UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal period from _____________ to _____________

Commission file number 001-15565

SEMCO ENERGY, INC.
(Exact name of registrant as specified in its charter)

MICHIGAN 38-2144267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

28470 13 MILE ROAD, SUITE 300, FARMINGTON HILLS, MICHIGAN 48334
(Address of principal executive offices)

248-702-6000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

The number of outstanding shares of the Registrant's common stock as of July 31,
2003: 19,085,206

INDEX TO FORM 10-Q
------------------
For Quarter Ended June 30, 2003

Page
Number
------

COVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS. . . . . . . . . . . . . . . . 2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . .. . . . . . . . . . . 17
Item 3. Qualitative and Quantitative Disclosures About Market Risk . . . . . 29
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . 29

PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . 30
Item 3. Default upon Senior Securities . . . . . . . . . . . . . . . . . . . 30
Item 4. Submission of Matters to a Vote of Securityholders . . . . . . . . . . 30
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 30

SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are based on current
expectations, estimates and projections of SEMCO Energy, Inc. and its
subsidiaries (the "Company"). Statements that are not historical facts,
including without limitation, statements about the Company's outlook, beliefs,
plans, goals and expectations, are forward-looking statements. In addition,
these forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may", "will", "expect", "intend",
"estimate", "anticipate", "believe", or "continue" or the negatives of these
terms or variations of them or similar terminology. These statements are
subject to potential risks and uncertainties and, therefore, actual results may
differ materially. The Company undertakes no obligation to update publicly any
forward-looking statements whether as a result of new information, future events
or otherwise. Factors that may impact forward-looking statements include, but
are not limited to, the following: (i) the effects of weather and other natural
phenomena; (ii) the economic climate and growth in the geographical regions
where the Company does business; (iii) the capital intensive nature of the
Company's business; (iv) increased competition within the energy industry as
well as from alternative forms of energy; (v) the timing and extent of changes
in commodity prices for natural gas and propane; (vi) the effects of changes in
governmental and regulatory policies, including income taxes, environmental
compliance and authorized rates; (vii) the Company's ability to bid on and win
construction contracts; (viii) the impact of energy prices on the amount of
projects and business available to the Company's construction services business;
(ix) the nature, availability and projected profitability of potential
investments available to the Company; (x) the Company's ability to remain in
compliance with its debt covenants and accomplish its financing objectives in a
timely and cost-effective manner in light of changing conditions in the capital
markets; (xi) the Company's ability to operate acquired businesses in accordance
with its plans and (xii) the Company's ability to effectively execute its
strategic plan.

- 2 -

SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

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

OPERATING REVENUES
Gas sales. . . . . . . . . . . . . . . . . . . . . . $ 73,163 $ 63,869 $254,679 $186,092 $404,242 $311,220
Gas transportation . . . . . . . . . . . . . . . . . 5,929 5,646 14,113 13,961 25,859 26,447
Construction services. . . . . . . . . . . . . . . . 17,449 33,906 30,350 55,780 81,935 122,268
Other. . . . . . . . . . . . . . . . . . . . . . . . 2,984 2,679 7,487 6,178 13,547 11,409
--------- --------- --------- --------- --------- ---------
99,525 106,100 306,629 262,011 525,583 471,344
--------- --------- --------- --------- --------- ---------

OPERATING EXPENSES
Cost of gas sold . . . . . . . . . . . . . . . . . . 51,187 40,510 188,346 119,292 289,476 195,638
Operations and maintenance . . . . . . . . . . . . . 32,720 43,354 63,204 79,973 139,884 169,082
Depreciation and amortization. . . . . . . . . . . . 8,878 8,892 17,951 17,653 35,635 36,206
Property and other taxes . . . . . . . . . . . . . . 2,953 3,003 5,862 6,133 11,573 11,975
Restructuring and impairment charges . . . . . . . . - - - - - 6,103
--------- --------- --------- --------- --------- ---------
95,738 95,759 275,363 223,051 476,568 419,004
--------- --------- --------- --------- --------- ---------

OPERATING INCOME . . . . . . . . . . . . . . . . . . . 3,787 10,341 31,266 38,960 49,015 52,340

OTHER INCOME (DEDUCTIONS)
Interest expense . . . . . . . . . . . . . . . . . . (9,052) (7,477) (17,009) (15,151) (33,126) (31,216)
Debt exchange and extinguishment costs . . . . . . . (24,030) - (24,030) - (24,030) -
Other. . . . . . . . . . . . . . . . . . . . . . . . 781 709 1,479 1,034 2,683 2,003
--------- --------- --------- --------- --------- ---------
(32,301) (6,768) (39,560) (14,117) (54,473) (29,213)
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
DIVIDENDS ON TRUST PREFERRED SECURITIES. . . . . . . (28,514) 3,573 (8,294) 24,843 (5,458) 23,127

INCOME TAX EXPENSE (BENEFIT) . . . . . . . . . . . . . (10,033) 1,378 (2,637) 9,168 (1,666) 9,521
--------- --------- --------- --------- --------- ---------

INCOME (LOSS) BEFORE DIVIDENDS ON TRUST
PREFERRED SECURITIES . . . . . . . . . . . . . . . . (18,481) 2,195 (5,657) 15,675 (3,792) 13,606

Dividends on trust preferred securities, net of
income taxes of $1,158, $1,158, $2,316,
$2,316, $4,631 and $4,632. . . . . . . . . . . . . 2,150 2,150 4,300 4,300 8,601 8,603
--------- --------- --------- --------- --------- ---------

INCOME (LOSS) FROM CONTINUING OPERATIONS . . . . . . . (20,631) 45 (9,957) 11,375 (12,393) 5,003

DISCONTINUED OPERATIONS
Loss from engineering services operations, net of
income tax benefit of $0, $0, $0, $0, $0 and $434. - - - - - (726)
Loss on divestiture of engineering services
operations including losses during phase-out
period, net of income tax benefit (expense)
of $0, $0, $0, $0, ($1,276) and $2,429 . . . . . . - - - - 10 (4,980)
--------- --------- --------- --------- --------- ---------

NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . $(20,631) $ 45 $ (9,957) $ 11,375 $(12,383) $ (703)
========= ========= ========= ========= ========= =========

EARNINGS PER SHARE - BASIC
Net income (loss) from continuing operations . . . . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ 0.27
Net income (loss) available to common shareholders . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ (0.04)

EARNINGS PER SHARE - DILUTED
Net income (loss) from continuing operations . . . . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ 0.27
Net income (loss) available to common shareholders . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ (0.04)

CASH DIVIDENDS PAID PER SHARE. . . . . . . . . . . . . $ 0.125 $ 0.125 $ 0.250 $ 0.335 $ 0.500 $ 0.755

AVERAGE COMMON SHARES OUTSTANDING - BASIC. . . . . . . 18,988 18,431 18,884 18,374 18,726 18,261
AVERAGE COMMON SHARES OUTSTANDING - DILUTED. . . . . . 18,988 18,472 18,884 18,400 18,726 18,261

<FN>
The accompanying condensed notes to the unaudited consolidated financial statements are an integral part of these
statements.

- 3 -

SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

ASSETS
(In thousands)

June 30, December 31,
2003 2002
----------- -------------
(Unaudited)

CURRENT ASSETS
Cash and temporary cash investments, at cost. . . . . . . . . . . . $ 740 $ 1,813
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . 29,862 1,212
Receivables, less allowances of $2,379 and $1,909 . . . . . . . . . 33,512 49,841
Accrued revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 9,750 40,757
Gas in underground storage, at average cost . . . . . . . . . . . . 34,082 35,232
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 25,710 23,449
Materials and supplies, at average cost . . . . . . . . . . . . . . 5,107 4,254
Gas charges recoverable from customers. . . . . . . . . . . . . . . 16,031 2,200
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 980 1,537
----------- -------------
155,774 160,295

PROPERTY, PLANT AND EQUIPMENT
Gas distribution. . . . . . . . . . . . . . . . . . . . . . . . . . 647,173 635,992
Diversified businesses and other. . . . . . . . . . . . . . . . . . 91,929 92,774
----------- -------------
739,102 728,766
Less accumulated depreciation and impairments . . . . . . . . . . . 223,996 207,635
----------- -------------
515,106 521,131

DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less accumulated amortization and impairments of $17,764. 161,084 161,084
Deferred retiree medical benefits . . . . . . . . . . . . . . . . . 8,542 8,992
Unamortized debt expense. . . . . . . . . . . . . . . . . . . . . . 16,272 7,809
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,436 17,203
----------- -------------
207,334 195,088
----------- -------------

TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 878,214 $ 876,514
=========== =============

<FN>
The accompanying condensed notes to the unaudited consolidated financial statements are an
integral part of these statements.

- 4 -

SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

LIABILITIES AND CAPITALIZATION
(In thousands)

June 30, December 31,
2003 2002
------------ --------------
(Unaudited)

CURRENT LIABILITIES
Notes payable and current maturities of long-term debt. . . $ 84,732 $ 121,835
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 27,499 38,148
Customer advance payments . . . . . . . . . . . . . . . . . 9,083 11,408
Accrued interest. . . . . . . . . . . . . . . . . . . . . . 7,130 7,598
Accumulated deferred income taxes . . . . . . . . . . . . . 1,879 1,879
Amounts payable to customers. . . . . . . . . . . . . . . . 2,737 1,073
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,377 19,194
------------ --------------
148,437 201,135

DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . 33,186 33,043
Customer advances for construction. . . . . . . . . . . . . 14,945 15,841
Unamortized investment tax credit . . . . . . . . . . . . . 1,044 1,178
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,563 9,833
------------ --------------
57,738 59,895

LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . 435,286 366,026

COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
PREFERRED SECURITIES OF SUBSIDIARIES HOLDING
SOLELY DEBT SECURITIES OF SEMCO ENERGY, INC.. . . . . . . . 139,457 139,436

COMMON SHAREHOLDERS' EQUITY
Common stock - $1 par value; 40,000,000 shares authorized;
19,064,054 and 18,682,027 shares outstanding. . . . . . . 19,064 18,682
Capital surplus . . . . . . . . . . . . . . . . . . . . . . 121,571 120,089
Accumulated other comprehensive income (loss) . . . . . . . (7,524) (7,597)
Retained earnings (deficit) . . . . . . . . . . . . . . . . (35,815) (21,152)
------------ --------------
97,296 110,022
------------ --------------

TOTAL LIABILITIES AND CAPITALIZATION. . . . . . . . . . . . . $ 878,214 $ 876,514
============ ==============

<FN>
The accompanying condensed notes to the unaudited consolidated financial statements are
an integral part of these statements.

- 5 -

SEMCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(in thousands)

Six Months Ended Twelve Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
---------- --------- ---------- ---------

CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ (9,957) $ 11,375 $ (12,383) $ (703)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 17,951 17,653 35,635 36,206
Depreciation and amortization in discontinued operations . . - 198 27 426
Debt exchange and extinguishment costs . . . . . . . . . . . 24,030 - 24,030 -
Accumulated deferred income taxes and investment tax credit. 9 186 3,339 4,427
Non-cash impairment charges and subsequent adjustment. . . . - - (1,732) 7,679
Changes in assets and liabilities, net of effects of
acquisitions, divestitures and other changes as
shown below . . . . . . . . . . . . . . . . . . . . . . . 10,829 9,812 (20,333) (18,829)
---------- --------- ---------- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES . 42,862 39,224 28,583 29,206
---------- --------- ---------- ---------

CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Property additions - gas distribution. . . . . . . . . . . . . . . (11,322) (13,631) (27,663) (30,037)
Property additions - diversified businesses and other. . . . . . . (935) (2,686) (3,254) (13,413)
Proceeds from property sales, net of retirement costs. . . . . . . 636 883 4,261 970
---------- --------- ---------- ---------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . . (11,621) (15,434) (26,656) (42,480)
---------- --------- ---------- ---------

CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Issuance of common stock, net of expenses. . . . . . . . . . . . . 1,902 1,944 3,600 4,236
Net change in notes payable. . . . . . . . . . . . . . . . . . . . (65,103) (21,301) (29,924) 15,305
Issuance of long-term debt, net of expenses. . . . . . . . . . . . 197,713 - 226,703 (142)
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . . (110,090) - (140,215) (10)
Debt exchange and extinguishment costs . . . . . . . . . . . . . . (24,030) - (24,030) -
Restricted cash for long-term debt retirement. . . . . . . . . . . (28,000) - (28,000) -
Payment of dividends on common stock . . . . . . . . . . . . . . . (4,706) (6,136) (9,346) (13,745)
---------- --------- ---------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES . (32,314) (25,493) (1,212) 5,644
---------- --------- ---------- ---------

CASH AND TEMPORARY CASH INVESTMENTS
Net increase (decrease). . . . . . . . . . . . . . . . . . . . . . (1,073) (1,703) 715 (7,630)
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . 1,813 1,728 25 7,655
---------- --------- ---------- ---------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 740 $ 25 $ 740 $ 25
========== ========= ========== =========

CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS, DIVESTITURES AND OTHER CHANGES:
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . $ (650) $ - $ (1,862) $ -
Receivables, net . . . . . . . . . . . . . . . . . . . . . . 16,329 17,395 13,312 2,312
Accrued revenue. . . . . . . . . . . . . . . . . . . . . . . 31,007 20,435 2,968 3
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . (2,261) 3,107 (6,541) (5,529)
Materials, supplies and gas in undergroung storage . . . . . 297 (9,044) (12,156) (12,313)
Gas charges recoverable from customers . . . . . . . . . . . (13,831) (1,354) (12,683) (1,038)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . (10,649) (11,083) 8,172 (4,981)
Customer advances and amounts payable to customers . . . . . (1,557) (6,706) 2,930 1,346
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,856) (2,938) (14,473) 1,371
---------- --------- ---------- ---------
$ 10,829 $ 9,812 $ (20,333) $(18,829)
========== ========= ========== =========

<FN>
The accompanying condensed notes to the unaudited consolidated financial statements are an integral part of
these statements.

- 6 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Under the rules and regulations of the Securities and Exchange Commission
for Form 10-Q Quarterly Reports, certain footnotes and other financial statement
information normally included in the year-end financial statements of SEMCO
Energy, Inc. and its subsidiaries (the "Company") have been condensed or omitted
in the accompanying unaudited financial statements. These financial statements
prepared by the Company should be read in conjunction with the financial
statements and notes thereto included in the Company's 2002 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The information in
the accompanying financial statements reflects, in the opinion of the Company's
management, all adjustments (which include only normal recurring adjustments)
necessary for a fair statement of the information shown, subject to year-end and
other adjustments, as later information may require.

USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

GOODWILL - Goodwill represents the excess of purchase price and related
costs over the value assigned to the net tangible assets of businesses acquired.
The Company accounts for Goodwill under the provisions of Statement of Financial
Accounting Standard ("SFAS") 141, "Business Combinations" and SFAS 142,
"Goodwill and Other Intangible Assets." SFAS 141 addresses financial accounting
and reporting for all business combinations and requires that all business
combinations entered into subsequent to June 2001 be recorded under the purchase
method. This Statement also addresses financial accounting and reporting for
goodwill and other intangible assets acquired in a business combination at
acquisition. SFAS 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets at
acquisition. This Statement also addresses financial accounting and reporting
for goodwill and other intangible assets subsequent to their acquisition. In
conjunction with the requirements of these Statements, the Company ceased
Goodwill amortization effective January 1, 2002.
The Company is also required to perform impairment tests annually on the
remaining goodwill balance or at any time when events occur which could impact
the value of the Company's business segments. If an impairment test of goodwill
shows that the carrying amount of the goodwill is in excess of the fair value, a
corresponding impairment loss would be recorded in the Consolidated Statements
of Operations. The 2002 annual impairment tests were performed for the
Company's business units and the results of those tests indicated that there was
no impairment of Goodwill. The 2003 annual impairment test has also been
performed for the Company's construction services business segment and indicates
that there is no impairment of goodwill. As a result, there was no change in
the carrying amount of goodwill at June 30, 2003 when compared to December 31,
2002. The 2003 annual impairment tests for the remaining business units will be
conducted during the fourth quarter of 2003.
The following table presents what would have been reported as net income
(loss) available to common shareholders and the related per share amounts on a
basic and diluted basis in all periods presented, exclusive of amortization
expense (including any related tax effects) recognized in those periods related
to goodwill.

- 7 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
Reported net income (loss) from continuing operations . . . $(20,631) $ 45 $(9,957) $11,375 $(12,393) $ 5,003
Discontinued operations . . . . . . . . . . . . . . . . . . - - - - 10 (5,706)
--------- ----- -------- ------- --------- --------
Reported net income (loss) available to common shareholders (20,631) 45 (9,957) 11,375 (12,383) (703)
Add back: Goodwill amortization, net of income taxes. . . . - - - - - 1,401
--------- ----- -------- ------- --------- --------
Adjusted net income (loss) available to common shareholders $(20,631) $ 45 $(9,957) $11,375 $(12,383) $ 698
--------- ----- -------- ------- --------- --------

ADJUSTED EARNINGS PER SHARE - BASIC
Reported net income (loss) from continuing operations . . . $ (1.09) $0.00 $ (0.53) $ 0.62 $ (0.66) $ 0.27
Discontinued operations . . . . . . . . . . . . . . . . . . - - - - - (0.31)
--------- ----- -------- ------- --------- --------
Reported net income (loss) available to common shareholders (1.09) 0.00 (0.53) 0.62 (0.66) (0.04)
Add back: Goodwill amortization, net of income taxes. . . . - - - - - 0.08
--------- ----- -------- ------- --------- --------
Adjusted net income (loss) available to common shareholders $ (1.09) $0.00 $ (0.53) $ 0.62 $ (0.66) $ 0.04
--------- ----- -------- ------- --------- --------

ADJUSTED EARNINGS PER SHARE - DILUTED
Reported net income (loss) from continuing operations . . . $ (1.09) $0.00 $ (0.53) $ 0.62 $ (0.66) $ 0.27
Discontinued operations . . . . . . . . . . . . . . . . . . - - - - - (0.31)
--------- ----- -------- ------- --------- --------
Reported net income (loss) available to common shareholders (1.09) 0.00 (0.53) 0.62 (0.66) (0.04)
Add back: Goodwill amortization, net of income taxes. . . . - - - - - 0.08
--------- ----- -------- ------- --------- --------
Adjusted net income (loss) available to common shareholders $ (1.09) $0.00 $ (0.53) $ 0.62 $ (0.66) $ 0.04
--------- ----- -------- ------- --------- --------

COMPREHENSIVE INCOME - The Company's comprehensive income (loss) for the
three, six and twelve months ended June 30, 2003 and June 30, 2002 is summarized
in the following table.

Three months ended Six months ended Twelve months ended
June 30, June 30, June 30,
------------------ ----------------- -------------------
2003 2002 2003 2002 2003 2002
--------- ------- -------- ------- --------- --------
(in thousands)

Net income (loss) available to common
shareholders. . . . . . . . . . . . . . . . $(20,631) $ 45 $(9,957) $11,375 $(12,383) $ (703)

Minimum pension liability adjustment, net of
income tax benefits of $2,922 and $781. . . - - - - (5,427) (1,452)

Unrealized derivative gain (loss) on
interest rate hedge from an
investment in an affiliate. . . . . . . . . 63 66 73 205 (106) (539)
--------- ------- -------- ------- --------- --------

Total other comprehensive income (loss) . . . $(20,568) $ 111 $(9,884) $11,580 $(17,916) $(2,694)
========= ======= ======== ======= ========= ========

STOCK BASED COMPENSATION - The Company accounts for all stock options under
the provisions and related interpretations of Accounting Principles Board
("APB") Opinion 25, "Accounting for Stock Issued to Employees." In accordance
with SFAS 123, "Accounting for Stock-Based Compensation," the Company has chosen
to account for these transactions under APB 25 for purposes of determining net
income but must present the pro forma disclosures required by SFAS 123 as
amended by SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." If compensation expense had been determined in a manner consistent
with the provisions of SFAS 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated in the table below.

- 8 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------ -------------------
YEARS ENDED DECEMBER 31, 2003 2002 2003 2002 2003 2002
- ---------------------------------------- --------- ------- --------- ------- --------- --------
(000's)

NET INCOME (LOSS), AS REPORTED . . . . . $(20,631) $ 45 $ (9,957) $11,375 $(12,383) $ (703)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects . . 95 84 198 199 409 388
--------- ------- --------- ------- --------- --------
PRO FORMA NET INCOME (LOSS). . . . . . . $(20,726) $ (39) $(10,155) $11,176 $(12,792) $(1,091)
--------- ------- --------- ------- --------- --------

EARNINGS PER SHARE - BASIC
As reported . . . . . . . . . . . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ (0.04)
Pro forma . . . . . . . . . . . . $ (1.09) $ - $ (0.54) $ 0.61 $ (0.67) $ (0.06)
EARNINGS PER SHARE - DILUTED
As reported . . . . . . . . . . . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ (0.04)
Pro forma . . . . . . . . . . . . $ (1.09) $ - $ (0.54) $ 0.61 $ (0.67) $ (0.06)

NEW ACCOUNTING STANDARDS - On January 1, 2003 the Company adopted SFAS 143,
"Accounting for Asset Retirement Obligations." The Standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred.
When the liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded amount
or incurs a gain or loss upon settlement.
The Company adopted SFAS 143 on January 1, 2003 and has determined that it
does not have any asset retirement obligations (ARO) that are to be recorded in
accordance with SFAS 143. However, the Company does have non-ARO negative
salvage value that is recorded in the accumulated depreciation of its gas
distribution business. The non-ARO negative salvage value is recognized as a
component of depreciation expense when the Company receives amounts in its gas
distribution customer rates for estimated future removal costs related to its
regulated gas distribution infrastructure. The Company reflects these amounts
in its accumulated depreciation accounts in accordance with industry practice.
As of June 30, 2003, the non-ARO negative salvage included in accumulated
depreciation was approximately $50.3 million.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 eliminates SFAS 4, Reporting Gains and Losses from Extinguishment of
Debt" ("SFAS 4") and thus allows for only those gains or losses on the
extinguishment of debt that meet the criteria of extraordinary items to be
treated as such in the financial statements. SFAS 145 also amends SFAS 13,
Accounting for Leases" ("SFAS 13") to require sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The provisions of this Statement relating to the
rescission of SFAS 4 are effective for fiscal years beginning after May 15,
2002. The provisions of this Statement relating to the amendment of SFAS 13 are
effective for transactions occurring after May 15, 2002. All other provisions
of this Statement are effective for financial statements issued on or after May
15, 2002. In accordance with the provisions of SFAS 145, the Company reported
debt extinguishments costs incurred during the second quarter of 2003 as a
separate line item within the continuing operations section of the Consolidated
Statements of Operations. Under previous FASB guidance these costs would have
been reported as an extraordinary charge. For further information on the debt
extinguishments costs see

- 9 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Note 2 of the Condensed Notes to the Unaudited Consolidated Financial
Statements. The remaining provisions of SFAS 145 have not had a material impact
on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 requires that the liability for
costs associated with exit or disposal activities be recognized when incurred,
rather than at the date of a commitment to an exit or disposal plan. SFAS 146
is to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS 146 did not have a material impact on
the Company's financial statements.
In November 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both the annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the method
used on reported results. The disclosure requirements apply to all companies
for fiscal years ending after December 15, 2002. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The Company continues to
account for all stock options under the provisions and related interpretations
of APB 25 and reports the disclosure of stock options in accordance with the
provisions of SFAS 148. The adoption of the disclosure provisions of SFAS 148
did not to have a material impact on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
and standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions of FIN 45 related to recognizing a liability at inception of the
guarantee do not apply to product warranties or guarantees accounted for as
derivatives. The initial recognition and initial measurement provisions of FIN
45 apply on a prospective basis to guarantees issued or modified after December
31, 2002. The disclosure provisions were effective for financial statements for
periods ending after December 15, 2002. The adoption of the recognition and
measurement provisions of FIN 45 on January 1, 2003 did not have a material
impact on the Company's financial statements.
In January 2003, the FASB issued Interpretation No.46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 addresses
conditions for consolidating an entity based on variable interests (as defined
in the standard) rather than voting interests. FIN 46 clarifies that variable
interest entities that do not disperse risks among the parties involved should
be consolidated by the entity that is determined to be the primary beneficiary.
FIN 46 applies immediately to variable interest entities created after January
31, 2003. For variable interest entities in which an enterprise holds a
variable interest that was acquired before February 1, 2003, FIN 46 must be
adopted no later than the first fiscal year or interim period beginning after
June 15, 2003. FIN 46 did not have an impact on the Company during the three or
six months ended June 30, 2003. The Company is evaluating its consolidated
capital trusts to determine whether they are variable interest entities under
FIN 46. The trusts, "SEMCO Capital Trust I" and "SEMCO Capital Trust II", have
issued $40 million and $101 million, respectively, of mandatorily redeemable
preferred securities and are consolidated as of June 30, 2003.

- 10 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative and when a derivative contains a financing component. This
Statement also amends the definition of an "underlying" to conform it to
language used in FIN 45 and certain other existing pronouncements. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. In
addition, all provisions of this Statement should be applied prospectively
except that: a) the provisions of this Statement that relate to SFAS 133
implementation issues that have been effective for fiscal quarters that began
prior to June 30, 2003, should continue to be applied in accordance with their
respective effective dates and b) provisions related to forward purchases or
sales of when-issued securities or securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The Company does not believe that the adoption of SFAS 149 will have a
material impact on its financial condition and results of operation.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003. For financial instruments created before the issuance date of
this Statement, this Statement is effective at the interim period beginning July
1, 2003. Transition shall be achieved by reporting the cumulative effect of a
change in an accounting principle by initially measuring the financial
instrument at fair value or other measurement attribute required by this
Statement.
The Company has trust preferred securities and FELINE PRIDES that were in
existence prior to the issuance of this Statement. Each FELINE PRIDES includes
a trust preferred security. These securities have characteristics of both
liabilities and equity and have been reported in the Consolidated Statements of
Financial Position as a separate line item between long-term debt and common
shareholders equity. The trust preferred securities will be reclassified to the
long-term debt section in compliance with the provisions of this Statement. The
Company does not expect the adoption of this Statement to have a material impact
on its net income (loss) available to common shareholders.

NOTE 2 - SHORT-TERM BORROWINGS AND CAPITALIZATION

SHORT-TERM BORROWINGS - During the second quarter of 2003, the Company
amended its bank credit facility to permit the issuance of additional debt
securities, to increase the facility from $145 million to $155 million and to
extend the maturity date of the 364-day component of the facility to May 20,
2004. The $155 million bank credit facility consists of an $85.5 million
multi-year revolver, which expires in June 2005, and a $69.5 million 364 day
facility, with a one year term loan option. This amendment provides covenant
relief to permit the recently completed offering of senior unsecured notes (as
described below), including the incurrence of costs associated with the offering
and the other transactions that occurred concurrently with the offering. On
June 30, 2003, $97.8 million of the Company's bank credit facility was unused.

- 11 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 2 - SHORT-TERM BORROWINGS AND CAPITALIZATION (CONTINUED)

Covenants contained in the Company's amended bank credit facility require
maintenance of a minimum net worth of $215.0 million, a fixed-charge coverage
ratio of at least 1.2 until September 30, 2003, at least 1.33 until March 31,
2004 and 1.5 thereafter, and a debt-to-capitalization ratio of less than 0.70
until the earlier of March 31, 2004 or the sale of Alaska Pipeline Company, at
which time the debt-to-capitalization ratio must be less than 0.65. As of June
30, 2003, the Company was in compliance with all debt covenants. Failure to
comply with such covenants may result in a default with respect to the related
debt and could lead to the acceleration of such debt or any instruments
evidencing indebtedness that contain cross-acceleration or cross-default
provisions. In such a case, there can be no assurance that the Company would be
able to refinance or otherwise repay such indebtedness.

LONG-TERM DEBT - In May 2003, the Company completed an offering of an
aggregate of $300 million of senior unsecured notes. The offering consisted of
$150 million of 7.125% senior unsecured notes due 2008 ("7.125% Notes") and $150
million of 7.75% senior unsecured notes due 2013 ("7.75% Notes"). The Company
used approximately $92.3 million of the 7.75% Notes in an exchange for $77
million of its outstanding 8.95% Remarketable or Redeemable Securities
("ROARS"). After the exchange was completed the Company cancelled the $77
million of ROARS. The Company accounted for the debt exchange under the
provisions of Emerging Issues Task Force Opinion No. 96-19 ("EITF 96-19"). In
accordance with EITF 96-19, the Company used the book value of the ROARS ($77
million) as the initial book value for the $92.3 million of 7.75% Notes issued
in the exchange. The difference between the face amount and the initial book
value of the 7.75% Notes will be amortized as interest expense, using the
effective interest method, over the life of the notes. As a result, the book
value of the 7.75% Notes will increase by the amount of amortization expense
recognized over the life of the notes. The exchange of the $92.3 million of
7.75% Notes for the $77 million of ROARS was a non-cash financing activity. As
a result, it is not reflected in the Company's Consolidated Statements of Cash
Flows.
The Company used a portion of the proceeds from the issuance of the new
notes, to repurchase its $55 million of outstanding 8.00% Senior Notes due 2004,
$30 million of outstanding 7.2% Senior Notes due 2007 and $25 million of
outstanding 8.32% Senior Notes due 2024. Approximately $29.6 million of the
proceeds was placed into a restricted escrow account and used to repurchase the
remaining $28 million of ROARS in July 2003 and to pay the accrued interest
thereon. At June 30, 2003, the $28 million of ROARS is reflected in the
Company's Consolidated Statement of Financial Position as a current maturity of
long-term debt. For further information concerning the repurchase of the
remaining ROARS, see Note 7 of the Condensed Notes to the Unaudited Consolidated
Financial Statements. Approximately $24 million of the proceeds was used to pay
make-whole premiums or similar amounts in connection with the repurchase of the
$138 million in notes and securities discussed above. The make-whole premiums
or similar amounts were incurred, in most instances, in order to repurchase
these obligations prior to their maturity. The Company expensed the $24 million
($15.6 million net of taxes) at the time of the refinancing. The remainder of
the proceeds was used to pay expenses associated with the issuance of the new
notes (approximately $9.6 million was incurred through June 30, 2003), to pay
down short-term debt and for working capital and general corporate purposes.

- 12 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 2 - SHORT-TERM BORROWINGS AND CAPITALIZATION (CONTINUED)

The following table identifies the changes in long-term debt since December
31, 2002 as a result of the recent debt offerings, debt exchange and debt
repurchases discussed above:

June 30, December 31,
2003 2002
--------- -------------

LONG-TERM DEBT
8.00% notes due 2004. . . . . . . . . . $ - $ 55,000
7.20% notes due 2007. . . . . . . . . . - 30,000
8.95% notes due 2008, remarketable 2003 - 105,378
7.125% notes due 2008 . . . . . . . . . 150,000 -
6.49% notes due 2009. . . . . . . . . . 30,000 30,000
8.00% notes due 2010. . . . . . . . . . 30,681 30,758
7.75% notes due 2013. . . . . . . . . . 134,840 -
8.00% notes due 2016. . . . . . . . . . 59,765 59,890
8.32% notes due 2024. . . . . . . . . . - 25,000
6.50% medium-term notes due 2005. . . . 15,000 15,000
6.40% medium-term notes due 2008. . . . 5,000 5,000
7.03% medium-term notes due 2013. . . . 10,000 10,000
--------- -------------

$ 435,286 $ 366,026
========= =============

COMMON STOCK EQUITY - On June 19, 2003, the Company's Board of Directors
changed the annual dividend rate on the common stock of the Company from $0.50
per share to $0.30 per share and declared a quarterly cash dividend of $0.075
per share on the Company's common stock. The dividend is payable on August 15,
2003 to shareholders of record at the close of business on August 1, 2003.
In May 2003, the Company paid a quarterly cash dividend of $0.125 per share
on its common stock. The total cash dividend was approximately $2.4 million of
which $.4 million was reinvested by shareholders into common stock through
participation in the Direct Stock Purchase and Dividend Reinvestment Plan
("DRIP"). The cash dividends for the six months ended June 30, 2003, were $4.7
million, of which $.8 million was reinvested by shareholders through
participation in the DRIP. During the three and six months ended June 30, 2003,
the Company issued approximately 131,000 and 303,000 shares of Company common
stock, respectively, to meet the dividend reinvestment and stock purchase
requirements of its DRIP participants. Also during the three and six months
ended June 30, 2003, the Company issued approximately 38,000 and 79,000 shares,
respectively, of its common stock to certain of the Company's employee benefit
plans.

NOTE 3 - RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

The Company's business activities expose it to a variety of risks,
including commodity price risk and interest rate risk. The Company's management
identifies risks associated with the Company's business and determines which
risks it wants to manage and which types of instruments it should use to manage
those risks.

- 13 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 3 - RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
(CONTINUED)

The Company records all derivative instruments it enters into under the
provisions of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS 137 and SFAS 138, which were amendments to SFAS 133
(hereinafter collectively referred to as "SFAS 133"). SFAS 133 requires that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the statement of financial position, as
either an asset or liability, measured at its fair value. SFAS 133 also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. For derivatives designated as cash flow hedges,
changes in fair value are recorded in other comprehensive income for the portion
of the change in value of the derivative that is an effective hedge.
An affiliate, in which the Company has a 50% ownership interest, uses a
floating to fixed interest rate swap agreement to hedge the variable interest
rate payments on a portion of its long-term debt. This swap is designated as a
cash flow hedge and the difference between the amounts paid and received under
the swap is recorded as an adjustment to interest expense over the term of the
agreement. The Company's share of changes in the fair value of the swap are
recorded in accumulated other comprehensive income until the swap is terminated.
As a result of this interest rate swap agreement, the Company's Consolidated
Statements of Financial Position, at June 30, 2003 and December 31, 2002,
reflected reductions of $.6 million and $.7 million, respectively, in the
Company's equity investment in the affiliate and in accumulated other
comprehensive income.

NOTE 4 - EARNINGS PER SHARE

The computations of basic and diluted earnings per share for the three, six
and twelve months ended June 30, 2003 and 2002 are as follows (in thousands
except per share amounts):

EARNINGS PER SHARE COMPUTATION
Income (loss) from continuing operations. . . . . . $(20,631) $ 45 $(9,957) $11,375 $(12,393) $ 5,003
Discontinued operations (a) . . . . . . . . . . . . - - - - 10 (5,706)
--------- ------- -------- ------- --------- --------
Net income (loss) available to common shareholders. $(20,631) $ 45 $(9,957) $11,375 $(12,383) $ (703)
--------- ------- -------- ------- --------- --------

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . 18,988 18,431 18,884 18,374 18,726 18,261
--------- ------- -------- ------- --------- --------

EARNINGS PER SHARE - BASIC
Income (loss) from continuing operations. . . . . . $ (1.09) 0.00 $ (0.53) $ 0.62 $ (0.66) $ 0.27
Discontinued operations (a) . . . . . . . . . . . . - - - - - (0.31)
--------- ------- -------- ------- --------- --------
Net income (loss) available to common shareholders. $ (1.09) $ 0.00 $ (0.53) $ 0.62 $ (0.66) $ (0.04)
--------- ------- -------- ------- --------- --------

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . 18,988 18,431 18,884 18,374 18,726 18,261
Incremental shares from assumed conversions of:
FELINE PRIDES - stock purchase contracts (b). . . - - - - - -
Stock options . . . . . . . . . . . . . . . . . . - 41 - 26 - -
--------- ------- -------- ------- --------- --------
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (B). . . 18,988 18,472 18,884 18,400 18,726 18,261
--------- ------- -------- ------- --------- --------

EARNINGS PER SHARE - DILUTED
Income (loss) from continuing operations. . . . . . $ (1.09) $ 0.00 $ (0.53) $ 0.62 $ (0.66) $ 0.27
Discontinued operations (a) . . . . . . . . . . . . - - - - - (0.31)
--------- ------- -------- ------- --------- --------
Net income (loss) available to common shareholders. $ (1.09) $ 0.00 $ (0.53) $ 0.62 $ (0.66) $ (0.04)
--------- ------- -------- ------- --------- --------

<FN>
(a) Effective December 2001, the Company began accounting for the engineering services business as a discontinued
operation. Accordingly, it's operating results are segregated and reported as discontinued operations in the
Consolidated Statement of Operations.

(b) 48,835, 24,945, 12,302 and 12,919 shares of stock options were not included in the computation of diluted earnings
per share for the three, six and twelve month periods ending June 30, 2003 and the twelve month period ending
June 30, 2002, respectively, because their effect was antidilutive.

- 14 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 5 - BUSINESS SEGMENTS

The Company operates four reportable business segments: (1) gas
distribution; (2) construction services; (3) information technology services;
and (4) propane, pipelines and storage. The latter three segments are sometimes
referred to together as the "Diversified Businesses." For information regarding
the determination of reportable business segments, refer to Note 11 of the Notes
to the Consolidated Financial Statements in the Company's 2002 Annual Report on
Form 10-K.
The Company's gas distribution segment distributes and transports natural
gas to approximately 272,000 customers in the state of Michigan and
approximately 113,000 customers in the state of Alaska. The construction
services segment ("Construction Services") currently conducts most of its
business in the mid-western, southern and southeastern areas of the United
States. Its primary service is the installation and upgrade of compressor
stations and underground natural gas mains and service lines. The information
technology service segment ("IT Services") is headquartered in Michigan and
provides IT infrastructure outsourcing services, and other IT services with a
focus on mid-range computers, particularly the IBM I-Series (AS-400) platform.
The propane, pipelines and storage segment sells more than four million gallons
of propane annually to retail customers in Michigan's upper peninsula and
northeast Wisconsin and operates natural gas transmission and storage facilities
in Michigan.
The accounting policies of the operating segments are the same as those
described in Notes 1 and 11 of the Notes to the Consolidated Financial
Statements in the Company's 2002 Annual Report on Form 10-K, except that
intercompany transactions have not been eliminated in determining individual
segment results. The following table provides business segment information as
well as a reconciliation ("Corporate and other") of the segment information to
the applicable line in the Consolidated Financial Statements. Corporate and
Other includes corporate related expenses not allocated to segments,
intercompany eliminations and results of other smaller operations.

Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- -------------------- --------------------
2003 2002 2003 2002 2003 2002
-------- --------- --------- --------- --------- ---------
(in thousands)

OPERATING REVENUES
Gas distribution . . . . . . . . $80,122 $ 70,355 $270,934 $201,807 $433,838 $340,746
Construction services. . . . . . 19,864 36,524 34,976 62,105 92,125 136,313
Information technology services. 2,268 2,317 4,422 4,578 9,462 9,705
Propane, pipelines and storage . 1,414 1,416 4,241 3,654 7,645 6,979
Corporate and other (a). . . . . (4,143) (4,512) (7,944) (10,133) (17,487) (22,399)
-------- --------- --------- --------- --------- ---------
Total operating revenues . . . $99,525 $106,100 $306,629 $262,011 $525,583 $471,344
======== ========= ========= ========= ========= =========

OPERATING INCOME (LOSS)
Gas distribution . . . . . . . . $ 6,068 $ 8,535 $ 36,601 $ 38,727 $ 56,950 $ 56,219
Construction services. . . . . . (1,881) 1,939 (5,521) 629 (8,149) 252
Information technology services. 157 143 377 319 660 513
Propane, pipelines and storage . 323 381 1,221 990 2,177 1,779
Corporate and other. . . . . . . (880) (657) (1,412) (1,705) (2,623) (6,423)
-------- --------- --------- --------- --------- ---------
Total operating income . . . . $ 3,787 $ 10,341 $ 31,266 $ 38,960 $ 49,015 $ 52,340
======== ========= ========= ========= ========= =========

<FN>
(a) Includes the elimination of intercompany construction services revenue
of $2,415,000, $4,626,000 and $10,190,000 for the three, six and twelve months
ended June 30, 2003, respectively, and $2,618,000, $6,325,000 and $14,045,000
for the three, six and twelve months ended June 30, 2002, respectively. Also
includes the elimination of intercompany information technology services revenue
of $1,686,000, $3,236,000 and $7,128,000 for the three, six and twelve months
ended June 30, 2003, respectively, and $1,858,000, $3,728,000 and $8,187,000 for
the three, six and twelve months ended June 30, 2002, respectively.

- 15 -

SEMCO ENERGY, INC.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 6 - COMMITMENTS AND CONTINGENCIES

ENVIRONMENTAL MATTERS - Prior to the construction of major natural gas
pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. The Company owns seven Michigan sites, which
formerly housed such manufacturing facilities and expects that it will
ultimately incur investigation and remedial action costs at some of these sites
and one other site. The Company has closed a related site with the approval of
the appropriate environmental regulatory authority in the State of Michigan and
has developed plans and conducted preliminary field investigations at two other
sites. The Company is in the process of estimating its liabilities and
potential costs in connection with these sites, but the scope of the Company's
liabilities has not been finally determined. In accordance with a Michigan
Public Service Commission ("MPSC") accounting order, any environmental
investigation and remedial action costs will be deferred and amortized over ten
years. Rate recognition of the related amortization expense will not begin
until after a prudence review in a general rate case.

OTHER - In the normal course of business, the Company may be a party to
certain lawsuits and administrative proceedings before various courts and
government agencies. These lawsuits and proceedings may involve personal
injury, property damage, contractual issues and other matters. Management
cannot predict the ultimate outcome of any pending or threatened litigation or
of actual or possible claims; however, management believes resulting
liabilities, if any, will not have a material adverse impact upon the Company's
financial position or results of operations. Notwithstanding the above
statement, in late March 2003 the Company was served a complaint in a putative
class-action lawsuit alleging that the approximately 30 defendants, including
SEMCO Energy and SEMCO Energy Ventures, Inc., engaged in practices that violated
the Sherman Anti-Trust Act and tortuously interfered with the business of the
plaintiffs. The Company is considering potential legal and factual defenses to
these claims and intends to vigorously defend itself in this action. Although
the Company cannot make assurances, management believes that this suit will not
have a material adverse effect on its business or results of operations. Refer
to Note 13 of the Notes to the Consolidated Financial Statements in the
Company's 2002 Annual Report on Form 10-K for further details regarding other
commitments and contingencies.

NOTE 7 - SUBSEQUENT EVENTS

In July 2003, the Company exercised its right to redeem the remaining $28
million of outstanding ROARS. The funds used to repurchase the ROARS and pay
the accrued interest thereon are reflected in the Company's Statements of
Financial Position as restricted cash at June 30, 2003.

- 16 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

SEMCO Energy, Inc. and its subsidiaries (the "Company") had net losses of
$20.6 million (or $1.09 per share) and $10.0 million (or $0.53 per share) for
the three and six months ended June 30, 2003, respectively, compared to net
income of $45,000 (or breakeven on a per share basis) and $11.4 million (or
$0.62 per share) for the three and six months ended June 30, 2002, respectively.
The results for the three and six months ended June 30, 2003 includes an expense
of $24 million ($15.6 million net of taxes) incurred in the second quarter of
2003 for debt exchange and extinguishment costs. For further information on
debt exchange and extinguishment costs, refer to Note 2 of the Condensed Notes
to the Unaudited Consolidated Financial Statements. All references to earnings
per share in this Management's Discussion and Analysis are on a diluted basis.
For information related to the calculation of diluted earnings per share, refer
to Note 4 of the Condensed Notes to the Unaudited Consolidated Financial
Statements.
The Company had a net loss of $12.4 million (or $0.66 per share) for the
twelve months ended June 30, 2003 compared to a net loss of $.7 million (or
$0.04 per share) for the twelve months ended June 30, 2002. The results for the
twelve months ended June 30, 2003 include the impact of the debt exchange and
extinguishment costs, as discussed above. The results for the twelve months
ended June 30, 2002 include several unusual items, which reduced net income by
$10.8 million. The unusual items include losses from discontinued operations,
restructuring charges, asset impairments and other unusual items. Refer to
Management's Discussion and Analysis and Note 14 of the Notes to the
Consolidated Financial Statements in the Company's 2002 Annual Report on Form
10-K for further information regarding these unusual items.
The Company operates four reportable business segments: (1) gas
distribution; (2) construction services; (3) information technology services;
and (4) propane, pipelines and storage. The latter three segments are sometimes
referred to together as the "Diversified Businesses." Refer to Note 5 of the
Condensed Notes to the Unaudited Consolidated Financial Statements for further
information regarding business segments and a summary of operating revenues and
operating income by business segment.
The Company's largest business segment, natural gas distribution, is
seasonal in nature and depends on the winter months for the majority of its
operating revenue. As a result, a substantial portion of the Company's annual
income is earned during the first and fourth quarters of the year. In addition,
the Company's construction services business segment is also seasonal in nature
and earns most of its income during the summer and fall months and incurs losses
during the winter and spring months. Therefore, the Company's results of
operations for the three and six-month periods ended June 30, 2003 and 2002 are
not necessarily indicative of results for a full year.
The business segment analyses and other discussions on the next several
pages provide additional information regarding variations in operating results
when comparing the three, six and twelve-month periods ended June 30, 2003 to
the same periods of the prior year. The Company evaluates the performance of
its business segments based on the operating income generated. Operating income
does not include income taxes, interest expense, discontinued operations or
other non-operating income and expense items. A review of the non-operating
items follows the business segment discussions.

- 17 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

RESULTS OF OPERATIONS (CONTINUED)

Operating revenues . . . . . . . . . . . . . . . . $ 99,525 $106,100 $306,629 $262,011 $525,583 $471,344
Restructuring & impairment charges . . . . . . . - - - - - 6,103
Other operating expenses . . . . . . . . . . . . 95,738 95,759 275,363 223,051 476,568 412,901
--------- --------- --------- --------- --------- ---------
Operating income . . . . . . . . . . . . . . . . . $ 3,787 $ 10,341 $ 31,266 $ 38,960 $ 49,015 $ 52,340
Other income & (deductions). . . . . . . . . . . (32,301) (6,768) (39,560) (14,117) (54,473) (29,213)
Income tax (expense) benefit . . . . . . . . . . 10,033 (1,378) 2,637 (9,168) 1,666 (9,521)
--------- --------- --------- --------- --------- ---------
Income (loss) before dividends on trust preferred
securities & discontinued operations . . . . . . $(18,481) $ 2,195 $ (5,657) $ 15,675 $ (3,792) $ 13,606
Dividends on trust preferred
securities, net of income tax. . . . . . . . . (2,150) (2,150) (4,300) (4,300) (8,601) (8,603)
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations . . . . . $(20,631) $ 45 $ (9,957) $ 11,375 $(12,393) $ 5,003
Income (loss) from discontinued
operations, net of income taxes. . . . . . . . . - - - - 10 (5,706)
--------- --------- --------- --------- --------- ---------
Net income (loss) available to common
shareholders . . . . . . . . . . . . . . . . . . $(20,631) $ 45 $ (9,957) $ 11,375 $(12,383) $ (703)
========= ========= ========= ========= ========= =========

Earnings per share - basic
Income (loss) from continuing operations . . . . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ 0.27
Net income (loss) available to
common shareholders. . . . . . . . . . . . . . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ (0.04)

Earnings per share - diluted
Income (loss) from continuing operations . . . . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ 0.27
Net income (loss) available to
common shareholders. . . . . . . . . . . . . . $ (1.09) $ - $ (0.53) $ 0.62 $ (0.66) $ (0.04)

Average common shares outstanding
Basic. . . . . . . . . . . . . . . . . . . . . . 18,988 18,431 18,884 18,374 18,726 18,261
Diluted. . . . . . . . . . . . . . . . . . . . . 18,988 18,472 18,884 18,400 18,726 18,261

THE IMPACT OF WEATHER

The Company's largest business segment is natural gas distribution and, as
a result, temperature fluctuations have a significant impact on operating
results. The Company believes that information about the estimated impact on
operating results of warmer or colder than normal temperatures is useful for
fully understanding the Company's gas distribution business. For further
information about the estimated impact of warmer or colder than normal weather
and how such information is calculated, refer to the Management's Discussion and
Analysis - Results of Operations section in the Company's 2002 Annual Report on
Form 10-K.
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.

- 18 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

THE IMPACT OF WEATHER (CONTINUED)

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 the 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 approximately $1.5 million during the six months ended June 30, 2002.

GAS DISTRIBUTION

The Company's gas distribution business segment consists of operations in
Michigan and Alaska. The Michigan operation is sometimes referred to as "SEMCO
Gas" and the Alaska operation is sometimes referred to as "ENSTAR." These
operations are referred to together as the "Gas Distribution Business."
Operating income for the Gas Distribution Business was $6.1 million for the
quarter ended June 30, 2003, compared to operating income of $8.5 million for
the quarter ended June 30, 2002.

Gas sales revenues. . . . . . . . . . $ 73,163 $ 63,869 $254,679 $186,092 $404,242 $311,220
Cost of gas sold. . . . . . . . . . . 51,187 40,509 188,346 119,292 289,476 195,638
--------- --------- --------- --------- --------- ---------
Gas sales margin. . . . . . . . . . $ 21,976 $ 23,360 $ 66,333 $ 66,800 $114,766 $115,582
Gas transportation revenue. . . . . . 5,929 5,646 14,113 13,961 25,859 26,447
Other operating revenue . . . . . . . 1,030 840 2,142 1,754 3,737 3,079
--------- --------- --------- --------- --------- ---------
Gross margin. . . . . . . . . . . . $ 28,935 $ 29,846 $ 82,588 $ 82,515 $144,362 $145,108
Restructuring charges . . . . . . . . - - - - - 1,051
Other operating expenses. . . . . . . 22,867 21,311 45,987 43,788 87,412 87,838
--------- --------- --------- --------- --------- ---------
Operating income. . . . . . . . . . . $ 6,068 $ 8,535 $ 36,601 $ 38,727 $ 56,950 $ 56,219
========= ========= ========= ========= ========= =========

Volumes of gas sold (MMcf). . . . . . 10,785 11,645 40,545 38,207 67,395 64,573
Volumes of gas transported (MMcf) . . 9,682 10,939 22,598 22,990 44,529 44,133
Number of customers at end of period. 384,980 377,480 384,980 377,480 384,980 377,480
Degree Days
Alaska. . . . . . . . . . . . . . . 1,545 1,863 4,976 5,672 8,696 10,650
Michigan. . . . . . . . . . . . . . 1,041 1,039 4,647 4,043 7,272 6,232
Percent colder (warmer) than normal
Alaska. . . . . . . . . . . . . . . (3.5)% 15.1% (10.9)% 1.0% (14.3)% 3.8%
Michigan. . . . . . . . . . . . . . 9.8% 10.6% 10.6% (3.8)% 8.2% (8.1)%

<FN>
The amounts in the above table include intercompany transactions.

- 19 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

GAS DISTRIBUTION (CONTINUED)

GAS SALES MARGIN - During the three and six months ended June 30, 2003, gas
sales margin decreased by approximately $1.4 million and $.5 million when
compared to the same periods in 2002. The decrease during the second quarter of
2003, when compared to the second quarter of 2002 was due primarily to the
impact of a reduction in customer rates at ENSTAR effective in September 2002,
warmer temperatures and a decrease in gas cost savings realized. The impact of
these factors was offset partially by the addition of new customers and the
impact of an increase in customer rates, effective in May 2003, for customers
located in the Company's service areas regulated by the Michigan Public Service
Commission ("MPSC") ("MPSC Customers").
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 than normal and therefore partially
offset the other items that contributed to the decrease in gas sales margin. In
addition, these factors were also partially offset by the impact of all
remaining customers switching from the Company's aggregated transportation
service ("ATS") program back to gas sales service when the ATS program ended in
March 2002.
During the twelve months ended June 30, 2003, gas sales margin decreased by
$.8 million when compared to the same period in 2002. The decrease was due
primarily to the same items that contributed to the variances in six-month
results, as discussed above.
Under the terms of certain of the Company's third-party natural gas supply
and management agreements for its Michigan operations, certain gas cost savings
are passed through to the Company. One such contract expired on March 31, 2002
and was not renewed. As a result, a large portion of the gas cost savings
realized during the first half of 2002 was non-recurring.
The reduction in customer rates at ENSTAR was required by an Order issued
by the Regulatory Commission of Alaska ("RCA"). The RCA Order was based on an
RCA rate review. The rate reduction took effect in September 2002 and generally
reduces gas sales margins at ENSTAR by approximately 3.6%.
The increase in customer rates for MPSC customers was the result of a
settlement agreement reached with the MPSC. The settlement took effect May 3,
2003 and generally increases gas sales margins generated from MPSC Customers by
approximately 4.8%.
The ATS program for residential customers was effective from April 1, 1999
through March 31, 2002. A program similar to the ATS program, referred to as
the Gas Customer Choice program, was opened to customers on October 1, 2002.
These programs provide Michigan residential customers the opportunity to
purchase their gas from a third-party supplier, while allowing the Gas
Distribution Business to continue charging the existing distribution fees and
customer fees. Distribution and customer fees associated with customers who
switched to third-party gas suppliers were recorded in gas transportation
revenue rather than gas sales revenue because the Company acted as a transporter
for those customers. During 2001 and 2002, certain ATS customers switched back
to the Company's gas sales service because the third-party suppliers they were
utilizing stopped participating in the ATS program primarily due to significant
fluctuations in the market price of natural gas. When the ATS program for
residential customers ended on March 31, 2002, all remaining ATS customers
became gas sales customers because they were turned back to the Company by their
third-party gas suppliers. Currently, there are no third-party gas suppliers
providing service under the Gas Customer Choice program.

- 20 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

GAS DISTRIBUTION (CONTINUED)

GAS TRANSPORTATION REVENUE - For the three and six months ended June 30,
2003, gas transportation revenue increased by $.3 million and $.2 million,
respectively, when compared to the same periods ended June 30, 2002. The
primary reasons for these increases were due to an increase in normal
transportation volumes partially offset by the rate reduction at ENSTAR and the
impact of ATS customers switching from the ATS program back to gas sales service
in Michigan in the first quarter of 2002. As discussed above, under the ATS
program, the Company charged ATS customers the same distribution fees and
customer fees that were charged to gas sales service customers. Gas
transportation revenue decreased by $.6 million for the twelve months ended June
30, 2003, when compared to the same period ended June 30, 2002. The primary
reasons for the decrease were the rate reduction at ENSTAR and the impact of ATS
customers switching from the ATS program back to gas sales service in Michigan
during the last half of 2002 and the first quarter of 2003.

OTHER OPERATING REVENUE - Other operating revenue for the three, six and
twelve months ended June 30, 2003, was $1.0 million, $2.1 million and $3.7
million, respectively, compared to $.8 million, $1.8 million and $3.1 million
for the same periods ended June 30, 2002, respectively. The $.2 million and $.3
million increases for the three and six months ended June 30, 2003 were due
primarily to an increase in miscellaneous services fees, offset partially by a
reduction in ATS balancing fees as a result of remaining ATS customers switching
back to gas sales service in the first quarter of 2002. The $.7 million
increase for the twelve months ended June 30, 2003 was due to the same items
discussed above plus an increase in fees on new transmission pipelines in
service.

OPERATING EXPENSES - Operating expenses of the Gas Distribution Business
for the three and six months ended June 30, 2003 increased by $1.6 million and
$2.2 million, respectively, when compared to the three and six months ended June
30, 2002. These increases are due primarily to higher employee benefit costs,
including pension expense, health care costs and retiree medical costs,
increased commercial insurance costs and bad debt expense.
Operating expenses for the twelve months ended June 30, 2003 decreased by
$1.5 million when compared to the twelve months ended June 30, 2002.
Contributing to this decrease is approximately $1.1 million of restructuring
charges included in the results for the twelve months ended March 31, 2002. The
remainder of the decrease was primarily the result of a decrease in goodwill
amortization expense of $1.8 million. These decreases were offset partially by
an increase in depreciation expense of $1.1 million and an increase in general
business tax expenses of $.2 million. The decrease in goodwill amortization was
due to its elimination effective January 1, 2002 as a result of the adoption of
SFAS 142. For further information on SFAS 142 and its impact on goodwill, see
Note 1 of the Condensed Notes to the Unaudited Consolidated Financial
Statements. General business tax expense increased due primarily to property
taxes on additional property, plant and equipment placed in service. The
increase in depreciation expense was also due primarily to additional property,
plant and equipment placed in service.

- 21 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

GAS DISTRIBUTION (CONTINUED)

REGULATORY MATTERS - On May 2, 2003, the MPSC approved a settlement
agreement, authorizing the Company to implement revised rates for the sale and
transportation of natural gas and to revise its depreciation rates and
practices. The settlement establishes a revenue requirement of $71.9 million
based on a 2003 projected test year and an increase in the return on its common
equity from 10.75% to 11.40%. The settlement also provides for a) the
elimination of the reverse taper incentive mechanism so that the Company is no
longer required to refund revenues to customers above the return on common
equity, b) no potential refund to customers for property tax expense based on
lower state property tax tables and c) an increase in the monthly service charge
from $7.00 to $9.50 per month for residential customers. The increase in the
monthly service charge will help reduce the impact to the Company and its
customers of colder or warmer than normal weather. The new authorized rates,
which became effective May 3, 2003, are expected to increase annual revenue by
$3.4 million and decrease annual depreciation expense by $1.4 million.
The Company received a rate order in August 2002, which set ENSTAR's
revenue requirement and included a 12.55% authorized return on equity. After
receiving the order, ENSTAR filed the rate design portion of the case. An order
on the rate design was issued on May 21, 2003 and provides for decreases to
residential, power plant and industrial customers and an increase to commercial
customers. The design also increases the monthly customer service charges over
a 3-year period. For example, the monthly service charge for residential
customers was increased from $4.50 to $7.00 and will increase to $8.00 and $9.00
over the next two years. These higher monthly charges will help mitigate the
impact of weather on ENSTAR's financial results.

CONSTRUCTION SERVICES

The Company's Construction Services business ("Construction Services") is
seasonal. As a result, it generally incurs operating losses during the winter
and spring months when underground construction and related services are
inhibited by weather, and generates the majority of its operating income during
the summer and fall months.

Operating revenues. . . . . . . . . $19,864 $36,524 $34,976 $62,105 $ 92,125 $136,313
Restructuring & impairment charges. - - - - - 3,098
Other operating expenses. . . . . . 21,745 34,585 40,497 61,476 100,274 132,963
-------- ------- -------- ------- --------- --------
Operating income (loss) . . . . . . $(1,881) $ 1,939 $(5,521) $ 629 $ (8,149) $ 252
======== ======= ======== ======= ========= ========

Feet of pipe installed. . . . . . . 976 1,189 1,427 2,244 4,381 6,983
======== ======= ======== ======= ========= ========

<FN>
The amounts in the above table include intercompany transactions.

- 22 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

CONSTRUCTION SERVICES (CONTINUED)

OPERATING REVENUES - The operating revenues of Construction Services for
the three and six months ended June 30, 2003 were $19.9 million and $35.0
million, respectively which represent a $16.7 million and $27.1 million decrease
in comparison to the same periods ended June 30, 2002. These decreases were
due, in part, to a reduction of projects in the southern division of
Construction Services and the cessation of construction operations in certain
unprofitable regions of the mid-western division. During the first and second
quarters of last year, the southern division of Construction Services
experienced an acceleration of work on projects that had been scheduled for the
last half of 2002, which caused a significant increase in revenues during the
first and second quarters of 2002. Construction Services also has bid on
numerous projects in 2003 but has not experienced the expected level of success
in being awarded these projects due to the current level of competition in the
industry. In addition, lower work levels in the mid-western division due to
cold weather also contributed to the decrease in six-month revenues. The colder
than normal temperatures in the mid-western regions of the United States kept
frost levels deep during the entire first quarter of 2003, which inhibited
construction activity during that period.
The operating revenues of Construction Services for the twelve-month period
ended June 30, 2003 and 2002 were $92.1 million and $136.3 million,
respectively. The decrease of $44.2 million was due in part to customers in the
mid-western and southern regions of the country delaying projects in the latter
part of 2002 in light of the generally depressed economy and their own financial
considerations. Contributing also to the decrease were the reasons previously
discussed for the decrease in revenues during the first half of 2003.

OPERATING INCOME - Construction Services had an operating loss of $1.9
million and $5.5 million for the three and six months ended June 30, 2003
compared to operating income of $1.9 million and $.6 million for the same
periods ended June 30, 2002. The decreases of $3.8 million and $6.1 million,
respectively, were due primarily to the same items discussed above which caused
the decrease in operating revenues during the three and six months ended June
30, 2003.
Construction Services had an operating loss of $8.1 million for the twelve
months ended June 30, 2003, compared to operating income of $.3 million for the
twelve months ended June 30, 2002. The decrease of $8.4 million is due
primarily to the same items discussed above which caused the decrease in
operating revenues for the twelve months ended June 30, 2003. In addition, the
Company experienced lower than expected margins on some of the work performed
and higher than anticipated costs on some projects during the twelve months
ended June 30, 2003. The Company believes that the softening economy caused
many customers to delay or cancel certain construction projects during 2002,
which changed the mix of work available to Construction Services. The mix of
work during the twelve months ended June 30, 2003 included more lower margin
work at certain business units because of the competition for the limited supply
of available work. The reduced construction activity also eroded margins
because of the time lag required to reduce the staffing levels and other fixed
costs, which were required for the previously higher level of revenues. In
addition, the operating performance in certain regions of Construction Services
was below the Company's profitability expectations and, therefore, the Company
ceased operations in several of these under performing regions in late 2002 and
early 2003. These factors were partially offset by the non-recurrence during
the twelve months ended June 30, 2002 of $3.3 million of restructuring charges,
impairments and other unusual charges incurred in the fourth quarter of 2001.

- 23 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

INFORMATION TECHNOLOGY SERVICES

The information technology services business ("IT Services"), under the
Aretech Information Services name, provides IT infrastructure outsourcing
services and other IT services with a focus on mid-range computers, particularly
the IBM I-Series (AS-400) platform.

Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ---------------- -------------------
2003 2002 2003 2002 2003 2002
------ ------ ------ ------ ------ ------
(in thousands)

Operating revenues. . . . $2,268 $2,317 $4,422 $4,578 $9,462 $9,705
Restructuring charges . . - - - - - 20
Other operating expenses. 2,111 2,174 4,045 4,259 8,802 9,172
------ ------ ------ ------ ------ ------
Operating income. . . . . $ 157 $ 143 $ 377 $ 319 $ 660 $ 513
====== ====== ====== ====== ====== ======

<FN>
The amounts in the above table include intercompany transactions.

OPERATING REVENUES - Operating revenues for IT Services for the three
months ended June 30, 2003 were $2.3 million, which was essentially unchanged
from revenues for the three months ended June 30, 2002. Of these amounts, $1.7
million and $1.9 million for these same periods, respectively, represent sales
to affiliates. Operating revenues for IT Services for the six months ended June
30, 2003 were $4.4 million compared to $4.6 million for the six months ended
June 30, 2002. Of these amounts, $3.2 million and $3.7 million for these same
periods, respectively, represent sales to affiliates. Operating revenues for
the twelve months ended June 30, 2003 were $9.5 million, compared to $9.7
million for the twelve months ended June 30, 2002. Of these amounts, $7.1
million and $8.2 million for these same periods, respectively, represent sales
to affiliates.
The decreases in operating revenues of $.2 million for the six and twelve
months ended June 30, 2003, when compared to the same periods ended June 30,
2002, were due primarily to fewer special projects with affiliate customers
offset partially by an increase in business with non-affiliate customers.

OPERATING INCOME - Operating income for the three months ended June 30,
2003, when compared to the same period ending June 30, 2002, remained largely
unchanged. Operating income for the six months ended June 30, 2003, when
compared to the same period ending June 30, 2002, increased by less than $.1
million. Operating income for the twelve months ended June 30, 2003 increased
by approximately $.1 million, compared to the same period ended June 30, 2002.
The increases for the six- and twelve-month periods ended June 30, 2003 were due
primarily to an increase in business with non-affiliate customers and a decrease
in business taxes, offset partially by an increase in depreciation and
amortization expense.

- 24 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

PROPANE, PIPELINES AND STORAGE

Operating revenues. $1,414 $1,416 $4,241 $3,654 $7,645 $6,979
Operating expenses. 1,091 1,035 3,020 2,664 5,468 5,200
------ ------ ------ ------ ------ ------
Operating income. . $ 323 $ 381 $1,221 $ 990 $2,177 $1,779
====== ====== ====== ====== ====== ======

OPERATING REVENUES - The operating revenues of the Company's propane,
pipelines and storage business for the three, six and twelve-month periods ended
June 30, 2003 were $1.4 million, $4.2 million and $7.6 million, respectively,
compared to $1.4 million, $3.7 million and $7.0 million, respectively, for the
same periods ended June 30, 2002. The increases for the six and twelve-month
periods were due primarily to higher propane distribution revenues resulting
from colder weather in the Company's propane distribution service area, which
increased propane sales, and an increase in the market price for propane.

OPERATING INCOME - Operating income from the propane, pipelines and storage
business for the second quarter of 2003 decreased by less than $.1 million when
compared to the same period in 2002. Operating income for the six and twelve
month ended June 30, 2003, when compared to the same periods in 2002, increased
by approximately $.2 million and $.4 million, respectively. These increases
were due primarily to colder weather during the first quarter of 2003 and the
fourth quarter of 2002, which increased propane sales and margins. Also
contributing to the increase were lower business taxes in 2003, partially offset
by an increase in depreciation expense.

OTHER INCOME AND DEDUCTIONS

Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- -------------------- --------------------
2003 2002 2003 2002 2003 2002
--------- -------- --------- --------- --------- ---------
(in thousands)

Interest expense. . . . . . . . . . . . $ (9,052) $(7,477) $(17,009) $(15,151) $(33,126) $(31,216)
Debt exchange and extinguishment costs. (24,030) - (24,030) - (24,030) -
Other income. . . . . . . . . . . . . . 781 709 1,479 1,034 2,683 2,003
--------- -------- --------- --------- --------- ---------
Total other income (deductions) . . . $(32,301) $(6,768) $(39,560) $(14,117) $(54,473) $(29,213)
--------- -------- --------- --------- --------- ---------

INTEREST EXPENSE - Interest expense for the three, six and twelve months
ended June 30, 2003 increased by $1.6 million, $1.9 million and $1.9 million,
respectively, when compared to the same periods ended June 30, 2002. These
increases in interest expense were due primarily to a) higher long-term debt
balances in the second quarter of 2003 as a result of the refinancing of the
Company's long-term debt, as discussed below, b) an increase in bank fees
relating to our short-term debt facilities and c) an increase in amortization
expenses for debt issuance costs.

- 25 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

OTHER INCOME AND DEDUCTIONS (CONTINUED)

DEBT EXCHANGE AND EXTINGUISHMENT COSTS - For the three, six and twelve
months ended June 30, 2003, the Company's Consolidated Statements of Operations
reflect $24 million of debt exchange and extinguishment costs. In the second
quarter of 2003, the Company completed a refinancing of its long-term debt
through the issuance of new senior unsecured notes and the exchange and
repurchase of existing notes. In connection with the repurchase of existing
notes, the Company paid approximately $24 million for make-whole premiums or
similar amounts. For further information regarding the refinancing and the debt
exchange and extinguishment costs refer to Note 2 of the Condensed Notes to the
Unaudited Consolidated Financial Statements.

OTHER INCOME - Other income for the three, six and twelve months ended June
30, 2003 increased by approximately $.1 million, $.4 million and $.7 million,
respectively, when compared to the same periods ended June 30, 2002. The
increase for the three and six-month periods ended June 30, 2003, in comparison
to the same periods ended June 30, 2002, was due primarily to net gains on the
sale of equipment, compared to net losses during the first half of 2002. The
increase during the twelve months ended June 30, 2003 when compared to the same
period of 2002, was due primarily to an increase in net gains on the sale of
equipment and income from an engineering project performed by the Gas
Distribution business for a third party.

INCOME TAXES

Income tax expense for the three, six and twelve-month periods ended June
30, 2003 decreased by $11.4 million, $11.8 million and $11.2 million,
respectively, when compared to the same periods ended June 30, 2002. The change
in income taxes, when comparing one period to another, is due primarily to
changes in earnings before income taxes and dividends on trust preferred
securities and any adjustments necessary for compliance with tax laws and
regulations.

DIVIDENDS ON TRUST PREFERRED SECURITIES, NET OF INCOME TAX

Dividends on trust preferred securities, net of Income taxes, for the
three, six and twelve-month periods ended June 30, 2003 were essentially
unchanged at $2.1 million, $4.3 million and $8.6 million when compared to the
same periods ended June 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS USED FOR INVESTING - The following table identifies capital
investments for the six and twelve months ended June 30, 2003 and 2002:

Six Months Ended Twelve Months Ended
June 30, June 30,
---------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------

Capital investments:
Property additions - gas distribution . . . . . . . . $11,322 $13,631 $27,663 $30,037
Property additions - diversified businesses and other 935 2,686 3,254 13,413
------- ------- ------- -------
$12,257 $16,317 $30,917 $43,450
======= ======= ======= =======

- 26 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The Company's expenditures for property additions were approximately $12.3
million for the first half of 2003. Expenditures for property additions during
the remainder of 2003 are anticipated to be approximately $21.0 million.

CASH FLOWS PROVIDED BY OPERATIONS - Net cash provided by operating
activities for the six and twelve months ended June 30, 2003, when compared to
the same periods of the prior year, increased by $3.6 million and decreased by $
..6 million, respectively. The change in operating cash flows is influenced
significantly by changes in the level and cost of gas in underground storage,
changes in accounts receivable and accrued revenue and other working capital
changes. The changes in these accounts are largely the result of the timing of
cash receipts and payments.

CASH FLOWS PROVIDED BY FINANCING - Net cash provided by financing
activities during the six and twelve-month periods ended June 30, 2003 decreased
by $6.8 million and $6.9 million, respectively, when compared to the same
periods ended June 30, 2002.

Six Months Ended Twelve Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
---------- --------- ---------- ---------

Cash provided by (used for) financing activities:
Issuance of common stock. . . . . . . . . . . . $ 1,902 $ 1,944 $ 3,600 $ 4,236
Net cash change in notes payable. . . . . . . . (65,103) (21,301) (29,924) 15,305
Isuance of long-term debt, net of expenses. . . 197,713 - 226,703 (142)
Repayment of long-term debt . . . . . . . . . . (110,090) - (140,215) (10)
Debt exchange and extinguishment costs. . . . . (24,030) - (24,030) -
Restricted cash for long-term debt retirements. (28,000) - (28,000) -
Payment of dividends on common stock. . . . . . (4,706) (6,136) (9,346) (13,745)
---------- --------- ---------- ---------
$ (32,314) $(25,493) $ (1,212) $ 5,644
========== ========= ========== =========

In June 2003, the Company's Board of Directors changed the annual dividend
rate on the common stock of the Company from $0.50 to $0.30 per share and
declared a regular quarterly cash dividend of $0.075 per share on the Company's
common stock. The dividend is payable on August 15, 2003 to shareholders of
record at the close of business on August 1 , 2003.
The Company completed an offering of an aggregate of $300 million of senior
unsecured notes. The Company used approximately $92.3 million of the new notes
in an exchange for other outstanding debt of the Company. The debt exchange was
a non-cash financing activity and therefore is not reflected in cash flows
provided by financing activities. Refer to Note 2 of the Condensed Notes to the
Unaudited Consolidated Financial Statements for further information regarding
the debt exchange and the use of the remaining proceeds from the $300 million
offering.

- 27 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

FUTURE FINANCING - In general, the Company funds its capital expenditure
program and dividend payments with operating cash flows and the utilization of
its short-term bank credit facility. When appropriate, the Company will
refinance its short-term debt with long-term debt, common stock or other
long-term financing instruments. During the second quarter of 2003, the Company
amended its bank credit facility to permit the issuance of additional debt
securities, to increase the facility from $145 million to $155 million and to
extend the maturity date of the 364-day component of the facility to May 20,
2004. The $155 million bank credit facility consists of an $85.5 million
multi-year revolver, which expires in June 2005, and a $69.5 million 364 day
facility, with a one year term loan option. Refer to Note 2 of the Condensed
Notes to the Unaudited Consolidated Financial Statements for additional
information regarding the bank credit facility. On June 30, 2003, $97.8 million
of the Company's bank credit facility was unused.
In March 2000, a registration statement on Form S-3 ("registration
statement") filed by the Company and SEMCO Capital Trust I, SEMCO Capital Trust
II and SEMCO Capital Trust III ("Capital Trusts") with the Securities and
Exchange Commission became effective. On June 30, 2003, there was $134 million
available under the Company's registration statement for any future issuances of
common stock, preferred stock, trust preferred securities and long-term debt.
The Company has 10.1 million FELINE PRIDES securities outstanding at June
30, 2003. Each FELINE PRIDES consists of a stock purchase contract of the
Company and a 9% trust preferred security (9% TPS"). Under the terms of each
stock purchase contract, the FELINE PRIDES holder is obligated to purchase
common stock of the Company in August 2003. The distribution rate on the 9% TPS
is also subject to a rate reset in August 2003. Refer to Note 4 of the Notes to
Consolidated Financial Statements in the Company's 2002 Annual Report on Form
10-K for further information regarding the terms of the stock purchase contracts
and 9% TPS.
Covenants contained in the Company's amended bank credit facility require
maintenance of a minimum net worth of $215.0 million, a fixed-charge coverage
ratio of at least 1.2 until September 30, 2003, at least 1.33 until March 31,
2004 and 1.5 thereafter, and a debt-to-capitalization ratio of less than 0.70
until the earlier of March 31, 2004 or the sale of Alaska Pipeline Company, at
which time the debt-to-capitalization ratio must be less than 0.65. As of June
30, 2003, the Company was in compliance with all debt covenants. Failure to
comply with such covenants may result in a default with respect to the related
debt and could lead to the acceleration of such debt or any instruments
evidencing indebtedness that contain cross-acceleration or cross-default
provisions. In such a case, there can be no assurance that the Company would be
able to refinance or otherwise repay such indebtedness.
The Company's ratio of earnings to fixed charges, as defined under Item 502
of SEC Regulation S-K, was .60 for the twelve months ended June 30, 2003. This
ratio is more strictly defined than the fixed charge coverage ratio used to
determine compliance with the Company's previously discussed debt covenants.

- 28 -

PART I - FINANCIAL INFORMATION - (CONTINUED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

OTHER MATTERS - The Company has been discussing the sale of Alaska Pipeline
Company (APC) with potential buyers. APC, a wholly owned subsidiary of SEMCO
ENERGY, delivers natural gas from several producing fields in south central
Alaska to ENSTAR Natural Gas Company's distribution system. APC has no
employees and ENSTAR is its only customer. Under the Company's proposed terms
of a sale, ENSTAR would continue to operate and manage APC's transmission
pipelines. A sales transaction acceptable to the Company would be expected to
close in the latter half of 2003, subject to various approvals, including
approval by the Regulatory Commission of Alaska. Proceeds of the potential sale
would be used to reduce SEMCO's outstanding debt obligations. It is anticipated
that rates to customers, the services offered, pipeline operations and staffing
would not change as a result of a sale. The book value of the APC assets the
Company expects to be part of a sale was approximately $90 million as of June
30, 2003. The Company has not entered into any agreement with respect to the
sale of APC and such sale may not occur unless the Company is able to sell APC
on terms acceptable to it. APC is an integral part of ENSTAR's ongoing
operations, and for the foreseeable future, ENSTAR will use APC to deliver its
gas supply.

NEW ACCOUNTING STANDARDS

See Note 1 of the Notes to the Financial Statements, which is incorporated
herein by reference.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures - As of the end of the period covered by
this report, the Company carried out an evaluation, under the supervision and
with the participation of management, including the Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on the review of the
disclosure controls and procedures, the Chief Executive Officer and the Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to the material information
relating to the Company that is required to be included in the periodic SEC
filings.

Internal Controls and Procedures - There were no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the Company's evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

- 29 -

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

During the second quarter of 2003, the Company issued an aggregate of 7,056
shares of unregistered common stock to the members of its Board of Directors in
exchange for services rendered, valued at $32,729.
The preceding transaction was exempt from registration under Section 4(2)
of the Securities Act of 1933.

ITEM 3. DEFAULT UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

At the April 15, 2003 Annual Meeting of Common Shareholders, the following
nominees were elected as directors to hold office for a term of three years:

Name Votes For Votes Withheld
---- ---------- ---------------

John T. Ferris . . . . . . . 13,197,347 1,246,169
Michael O. Frazer. . . . . . 13,046,425 1,397,091
Frederick S. Moore . . . . . 13,038,528 1,404,988
Edith A. Stotler . . . . . . 12,993,010 1,450,506

ITEM 5. OTHER INFORMATION.

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) List of Exhibits - (See page 33 for the Exhibit Index.)

12 Ratio of Earnings to Fixed Charges.
31.1 CEO Certification, as Adopted Pursuant to Section 302
of the Sarbanes-Oxely Act of 2002.
31.2 CFO Certification, as Adopted Pursuant to Section 302
of the Sarbanes-Oxely Act of 2002.
32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 CFO Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

- 30 -

PART II - OTHER INFORMATION (CONTINUED)

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED).

(b) Reports on Form 8-K.

The Company filed the following Form 8-K Reports during the second quarter
of 2003: (1) report filed on May 2, 2003 to announce its first quarter 2003
results and the potential sale of Alaska Pipeline Company, a wholly owned
subsidiary of the Company (2) report filed on May 7, 2003 to announce that the
Company was planning a $300 million debt offering along with an amendment to its
existing bank credit facilities (3) report filed on May 22, 2003 to announce
that the Company had completed $300 million in debt offerings along with an
amendments to its existing bank credit facilities and (4) report filed on June
24, 2003 to announce a change in the annual dividend rate and revised earnings
guidance.

- 31 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SEMCO ENERGY, INC.
(Registrant)

Dated: August 12, 2003
By: /s/John E. Schneider
-------------------------------------
John E. Schneider
Senior Vice President and Principal
Financial Officer

- 32 -

EXHIBIT INDEX
Form 10-Q
Second Quarter 2003

Exhibit
No. Description Filed Herewith
- -------- ----------- ---------------

12 Ratio of Earnings to Fixed Charges. x
31.1 CEO Certification, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxely Act
of 2002. x
31.2 CFO Certification, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxely Act
of 2002. x
32.1 CEO Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002. x
32.2 CFO Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002. x

- 33 -