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SEMCO ENERGY Reports 2003 Results

FARMINGTON HILLS, Mich., Feb. 16 /PRNewswire-FirstCall/ -- SEMCO ENERGY, Inc. (NYSE: SEN) today reported net income of $4.8 million, or $0.17 per share, for the fourth quarter of 2003 compared to net income of $4.6 million, or $0.25 per share, for the fourth quarter of 2002. The increase in net income, when compared to the fourth quarter of 2002, was primarily due to improved operating results from the Company's Gas Distribution Business, a lower operating loss at the Construction Services Business and lower dividends on trust preferred securities, partially offset by an increase in interest expense. The decrease in earnings per share was due to an increase in average outstanding common shares during the fourth quarter of 2003, when compared to the fourth quarter of 2002, as a result of the issuance of 8.7 million shares in August 2003.

Eugene Dubay, Interim President and Chief Executive Officer, said, "Our Gas Distribution Business continues to perform well. Operating income for the fourth quarter of 2003 from this business was up slightly from the fourth quarter of 2002. Meanwhile, our Construction Services Business reported a smaller operating loss in the fourth quarter of 2003, compared to the fourth quarter of 2002, primarily due to cost cutting measures and other earnings improvement initiatives."

YEAR-TO-DATE RESULTS

For the year ended December 31, 2003, the Company had a net loss of $30.0 million, or $1.34 per share, compared to net income of $8.9 million, or $0.48 per share, for the year ended December 31, 2002. The decrease in earnings was due in part to non-cash charges totaling approximately $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 2003 by approximately $17.4 million, or $0.78 per share. The Company also incurred debt exchange and extinguishment costs during 2003, which increased the net loss by $15.6 million, or $0.70 per share. Other factors contributing to the decrease in earnings were an increase in overall interest expense, which includes dividends on trust preferred securities recorded after June 30, 2003, and a significant decrease in earnings from the Company's Construction Services Business, which is discussed in more detail in the Business Segment Results section below.

IMPACT OF WEATHER

Temperatures during the quarter and year ended December 31, 2003 were warmer than normal in Alaska. During the fourth quarter of 2003, temperatures in Michigan were warmer than normal, while during the year ended December 31, 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 $1.3 million during the fourth quarter of 2003 and by approximately $1.5 million during the year 2003. By comparison, temperatures in Alaska were warmer than normal during both the quarter and year ended December 31, 2002, and temperatures in Michigan were colder than normal for the fourth quarter of 2002 and warmer than normal for the year 2002. The Company has estimated that variations from normal temperatures in Alaska and Michigan combined decreased net income for the three months and year ended December 31, 2002 by approximately $1.4 million and $3.6 million, respectively.

2004 EARNINGS AND CAPITAL EXPENDITURES GUIDANCE

The Company expects earnings of $0.28 to $0.32 per share for 2004. This estimate assumes normal temperatures in the Company's gas distribution service areas. The EPS estimate also includes earnings from the discontinued construction operations of $0.06 per share, assuming the sale occurs in the fourth quarter of 2004. The Company began marketing the Construction Services Business for sale recently and expects to complete the sale during 2004. It is too early in the selling process to determine the actual amount of proceeds and, therefore, no gain or loss from the sale is included in the EPS estimate. The EPS estimate also includes non-cash charges of $0.05 per share related to the early retirement of debt. The Company expects capital expenditures for property additions to be approximately $35 million in 2004.

BUSINESS SEGMENT RESULTS

GAS DISTRIBUTION

The Gas Distribution Business reported operating income of $21.6 million during the fourth quarter of 2003 compared to $21.1 million during the fourth quarter of 2002. Operating income for the year 2003 was $59.2 million, which was essentially unchanged from 2002. However, the 2003 results include a number of offsetting items, when compared to 2002. Gas sales margin increased by $3.8 million while gas transportation and other operating revenues increased by approximately $5.3 million. These increases were offset almost entirely by a $9.1 million increase in operating expenses primarily caused by increases of approximately $3.5 million for employee benefit costs, including pension expense, health care costs and retiree medical costs, $1.5 million for commercial insurance costs, $1.5 million for uncollectible customer accounts and $2.1 million for expenses at Norstar, the company's pipeline management subsidiary.

The primary items contributing to the increase in gas sales margin were the addition of new customers, an increase in gas consumption per customer and a decrease in unaccounted-for gas. The increase in gas transportation revenue was primarily due to an increase in gas deliveries at ENSTAR, partially offset by a decrease in customer rates at ENSTAR. The increase in other operating revenue is primarily due to a $2.5 million increase in revenues from Norstar and an increase in miscellaneous customer fees.

The $0.5 million increase in operating income for the fourth quarter of 2003, compared to the fourth quarter of 2002, was due primarily to the same offsetting items that caused the variance in annual results, as discussed above.

The Gas Distribution Business had 390,677 customers at December 31, 2003 compared to 383,298 at December 31, 2002. The volume of gas sold and transported during the three months ended December 31, 2003 and 2002 was 34.3 billion cubic feet (Bcf) and 33.2 Bcf, respectively. During the year 2003 and the year 2002, the volume of gas sold and transported was 118.6 Bcf and 110.0 Bcf, respectively.

CONSTRUCTION SERVICES

The Construction Services Business reported an operating loss of $1.8 million for the fourth quarter of 2003 compared to an operating loss of $3.6 million for the fourth quarter of 2002. The $1.8 million improvement in operating results was due primarily to cost cutting measures and other earnings improvement initiatives undertaken since last year and a decrease in depreciation expense. For the year 2003, the Construction Services Business reported an operating loss of $28.5 million compared to an operating loss of $2.4 million for the year 2002. The operating loss for year 2003 includes $20.5 million in non-cash charges for the impairment of goodwill and equipment. In addition, customers have delayed or cancelled projects, which has lead to a significant reduction in work levels and contributed to the increase in operating loss during 2003. This decrease in market demand increased competition for the supply of available work, which also caused a decrease in margins during 2003. In addition, weather conditions hindered productivity at various times during the first half of 2003.

Operating revenue for the fourth quarter of 2003 and 2002 was $22.6 million and $23.3 million, respectively. Operating revenue for the year ended December 31, 2003 and 2002 was $83.5 million and $119.3 million, respectively.

INFORMATION TECHNOLOGY

The operating income of the Information Technology Services Business for the fourth quarter of 2003 and 2002 was $0.1 million and $0.2 million, respectively. Operating income for the year 2003 was $0.5 million compared to $0.6 million for the year 2002. The decrease in operating income during 2003 was primarily due to a loss on the sale of equipment and an increase in depreciation expense, offset partially by a decrease in administrative costs and business taxes.

Operating revenue was $2.3 million during the fourth quarter of 2003 and $2.5 million during the fourth quarter of 2002. Operating revenue for the year 2003 and 2002 was $9.0 million and $9.6 million, respectively.

PROPANE, PIPELINES AND STORAGE

The Propane, Pipelines and Storage Business reported operating income of $0.6 million for the fourth quarter of 2003 and $0.7 million for the fourth quarter of 2002. Operating income for the year 2003 was $2.1 million compared to $1.9 million for the year 2002. The increase was primarily due to an increase in propane sales, due to colder temperatures, and a decrease in operating expenses and business taxes. These items were partially offset by an increase in depreciation expense.

Operating revenue was $2.5 million for the three months ended December 31, 2003 and $2.3 million for the three months ended December 31, 2002. Operating revenue during the year 2003 and 2002 was $7.9 million and $7.1 million, respectively.

SEMCO ENERGY, Inc. is a diversified energy and infrastructure company that distributes natural gas to approximately 391,000 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 Twelve Months Ended
                                          December 31,        December 31,
                                         2003      2002      2003      2002

    Statement of Operations data

      Operating revenues               $163,140  $146,504  $545,355  $481,527

      Goodwill impairment charge              -         -    17,649         -
      Restructuring and asset
       impairment charges                     -         -     2,825         -
      Other operating expenses          144,346   128,343   495,152   425,088

      Operating income (loss)            18,794    18,161    29,729    56,439

      Other income and (deductions)
        Interest expense                (11,701)   (8,166)  (41,001)  (31,268)
        Debt exchange and
         extinguishment costs                 -         -   (24,030)        -
        Other                               616       444     2,205     2,508
          Total other income and
           (deductions)                 (11,085)   (7,722)  (62,826)  (28,760)

      Income tax (expense) benefit       (2,866)   (3,711)    7,442   (10,139)

      Minority interest - dividends on
       trust preferred securities, net
       of income taxes (a)                    -    (2,150)   (4,300)   (8,601)

      Income (loss) from continuing
       operations                         4,843     4,578   (29,955)    8,939

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

      Net income (loss) available to
       common shareholders               $4,843    $4,588  $(29,955)   $8,949

      Earnings per share - basic
        Net income (loss) from
         continuing operations            $0.17     $0.25    $(1.34)    $0.48
        Net income (loss) available to
         common shareholders              $0.17     $0.25    $(1.34)    $0.48

      Earnings per share - diluted
        Net income (loss) from
         continuing operations            $0.17     $0.25    $(1.34)    $0.48
        Net income (loss) available to
         common shareholders              $0.17     $0.25    $(1.34)    $0.48

      Cash dividends declared per share  $0.150    $0.250    $0.350    $0.500
      Cash dividends paid per share      $0.075    $0.125    $0.400    $0.585

      Average number of common shares
       outstanding
        Basic                            28,001    18,620    22,297    18,472
        Diluted                          28,019    18,620    22,297    18,493

    Statement of Financial Position
     data at December 31, 2003
        Total assets                   $951,219
        Short-term notes payable         82,034
        Long-term debt                  529,007
        Common shareholders' equity     176,524


(a) Minority interest - dividends on trust preferred securities was zero for the three months ended December 31, 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 Twelve months ended
                                          December 31,        December 31,
                                         2003      2002      2003      2002

    Business Segment Information

      Operating revenues
        Gas Distribution               $143,019  $122,992  $462,889  $365,273
        Construction Services            22,648    23,281    83,484   119,254
        Information Technology
         Services                         2,325     2,530     9,000     9,618
        Propane,Pipelines and Storage     2,476     2,307     7,915     7,058
        Corporate and Other (includes
         intercompany eliminations)      (4,976)   (4,287)  (17,933)  (19,676)
          Total operating revenues     $165,492  $146,823  $545,355  $481,527

      Operating income (loss)  (b)
        Gas Distribution                $21,574   $21,149   $59,222   $59,186
        Construction Services            (1,787)   (3,644)  (28,487)   (2,437)
        Information Technology Services      53       235       511       602
        Propane, Pipelines and Storage      647       729     2,062     1,946
        Corporate and Other (includes
         intercompany eliminations)      (1,130)     (644)   (3,579)   (2,858)
          Total operating income        $19,357   $17,825   $29,729   $56,439

      Depreciation and amortization
       expense
        Gas Distribution                 $6,360    $6,295   $25,528   $25,342
        Construction Services             1,688     2,051     7,745     8,049
        Information Technology Services     169       168       684       586
        Propane, Pipelines and Storage      218       236       985       931
        Corporate and Other                  96       100       338       429
          Total depreciation and
           amortization expense          $8,531    $8,850   $35,280   $35,337

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)              21,256    21,483    67,272    65,057
        Volumes transported  (MMcf)      13,020    11,718    51,358    44,921
        Number of customers at end of
         period                         390,677   383,298   390,677   383,298
        Weather statistics:
          Degree days
            Alaska                        3,573     2,900     9,384     9,392
            Michigan                      2,238     2,528     7,063     6,668
          Percent colder (warmer) than
           normal
            Alaska                       (3.6)%    (20.4)%    (8.0)%   (7.8)%
            Michigan                     (5.2)%      7.7%      4.7%     (.9)%

      Propane Distribution:
        Gallons sold (in thousands)       1,461     1,667     4,602     4,493



(b) Operating income for the twelve months ended December 31, 2003 includes non-cash charges of $20.5 million for the impairment of goodwill and equipment at the Construction Services Business.

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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