##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the Fiscal Year Ended December 31, 2005                                                 
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition 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
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|1411 Third Street, Suite A, Port Huron, Michigan                   |  | 48060                                   
|(Address of principal executive offices)                           |  | (Zip Code)                              

(Registrants telephone number, including area
code) 810-987-2200


Securities registered pursuant to Section 12(b) of the
Act:


|                           |  |                                          
|-------------------------- |  | -----------------------------------------
|Title of Each Class        |  | Name of Each Exchange on Which Registered
|                           |  |                                          
|Common Stock, $1 Par Value |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the
Act:


None


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


o þ o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE:


10-K.










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##### 










TABLE OF CONTENTS


|                                                                                                         |  |                                                                                                                      |     |        |    | 
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | --- | ------ | -- | 
|                                                                                                         |  |                                                                                                                      |     | Page   |   
|                                                                                                         |  |                                                                                                                      |     | Number |   
|                                                                                                         |  |                                                                                                                      |     |        |   
|Information About Forward-Looking Statements                                                             |  |                                                                                                                      | 2   |       
|PART I                                                                                                  
|Item 1.                                                                                                  |  | Business                                                                                                             |     |        | 3  | 
|Item 1A.                                                                                                 |  | Risk Factors                                                                                                         |     |        | 11 | 
|Item 1B.                                                                                                 |  | Unresolved Staff Comments                                                                                            |     |        | 21 | 
|Item 2.                                                                                                  |  | Properties                                                                                                           |     |        | 21 | 
|Item 3.                                                                                                  |  | Legal Proceedings                                                                                                    |     |        | 22 | 
|Item 4.                                                                                                  |  | Submission of Matters to a Vote of Security
    Holders                                                              |     |        | 23 | 
|PART II                                                                                                 
|Item 5.                                                                                                  |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |     |        | 23 | 
|Item 6.                                                                                                  |  | Selected Financial Data                                                                                              |     |        | 25 | 
|Item 7.                                                                                                  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operation                             |     |        | 26 | 
|Item 7A.                                                                                                 |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |     |        | 48 | 
|Item 8.                                                                                                  |  | Financial Statements and Supplementary
    Data                                                                      |     |        | 48 | 
|Item 9.                                                                                                  |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |     |        | 95 | 
|Item 9A.                                                                                                 |  | Controls and Procedures                                                                                              |     |        | 95 | 
|Item 9B.                                                                                                 |  | Other Information                                                                                                    |     |        | 96 | 
|PART III                                                                                                
|Item 10.                                                                                                 |  | Directors and Executive Officers of the
    Registrant                                                               |     |        | 97 | 
|Item 11.                                                                                                 |  | Executive Compensation                                                                                               |     |        | 98 | 
|Item 12.                                                                                                 |  | Security Ownership of Certain Beneficial
    Owners and Management and Related
    Stockholder Matters               |     |        | 98 | 
|Item 13.                                                                                                 |  | Certain Relationships and Related
    Transactions                                                                   |     |        | 98 | 
|Item 14.                                                                                                 |  | Principal Accountant Fees and Services                                                                               |     |        | 98 | 
|PART IV                                                                                                 
|Item 15.                                                                                                 |  | Exhibits and Financial Statement
    Schedules                                                                       |     |        | 99 | 
|Signatures                                                                                               |  |                                                                                                                      | 105 |       
|First Amended and Restated Deferred Compensation and Stock Purchase Plan for Non-Employee Directors     
|2006 Target Bonuses under the Company's Short-Term Incentive Plan                                       
|Base Salaries for Named Executive Officers                                                              
|First Amendment to Second Amended and Restated Credit Agreement                                         
|Letter Agreement between SEMCO Energy, Inc. and LaSalle Bank Midwest National Association               
|Gas Sales Agreement between Union Oil Company of California and Alaska Pipeline Company                 
|Addendum No. 1, effective as of 11/15/01 to Gas Sales Agreement                                         
|Gas Sales Agreement between Anadarko petroleum Corporation, Phillips Alaska, and Alaska Pipeline Company
|Assignment Approval, (dated as of December 26, 2002)                                                    
|Assignment Approval, (dated as of January 13, 2003)                                                     
|Gas Purchase Contract between Shell Oil Company and Alaska Pipeline Company                             
|Letter Agreement No. 1 dated May 24, 1983                                                               
|Letter Agreement between Shell Western E&P Inc. and Alaska Pipeline Company                             
|Partial Assignment of the Gas Purchase Contract, effective 10/01/89                                     
|Agreement between Alaska Pipeline Company and Shell Western E&P Inc.                                    
|Agreement between Alaska Pipeline Company and ARCO Alaska, Inc. dated 11/15/91                          
|Partial Assignment of the Gas Purchase Contract, effective 01/01/93                                     
|Assignment and Conveyance of the retained interest in the Gas Purchase Contract, effective 09/01/96     
|Partial Assignment of the Gas Purchase Contract, effective 12/27/96                                     
|Partial Assignment of Gas Purchase Contract, effective 01/07/97                                         
|Ratio of Earnings to Fixed Charges                                                                      
|Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends                               
|Subsidiaries of the Registrant                                                                          
|Consent of Independent Registered Public Accounting Firm                                                
|CEO Certification Pursuant to Section 302                                                               
|CFO Certification Pursuant to Section 302                                                               
|CEO and CFO Certification Pursuant to 18 U.S.C. Section 1350                                            



1



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##### Table of Contents



Information About Forward-Looking Statements


10-K 10-K




| |   |                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the effects of weather and other natural phenomena (including
    the effects of these phenomena on customer consumption);                                                                                                                                                     
|
| |  | the economic climate and growth in the geographical areas where
    the Company does business;                                                                                                                                                                                 
|
| |  | the capital intensive nature of the Companys business;                                                                                                                                                                                                                        
|
| |  | the operational risks associated with operating businesses
    involved in the storage, transportation and distribution of
    natural gas and propane;                                                                                                                        
|
| |  | competition within the energy industry as well as from
    alternative forms of energy;                                                                                                                                                                                        
|
| |  | the timing and extent of changes in commodity prices for natural
    gas and propane and the resulting changes in, among other
    things, the Companys working capital requirements,
    customer rates and customer gas consumption;                                        
|
| |  | the effects of changes in governmental and regulatory policies,
    including income taxes, environmental compliance and authorized
    rates;                                                                                                                                 
|
| |  | the adequacy of authorized rates to compensate the Company, on a
    timely basis, for the costs of doing business, including the
    cost of capital and cost of gas supply, and the amount of any
    cost disallowances;                                                    
|
| |  | the Companys ability to procure its gas supply on
    reasonable credit terms;                                                                                                                                                                                                
|
| |  | the availability of long-term gas supplies in the Cook Inlet
    region of Alaska;                                                                                                                                                                                             
|
| |  | the amounts and terms of the Companys debt and its credit
    ratings;                                                                                                                                                                                                        
|
| |  | the Companys ability to remain in compliance with its debt
    covenants and accomplish its financing objectives in a timely
    and cost-effective manner;                                                                                                                   
|
| |  | the Companys ability to maintain an effective system of
    internal controls;                                                                                                                                                                                                
|
| |  | the Companys ability to execute its strategic plan
    effectively, including the ability to make acquisitions and
    investments on reasonable terms and the reasonableness of any
    conditions imposed on those transactions by governmental and
    regulatory agencies;
|
| |  | the Companys ability to conclude litigation and other
    dispute resolution proceedings on reasonable terms;                                                                                                                                                                 
|
| |  | the Companys ability to utilize its net operating loss
    carry-forwards for federal income tax purposes; and                                                                                                                                                                
|
| |  | changes in the performance of certain assets, which could impact
    the carrying amount of the Companys existing goodwill.                                                                                                                                                   

2



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10-K,





PART I







|        |         
|------- | --------
|Item 1. | Business

SEMCO Energy, Inc.




10-K.


Gas Distribution Business Segment








3



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|                                          |                                        |                           |         |         |         |    |         |         |         |    |         |         |         |   
|----------------------------------------- | -------------------------------------- | ------------------------- | ------- | ------- | ------- | -- | ------- | ------- | ------- | -- | ------- | ------- | ------- | --
|                                          |                                        | Years Ended December 31,  |        
|                                          |                                        |                           |        
|                                          |                                        | 2005                      |         |         | 2004    |    |         | 2003    |        
|                                          |                                        |                           |         |         |         |    |         |         |        
|Gas sales revenues (in thousands)         |                                        |                           |         |         |         |    |         |         |         |    |         |        
|                                          | Residential                            |                           | $       | 385,978 |         |    | $       | 315,606 |         |    | $       | 290,911 |        
|                                          | Commercial and industrial              |                           |         | 183,158 |         |    |         | 147,750 |         |    |         | 137,025 |        
|                                          |                                        |                           |         |         |         |    |         |         |        
|                                          |                                        | Total gas sales revenue   |         | $       | 569,136 |    |         | $       | 463,356 |    |         | $       | 427,936 |   
|                                          |                                        |                           |         |         |         |    |         |         |        
|Gas transportation revenue (in thousands) |                                        | $                         | 29,142  |         |         | $  | 29,071  |         |         | $  | 27,737  |        
|Cost of gas sold (in thousands)           |                                        |                           |         |         |         |    |         |         |         |    |         |        
|                                          | Purchased                              |                           | $       | 473,157 |         |    | $       | 351,288 |         |    | $       | 331,821 |        
|                                          | Withdrawn from (injected into) storage |                           |         | (29,297 | )       |    |         | (5,047  | )       |    |         | (22,902 | )      
|                                          |                                        |                           |         |         |         |    |         |         |        
|                                          |                                        | Total cost of gas sold    |         | $       | 443,860 |    |         | $       | 346,241 |    |         | $       | 308,919 |   
|                                          |                                        |                           |         |         |         |    |         |         |        
|Volumes of gas sold (MMcf)(a)             |                                        |                           |         |         |         |    |         |         |         |    |         |        
|                                          | Residential                            |                           |         | 44,235  |         |    |         | 44,880  |         |    |         | 45,324  |        
|                                          | Commercial and industrial              |                           |         | 20,488  |         |    |         | 21,285  |         |    |         | 21,948  |        
|                                          |                                        |                           |         |         |         |    |         |         |        
|                                          |                                        | Total volumes of gas sold |         |         | 64,723  |    |         |         | 66,165  |    |         |         | 67,272  |   
|Volumes of gas transported (MMcf)         |                                        |                           | 55,709  |         |         |    | 56,619  |         |         |    | 51,358  |        
|                                          |                                        |                           |         |         |         |    |         |         |        
|Total volumes delivered                   |                                        |                           | 120,432 |         |         |    | 122,784 |         |         |    | 118,630 |        
|                                          |                                        |                           |         |         |         |    |         |         |        
|Temperature Statistics(b)                 |                                        |                           |         |         |         |    |         |         |         |    |         |        
|                                          | Degree Days                            |                           |         |         |         |    |         |         |         |    |         |         |        
|                                          |                                        | Alaska                    |         |         | 9,572   |    |         |         | 9,573   |    |         |         | 9,384   |   
|                                          |                                        | Michigan                  |         |         | 6,689   |    |         |         | 6,726   |    |         |         | 7,063   |   
|                                          | Percent colder (warmer) than normal    |                           |         |         |         |    |         |         |         |    |         |         |        
|                                          |                                        | Alaska                    |         |         | (5.7    | )% |         |         | (6.0    | )% |         |         | (8.0    | )%
|                                          |                                        | Michigan                  |         |         | (0.1    | )% |         |         | (0.3    | )% |         |         | 4.7     | % 
|Number of customers at year end           |                                        |                           | 409,462 |         |         |    | 398,225 |         |         |    | 390,677 |        
|Number of customers, annual average       |                                        |                           |         |         |         |    |         |         |         |    |         |        
|                                          | Residential                            |                           |         | 363,678 |         |    |         | 354,261 |         |    |         | 346,819 |        
|                                          | Commercial and industrial              |                           |         | 37,639  |         |    |         | 37,234  |         |    |         | 37,640  |        
|                                          | Transportation                         |                           |         | 1,638   |         |    |         | 1,540   |         |    |         | 1,481   |        
|                                          |                                        |                           |         |         |         |    |         |         |        
|                                          |                                        |                           | 402,955 |         |         |    | 393,035 |         |         |    | 385,940 |        
|                                          |                                        |                           |         |         |         |    |         |         |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | MMcf is a quantity of natural gas equal to one million standard
    cubic feet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(b) | Degree days are a measure of coldness determined daily as the
    number of degrees the average temperature during the day in
    question is below 65 degrees Fahrenheit. Degree days for a
    particular year are determined by adding the degree days
    incurred during each day of that year. The Company determines
    the percent (%) that weather is warmer or colder than normal for
    a particular year by computing the deviation of actual degree
    days for that year from the average of degree days during the
    prior fifteen years and dividing the deviation by such
    fifteen-year average. Degree days are an indicator of natural
    gas consumption, since natural gas supplied and delivered by the
    Company is used by many customers for space heating, and heating
    consumption is affected by how warm or cold it is.

10-K,


4



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Rates and Regulation.


10-K.


Gas Sales.






Transportation.


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Customer Base.


10-K.


Competition.






6



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Natural Gas Supply.










10-K.






7



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36-month


12-month






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Environmental Matters.






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Corporate and Other


10-K,






10-K




10



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Miscellaneous Information




|                                                  |       |               |  |           |    |     |                 |                    | 
|------------------------------------------------- | ----- | ------------- |  | --------- | -- | --- | --------------- | ------------------ | 
|                                                  |       |               |  | No. of    |    |     |                
|                                                  |       | Division/     |  | Employees |    |     |                
|Collective Bargaining Agreement With              |       | Business Unit |  | Covered   |    |     | Expiration Date
|                                                  |       |               |  |           |    |     |                
|Local 328 Teamsters                               |       | Hotflame      |  |           | 9  |     |                 | February 28, 2007 
|Local 3135 Steelworkers                           |       | MPSC          |  |           | 20 |     |                 | April 19, 2007    
|Local 16201 Steelworkers                          |       | MPSC          |  |           | 44 |     |                 | June 28, 2007     
|Local 473 Utility Workers                         |       | MPSC          |  |           | 39 |     |                 | December 7, 2007  
|Local 445 Utility Workers                         |       | Battle Creek  |  |           | 38 |     |                 | September 11, 2008
|Local 367 Plumbers and Pipefitters Operating Unit |       | ENSTAR        |  |           | 88 |     |                 | April 1, 2009     
|Local 367 Plumbers and Pipefitters Clerical Unit  |       | ENSTAR        |  |           | 39 |     |                 | April 1, 2009     
|                                                  |       |               |  |           |    |     |                
|                                                  | Total |               |  |           |    | 277 |                 |                    | 

10-K, 10-Q, 8-K, 10-K 10-K 1-800-SEC-0330.







|         |             
|-------- | ------------
|Item 1A. | Risk Factors

10-K,


Risks Relating to the Companys Operations




| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys natural gas distribution business is
    subject to rate regulation, and certain actions of these
    regulatory bodies may reduce the Companys revenues,
    earnings and cash flow.



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cost-of






| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The increased cost of purchasing natural gas during
    periods in which natural gas prices are rising significantly
    could adversely impact the Companys liquidity and
    earnings.

12-month








| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Volatility in the price of natural gas could result in
    large industrial customers switching to alternative energy
    sources and reduced revenues, earnings and cash flow.



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| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys liquidity and earnings could be
    adversely affected by the MPSCs disallowance of costs
    after retrospective reviews of the Companys gas
    procurement practices.





| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys earnings and cash flow are sensitive to
    decreases in customer consumption resulting from warmer than
    normal temperatures and customer conservation.







| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys earnings are substantially dependent on
    its current customers maintaining a certain level of consumption
    as well as customer growth.



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| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys customers may be able to acquire
    natural gas without using the Companys distribution
    system, which would reduce revenues and earnings.





| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Declining production from the Cook Inlet gas fields may
    result in potential deliverability problems in ENSTARs
    service area.





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| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in the regulatory environment and events in the
    energy markets that are beyond the Companys control may
    reduce the Companys earnings and limit its access to
    capital markets.





| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | The Company may be required to recognize additional
    impairment charges which would reduce its earnings.











| |                                                                                    
| | -----------------------------------------------------------------------------------
| | The Companys ability to use net operating loss
    carry-forwards may be impaired.



15



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| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys operations and business are subject to
    environmental laws and regulations that may increase the
    Companys cost of operations, impact or limit the
    Companys business plans or expose the Company to
    environmental liabilities.







16



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| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Substantial operational risks are involved in operating a
    natural gas distribution, pipeline and storage system and such
    operational risks could adversely affect the Companys
    revenues, earnings, cash flow and financial condition.





| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys ability to grow its businesses will be
    adversely affected if the Company is not successful in making
    acquisitions or in integrating the acquisitions it makes.









| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Earnings and cash flow may be adversely affected by
    downturns in the economy.



17



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| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys debt indentures and Bank Credit
    Agreement contain restrictive covenants that may reduce the
    Companys flexibility, and adversely affect its business,
    earnings, cash flow, liquidity and financial condition.





| |   |                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | requiring the Company to dedicate a substantial portion of its
    cash flow from operations to the payment of principal and
    interest on the Companys indebtedness, thereby reducing
    the availability of cash flow for working capital, capital
    expenditures and other business activities;
|
| |  | requiring the Company to meet certain financial tests, which may
    affect the Companys flexibility in planning for, or
    reacting to, changes in the Companys business and the
    industries in which the Company operates;                                                                      
|
| |  | limiting the Companys ability to sell assets, make
    investments or acquire assets of, or merge or consolidate with,
    other companies;                                                                                                                                                            
|
| |  | limiting the Companys ability to repurchase or redeem its
    stock or enter into transactions with its stockholders or
    affiliates; and                                                                                                                                                            
|
| |  | limiting the Companys ability to grant liens, incur
    additional indebtedness or contingent obligations or obtain
    additional financing for working capital, capital expenditures,
    acquisitions and general corporate and other activities.                                                   





| |                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Adverse changes in the Companys credit ratings may
    limit the Companys access to capital, increase the
    Companys cost of capital, increase the cost of maintaining
    certain contractual relationships or otherwise have a material
    adverse effect on the Companys business, earnings, cash
    flow, liquidity and financial condition.





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| |                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys substantial indebtedness may limit its
    ability to borrow additional funds at all, or on reasonable
    terms, limit its growth and diminish its ability to respond to
    changing business and economic conditions and, thereby, may
    adversely affect its business, earnings, cash flow, liquidity
    and financial condition.





| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | limit the Companys ability to borrow additional funds;                                                                                
|
| |  | increase the cost of any future debt that the Company incurs;                                                                          
|
| |  | reduce cash flow from operations available for working capital,
    capital expenditures and other general corporate purposes;         
|
| |  | limit the Companys flexibility in planning for, or
    reacting to, changes in its business and the industry in which
    it operates;
|
| |  | place the Company at a competitive disadvantage as compared to
    the Companys competitors that are less highly leveraged;           
|
| |  | result in a downgrade in the Companys credit
    ratings; or                                                                          
|
| |  | diminish the Companys ability to successfully withstand a
    downturn in its business or the economy generally.                      





| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Despite the Companys substantial indebtedness, the
    Company may still be able to incur more debt, which could
    further exacerbate the risks associated with its substantial
    debt.



19



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| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is vulnerable to interest rate risk with
    respect to its debt which could lead to an increase in interest
    expense and a corresponding decrease in earnings and cash
    flow.





| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys Shareholder Rights Plan and other
    defensive mechanisms could make it more difficult for an
    acquisition bid for the Company or a change of control
    transaction to succeed.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Companys Shareholder Rights Plan grants holders of its
    Common Stock certain rights upon the occurrence of certain
    triggering events unless a majority of independent directors on
    the Board of Directors (the Board) determines that
    the takeover offer is fair and otherwise in the best interests
    of the Company and its stockholders;                                   
|
| |  | the Companys articles of incorporation divide the Board
    into three classes that serve staggered terms, and directors may
    be elected by stockholders only at an annual meeting of
    stockholders or at a special meeting called for that purpose by
    the Board;                                                                                                                          
|
| |  | a director may be removed by stockholders but only for cause and
    only at an annual meeting of stockholders and by the affirmative
    vote of a majority of the shares then entitled to vote for the
    election of directors;                                                                                                                                                                   
|
| |  | holders of the Preferred Stock have certain rights, including
    the right to receive a make-whole premium in connection with
    exercising their conversion rights in connection with a
    fundamental change, which would include certain acquisition
    offers;                                                                                                                                
|
| |  | the Bank Credit Agreement and certain of the Companys debt
    indentures include provisions whereby the acquisition of a
    certain percentage of the Companys Common Stock would be
    an event of default and cause the outstanding loans to become
    due and payable, or would require the Company to make an offer
    to holders of notes to repurchase outstanding notes at a premium;   
|
| |  | unless the Board approves a business combination or the
    combination meets certain enumerated fairness standards,
    Michigan law requires the affirmative vote of 90% of the votes
    of each class of stock entitled to vote, and not less than
    two-thirds of the votes of each class of stock entitled to vote,
    voting as a separate class, to approve a business
    combination; and
|
| |  | Michigan law provides that control shares of a public company
    acquired in a control share acquisition have no voting rights
    except as granted by resolution approved by the stockholders of
    the company, effectively conditioning the acquisition of voting
    control of a corporation on the approval of a majority of
    pre-existing, disinterested stockholders.                   



20



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Item 1B.     Unresolved
Staff Comments









|        |           
|------- | ----------
|Item 2. | Properties

Gas Distribution Business Segment










Corporate and Other










21



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|                      |  |                                 |        |  |                   |  |     |               |  |   |       | 
|--------------------- |  | ------------------------------- | ------ |  | ----------------- |  | --- | ------------- |  | - | ----- | 
|                      |  | Total Net                       |        |  | The Companys     |  |     | The Companys | 
|                      |  | Property                        |        |  | Percent Ownership |  |     | Net Property  | 
|                      |  |                                 |        |  |                   |  |     |               | 
|                      |  | (In thousands, except percents) |       
|Litchfield Lateral    |  | $                               | 7,230  |  |                   |  | 33  | %             |  | $ | 2,410 | 
|Greenwood Pipeline    |  |                                 | 4,553  |  |                   |  | 100 | %             |  |   | 4,553 | 
|Eaton Rapids Pipeline |  |                                 | 382    |  |                   |  | 100 | %             |  |   | 382   | 
|                      |  |                                 |        |  |                   |  |     |               | 
|                      |  | $                               | 12,165 |  |                   |  |     |               |  | $ | 7,345 | 
|                      |  |                                 |        |  |                   |  |     |               | 

31-mile 17-mile 37-mile









|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings







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|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



|               |  |            |      |  |     |   |      | 
|-------------- |  | ---------- | ---- |  | --- | - | ---- | 
|               |  | 2005 Price |     
|               |  | Range      |     
|               |  |            |     
|Quarter        |  | High       |      |  | Low |  
|               |  |            |      |  |     |  
|First Quarter  |  | $          | 6.24 |  |     | $ | 5.10 | 
|Second Quarter |  | $          | 6.19 |  |     | $ | 5.00 | 
|Third Quarter  |  | $          | 7.05 |  |     | $ | 5.82 | 
|Fourth Quarter |  | $          | 6.85 |  |     | $ | 5.16 | 

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|               |  |            |      |  |     |   |      | 
|-------------- |  | ---------- | ---- |  | --- | - | ---- | 
|               |  | 2004 Price |     
|               |  | Range      |     
|               |  |            |     
|Quarter        |  | High       |      |  | Low |  
|               |  |            |      |  |     |  
|First Quarter  |  | $          | 6.38 |  |     | $ | 4.80 | 
|Second Quarter |  | $          | 6.35 |  |     | $ | 5.00 | 
|Third Quarter  |  | $          | 5.88 |  |     | $ | 4.86 | 
|Fourth Quarter |  | $          | 5.74 |  |     | $ | 4.50 | 



10-K 10-K.


10-K.


10-K.


24



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

10-K 10-K.


|                             |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |         |         | 
|---------------------------- | ---------------------------------------------------------------- | ---------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                             |                                                                  | Years Ended December 31,                 |        
|                             |                                                                  |                                          |        
|                             |                                                                  | 2005                                     |         |         | 2004    |   |         | 2003    |         |   | 2002    |         |         | 2001 |        
|                             |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |        
|                             |                                                                  | (In thousands, except per share amounts) |        
|Statement of operations data |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                             | Operating revenues                                               |                                          | $       | 615,102 |         |   | $       | 508,336 |         |   | $       | 472,955 |         |      | $       | 374,162 |         |   | $       | 328,663 |        
|                             |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |        
|                             | Operating expenses                                               |                                          |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |         |        
|                             |                                                                  | Cost of gas sold                         |         | $       | 443,860 |   |         | $       | 346,241 |   |         | $       | 308,919 |      |         | $       | 220,422 |   |         | $       | 184,973 | 
|                             |                                                                  | Operations and maintenance(a)            |         |         | 71,913  |   |         |         | 75,883  |   |         |         | 65,152  |      |         |         | 54,373  |   |         |         | 55,493  | 
|                             |                                                                  | Depreciation and amortization            |         |         | 28,224  |   |         |         | 27,578  |   |         |         | 27,448  |      |         |         | 27,127  |   |         |         | 28,887  | 
|                             |                                                                  | Property and other taxes                 |         |         | 11,601  |   |         |         | 13,149  |   |         |         | 10,739  |      |         |         | 10,816  |   |         |         | 10,554  | 
|                             |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |        
|                             |                                                                  | $                                        | 555,598 |         |         | $ | 462,851 |         |         | $ | 412,258 |         |         | $    | 312,738 |         |         | $ | 279,907 |        
|                             |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |        
|                             | Operating Income                                                 |                                          | $       | 59,504  |         |   | $       | 45,485  |         |   | $       | 60,697  |         |      | $       | 61,424  |         |   | $       | 48,756  |        
|                             | Other income (deductions)(b)                                     |                                          |         | (41,746 | )       |   |         | (41,796 | )       |   |         | (61,561 | )       |      |         | (27,647 | )       |   |         | (27,418 | )      
|                             |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |        
|                             | Income (loss) before income taxes and minority interest          |                                          | $       | 17,758  |         |   | $       | 3,689   |         |   | $       | (864    | )       |      | $       | 33,777  |         |   | $       | 21,338  |        
|                             | Income tax (expense) benefit                                     |                                          |         | (6,021  | )       |   |         | 467     |         |   |         | 80      |         |      |         | (13,005 | )       |   |         | (7,100  | )      
|                             | Minority interest, net of income tax benefit                     |                                          |         |        |         |   |         |        |         |   |         | (4,300  | )       |      |         | (8,601  | )       |   |         | (8,603  | )      
|                             |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |        
|                             | Income (loss) from continuing operations                         |                                          | $       | 11,737  |         |   | $       | 4,156   |         |   | $       | (5,084  | )       |      | $       | 12,171  |         |   | $       | 5,635   |        
|                             | Discontinued operations, net of income tax                       |                                          |         | 538     |         |   |         | (9,339  | )       |   |         | (24,871 | )       |      |         | (3,222  | )       |   |         | (11,996 | )      
|                             |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |        
|                             | Net income (loss)                                                |                                          | $       | 12,275  |         |   | $       | (5,183  | )       |   | $       | (29,955 | )       |      | $       | 8,949   |         |   | $       | (6,361  | )      
|                             | Dividends on convertible cumulative preferred stock              |                                          |         | 2,994   |         |   |         |        |         |   |         |        |         |      |         |        |         |   |         |        |        
|                             | Dividends and repurchase premium on convertible preference stock |                                          |         | 9,112   |         |   |         | 3,203   |         |   |         |        |         |      |         |        |         |   |         |        |        
|                             |                                                                  |                                          |         |         |         |   |         |         |         |   |         |         |         |      |        
|                             | Net income (loss) available to common shareholders               |                                          | $       | 169     |         |   | $       | (8,386  | )       |   | $       | (29,955 | )       |      | $       | 8,949   |         |   | $       | (6,361  | )      






|    |  |                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | 2004 includes $8,398 of expenses related to the terminated sale
    of a subsidiary and a $152 goodwill impairment charge and 2001
    includes $3,005 for restructuring and asset impairment charges.
|   
|(b) |  | 2005 includes debt extinguishment expenses of $1,456 and 2003
    includes debt exchange and extinguishment expenses of $24,030.                                                                      

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|                                                    |                                                                              |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |   |         |         |  |   |         |         |  
|--------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------------- | - | --------- | ------- | - | - | ------- | ------- | - | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | -
|                                                    |                                                                              | Years Ended December 31,                        |  
|                                                    |                                                                              |                                                 |  
|                                                    |                                                                              | 2005                                            |   |           | 2004    |   |   | 2003    |         |   | 2002 |         |         | 2001 |  
|                                                    |                                                                              |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |  
|                                                    |                                                                              | (In thousands, except per share amounts)        |  
|Common stock and per share data                     |                                                                              |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |   |         |         |  |   |        
|                                                    | Average shares outstanding (in thousands)                                    |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |   |         |         |  |   |         |        
|                                                    |                                                                              | Basic                                           |   |           | 30,408  |   |   |         | 28,263  |   |      |         | 22,297  |      |   |         | 18,472  |  |   |         | 18,106  |  
|                                                    |                                                                              | Diluted                                         |   |           | 30,408  |   |   |         | 28,296  |   |      |         | 22,297  |      |   |         | 18,493  |  |   |         | 18,106  |  
|                                                    | Earnings per share on income (loss) from continuing operations               |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |   |         |         |  |   |         |        
|                                                    |                                                                              | Basic                                           |   | $         | (0.01   | ) |   | $       | 0.03    |   |      | $       | (0.23   | )    |   | $       | 0.66    |  |   | $       | 0.31    |  
|                                                    |                                                                              | Diluted                                         |   | $         | (0.01   | ) |   | $       | 0.03    |   |      | $       | (0.23   | )    |   | $       | 0.66    |  |   | $       | 0.31    |  
|                                                    | Earnings per share on net income (loss) available to common
    shareholders |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |   |         |         |  |   |         |        
|                                                    |                                                                              | Basic                                           |   | $         | 0.01    |   |   | $       | (0.30   | ) |      | $       | (1.34   | )    |   | $       | 0.48    |  |   | $       | (0.35   | )
|                                                    |                                                                              | Diluted                                         |   | $         | 0.01    |   |   | $       | (0.30   | ) |      | $       | (1.34   | )    |   | $       | 0.48    |  |   | $       | (0.35   | )
|                                                    | Dividends declared per share                                                 |                                                 | $ |          |         |   | $ | 0.08    |         |   | $    | 0.35    |         |      | $ | 0.50    |         |  | $ | 0.84    |        
|Statement of financial position data at December 31 |                                                                              |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |   |         |         |  |   |        
|                                                    | Total assets                                                                 |                                                 | $ | 1,016,555 |         |   | $ | 926,198 |         |   | $    | 951,219 |         |      | $ | 927,703 |         |  | $ | 905,094 |        
|                                                    | Capitalization                                                               |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |   |         |         |  |   |         |        
|                                                    |                                                                              | Long-term debt, including current maturities(a) |   | $         | 441,659 |   |   | $       | 498,427 |   |      | $       | 529,007 |      |   | $       | 505,462 |  |   | $       | 508,360 |  
|                                                    |                                                                              | Convertible cumulative preferred stock          |   |           | 66,526  |   |   |         |        |   |      |         |        |      |   |         |        |  |   |         |        |  
|                                                    |                                                                              | Series B convertible preference stock           |   |           |        |   |   |         | 48,405  |   |      |         |        |      |   |         |        |  |   |         |        |  
|                                                    |                                                                              | Common shareholders equity                     |   |           | 194,000 |   |   |         | 166,086 |   |      |         | 174,418 |      |   |         | 110,022 |  |   |         | 113,810 |  
|                                                    |                                                                              |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |  
|                                                    | Total Capitalization                                                         |                                                 | $ | 702,185   |         |   | $ | 712,918 |         |   | $    | 703,425 |         |      | $ | 615,484 |         |  | $ | 622,170 |        
|                                                    |                                                                              |                                                 |   |           |         |   |   |         |         |   |      |         |         |      |  






|    |  |                                                                                                    
|--- |  | ---------------------------------------------------------------------------------------------------
|(a) |  | Includes Company-obligated mandatorily redeemable trust
    preferred securities for 2002 and 2001.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operation

Business Strategy Summary






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10-K




27



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Summary of Results of Operations


10-K.


|                                                                 |                                                                                            |                                 |         |         |      |   |         |         |   |   |         |         |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                 |                                                                                            | Years Ended December 31,        |        
|                                                                 |                                                                                            |                                 |        
|                                                                 |                                                                                            | 2005                            |         |         | 2004 |   |         | 2003    |  
|                                                                 |                                                                                            |                                 |         |         |      |   |         |         |  
|                                                                 |                                                                                            | (In thousands, except per share |        
|                                                                 |                                                                                            | amounts)                        |        
|Operating revenues                                               |                                                                                            | $                               | 615,102 |         |      | $ | 508,336 |         |   | $ | 472,955 |        
|                                                                 | Operating expenses                                                                         |                                 |         | 555,598 |      |   |         | 462,851 |   |   |         | 412,258 |  
|                                                                 |                                                                                            |                                 |         |         |      |   |         |         |  
|Operating income                                                 |                                                                                            | $                               | 59,504  |         |      | $ | 45,485  |         |   | $ | 60,697  |        
|                                                                 | Other income (deductions)                                                                  |                                 |         | (41,746 | )    |   |         | (41,796 | ) |   |         | (61,561 | )
|                                                                 | Income tax (expense) benefit                                                               |                                 |         | (6,021  | )    |   |         | 467     |   |   |         | 80      |  
|                                                                 | Minority interest  dividends on trust preferred
    securities, net of income tax benefit |                                 |         |        |      |   |         |        |   |   |         | (4,300  | )
|                                                                 |                                                                                            |                                 |         |         |      |   |         |         |  
|Income (loss) from continuing operations                         |                                                                                            | $                               | 11,737  |         |      | $ | 4,156   |         |   | $ | (5,084  | )      
|Income (loss) from discontinued operations, net of income tax    |                                                                                            |                                 | 538     |         |      |   | (9,339  | )       |   |   | (24,871 | )      
|                                                                 |                                                                                            |                                 |         |         |      |   |         |         |  
|Net income (loss)                                                |                                                                                            | $                               | 12,275  |         |      | $ | (5,183  | )       |   | $ | (29,955 | )      
|Dividends on convertible cumulative preferred stock              |                                                                                            |                                 | 2,994   |         |      |   |        |         |   |   |        |        
|Dividends and repurchase premium on convertible preference stock |                                                                                            |                                 | 9,112   |         |      |   | 3,203   |         |   |   |        |        
|                                                                 |                                                                                            |                                 |         |         |      |   |         |         |  
|Net income (loss) available to common shareholders               |                                                                                            | $                               | 169     |         |      | $ | (8,386  | )       |   | $ | (29,955 | )      
|Earnings per share  basic                                       |                                                                                            |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                 | Income (loss) from continuing operations                                                   |                                 | $       | (0.01   | )    |   | $       | 0.03    |   |   | $       | (0.23   | )
|                                                                 | Net income (loss) available to common shareholders                                         |                                 | $       | 0.01    |      |   | $       | (0.30   | ) |   | $       | (1.34   | )
|Earnings per share  diluted                                     |                                                                                            |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                 | Income (loss) from continuing operations                                                   |                                 | $       | (0.01   | )    |   | $       | 0.03    |   |   | $       | (0.23   | )
|                                                                 | Net income (loss) available to common shareholders                                         |                                 | $       | 0.01    |      |   | $       | (0.30   | ) |   | $       | (1.34   | )
|Average common shares outstanding  basic                        |                                                                                            |                                 | 30,408  |         |      |   | 28,263  |         |   |   | 22,297  |        
|Average common shares outstanding  diluted                      |                                                                                            |                                 | 30,408  |         |      |   | 28,296  |         |   |   | 22,297  |        

Comparison of 2005 and 2004 results.


28



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Comparison of 2004 and 2003 results.






The Impact of Higher Natural Gas Prices






29



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10-K










30



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The Impact of Weather and Energy Conservation






31



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|         |                                                   |                                                                                                                                           |                         |  |        |      |    |      |        |      |    |  |        |      |   
|-------- | ------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- |  | ------ | ---- | -- | ---- | ------ | ---- | -- |  | ------ | ---- | --
|         |                                                   | Years Ended December 31,                                                                                                                  |                        
|         |                                                   |                                                                                                                                           |                        
|         |                                                   | 2005                                                                                                                                      |                         |  | 2004   |      |    | 2003 |       
|         |                                                   |                                                                                                                                           |                         |  |        |      |    |      |       
|Michigan |                                                   |                                                                                                                                           |                         |  |        |      |    |      |        |      |    | 
|         | Degree days (DD)(a)                               |                                                                                                                                           |                         |  |        |      |    |      |        |      |    |  |       
|         |                                                   | Actual                                                                                                                                    |                         |  | 6,689  |      |    |      | 6,726  |      |    |  | 7,063  |     
|         |                                                   | Normal(b)                                                                                                                                 |                         |  | 6,694  |      |    |      | 6,747  |      |    |  | 6,746  |     
|         |                                                   | Actual DD as a percent of normal DD                                                                                                       |                         |  | 99.9   | %    |    |      | 99.7   | %    |    |  | 104.7  | %   
|         |                                                   | Percent by which actual DD differ from:                                                                                                   |                         |  |        |      |    |      |        |      |    |  |        |     
|         |                                                   |                                                                                                                                           | Normal DD(c)            |  |        | (0.1 | )% |      |        | (0.3 | )% |  |        | 4.7  | % 
|         |                                                   |                                                                                                                                           | Prior year actual DD(d) |  |        | (0.6 | )% |      |        | (4.8 | )% |  |        | 5.9  | % 
|         | Average annual gas consumption per customer (Mcf) |                                                                                                                                           |                         |  |        |      |    |      |        |      |    |  |       
|         |                                                   | Residential gas sales customers                                                                                                           |                         |  | 103.7  |      |    |      | 107.8  |      |    |  | 116.7  |     
|         |                                                   | Residential gas sales customers normalized(e)                                                                                             |                         |  | 103.8  |      |    |      | 108.1  |      |    |  | 111.5  |     
|         |                                                   | Percent by which residential gas sales customers normalized
    differs from prior year residential gas sales customers
    normalized(f) |                         |  | (4.0   | )%   |    |      | (3.0   | )%   |    |  | (0.7   | )%  
|         |                                                   | All gas sales customers                                                                                                                   |                         |  | 146.1  |      |    |      | 152.7  |      |    |  | 163.2  |     
|         |                                                   | All gas sales customers normalized(e)                                                                                                     |                         |  | 146.2  |      |    |      | 153.2  |      |    |  | 155.9  |     
|         |                                                   | Percent by which all gas sales customers normalized differs from
    prior year all gas sales customers normalized(f)                     |                         |  | (4.5   | )%   |    |      | (1.7   | )%   |    |  | (3.8   | )%  
|Alaska   |                                                   |                                                                                                                                           |                         |  |        |      |    |      |        |      |    | 
|         | Degree days (DD)(a)                               |                                                                                                                                           |                         |  |        |      |    |      |        |      |    |  |       
|         |                                                   | Actual                                                                                                                                    |                         |  | 9,572  |      |    |      | 9,573  |      |    |  | 9,384  |     
|         |                                                   | Normal(b)                                                                                                                                 |                         |  | 10,151 |      |    |      | 10,187 |      |    |  | 10,204 |     
|         |                                                   | Actual DD as a percent of normal DD                                                                                                       |                         |  | 94.3   | %    |    |      | 94.0   | %    |    |  | 92.0   | %   
|         |                                                   | Percent by which actual DD differ from:                                                                                                   |                         |  |        |      |    |      |        |      |    |  |        |     
|         |                                                   |                                                                                                                                           | Normal DD(c)            |  |        | (5.7 | )% |      |        | (6.0 | )% |  |        | (8.0 | )%
|         |                                                   |                                                                                                                                           | Prior year actual DD(d) |  |        | (0.0 | )% |      |        | 2.0  | %  |  |        | (0.1 | )%
|         | Average annual gas consumption per customer (Mcf) |                                                                                                                                           |                         |  |        |      |    |      |        |      |    |  |       
|         |                                                   | Residential gas sales customers                                                                                                           |                         |  | 165.2  |      |    |      | 173.4  |      |    |  | 166.7  |     
|         |                                                   | Residential gas sales customers normalized(e)                                                                                             |                         |  | 175.2  |      |    |      | 184.5  |      |    |  | 181.3  |     
|         |                                                   | Percent by which residential gas sales customers normalized
    differs from prior year residential gas sales customers
    normalized(f) |                         |  | (5.1   | )%   |    |      | 1.8    | %    |    |  | 0.9    | %   
|         |                                                   | All gas sales customers                                                                                                                   |                         |  | 197.3  |      |    |      | 208.1  |      |    |  | 203.8  |     
|         |                                                   | All gas sales customers normalized(e)                                                                                                     |                         |  | 209.2  |      |    |      | 221.4  |      |    |  | 221.6  |     
|         |                                                   | Percent by which all gas sales customers normalized differs from
    prior year all gas sales customers normalized(f)                     |                         |  | (5.5   | )%   |    |      | (0.1   | )%   |    |  | (0.0   | )%  






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Degree days are a measure of coldness determined daily as the
    number of degrees the average temperature during the day in
    question is below 65 degrees Fahrenheit. Degree days for a
    particular year are determined by adding the degree days
    incurred during each day of the year.                                                                                                                        
|   
|(b) |  | Normal degree days for a particular year is the average of
    degree days during the prior fifteen years. Beginning in 2006,
    the Company plans to determine normal degree days for its Alaska
    operations using a
    ten-year average of
    degree days rather than a
    fifteen-year average.                                                                                                                  
|   
|(c) |  | The percent by which actual degree days differ from normal
    degree days is often referred to as the percent by which
    temperatures were colder (warmer) than normal.                                                                                                                                                                                                                                                 
|   
|(d) |  | The percent by which actual degree days differ from prior year
    actual degree days is often referred to as the percent by which
    temperatures were colder (warmer) than the prior year.                                                                                                                                                                                                                              
|   
|(e) |  | Normalized average annual gas consumption is determined by
    dividing the actual average annual gas consumption by actual
    degree days as a percent of normal degree days. The normalized
    average annual gas consumption represents an estimate of what
    average annual gas consumption would have been if during the
    period in question, actual degree days had equaled normal degree
    days.           
|   
|(f) |  | The percent by which normalized average annual gas consumption
    differs from prior year normalized average annual gas
    consumption represents an estimate of the percentage change in
    gas consumption from one year to the next caused by factors
    other than temperature variations. This change can relate to
    various factors but is most likely due to changes in energy
    conservation by customers.

32



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Reportable Business Segments


10-K, 10-K


Gas Distribution Business Segment


Gas Sales Revenue. year-to


33



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##### Table of Contents



10-K


|                                    |                          |                          |         |         |      |   |         |         |    |   |         |         |   
|----------------------------------- | ------------------------ | ------------------------ | ------- | ------- | ---- | - | ------- | ------- | -- | - | ------- | ------- | --
|                                    |                          | Years Ended December 31, |        
|                                    |                          |                          |        
|                                    |                          | 2005                     |         |         | 2004 |   |         | 2003    |   
|                                    |                          |                          |         |         |      |   |         |         |   
|                                    |                          | ($ in thousands)         |        
|Gas sales revenues                  |                          | $                        | 569,136 |         |      | $ | 463,356 |         |    | $ | 427,936 |        
|Cost of gas sold                    |                          |                          | 443,860 |         |      |   | 346,241 |         |    |   | 308,919 |        
|                                    |                          |                          |         |         |      |   |         |         |   
|                                    | Gas sales margin         |                          | $       | 125,276 |      |   | $       | 117,115 |    |   | $       | 119,017 |   
|Gas transportation revenue          |                          |                          | 29,142  |         |      |   | 29,071  |         |    |   | 27,737  |        
|Other operating revenue             |                          |                          | 8,037   |         |      |   | 5,822   |         |    |   | 7,216   |        
|                                    |                          |                          |         |         |      |   |         |         |   
|                                    |                          | $                        | 162,455 |         |      | $ | 152,008 |         |    | $ | 153,970 |        
|Operations and maintenance          |                          |                          | 66,626  |         |      |   | 60,779  |         |    |   | 58,935  |        
|Depreciation and amortization       |                          |                          | 26,825  |         |      |   | 25,925  |         |    |   | 25,528  |        
|Property and other taxes            |                          |                          | 11,040  |         |      |   | 12,544  |         |    |   | 10,285  |        
|                                    |                          |                          |         |         |      |   |         |         |   
|Operating income                    |                          | $                        | 57,964  |         |      | $ | 52,760  |         |    | $ | 59,222  |        
|                                    |                          |                          |         |         |      |   |         |         |   
|Volumes of gas sold (MMcf)          |                          |                          | 64,723  |         |      |   | 66,165  |         |    |   | 67,272  |        
|Volumes of gas transported (MMcf)   |                          |                          | 55,709  |         |      |   | 56,619  |         |    |   | 51,358  |        
|Number of customers at year end     |                          |                          | 409,462 |         |      |   | 398,225 |         |    |   | 390,677 |        
|Average number of customers         |                          |                          |         |         |      |   |         |         |    |   |         |        
|                                    | Gas sales customers      |                          |         | 401,317 |      |   |         | 391,495 |    |   |         | 384,459 |   
|                                    | Transportation customers |                          |         | 1,638   |      |   |         | 1,540   |    |   |         | 1,481   |   
|                                    |                          |                          |         |         |      |   |         |         |   
|                                    |                          |                          | 402,955 |         |      |   | 393,035 |         |    |   | 385,940 |        
|Degree Days                         |                          |                          |         |         |      |   |         |         |    |   |         |        
|                                    | Alaska                   |                          |         | 9,572   |      |   |         | 9,573   |    |   |         | 9,384   |   
|                                    | Michigan                 |                          |         | 6,689   |      |   |         | 6,726   |    |   |         | 7,063   |   
|Percent colder (warmer) than normal |                          |                          |         |         |      |   |         |         |    |   |         |        
|                                    | Alaska                   |                          |         | (5.7    | )%   |   |         | (6.0    | )% |   |         | (8.0    | )%
|                                    | Michigan                 |                          |         | (0.1    | )%   |   |         | (0.3    | )% |   |         | 4.7     | % 



Gas Sales Margin.




34



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10-K. 10-K.


Gas Transportation Revenue.


35



---



##### Table of Contents







Other Operating Revenue. one-time




Operations and Maintenance Expenses.


10-K.






36



---



##### Table of Contents





write-offs.




10-K


Depreciation and Amortization.


Property and Other Taxes. 10-K


Regulatory, Environmental and Other Matters. 10-K, 10-K. 10-K. 10-K


37



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Corporate and Other


|                        |  |                          |        |  |      |   |        |      |  |   |        | 
|----------------------- |  | ------------------------ | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                        |  | Years Ended December 31, |       
|                        |  |                          |       
|                        |  | 2005                     |        |  | 2004 |   |        | 2003 | 
|                        |  |                          |        |  |      |   |        |      | 
|                        |  | (In thousands)           |       
|Operating revenues      |  | $                        | 16,379 |  |      | $ | 17,152 |      |  | $ | 17,220 | 
|Operating expenses      |  |                          | 14,839 |  |      |   | 24,427 |      |  |   | 15,745 | 
|                        |  |                          |        |  |      |   |        |      | 
|Operating income (loss) |  | $                        | 1,540  |  |      | $ | (7,275 | )    |  | $ | 1,475  | 
|                        |  |                          |        |  |      |   |        |      | 



Operating Revenues.


Operating Income.


Other Income and Deductions


|                                       |  |                          |         |   |      |   |         |      |  |   |         |  
|-------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                       |  | Years Ended December 31, |        
|                                       |  |                          |        
|                                       |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                       |  |                          |         |   |      |   |         |      | 
|                                       |  | (In thousands)           |        
|Interest expense                       |  | $                        | (43,058 | ) |      | $ | (44,293 | )    |  | $ | (39,685 | )
|Debt exchange and extinguishment costs |  |                          | (1,456  | ) |      |   |        |      |  |   | (24,030 | )
|Other income                           |  |                          | 2,768   |   |      |   | 2,497   |      |  |   | 2,154   |  
|                                       |  |                          |         |   |      |   |         |      | 
|Total other income (deductions)        |  | $                        | (41,746 | ) |      | $ | (41,796 | )    |  | $ | (61,561 | )
|                                       |  |                          |         |   |      |   |         |      | 

Interest Expense.


10-K.


38



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10-K


Debt Exchange and Extinguishment Costs. 10-K.


Other Income.


Income Taxes


10-K


Minority Interest  Dividends on Company-Obligated
Mandatorily Redeemable Trust Preferred Securities of
Subsidiaries Holding Solely Debt Securities of Semco Energy,
Inc., Net of Income Tax Benefit


10-K.


Discontinued Operations


10-K.


39



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Dividends and Repurchase Premium on Convertible Preference
Stock


paid-in


Dividends on Convertible Cumulative Preferred Stock




Liquidity and Capital Resources


Cash Flows Used For Investing.


|                    |                                            |                          |        |        |      |   |        |        |  |   |        |        | 
|------------------- | ------------------------------------------ | ------------------------ | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                    |                                            | Years Ended December 31, |       
|                    |                                            |                          |       
|                    |                                            | 2005                     |        |        | 2004 |   |        | 2003   | 
|                    |                                            |                          |        |        |      |   |        |        | 
|                    |                                            | (In thousands)           |       
|Capital investments |                                            |                          |        |        |      |   |        |        |  |   |        |       
|                    | Property additions  gas distribution      |                          | $      | 38,739 |      |   | $      | 37,924 |  |   | $      | 28,323 | 
|                    | Property additions  corporate and other   |                          |        | 1,417  |      |   |        | 988    |  |   |        | 1,843  | 
|                    | Business acquisition, net of cash acquired |                          |        | 3,076  |      |   |        |       |  |   |        |       | 
|                    |                                            |                          |        |        |      |   |        |        | 
|                    |                                            | $                        | 43,232 |        |      | $ | 38,912 |        |  | $ | 30,166 |       
|                    |                                            |                          |        |        |      |   |        |        | 





10-K.




Cash Flows Provided by Operations.


40



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Cash Flows Provided by Financing.


|                                                 |                                                                           |                          |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------ | ------------------------------------------------------------------------- | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                 |                                                                           | Years Ended December 31, |  
|                                                 |                                                                           |                          |  
|                                                 |                                                                           | 2005                     |   |         | 2004 |  |   | 2003    |  
|                                                 |                                                                           |                          |   |         |      |  |   |         |  
|                                                 |                                                                           | (In thousands)           |  
|Cash provided by (used for) financing activities |                                                                           |                          |   |         |      |  |   |         |   |  |   |        
|                                                 | Issuance of common stock and common stock warrants, net of
    expenses   |                          | $ | 29,918  |      |  | $ | 2,500   |   |  | $ | 3,329   |  
|                                                 | Issuance of convertible cumulative preferred stock, net of
    expenses   |                          |   | 66,302  |      |  |   |        |   |  |   |        |  
|                                                 | Issuance of convertible preference stock, net of expenses                 |                          |   |        |      |  |   | 45,590  |   |  |   |        |  
|                                                 | Repurchase of convertible preference stock and common stock
    warrants  |                          |   | (60,000 | )    |  |   |        |   |  |   |        |  
|                                                 | Issuance (repayment) of notes payable and payment of
    related expenses |                          |   | 38,983  |      |  |   | (43,074 | ) |  |   | (39,800 | )
|                                                 | Issuance of long-term debt, net of redemptions                            |                          |   | (56,364 | )    |  |   | (30,132 | ) |  |   | 109,622 |  
|                                                 | Debt exchange and extinguishment costs                                    |                          |   |        |      |  |   |        |   |  |   | (24,030 | )
|                                                 | Payment of dividends on convertible cumulative preferred stock            |                          |   | (2,333  | )    |  |   |        |   |  |   |        |  
|                                                 | Payment of dividends on common stock                                      |                          |   |        |      |  |   | (4,221  | ) |  |   | (8,235  | )
|                                                 | Change in book overdrafts included in current liabilities                 |                          |   | (690    | )    |  |   | 883     |   |  |   |        |  
|                                                 |                                                                           |                          |   |         |      |  |   |         |  
|                                                 |                                                                           |                          | $ | 15,816  |      |  | $ | (28,454 | ) |  | $ | 40,886  |  
|                                                 |                                                                           |                          |   |         |      |  |   |         |  

41



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10-K.




10-K.




Non-Cash Financing Activities. 10-K.


Pension Plans and Other Post Retirement Benefits.




42



---



##### Table of Contents





Future Financing. long-term




S-3


364-day 10-K




43



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Business Development Initiatives.


Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends. one-to one-to one-to


Off-Balance Sheet Arrangements. S-K.


Guarantees. 10-K.


Contractual Obligations and Commercial Commitments.


|                                                              |  |                        |       |      |      |               |       |      |  |   |      |  |  |      |       |  |      |   |      |            |  |   |     |  |  |   |       | 
|------------------------------------------------------------- |  | ---------------------- | ----- | ---- | ---- | ------------- | ----- | ---- |  | - | ---- |  |  | ---- | ----- |  | ---- | - | ---- | ---------- |  | - | --- |  |  | - | ----- | 
|                                                              |  | Payments Due by Period |      
|                                                              |  |                        |      
|                                                              |  |                        |       | 2011 |     
|Contractual Obligations                                       |  | Total                  |       |      | 2006 |               |       | 2007 |  |   | 2008 |  |  | 2009 |       |  | 2010 |   |      | and Beyond | 
|                                                              |  |                        |       |      |      |               |       |      |  |   |      |  |  |      |       |  |      |   |      |            | 
|                                                              |  |                        |       |      |      | (In millions) |       |      |  |   |      |  | 
|Long-term debt obligations                                    |  | $                      | 454.6 |      |      | $             |      |      |  | $ |     |  |  | $    | 155.0 |  |      | $ | 30.0 |            |  | $ |    |  |  | $ | 269.6 | 
|Unconditional gas purchase and gas transportation obligations |  |                        | 228.9 |      |      |               | 168.7 |      |  |   | 26.6 |  |  |      | 19.4  |  |      |   | 11.6 |            |  |   | 2.6 |  |  |   |      | 
|Operating lease obligations                                   |  |                        | 15.2  |      |      |               | 1.9   |      |  |   | 1.8  |  |  |      | 1.9   |  |      |   | 1.9  |            |  |   | 1.9 |  |  |   | 5.8   | 
|                                                              |  |                        |       |      |      |               |       |      |  |   |      |  |  |      |       |  |      |   |      |            | 
|Total contractual obligations                                 |  | $                      | 698.7 |      |      | $             | 170.6 |      |  | $ | 28.4 |  |  | $    | 176.3 |  |      | $ | 43.5 |            |  | $ | 4.5 |  |  | $ | 275.4 | 
|                                                              |  |                        |       |      |      |               |       |      |  |   |      |  |  |      |       |  |      |   |      |            | 

|                       |  |                                            |       |      |      |   |      |  |      |   |   |      |  |      |       |            |  |   |   |  |  |   |   |  |  |   |   | 
|---------------------- |  | ------------------------------------------ | ----- | ---- | ---- | - | ---- |  | ---- | - | - | ---- |  | ---- | ----- | ---------- |  | - | - |  |  | - | - |  |  | - | - | 
|                       |  | Amount of Commitment Expiration per Period
|                       |  |                                           
|                       |  |                                            |       | 2011
|Commercial Commitments |  | Total                                      |       |      | 2006 |   | 2007 |  | 2008 |   |   | 2009 |  | 2010 |       | and Beyond
|                       |  |                                            |       |      |      |   |      |  |      |   |   |      |  |      |       |           
|Bank credit facility   |  | $                                          | 120.0 |      |      | $ |     |  |      | $ |  |      |  | $    | 120.0 |            |  | $ |  |  |  | $ |  |  |  | $ |  | 
|                       |  |                                            |       |      |      |   |      |  |      |   |   |      |  |      |       |            |  |   |   |  | 

44



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Other Commitments and Contingencies. 10-K.


Market Risk Information


10-K.


10-K


10-K.


|                        |                          |                                                                       |   |       |      |  |      |   |  |      |   |       |      |  |        |      |   |       |   |   |  |  |   |       |   |  |   |       |  
|----------------------- | ------------------------ | --------------------------------------------------------------------- | - | ----- | ---- |  | ---- | - |  | ---- | - | ----- | ---- |  | ------ | ---- | - | ----- | - | - |  |  | - | ----- | - |  | - | ----- | -
|                        |                          | Principal Payments by Expected Maturity Date and Interest Rate Detail |  
|                        |                          |                                                                       |  
|                        |                          |                                                                       |   | 2011  |      |  |     
|                        |                          |                                                                       |   | and   |      |  |     
|As of December 31, 2005 |                          | 2006                                                                  |   |       | 2007 |  | 2008 |   |  | 2009 |   |       | 2010 |  | Beyond |      |   | Total |  
|                        |                          |                                                                       |   |       |      |  |      |   |  |      |   |       |      |  |        |      |   |       |  
|                        |                          | (In millions, except percentages)                                     |  
|Long-term debt          |                          |                                                                       |   |       |      |  |      |   |  |      |   |       |      |  |        |      |   |       |   |   |  |  |   |       |   |  |   |      
|                        | Fixed rate               |                                                                       | $ |      |      |  | $    |  |  |      | $ | 155.0 |      |  | $      | 30.0 |   |       | $ |  |  |  | $ | 269.6 |   |  | $ | 454.6 |  
|                        | Average interest rate    |                                                                       |   |      |      |  |      |  |  |      |   | 7.10  | %    |  |        | 6.49 | % |       |   |  |  |  |   | 7.78  | % |  |   | 7.46  | %
|Bank Credit facility    |                          |                                                                       |   |       |      |  |      |   |  |      |   |       |      |  |        |      |   |       |   |   |  |  |   |       |   |  |   |      
|                        | Variable rate(a)         |                                                                       | $ | 120.0 |      |  | $    |  |  |      | $ |      |      |  | $      |     |   |       | $ |  |  |  | $ |      |   |  | $ | 120.0 |  
|                        | Average interest rate(b) |                                                                       |   | 5.62  | %    |  |      |  |  |      |   |      |      |  |        |     |   |       |   |  |  |  |   |      |   |  |   | 5.62  | %






|    |  |                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Amounts represent total credit available to the Company at
    December 31, 2005 rather than the actual amount outstanding
    at December 31, 2005.
|   
|(b) |  | The average interest rate reported for the variable rate bank
    credit facility is the average rate during the year ended
    December 31, 2005.  

Impact of Inflation


10-K


45



---



##### Table of Contents



10-K.




Critical Accounting Policies


10-K.


Rate Regulation.




Goodwill.


46



---



##### Table of Contents





10-K.


Pensions and Other Postretirement Benefits.


10-K.


New Accounting Standards


10-K


47



---



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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk

10-K.







|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data























48



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








Consolidated Financial Statements and Financial Statement
Schedule




Internal Control over Financial Reporting


Internal
Control  Integrated Framework Internal Control 
Integrated Framework




49



---



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50



---



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CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                                                                                                                                                      |                                                                                                                           | Years Ended December 31,        |        
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |        
|                                                                                                                                                                                                                                      |                                                                                                                           | 2005                            |         |         | 2004 |   |         | 2003    |  
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|                                                                                                                                                                                                                                      |                                                                                                                           | (In thousands, except per share |        
|                                                                                                                                                                                                                                      |                                                                                                                           | amounts)                        |        
|Operating Revenues                                                                                                                                                                                                                    |                                                                                                                           |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                                                                                                                                                                      | Gas sales                                                                                                                 |                                 | $       | 569,136 |      |   | $       | 463,356 |   |   | $       | 427,936 |  
|                                                                                                                                                                                                                                      | Gas transportation                                                                                                        |                                 |         | 29,142  |      |   |         | 29,071  |   |   |         | 27,737  |  
|                                                                                                                                                                                                                                      | Other                                                                                                                     |                                 |         | 16,824  |      |   |         | 15,909  |   |   |         | 17,282  |  
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 | 615,102 |         |      |   | 508,336 |         |   |   | 472,955 |        
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|Operating expenses                                                                                                                                                                                                                    |                                                                                                                           |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                                                                                                                                                                      | Cost of gas sold                                                                                                          |                                 |         | 443,860 |      |   |         | 346,241 |   |   |         | 308,919 |  
|                                                                                                                                                                                                                                      | Operations and Maintenance                                                                                                |                                 |         | 71,913  |      |   |         | 67,333  |   |   |         | 65,152  |  
|                                                                                                                                                                                                                                      | Depreciation and amortization                                                                                             |                                 |         | 28,224  |      |   |         | 27,578  |   |   |         | 27,448  |  
|                                                                                                                                                                                                                                      | Property and other taxes                                                                                                  |                                 |         | 11,601  |      |   |         | 13,149  |   |   |         | 10,739  |  
|                                                                                                                                                                                                                                      | Expenses related to terminated sale of subsidiary                                                                         |                                 |         |        |      |   |         | 8,398   |   |   |         |        |  
|                                                                                                                                                                                                                                      | Goodwill impairment charge                                                                                                |                                 |         |        |      |   |         | 152     |   |   |         |        |  
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 | 555,598 |         |      |   | 462,851 |         |   |   | 412,258 |        
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|Operating income                                                                                                                                                                                                                      |                                                                                                                           |                                 | 59,504  |         |      |   | 45,485  |         |   |   | 60,697  |        
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|Other income (deductions)                                                                                                                                                                                                             |                                                                                                                           |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                                                                                                                                                                      | Interest expense                                                                                                          |                                 |         | (43,058 | )    |   |         | (44,293 | ) |   |         | (39,685 | )
|                                                                                                                                                                                                                                      | Debt exchange and extinguishment costs                                                                                    |                                 |         | (1,456  | )    |   |         |        |   |   |         | (24,030 | )
|                                                                                                                                                                                                                                      | Other                                                                                                                     |                                 |         | 2,768   |      |   |         | 2,497   |   |   |         | 2,154   |  
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 | (41,746 | )       |      |   | (41,796 | )       |   |   | (61,561 | )      
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|Income (loss) before income taxes and minority interest                                                                                                                                                                               |                                                                                                                           |                                 | 17,758  |         |      |   | 3,689   |         |   |   | (864    | )      
|Income tax (expense) benefit                                                                                                                                                                                                          |                                                                                                                           |                                 | (6,021  | )       |      |   | 467     |         |   |   | 80      |        
|Minority interest  dividends on company-obligated
    mandatorily redeemable trust preferred securities of
    subsidiaries holding solely debt securities of SEMCO Energy,
    Inc., net of income tax benefit of $0, $0 and $2,316 |                                                                                                                           |                                 |        |         |      |   |        |         |   |   | (4,300  | )      
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|Income (loss) from continuing operations                                                                                                                                                                                              |                                                                                                                           |                                 | 11,737  |         |      |   | 4,156   |         |   |   | (5,084  | )      
|Discontinued operations                                                                                                                                                                                                               |                                                                                                                           |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                                                                                                                                                                      | Income (loss) from construction services operations, net of
    income tax (expense) benefit of $(312), $1,782 and $7,362 |                                 |         | 538     |      |   |         | (4,641  | ) |   |         | (24,871 | )
|                                                                                                                                                                                                                                      | Loss on divestiture of construction services operations, net of
    income tax benefit of $0, $1,722 and $0               |                                 |         |        |      |   |         | (4,698  | ) |   |         |        |  
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|Net income (loss)                                                                                                                                                                                                                     |                                                                                                                           |                                 | 12,275  |         |      |   | (5,183  | )       |   |   | (29,955 | )      
|Dividends on convertible cumulative preferred stock                                                                                                                                                                                   |                                                                                                                           |                                 | 2,994   |         |      |   |        |         |   |   |        |        
|Dividends and repurchase premium on convertible preference stock                                                                                                                                                                      |                                                                                                                           |                                 | 9,112   |         |      |   | 3,203   |         |   |   |        |        
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|Net income (loss) available to common shareholders                                                                                                                                                                                    |                                                                                                                           | $                               | 169     |         |      | $ | (8,386  | )       |   | $ | (29,955 | )      
|                                                                                                                                                                                                                                      |                                                                                                                           |                                 |         |         |      |   |         |         |  
|Earnings per share  basic                                                                                                                                                                                                            |                                                                                                                           |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                                                                                                                                                                      | Income (loss) from continuing operations                                                                                  |                                 | $       | (0.01   | )    |   | $       | 0.03    |   |   | $       | (0.23   | )
|                                                                                                                                                                                                                                      | Net income (loss) available to common shareholders                                                                        |                                 | $       | 0.01    |      |   | $       | (0.30   | ) |   | $       | (1.34   | )
|Earnings per share  diluted                                                                                                                                                                                                          |                                                                                                                           |                                 |         |         |      |   |         |         |   |   |         |        
|                                                                                                                                                                                                                                      | Income (loss) from continuing operations                                                                                  |                                 | $       | (0.01   | )    |   | $       | 0.03    |   |   | $       | (0.23   | )
|                                                                                                                                                                                                                                      | Net income (loss) available to common shareholders                                                                        |                                 | $       | 0.01    |      |   | $       | (0.30   | ) |   | $       | (1.34   | )
|Dividends declared per share                                                                                                                                                                                                          |                                                                                                                           | $                               |        |         |      | $ | 0.08    |         |   | $ | 0.35    |        
|Average common shares outstanding  basic                                                                                                                                                                                             |                                                                                                                           |                                 | 30,408  |         |      |   | 28,263  |         |   |   | 22,297  |        
|Average common shares outstanding  diluted                                                                                                                                                                                           |                                                                                                                           |                                 | 30,408  |         |      |   | 28,296  |         |   |   | 22,297  |        



51



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##### Table of Contents



CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


|                                            |                                                                                                                           |                           |           |         |      |   |         |         | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------- | --------- | ------- | ---- | - | ------- | ------- | 
|                                            |                                                                                                                           | December 31,              |          
|                                            |                                                                                                                           |                           |          
|                                            |                                                                                                                           | 2005                      |           |         | 2004 |  
|                                            |                                                                                                                           |                           |           |         |      |  
|                                            |                                                                                                                           | (In thousands, except for |          
|                                            |                                                                                                                           | number of shares and      |          
|                                            |                                                                                                                           | par value)                |          
|Current Assets                              |                                                                                                                           |                           |           |         |      |   |         |        
|                                            | Cash and cash equivalents                                                                                                 |                           | $         | 4,124   |      |   | $       | 2,118   | 
|                                            | Restricted cash                                                                                                           |                           |           | 1,590   |      |   |         | 1,588   | 
|                                            | Receivables, less allowances of $1,758 and $2,247                                                                         |                           |           | 64,584  |      |   |         | 36,327  | 
|                                            | Accrued revenue                                                                                                           |                           |           | 71,615  |      |   |         | 54,285  | 
|                                            | Gas in underground storage, at average cost                                                                               |                           |           | 93,065  |      |   |         | 63,980  | 
|                                            | Prepaid expenses                                                                                                          |                           |           | 15,307  |      |   |         | 21,450  | 
|                                            | Deferred income taxes                                                                                                     |                           |           | 5,345   |      |   |         | 341     | 
|                                            | Materials and supplies, at average cost                                                                                   |                           |           | 4,970   |      |   |         | 4,876   | 
|                                            | Regulatory asset  gas charges recoverable from
    customers                                                             |                           |           | 971     |      |   |         | 137     | 
|                                            | Other                                                                                                                     |                           |           | 1,114   |      |   |         | 1,266   | 
|                                            |                                                                                                                           |                           |           |         |      |  
|                                            |                                                                                                                           |                           | 262,685   |         |      |   | 186,368 |        
|                                            |                                                                                                                           |                           |           |         |      |  
|Property Plant and Equipment                |                                                                                                                           |                           |           |         |      |   |         |        
|                                            | Gas distribution                                                                                                          |                           |           | 735,052 |      |   |         | 697,079 | 
|                                            | Corporate and other                                                                                                       |                           |           | 39,879  |      |   |         | 39,607  | 
|                                            |                                                                                                                           |                           |           |         |      |  
|                                            |                                                                                                                           |                           | 774,931   |         |      |   | 736,686 |        
|                                            | Less accumulated depreciation                                                                                             |                           |           | 197,543 |      |   |         | 177,012 | 
|                                            |                                                                                                                           |                           |           |         |      |  
|                                            |                                                                                                                           |                           | 577,388   |         |      |   | 559,674 |        
|                                            |                                                                                                                           |                           |           |         |      |  
|Deferred Charges and Other Assets           |                                                                                                                           |                           |           |         |      |   |         |        
|                                            | Goodwill                                                                                                                  |                           |           | 143,374 |      |   |         | 143,283 | 
|                                            | Regulatory assets                                                                                                         |                           |           | 12,602  |      |   |         | 12,062  | 
|                                            | Unamortized debt expense                                                                                                  |                           |           | 10,057  |      |   |         | 13,313  | 
|                                            | Other                                                                                                                     |                           |           | 10,449  |      |   |         | 11,498  | 
|                                            |                                                                                                                           |                           |           |         |      |  
|                                            |                                                                                                                           |                           | 176,482   |         |      |   | 180,156 |        
|                                            |                                                                                                                           |                           |           |         |      |  
|Total Assets                                |                                                                                                                           | $                         | 1,016,555 |         |      | $ | 926,198 |        
|                                            |                                                                                                                           |                           |           |         |      |  
|Current Liabilities                         |                                                                                                                           |                           |           |         |      |   |         |        
|                                            | Current maturities of long-term debt                                                                                      |                           | $         |        |      |   | $       | 15,092  | 
|                                            | Notes payable                                                                                                             |                           |           | 78,900  |      |   |         | 39,300  | 
|                                            | Accounts payable                                                                                                          |                           |           | 64,557  |      |   |         | 29,254  | 
|                                            | Customer advance payments                                                                                                 |                           |           | 22,043  |      |   |         | 19,818  | 
|                                            | Regulatory liability  amounts payable to customers                                                                       |                           |           | 12,281  |      |   |         | 5,624   | 
|                                            | Pension and other postretirement costs                                                                                    |                           |           | 7,100   |      |   |         | 4,300   | 
|                                            | Accrued interest                                                                                                          |                           |           | 4,616   |      |   |         | 4,508   | 
|                                            | Other                                                                                                                     |                           |           | 8,806   |      |   |         | 9,187   | 
|                                            |                                                                                                                           |                           |           |         |      |  
|                                            |                                                                                                                           |                           | 198,303   |         |      |   | 127,083 |        
|                                            |                                                                                                                           |                           |           |         |      |  
|Deferred Credits and Other Liabilities      |                                                                                                                           |                           |           |         |      |   |         |        
|                                            | Regulatory liabilities                                                                                                    |                           |           | 59,214  |      |   |         | 57,442  | 
|                                            | Deferred income taxes                                                                                                     |                           |           | 30,715  |      |   |         | 20,758  | 
|                                            | Customer advances for construction                                                                                        |                           |           | 17,263  |      |   |         | 15,887  | 
|                                            | Pension and other postretirement costs                                                                                    |                           |           | 3,490   |      |   |         | 5,571   | 
|                                            | Other                                                                                                                     |                           |           | 5,385   |      |   |         | 1,631   | 
|                                            |                                                                                                                           |                           |           |         |      |  
|                                            |                                                                                                                           |                           | 116,067   |         |      |   | 101,289 |        
|                                            |                                                                                                                           |                           |           |         |      |  
|Commitments and Contingencies (See Note 13) |                                                                                                                           |                           |           |         |      |   |         |        
|Capitalization                              |                                                                                                                           |                           |           |         |      |   |         |        
|                                            | Long-term debt                                                                                                            |                           |           | 441,659 |      |   |         | 483,335 | 
|                                            | Convertible cumulative preferred stock, $1 par value,
    500,000 shares authorized; 350,000 and 0 shares
    outstanding |                           |           | 66,526  |      |   |         |        | 
|                                            | Series B convertible preference stock, $1 par value,
    70,000 shares authorized; 0 and 51,766 shares
    outstanding    |                           |           |        |      |   |         | 48,405  | 
|                                            | Common shareholders equity                                                                                               |                           |           | 194,000 |      |   |         | 166,086 | 
|                                            |                                                                                                                           |                           |           |         |      |  
|                                            |                                                                                                                           |                           | 702,185   |         |      |   | 697,826 |        
|                                            |                                                                                                                           |                           |           |         |      |  
|Total Liabilities and Capitalization        |                                                                                                                           | $                         | 1,016,555 |         |      | $ | 926,198 |        
|                                            |                                                                                                                           |                           |           |         |      |  



52



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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |        |         |         |          |         |         |  
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | -------- | ------- | ------- | -
|                                                       |                                                                                                         | Years Ended December 31,                                                                                                   |                                                              
|                                                       |                                                                                                         |                                                                                                                            |                                                              
|                                                       |                                                                                                         | 2005                                                                                                                       |                                                               |         | 2004   |         |         | 2003    |       
|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |       
|                                                       |                                                                                                         | (In thousands)                                                                                                             |                                                              
|Cash flow provided by (used for) operating activities  |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |        |         |         |         
|                                                       | Net income (loss)                                                                                       |                                                                                                                            | $                                                             | 12,275  |        |         | $       | (5,183  | )      |         | $       | (29,955  | )      
|                                                       | Adjustments to reconcile net income (loss) to net cash provided
    by (used for) operating activities: |                                                                                                                            |                                                               |         |        |         |         |         |        |         |         |          |        
|                                                       |                                                                                                         | Depreciation and amortization                                                                                              |                                                               |         | 28,224 |         |         |         | 27,578 |         |         |          | 27,448  |        
|                                                       |                                                                                                         | Depreciation and amortization in discontinued operations                                                                   |                                                               |         |       |         |         |         | 443    |         |         |          | 7,832   |        
|                                                       |                                                                                                         | Amortization of debt costs and debt basis adjustments included
    in interest expense                                     |                                                               |         | 3,507  |         |         |         | 3,630  |         |         |          | 2,369   |        
|                                                       |                                                                                                         | Accumulated deferred income taxes and amortization of investment
    tax credits                                           |                                                               |         | 4,955  |         |         |         | (3,658 | )       |         |          | (10,848 | )      
|                                                       |                                                                                                         | Non-cash impairment charges                                                                                                |                                                               |         |       |         |         |         | 152    |         |         |          | 20,474  |        
|                                                       |                                                                                                         | Non-cash share-based compensation                                                                                          |                                                               |         | 756    |         |         |         | 187    |         |         |          | 56      |        
|                                                       |                                                                                                         | Loss on divestiture of discontinued construction services
    business                                                     |                                                               |         |       |         |         |         | 6,420  |         |         |          |        |        
|                                                       |                                                                                                         | Debt exchange and extinguishment costs                                                                                     |                                                               |         | 1,456  |         |         |         |       |         |         |          | 24,030  |        
|                                                       |                                                                                                         | Changes in operating assets and liabilities and other, excluding
    the impact of business acquisitions and divestitures: |                                                               |         |        |         |         |         |        |         |         |          |         |        
|                                                       |                                                                                                         |                                                                                                                            | Receivables, net                                              |         |        | (27,764 | )       |         |        | 5,956   |         |          |         | 208     |  
|                                                       |                                                                                                         |                                                                                                                            | Accrued revenue                                               |         |        | (17,054 | )       |         |        | (10,514 | )       |          |         | (4,456  | )
|                                                       |                                                                                                         |                                                                                                                            | Prepaid expenses                                              |         |        | 6,143   |         |         |        | 1,320   |         |          |         | 679     |  
|                                                       |                                                                                                         |                                                                                                                            | Materials, supplies and gas in underground storage            |         |        | (29,113 | )       |         |        | (5,337  | )       |          |         | (24,225 | )
|                                                       |                                                                                                         |                                                                                                                            | Regulatory asset  gas charges recoverable from
    customers |         |        | (832    | )       |         |        | 6,124   |         |          |         | (4,061  | )
|                                                       |                                                                                                         |                                                                                                                            | Accounts payable                                              |         |        | 35,303  |         |         |        | 10,480  |         |          |         | (15,282 | )
|                                                       |                                                                                                         |                                                                                                                            | Customer advances and amounts payable to customers            |         |        | 10,257  |         |         |        | 3,643   |         |          |         | 4,561   |  
|                                                       |                                                                                                         |                                                                                                                            | Other                                                         |         |        | 713     |         |         |        | (1,016  | )       |          |         | (11,375 | )
|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |       
|Net cash provided by (used for) operating activities   |                                                                                                         |                                                                                                                            | 28,826                                                        |         |        |         | 40,225  |         |        |         | (12,545 | )       
|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |       
|Cash flows provided by (used for) investing activities |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |        |         |         |         
|                                                       | Property additions  gas distribution                                                                   |                                                                                                                            |                                                               | (38,739 | )      |         |         | (37,924 | )      |         |         | (28,323  | )      
|                                                       | Property additions  corporate and other                                                                |                                                                                                                            |                                                               | (1,417  | )      |         |         | (988    | )      |         |         | (1,843   | )      
|                                                       | Business acquisition, net of cash acquired                                                              |                                                                                                                            |                                                               | (3,076  | )      |         |         |        |        |         |         |         |        
|                                                       | Proceeds from divestiture of discontinued construction services                                         |                                                                                                                            |                                                               |         |        |         |         |         |        |         |         |          |        
|                                                       | business, net of related expenses                                                                       |                                                                                                                            |                                                               |        |        |         |         | 21,290  |        |         |         |         |        
|                                                       | Proceeds from other property sales, net of retirement costs                                             |                                                                                                                            |                                                               | (642    | )      |         |         | (1,164  | )      |         |         | 1,683    |        
|                                                       | Proceeds from early retirement of a note receivable                                                     |                                                                                                                            |                                                               |        |        |         |         | 7,838   |        |         |         |         |        
|                                                       | Proceeds from redemption of investment in unconsolidated
    subsidiary                                 |                                                                                                                            |                                                               | 1,240   |        |         |         |        |        |         |         |         |        
|                                                       | Changes in restricted cash                                                                              |                                                                                                                            |                                                               | (2      | )      |         |         | (1,388  | )      |         |         | 1,012    |        
|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |       
|Net cash used for investing activities                 |                                                                                                         |                                                                                                                            | (42,636                                                       | )       |        |         | (12,336 | )       |        |         | (27,471 | )       
|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |       
|Cash flows provided by (used for) financing activities |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |        |         |         |         
|                                                       | Issuance of common stock and common stock warrants, net of
    expenses                                 |                                                                                                                            |                                                               | 29,918  |        |         |         | 2,500   |        |         |         | 3,329    |        
|                                                       | Issuance of convertible cumulative preferred stock, net of
    expenses                                 |                                                                                                                            |                                                               | 66,302  |        |         |         |        |        |         |         |         |        
|                                                       | Issuance of convertible preference stock, net of expenses                                               |                                                                                                                            |                                                               |        |        |         |         | 45,590  |        |         |         |         |        
|                                                       | Repurchase of convertible preference stock and common stock
    warrants                                |                                                                                                                            |                                                               | (60,000 | )      |         |         |        |        |         |         |         |        
|                                                       | Issuance (repayment) of notes payable and payment of
    related expenses                               |                                                                                                                            |                                                               | 38,983  |        |         |         | (43,074 | )      |         |         | (39,800  | )      
|                                                       | Issuance of long-term debt, net of expenses                                                             |                                                                                                                            |                                                               |        |        |         |         | (167    | )      |         |         | 247,931  |        
|                                                       | Repayment of long-term debt                                                                             |                                                                                                                            |                                                               | (56,364 | )      |         |         | (29,965 | )      |         |         | (138,309 | )      
|                                                       | Debt exchange and extinguishment costs                                                                  |                                                                                                                            |                                                               |        |        |         |         |        |        |         |         | (24,030  | )      
|                                                       | Payment of dividends on convertible cumulative preferred stock                                          |                                                                                                                            |                                                               | (2,333  | )      |         |         |        |        |         |         |         |        
|                                                       | Payment of dividends on common stock                                                                    |                                                                                                                            |                                                               |        |        |         |         | (4,221  | )      |         |         | (8,235   | )      
|                                                       | Change in book overdrafts included in current liabilities                                               |                                                                                                                            |                                                               | (690    | )      |         |         | 883     |        |         |         |         |        
|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |       
|Net cash provided by (used for) financing activities   |                                                                                                         |                                                                                                                            | 15,816                                                        |         |        |         | (28,454 | )       |        |         | 40,886  |         
|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |       
|Cash and cash equivalents                              |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |        |         |         |         
|                                                       | Net increase (decrease)                                                                                 |                                                                                                                            |                                                               | 2,006   |        |         |         | (565    | )      |         |         | 870      |        
|                                                       | Beginning of period                                                                                     |                                                                                                                            |                                                               | 2,118   |        |         |         | 2,683   |        |         |         | 1,813    |        
|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |       
|End of period                                          |                                                                                                         | $                                                                                                                          | 4,124                                                         |         |        | $       | 2,118   |         |        | $       | 2,683   |         
|                                                       |                                                                                                         |                                                                                                                            |                                                               |         |        |         |         |         |       



53



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##### Table of Contents



CONSOLIDATED STATEMENTS OF CAPITALIZATION


|                                                                                                                    |                                                                                                                            |                           |         |         |      |   |         |         |  
|------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------- | ------- | ---- | - | ------- | ------- | -
|                                                                                                                    |                                                                                                                            | December 31,              |        
|                                                                                                                    |                                                                                                                            |                           |        
|                                                                                                                    |                                                                                                                            | 2005                      |         |         | 2004 |  
|                                                                                                                    |                                                                                                                            |                           |         |         |      |  
|                                                                                                                    |                                                                                                                            | (In thousands, except for |        
|                                                                                                                    |                                                                                                                            | number of shares and par  |        
|                                                                                                                    |                                                                                                                            | value)                    |        
|Long-term debt                                                                                                      |                                                                                                                            |                           |         |         |      |   |         |        
|                                                                                                                    | 6.50% senior notes due 2005                                                                                                |                           | $       |        |      |   | $       | 15,000  |  
|                                                                                                                    | 3.77% senior notes due 2005                                                                                                |                           |         |        |      |   |         | 92      |  
|                                                                                                                    | 6.40% senior notes due 2008                                                                                                |                           |         | 5,000   |      |   |         | 5,000   |  
|                                                                                                                    | 7.125% senior notes due 2008                                                                                               |                           |         | 148,268 |      |   |         | 149,455 |  
|                                                                                                                    | 6.49% senior notes due 2009                                                                                                |                           |         | 30,000  |      |   |         | 30,000  |  
|                                                                                                                    | 7.03% senior notes due 2013                                                                                                |                           |         | 10,000  |      |   |         | 10,000  |  
|                                                                                                                    | 7.75% senior notes due 2013                                                                                                |                           |         | 188,795 |      |   |         | 188,012 |  
|                                                                                                                    | 8.00% senior notes due 2016                                                                                                |                           |         | 59,596  |      |   |         | 59,631  |  
|                                                                                                                    | 10.25% subordinated notes due 2040                                                                                         |                           |         |        |      |   |         | 41,237  |  
|                                                                                                                    |                                                                                                                            |                           |         |         |      |  
|                                                                                                                    |                                                                                                                            | $                         | 441,659 |         |      | $ | 498,427 |        
|                                                                                                                    | Less: Current maturities of long-term debt                                                                                 |                           |         |        |      |   |         | 15,092  |  
|                                                                                                                    |                                                                                                                            |                           |         |         |      |  
|                                                                                                                    |                                                                                                                            | $                         | 441,659 |         |      | $ | 483,335 |        
|                                                                                                                    |                                                                                                                            |                           |         |         |      |  
|Convertible cumulative preferred stock$1 par value, 500,000 shares authorized; 350,000
    and 0 shares outstanding |                                                                                                                            | $                         | 66,526  |         |      | $ |        |        
|                                                                                                                    |                                                                                                                            |                           |         |         |      |  
|Series B convertible preference stock$1 par value, 70,000 shares authorized; 0 and
    51,766 shares outstanding    |                                                                                                                            | $                         |        |         |      | $ | 48,405  |        
|                                                                                                                    |                                                                                                                            |                           |         |         |      |  
|Common shareholders equity                                                                                         |                                                                                                                            |                           |         |         |      |   |         |        
|                                                                                                                    | Common stock, par value $1 per share 
    100,000,000 shares authorized; 33,704,025 and
    28,396,538 shares outstanding |                           | $       | 33,704  |      |   | $       | 28,397  |  
|                                                                                                                    | Capital surplus                                                                                                            |                           |         | 241,944 |      |   |         | 217,073 |  
|                                                                                                                    | Unearned compensation associated with restricted stock                                                                     |                           |         | (795    | )    |   |         |        |  
|                                                                                                                    | Accumulated comprehensive income (loss)                                                                                    |                           |         | (9,073  | )    |   |         | (7,435  | )
|                                                                                                                    | Retained earnings (deficit)                                                                                                |                           |         | (71,780 | )    |   |         | (71,949 | )
|                                                                                                                    |                                                                                                                            |                           |         |         |      |  
|                                                                                                                    |                                                                                                                            | $                         | 194,000 |         |      | $ | 166,086 |        
|                                                                                                                    |                                                                                                                            |                           |         |         |      |  
|Total capitalization                                                                                                |                                                                                                                            | $                         | 702,185 |         |      | $ | 697,826 |        
|                                                                                                                    |                                                                                                                            |                           |         |         |      |  



54



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CONSOLIDATED STATEMENTS OF CHANGES IN COMMON
SHAREHOLDERS EQUITY


|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |        |   |   |         |         |  
|----------------------------------------------------------------- | ----------------- | ----------------------------------------------------------------------------------------------------------------------------------- | - | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------- | -
|                                                                  |                   | Years Ended December 31,                                                                                                            |  
|                                                                  |                   |                                                                                                                                     |  
|                                                                  |                   | 2005                                                                                                                                |   |         | 2004   |   |   | 2003    |       
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|                                                                  |                   | (In thousands)                                                                                                                      |  
|Shares of common stock                                            |                   |                                                                                                                                     |   |         |        |   |   |         |        |   |   |        
|                                                                  | Beginning of year |                                                                                                                                     |   | 28,397  |        |   |   | 28,059  |        |   |   | 18,682  |        
|                                                                  |                   | Issuance of common stock pursuant to a public offering                                                                              |   |         | 4,945  |   |   |         |       |   |   |         |        |  
|                                                                  |                   | Issuance of common stock pursuant to stock purchase contracts
    associated with the
    FELINE PRIDES securities                  |   |         |       |   |   |         |       |   |   |         | 8,737   |  
|                                                                  |                   | Issuance of common stock pursuant to share-based compensation
    arrangements                                                      |   |         | 14     |   |   |         | 9      |   |   |         | 12      |  
|                                                                  |                   | Issuance of restricted common stock                                                                                                 |   |         | 169    |   |   |         |       |   |   |         |        |  
|                                                                  |                   | Issuance of common stock for the DRIP and other                                                                                     |   |         | 179    |   |   |         | 329    |   |   |         | 628     |  
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|                                                                  | End of year       |                                                                                                                                     |   | 33,704  |        |   |   | 28,397  |        |   |   | 28,059  |        
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|Common stock                                                      |                   |                                                                                                                                     |   |         |        |   |   |         |        |   |   |        
|                                                                  | Beginning of year |                                                                                                                                     | $ | 28,397  |        |   | $ | 28,059  |        |   | $ | 18,682  |        
|                                                                  |                   | Issuance of common stock pursuant to a public offering                                                                              |   |         | 4,945  |   |   |         |       |   |   |         |        |  
|                                                                  |                   | Issuance of common stock pursuant to stock purchase contracts
    associated with the
    FELINE PRIDES securities                  |   |         |       |   |   |         |       |   |   |         | 8,737   |  
|                                                                  |                   | Issuance of common stock pursuant to share-based compensation
    arrangements                                                      |   |         | 14     |   |   |         | 9      |   |   |         | 12      |  
|                                                                  |                   | Issuance of restricted common stock                                                                                                 |   |         | 169    |   |   |         |       |   |   |         |        |  
|                                                                  |                   | Issuance of common stock for the DRIP and other                                                                                     |   |         | 179    |   |   |         | 329    |   |   |         | 628     |  
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|                                                                  | End of year       |                                                                                                                                     | $ | 33,704  |        |   | $ | 28,397  |        |   | $ | 28,059  |        
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|Capital surplus                                                   |                   |                                                                                                                                     |   |         |        |   |   |         |        |   |   |        
|                                                                  | Beginning of year |                                                                                                                                     | $ | 217,073 |        |   | $ | 214,779 |        |   | $ | 120,089 |        
|                                                                  |                   | Issuance of common stock pursuant to a public offering, net of
    expenses                                                         |   |         | 24,730 |   |   |         |       |   |   |         |        |  
|                                                                  |                   | Issuance of common stock pursuant to stock purchase contracts
    associated with the
    FELINE PRIDES securities, net of expenses |   |         |       |   |   |         |       |   |   |         | 92,181  |  
|                                                                  |                   | Issuance of common stock pursuant to share-based compensation
    arrangements                                                      |   |         | 70     |   |   |         | 47     |   |   |         | 44      |  
|                                                                  |                   | Issuance of restricted common stock                                                                                                 |   |         | 815    |   |   |         |       |   |   |         |        |  
|                                                                  |                   | Issuance of common stock for the DRIP and other                                                                                     |   |         | 867    |   |   |         | 1,375  |   |   |         | 2,465   |  
|                                                                  |                   | Issuance of common stock warrants                                                                                                   |   |         |       |   |   |         | 741    |   |   |         |        |  
|                                                                  |                   | Repurchase of common stock warrants                                                                                                 |   |         | (2,094 | ) |   |         |       |   |   |         |        |  
|                                                                  |                   | Non-cash share-based compensation                                                                                                   |   |         | 483    |   |   |         | 131    |   |   |         |        |  
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|                                                                  | End of year       |                                                                                                                                     | $ | 241,944 |        |   | $ | 217,073 |        |   | $ | 214,779 |        
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|Unearned Compensation associated with restricted common
    stock |                   |                                                                                                                                     |   |         |        |   |   |         |        |   |   |        
|                                                                  | Beginning of year |                                                                                                                                     | $ |        |        |   | $ |        |        |   | $ |        |        
|                                                                  |                   | Issuance of restricted common stock                                                                                                 |   |         | (984   | ) |   |         |       |   |   |         |        |  
|                                                                  |                   | Amortization of unearned compensation expense associated with
    restricted common stock                                           |   |         | 189    |   |   |         |       |   |   |         |        |  
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|                                                                  | End of year       |                                                                                                                                     | $ | (795    | )      |   | $ |        |        |   | $ |        |        
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|Accumulated comprehensive income (loss)                           |                   |                                                                                                                                     |   |         |        |   |   |         |        |   |   |        
|                                                                  | Beginning of year |                                                                                                                                     | $ | (7,435  | )      |   | $ | (6,972  | )      |   | $ | (7,597  | )      
|                                                                  |                   | Minimum pension liability adjustment, net of income tax benefit
    (expense) of $1,008, $420 and $(200)                            |   |         | (1,872 | ) |   |         | (781   | ) |   |         | 372     |  
|                                                                  |                   | Valuation adjustment for marketable securities, net of income
    tax expense of $31, $30 and $0                                    |   |         | 58     |   |   |         | 57     |   |   |         |        |  
|                                                                  |                   | Unrealized derivative gain (loss) on interest rate hedge from an
    investment in an affiliate                                     |   |         | 176    |   |   |         | 261    |   |   |         | 253     |  
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|                                                                  | End of year       |                                                                                                                                     | $ | (9,073  | )      |   | $ | (7,435  | )      |   | $ | (6,972  | )      
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|Retained earnings (deficit)                                       |                   |                                                                                                                                     |   |         |        |   |   |         |        |   |   |        
|                                                                  | Beginning of year |                                                                                                                                     | $ | (71,949 | )      |   | $ | (61,448 | )      |   | $ | (21,152 | )      
|                                                                  |                   | Net income (loss) available to common shareholders                                                                                  |   |         | 169    |   |   |         | (8,386 | ) |   |         | (29,955 | )
|                                                                  |                   | Cash dividends declared on common stock  $0.00, $0.08
    and $0.35 per share                                                      |   |         |       |   |   |         | (2,115 | ) |   |         | (10,341 | )
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       
|                                                                  | End of year       |                                                                                                                                     | $ | (71,780 | )      |   | $ | (71,949 | )      |   | $ | (61,448 | )      
|                                                                  |                   |                                                                                                                                     |   |         |        |   |   |         |       



55



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##### Table of Contents



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


|                                  |                                                                                                          |                          |        |        |      |   |        |      |   |   |         |     | 
|--------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------ | ------ | ------ | ---- | - | ------ | ---- | - | - | ------- | --- | 
|                                  |                                                                                                          | Years Ended December 31, |       
|                                  |                                                                                                          |                          |       
|                                  |                                                                                                          | 2005                     |        |        | 2004 |   |        | 2003 |  
|                                  |                                                                                                          |                          |        |        |      |   |        |      |  
|                                  |                                                                                                          | (In thousands)           |       
|Net income (loss)                 |                                                                                                          | $                        | 12,275 |        |      | $ | (5,183 | )    |   | $ | (29,955 | )  
|                                  | Minimum pension liability adjustment, net of income tax benefit
    (expense) of $1,008, $420 and $(200) |                          |        | (1,872 | )    |   |        | (781 | ) |   |         | 372 | 
|                                  | Valuation adjustment for marketable securities, net of income
    tax expense of $31, $30 and $0         |                          |        | 58     |      |   |        | 57   |   |   |         |    | 
|                                  | Unrealized derivative gain (loss) on interest rate hedge from an
    investment in an affiliate          |                          |        | 176    |      |   |        | 261  |   |   |         | 253 | 
|                                  |                                                                                                          |                          |        |        |      |   |        |      |  
|Total comprehensive income (loss) |                                                                                                          | $                        | 10,637 |        |      | $ | (5,646 | )    |   | $ | (29,330 | )  
|                                  |                                                                                                          |                          |        |        |      |   |        |      |  



56



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS




|        |                                                        
|------- | -------------------------------------------------------
|Note 1. | Company Description and Significant Accounting Policies

Company Description.






Discontinued Operations.


Basis of Presentation.


Principles of Consolidation.


Rate Regulation.


57



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                        
|------- | -----------------------------------------------------------------------
|Note 1. | Company Description and Significant Accounting Policies
    (continued)



Cash and Cash Equivalents.


Restricted Cash.


Accounts Receivable.


Accrued Revenue.


Gas in Underground Storage.


Property, Plant, Equipment and Depreciation.


|                                      |  |         |  |                                           |  |   
|------------------------------------- |  | ------- |  | ----------------------------------------- |  | --
|Regulated Property, Plant & Equipment |  |         |  | Non-Regulated Property, Plant & Equipment |  |   
|(Gas Distribution Business)           |  |         |  | (Corporate and Other)                     |  |   
|                                      |  |         |  |                                           |  |   
|Land                                  |  |        |  | Intrastate gas pipelines                  |  | 25
|Underground gas storage property      |  | 25  39 |  | Propane storage tanks                     |  | 30
|Gas transmission property             |  | 30  41 |  | Computer & related equipment              |  | 5 
|Gas distribution property             |  | 19  58 |  | Software                                  |  | 3 
|General property                      |  | 5  34  |  |                                           |  |   





58



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                        
|------- | -----------------------------------------------------------------------
|Note 1. | Company Description and Significant Accounting Policies
    (continued)







Goodwill and Goodwill Impairment.










59



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                        
|------- | -----------------------------------------------------------------------
|Note 1. | Company Description and Significant Accounting Policies
    (continued)



|                                                            |  |                |         |  |           |   |       |         |  |   |         |  
|----------------------------------------------------------- |  | -------------- | ------- |  | --------- | - | ----- | ------- |  | - | ------- | -
|                                                            |  | Gas            |         |  |           |   |      
|                                                            |  | Distribution   |         |  | Corporate |   |       | Total   | 
|                                                            |  | Segment        |         |  | and Other |   |       | Company | 
|                                                            |  |                |         |  |           |   |       |         | 
|                                                            |  | (In thousands) |        
|Balance as of December 31, 2003                             |  | $              | 140,227 |  |           | $ | 3,208 |         |  | $ | 143,435 |  
|Impairment charge                                           |  |                |        |  |           |   | (152  | )       |  |   | (152    | )
|                                                            |  |                |         |  |           |   |       |         | 
|Balance as of December 31, 2004                             |  | $              | 140,227 |  |           | $ | 3,056 |         |  | $ | 143,283 |  
|Goodwill acquired in a business acquisition on June 1, 2005 |  |                | 91      |  |           |   |      |         |  |   | 91      |  
|Impairment charge                                           |  |                |        |  |           |   |      |         |  |   |        |  
|                                                            |  |                |         |  |           |   |       |         | 
|Balance as of December 31, 2005                             |  | $              | 140,318 |  |           | $ | 3,056 |         |  | $ | 143,374 |  
|                                                            |  |                |         |  |           |   |       |         | 

Unamortized Debt Expense.


Customer Advance Payments.


Revenue Recognition.




Cost of Gas, Gas Charges Recoverable from Customers, and
Amounts Payable to Customers.


60



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                        
|------- | -----------------------------------------------------------------------
|Note 1. | Company Description and Significant Accounting Policies
    (continued)







12-month






61



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                        
|------- | -----------------------------------------------------------------------
|Note 1. | Company Description and Significant Accounting Policies
    (continued)

Self-Insurance.


Income Taxes.


Share-Based Compensation.


|                                                   |             |                                                                                                                                           |   |      |      |  |   |        |     |  |   |         |     | 
|-------------------------------------------------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------- | - | ---- | ---- |  | - | ------ | --- |  | - | ------- | --- | 
|                                                   |             | Years Ended December 31,                                                                                                                  |  
|                                                   |             |                                                                                                                                           |  
|                                                   |             | 2005                                                                                                                                      |   |      | 2004 |  |   | 2003   |    
|                                                   |             |                                                                                                                                           |   |      |      |  |   |        |    
|                                                   |             | (In thousands, except per share                                                                                                           |  
|                                                   |             | amounts)                                                                                                                                  |  
|Net income (loss) available to common shareholders |             |                                                                                                                                           |   |      |      |  |   |        |     |  |   |        
|                                                   | As reported |                                                                                                                                           | $ | 169  |      |  | $ | (8,386 | )   |  | $ | (29,955 | )  
|                                                   |             | Add back total share-based compensation expense included in
    reported net income, net of related tax effects                           |   |      | 492  |  |   |        | 122 |  |   |         | 36  | 
|                                                   |             | Deduct total share-based compensation expense determined under
    fair value based method for all awards, net of related tax
    effects |   |      | 755  |  |   |        | 330 |  |   |         | 380 | 
|                                                   |             |                                                                                                                                           |   |      |      |  |   |        |    
|                                                   | Pro forma   |                                                                                                                                           | $ | (94  | )    |  | $ | (8,594 | )   |  | $ | (30,299 | )  
|                                                   |             |                                                                                                                                           |   |      |      |  |   |        |    
|Earnings (loss) per share  basic                  |             |                                                                                                                                           |   |      |      |  |   |        |     |  |   |        
|                                                   | As reported |                                                                                                                                           | $ | 0.01 |      |  | $ | (0.30  | )   |  | $ | (1.34   | )  
|                                                   | Pro forma   |                                                                                                                                           | $ |     |      |  | $ | (0.30  | )   |  | $ | (1.36   | )  
|Earnings (loss) per share  diluted                |             |                                                                                                                                           |   |      |      |  |   |        |     |  |   |        
|                                                   | As reported |                                                                                                                                           | $ | 0.01 |      |  | $ | (0.30  | )   |  | $ | (1.34   | )  
|                                                   | Pro forma   |                                                                                                                                           | $ |     |      |  | $ | (0.30  | )   |  | $ | (1.36   | )  

62



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                        
|------- | -----------------------------------------------------------------------
|Note 1. | Company Description and Significant Accounting Policies
    (continued)

New Accounting Standards.






Statements of Cash Flows.


payment-in




63



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                        
|------- | -----------------------------------------------------------------------
|Note 1. | Company Description and Significant Accounting Policies
    (continued)







|                               |                                                      |                          |   |        |      |  |   |        |  |  |   |        |  
|------------------------------ | ---------------------------------------------------- | ------------------------ | - | ------ | ---- |  | - | ------ |  |  | - | ------ | -
|                               |                                                      | Years Ended December 31, |  
|                               |                                                      |                          |  
|                               |                                                      | 2005                     |   |        | 2004 |  |   | 2003   | 
|                               |                                                      |                          |   |        |      |  |   |        | 
|                               |                                                      | (In thousands)           |  
|Cash paid during the year for: |                                                      |                          |   |        |      |  |   |        |  |  |   |       
|                               | Interest and dividends on trust preferred securities |                          | $ | 39,443 |      |  | $ | 41,216 |  |  | $ | 49,173 |  
|                               | Income taxes, net of (refunds)                       |                          | $ | (1,840 | )    |  | $ | 3,500  |  |  | $ | (3,000 | )



|        |                   
|------- | ------------------
|Note 2. | Regulatory Matters

MPSC.




12-month




64



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                               
|------- | ------------------------------
|Note 2. | Regulatory Matters (continued)







CCBC.






65



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                               
|------- | ------------------------------
|Note 2. | Regulatory Matters (continued)



RCA.


Regulatory Assets and Liabilities.


66



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                               
|------- | ------------------------------
|Note 2. | Regulatory Matters (continued)



|                       |            |                                                      |        |   |        |   |        |                  |        |  |  |  |               | 
|---------------------- | ---------- | ---------------------------------------------------- | ------ | - | ------ | - | ------ | ---------------- | ------ |  |  |  | ------------- | 
|                       |            | December 31,                                         |       
|                       |            |                                                      |       
|                       |            | 2005                                                 |        |   | 2004   |   |        | Remaining Period |       
|                       |            |                                                      |        |   |        |   |        |                  |       
|                       |            | (In thousands, except number of years)               |       
|Regulatory assets      |            |                                                      |        |   |        |   |        |                  |        |  |  | 
|                       | Current    |                                                      |        |   |        |   |        |                  |        |  |  |  |              
|                       |            | Gas charges recoverable from customers               |        | $ | 971    |   |        | $                | 137    |  |  |  | 1 year        | 
|                       | Noncurrent |                                                      |        |   |        |   |        |                  |        |  |  |  |              
|                       |            | Deferred retiree medical costs                       |        | $ | 6,294  |   |        | $                | 7,193  |  |  |  | 7 years       | 
|                       |            | Deferred loss on retirement of debt                  |        |   | 1,827  |   |        |                  | 2,133  |  |  |  | 5  11 years  | 
|                       |            | Deferred asset retirement obligation                 |        |   | 1,820  |   |        |                  |       |  |  |  | 15  35 years | 
|                       |            | Other                                                |        |   | 2,661  |   |        |                  | 2,736  |  |  |  | 1  10 years  | 
|                       |            |                                                      |        |   |        |   |        |                  |       
|                       |            | $                                                    | 12,602 |   |        | $ | 12,062 |                  |        |  |  | 
|                       |            |                                                      |        |   |        |   |        |                  |       
|Regulatory liabilities |            |                                                      |        |   |        |   |        |                  |        |  |  | 
|                       | Current    |                                                      |        |   |        |   |        |                  |        |  |  |  |              
|                       |            | Amounts payable to customers (gas cost overrecovery) |        | $ | 12,281 |   |        | $                | 5,624  |  |  |  | 1 year        | 
|                       | Noncurrent |                                                      |        |   |        |   |        |                  |        |  |  |  |              
|                       |            | Negative salvage value                               |        | $ | 56,627 |   |        | $                | 54,094 |  |  |  | 15  40 years | 
|                       |            | Tax benefits amortizable to customers                |        |   | 2,235  |   |        |                  | 2,731  |  |  |  | 8 years       | 
|                       |            | Unamortized investment tax credits                   |        |   | 352    |   |        |                  | 617    |  |  |  | 1 year        | 
|                       |            |                                                      |        |   |        |   |        |                  |       
|                       |            | $                                                    | 59,214 |   |        | $ | 57,442 |                  |        |  |  | 
|                       |            |                                                      |        |   |        |   |        |                  |       

67



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |             
|------- | ------------
|Note 3. | Income Taxes

SFAS 109.


|                                                                 |                                                                 |                          |       |       |      |   |        |        |   |   |        |         |  
|---------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------ | ----- | ----- | ---- | - | ------ | ------ | - | - | ------ | ------- | -
|                                                                 |                                                                 | Years Ended December 31, |      
|                                                                 |                                                                 |                          |      
|                                                                 |                                                                 | 2005                     |       |       | 2004 |   |        | 2003   |  
|                                                                 |                                                                 |                          |       |       |      |   |        |        |  
|                                                                 |                                                                 | (In thousands)           |      
|Federal income tax expense (benefit):                            |                                                                 |                          |       |       |      |   |        |        |   |   |        |        
|                                                                 | Current                                                         |                          | $     |      |      |   | $      | (83    | ) |   | $      | 460     |  
|                                                                 | Deferred to future periods                                      |                          |       | 5,751 |      |   |        | (1,546 | ) |   |        | (11,172 | )
|                                                                 | Amortization of deferred investment tax credits (ITC)         |                          |       | (265  | )    |   |        | (265   | ) |   |        | (296    | )
|State income tax expense (benefit):                              |                                                                 |                          |       |       |      |   |        |        |   |   |        |        
|                                                                 | Current                                                         |                          |       | 248   |      |   |        | 34     |   |   |        | 926     |  
|                                                                 | Deferred to future periods                                      |                          |       | 599   |      |   |        | (2,111 | ) |   |        | 324     |  
|                                                                 |                                                                 |                          |       |       |      |   |        |        |  
|Total income tax expense (benefit)                               |                                                                 | $                        | 6,333 |       |      | $ | (3,971 | )      |   | $ | (9,758 | )      
|Less amounts included in:                                        |                                                                 |                          |       |       |      |   |        |        |   |   |        |        
|                                                                 | Minority interest  dividends on trust preferred
    securities |                          |       |      |      |   |        |       |   |   |        | (2,316  | )
|                                                                 | Discontinued operations                                         |                          |       | 312   |      |   |        | (3,504 | ) |   |        | (7,362  | )
|                                                                 |                                                                 |                          |       |       |      |   |        |        |  
|Income tax expense (benefit), excluding amounts shown separately |                                                                 | $                        | 6,021 |       |      | $ | (467   | )      |   | $ | (80    | )      
|                                                                 |                                                                 |                          |       |       |      |   |        |        |  

Reconciliation of Statutory Rate to Effective Rate.


|                                                                                |                                       |                          |        |       |      |   |        |        |   |   |         |        |  
|------------------------------------------------------------------------------- | ------------------------------------- | ------------------------ | ------ | ----- | ---- | - | ------ | ------ | - | - | ------- | ------ | -
|                                                                                |                                       | Years Ended December 31, |       
|                                                                                |                                       |                          |       
|                                                                                |                                       | 2005                     |        |       | 2004 |   |        | 2003   |  
|                                                                                |                                       |                          |        |       |      |   |        |        |  
|                                                                                |                                       | (In thousands)           |       
|Net Income (loss)                                                               |                                       | $                        | 12,275 |       |      | $ | (5,183 | )      |   | $ | (29,955 | )     
|                                                                                | Add back income tax expense (benefit) |                          |        | 6,333 |      |   |        | (3,971 | ) |   |         | (9,758 | )
|                                                                                |                                       |                          |        |       |      |   |        |        |  
|Pre-tax income (loss)                                                           |                                       | $                        | 18,608 |       |      | $ | (9,154 | )      |   | $ | (39,713 | )     
|                                                                                |                                       |                          |        |       |      |   |        |        |  
|Computed federal income tax expense (benefit)                                   |                                       | $                        | 6,513  |       |      | $ | (3,204 | )      |   | $ | (13,899 | )     
|Amortization of deferred ITC                                                    |                                       |                          | (265   | )     |      |   | (265   | )      |   |   | (296    | )     
|State income tax expense, net of federal taxes                                  |                                       |                          | 550    |       |      |   | 880    |        |   |   | 812     |       
|Change in estimate of prior years state income taxes, net
    of federal taxes |                                       |                          |       |       |      |   | (2,230 | )      |   |   |        |       
|Goodwill impairment charge not deductible for tax purposes                      |                                       |                          |       |       |      |   |       |        |   |   | 4,095   |       
|Other                                                                           |                                       |                          | (465   | )     |      |   | 848    |        |   |   | (470    | )     
|                                                                                |                                       |                          |        |       |      |   |        |        |  
|Total income tax expense (benefit)                                              |                                       | $                        | 6,333  |       |      | $ | (3,971 | )      |   | $ | (9,758  | )     
|                                                                                |                                       |                          |        |       |      |   |        |        |  

Deferred Income Taxes.


68



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                         
|------- | ------------------------
|Note 3. | Income Taxes (continued)





|                                                       |  |                |          |   |      |   |         |  
|------------------------------------------------------ |  | -------------- | -------- | - | ---- | - | ------- | -
|                                                       |  | December 31,   |         
|                                                       |  |                |         
|                                                       |  | 2005           |          |   | 2004 |  
|                                                       |  |                |          |   |      |  
|                                                       |  | (In thousands) |         
|Property, plant and equipment                          |  | $              | (57,702  | ) |      | $ | (56,207 | )
|Retiree medical benefit liability                      |  |                | (200     | ) |      |   | 303     |  
|Retiree medical benefit regulatory assets              |  |                | (2,203   | ) |      |   | (2,518  | )
|Deferred ITC                                           |  |                | 151      |   |      |   | 339     |  
|Unamortized debt expense                               |  |                | (499     | ) |      |   | (613    | )
|Property taxes                                         |  |                | (1,757   | ) |      |   | (2,629  | )
|Goodwill                                               |  |                | (11,178  | ) |      |   | (8,722  | )
|Other comprehensive income  minimum pension liability |  |                | 4,932    |   |      |   | 3,924   |  
|Other comprehensive income  valuation adjustment      |  |                | (61      | ) |      |   | (30     | )
|Gas in underground storage                             |  |                | 1,312    |   |      |   | (514    | )
|Gas charge over-recovery                               |  |                | 3,870    |   |      |   | 1,879   |  
|Net operating loss carryforward                        |  |                | 33,503   |   |      |   | 38,851  |  
|AMT credit carryforward                                |  |                | 2,276    |   |      |   | 2,276   |  
|Valuation allowance for deferred tax assets            |  |                | (361     | ) |      |   | (580    | )
|Other                                                  |  |                | 2,547    |   |      |   | 3,824   |  
|                                                       |  |                |          |   |      |  
|Total deferred taxes                                   |  | $              | (25,370  | ) |      | $ | (20,417 | )
|                                                       |  |                |          |   |      |  
|Gross deferred tax liabilities                         |  | $              | (108,837 | ) |      | $ | (99,670 | )
|Gross deferred tax assets                              |  |                | 83,828   |   |      |   | 79,833  |  
|Valuation allowance for deferred tax assets            |  |                | (361     | ) |      |   | (580    | )
|                                                       |  |                |          |   |      |  
|Total deferred taxes                                   |  | $              | (25,370  | ) |      | $ | (20,417 | )
|                                                       |  |                |          |   |      |  



|        |               
|------- | --------------
|Note 4. | Capitalization

Common Shareholders Equity.




69



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                           
|------- | --------------------------
|Note 4. | Capitalization (continued)











Convertible Preference Stock and Stock Warrants.






70



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                           
|------- | --------------------------
|Note 4. | Capitalization (continued)



5% Series B Convertible Cumulative Preferred Stock.


30-day




360-day 30-day




over-the


Registration Statements. S-3


71



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                           
|------- | --------------------------
|Note 4. | Capitalization (continued)



Company Obligated Mandatorily Redeemable Trust Preferred
Securities.








Other Matters Regarding Trust Preferred Securities.


72



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                           
|------- | --------------------------
|Note 4. | Capitalization (continued)

20-day




Long-Term Debt.










96-19,


73



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                           
|------- | --------------------------
|Note 4. | Capitalization (continued)







|     |  |   |     | 
|---- |  | - | --- | 
|2006 |  | $ |    | 
|2007 |  | $ |    | 
|2008 |  | $ | 155 | 
|2009 |  | $ | 30  | 
|2010 |  | $ |    | 



|        |                      
|------- | ---------------------
|Note 5. | Short-Term Borrowings

364-day


|                                    |  |                          |        |   |      |   |        |      |  |   |         |  
|----------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                    |  | Years Ended December 31, |       
|                                    |  |                          |       
|                                    |  | 2005                     |        |   | 2004 |   |        | 2003 | 
|                                    |  |                          |        |   |      |   |        |      | 
|                                    |  | (In thousands)           |       
|Notes payable balance at year end   |  | $                        | 78,900 |   |      | $ | 39,300 |      |  | $ | 82,034  |  
|Unused lines of credit at year end  |  | $                        | 24,277 |   |      | $ | 61,914 |      |  | $ | 38,275  |  
|Average interest rate at year end   |  |                          | 6.1    | % |      |   | 4.9    | %    |  |   | 3.4     | %
|Highest borrowings at any month-end |  | $                        | 89,300 |   |      | $ | 65,203 |      |  | $ | 124,468 |  
|Average borrowings                  |  | $                        | 15,795 |   |      | $ | 14,477 |      |  | $ | 92,138  |  
|Weighted average interest rate      |  |                          | 5.6    | % |      |   | 3.6    | %    |  |   | 3.0     | %



74



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                  
|------- | ---------------------------------
|Note 5. | Short-Term Borrowings (continued)





|        |                      
|------- | ---------------------
|Note 6. | Financial Instruments



Cash, Cash Equivalents, Accounts Receivables, Payables and
Notes Payable.


Long-Term Debt.


|                                             |                 |                |   |         |      |  |   |         | 
|-------------------------------------------- | --------------- | -------------- | - | ------- | ---- |  | - | ------- | 
|                                             |                 | December 31,   |  
|                                             |                 |                |  
|                                             |                 | 2005           |   |         | 2004 | 
|                                             |                 |                |   |         |      | 
|                                             |                 | (In thousands) |  
|Long-term debt, including current maturities |                 |                |   |         |      |  |   |        
|                                             | Carrying amount |                | $ | 441,659 |      |  | $ | 498,427 | 
|                                             | Fair value      |                |   | 471,967 |      |  |   | 548,060 | 



|        |                                                       
|------- | ------------------------------------------------------
|Note 7. | Risk Management Activities and Derivative Transactions





floating-to


75



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                       
|------- | ----------------------------------------------------------------------
|Note 7. | Risk Management Activities and Derivative Transactions
    (continued)



fixed-to




|        |                                                
|------- | -----------------------------------------------
|Note 8. | Pension Plans and Other Postretirement Benefits

Pensions.




Other Postretirement Benefits.




76



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                
|------- | ---------------------------------------------------------------
|Note 8. | Pension Plans and Other Postretirement Benefits
    (continued)



|                               |                                       |                          |       |        |                               |   |       |        |   |   |       |        |   |      |       |        |      |   |       |        |   |   |       |        |  
|------------------------------ | ------------------------------------- | ------------------------ | ----- | ------ | ----------------------------- | - | ----- | ------ | - | - | ----- | ------ | - | ---- | ----- | ------ | ---- | - | ----- | ------ | - | - | ----- | ------ | -
|                               |                                       | Years Ended December 31, |      
|                               |                                       |                          |      
|                               |                                       | Pension Benefits         |       |        | Other Postretirement Benefits |  
|                               |                                       |                          |       |        |                               |  
|                               |                                       | 2005                     |       |        | 2004                          |   |       | 2003   |   |   | 2005  |        |   | 2004 |       |        | 2003 |  
|                               |                                       |                          |       |        |                               |   |       |        |   |   |       |        |   |      |       |        |      |  
|                               |                                       | (In thousands)           |      
|Components of net benefit cost |                                       |                          |       |        |                               |   |       |        |   |   |       |        |   |      |       |        |      |   |       |        |   |   |       |       
|                               | Service cost                          |                          | $     | 2,922  |                               |   | $     | 2,387  |   |   | $     | 1,865  |   |      | $     | 467    |      |   | $     | 362    |   |   | $     | 355    |  
|                               | Interest cost                         |                          |       | 4,899  |                               |   |       | 4,508  |   |   |       | 4,299  |   |      |       | 1,860  |      |   |       | 1,859  |   |   |       | 2,447  |  
|                               | Expected return on plan assets        |                          |       | (5,460 | )                             |   |       | (5,072 | ) |   |       | (4,812 | ) |      |       | (2,163 | )    |   |       | (1,910 | ) |   |       | (1,647 | )
|                               | Amortization of transition obligation |                          |       |       |                               |   |       | 2      |   |   |       | 23     |   |      |       | 69     |      |   |       | 69     |   |   |       | 413    |  
|                               | Amortization of prior service cost    |                          |       | 108    |                               |   |       | 173    |   |   |       | 118    |   |      |       | (286   | )    |   |       | (286   | ) |   |       | (59    | )
|                               | Amortization of net (gain) or loss    |                          |       | 2,497  |                               |   |       | 1,487  |   |   |       | 1,065  |   |      |       | 198    |      |   |       | 200    |   |   |       | 423    |  
|                               | Amortization of regulatory asset      |                          |       |       |                               |   |       |       |   |   |       |       |   |      |       | 899    |      |   |       | 899    |   |   |       | 899    |  
|                               |                                       |                          |       |        |                               |   |       |        |   |   |       |        |   |      |       |        |      |  
|Net benefit cost               |                                       | $                        | 4,966 |        |                               | $ | 3,485 |        |   | $ | 2,558 |        |   | $    | 1,044 |        |      | $ | 1,193 |        |   | $ | 2,831 |       
|                               |                                       |                          |       |        |                               |   |       |        |   |   |       |        |   |      |       |        |      |  





|                             |                                                                           |                  |   |                      |          |  |   |        |   |  |      |        |   |  |   |        |  
|---------------------------- | ------------------------------------------------------------------------- | ---------------- | - | -------------------- | -------- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                             |                                                                           |                  |   | Other Postretirement |         
|                             |                                                                           | Pension Benefits |   |                      | Benefits | 
|                             |                                                                           |                  |   |                      |          | 
|                             |                                                                           | 2005             |   |                      | 2004     |  |   | 2005   |   |  | 2004 |       
|                             |                                                                           |                  |   |                      |          |  |   |        |   |  |      |       
|                             |                                                                           | (In thousands)   |  
|Change in benefit obligation |                                                                           |                  |   |                      |          |  |   |        |   |  |      |        |   |  |   |       
|                             | Benefit obligation at January 1                                           |                  | $ | 82,227               |          |  | $ | 72,831 |   |  | $    | 34,409 |   |  | $ | 40,033 |  
|                             | Service cost                                                              |                  |   | 2,922                |          |  |   | 2,387  |   |  |      | 467    |   |  |   | 362    |  
|                             | Interest cost                                                             |                  |   | 4,899                |          |  |   | 4,508  |   |  |      | 1,860  |   |  |   | 1,859  |  
|                             | Actuarial (gain) loss                                                     |                  |   | 8,122                |          |  |   | 5,996  |   |  |      | 1,074  |   |  |   | (1,542 | )
|                             | Benefits paid from plan assets                                            |                  |   | (3,527               | )        |  |   | (4,260 | ) |  |      |       |   |  |   |       |  
|                             | Benefits paid from corporate assets, net of participant
    contributions |                  |   |                     |          |  |   |       |   |  |      | (1,677 | ) |  |   | (829   | )
|                             | Plan amendments                                                           |                  |   | 202                  |          |  |   | 765    |   |  |      |       |   |  |   | (5,474 | )
|                             |                                                                           |                  |   |                      |          |  |   |        |   |  |      |       
|                             | Benefit obligation at December 31                                         |                  | $ | 94,845               |          |  | $ | 82,227 |   |  | $    | 36,133 |   |  | $ | 34,409 |  
|                             |                                                                           |                  |   |                      |          |  |   |        |   |  |      |       

77



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                
|------- | ---------------------------------------------------------------
|Note 8. | Pension Plans and Other Postretirement Benefits
    (continued)

|                                                                                                                                             |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |        |   |  |     |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------- | ------ | -------------------- | -------- | - | ------ | ------- | - |  | ---- | ------ | - |  | --- | ------ | -
|                                                                                                                                             |                                                                                     |                  |        | Other Postretirement |         
|                                                                                                                                             |                                                                                     | Pension Benefits |        |                      | Benefits |  
|                                                                                                                                             |                                                                                     |                  |        |                      |          |  
|                                                                                                                                             |                                                                                     | 2005             |        |                      | 2004     |   |        | 2005    |   |  | 2004 |       
|                                                                                                                                             |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |       
|                                                                                                                                             |                                                                                     | (In thousands)   |       
|Change in plan assets                                                                                                                        |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |        |   |  |     |       
|                                                                                                                                             | Fair value of plan assets at January 1                                              |                  | $      | 63,454               |          |   | $      | 54,936  |   |  | $    | 25,449 |   |  | $   | 22,474 |  
|                                                                                                                                             | Actual return on plan assets                                                        |                  |        | 4,043                |          |   |        | 5,440   |   |  |      | 1,729  |   |  |     | 2,975  |  
|                                                                                                                                             | Company contributions                                                               |                  |        | 5,742                |          |   |        | 7,338   |   |  |      |       |   |  |     |       |  
|                                                                                                                                             | Benefits paid from plan assets                                                      |                  |        | (3,527               | )        |   |        | (4,260  | ) |  |      |       |   |  |     |       |  
|                                                                                                                                             |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |       
|                                                                                                                                             | Fair value of plan assets at December 31                                            |                  | $      | 69,712               |          |   | $      | 63,454  |   |  | $    | 27,178 |   |  | $   | 25,449 |  
|                                                                                                                                             |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |       
|Reconciliation of funded status of the plans                                                                                                 |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |        |   |  |     |       
|                                                                                                                                             | Funded (unfunded) status                                                            |                  | $      | (25,133              | )        |   | $      | (18,773 | ) |  | $    | (8,955 | ) |  | $   | (8,960 | )
|                                                                                                                                             | Unrecognized net (gain) loss                                                        |                  |        | 33,101               |          |   |        | 26,060  |   |  |      | 5,828  |   |  |     | 4,518  |  
|                                                                                                                                             | Unrecognized prior service cost                                                     |                  |        | 898                  |          |   |        | 804     |   |  |      | (2,273 | ) |  |     | (2,559 | )
|                                                                                                                                             | Unrecognized net transition obligation                                              |                  |        |                     |          |   |        |        |   |  |      | 483    |   |  |     | 552    |  
|                                                                                                                                             | Additional minimum pension liability                                                |                  |        | (14,547              | )        |   |        | (11,514 | ) |  |      |       |   |  |     |       |  
|                                                                                                                                             |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |       
|                                                                                                                                             | Total liability at December 31                                                      |                  | $      | (5,681               | )        |   | $      | (3,423  | ) |  | $    | (4,917 | ) |  | $   | (6,449 | )
|                                                                                                                                             |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |       
|Amounts recognized in statements of financial position consist
    of:                                                                       |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |        |   |  |     |       
|                                                                                                                                             | Prepaid benefit cost                                                                |                  | $      | 8,866                |          |   | $      | 8,091   |   |  | $    |       |   |  | $   |       |  
|                                                                                                                                             | Accrued benefit cost                                                                |                  |        |                     |          |   |        |        |   |  |      | (4,917 | ) |  |     | (6,449 | )
|                                                                                                                                             | Intangible asset                                                                    |                  |        | (456                 | )        |   |        | (302    | ) |  |      |       |   |  |     |       |  
|                                                                                                                                             | Accumulated comprehensive income                                                    |                  |        | (14,091              | )        |   |        | (11,212 | ) |  |      |       |   |  |     |       |  
|                                                                                                                                             |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |       
|                                                                                                                                             | Total liability at December 31                                                      |                  | $      | (5,681               | )        |   | $      | (3,423  | ) |  | $    | (4,917 | ) |  | $   | (6,449 | )
|                                                                                                                                             |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |       
|Information for pension plans with an accumulated benefit
    obligation in excess of plan assets at December 31                             |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |        |   |  |     |       
|                                                                                                                                             | Accumulated benefit obligation                                                      |                  | $      | 51,320               |          |   | $      | 45,359  |   |  |      | n/a    |   |  |     | n/a    |  
|                                                                                                                                             | Fair value of plan assets                                                           |                  | $      | 36,078               |          |   | $      | 34,927  |   |  |      | n/a    |   |  |     | n/a    |  
|Information for pension and postretirement benefit plans with a
    projected benefit obligation in excess of plan assets at
    December 31 |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |        |   |  |     |       
|                                                                                                                                             | Projected benefit obligation                                                        |                  | $      | 84,096               |          |   | $      | 73,285  |   |  | $    | 22,267 |   |  | $   | 21,180 |  
|                                                                                                                                             | Fair value of plan assets                                                           |                  | $      | 58,769               |          |   | $      | 54,284  |   |  | $    | 12,182 |   |  | $   | 11,422 |  
|Accumulated benefit obligation for all plans at December 31                                                                                  |                                                                                     | $                | 84,418 |                      |          | $ | 73,322 |         |   |  | n/a  |        |   |  | n/a |       
|Additional information                                                                                                                       |                                                                                     |                  |        |                      |          |   |        |         |   |  |      |        |   |  |     |       
|                                                                                                                                             | Increase (decrease) in minimum liability included in other
    comprehensive income |                  | $      | 2,880                |          |   | $      | 1,201   |   |  |      | n/a    |   |  |     | n/a    |  

78



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                
|------- | ---------------------------------------------------------------
|Note 8. | Pension Plans and Other Postretirement Benefits
    (continued)

Assumptions.


|                                                                                                         |                                                         |                                                                                   |  |                      |          |  |  |      |     |  |      |        |       |   |   |        |       |  
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------------------------------------- |  | -------------------- | -------- |  |  | ---- | --- |  | ---- | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                         |                                                         |                                                                                   |  | Other Postretirement |         
|                                                                                                         |                                                         | Pension Benefits                                                                  |  |                      | Benefits | 
|                                                                                                         |                                                         |                                                                                   |  |                      |          | 
|                                                                                                         |                                                         | 2005                                                                              |  |                      | 2004     |  |  | 2005 |     |  | 2004 |       
|                                                                                                         |                                                         |                                                                                   |  |                      |          |  |  |      |     |  |      |       
|                                                                                                         |                                                         | (In thousands, except for percentages)                                            | 
|Weighted average assumptions used to determine net periodic
    benefit cost for years ended December 31 |                                                         |                                                                                   |  |                      |          |  |  |      |     |  |      |        |       |   |   |       
|                                                                                                         | Discount rate                                           |                                                                                   |  | 5.75                 | %        |  |  | 6.25 | %   |  |      | 5.75   | %     |   |   | 6.25   | %    
|                                                                                                         | Expected long-term rate of return on plan assets        |                                                                                   |  | 8.50                 | %        |  |  | 8.50 | %   |  |      | 8.50   | %     |   |   | 8.50   | %    
|                                                                                                         | Rate of compensation increase                           |                                                                                   |  | 4.00                 | %        |  |  | 4.00 | %   |  |      | n/a    |       |   |   | n/a    |      
|Weighted average assumptions used to determine benefit
    obligations at December 31                    |                                                         |                                                                                   |  |                      |          |  |  |      |     |  |      |        |       |   |   |       
|                                                                                                         | Discount rate                                           |                                                                                   |  | 5.50                 | %        |  |  | 5.75 | %   |  |      | 5.50   | %     |   |   | 5.75   | %    
|                                                                                                         | Rate of compensation increase                           |                                                                                   |  | 4.00                 | %        |  |  | 4.00 | %   |  |      | n/a    |       |   |   | n/a    |      
|Assumed health care cost trend rate                                                                      |                                                         |                                                                                   |  |                      |          |  |  |      |     |  |      |        |       |   |   |       
|                                                                                                         | Medical                                                 |                                                                                   |  |                      |          |  |  |      |     |  |      |        |       |   |   |        |      
|                                                                                                         |                                                         | Rate assumed for next year                                                        |  |                      | n/a      |  |  |      | n/a |  |      |        | 8.00  | % |   |        | 8.00  | %
|                                                                                                         |                                                         | Rate to which cost trend rate is assumed to decline (the
    ultimate trend rate) |  |                      | n/a      |  |  |      | n/a |  |      |        | 5.00  | % |   |        | 5.00  | %
|                                                                                                         |                                                         | Year of ultimate trend rate                                                       |  |                      | n/a      |  |  |      | n/a |  |      |        | 2013  |   |   |        | 2010  |  
|                                                                                                         | Prescription drug                                       |                                                                                   |  |                      |          |  |  |      |     |  |      |        |       |   |   |        |      
|                                                                                                         |                                                         | Rate assumed for next year                                                        |  |                      | n/a      |  |  |      | n/a |  |      |        | 10.00 | % |   |        | 12.00 | %
|                                                                                                         |                                                         | Rate to which cost trend rate is assumed to decline (the
    ultimate trend rate) |  |                      | n/a      |  |  |      | n/a |  |      |        | 5.00  | % |   |        | 5.00  | %
|                                                                                                         |                                                         | Year of ultimate trend rate                                                       |  |                      | n/a      |  |  |      | n/a |  |      |        | 2013  |   |   |        | 2010  |  
|Effect of a 1% increase in health cost trend rate                                                        |                                                         |                                                                                   |  |                      |          |  |  |      |     |  |      |        |       |   |   |       
|                                                                                                         | Effect on accumulated postretirement benefit obligation |                                                                                   |  | n/a                  |          |  |  | n/a  |     |  | $    | 5,734  |       |   | $ | 5,161  |      
|                                                                                                         | Effect on aggregate of service and interest costs       |                                                                                   |  | n/a                  |          |  |  | n/a  |     |  | $    | 412    |       |   | $ | 362    |      
|Effect of a 1% decrease in health cost trend rate                                                        |                                                         |                                                                                   |  |                      |          |  |  |      |     |  |      |        |       |   |   |       
|                                                                                                         | Effect on accumulated postretirement benefit obligation |                                                                                   |  | n/a                  |          |  |  | n/a  |     |  | $    | (4,658 | )     |   | $ | (4,219 | )    
|                                                                                                         | Effect on aggregate of service and interest costs       |                                                                                   |  | n/a                  |          |  |  | n/a  |     |  | $    | (327   | )     |   | $ | (290   | )    





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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                                                
|------- | ---------------------------------------------------------------
|Note 8. | Pension Plans and Other Postretirement Benefits
    (continued)

Plan Assets.


|               |                   |                       |  |                |          |  |  |       |   |  |      |       |   |  |  |       |  
|-------------- | ----------------- | --------------------- |  | -------------- | -------- |  |  | ----- | - |  | ---- | ----- | - |  |  | ----- | -
|               |                   | Percentage Allocation | 
|               |                   |                       | 
|               |                   |                       |  | Other          |         
|               |                   |                       |  | Postretirement |         
|               |                   | Pension Benefits      |  |                | Benefits | 
|               |                   |                       |  |                |          | 
|December 31,   |                   | 2005                  |  |                | 2004     |  |  | 2005  |   |  | 2004 |      
|               |                   |                       |  |                |          |  |  |       |   |  |      |      
|Asset Category |                   |                       |  |                |          |  |  |       |   |  |      |       |   |  |  |      
|               | Equity securities |                       |  | 65.0           | %        |  |  | 67.5  | % |  |      | 65.0  | % |  |  | 61.9  | %
|               | Debt securities   |                       |  | 25.9           | %        |  |  | 25.6  | % |  |      | 35.0  | % |  |  | 35.2  | %
|               | Other             |                       |  | 9.1            | %        |  |  | 6.9   | % |  |      | 0.0   | % |  |  | 2.9   | %
|               |                   |                       |  |                |          |  |  |       |   |  |      |      
|               | Total             |                       |  | 100.0          | %        |  |  | 100.0 | % |  |      | 100.0 | % |  |  | 100.0 | %
|               |                   |                       |  |                |          |  |  |       |   |  |      |      





Estimated Future Benefit Payments.


|                  |  |                |        |                               |          |   |        |                      |  |   |          |  |  |   |        | 
|----------------- |  | -------------- | ------ | ----------------------------- | -------- | - | ------ | -------------------- |  | - | -------- |  |  | - | ------ | 
|                  |  |                |        | Other Postretirement Benefits |         
|                  |  |                |        |                               |         
|                  |  | Pension        |        |                               | Gross    |   |        | Less Medicare Part D |  |   | Net      | 
|                  |  | Benefits       |        |                               | Benefits |   |        | Subsidy              |  |   | Benefits | 
|                  |  |                |        |                               |          |   |        |                      |  |   |          | 
|                  |  | (In thousands) |       
|2006              |  | $              | 3,600  |                               |          | $ | 1,900  |                      |  | $ | 200      |  |  | $ | 1,700  | 
|2007              |  |                | 3,800  |                               |          |   | 1,900  |                      |  |   | 200      |  |  |   | 1,700  | 
|2008              |  |                | 3,800  |                               |          |   | 1,900  |                      |  |   | 200      |  |  |   | 1,700  | 
|2009              |  |                | 4,300  |                               |          |   | 2,000  |                      |  |   | 200      |  |  |   | 1,800  | 
|2010              |  |                | 4,800  |                               |          |   | 2,100  |                      |  |   | 200      |  |  |   | 1,900  | 
|Years 2011 - 2015 |  |                | 28,100 |                               |          |   | 11,900 |                      |  |   | 1,500    |  |  |   | 10,400 | 

401(K) Plans and Profit Sharing Plans.




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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                         
|------- | ------------------------
|Note 9. | Share-Based Compensation







Restricted Stock Units for Executives.


Employee Performance Share Units.


Restricted Stock for Directors.


81



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                     
|------- | ------------------------------------
|Note 9. | Share-Based Compensation (Continued)



Options to Purchase Common Stock.


|                              |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                              |  | 2005 |       |   | 2004 |   |       | 2003 | 
|                              |  |      |       |   |      |   |       |      | 
|Risk-free interest rate       |  |      | 3.95  | % |      |   | 3.44  | %    |  |   | 2.91  | %
|Dividend yield                |  |      | 0.00  | % |      |   | 0.26  | %    |  |   | 8.21  | %
|Volatility                    |  |      | 39.32 | % |      |   | 43.35 | %    |  |   | 41.81 | %
|Average expected term (years) |  |      | 5     |   |      |   | 5     |      |  |   | 5     |  
|Fair value of options granted |  | $    | 2.59  |   |      | $ | 2.20  |      |  | $ | 0.52  |  



|                            |  |                     |           |           |                     |  |         |           |          |  |             |         |  |           |         |  |  |  |       | 
|--------------------------- |  | ------------------- | --------- | --------- | ------------------- |  | ------- | --------- | -------- |  | ----------- | ------- |  | --------- | ------- |  |  |  | ----- | 
|                            |  | Options Outstanding |           |           | Options Exercisable | 
|                            |  |                     |           |           |                     | 
|                            |  |                     |           | Weighted  |                     |  |         |           | Weighted | 
|                            |  |                     |           | Remaining |                     |  | Average |           |          |  |             | Average | 
|                            |  | Number              |           |           | Contractual Life in |  |         | Exercise  |          |  | Number      |         |  | Exercise  |        
|Range of Exercisable Prices |  | Outstanding         |           |           | Years               |  |         | Price ($) |          |  | Exercisable |         |  | Price ($) |        
|                            |  |                     |           |           |                     |  |         |           |          |  |             |         |  |           |        
|$ 4.13 - $ 5.64             |  |                     | 406,267   |           |                     |  | 8.2     |           |          |  | 5.15        |         |  |           | 191,074 |  |  |  | 4.91  | 
|$ 5.78 - $ 7.43             |  |                     | 413,113   |           |                     |  | 7.6     |           |          |  | 6.66        |         |  |           | 231,777 |  |  |  | 7.16  | 
|$ 9.99 - $14.26             |  |                     | 193,000   |           |                     |  | 4.9     |           |          |  | 13.52       |         |  |           | 193,000 |  |  |  | 13.52 | 
|$14.35 - $17.14             |  |                     | 146,979   |           |                     |  | 3.6     |           |          |  | 15.42       |         |  |           | 146,979 |  |  |  | 15.42 | 
|                            |  |                     |           |           |                     |  |         |           |          |  |             |         |  |           |        
|                            |  |                     | 1,159,359 |           |                     |  |         |           |          |  |             |         |  |           | 762,830 |  |  |  |       | 
|                            |  |                     |           |           |                     |  |         |           |          |  |             |         |  |           |        

82



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                     
|------- | ------------------------------------
|Note 9. | Share-Based Compensation (Continued)



|                                 |           |           |           |          |                    |  |       |       | 
|-------------------------------- | --------- | --------- | --------- | -------- | ------------------ |  | ----- | ----- | 
|                                 |           | Number of |           |          | Weighted Average   | 
|                                 |           | Shares    |           |          | Exercise Price ($) | 
|                                 |           |           |           |          |                    | 
|Outstanding at December 31, 2002 |           |           | 1,139,218 |          |                    |  | 12.96 |      
|                                 | Granted   |           |           | 184,285  |                    |  |       | 4.29  | 
|                                 | Exercised |           |           |         |                    |  |       |      | 
|                                 | Canceled  |           |           | (145,768 | )                  |  |       | 11.99 | 
|Outstanding at December 31, 2003 |           |           | 1,177,735 |          |                    |  | 11.72 |      
|                                 | Granted   |           |           | 419,800  |                    |  |       | 5.51  | 
|                                 | Exercised |           |           | (2,668   | )                  |  |       | 4.13  | 
|                                 | Canceled  |           |           | (302,825 | )                  |  |       | 11.66 | 
|Outstanding at December 31, 2004 |           |           | 1,292,042 |          |                    |  | 9.73  |      
|                                 | Granted   |           |           | 136,813  |                    |  |       | 6.11  | 
|                                 | Exercised |           |           | (2,333   | )                  |  |       | 4.13  | 
|                                 | Canceled  |           |           | (267,163 | )                  |  |       | 13.78 | 
|Outstanding at December 31, 2005 |           |           | 1,159,359 |          |                    |  | 8.38  |      
|Exercisable at December 31, 2003 |           |           | 781,208   |          |                    |  | 13.81 |      
|Exercisable at December 31, 2004 |           |           | 857,523   |          |                    |  | 11.92 |      
|Exercisable at December 31, 2005 |           |           | 762,830   |          |                    |  | 9.80  |      





|         |                   
|-------- | ------------------
|Note 10. | Earnings Per Share



83



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                               
|-------- | ------------------------------
|Note 10. | Earnings Per Share (continued)



|                                                                                                               |                                                                                                  |                          |   |       |      |  |   |       |  |  |   |       | 
|-------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------ | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                                                                               |                                                                                                  | Years Ended December 31, |  
|                                                                                                               |                                                                                                  |                          |  
|                                                                                                               |                                                                                                  | 2005                     |   |       | 2004 |  |   | 2003  | 
|                                                                                                               |                                                                                                  |                          |   |       |      |  |   |       | 
|                                                                                                               |                                                                                                  | (In thousands)           |  
|Potential dilutive impact on average common shares
    outstanding when calculating diluted earnings per share |                                                                                                  |                          |   |       |      |  |   |       |  |  |   |      
|                                                                                                               | Assumed conversion of convertible cumulative preferred stock                                     |                          |   | 7,283 |      |  |   |      |  |  |   |      | 
|                                                                                                               | Assumed conversion of convertible preference stock                                               |                          |   | 1,614 |      |  |   | 5,430 |  |  |   |      | 
|                                                                                                               | Assumed exercise of stock options                                                                |                          |   | 55    |      |  |   | 24    |  |  |   | 20    | 
|                                                                                                               | Assumed settlement of restricted stock units and performance
    share units                     |                          |   | 13    |      |  |   | 9     |  |  |   |      | 
|                                                                                                               | Assumed vesting of non-vested restricted stock                                                   |                          |   | 16    |      |  |   |      |  |  |   |      | 
|                                                                                                               | Assumed failed remarketing and assumed retirement of trust
    preferred securities              |                          |   |      |      |  |   |      |  |  |   | 5,280 | 
|Potential income statement adjustments when calculating
    diluted earnings per share                         |                                                                                                  |                          |   |       |      |  |   |       |  |  |   |      
|                                                                                                               | Eliminate dividends on convertible cumulative preferred stock
    assumed converted              |                          | $ | 2,994 |      |  | $ |      |  |  | $ |      | 
|                                                                                                               | Eliminate dividends and repurchase premium on convertible
    preference stock assumed converted |                          | $ | 9,112 |      |  | $ | 3,203 |  |  | $ |      | 
|                                                                                                               | Eliminate dividends on trust preferred securities assumed retired                                |                          | $ |      |      |  | $ |      |  |  | $ | 5,681 | 

84



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                               
|-------- | ------------------------------
|Note 10. | Earnings Per Share (continued)



|                                                                               |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |        |   |   |         |   | 
|------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | - | ------ | ------ | - | - | ------ | ------ | - | - | ------- | - | 
|                                                                               |                                                                                                                           | Years Ended December 31,                                                                         |  
|                                                                               |                                                                                                                           |                                                                                                  |  
|                                                                               |                                                                                                                           | 2005                                                                                             |   |        | 2004   |   |   | 2003   |       
|                                                                               |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |       
|                                                                               |                                                                                                                           | (In thousands, except per share                                                                  |  
|                                                                               |                                                                                                                           | amounts)                                                                                         |  
|Average common shares outstanding                                              |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |        |   |   |        
|                                                                               | Issued                                                                                                                    |                                                                                                  |   | 30,470 |        |   |   | 28,263 |        |   |   | 22,297  |  
|                                                                               | Adjustments to reconcile to average common shares outstanding
    for purposes of computing basic EPS:                    |                                                                                                  |   |        |        |   |   |        |        |   |   |         |  
|                                                                               |                                                                                                                           | Subtract non-vested restricted stock                                                             |   |        | (83    | ) |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           | Add shares issuable under fully vested restricted stock units                                    |   |        | 21     |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |       
|                                                                               | As adjusted  basic                                                                                                       |                                                                                                  |   | 30,408 |        |   |   | 28,263 |        |   |   | 22,297  |  
|                                                                               | Adjustments to reconcile to average common shares outstanding
    for purposes of computing diluted EPS:                  |                                                                                                  |   |        |        |   |   |        |        |   |   |         |  
|                                                                               |                                                                                                                           | Assumed conversion of convertible cumulative preferred stock                                     |   |        |       |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           | Assumed conversion of convertible preference stock                                               |   |        |       |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           | Assumed exercise of stock options                                                                |   |        |       |   |   |        | 24     |   |   |         |  | 
|                                                                               |                                                                                                                           | Assumed settlement of restricted stock units and performance
    share units                     |   |        |       |   |   |        | 9      |   |   |         |  | 
|                                                                               |                                                                                                                           | Assumed vesting of non-vested restricted stock                                                   |   |        |       |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           | Assumed failed remarketing and assumed retirement of trust
    preferred securities              |   |        |       |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |       
|                                                                               | Diluted                                                                                                                   |                                                                                                  |   | 30,408 |        |   |   | 28,296 |        |   |   | 22,297  |  
|Income (loss) from continuing operations                                       |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |        |   |   |        
|                                                                               | As reported                                                                                                               |                                                                                                  | $ | 11,737 |        |   | $ | 4,156  |        |   | $ | (5,084  | )
|                                                                               | Adjustments to reconcile to income (loss) from continuing
    operations for purposes of computing basic EPS:             |                                                                                                  |   |        |        |   |   |        |        |   |   |         |  
|                                                                               |                                                                                                                           | Subtract dividends and repurchase premium on convertible
    preference stock                    |   |        | (9,112 | ) |   |        | (3,203 | ) |   |         |  | 
|                                                                               |                                                                                                                           | Subtract dividends on convertible cumulative preferred stock                                     |   |        | (2,994 | ) |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |       
|                                                                               | As adjusted  basic                                                                                                       |                                                                                                  | $ | (369   | )      |   | $ | 953    |        |   | $ | (5,084  | )
|                                                                               | Adjustments to reconcile to income (loss) from continuing
    operations for purposes of computing diluted EPS:           |                                                                                                  |   |        |        |   |   |        |        |   |   |         |  
|                                                                               |                                                                                                                           | Eliminate dividends on convertible cumulative preferred stock
    assumed converted              |   |        |       |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           | Eliminate dividends and repurchase premium on convertible
    preference stock assumed converted |   |        |       |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |       
|                                                                               | Diluted                                                                                                                   |                                                                                                  | $ | (369   | )      |   | $ | 953    |        |   | $ | (5,084  | )
|Earnings per share from income (loss) from continuing
    operations           |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |        |   |   |        
|                                                                               | Basic                                                                                                                     |                                                                                                  | $ | (0.01  | )      |   | $ | 0.03   |        |   | $ | (0.23   | )
|                                                                               | Diluted                                                                                                                   |                                                                                                  | $ | (0.01  | )      |   | $ | 0.03   |        |   | $ | (0.23   | )
|Income (loss) from discontinued operations                                     |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |        |   |   |        
|                                                                               | As reported  basic                                                                                                       |                                                                                                  | $ | 538    |        |   | $ | (9,339 | )      |   | $ | (24,871 | )
|                                                                               | Diluted                                                                                                                   |                                                                                                  | $ | 538    |        |   | $ | (9,339 | )      |   | $ | (24,871 | )
|Earnings per share from income (loss) from discontinued
    operations         |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |        |   |   |        
|                                                                               | Basic                                                                                                                     |                                                                                                  | $ | 0.02   |        |   | $ | (0.33  | )      |   | $ | (1.11   | )
|                                                                               | Diluted                                                                                                                   |                                                                                                  | $ | 0.02   |        |   | $ | (0.33  | )      |   | $ | (1.11   | )
|Net income (loss) available to common shareholders                             |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |        |   |   |        
|                                                                               | As reported  basic                                                                                                       |                                                                                                  | $ | 169    |        |   | $ | (8,386 | )      |   | $ | (29,955 | )
|                                                                               | Adjustments to reconcile to net income (loss) available to
    common shareholders for purposes of computing diluted EPS: |                                                                                                  |   |        |        |   |   |        |        |   |   |         |  
|                                                                               |                                                                                                                           | Eliminate dividends on convertible cumulative preferred stock
    assumed converted              |   |        |       |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           | Eliminate dividends and repurchase premium on convertible
    preference stock assumed converted |   |        |       |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           | Eliminate dividends on trust preferred securities assumed retired                                |   |        |       |   |   |        |       |   |   |         |  | 
|                                                                               |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |       
|                                                                               | Diluted                                                                                                                   |                                                                                                  | $ | 169    |        |   | $ | (8,386 | )      |   | $ | (29,955 | )
|Earnings per share from net income (loss) available to common
    shareholders |                                                                                                                           |                                                                                                  |   |        |        |   |   |        |        |   |   |        
|                                                                               | Basic                                                                                                                     |                                                                                                  | $ | 0.01   |        |   | $ | (0.30  | )      |   | $ | (1.34   | )
|                                                                               | Diluted                                                                                                                   |                                                                                                  | $ | 0.01   |        |   | $ | (0.30  | )      |   | $ | (1.34   | )

85



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                  
|-------- | -----------------
|Note 11. | Business Segments







86



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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                              
|-------- | -----------------------------
|Note 11. | Business Segments (continued)



|                              |                                                     |                                            |   |         |           |  |   |         |         |  |   |         |         | 
|----------------------------- | --------------------------------------------------- | ------------------------------------------ | - | ------- | --------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                                                     | Years Ended December 31,                   |  
|                              |                                                     |                                            |  
|                              |                                                     | 2005                                       |   |         | 2004      |  |   | 2003    |        
|                              |                                                     |                                            |   |         |           |  |   |         |        
|                              |                                                     | (In thousands)                             |  
|Operating revenues            |                                                     |                                            |   |         |           |  |   |         |         |  |   |        
|                              | Gas distribution                                    |                                            | $ | 606,315 |           |  | $ | 498,249 |         |  | $ | 462,889 |        
|                              | Corporate and other                                 |                                            |   | 16,379  |           |  |   | 17,152  |         |  |   | 17,220  |        
|                              | Reconciliation to consolidated financial statements |                                            |   |         |           |  |   |         |         |  |   |         |        
|                              | Intercompany eliminations(a)                        |                                            |   | (7,592  | )         |  |   | (7,065  | )       |  |   | (7,154  | )      
|                              |                                                     |                                            |   |         |           |  |   |         |        
|                              |                                                     | Consolidated operating revenues            |   | $       | 615,102   |  |   | $       | 508,336 |  |   | $       | 472,955 | 
|                              |                                                     |                                            |   |         |           |  |   |         |        
|Depreciation and amortization |                                                     |                                            |   |         |           |  |   |         |         |  |   |        
|                              | Gas distribution                                    |                                            | $ | 26,825  |           |  | $ | 25,925  |         |  | $ | 25,528  |        
|                              | Corporate and other                                 |                                            |   | 1,399   |           |  |   | 1,653   |         |  |   | 1,920   |        
|                              |                                                     |                                            |   |         |           |  |   |         |        
|                              |                                                     | Consolidated depreciation and amortization |   | $       | 28,224    |  |   | $       | 27,578  |  |   | $       | 27,448  | 
|                              |                                                     |                                            |   |         |           |  |   |         |        
|Operating income (loss)       |                                                     |                                            |   |         |           |  |   |         |         |  |   |        
|                              | Gas distribution                                    |                                            | $ | 57,964  |           |  | $ | 52,760  |         |  | $ | 59,222  |        
|                              | Corporate and other                                 |                                            |   | 1,540   |           |  |   | (7,275  | )       |  |   | 1,475   |        
|                              |                                                     |                                            |   |         |           |  |   |         |        
|                              |                                                     | Consolidated operating income              |   | $       | 59,504    |  |   | $       | 45,485  |  |   | $       | 60,697  | 
|                              |                                                     |                                            |   |         |           |  |   |         |        
|Capital investments           |                                                     |                                            |   |         |           |  |   |         |         |  |   |        
|                              | Gas distribution(b)                                 |                                            | $ | 41,815  |           |  | $ | 37,924  |         |  | $ | 28,323  |        
|                              | Corporate and other                                 |                                            |   | 1,417   |           |  |   | 954     |         |  |   | 840     |        
|                              | Construction services(c)                            |                                            |   |        |           |  |   | 34      |         |  |   | 1,003   |        
|                              |                                                     |                                            |   |         |           |  |   |         |        
|                              |                                                     | Consolidated capital investments           |   | $       | 43,232    |  |   | $       | 38,912  |  |   | $       | 30,166  | 
|                              |                                                     |                                            |   |         |           |  |   |         |        
|Assets at year end            |                                                     |                                            |   |         |           |  |   |         |         |  |   |        
|                              | Gas distribution                                    |                                            | $ | 966,835 |           |  | $ | 864,183 |         |  |   |         |        
|                              | Corporate and other                                 |                                            |   | 49,720  |           |  |   | 62,015  |         |  |   |         |        
|                              |                                                     |                                            |   |         |           |  |   |         |        
|                              |                                                     | Consolidated assets at year end            |   | $       | 1,016,555 |  |   | $       | 926,198 |  |   |         |         | 
|                              |                                                     |                                            |   |         |           |  |   |         |        






|    |  |                                                                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes the elimination of intercompany gas distribution
    revenue of $209, $199 and $174 for 2005, 2004 and 2003. Includes
    the elimination of intercompany corporate and other revenue of
    $7,383, $6,866 and $6,980 for 2005, 2004 and 2003, respectively.
|   
|(b) |  | Gas Distribution capital investments for 2005 include $3,076 for
    a business acquisition.                                                                                                                                                                          



|    |  |                                                                                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) |  | Effective January 1, 2004, the Company began accounting for
    the construction services segment as a discontinued operation.
    Accordingly, its operating results are segregated and
    reported as discontinued operations in the Consolidated
    Statements of Operations.



|         |                          
|-------- | -------------------------
|Note 12. | Investments in Affiliates



87



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                          
|-------- | -------------------------
|Note 12. | Investments in Affiliates



|                                         |  |                |        |  |      |   |        |      |  |   |        | 
|---------------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                         |  | 2005           |        |  | 2004 |   |        | 2003 | 
|                                         |  |                |        |  |      |   |        |      | 
|                                         |  | (In thousands) |       
|Operating revenues                       |  | $              | 6,448  |  |      | $ | 6,752  |      |  | $ | 6,514  | 
|Operating income                         |  | $              | 3,947  |  |      | $ | 4,308  |      |  | $ | 4,141  | 
|Equity income                            |  | $              | 3,245  |  |      | $ | 3,511  |      |  | $ | 3,208  | 
|The Companys share of equity income     |  | $              | 1,623  |  |      | $ | 1,755  |      |  | $ | 1,604  | 
|Current assets                           |  | $              | 6,203  |  |      | $ | 4,232  |      |  | $ | 4,358  | 
|Non-current assets                       |  |                | 20,736 |  |      |   | 22,086 |      |  |   | 20,564 | 
|                                         |  |                |        |  |      |   |        |      | 
|Total assets                             |  | $              | 26,939 |  |      | $ | 26,318 |      |  | $ | 24,922 | 
|                                         |  |                |        |  |      |   |        |      | 
|Current liabilities                      |  | $              | 13,198 |  |      | $ | 6,242  |      |  | $ | 5,636  | 
|Non-current liabilities                  |  |                |       |  |      |   | 7,313  |      |  |   | 9,013  | 
|Equity                                   |  |                | 13,741 |  |      |   | 12,763 |      |  |   | 10,273 | 
|                                         |  |                |        |  |      |   |        |      | 
|Total liabilities and equity             |  | $              | 26,939 |  |      | $ | 26,318 |      |  | $ | 24,922 | 
|                                         |  |                |        |  |      |   |        |      | 
|The Companys equity investment in ERGSS |  | $              | 6,870  |  |      | $ | 6,381  |      |  | $ | 5,137  | 





|         |                              
|-------- | -----------------------------
|Note 13. | Commitments and Contingencies

Capital Investments.


Lease Commitments.




|           |  |   |     | 
|---------- |  | - | --- | 
|2006       |  | $ | 1.9 | 
|2007       |  | $ | 1.8 | 
|2008       |  | $ | 1.9 | 
|2009       |  | $ | 1.9 | 
|2010       |  | $ | 1.9 | 
|Thereafter |  | $ | 5.8 | 

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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                                          
|-------- | -----------------------------------------
|Note 13. | Commitments and Contingencies (continued)

month-to


Sublease Commitments.


Commitments for Natural Gas Supplies.


|           |  |   |       | 
|---------- |  | - | ----- | 
|2006       |  | $ | 168.7 | 
|2007       |  | $ | 26.6  | 
|2008       |  | $ | 19.4  | 
|2009       |  | $ | 11.6  | 
|2010       |  | $ | 2.6   | 
|Thereafter |  | $ |      | 

Guarantees. six-to


Environmental Issues.


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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                                          
|-------- | -----------------------------------------
|Note 13. | Commitments and Contingencies (continued)







Personal Property Taxes.






Other Contingencies.


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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                                          
|-------- | -----------------------------------------
|Note 13. | Commitments and Contingencies (continued)











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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                                                          
|-------- | ---------------------------------------------------------
|Note 14. | Acquisitions, Disposals and Discontinuation of Operations

Acquisition of Peninsular Gas Company.


Disposal of Construction Services Business Segment.






|                                                                                                                      |  |                         |      |   |      |   |        |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                                      |  | Year Ended December 31, |     
|                                                                                                                      |  |                         |     
|                                                                                                                      |  | 2005                    |      |   | 2004 |   |        | 2003 | 
|                                                                                                                      |  |                         |      |   |      |   |        |      | 
|                                                                                                                      |  | (In thousands)          |     
|Revenues                                                                                                              |  | $                       |     |   |      | $ | 34,106 |      |  | $ | 72,400  |  
|Operating expenses                                                                                                    |  |                         | (850 | ) |      |   | 39,722 |      |  |   | 82,894  |  
|Goodwill impairment charge                                                                                            |  |                         |     |   |      |   |       |      |  |   | 17,649  |  
|Asset impairment charge                                                                                               |  |                         |     |   |      |   |       |      |  |   | 2,825   |  
|                                                                                                                      |  |                         |      |   |      |   |        |      | 
|Operating income (loss)                                                                                               |  |                         | 850  |   |      |   | (5,616 | )    |  |   | (30,968 | )
|Other deductions                                                                                                      |  |                         |     |   |      |   | (807   | )    |  |   | (1,265  | )
|Income tax (expense) benefit                                                                                          |  |                         | (312 | ) |      |   | 1,782  |      |  |   | 7,362   |  
|                                                                                                                      |  |                         |      |   |      |   |        |      | 
|Income (loss) from discontinued operations                                                                            |  | $                       | 538  |   |      | $ | (4,641 | )    |  | $ | (24,871 | )
|                                                                                                                      |  |                         |      |   |      |   |        |      | 
|Loss on divestiture of construction services operations, net of
    income tax (expense) benefit of $0, $1,722 and $0 |  | $                       |     |   |      | $ | (4,698 | )    |  | $ |        |  
|                                                                                                                      |  |                         |      |   |      |   |        |      | 

92



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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                                            
|-------- | -------------------------------------------
|Note 15. | Quarterly Financial Information (Unaudited)



|                                                                                |           |                                          |         |      |        |   |        |       |   |   |        |       |   |   |         |      | 
|------------------------------------------------------------------------------- | --------- | ---------------------------------------- | ------- | ---- | ------ | - | ------ | ----- | - | - | ------ | ----- | - | - | ------- | ---- | 
|                                                                                |           | Quarters during 2005                     |        
|                                                                                |           |                                          |        
|                                                                                |           | First                                    |         |      | Second |   |        | Third |   |   | Fourth |      
|                                                                                |           |                                          |         |      |        |   |        |       |   |   |        |      
|                                                                                |           | (In thousands, except per share amounts) |        
|Operating revenues                                                              |           | $                                        | 226,560 |      |        | $ | 95,633 |       |   | $ | 62,310 |       |   | $ | 230,599 |     
|Operating income (loss)                                                         |           |                                          | 30,143  |      |        |   | 7,143  |       |   |   | (1,734 | )     |   |   | 23,952  |     
|Income (loss) from continuing operations                                        |           |                                          | 12,496  |      |        |   | (2,113 | )     |   |   | (7,930 | )     |   |   | 9,284   |     
|Discontinued operations                                                         |           |                                          |        |      |        |   |       |       |   |   | 538    |       |   |   |        |     
|Net income (loss) available to common shareholders                              |           |                                          | 3,232   |      |        |   | (3,058 | )     |   |   | (8,339 | )     |   |   | 8,334   |     
|Earnings per share from income (loss) from continuing operations:               |           |                                          |         |      |        |   |        |       |   |   |        |       |   |   |         |     
|                                                                                |  basic   |                                          |         | 0.11 |        |   |        | (0.11 | ) |   |        | (0.29 | ) |   |         | 0.25 | 
|                                                                                |  diluted |                                          |         | 0.11 |        |   |        | (0.11 | ) |   |        | (0.29 | ) |   |         | 0.22 | 
|Earnings per share from net income (loss) available to common
    shareholders: |           |                                          |         |      |        |   |        |       |   |   |        |       |   |   |         |     
|                                                                                |  basic   |                                          |         | 0.11 |        |   |        | (0.11 | ) |   |        | (0.27 | ) |   |         | 0.25 | 
|                                                                                |  diluted |                                          |         | 0.11 |        |   |        | (0.11 | ) |   |        | (0.27 | ) |   |         | 0.22 | 
|Dividends paid per share                                                        |           |                                          |        |      |        |   |       |       |   |   |       |       |   |   |        |     
|Dividends declared per share                                                    |           |                                          |        |      |        |   |       |       |   |   |       |       |   |   |        |     

|                                                                                |           |                                          |         |      |        |   |        |       |   |   |        |       |   |   |         |       |  
|------------------------------------------------------------------------------- | --------- | ---------------------------------------- | ------- | ---- | ------ | - | ------ | ----- | - | - | ------ | ----- | - | - | ------- | ----- | -
|                                                                                |           | Quarters during 2004                     |        
|                                                                                |           |                                          |        
|                                                                                |           | First                                    |         |      | Second |   |        | Third |   |   | Fourth |      
|                                                                                |           |                                          |         |      |        |   |        |       |   |   |        |      
|                                                                                |           | (In thousands, except per share amounts) |        
|Operating revenues                                                              |           | $                                        | 207,784 |      |        | $ | 81,762 |       |   | $ | 54,034 |       |   | $ | 164,756 |      
|Operating income (loss)                                                         |           |                                          | 31,290  |      |        |   | 4,934  |       |   |   | (1,492 | )     |   |   | 10,753  |      
|Income (loss) from continuing operations                                        |           |                                          | 12,861  |      |        |   | (3,544 | )     |   |   | (7,335 | )     |   |   | 2,174   |      
|Discontinued operations                                                         |           |                                          | (4,776  | )    |        |   | (2,344 | )     |   |   | (1,129 | )     |   |   | (1,090  | )    
|Net income (loss) available to common shareholders                              |           |                                          | 8,023   |      |        |   | (6,756 | )     |   |   | (9,617 | )     |   |   | (36     | )    
|Earnings per share from income (loss) from continuing operations:               |           |                                          |         |      |        |   |        |       |   |   |        |       |   |   |         |      
|                                                                                |  basic   |                                          |         | 0.46 |        |   |        | (0.16 | ) |   |        | (0.30 | ) |   |         | 0.04  |  
|                                                                                |  diluted |                                          |         | 0.45 |        |   |        | (0.16 | ) |   |        | (0.30 | ) |   |         | 0.04  |  
|Earnings per share from net income (loss) available to common
    shareholders: |           |                                          |         |      |        |   |        |       |   |   |        |       |   |   |         |      
|                                                                                |  basic   |                                          |         | 0.29 |        |   |        | (0.24 | ) |   |        | (0.34 | ) |   |         | (0.00 | )
|                                                                                |  diluted |                                          |         | 0.28 |        |   |        | (0.24 | ) |   |        | (0.34 | ) |   |         | (0.00 | )
|Dividends paid per share                                                        |           |                                          | 0.075   |      |        |   | 0.075  |       |   |   |       |       |   |   |        |      
|Dividends declared per share                                                    |           |                                          |        |      |        |   | 0.075  |       |   |   |       |       |   |   |        |      

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SCHEDULE II CONSOLIDATED VALUATION AND QUALIFYING
ACCOUNTS


|                                                                                                                                |  |                |       |               |            |   |                 |                   |  |   |         |  |  |   |       | 
|------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ------------- | ---------- | - | --------------- | ----------------- |  | - | ------- |  |  | - | ----- | 
|                                                                                                                                |  |                |       | Additions for |            |   | Deductions From |                   |  |  
|                                                                                                                                |  |                |       | Provisions    |            |   | Reserves for    |                   |  |  
|                                                                                                                                |  | Balance        |       |               | Charged or |   |                 | Purpose for       |  |   | Balance | 
|                                                                                                                                |  | Beginning      |       |               | (Credited) |   |                 | Which the Reserve |  |   | End of  | 
|Description                                                                                                                     |  | of Period      |       |               | to Income  |   |                 | was Provided      |  |   | Period  | 
|                                                                                                                                |  |                |       |               |            |   |                 |                   |  |   |         | 
|                                                                                                                                |  | (In thousands) |      
|Year Ended December 31, 2005                                                                                                   
|Allowance for doubtful accounts deducted from receivables in the
    Statement of Financial Position                            |  | $              | 2,247 |               |            | $ | 2,378           |                   |  | $ | 2,867   |  |  | $ | 1,758 | 
|Year Ended December 31, 2004                                                                                                   
|Allowance for doubtful accounts deducted from receivables in the
    Statement of Financial Position                            |  | $              | 2,387 |               |            | $ | 3,133           |                   |  | $ | 3,273   |  |  | $ | 2,247 | 
|Reserve for restructuring costs included in current liabilities
    and deferred credits in the Statement of Financial Position |  | $              | 278   |               |            | $ |                |                   |  | $ | 278     |  |  | $ |      | 
|Year Ended December 31, 2003                                                                                                   
|Allowance for doubtful accounts deducted from receivables in the
    Statement of Financial Position                            |  | $              | 1,909 |               |            | $ | 3,616           |                   |  | $ | 3,138   |  |  | $ | 2,387 | 
|Reserve for restructuring costs included in current liabilities
    and deferred credits in the Statement of Financial Position |  | $              | 1,093 |               |            | $ |                |                   |  | $ | 815     |  |  | $ | 278   | 

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Disclosure Controls and Procedures. 13a-15(e) 15d-15(e)


Managements Report on Internal Control Over Financial
Reporting. 13a-15(f)).






10-K.


Changes in Internal Control Over Financial Reporting. 13a-15(f) 15d-15(f)


95



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|         |                  
|-------- | -----------------
|Item 9B. | Other Information



|          |                                            
|--------- | -------------------------------------------
|Item 1.01 | Entry into a Material Definitive Agreement.

10-K






| |                                          
| | -----------------------------------------
| | Base Salaries of Named Executive Officers

10-K)


|                         |                                           |             |         |  | 
|------------------------ | ----------------------------------------- | ----------- | ------- |  | 
|                         |                                           | Base Salary |        
|                         |                                           | Effective   |        
|Name and Position        |                                           | July 2006   |        
|                         |                                           |             |        
|George A. Schreiber, Jr. |                                           | $           | 535,000 | 
|                         | President and CEO                         |             |         |  | 
|Michael V. Palmeri       |                                           | $           | 285,000 | 
|                         | Senior Vice President, Treasurer and CFO  |             |         |  | 
|Eugene N. Dubay          |                                           | $           | 275,000 | 
|                         | Senior Vice President of Operations       |             |         |  | 
|Peter F. Clark           |                                           | $           | 255,000 | 
|                         | Senior Vice President and General Counsel |             |         |  | 
|Mark T. Prendeville      |                                           | $           | 180,000 | 
|                         | Vice President and Deputy General Counsel |             |         |  | 



| |                                          
| | -----------------------------------------
| | Cash Bonus Awards under the STIP for 2005



|                         |                                           |               |         |  | 
|------------------------ | ----------------------------------------- | ------------- | ------- |  | 
|                         |                                           | Cash Bonus    |        
|                         |                                           | Award under   |        
|Name and Position        |                                           | STIP for 2005 |        
|                         |                                           |               |        
|George A. Schreiber, Jr. |                                           | $             | 200,000 | 
|                         | President and CEO                         |               |         |  | 
|Michael V. Palmeri       |                                           | $             | 83,200  | 
|                         | Senior Vice President, Treasurer and CFO  |               |         |  | 
|Eugene N. Dubay          |                                           | $             | 72,800  | 
|                         | Senior Vice President of Operations       |               |         |  | 
|Peter F. Clark           |                                           | $             | 65,800  | 
|                         | Senior Vice President and General Counsel |               |         |  | 
|Mark T. Prendeville      |                                           | $             | 40,765  | 
|                         | Vice President and Deputy General Counsel |               |         |  | 

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| |                                         
| | ----------------------------------------
| | 2006 Performance Criteria under the STIP





|                         |                                           |                       |                    |  | 
|------------------------ | ----------------------------------------- | --------------------- | ------------------ |  | 
|                         |                                           | Target Bonus That May |                   
|                         |                                           | be Granted Under STIP |                   
|Name and Position        |                                           | for 2006              |                   
|                         |                                           |                       |                   
|George A. Schreiber, Jr. |                                           |                       | 60% of Base Salary | 
|                         | President and CEO                         |                       |                    |  | 
|Michael V. Palmeri       |                                           |                       | 40% of Base Salary | 
|                         | Senior Vice President, Treasurer and CFO  |                       |                    |  | 
|Eugene N. Dubay          |                                           |                       | 50% of Base Salary | 
|                         | Senior Vice President of Operations       |                       |                    |  | 
|Peter F. Clark           |                                           |                       | 35% of Base Salary | 
|                         | Senior Vice President and General Counsel |                       |                    |  | 
|Mark T. Prendeville      |                                           |                       | 30% of Base Salary | 
|                         | Vice President and Deputy General Counsel |                       |                    |  | 





| |                                         
| | ----------------------------------------
| | 2006 Performance Criteria under the LTIP








PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



97



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10-K







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



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PART IV







|         |                                        
|-------- | ---------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules

| |     |  |  |   |  |                                                                                                                                         
| | --- |  |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------
| | (a) |  |  | 1 |  | Financial statements filed as part of this report are listed in
    Item 8 of this Form 10-K, and reference is made
    thereto.        
| | (a) |  |  | 2 |  | Financial statement schedules filed as part of this report are
    listed in Item 8 of this Form 10-K, and reference is
    made hereto.
| | (a) |  |  | 3 |  | Exhibits, including those incorporated by reference, are
    included in the list of exhibits below.                                    
| | (b) |  |  |   |  | The exhibits filed herewith are identified in Item 15(a)3
    above.                                                                    
| | (c) |  |  |   |  | The financial statement schedules filed herewith are identified
    under Item 15(a)2 above.                                            

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EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE


|        |    |             |  |                                                                                                                                                                                                                                                |  |           |   |  |  |  |   | 
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | - |  |  |  | - | 
|        |    |             |  | Filed                                                                                                                                                                                                                                         
|        |    |             |  |                                                                                                                                                                                                                                               
|Exhibit |    |             |  |                                                                                                                                                                                                                                                |  | By       
|No.     |    | Description |  | Herewith                                                                                                                                                                                                                                       |  | Reference
|        |    |             |  |                                                                                                                                                                                                                                                |  |          
|        | 3  | .1          |  | Articles of Incorporation of SEMCO Energy, Inc., as restated
    June 25, 1999, and amendments thereto through May 28,
    2004, including Certificate of Designation of 6% Series B
    Convertible Preference Stock filed March 19, 2004.(m) |  |           |   |  |  |  | x | 
|        | 3  | .1.1        |  | Certificate of Designation of 5% Series B Convertible
    Cumulative Preferred Stock, filed March 14, 2005.(q)                                                                                                                                 |  |           |   |  |  |  | x | 
|        | 3  | .2          |  | Bylaws  last revised June 28, 2005.(s)                                                                                                                                                                                                        |  |           |   |  |  |  | x | 
|        | 4  | .1          |  | Rights Agreement dated as of April 15, 1997 with
    Continental Stock Transfer & Trust Company, as Rights
    Agent.(b)                                                                                                                       |  |           |   |  |  |  | x | 
|        | 4  | .1.2        |  | Amended Rights Agreement as of March 19, 2004 with National
    City Bank (successor Rights Agent).(l)                                                                                                                                         |  |           |   |  |  |  | x | 
|        | 4  | .2          |  | Indenture relating to Senior Debt Securities dated as of
    October 23, 1998, with Bank One Trust Company (formerly NBD
    Bank) as Trustee.(r)                                                                                              |  |           |   |  |  |  | x | 
|        | 4  | .2.1        |  | Third Supplemental Indenture relating to Senior Debt Securities
    dated as of June 15, 2001, with Bank One Trust Company as
    Trustee.(e)                                                                                                  |  |           |   |  |  |  | x | 
|        | 4  | .2.2        |  | Fourth Supplemental Indenture relating to Senior Debt Securities
    dated as of September 19, 2002, with Bank One Trust Company
    as Trustee.(h)                                                                                            |  |           |   |  |  |  | x | 
|        | 4  | .3          |  | Indenture, dated as of May 15, 2003, between SEMCO Energy,
    Inc. and Fifth Third Bank, relating to SEMCO Energy, Inc.s
    73/4% Senior
    Notes due 2013.(i)                                                                             |  |           |   |  |  |  | x | 
|        | 4  | .4          |  | Indenture, dated as of May 21, 2003, between SEMCO Energy,
    Inc. and Fifth Third Bank, relating to SEMCO Energy, Inc.s
    71/8% Senior
    Notes due 2008.(i)                                                                             |  |           |   |  |  |  | x | 
|        | 4  | .5          |  | Registration Rights Agreement, dated March 15, 2005, for
    the benefit of holders of 5% Series B Convertible
    Cumulative Preferred Stock.(q)                                                                                              |  |           |   |  |  |  | x | 
|        | 10 | .1          |  | 1997 Long-Term Incentive Plan.(a)                                                                                                                                                                                                              |  |           |   |  |  |  | x | 
|        | 10 | .2          |  | Amendment (dated August 10, 2001) to Employment Agreement
    with William L. Johnson.(f)                                                                                                                                                      |  |           |   |  |  |  | x | 
|        | 10 | .3          |  | Executive Security Agreement.(c)                                                                                                                                                                                                               |  |           |   |  |  |  | x | 
|        | 10 | .4          |  | Split-Dollar Agreement, dated April 14, 2000.(c)                                                                                                                                                                                               |  |           |   |  |  |  | x | 
|        | 10 | .5          |  | Executive Security Trust, dated April 14, 2000.(c)                                                                                                                                                                                             |  |           |   |  |  |  | x | 
|        | 10 | .6          |  | Stock Option Plan of 2000, dated April 14, 2000.(d)                                                                                                                                                                                            |  |           |   |  |  |  | x | 
|        | 10 | .7          |  | Deferred Compensation and Stock Purchase Plan for Non-Employee
    Directors, effective as of January 1, 2002.(g)                                                                                                                              |  |           |   |  |  |  | x | 
|        | 10 | .7.1        |  | First Amendment to the Deferred Compensation and Stock Purchase
    Plan for Non-Employee Directors, effective as of January 1,
    2005.(v)                                                                                                   |  |           |   |  |  |  | x | 
|        | 10 | .8          |  | First Amended and Restated Deferred Compensation and Stock
    Purchase Plan for Non-Employee Directors amended and restated
    January 1, 2006.                                                                                              |  |           | x |  |  |  |   | 
|        | 10 | .9          |  | 2004 Stock Award and Incentive Plan.(j)                                                                                                                                                                                                        |  |           |   |  |  |  | x | 
|        | 10 | .9.1        |  | Form of Employee Stock Option Agreement for stock options
    granted pursuant to the 2004 Stock Award and Incentive Plan.(p)                                                                                                                  |  |           |   |  |  |  | x | 
|        | 10 | .9.2        |  | Form of Employee Performance Share Unit Award Agreement for
    performance share units granted pursuant to the 2004 Stock Award
    and Incentive Plan.(p)                                                                                    |  |           |   |  |  |  | x | 
|        | 10 | .9.3        |  | Form of Restricted Stock Grant Agreement For Directors.(s)                                                                                                                                                                                     |  |           |   |  |  |  | x | 
|        | 10 | .9.4        |  | Form of Restricted Stock Grant Agreement For Chairmen.(s)                                                                                                                                                                                      |  |           |   |  |  |  | x | 

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |           |   |  |  |  |   | 
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | - |  |  |  | - | 
|        |    |             |  | Filed                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Exhibit |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | By       
|No.     |    | Description |  | Herewith                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | Reference
|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |          
|        | 10 | .9.5        |  | Form of Restricted Stock Unit Award Agreement.(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |           |   |  |  |  | x | 
|        | 10 | .9.6        |  | Form of Stock Option Agreement pursuant to executive
    agreements.(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |           |   |  |  |  | x | 
|        | 10 | .10         |  | Severance Agreement dated June 29, 2005 between SEMCO
    Energy, Inc. and George A. Schreiber, Jr.(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |           |   |  |  |  | x | 
|        | 10 | .10.1       |  | Corrected exhibits D and E to Severance Agreement between
    SEMCO Energy, Inc. and George A. Schreiber, Jr. dated
    June 29, 2005.(t)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |           |   |  |  |  | x | 
|        | 10 | .11         |  | Severance Agreement dated June 29, 2005 between SEMCO
    Energy, Inc. and Peter F. Clark.(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |  |  | x | 
|        | 10 | .12         |  | Severance Agreement dated June 29, 2005 between SEMCO
    Energy, Inc. and Eugene N. Dubay.(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |   |  |  |  | x | 
|        | 10 | .13         |  | Severance Agreement dated June 29, 2005 between SEMCO
    Energy, Inc. and Michael V. Palmeri.(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |           |   |  |  |  | x | 
|        | 10 | .14         |  | Severance Agreement dated June 29, 2005 between SEMCO
    Energy, Inc. and Lance S. Smotherman.(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |           |   |  |  |  | x | 
|        | 10 | .15         |  | Change in Control Severance Agreement between SEMCO Energy, Inc.
    and Mark T. Prendeville dated June 29, 2005.(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |           |   |  |  |  | x | 
|        | 10 | .16         |  | Employment Agreement dated July 8, 2004 between SEMCO
    Energy, Inc. and Doris Friedrich Galvin.(n)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |           |   |  |  |  | x | 
|        | 10 | .17         |  | Severance and Consulting Agreement between SEMCO Energy, Inc.
    and Doris F. Galvin effective February 17, 2005.(o)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |           |   |  |  |  | x | 
|        | 10 | .18         |  | Short Term Incentive Plan effective January 1, 2005.(p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |           |   |  |  |  | x | 
|        | 10 | .18.1       |  | 2006 Target Bonuses under the Companys Short-Term
    Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |           | x |  |  |  |   | 
|        | 10 | .19         |  | 2004 Supplemental Executive Retirement Plan.(p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |           |   |  |  |  | x | 
|        | 10 | .20         |  | Non-Employee Director Compensation Summary.(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |   |  |  |  | x | 
|        | 10 | .21         |  | Base Salaries for Named Executive Officers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |           | x |  |  |  |   | 
|        | 10 | .22         |  | Second Amended and Restated Credit Agreement, dated as of
    September 15, 2005 by and among SEMCO Energy, Inc. as the
    Company, the various financial institutions as party thereto, as
    lenders, and LaSalle Bank Midwest National Association, a
    national banking association, as Administrative Agent, National
    City Bank of the Midwest, a national banking association, as
    Syndication Agent, U.S. Bank, N.A., as Documentation Agent
    and LaSalle Bank Midwest National Association, a national
    banking association, as Arranger (the Second Amended and
    Restated Credit Agreement).(u) |  |           |   |  |  |  | x | 
|        | 10 | .22.1       |  | First Amendment to Second Amended and Restated Credit Agreement,
    dated February 10, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           | x |  |  |  |   | 
|        | 10 | .22.2       |  | Letter Agreement between SEMCO Energy, Inc. and LaSalle Bank
    Midwest National Association, as Swing Line Lender under the
    Second Amended and Restated Credit Agreement, dated
    February 15, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                   |  |           | x |  |  |  |   | 
|        | 10 | .23         |  | Gas Sales Agreement between Marathon Oil Company and Alaska
    Pipeline Company dated as of May 1, 1988.(v)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |           |   |  |  |  | x | 
|        | 10 | .23.1       |  | First Amendment, dated as of December 20, 1989, to Gas
    Purchase Agreement Between Marathon Oil Company and Alaska
    Pipeline Company dated May 1, 1988.(v)                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |           |   |  |  |  | x | 
|        | 10 | .23.2       |  | Second Amendment, dated as of November 19, 1991, to Gas
    Purchase Agreement Between Marathon Oil Company and Alaska
    Pipeline Company dated May 1, 1988.(v)                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |           |   |  |  |  | x | 

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                              |  |           |   |  |  |  |  | 
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | - |  |  |  |  | 
|        |    |             |  | Filed                                                                                                                                                                                                                                                                                                                       
|        |    |             |  |                                                                                                                                                                                                                                                                                                                             
|Exhibit |    |             |  |                                                                                                                                                                                                                                                                                                                              |  | By       
|No.     |    | Description |  | Herewith                                                                                                                                                                                                                                                                                                                     |  | Reference
|        |    |             |  |                                                                                                                                                                                                                                                                                                                              |  |          
|        | 10 | .24         |  | Gas Sales Agreement between Union Oil Company of California and
    Alaska Pipeline Company effective November 17, 2000.                                                                                                                                                                                                     |  |           | x |  |  |  |  | 
|        | 10 | .24.1       |  | Addendum No. 1, effective as of November 15, 2001, to
    Gas Sales Agreement between Union Oil Company of California and
    Alaska Pipeline Company.                                                                                                                                                                       |  |           | x |  |  |  |  | 
|        | 10 | .25         |  | Gas Sales Agreement between Anadarko Petroleum Corporation,
    Phillips Alaska, Inc. and Alaska Pipeline Company effective
    January 1, 2002.                                                                                                                                                                             |  |           | x |  |  |  |  | 
|        | 10 | .26         |  | Assignment Approval (dated as of December 26, 2002) by
    Alaska Pipeline Company and Joinder and Ratification by Aurora
    Gas, LLC of the Gas Sales Agreement between Anadarko Petroleum
    Corporation, Phillips Alaska, Inc. and Alaska Pipeline Company
    effective January 1, 2002.                               |  |           | x |  |  |  |  | 
|        | 10 | .27         |  | Assignment Approval (dated as of January 13, 2003) by
    Alaska Pipeline Company and Joinder and Ratification by Aurora
    Gas, LLC of the Gas Sales Agreement between Anadarko Petroleum
    Corporation, Phillips Alaska, Inc. and Alaska Pipeline Company
    effective January 1, 2002.                                |  |           | x |  |  |  |  | 
|        | 10 | .28         |  | Gas Purchase Contract between Shell Oil Company and Alaska
    Pipeline Company dated as of December 20, 1982.                                                                                                                                                                                                               |  |           | x |  |  |  |  | 
|        | 10 | .28.1       |  | Letter Agreement No. 1 dated May 24, 1983 amending the
    Gas Purchase Contract between Shell Oil Company and Alaska
    Pipeline Company dated as of December 20, 1982.                                                                                                                                                    |  |           | x |  |  |  |  | 
|        | 10 | .28.2       |  | Letter Agreement between Shell Western E&P Inc. and Alaska
    Pipeline Company dated January 26, 1988 amending the Gas
    Purchase Contract between Shell Oil Company and Alaska Pipeline
    Company dated as of December 20, 1982.                                                                                       |  |           | x |  |  |  |  | 
|        | 10 | .29         |  | Partial Assignment of the Gas Purchase Contract between Shell
    Oil Company and Alaska Pipeline Company dated as of
    December 20, 1982, as amended, from Shell Western E&P
    Inc. to ARCO Alaska, Inc. effective October 1, 1989.                                                                                     |  |           | x |  |  |  |  | 
|        | 10 | .30         |  | Agreement between Alaska Pipeline Company and Shell Western
    E&P Inc. dated November 15, 1991, to amend a
    retained interest in the Gas Purchase Contract between Shell Oil
    Company and Alaska Pipeline Company dated as of
    December 20, 1982, as amended.                                                     |  |           | x |  |  |  |  | 
|        | 10 | .31         |  | Agreement between Alaska Pipeline Company and ARCO Alaska, Inc.
    dated November 15, 1991, to amend an assigned interest in
    the Gas Purchase Contract between Shell Oil Company and Alaska
    Pipeline Company dated as of December 20, 1982, as amended.                                                             |  |           | x |  |  |  |  | 
|        | 10 | .32         |  | Partial Assignment of Gas Purchase Contract between Shell Oil
    Company and Alaska Pipeline Company dated as of
    December 20, 1982, as amended, from Shell Western E&P
    Inc. to Chevron U.S.A. Inc. effective January 1, 1993.                                                                                       |  |           | x |  |  |  |  | 
|        | 10 | .33         |  | Assignment and Conveyance of the retained interest in the Gas
    Purchase Contract between Shell Oil Company and Alaska Pipeline
    Company dated as of December 20, 1982, as amended, from
    Shell Western E&P Inc. to the Municipality of Anchorage
    d/b/a Municipal Light & Power effective
    September 1, 1996. |  |           | x |  |  |  |  | 
|        | 10 | .34         |  | Partial Assignment of Gas Purchase Contract between Shell Oil
    Company and Alaska Pipeline Company dated as of
    December 20, 1982, as amended, from ARCO Alaska, Inc. to
    CH-Twenty, Inc. effective December 27, 1996.                                                                                              |  |           | x |  |  |  |  | 

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|        |    |             |  |                                                                                                                                                                                                                               |  |           |   |  |  |  |   | 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | - |  |  |  | - | 
|        |    |             |  | Filed                                                                                                                                                                                                                        
|        |    |             |  |                                                                                                                                                                                                                              
|Exhibit |    |             |  |                                                                                                                                                                                                                               |  | By       
|No.     |    | Description |  | Herewith                                                                                                                                                                                                                      |  | Reference
|        |    |             |  |                                                                                                                                                                                                                               |  |          
|        | 10 | .35         |  | Partial Assignment of Gas Purchase Contract between Shell Oil
    Company and Alaska Pipeline Company dated as of
    December 20, 1982, as amended, from CH-Twenty, Inc. to ARCO
    Beluga, Inc. effective January 7, 1997. |  |           | x |  |  |  |   | 
|        | 12 | .1          |  | Ratio of Earnings to Fixed Charges.                                                                                                                                                                                           |  |           | x |  |  |  |   | 
|        | 12 | .2          |  | Ratio of Earnings to Combined Fixed Charges and Preferred Stock
    Dividends.                                                                                                                                                |  |           | x |  |  |  |   | 
|        | 14 |             |  | Code of Business Conduct and Ethics approved February 20,
    2003.(k)                                                                                                                                                        |  |           |   |  |  |  | x | 
|        | 21 |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                               |  |           | x |  |  |  |   | 
|        | 23 |             |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                     |  |           | x |  |  |  |   | 
|        | 31 | .1          |  | CEO Certification as adopted Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                   |  |           | x |  |  |  |   | 
|        | 31 | .2          |  | CFO Certification as adopted Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                   |  |           | x |  |  |  |   | 
|        | 32 | .1          |  | CEO and CFO Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                   |  |           | x |  |  |  |   | 
|        | 99 | .1          |  | Proxy Statement with respect to SEMCO Energy, Inc.s 2006
    Annual Meeting of Common Shareholders.(w)                                                                                                                       |  |           |   |  |  |  | x | 

Key to Exhibits Incorporated by Reference







|    |  |                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Filed with SEMCO Energy, Inc.s 1997 Proxy Statement, filed
    March 6, 1997, File No. 0-8503.                                                                   
|   
|(b) |  | Filed with SEMCO Energy, Inc.s
    Form 10-K for the
    fiscal year ended December 31, 1996, filed March 31,
    1997, File No. 0-8503.                         
|   
|(c) |  | Filed with SEMCO Energy, Inc.s
    Form 10-Q for the
    quarter ended September 30, 2000, filed November 13,
    2000, File No. 001-15565.                      
|   
|(d) |  | Filed with SEMCO Energy, Inc.s
    Form 10-K for the
    fiscal year ended December 31, 2000, filed March 30,
    2001, File No. 001-15565.                      
|   
|(e) |  | Filed with SEMCO Energy, Inc.s
    Form 8-K filed
    June 21, 2001, File No. 001-15565.                                                                         
|   
|(f) |  | Filed with SEMCO Energy, Inc.s
    Form 10-Q for the
    quarter ended September 30, 2001, filed November 13,
    2001, File No. 001-15565.                      
|   
|(g) |  | Filed with SEMCO Energy, Inc.s
    Form 10-K for the
    fiscal year ended December 31, 2001, filed March 27,
    2002, File No. 001-15565.                      
|   
|(h) |  | Filed with SEMCO Energy, Inc.s
    Form 8-K filed
    September 20, 2002, File No. 001-15565.                                                                    
|   
|(i) |  | Filed with SEMCO Energy, Inc.s Registration Statement,
    Form S-4,
    No. 333-107200,
    filed July 21, 2003.                                                
|   
|(j) |  | Filed as Appendix A to SEMCO Energy, Inc.s 2004 Proxy
    Statement, filed April 6, 2004, pursuant to
    Rule 14a-6 of the
    Exchange Act, File No. 001-15565.
|   
|(k) |  | Filed with SEMCO Energy, Inc.s
    Form 10-K for the
    fiscal year ended December 31, 2003, filed March 4,
    2004, File No. 001-15565.                       
|   
|(l) |  | Filed with SEMCO Energy, Inc.s
    Form 10-Q for the
    quarter ended March 31, 2004, filed May 7, 2004, File
    No. 001-15565.                                
|   
|(m) |  | Filed with SEMCO Energy, Inc.s
    Form 10-Q for the
    quarter ended June 30, 2004, filed August 9, 2004,
    File No. 001-15565.                              
|   
|(n) |  | Filed with SEMCO Energy, Inc.s
    Form 10-Q for the
    quarter ended September 30, 2004, filed November 9,
    2004, File No. 001-15565.                       

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|    |  |                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|(o) |  | Filed with SEMCO Energy, Inc.s
    Form 8-K filed
    February 18, 2005, File No. 001-15565.                                                 
|   
|(p) |  | Filed with SEMCO Energy, Inc.s
    Form 10-K for the
    fiscal year ended December 31, 2004, filed March 8,
    2005, File No. 001-15565.   
|   
|(q) |  | Filed with SEMCO Energy, Inc.s
    Form 8-K filed
    March 17, 2005, File No. 001-15565.                                                    
|   
|(r) |  | Filed with SEMCO Energy, Inc.s Registration Statement,
    Form S-3,
    No. 333-124005,
    filed April 11, 2005.                           
|   
|(s) |  | Filed with SEMCO Energy, Inc.s
    Form 8-K filed
    July 1, 2005, File No. 001-15565.                                                      
|   
|(t) |  | Filed with SEMCO Energy, Inc.s
    Form 10-Q for the
    quarter ended June 30, 2005, filed August 3, 2005,
    File No. 001-15565.          
|   
|(u) |  | Filed with SEMCO Energy, Inc.s
    Form 8-K filed
    September 19, 2005, File No. 001-15565.                                                
|   
|(v) |  | Filed with SEMCO Energy, Inc.s
    Form 10-Q/ A for
    the quarter ended September 30, 2005, filed
    January 10, 2006, File No. 001-15565.
|   
|(w) |  | To be filed in April 2006, pursuant to
    Rule 14a-6 of the
    Exchange Act, File No. 001-15565.                                            

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##### Table of Contents






SIGNATURES






| |                  
| | -----------------
| | Semco Energy,Inc.



| |    |                                 
| | -- | --------------------------------
| | By | /s/ George A.
    Schreiber, Jr.

| |                                      
| | -------------------------------------
| |                                      
| | George A. Schreiber, Jr.             
| | President and Chief Executive Officer
| | (principal executive officer)        





|                                                         |  |                                                                                                               |  |                |  | 
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                |  | Title                                                                                                         |  | Date          
|                                                         |  |                                                                                                               |  |               
|                                                        
|/s/ George A.
    Schreiber, Jr.George A. Schreiber, Jr. |  | President, Chief Executive Officer and Director                                                               |  | March 14, 2006
|                                                        
|/s/ Michael V. PalmeriMichael V. Palmeri                 |  | Senior Vice President, Treasurer and Chief Financial Officer
    (principal financial and accounting officer) |  | March 14, 2006
|                                                        
|/s/ John M. AlbertineJohn M. Albertine                   |  | Director and Chairman                                                                                         |  | March 14, 2006
|                                                        
|/s/ John T. FerrisJohn T. Ferris                         |  | Director                                                                                                      |  | March 14, 2006
|                                                        
|/s/ Harvey I. KleinHarvey I. Klein                       |  | Director                                                                                                      |  | March 14, 2006
|                                                        
|/s/ Paul F. NaughtonPaul F. Naughton                     |  | Director                                                                                                      |  | March 14, 2006
|                                                        
|/s/ Edwina RogersEdwina Rogers                           |  | Director                                                                                                      |  | March 14, 2006
|                                                        
|/s/ Ben A. StevensBen A. Stevens                         |  | Director                                                                                                      |  | March 14, 2006
|                                                        
|/s/ Donald W. ThomasonDonald W. Thomason                 |  | Director                                                                                                      |  | March 14, 2006
|                                                        
|/s/ John C. Van
    Roden, Jr.John C. Van Roden, Jr.     |  | Director                                                                                                      |  | March 14, 2006

105