividends on trust preferred
       securities, net of income taxes   (2,150)   (2,150)   (4,300)   (4,300)

      Income from continuing operations (20,631)       45    (9,957)   11,375

      Income (loss) from discontinued
       operations, net of income taxes        -         -         -         -

      Net income (loss) available to
       common shareholders             $(20,631)      $45   $(9,957)  $11,375

      Earnings per share - basic
        Net income from continuing
         operations                      $(1.09)    $0.00    $(0.53)    $0.62
        Net income (loss) available to
         common shareholders             $(1.09)    $0.00    $(0.53)    $0.62

      Earnings per share - diluted
        Net income from continuing
         operations                      $(1.09)    $0.00    $(0.53)    $0.62
        Net income (loss) available to
         common shareholders             $(1.09)    $0.00    $(0.53)    $0.62

      Cash dividends per share           $0.125    $0.125    $0.250    $0.335

      Average number of common shares
       outstanding
        Basic                            18,988    18,431    18,884    18,374
        Diluted                          18,988    18,472    18,884    18,400



                                                     Twelve Months Ended
                                                           June 30,
                                                   2003               2002

    Financial Summary

      Operating revenues                          $525,583           $471,344

      Restructuring and impairment charges               -              6,103
      Other operating expenses                     476,568            412,901

      Operating income                              49,015             52,340

      Other income and (deductions)
        Interest expense                           (33,126)           (31,216)
        Debt exchange and extinguishments costs    (24,030)                 -
        Other                                        2,683              2,003
          Total other income and (deductions)      (54,473)           (29,213)

      Income tax expense                            (1,666)             9,521

      Income before dividends on trust
       preferred securities and discontinued
       operations                                   (3,792)            13,606

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

      Income from continuing operations            (12,393)             5,003

      Income (loss) from discontinued
       operations, net of income taxes                  10             (5,706)

      Net income (loss) available to
       common shareholders                        $(12,383)             $(703)

      Earnings per share - basic
        Net income from continuing
         operations                                 $(0.66)             $0.27
        Net income (loss) available to
         common shareholders                        $(0.66)            $(0.04)

      Earnings per share - diluted
        Net income from continuing
         operations                                 $(0.66)             $0.27
        Net income (loss) available to
         common shareholders                        $(0.66)            $(0.04)

      Cash dividends per share                      $0.500             $0.755

      Average number of common shares
       outstanding
        Basic                                       18,726             18,261
        Diluted                                     18,726             18,261



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


                                       Three Months Ended   Six Months Ended
                                            June 30,            June 30,
                                         2003      2002      2003      2002

    Business Segment Information

      Operating revenues
        Gas Distribution                $80,122   $70,355  $270,934  $201,807
        Construction Services            19,864    36,524    34,976    62,105
        Information Technology Services   2,268     2,317     4,422     4,578
        Propane, Pipelines and Storage    1,414     1,416     4,241     3,654
        Corporate and Other (includes
         intercompany eliminations)      (4,143)   (4,512)   (7,944)  (10,133)
          Total operating revenues      $99,525  $106,100  $306,629  $262,011

      Operating income (loss)  (a)
        Gas Distribution                 $6,068    $8,535   $36,601   $38,727
        Construction Services            (1,881)    1,939    (5,521)      629
        Information Technology Services     157       143       377       319
        Propane, Pipelines and Storage      323       381     1,221       990
        Corporate and Other (includes
         intercompany eliminations)        (880)     (657)   (1,412)   (1,705)
          Total operating income         $3,787   $10,341   $31,266   $38,960

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)              10,785    11,645    40,545    38,207
        Volumes transported  (MMcf)       9,682    10,939    22,598    22,990
        Number of customers at end of
         period                         384,980   377,480   384,980   377,480
        Weather statistics:
          Degree days
            Alaska                        1,545     1,863     4,976     5,672
            Michigan                      1,041     1,039     4,647     4,043
          Percent colder (warmer) than
           normal
            Alaska                       (3.5)%     15.1%   (10.9)%      1.0%
            Michigan                       9.8%     10.6%     10.6%    (3.8)%

      Construction:
        Feet of pipe installed (in
         thousands)                         976     1,189     1,427     2,244

      Propane Distribution:
        Gallons sold (in thousands)         717       783     2,662     2,386



                                                    Twelve Months Ended
                                                          June 30,
                                                  2003               2002

    Business Segment Information

      Operating revenues
        Gas Distribution                         $433,838           $340,746
        Construction Services                      92,125            136,313
        Information Technology Services             9,462              9,705
        Propane, Pipelines and Storage              7,645              6,979
        Corporate and Other (includes
         intercompany eliminations)               (17,487)           (22,399)
          Total operating revenues               $525,583           $471,344

      Operating income (loss)  (a)
        Gas Distribution                          $56,950            $56,219
        Construction Services                      (8,149)               252
        Information Technology Services               660                513
        Propane, Pipelines and Storage              2,177              1,779
        Corporate and Other (includes
         intercompany eliminations)                (2,623)            (6,423)
          Total operating income                  $49,015            $52,340

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)                        67,395             64,573
        Volumes transported  (MMcf)                44,529             44,133
        Number of customers at end of period      384,980            377,480
        Weather statistics:
          Degree days
            Alaska                                  8,696             10,650
            Michigan                                7,272              6,232
          Percent colder (warmer) than normal
            Alaska                                (14.3)%               3.8%
            Michigan                                 8.2%             (8.1)%

      Construction:
        Feet of pipe installed (in thousands)       4,381              6,983

      Propane Distribution:
        Gallons sold (in thousands)                 4,769              4,342


(a) Results for the twelve months ended June 30, 2002 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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