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SEMCO ENERGY Reports Third Quarter 2003 Results

Announces Intention to Sell Construction Services Business Revises Previous Earnings Guidance

FARMINGTON HILLS, Mich., Nov. 12 /PRNewswire-FirstCall/ -- SEMCO ENERGY, Inc. (NYSE: SEN) today reported a net loss of $24.8 million, or $1.07 per share, for the third quarter of 2003 compared to a net loss of $7.0 million, or $0.38 per share, for the third quarter of 2002. The most significant items contributing to the loss were non-cash charges totaling $20.5 million for impairment of goodwill and equipment at the Company's Construction Services Business which, after adjusting for income taxes, increased the Company's net loss for the quarter ended September 30, 2003 by approximately $17.4 million, or $0.75 per share. The Company's Gas Distribution Business had operating income of $1.0 million during the third quarter of 2003, compared to an operating loss of $0.7 million for the third quarter of 2002, while the Company's Construction Services Business had an operating loss of $21.2 million, including the impairment charges of $20.5 million, for the third quarter of 2003 compared to operating income of $0.6 million for the third quarter of 2002. The Company's Information Technology Services Business and its Propane, Pipelines and Storage Business reported operating income of $0.1 million and $0.2 million, respectively, for the third quarter of 2003, which were essentially unchanged from the third quarter of 2002.

Marcus Jackson, Chairman, President and Chief Executive Officer, said, "The quarterly operating results of our Gas Distribution Business, which improved year over year, reflect the fundamental strength of that business. However, the continuing challenges faced by EnStructure, our pipeline construction services business, have continued to adversely affect our overall financial results. After thoroughly reviewing a number of strategic alternatives, the Board of Directors has instructed management to pursue a sale of EnStructure.

"We continue to believe that EnStructure is a good business which, with an appropriate ownership structure, has significant potential. We are convinced that a sale of EnStructure to a suitable buyer will benefit the customers and employees of EnStructure.

"Moreover, such a sale -- which is consistent with the back-to-basics strategy we have been pursuing over the past two years -- would enable SEMCO to focus substantially all of our resources on our core Gas Distribution Business, to strengthen our financial position, and, in turn, to position the Company to achieve our overriding objective of building value for SEMCO shareholders."

IMPAIRMENT ANALYSIS

The analysis of the Construction Services Business for impairment of goodwill and assets, which resulted in the $20.5 million charge, was conducted based on numerous factors. First, the third quarter 2003 operating results of the Construction Services Business were well below the Company's expectations and management subsequently determined that profits were unlikely in the near term. Second, the underground gas distribution construction industry has continued to produce weak results due to generally soft economic conditions and increased competition. Third, several of the Company's construction customers have continued to delay projects. The Company now believes the above-mentioned conditions will continue for a longer period than previously anticipated. In light of these and other factors, management recognized that the value of the Construction Services Business had likely deteriorated and engaged a nationally recognized appraisal company to perform an evaluation in order to determine if there was an impairment of assets or goodwill. Based on that evaluation, the Company recognized an impairment of goodwill at the Construction Services Business, which reduced the Company's net income by $15.6 million, and an impairment of equipment at the Construction Services Business, which reduced net income by $1.8 million. As of September 30, 2003, after recording the impairment charges, the book value of the Construction Services Business's assets was approximately $40 million.

INTEREST EXPENSE AND DIVIDENDS ON TRUST PREFERRED SECURITIES

An increase in interest expense due primarily to higher long-term debt levels also contributed to the increased loss for the third quarter of 2003, when compared to the same period in 2002. Dividends on trust preferred securities incurred after July 1, 2003 are also reflected in interest expense in accordance with a new accounting pronouncement, which also requires that these trust preferred securities be classified as long-term debt. Dividends on trust preferred securities incurred prior to July 1, 2003 are reflected separately in the Company's statement of operations. However, the dividends on trust preferred securities incurred in the third quarter of 2003 were lower than those incurred in the third quarter of 2002 as a result of the retirement of approximately $101 million of trust preferred securities associated with the Company's FELINE PRIDES securities.

YEAR-TO-DATE RESULTS

For the nine months ended September 30, 2003, the Company had a net loss of $34.8 million, or $1.71 per share, compared to net income of $4.4 million, or $0.24 per share, for the nine months ended September 30, 2002. The decrease in year-to-date results was due primarily to the same items that contributed to the decrease in quarterly results, as well as the debt exchange and extinguishments costs incurred during the second quarter of 2003, which reduced net income by $15.6 million, and a significant decrease in the operating results of the Company's Construction Services Business, which is discussed in more detail in the Business Segment Results section below.

TWELVE MONTHS-TO-DATE RESULTS

For the twelve months ended September 30, 2003, the Company had a net loss of $30.2 million, or $1.52 per share, compared to a net loss of $1.1 million, or $0.06 per share, for the twelve months ended September 30, 2002. The decrease in results for the twelve months ended September 30, 2003 was caused in part by the same factors contributing to the decrease in year-to-date results described above. In addition, results for the twelve months ended September 30, 2002, included losses from discontinued operations, restructuring charges, asset impairments and other unusual items, which in the aggregate amounted to $10.8 million. A significant decrease in operating results for the Company's Construction Services Business also contributed to the reduction in earnings for the twelve months ended September 30, 2003, when compared to the same period of the prior year.

IMPACT OF WEATHER

Temperatures during the three- and nine-month periods ended September 30, 2003 were warmer than normal in Alaska. During the third quarter of 2003, temperatures in Michigan were warmer than normal, while during the nine months ended September 30, 2003, temperatures in Michigan were colder than normal. The Company has estimated that the combined variations from normal temperatures in Alaska and Michigan decreased net income by approximately $0.3 million during the third quarter of 2003 and by approximately $0.2 million during the nine months ended September 30, 2003. By comparison, during the three months and nine months ended September 30, 2002, temperatures were warmer than normal in both Alaska and Michigan. The Company has estimated that variations from normal temperatures in Alaska and Michigan combined decreased net income for the three months and nine months ended September 30, 2002 by approximately $0.6 million and $2.2 million, respectively.

EARNINGS GUIDANCE

The Gas Distribution Business continues to perform better than originally expected. However, as a result of the impairment charges and lower than expected results for the Construction Services Business for the third quarter of 2003, the Company has revised its earnings outlook for the year 2003. The Company now expects to report a loss between $1.23 and $1.28 per share. This estimate includes one-time debt exchange and extinguishments costs of $0.69 per share and non-cash asset and goodwill impairment charges of $0.77 per share. Excluding these two items, earnings per share for 2003 are expected to be between $0.18 and $0.23 per share. The Company expects to provide earnings guidance for 2004 in mid-December.

BUSINESS SEGMENT RESULTS

GAS DISTRIBUTION

The Gas Distribution Business reported operating income of $1.0 million during the third quarter of 2003 compared to an operating loss of $0.7 million during the third quarter of 2002. The improvement was due primarily to a $2.3 million increase in gas sales margin and a $0.6 million increase in gas transportation revenue, partially offset by a $1.3 million increase in operating expenses. The increase in gas sales margin was due primarily to an increase in customer rates authorized by the Michigan Public Service Commission (MPSC) effective in May 2003 for customers in service areas under the MPSC's jurisdiction, and the impact of colder temperatures, partially offset by the impact of a reduction in customer rates, effective in September 2002, at ENSTAR, the Company's Alaska-based gas distribution operation. The increase in gas transportation revenue was due primarily to an increase in gas deliveries at ENSTAR. The increase in operating expenses was due primarily to increases in employee benefit costs, including health care expense, pension expense and retiree medical expense, commercial insurance costs and uncollectible customer accounts.

Operating income for the nine months ended September 30, 2003 was $37.6 million compared to $38.0 million for the nine months ended September 30, 2002. The items contributing to the decrease were a $3.5 million increase in operating expenses, partially offset by a $1.8 million increase in gas sales margin and a $1.3 million increase in gas transportation and other operating revenues. The increase in operating expenses was due primarily to increases in employee benefit costs, including health care expense, pension expense and retiree medical expense, commercial insurance costs and uncollectible customer accounts. The primary items contributing to the increase in gas sales margin were the customer rate increase authorized by the MPSC, the addition of new customers and the impact of colder temperatures, partially offset by the decrease in customer rates at ENSTAR and a decrease in gas cost savings realized. The increase in gas transportation revenue and other operating revenues was due primarily to an increase in gas deliveries at ENSTAR and increases in miscellaneous customer charges.

The Gas Distribution Business had 384,930 customers at September 30, 2003 compared to 377,845 at September 30, 2002. The volume of gas sold and transported during the three months ended September 30, 2003 and 2002 was 17.9 Bcf and 15.6 Bcf, respectively. During the nine months ended September 30, 2003 and 2002, the volume of gas sold and transported was 81.1 Bcf and 76.8 Bcf, respectively.

CONSTRUCTION SERVICES

The Construction Services Business reported an operating loss of $21.2 million for the third quarter of 2003 compared to operating income of $0.6 million for the third quarter of 2002. For the first nine months of 2003, the Construction Services Business reported an operating loss of $26.7 million compared to operating income of $1.2 million for the nine months ended September 30, 2002. The operating losses for the three and nine months ended September 30, 2003 include the $20.5 million in non-cash charges discussed previously for the impairment of goodwill and equipment. Operating revenue for the third quarter of 2003 and 2002 was $25.9 million and $33.9 million, respectively. Operating revenue for the first nine months of 2003 and 2002 was $60.8 million and $96.0 million, respectively.

The decrease in revenues and operating results is due primarily to a significant reduction in work levels when compared to last year. 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 increased competition in the industry. Furthermore, a number of the Construction Services Business's customers have delayed various projects. Margins are also lower than normal due to decreased market demand, which increased competition for the lower level of available work. The southern division of the Construction Services Business was also affected by unusually high levels of rainfall during the second quarter of 2003, which interrupted work execution for extended periods of time and contributed to the decrease in operating results during the nine months ended September 30, 2003. 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 and lowered productivity levels during the entire first quarter of 2003, which also contributed to the decrease in operating results during the nine months ended September 30, 2003.

INFORMATION TECHNOLOGY

The operating income of the Information Technology Services Business for the third quarter of 2003 was $0.1 million, which was essentially unchanged from the third quarter of 2002. Operating income for the first nine months of 2003 and 2002 was $0.5 million and $0.4 million, respectively. The increase in operating income was due primarily to a decrease in business taxes and other miscellaneous overhead costs.

Operating revenue was $2.3 million during the third quarter of 2003 and $2.5 million during the third quarter of 2002. Operating revenue for the first nine months of 2003 and 2002 was $6.7 million and $7.1 million, respectively.

PROPANE, PIPELINES AND STORAGE

The Propane, Pipelines and Storage Business reported operating income of $0.2 million for the third quarter of 2003, which was essentially unchanged from the third quarter of 2002. Operating income for the nine months ended September 30, 2003 was $1.4 million compared to $1.2 million for the nine months ended September 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 $1.2 million for the three months ended September 30, 2003 and $1.1 million for the three months ended September 30, 2002. Operating revenue during the first nine months of 2003 and 2002 was $5.4 million and $4.8 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 statement 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  Nine Months Ended
                                          September 30,      September 30,
                                          2003     2002      2003      2002

    Financial Summary

      Operating revenues                 $73,234  $72,693  $379,863  $334,704

      Goodwill impairment charge          17,649        -    17,649         -
      Restructuring and asset
       impairment charges                  2,825        -     2,825         -
      Other operating expenses            73,654   73,039   349,017   296,090

      Operating income (loss)            (20,894)    (346)   10,372    38,614

      Other income and (deductions)
        Interest expense                 (12,291)  (7,951)  (29,300)  (23,102)
        Debt exchange and
         extinguishment costs                  -        -   (24,030)        -
        Other                                673      694     2,152     1,728
          Total other income and
           (deductions)                  (11,618)  (7,257)  (51,178)  (21,374)

      Income tax (expense) benefit         7,671    2,740    10,308    (6,428)

      Minority interest - dividends on
       trust preferred securities, net
       of income taxes (a)                     -   (2,151)   (4,300)   (6,451)

      Income (loss) from continuing
       operations                        (24,841)  (7,014)  (34,798)    4,361

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

      Net income (loss) available to
       common shareholders              $(24,841) $(7,014) $(34,798)   $4,361

      Earnings per share - basic
        Net income (loss) from
         continuing operations            $(1.07)  $(0.38)   $(1.71)    $0.24
        Net income (loss) available to
         common shareholders              $(1.07)  $(0.38)   $(1.71)    $0.24

      Earnings per share - diluted
        Net income (loss) from
         continuing operations            $(1.07)  $(0.38)   $(1.71)    $0.24
        Net income (loss) available to
         common shareholders              $(1.07)  $(0.38)   $(1.71)    $0.24

      Cash dividends declared per share   $0.075   $0.125    $0.200    $0.250

      Average number of common shares
       outstanding
        Basic                             23,308   18,519    20,375    18,422
        Diluted                           23,308   18,519    20,375    18,452



                                                      Twelve Months Ended
                                                         September 30,
                                                    2003               2002

    Financial Summary

      Operating revenues                          $526,124           $467,232

      Goodwill impairment charge                    17,649                  -
      Restructuring and asset impairment charges     2,825              6,103
      Other operating expenses                     477,183            410,073

      Operating income (loss)                       28,467             51,056

      Other income and (deductions)
        Interest expense                           (37,466)           (31,076)
        Debt exchange and extinguishments costs    (24,030)                 -
        Other                                        2,662              2,353
          Total other income and (deductions)      (58,834)           (28,723)

      Income tax (expense) benefit                   6,597             (9,238)

      Minority interest - dividends on
       trust preferred securities, net
       of income taxes (a)                          (6,450)            (8,603)

      Income (loss) from continuing operations     (30,220)             4,492

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

      Net income (loss) available to
       common shareholders                        $(30,210)           $(1,072)

      Earnings per share - basic
        Net income (loss) from
         continuing operations                      $(1.52)             $0.24
        Net income (loss) available to
         common shareholders                        $(1.52)            $(0.06)

      Earnings per share - diluted
        Net income (loss) from
         continuing operations                      $(1.52)             $0.24
        Net income (loss) available to
         common shareholders                        $(1.52)            $(0.06)

      Cash dividends declared per share             $0.450             $0.670

      Average number of common shares outstanding
        Basic                                       19,933             18,365
        Diluted                                     19,933             18,365



(a) Minority interest - dividends on trust preferred securities was zero for the three months ended September 30, 2003 due to the adoption of a new accounting pronouncement (SFAS 150). All dividends on trust preferred securities incurred after July 1, 2003 are reflected in interest expense. All dividends on trust preferred securities incurred prior to July 1, 2003 are reflected in minority interest - dividends on trust preferred securities.

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


                                       Three Months Ended  Nine Months Ended
                                          September 30,      September 30,
                                          2003     2002      2003      2002

    Business Segment Information

      Operating revenues
        Gas Distribution                 $48,936  $40,474  $319,870  $242,281
        Construction Services             25,860   33,868    60,836    95,973
        Information Technology Services    2,253    2,510     6,675     7,088
        Propane, Pipelines and Storage     1,198    1,097     5,439     4,751
        Corporate and Other (includes
         intercompany eliminations)       (5,013)  (5,256)  (12,957)  (15,389)
          Total operating revenues       $73,234  $72,693  $379,863  $334,704

      Operating income (loss)  (b) (c)
        Gas Distribution                  $1,047    $(690)  $37,648   $38,037
        Construction Services            (21,179)     578   (26,700)    1,207
        Information Technology Services       81       48       458       367
        Propane, Pipelines and Storage       194      227     1,415     1,217
        Corporate and Other (includes
         intercompany eliminations)       (1,037)    (509)   (2,449)   (2,214)
          Total operating income        $(20,894)   $(346)  $10,372   $38,614

      Depreciation and amortization
       expense
        Gas Distribution                  $6,346   $6,354   $19,168   $19,047
        Construction Services              1,972    1,990     6,057     5,998
        Information Technology Services      175      152       515       418
        Propane, Pipelines and Storage       218      233       767       695
        Corporate and Other                   87      105       242       329
          Total depreciation and
           amortization expense           $8,798   $8,834   $26,749   $26,487

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)                5,471    5,367    46,016    43,574
        Volumes transported  (MMcf)       12,467   10,213    35,065    33,203
        Number of customers at end of
         period                          384,930  377,845   384,930   377,845
        Weather statistics:
          Degree days
            Alaska                           835      820     5,811     6,492
            Michigan                         178       97     4,825     4,140
          Percent colder (warmer) than
           normal
            Alaska                        (8.5)%  (11.1)%   (10.5)%     (.7)%
            Michigan                      (3.8)%  (44.6)%     10.0%    (5.4)%

      Propane Distribution:
        Gallons sold (in thousands)          479      440     3,141     2,826



                                                    Twelve Months Ended
                                                        September 30,
                                                   2003               2002

    Business Segment Information

      Operating revenues
        Gas Distribution                         $442,300           $343,567
        Construction Services                      84,117            128,784
        Information Technology Services             9,205              9,755
        Propane, Pipelines and Storage              7,746              6,787
        Corporate and Other (includes
         intercompany eliminations)               (17,244)           (21,661)
          Total operating revenues               $526,124           $467,232

      Operating income (loss)  (b) (c)
        Gas Distribution                          $58,687            $57,682
        Construction Services                     (29,906)            (2,724)
        Information Technology Services               693                445
        Propane, Pipelines and Storage              2,144              1,735
        Corporate and Other (includes
         intercompany eliminations)                (3,151)            (6,082)
          Total operating income                  $28,467            $51,056

      Depreciation and amortization expense
        Gas Distribution                          $25,463            $25,618
        Construction Services                       8,108              8,050
        Information Technology Services               683                650
        Propane, Pipelines and Storage              1,003                942
        Corporate and Other                           342                429
          Total depreciation and
           amortization expense                   $35,599            $35,689

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)                        67,499             64,039
        Volumes transported  (MMcf)                46,783             44,796
        Number of customers at end of period      384,930            377,845
        Weather statistics:
          Degree days
            Alaska                                  8,711             10,579
            Michigan                                7,353              6,112
          Percent colder (warmer) than normal
            Alaska                                (14.1)%               3.3%
            Michigan                                 9.2%             (9.7)%

      Propane Distribution:
        Gallons sold (in thousands)                 4,808              4,182



(b) Operating income for the three, nine and twelve months ended September 30, 2003 includes non-cash charges of $20.5 million for the impairment of goodwill and equipment at the Construction Services Business.

(c) Operating income for the twelve months ended September 30, 2002 includes restructuring charges and impairment charges of $6.1 million.

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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