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SEMCO ENERGY Reports Second Quarter 2005 Results

PORT HURON, Mich., Aug. 3 /PRNewswire-FirstCall/ -- SEMCO ENERGY, Inc. (NYSE: SEN) today announced its financial results for the quarter ended June 30, 2005. The Company's net loss available to common shareholders for the quarter was $3.1 million, or $0.11 per share, compared to a net loss available to common shareholders of $6.8 million, or $0.24 per share, for the second quarter of 2004. The results for the second quarter of 2004 include a loss from discontinued operations of $2.3 million or $0.08 per share. All discussions of per share amounts are on a fully diluted basis. The Company typically reports losses for the second quarter due to the seasonal nature of its business, which relies on winter heating season revenues for the majority of its profits.

George A. Schreiber, Jr., Company President and Chief Executive Officer, said, "The Company continues to make progress towards improved financial condition. Second quarter financial results confirm that we are on track to meet our earnings expectations for the year, which remain unchanged from last quarter. Gas distribution business operating income for the second quarter of 2005 was $7.0 million, compared to $5.9 million for the second quarter of 2004. Although weather was warmer than normal during the quarter, operating income was favorably impacted by recent rate increases in Michigan and by the sale of excess gas."

The primary factors that positively affected results when comparing the second quarter of 2005 to the second quarter of 2004 were increases in gas sales margin and other gas distribution revenues and the absence of losses from discontinued operations. The increases in gas sales margin and other gas distribution revenues reduced the net loss by approximately $2.4 million. This improvement was primarily due to rate increases, the sale of excess gas to a third-party gas supplier, new customers, and increases in miscellaneous customer fee and pipeline construction management revenues. The increase in gas sales margin and other gas distribution revenues includes the impact of a decrease in volumes of gas sold. These lower volumes are due in large part to warmer overall weather compared to last year. There were no losses from discontinued operations in the 2005 results, while 2004 results included $2.3 million in losses from discontinued operations.

The aforementioned items were partially offset by increases in operations and maintenance expenses, depreciation expense, property taxes and non-cash debt extinguishment costs, which increased the second quarter 2005 net loss when compared to second quarter of 2004. Operations and maintenance expenses increased by approximately $0.4 million due primarily to increases in employee benefit and incentive costs, compensation and various other operating expenses. Professional services expenses were lower in 2005 due to the non- recurrence of those costs which were incurred in 2004 in connection with the termination of the sale of the Company's Alaska Pipeline Company (APC). New property and equipment placed in service increased depreciation and property tax expenses, which increased the Company's net loss by approximately $0.3 million. During the second quarter of 2005, non-cash debt extinguishment costs of $0.2 million were incurred as a result of the early retirement of $10.3 million of the Company's long-term debt.

YEAR-TO-DATE RESULTS

The Company's net income available to common shareholders was $0.2 million, or $0.01 per share, for the six months ended June 30, 2005, compared to net income available to common shareholders of $1.3 million, or $0.07 per share, for the six months ended June 30, 2004. The primary factors that decreased earnings for the six months ended June 30, 2005, when compared to the same period ended June 30, 2004, were the premium associated with the repurchase of the Company's Convertible Preference Stock (CPS), increases in financing costs, operations and maintenance expenses, depreciation and property taxes, and the non-cash charge incurred in connection with the early retirement of long-term debt.

The premium associated with the repurchase of the Company's CPS reduced net income by approximately $8.2 million. Financing costs include interest expense and dividends on both the CPS and newly-issued 5 percent Convertible Preferred Stock, which increased on a net basis by approximately $0.6 million. Increases in operations and maintenance expenses, which decreased net income by approximately $1.7 million, were due primarily to increases in employee benefit and incentive costs, compensation and various other operating expenses. These items were partially offset by the non-recurrence in 2005 of professional services expenses recorded in the second quarter of 2004 related to the terminated sale of APC. The increases in depreciation expense and property taxes decreased net income by approximately $0.5 million. The non- cash debt extinguishment cost discussed previously also decreased net income for the six months ended June 30, 2005, by $0.2 million.

These items were partially offset by a decrease in losses from discontinued operations and an increase in gas sales margin and other gas distribution revenues. There were no losses from discontinued operations in the 2005 results, while the 2004 results included a charge of $7.1 million. Gas sales margin and other gas distribution revenues increased by approximately $3.3 million, primarily due to new customers, rate increases, the sale of excess gas to a third-party gas supplier, a reduction in unaccounted-for gas, a significant recovery from a bankrupt customer in the first quarter of 2005, and increases in miscellaneous customer fee and pipeline construction management revenues. The increase in gas sales margin and other gas distribution revenues is net of the impact of a decrease in volumes of gas sold, due in large part to warmer overall weather compared to last year.

IMPACT OF WEATHER

Temperatures during the first six months of 2005 were 7.5 percent warmer than normal in Alaska and 1.5 percent colder than normal in Michigan. During the first six months of 2004, temperatures were 2.3 percent warmer than normal in Alaska and essentially normal in Michigan. The Company estimates that the combined variations from normal weather decreased net income by approximately $1.9 million during the first six months of 2005 and decreased net income by approximately $0.5 million during the same period of 2004.

2005 OUTLOOK

The Company continues to expect 2005 net income available to common shareholders to be in the range of $0.03 to $0.07 per share. This includes the charge incurred in connection with the repurchase of CPS which reduced the Company's expected 2005 net income available to common shareholders by $8.2 million, or an estimated $0.27 per share. Excluding this charge, net income available to common shareholders is expected to be in the range of $0.30 to $0.34 per share for 2005. This guidance is consistent with prior earnings per share guidance given in February and May 2005.

As with previous guidance, this earnings outlook includes the impact of continuing initiatives to improve the Company's balance sheet and assumes normal weather for the remainder of the year in markets served. The Company today announced the proposed sale of additional shares of common stock for the purpose of redeeming, at par, an outstanding amount of the 10.25 percent subordinated debentures and related Trust Preferred Securities (TPS). The Company redeemed $10 million of these debentures and TPS during the second quarter. In conjunction with the second quarter redemption, the Company wrote-off unamortized non-cash debt issuance costs amounting to $0.2 million after taxes. The redemption of the remaining $30 million of debentures and TPS, would result in a non-cash charge of $0.7 million after taxes relating to the write-off of the remaining unamortized debt issuance costs. Under these circumstances, the Company would expect non-cash charges related to the early retirement of securities, along with the scheduled amortization of debt issuance costs and debt basis adjustments related to all of the Company's debt, to be $3.3 million after taxes, or $0.10 per share for the full year 2005. These charges along with the impact of the proposed sale of common stock are included in the current estimate of 2005 earnings per share.

For 2005, cash from operations, as measured by EBITDA, continues to be forecasted at approximately $94 million and capital expenditures are expected to be approximately $39.5 million. EBITDA represents earnings before interest, dividends on Convertible Preferred Stock, taxes, depreciation and amortization and is therefore a non-GAAP financial measure. EBITDA is reported here because the Company believes it is commonly used by investors as an indication of a company's ability to incur and service debt.

While the Company believes EBITDA is a useful measure for investors, it is not a measurement presented in accordance with generally accepted accounting principles in the U.S., or GAAP. The Company does not intend EBITDA to represent cash flows from operations as defined by GAAP. You should not consider EBITDA in isolation or as a substitute for net income, cash flows from operations or any other items calculated in accordance with GAAP. This calculation of EBITDA may or may not be consistent with that of other companies. Management views EBITDA as a liquidity measure and, therefore, the nearest GAAP measure is cash flow from operations. A reconciliation of the Company's projected EBITDA to projected cash flow from operations is included in the following statistics.

SEMCO ENERGY, Inc. distributes natural gas to approximately 404,000 customers combined in Michigan, as SEMCO ENERGY GAS COMPANY, and in Alaska, as ENSTAR Natural Gas Company. It also owns and operates businesses involved in propane distribution, intrastate pipelines and natural gas storage.

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,
                                           2005     2004      2005      2004

    Statement of Operations data

      Operating revenues                 $95,633  $81,762  $322,193  $289,546

      Cost of gas sold                    60,581   50,055   228,177   200,106
      Operations and maintenance          17,666   16,059    36,241    32,605
      Depreciation and amortization        7,147    6,951    14,125    13,823
      Property and other taxes             3,096    2,831     6,364     5,856
      Expenses related to the terminated
       sale of a subsidiary                    -      932         -       932

      Operating income                     7,143    4,934    37,286    36,224

      Other income and (deductions)
        Interest expense                 (10,860) (11,126)  (21,936)  (22,746)
        Debt extinguishment costs           (366)       -      (366)        -
        Other                                620      606     1,148     1,373
          Total other income and
           (deductions)                  (10,606) (10,520)  (21,154)  (21,373)

      Income tax (expense) benefit         1,350    2,042    (5,749)   (5,534)

      Income (loss) from continuing
       operations                         (2,113)  (3,544)   10,383     9,317

      Income (loss) from discontinued
       operations, net of income taxes         -   (2,344)        -    (7,120)

      Net income (loss)                   (2,113)  (5,888)   10,383     2,197

      Dividends on convertible
       cumulative preferred stock           (945)       -    (1,097)        -
      Dividends and repurchase premium
       on convertible preference stock (a)     -     (868)   (9,112)     (930)

      Net income (loss) available to
       common shareholders               $(3,058) $(6,756)     $174    $1,267

      Earnings per share - basic
        Income (loss) from continuing
         operations                       $(0.11)  $(0.16)    $0.01     $0.30
        Net income (loss) available to
         common shareholders              $(0.11)  $(0.24)    $0.01     $0.04

      Earnings per share - diluted
        Income (loss) from continuing
         operations                       $(0.11)  $(0.16)    $0.01     $0.30
        Net income (loss) available to
         common shareholders              $(0.11)  $(0.24)    $0.01     $0.07

      Cash dividends declared per share      $ -    $0.08       $ -     $0.08

      Average number of common shares outstanding
        Basic                             28,494   28,238    28,460    28,177
        Diluted                           28,494   28,238    28,516    31,341

(a) The amount for the six months ended June 30, 2005 includes a repurchase premium of $8,170,000 associated with the repurchase of Company's convertible preference stock from a private equity investor.



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


                                        Three months ended   Six months ended
                                             June 30,            June 30,
                                           2005     2004      2005      2004

    Business Segment Information

      Operating revenues
        Gas Distribution                 $94,083  $79,735  $317,531  $284,228
        Corporate and Other                3,311    3,535     8,446     8,624
        Reconciliation to Consolidated
         Financial Statements
          Intercompany eliminations       (1,761)  (1,508)   (3,784)   (3,306)
          Consolidated operating
           revenues                      $95,633  $81,762  $322,193  $289,546

      Operating income (loss)
        Gas Distribution                  $6,976   $5,863   $36,686   $36,236
        Corporate and Other                  167     (929)      600       (12)
          Consolidated operating income   $7,143   $4,934   $37,286   $36,224

      Depreciation and amortization
       expense
        Gas Distribution                  $6,793   $6,534   $13,416   $12,989
        Corporate and Other                  354      417       709       834
          Consolidated depreciation and
           amortization expense           $7,147   $6,951   $14,125   $13,823

    Gas Distribution Operating
     Statistics


        Volumes sold (MMcf)                9,393    9,694    38,338    39,588
        Volumes transported  (MMcf)       13,237   13,909    27,578    28,737
        Number of customers at end of
         period                          403,731  391,791   403,731   391,791
        Weather statistics:
          Degree days
            Alaska                         1,486    1,449     5,165     5,480
            Michigan                         833      892     4,244     4,227
          Percent colder (warmer) than
           normal
            Alaska                         (7.4)%  (10.0)%    (7.5)%    (2.3)%
            Michigan                      (10.3)%   (7.1)%     1.5%       .3%

    Statement of Financial Position data at June 30, 2005
        Total assets                    $875,380
        Cash and cash equivalents         18,010
        Gas charge underrecovery              18
        Gas charge overrecovery            8,552
        Short-term notes payable               -
        Current maturities of long-term
         debt                             15,092
        Long-term debt                   472,965
        Convertible cumulative
         preferred stock                  66,473
        Common shareholders' equity      165,092

    Other information at June 30, 2005
        Unused portion of bank credit
         facility                        $88,495

    Reconciliation of Forecasted EBITDA to Forecasted Cash Flow From
      Operations for the Forecasted Year Ended December 31, 2005
                                   (dollars in millions)
        EBITDA                               $94
        Interest expense                     (44)
        Income tax expense                    (8)
        Changes in assets and
         liabilities and
         other non-cash items                 (8)
        Cash flow from operations            $34


SOURCE SEMCO ENERGY, Inc.
08/03/2005

CONTACT:
Analysts Contact: Thomas Connelly, Director of Investor Relations, 1-248-458-6163
or
Media Contact: Timothy Lubbers, Director of Marketing and Corporate Communications, 1-810-887-4208
Both of SEMCO ENERGY, Inc.

4982 08/03/2005 16:54 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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