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SEMCO ENERGY Reports Second Quarter 2004 Results

FARMINGTON HILLS, Mich., Aug. 5 /PRNewswire-FirstCall/ -- SEMCO ENERGY, Inc. (NYSE: SEN) today reported a net loss of $6.9 million, or $0.24 per share, for the second quarter of 2004 compared to a net loss of $20.6 million, or $1.09 per share, for the second quarter of 2003. The net loss for the second quarter of 2004 includes a net loss of $2.3 million from the Company's discontinued construction services operation, which resulted from an increase in the estimated net loss expected from the disposition of this business. The actual results from the operations of the discontinued business were approximately breakeven for the second quarter of 2004. The Company's loss from continuing operations for the second quarter of 2004 was $3.7 million, or $0.13 per share, compared to a loss of $18.8 million, or $0.99 per share, for the second quarter of 2003.

The primary item contributing to the $15.1 million decrease in the loss from continuing operations during the second quarter of 2004, when compared to the second quarter of 2003, was $15.6 million of debt exchange and extinguishment costs incurred during the second quarter of 2003. In addition, a decrease in dividends on trust preferred securities also contributed to the decrease in the loss from continuing operations. The impact of these items was offset partially by an increase in interest expense and a decrease in operating income caused in part by the write-off of certain costs incurred in connection with the proposed sale of Alaska Pipeline Company.

The increase in interest expense was caused by higher levels of long-term debt, an increase in amortization of debt costs as a result of the issuance of additional long-term debt in 2003, and new accounting pronouncements that require dividends on trust preferred securities incurred after July 1, 2003 to be reflected in interest expense.

George Schreiber, Jr., President and Chief Executive Officer, said, "SEMCO made considerable progress on a number of strategic initiatives during the second quarter. We issued a second tranche of convertible preference stock for $19 million after receiving shareholder approval. We used a portion of the proceeds from this tranche and the initial tranche to call all $30 million of SEMCO's outstanding 8% notes due in 2010 at par. SEMCO also renegotiated, during the second quarter, the 364-day portion of its bank credit facility. This facility now gives the Company the ability to borrow $45 million and together with the existing $69 million revolving facility is expected to provide the Company with adequate short-term liquidity. We also announced, on August 4, the signing of a definitive agreement to sell the assets of the Company's construction services business for approximately $20.8 million in cash. The Company also expects to receive additional cash of approximately $4 million from the refund of certain prepaid assets that are not included in the sale. Each of these transactions will help strengthen the Company's financial condition and result in further progress toward operating exclusively in regulated gas businesses."

Mr. Schreiber also stated, "By letter dated July 1, 2004, SEMCO gave notice of termination of the Purchase and Sale Agreement related to the Company's proposed sale of Alaska Pipeline Company to Atlas Pipeline Partners. This followed the failure of the parties to receive from the Regulatory Commission of Alaska the approvals required as a condition to close under the Agreement. As a result, SEMCO has recorded with respect to the second quarter of 2004 a write-off of expenses that it had incurred in connection with the proposed transaction amounting to approximately $1 million, or $0.6 million after income taxes. In response to SEMCO's notice, Atlas initiated an arbitration proceeding against the Company with the American Arbitration Association, alleging that SEMCO breached and wrongfully terminated the Agreement and seeking compensatory damages from SEMCO of not less than $94.3 million. SEMCO intends to deny these allegations in the proceeding and will vigorously defend against Atlas' claims."

Mr. Schreiber concluded by saying, "SEMCO's Gas Distribution Business continued to perform well, providing the Company with stable earnings and cash flow. Operating income from this business was $5.7 million for the second quarter of 2004 compared to $6.3 million for the second quarter of 2003. For the first six months of 2004, the Gas Distribution Business reported operating income of $36.0 million compared to $36.8 million during the first six months of 2003."

YEAR-TO-DATE RESULTS

The Company reported net income of $1.0 million, or $0.03 per share, for the first six months of 2004 compared to a net loss of $10.0 million, or $0.53 per share, for the first six months of 2003. The results for the six months ended June 30, 2004 include a net loss of $7.1 million from the Company's discontinued construction services operation, $2.0 million of which is a net loss from the operations of that business and $5.1 million of which is an estimated net loss from the pending disposal of that business. By comparison, the net loss from the operations of the Company's discontinued construction services business was $4.6 million for the six months ended June 30, 2003.

The Company reported $9.0 million, or $0.29 per share, of income from continuing operations for the first six months of 2004 compared to a loss from continuing operations of $5.3 million, or $0.28 per share, for the comparable period of 2003. This change in results from continuing operations was due primarily to the same items that contributed to the change in results for the second quarter of 2004, when compared to the second quarter of 2003.

IMPACT OF WEATHER

Temperatures during the first six months of 2004 were 2.3% warmer than normal in Alaska and essentially normal in Michigan. During the first six months of 2003, temperatures in Alaska were 10.9% warmer than normal, while in Michigan, temperatures were 10.6% colder than normal. The Company has estimated that the combined variations from normal temperatures in Alaska and Michigan decreased net income by approximately $0.5 million during the first six months of 2004 and increased net income by approximately $0.1 million during the first six months of 2003.

2004 EARNINGS GUIDANCE

The Company currently expects its net loss available to common shareholders for 2004 to be in the range of $0.04 to $0.09 per share. This estimate includes expected net losses from discontinued construction operations of $0.24 per share, and assumes the sale of this operation occurs in the third quarter of 2004. These EPS estimates assume normal temperatures in the Company's gas distribution markets for the remainder of the year and are dependent on the amount and timing of asset sales and debt reductions.

BUSINESS SEGMENT RESULTS

GAS DISTRIBUTION

The Gas Distribution Business reported operating income of $5.7 million for the second quarter of 2004 compared to $6.3 million for the second quarter of 2003. The primary items contributing to the decrease were a $0.3 million decrease in gas sales margin and a $0.4 million increase in operating expenses. The increase in operating expenses was generally caused by increases in professional service fees, depreciation expense, commercial insurance costs and pension expense, offset partially by a decrease in uncollectible customer accounts and a decrease in health and medical costs, primarily retiree medical costs.

The decrease in gas sales margin was caused in part by a decrease in the volumes of gas sold primarily due to the warmer temperatures compared to the second quarter of 2003. This was offset partially by additional gas sales margins from new customers and the impact of the 2003 rate orders and settlements in Michigan and Alaska, whereby rate design was modified to, among other things, lessen the impact of temperature fluctuations. Rates were changed in 2003 to include higher monthly fixed fees and lower volumetric fees. These rate design changes reduce weather risk and, when compared to the previous rate design, generally produce higher gas sales margins during the non-heating season and lower gas sales margins during the high-volume heating season.

The Gas Distribution Business reported operating income of $36.0 million for the first six months of 2004 compared to $36.8 million for the first six months of 2003. The change in operating income between 2003 and 2004 was caused by a number of offsetting items. Gas transportation revenue and other operating revenues increased by approximately $1.1 million while gas sales margin decreased by $1.0 million. Operating expenses also increased by approximately $1.0 million. The increase in operating expenses was generally caused by increases in professional service fees, pension expense, depreciation expense, property tax expense, and commercial insurance costs, offset partially by a decrease in health and medical costs, including retiree medical costs.

The increase in gas transportation revenue was primarily due to an increase in gas deliveries at ENSTAR. The decrease in gas sales margin was primarily caused by a decrease in the volumes of gas sold mostly due to the warmer temperatures compared to 2003. In addition, gas sales margin for the first six months of 2004 when compared to the same period of 2003 was also lower as a result of the changes in design discussed previously. The impact of these items was offset partially by additional gas sales margins from new customers.

INFORMATION TECHNOLOGY

The operating income of the Information Technology Services Business for the second quarter of 2004 and the second quarter of 2003 was essentially unchanged at approximately $0.2 million. Operating income for the six months ended June 30, 2004 was $0.5 million compared to $0.4 million for the same period ended June 30, 2003. The increase in operating income for the first six months of 2004 was due primarily to cost reductions as a result of consolidating certain operations.

Operating revenue was $2.1 million for the three months ended June 30, 2004 and $2.3 million for the three months ended June 30, 2003. For the first six months of 2004, operating revenue was $4.5 million compared to $4.4 million for the same period of 2003.

PROPANE, PIPELINES AND STORAGE

The Propane, Pipelines and Storage Business reported operating income of $0.2 million for the second quarter of 2004, compared to $0.3 million for the second quarter of 2003. Operating income for the six months ended June 30, 2004 was $0.9 million compared to $1.2 million for the six months ended June 30, 2003. A decrease in the volume of propane sold due to warmer temperatures in Michigan contributed to the decrease in operating income for both the three and six months ended June 30, 2004, when compared to the comparable periods ended June 30, 2003. In addition, business tax refunds recorded in 2003, which did not recur in 2004, also contributed to the decrease in operating income for the first six months of 2004, when compared to the first six months of 2003.

Operating revenue was $1.4 million for both the three months ended June 30, 2004 and the three months ended June 30, 2003. Operating revenue for the first six months of 2004 was $4.0 million compared to $4.2 million for the same period of 2003.

SEMCO ENERGY, Inc. distributes natural gas to approximately 392,000 customers combined in Michigan, as SEMCO ENERGY GAS COMPANY, and in Alaska, as ENSTAR Natural Gas Company. It owns and operates businesses involved in propane distribution, 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, success in defending claims against the Company, 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,
                                         2004      2003      2004      2003

    Statement of Operations data

      Operating revenues                $81,762   $83,066  $289,546  $277,719

      Operating expenses                 76,970    76,455   253,606   239,621

      Operating income (loss)             4,792     6,611    35,940    38,098

      Other income and (deductions)
        Interest expense                (11,126)   (8,732)  (22,746)  (16,379)
        Debt exchange and
         extinguishment costs                 -   (24,030)        -   (24,030)
        Other                               606       444     1,373     1,180
          Total other income and
           (deductions)                 (10,520)  (32,318)  (21,373)  (39,229)

      Income tax (expense) benefit        2,042     9,047    (5,534)      105

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

      Income (loss) from continuing
       operations                        (3,686)  (18,810)    9,033    (5,326)

      Income (loss) from discontinued
       operations, net of income taxes   (2,344)   (1,821)   (7,120)   (4,631)

      Net income (loss)                  (6,030)  (20,631)    1,913    (9,957)

      Dividends on convertible
       preference stock                    (868)        -      (930)        -

      Net income (loss) available to
       common shareholders              $(6,898) $(20,631)     $983   $(9,957)

      Earnings per share - basic
        Net income (loss) from
         continuing operations           $(0.13)   $(0.99)    $0.32    $(0.28)
        Net income (loss) available to
         common shareholders             $(0.24)   $(1.09)    $0.03    $(0.53)

      Earnings per share - diluted
        Net income (loss) from
         continuing operations           $(0.13)   $(0.99)    $0.29    $(0.28)
        Net income (loss) available to
         common shareholders             $(0.24)   $(1.09)    $0.03    $(0.53)

      Cash dividends declared per
       share                             $0.075    $0.200    $0.075    $0.200
      Cash dividends paid per share      $0.075    $0.125    $0.150    $0.250

      Average number of common shares
       outstanding
        Basic                            28,238    18,988    28,177    18,884
        Diluted                          28,238    18,988    31,341    18,884

    Statement of Financial Position
     data at June 30, 2004
        Total assets                   $880,501         -         -         -
        Cash and temporary cash
         investments                      4,008         -         -         -
        Short-term notes payable              -         -         -         -
        Long-term debt                  497,691         -         -         -
        Convertible preference stock     46,200         -         -         -
        Common shareholders' equity     175,285         -         -         -

                                                      Twelve Months Ended
                                                           June 30,
                                                    2004               2003

    Statement of Operations data

      Operating revenues                          $484,782           $445,406

      Operating expenses                           426,243            385,763

      Operating income (loss)                       58,539             59,643

      Other income and (deductions)
        Interest expense                           (46,052)           (31,796)
        Debt exchange and extinguishments costs          -            (24,030)
        Other                                        2,347              2,549
          Total other income and (deductions)      (43,705)           (53,277)

      Income tax (expense) benefit                  (5,559)            (3,425)

      Minority interest - dividends on
       trust preferred securities, net
       of income taxes                                   -             (8,601)

      Income (loss) from continuing operations       9,275             (5,660)

      Income (loss) from discontinued
       operations, net of income taxes             (27,360)            (6,723)

      Net income (loss)                            (18,085)           (12,383)

      Dividends on convertible preference stock       (930)                 -

      Net income (loss) available to
       common shareholders                        $(19,015)          $(12,383)

      Earnings per share - basic
        Net income (loss) from continuing
         operations                                  $0.34             $(0.30)
        Net income (loss) available to common
         shareholders                               $(0.71)            $(0.66)

      Earnings per share - diluted
        Net income (loss) from continuing
         operations                                  $0.33             $(0.30)
        Net income (loss) available to common
         shareholders                               $(0.71)            $(0.66)

      Cash dividends declared per share             $0.225             $0.450
      Cash dividends paid per share                 $0.300             $0.500

      Average number of common shares outstanding
        Basic                                       26,909             18,726
        Diluted                                     28,479             18,726

    Statement of Financial Position data at
     June 30, 2004
        Total assets                                     -                  -
        Cash and temporary cash
         investments                                     -                  -
        Short-term notes payable                         -                  -
        Long-term debt                                   -                  -
        Convertible preference stock                     -                  -
        Common shareholders' equity                      -                  -



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

                                        Three months ended  Six months ended
                                             June 30,           June 30,
                                          2004     2003      2004      2003

    Business Segment Information

      Operating revenues
        Gas Distribution                 $79,735  $81,111  $284,228  $272,374
        Information Technology Services    2,144    2,268     4,494     4,422
        Propane, Pipelines and Storage     1,350    1,414     4,048     4,241
        Corporate and Other (includes
         intercompany eliminations)       (1,467)  (1,727)   (3,224)   (3,318)
          Total operating revenues       $81,762  $83,066  $289,546  $277,719

      Operating income (loss)
        Gas Distribution                  $5,721   $6,316   $35,952   $36,813
        Information Technology Services      148      157       537       377
        Propane, Pipelines and Storage       169      323       944     1,221
        Corporate and Other (includes
         intercompany eliminations)       (1,246)    (185)   (1,493)     (313)
          Total operating income          $4,792   $6,611   $35,940   $38,098

      Depreciation and amortization
       expense
        Gas Distribution                  $6,534   $6,363   $12,989   $12,822
        Information Technology Services      152      172       309       340
        Propane, Pipelines and Storage       224      219       443       549
        Corporate and Other                   41       59        82       116
          Total depreciation and
           amortization expense           $6,951   $6,813   $13,823   $13,827

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)                9,694   10,785    39,588    40,545
        Volumes transported (MMcf)        13,909   12,607    28,737    25,523
        Number of customers at end of
         period                          391,791  384,980   391,791   384,980
        Weather statistics:
          Degree days
            Alaska                         1,449    1,545     5,480     4,976
            Michigan                         892    1,041     4,227     4,647
          Percent colder (warmer) than
           normal
            Alaska                        (10.0)%   (3.5)%    (2.3)%   (10.9)%
            Michigan                       (7.1)%     9.8%       .3%     10.6%

                                                     Twelve months ended
                                                          June 30,
                                                   2004               2003

    Business Segment Information

      Operating revenues
        Gas Distribution                         $474,743           $435,596
        Information Technology Services             9,072              9,462
        Propane, Pipelines and Storage              7,722              7,645
        Corporate and Other (includes
         intercompany eliminations)                (6,755)            (7,297)
          Total operating revenues               $484,782           $445,406

      Operating income (loss)
        Gas Distribution                          $58,361            $57,210
        Information Technology Services               671                660
        Propane, Pipelines and Storage              1,785              2,177
        Corporate and Other (includes
         intercompany eliminations)                (2,278)              (404)
          Total operating income                  $58,539            $59,643

      Depreciation and amortization expense
        Gas Distribution                          $25,695            $25,471
        Information Technology Services               653                660
        Propane, Pipelines and Storage                879              1,018
        Corporate and Other                           217                252
          Total depreciation and amortization
           expense                                $27,444            $27,401

    Operating Statistics

      Gas distribution:
        Volumes sold (MMcf)                        66,315             67,395
        Volumes transported (MMcf)                 54,572             47,454
        Number of customers at end of period      391,791            384,980
        Weather statistics:
          Degree days
            Alaska                                  9,888              8,696
            Michigan                                6,643              7,272
          Percent colder (warmer) than normal
            Alaska                                  (3.3)%            (14.3)%
            Michigan                                (1.7)%              8.2%


SOURCE  SEMCO ENERGY, Inc.
    -0-                             08/05/2004
    /CONTACT:  Analysts Contact: Thomas Connelly, Director of Investor
Relations, +1-248-702-6240, Media Contact: Timothy Lubbers, Director of
Marketing and Corporate Communications, +1-810-966-4208, both of SEMCO ENERGY,
Inc./
    /Web site:  http://www.semcoenergy.com /
    (SEN)

CO:  SEMCO ENERGY, Inc.
ST:  Michigan
IN:  OIL UTI
SU:  ERN ERP



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6021 08/05/2004 16:02 EDT http://www.prnewswire.com
"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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