UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

SCHEDULE 14A

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þ		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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o		No fee required.
þ		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

	(1)		Title of each class of securities to which transaction applies:
			Common Stock, $1.00 par value 5.00% Series B Convertible Cumulative Preferred Stock, $1.00 par value
	(2)		Aggregate number of securities to which transaction applies:
			35,522,536 shares of Common Stock; 239,216 shares of 5.00% Series B Convertible Cumulative Preferred Stock; options to purchase 985,249 shares of Common Stock; restricted stock units with respect to 104,728 shares of Common Stock; performance share units with respect to 592,407 shares of Common Stock; and director stock units with respect to 1,599 shares of Common Stock
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
			The maximum aggregate value was determined based upon the sum of (A) 35,522,536 shares of Common Stock multiplied by $8.15 per share; (B) 239,216 shares of 5.00% Series B Convertible Cumulative Preferred Stock multiplied by $236.714 per share (calculated based on $213.07 per share plus make-whole premium of $23.644 per share calculated as of March 30, 2007); (C) options to purchase 985,249 shares of Common Stock with exercise prices less than $8.15 multiplied by $2.3255 (which is the difference between $8.15 and the weighted average exercise price of $5.8245 per share); restricted stock units with respect to 104,728 shares of Common Stock multiplied by $8.15 per share; performance share units with respect to 592,407 shares of Common Stock multiplied by $8.15 per share; and director stock units with respect to 1,599 shares of Common Stock multiplied by $8.15 per share. In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying 0.00003070 by the sum calculated in the preceding sentence.
	(4)		Proposed maximum aggregate value of transaction:
			$354,120,323.27
	(5)		Total fee paid:
			$10,871.49

o		Fee paid previously with preliminary materials.
		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

On February 23, 2007, SEMCO Energy, Inc. (“SEMCO Energy”) announced that it had entered into an agreement and plan of share exchange (the “Exchange Agreement”) with Cap Rock Holding Corporation (“Cap Rock Holding”) and Semco Holding Corporation (“Parent”), a subsidiary of Cap Rock Holding. Under the Exchange Agreement, each issued and outstanding share of common stock (“Common Stock”) and each issued and outstanding share of 5.00% Series B Convertible Cumulative Preferred Stock (“Series B Preferred Stock”) shall be transferred by operation of law to Parent (the “Exchange”). Upon completion of the Exchange, each holder of Common Stock shall be entitled to receive $8.15 per share in cash, without interest, and each holder of Series B Preferred Stock shall be entitled to receive $213.07 per share in cash plus a make-whole premium to be calculated at closing in accordance with the terms of the Series B Preferred Stock, without interest.

Our Board of Directors has determined, upon the unanimous recommendation of its Finance Committee, that the Exchange Agreement and the transactions contemplated thereby, including the Exchange, are advisable, fair to, and in the best interests of, SEMCO Energy and our shareholders, has approved and adopted the Exchange Agreement, and recommends that our holders of Common Stock approve the Exchange Agreement and the transactions contemplated thereby.

A special meeting of our holders of Common Stock will be held on ___, 2007, at 10:00 a.m. (Eastern Time), to vote on a proposal to approve the Exchange Agreement so that the Exchange can occur. The special meeting of shareholders will be held at the ___, Michigan. Notice of the special meeting is enclosed.

This proxy statement gives you detailed information about the special meeting and the Exchange and includes the Exchange Agreement as Annex A. Please read the proxy statement and the Exchange Agreement carefully and in their entirety.

Your vote is important. We cannot complete the Exchange unless a majority of all votes entitled to be cast approve the Exchange Agreement, which is sometimes referred to in this proxy statement as the “Exchange Proposal.” Our Board of Directors recommends that you vote “FOR” approval of the Exchange Proposal. The failure of any shareholder to vote on the Exchange Proposal will have the same effect as a vote against the Exchange Proposal.

Whether or not you plan to attend the special meeting, holders of shares of Common Stock should vote their shares promptly by completing, signing and dating the accompanying proxy card and returning it in the enclosed prepaid envelope or by voting by telephone or through the Internet by following the instructions on the accompanying proxy or voting instruction card.

Our Board of Directors appreciates your continuing support of SEMCO Energy, and we hope you will approve the Exchange Proposal.

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To the Shareholders of
SEMCO Energy, Inc.

     The Board of Directors of SEMCO Energy, Inc. (“SEMCO Energy”) provides this proxy statement to you to solicit your vote on the approval of the Exchange Proposal. If the holders of our common stock, par value $1.00 per share (“Common Stock”), approve the Exchange Proposal and the other conditions to the Exchange are satisfied, each holder of our Common Stock will receive $8.15 in cash, without interest, in exchange for each outstanding share of Common Stock owned at the time of the closing of the Exchange (the “Common Stock Exchange Consideration”), and each holder of 5.00% Series B Convertible Cumulative Preferred Stock, par value $1.00 per share (“Series B Preferred Stock”), will receive $213.07 in cash, plus a make-whole premium to be calculated at closing in accordance with the terms of the Series B Preferred Stock, without interest, in exchange for each outstanding share of our Series B Preferred Stock owned at the time of the closing of the Exchange (the “Preferred Stock Exchange Consideration”, and together with the Common Stock Exchange Consideration, the “Exchange Consideration”).

     The Exchange cannot occur unless a majority of all votes entitled to be cast approve the Exchange Proposal. A failure to vote has the same effect as voting your shares against the Exchange Proposal. The Board of Directors has scheduled a special meeting of the holders of our Common Stock to vote on the Exchange Proposal as follows:

                                             , 2007 at 10:00 a.m. (Eastern Time)

                                                                 

                                             , Michigan

     This document provides you with detailed information about the Exchange Proposal. Please see “Where You Can Find More Information” on page 81 for additional information about SEMCO Energy on file with the Securities and Exchange Commission.

     This proxy statement and proxy card are being mailed to shareholders beginning on or about ___, 2007.

     No person has been authorized to give any information or make any representation other than those contained in this proxy statement, and, if given or made, such information or representation must not be relied upon as having been authorized. The information in this proxy statement may only be accurate on the date of this proxy statement.

     We urge you to read and consider carefully this proxy statement in its entirety.

     The following questions and answers are intended to address briefly some commonly asked questions about the special meeting of holders of our Common Stock to be held for the purpose of considering and voting on the Exchange Proposal. These questions and answers may not address all questions that may be important to you as a shareholder. Please refer to the more detailed information contained elsewhere in this proxy statement, the Annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement for additional or more detailed information.

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you may choose to attend the special meeting in person;

	•		you may choose to vote by telephone by calling toll-free 1-800-690-6903 on any touch-tone telephone with your proxy card in hand before 11:59 p.m., Eastern Time, on ___, 2007, and then following the instructions provided over the phone;
	•		you may choose to vote through the Internet by accessing www.proxyvote.com with your proxy card in hand before 11:59 p.m., Eastern Time, on ___, 2007, and then following the instructions to obtain your records and to create an electronic voting instruction form; or
	•		you may choose to indicate on the enclosed proxy card how you would like to vote and return the proxy card in the accompanying pre-addressed postage paid envelope.

     This summary summarizes the material information in this proxy statement, but does not contain all of the information that may be important to you. You should carefully read this entire proxy statement and the attached Annexes and the other documents to which this proxy statement refers you for a more complete understanding of the matters being considered at the special meeting. In addition, this proxy statement incorporates by reference important business and financial information about SEMCO Energy, Inc.

     Unless the context otherwise indicates, the terms “SEMCO Energy,” “we,” “us” or “our” mean SEMCO Energy, Inc. and our subsidiaries. When we refer to shares of our Common Stock in this proxy statement, we are referring to the shares of our Common Stock, together with associated preference stock share purchase rights under our Rights Agreement, dated April 15, 1997, with National City Bank. You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions in “Where You Can Find More Information” on page 81.

     In the proposed transaction, upon completion of the Exchange, each issued and outstanding share of our Common Stock will be transferred to Semco Holding Corporation, which we refer to in this proxy statement as Parent, by operation of law in exchange for the right to receive $8.15 in cash per share, without interest, and each issued and outstanding share of Series B Preferred Stock will be transferred to Parent by operation of law in exchange for the right to receive $213.07 in cash per share plus a make-whole premium to be calculated at closing in accordance with the terms of the Series B Preferred Stock, without interest.

     As a result of the Exchange, SEMCO Energy will become a wholly owned subsidiary of Parent and will cease to be an independent, publicly traded company.

     SEMCO Energy. SEMCO Energy is a NYSE-listed, regulated public utility company. SEMCO Energy distributes natural gas to more than 400,000 customers combined in Michigan, as SEMCO Energy Gas Company, and, in Alaska, as ENSTAR Natural Gas Company. SEMCO Energy also owns and operates businesses involved in propane distribution, intrastate pipelines and natural gas storage. SEMCO Energy is incorporated in the State of Michigan. Our principal executive offices are located at 1411 Third Street, Suite A, Port Huron, Michigan 48060, and our telephone number is (810) 987-2200.

     Cap Rock Holding. Cap Rock Holding, through its regulated subsidiary, Cap Rock Energy Corporation, transmits and distributes power to residential and commercial customers in 28 counties in the State of Texas. Cap Rock Holding owns no generation facilities and instead purchases power wholesale through long-term power supply contracts. Cap Rock Holding’s headquarters are located at 500 West Wall, Suite 200, Midland, Texas 79701.

     Parent. Semco Holding Corporation is a Delaware corporation formed for the purpose of effecting the Exchange with SEMCO Energy. Semco Holding Corporation is a direct, wholly owned subsidiary of Cap Rock Holding. The executive offices of Semco Holding Corporation are located at c/o Cap Rock Holding, 500 West Wall, Suite 200, Midland, Texas 79701.

     Date, Time and Place of the Special Meeting. The special meeting of holders of our Common Stock is scheduled to be held as follows:

     Proposals to Be Considered at the Special Meeting. At the special meeting, holders of our Common Stock will be asked to consider and vote on the Exchange Proposal. In addition, you may (1) vote in your discretion with respect to the approval of any proposal to postpone or adjourn the special meeting to a later date or time, to solicit additional proxies in favor of the Exchange Proposal, if there are not sufficient votes for approval of the Exchange Proposal at the special meeting, and (2) consider and vote upon such other matters as may properly come before the special meeting or any adjournments or postponements of the special meeting.

     Record Date. Our Board of Directors has fixed the close of business on April 2, 2007, as the record date for the special meeting and only holders of record of our Common Stock on the record date are entitled to vote at the special meeting. As of the close of business on April 2, 2007, there were approximately ___shares of our Common Stock outstanding and entitled to vote.

     Voting Rights; Quorum; Vote Required for Approval. Each share of our Common Stock entitles its holder to one vote on all matters properly coming before the special meeting. A majority of the votes entitled to be cast on the Exchange Proposal, considered together, constitutes a quorum for the purpose of considering that matter. Abstentions and “broker non-votes” (as described below on page 17 of this proxy statement) will be treated as shares present and entitled to vote for purposes of determining a quorum at the special meeting. There must be a quorum for the vote on the Exchange Proposal.

     Required Vote. Under our articles of incorporation and Michigan law, the approval of the Exchange Proposal requires the affirmative vote of a majority of the outstanding shares of Common Stock entitled to vote on the Exchange Proposal. Abstentions and “broker non-votes” will have the same effect as a vote against the Exchange Proposal.

     Common Stock Ownership of Directors and Officers. As of March 31, 2007, our directors and executive officers (as such term is defined below in “The Exchange—Interests of Directors and Executive Officers in the Exchange”) beneficially owned approximately 939,386 shares of our Common Stock, or approximately 2.61% of the shares entitled to vote at the special meeting. On a fully-diluted basis, which only includes “in-the-money” stock options, our directors and executive officers beneficially owned approximately 1,495,457 shares of our Common Stock, or approximately 4.09% of the outstanding shares on a fully-diluted basis as of March 31, 2007. Each of our directors and executive officers, other than John T. Ferris, has informed us that they will vote the shares of Common Stock owned by him or her in favor of the Exchange Proposal.

     Voting and Revocation of Proxies. You may vote your shares of Common Stock by completing, dating and signing your proxy card and mailing it in the enclosed return envelope or by voting by telephone by calling 1-800-690-6903 or through the Internet at www.proxyvote.com. You can also vote in person at the meeting, but we encourage you to submit your proxy card promptly anyway. If you hold your shares in street name and do not provide your broker with instructions, your shares of Common

Stock will not be voted and that will have the same effect as a vote “AGAINST” the approval of the Exchange Agreement.

     Until the vote occurs at the special meeting, you can revoke your proxy and change your vote in any of the following ways:

	•		by delivering written notification to us at our principal executive offices at 1411 Third Street, Suite A, Port Huron, Michigan 48060, Attention: Corporate Secretary; before 11:59 p.m., Eastern Time, on ___, 2007, or by following the instructions included on your proxy card;
	•		by delivering a later dated proxy by mail in the manner described in this proxy statement; or
	•		by attending the special meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy; you must vote in person at the meeting).

     If you voted by telephone or through the Internet, you can also revoke your proxy and change your vote by any of these methods or you can revoke your proxy and change your vote by telephone by calling 1-800-690-6903 or through the Internet at www.proxyvote.com before 11:59 p.m., Eastern Time, on                     , 2007. If you decide to vote by completing, signing, dating and returning the enclosed proxy card, you should retain a copy of the voter control number found on the proxy card in the event that you later decide to revoke your proxy and change your vote by telephone or through the Internet. If you have instructed a broker or bank to vote your shares, you can revoke your proxy and change your vote by following the directions received from your broker or bank to change those instructions.

     Holders of shares of our Common Stock will be entitled to receive $8.15 in cash, without interest, in exchange for transferring to Parent each share of our Common Stock that they own at the time of the completion of the Exchange. Holders of shares of our Series B Preferred Stock will be entitled to receive $213.07 in cash per share plus a make-whole premium to be calculated at closing in accordance with the terms of the Series B Preferred Stock, without interest, in exchange for transferring to Parent each share of our Series B Preferred Stock that they own at the time of the completion of the Exchange. After the effective time of the Exchange, holders of our Common Stock will no longer own our Common Stock, and holders of our Series B Preferred Stock will no longer own our Series B Preferred Stock. See “The Exchange—Exchange Consideration.”

     Stock Options. At the effective time of the Exchange, all outstanding options to purchase shares of Common Stock will be canceled, with the holder of each such option becoming entitled to receive an amount in cash equal to the excess (if any) of $8.15 per share over the exercise price per share of our Common Stock subject to such option, multiplied by the number of shares of our Common Stock subject to such option, less any withholding taxes, without interest. All outstanding options to purchase shares of Common Stock which have an exercise price equal to or greater than $8.15 per share will be canceled at the effective time of the Exchange.

     Restricted Stock Units and Restricted Share Awards. At the effective time of the Exchange, all outstanding restricted stock units and restricted share awards of our Common Stock will vest, all restrictions upon such shares will lapse, and each outstanding restricted stock unit and restricted share award will be converted into the right to receive $8.15 in cash, less any withholding taxes, without interest.

     Director Shares and Directors Stock Units. At the effective time of the Exchange, each outstanding director share and director stock unit will be converted into the right to receive $8.15 in cash per share, less any withholding taxes, without interest.

     Performance Share Units. At the effective time of the Exchange, each outstanding performance share unit will be converted into the right to receive $8.15 in cash, less any withholding taxes, without interest.

     Finance Committee. The Finance Committee of our Board of Directors, acting with the assistance of its own legal and financial advisors and our legal and financial advisors, evaluated and negotiated the Exchange Proposal, including the terms and conditions of the Exchange Agreement with Cap Rock Holding and Parent. At the time of these activities, the Finance Committee was comprised of four directors who were neither officers nor employees of SEMCO Energy and who met the NYSE criteria as “independent directors.” The Finance Committee unanimously (1) determined that the Exchange Proposal is advisable, fair to, and in the best interest of, SEMCO Energy and its shareholders and (2) recommended to the Board of Directors that it approve the Exchange and the Exchange Agreement and recommend to holders of our Common Stock that they approve the Exchange Agreement. See “The Exchange—Recommendation of the Finance Committee and Our Board of Directors.”

     Board of Directors. After careful consideration, our Board of Directors, acting upon the unanimous recommendation of the Finance Committee:

	•		determined that the Exchange and the Exchange Agreement are advisable, fair to, and in the best interests of, us and our shareholders;
	•		approved and adopted the Exchange and the Exchange Agreement; and
	•		recommended that holders of our Common Stock vote to approve the Exchange and the Exchange Agreement.

     For a discussion of the material reasons considered by our Board of Directors in reaching its conclusions, see “The Exchange—Reasons for the Exchange.” Our Board of Directors did not assign relative weight to any of the reasons. In addition, our Board of Directors did not reach any specific conclusion on each reason considered, but conducted an overall analysis of these reasons. Individual members of our Board of Directors may have given different weight to different reasons. See “The Exchange—Recommendation of the Finance Committee and Our Board of Directors.”

     Credit Suisse Securities (USA) LLC. In connection with the Exchange, our financial advisor, Credit Suisse Securities (USA) LLC (“Credit Suisse”), delivered an opinion, dated February 22, 2007, to our Board of Directors as to the fairness, from a financial point of view and as of the date of such opinion, of the Common Stock Exchange Consideration. The full text of Credit Suisse’s written opinion is attached to this proxy statement as Annex B. Holders of Common Stock are encouraged to read this opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken. Credit Suisse’s opinion was provided to our Board of Directors for its information in connection with its evaluation of the Common Stock Exchange Consideration from a financial point of view, does not address any other aspect of the proposed Exchange and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act with respect to any matters relating to the Exchange.

     BB&T Capital Markets. BB&T Capital Markets (“BB&TCM”), as financial advisor to the Finance Committee of our Board of Directors, delivered its opinion to our Board of Directors, dated February 22, 2007, to the effect that, as of the date of the opinion and based on and subject to various qualifications, factors, assumptions and limitations described in its opinion, the Common Stock Exchange Consideration was fair, from a financial point of view, to such holders. BB&TCM also delivered a separate opinion to our Board of Directors, dated February 22, 2007, to the effect that, as of the date of the opinion and based on and subject to various qualifications, factors, assumptions and limitations described in its opinion that the Preferred Stock Exchange Consideration has a fair value that is not less than the fair value of the Series B Preferred Stock as of the date of the opinion. The full text of BB&TCM’s written opinion regarding the Common Stock is attached as Annex C to this proxy statement. The full text of BB&TCM’s written opinion regarding the Series B Preferred Stock is attached as Annex D to this proxy statement. BB&TCM provided its opinions for the information and assistance of our Board of Directors in connection with its consideration of the transaction. BB&TCM’s opinions are not a recommendation as to how any holder of shares of Common Stock should vote on the Exchange Proposal or act with respect to any matters relating to the Exchange. We urge you to, and you should, read each of the BB&TCM opinions in their entirety.

     The Exchange is not conditioned upon any financing arrangements. Cap Rock Holding and Parent have received an equity commitment letter from Lindsay Goldberg & Bessemer II L.P. and its affiliated investment partnerships (collectively, “LGB”), which owns a controlling interest in Cap Rock Holding, pursuant to which, subject to the conditions contained in such commitment, LGB has agreed to fund or cause to be funded to Parent all cash necessary for Parent to pay the Exchange Consideration. Cap Rock Holding has provided us with a debt commitment letter that it received in connection with the execution of the Exchange Agreement pursuant to which RBC Capital Markets has committed, subject to certain specified conditions, to provide debt financing through new credit facilities in the aggregate amount of $525.0 million. Funds from the debt commitment are expected to be used to refinance certain of our indebtedness at closing. Funding of the equity commitment and debt financing is subject to the satisfaction of conditions set forth in the commitment letters. We have agreed, upon the request of Parent, to commence offers to purchase with respect to all of the outstanding aggregate principal amount of our 7-3/4% Senior Notes due 2013 and 7-1/8% Senior Notes due 2008.

     Members of our Board of Directors and certain of our executive officers have various interests in the Exchange described in this section that may be in addition to, or different from, the interests of our shareholders generally. You should keep the existence of these interests in mind when considering the recommendation of our Board of Directors for the approval of the Exchange Proposal. The members of our Board of Directors were aware of these interests and considered them at the time they approved the Exchange Proposal.

     The Exchange will be a taxable transaction for U.S. holders of our Common Stock and Series B Preferred Stock. As a result, the transfer of your shares of Common Stock or Series B Preferred Stock for cash in the Exchange will be subject to United States federal income tax and also may be taxed under applicable state, local and other tax laws. You should consult your own tax advisor as to the specific tax consequences to you of the Exchange, including the applicable federal, state, local and foreign tax consequences of the Exchange. For more information see “The Exchange – Material U.S. Federal Income Tax Consequences of the Exchange.”

     Prior to the closing of the Exchange, Cap Rock Holding must receive a final order from the RCA approving its application to acquire an indirect controlling interest in our ENSTAR division which is a public utility in Alaska. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (which we refer to in this proxy statement as the “HSR Act”), and the rules promulgated thereunder by the Federal Trade Commission, the Exchange may not be completed until notification and report forms have been filed with the FTC and the Antitrust Division of the Department of Justice and the applicable waiting period has expired. We are currently in the process of preparing the notification and report form under the HSR Act.

     Go-Shop Period. From the execution of the Exchange Agreement until 11:59 p.m., New York time, on March 29, 2007 (which we sometimes refer to as the “go-shop” period), we and our representatives were permitted to solicit, initiate or encourage a company takeover proposal (including by way of providing access to non-public information pursuant to one or more acceptable confidentiality agreements), and participate in discussions or negotiations regarding, or take any other action to facilitate a superior company takeover proposal. In certain circumstances, we were permitted to continue to enter into and maintain discussions with respect to any person that our Board of Directors has, prior to the end of the go-shop period, determined to have made a superior company proposal (which we sometimes refer to as an “extension party”) until the later of the end of the go-shop period and 11:59 p.m., New York time, on the tenth calendar day following the day on which our Board of Directors made such determination (which we sometimes refer to as the “extension period”). We agreed to pay Parent a termination fee of $7.0 million if (i) we terminated the Exchange Agreement prior to the end of the go-shop period in order to enter into an agreement to implement a superior company proposal, or (ii) we terminated the Exchange Agreement prior to the end of an extension period in order to enter into an agreement to implement a superior company proposal made by an extension party. See “The Exchange—Background of the Exchange” for a description of the activities undertaken by the Company and Credit Suisse during the “go-shop” period.

     After the Go-Shop Period. After the end of the go-shop period until the effective time of the Exchange, we and our representatives have agreed not to:

	•		directly or indirectly solicit, initiate or encourage the submission of any company takeover proposal;
	•		enter into any agreement with respect to any company takeover proposal (other than in connection with a termination of the Exchange Agreement in order to implement a superior company proposal);
	•		directly or indirectly participate in any discussions or negotiations regarding, or furnish to any person any information with respect to any company takeover proposal (other than with an extension party during an extension period); or
	•		take any other action to facilitate any inquiries or the making of any proposal that constitutes, or could reasonably be expected to lead to, any company takeover proposal.

     In addition, we have agreed that neither our Board of Directors nor any committee thereof will (i) withdraw or modify (in a manner adverse to Parent) or propose publicly to withdraw or modify, its approval or recommendation of the Exchange Agreement or the Exchange, (ii) approve any letter of intent or agreement relating to a company takeover proposal or (iii) approve or recommend or propose publicly to approve or recommend a company takeover proposal.

     Notwithstanding these restrictions, at any time prior to the receipt of the requisite approval of the holders of Common Stock, we and our representatives are permitted to furnish information regarding us and our subsidiaries to, and participate in discussions and negotiations with, a third party making a bona fide unsolicited written company takeover proposal if a majority of the disinterested members of our Board of Directors determines in good faith, after consultation with our outside counsel and independent financial advisors, that such company takeover proposal is or could reasonably be expected to result in a superior company proposal and determines in good faith, after consultation with our outside counsel, that the failure to furnish information and negotiate with such third party would be inconsistent with the fiduciary obligations of our Board of Directors and subject to additional conditions. In addition, our Board of Directors may withdraw or modify its approval or recommendation prior to the receipt of the requisite approval of the holders of Common Stock if a majority of the disinterested members of our Board of Directors determines in good faith, after consultation with our outside counsel, that it is necessary to do so in connection with a superior company proposal in order to be consistent with its fiduciary obligations.

     Before we can complete the Exchange, a number of conditions must be satisfied or waived (to the extent permitted). These conditions include, among others:

	•		the receipt of the requisite approval of the Exchange Agreement by the holders of Common Stock;
	•		the absence of any temporary judgment or order issued by any court of competent jurisdiction or other law (whether enacted before or after the date of the Exchange Agreement) preventing the consummation of the Exchange shall be in effect;
	•		the receipt of various regulatory approvals, including the approval of the RCA;
	•		the truthfulness and correctness (without giving effect to any materiality or material adverse effect qualification) of our representations and warranties as of the closing date of the Exchange, except to the extent such representations and warranties expressly relate to an earlier date and except where the failure to be true and correct, individually or in the aggregate, has not had, and is not reasonably likely to have a company material adverse effect (as such term is defined below under “The Exchange Agreement—Material Adverse Effect”;
	•		the performance in all material respects of the obligations to be performed by us or Parent under the Exchange Agreement at or prior to the closing date;
	•		the absence of certain proceedings and legal prohibitions relating to the Exchange;
	•		the proposal by our Board of Directors to the record holders of Common Stock as of immediately following the effective time of the Exchange that we amend and restate our articles of incorporation in the form attached to the Exchange Agreement effective as of the Effective Time of the Exchange; and
	•		Parent shall have assumed the obligations under one of our lease agreements to the extent required thereunder.

     We and Parent may mutually agree in writing to terminate the Exchange Agreement without completing the Exchange at any time. The Exchange Agreement may also be terminated in certain other circumstances including:

•

by either Parent or us if:

	•		the Exchange is not consummated on or before February 22, 2008, or August 22, 2008, if the only unsatisfied condition as of February 22, 2008 is the receipt of required antitrust or regulatory approvals; so long as the failure of the Exchange to be consummated by the applicable date is not the result of any action or failure to take action by a party or a breach of the Exchange Agreement by the party seeking to terminate;
	•		any governmental entity issues a final and non-appealable order, decree or ruling permanently enjoining, restraining or otherwise prohibiting the Exchange;
	•		the holders of our Common Stock do not vote to approve the Exchange Agreement and the Exchange at the special meeting or any adjournment or postponement thereof; or
	•		certain regulatory approval conditions are not satisfied (see “Exchange Agreement—Conditions to the Exchange”).

•

by us if:

	•		Parent or Cap Rock Holding breaches or fails to perform in any material respect any of its representations, warranties or covenants contained in the Exchange Agreement in a manner that would give rise to the failure of certain conditions to closing and the breach or failure to perform cannot be or has not been cured within the required cure period; or
	•		the termination is effected prior to obtaining shareholder approval in order to enter into an agreement with respect to a superior proposal if certain conditions set forth in the Exchange Agreement are satisfied including the payment to Parent of the termination fee and reimbursement of Parent’s expenses as required under the Exchange Agreement.

•

by Parent if:

	•		we breach or fail to perform in any material respect any of our representations, warranties or covenants contained in the Exchange Agreement which would give rise to the failure of certain conditions to closing and the breach or failure to perform cannot be or has not been cured within the required cure period; or
	•		our Board of Directors adversely withdraws or modifies or proposes publicly to withdraw or modify, in a manner adverse to Parent, its approval or recommendation of the Exchange Agreement or the Exchange; approves or recommends, or proposes to approve or recommend, an alternative company takeover proposal; or fails to reaffirm publicly and unconditionally its recommendation to our shareholders that they approve the Exchange Agreement when requested to do so by Parent.

     By Us. If the Exchange Agreement is terminated under certain circumstances after the end of the go-shop period other than to enter into an agreement with an extension party during the extension period:

•

we will be obligated to pay Parent a termination fee of $15.5 million; and

•

in addition to any termination fee otherwise payable, we will be obligated under certain circumstances to reimburse Parent for its reasonable out-of-pocket expenses up to an amount of $2.0 million.

     By Cap Rock Holding or Parent. If the Exchange Agreement is terminated:

	•		by us as a result of Parent or Cap Rock Holding breaching or failing to perform in any material respect any of its representations, warranties or covenants, Cap Rock Holding will be obligated to pay us liquidated damages of $11.25 million; and
	•		by us or Parent under certain circumstances, Cap Rock Holding will be obligated to reimburse us for our reasonable out-of-pocket expenses.

     In connection with the execution of the Exchange Agreement on February 22, 2007, we amended our rights agreement, dated as of April 15, 1997, as amended, with National City Bank, as rights agent, for the purpose of rendering it inapplicable to the Exchange Agreement, the Exchange and the other transactions contemplated thereby. The amendment provided that the execution of, and the consummation of the transactions contemplated by, the Exchange Agreement will not cause (1) Cap Rock Holding or Parent or any of their affiliates or associates to be deemed an acquiring person, or (2) a distribution date, share acquisition date or triggering event to be deemed to have occurred.

     Under Michigan law, because our Common Stock is traded on the NYSE and the Common Stock Exchange Consideration is all cash, holders of our Common Stock are not entitled to exercise dissenters’ rights in connection with the Exchange. In addition, because holders of our Series B Preferred Stock are not entitled to vote on the Exchange Proposal under Michigan law, such holders are not entitled to exercise dissenters’ rights in connection with the Exchange. See “The Exchange – Dissenters’ Rights.”

     Our Common Stock is listed on the NYSE under the symbol “SEN.” On February 22, 2007, the last full trading day prior to the public announcement of the Exchange, the closing price for our Common Stock was $6.00 per share. On ___, 2007, the last full trading day prior to the date of this proxy statement, the closing price for our Common Stock was $______ per share. See “Market Price and Dividend Data.”

     This proxy statement contains forward-looking statements about SEMCO Energy. The Securities and Exchange Commission, which we refer to in this proxy statement as the SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. These statements may be made directly in this proxy statement and they may also be made a part of this proxy statement by reference to other documents filed by us with the SEC, which is known as “incorporation by reference.”

     Statements that are not historical or current facts, including statements about beliefs and expectations are forward-looking statements. These statements often include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook,” “objectives,” “strategies,” “goals” or similar expressions. These forward-looking statements cover, among other things, anticipated future plans and prospects of SEMCO Energy and words and terms of similar substance used in connection with any discussion of future operating or financial performance, or the acquisition of us by Cap Rock Holding and Parent. Our forward-looking statements are based on management’s current views about future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements including, among others:

	•		the occurrence of any event, change or other circumstances that could give rise to the termination of the Exchange Agreement;
	•		the outcome of any legal proceedings that may be instituted against SEMCO Energy and others relating to the Exchange Agreement;
	•		the inability to complete the Exchange due to the failure to obtain shareholder approval or the failure to satisfy other conditions to the consummation of the Exchange, including the receipt of satisfactory regulatory approvals from the RCA;
	•		the failure of the Exchange to close for any other reason;
	•		risks that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the Exchange;
	•		the effect of the announcement of the Exchange on our customers, key employees, operating results and business generally;
	•		the ability to realize the benefits of the Exchange;
	•		the amount of the costs, fees, expenses and charges related to the Exchange;

and other risks detailed in our current filings with the SEC, including our most recent filings on Form 10-K and Form 10-Q. See “Where You Can Find More Information.” Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at which, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause our actual performance or results to differ materially from those expressed or implied in the statements.

     We caution you not to place undue reliance on our forward-looking statements, which speak only as of the date of this proxy statement or the date of the documents incorporated by reference in this proxy statement. Except as required by law, we are under no obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

     SEMCO Energy

     SEMCO Energy is a NYSE-listed, regulated public utility company. SEMCO Energy distributes natural gas to more than 400,000 customers combined in Michigan, as SEMCO Energy Gas Company, and, in Alaska, as ENSTAR Natural Gas Company. SEMCO Energy also owns and operates businesses involved in propane distribution, intrastate pipelines and natural gas storage. SEMCO Energy is incorporated in the State of Michigan. Our principal executive offices are located at 1411 Third Street, Suite A, Port Huron, Michigan 48060, and our telephone number is (810) 987-2200.

     Cap Rock Holding

     Cap Rock Holding, through its regulated subsidiary, Cap Rock Energy Corporation, transmits and distributes power to residential and commercial customers in 28 counties in the State of Texas. Cap Rock Holding owns no generation facilities and instead purchases power wholesale through long-term power supply contracts. Cap Rock Holding’s headquarters are located at 500 West Wall, Suite 200, Midland, Texas 79701.

     Parent

     Semco Holding Corporation is a Delaware corporation formed for the purpose of effecting the share exchange with SEMCO Energy. Semco Holding Corporation is a direct, wholly owned subsidiary of Cap Rock Holding. The executive offices of Semco Holding Corporation are located at c/o Cap Rock Holding, 500 West Wall, Suite 200, Midland, Texas 79701.

     This proxy statement is furnished in connection with the solicitation of proxies by our Board of Directors in connection with a special meeting of holders of our Common Stock, which is referred to in this proxy statement as the special meeting.

     The special meeting is scheduled to be held as follows:

     Proposals to be Considered at the Special Meeting

     At the special meeting, holders of our Common Stock will consider and vote on the Exchange Proposal. In addition, holders of our Common Stock may (1) vote in their discretion with respect to the approval of any proposal to postpone or adjourn the special meeting to a later date or time, to solicit additional proxies in favor of the Exchange Proposal, if there are not sufficient votes for approval of the Exchange Proposal at the special meeting, and (2) consider and vote upon such other matters as may properly come before the special meeting or any adjournments or postponements of the special meeting.

     Record Date

     Our Board of Directors has fixed the close of business on April 2, 2007, as the record date for the special meeting and only holders of record of our Common Stock on the record date are entitled to vote at the special meeting. As of the close of business on April 2, 2007, there were issued and outstanding and entitled to vote approximately ___shares of our Common Stock.

     Voting Rights; Quorum; Vote Required for Approval

     Each share of our Common Stock entitles its holder to one vote on all matters properly coming before the special meeting. The presence in person or representation by proxy of the holders of a majority of the issued and outstanding shares entitled to vote on the Exchange Proposal, considered together, constitutes a quorum for the purpose of considering the Exchange Proposal. Shares of our Common Stock represented at the special meeting but not voted, including shares of our Common Stock for which proxies have been received but for which shareholders have abstained and “broker non-votes” (as described below), will be treated as shares present and entitled to vote for purposes of determining a quorum at the special meeting. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies.

     If you hold your shares of Common Stock in an account in “street name” with a broker or bank, you must instruct the broker or bank on how to vote your shares. If an executed proxy card returned by a broker or bank holding shares indicates that the broker or bank does not have authority to vote on the Exchange Proposal, the shares will be considered present at the meeting for purposes of determining the presence of a quorum, but will not be voted on the Exchange Proposal. This is called a “broker non-vote.” Your broker or bank will vote your shares only if you provide instructions on how to vote by following the instructions provided to you by your broker or bank. If you do not provide your broker with instructions, your shares of Common Stock will not be voted and that will have the same effect as a vote “AGAINST” the approval of the Exchange Agreement. If you hold shares of our Common Stock in

“street name,” you must request a legal proxy from your broker or bank in order to vote in person at the special meeting.

     Under our articles of incorporation and Michigan law, the approval of the Exchange Proposal requires the affirmative vote of a majority of the outstanding shares of Common Stock entitled to vote on the Exchange Proposal. Abstentions and “broker non-votes” will have the same effect as a vote “AGAINST” the Exchange Proposal. Under Michigan law, a class or series of shares that would otherwise be entitled to vote as a class on a share exchange is not entitled to vote as a class if the board of directors determines on a reasonable basis that the class or series is to receive consideration under the plan of share exchange that has a fair value that is not less than the fair value of the shares of the class or series on the date of adoption of the plan. On the date of adoption of the Exchange Agreement by our Board of Directors, the Board of Directors determined that the Preferred Stock Exchange Consideration had a fair value that was not less than the fair value of the Series B Preferred Stock on that date. As a result, holders of the Series B Preferred Stock are not entitled to vote on the Exchange Proposal.

     As of March 31, 2007, our directors and executive officers beneficially owned and had the right to vote approximately 939,386 shares of our Common Stock entitling them to exercise approximately 2.61% of the voting power of our Common Stock. In addition, each of our directors and executive officers, other than John T. Ferris, has informed us that they will vote the shares of Common Stock owned by him or her in favor of the Exchange Proposal.

     Voting and Revocation of Proxies

     Shareholders of record may submit proxies by mail, by telephone or through the Internet. Shareholders who wish to submit a proxy by mail should mark, date, sign and return the proxy card in the envelope furnished. The enclosed proxy card includes detailed information on how to vote by telephone at 1-800-690-6903 or through the Internet at www.proxyvote.com. Shareholders who hold shares beneficially through a nominee (such as a bank or broker) may be able to submit a proxy by telephone or through the Internet, if those services are offered by the nominee.

     Proxies received at any time before the special meeting, and not revoked or superseded before being voted, will be voted at the special meeting. Where a specification is indicated by the proxy, it will be voted in accordance with the specification. Where no specification is indicated, the proxy will be voted “FOR” the Exchange Proposal and the proposal to postpone or adjourn the special meeting, if necessary.

     If you hold your shares in certificated form, please do not send in your stock certificates with your proxy card. When the Exchange is completed, a separate letter of transmittal will be mailed to you that will enable you to receive the Exchange Consideration.

     Until the vote occurs at the special meeting, you can revoke your proxy and change your vote in any of the following ways:

	•		by delivering written notification to us at our principal executive offices at 1411 Third Street, Suite A, Port Huron, Michigan 48060, Attention: Corporate Secretary; before 11:59 p.m., Eastern Time, on ___, 2007, or by following the instructions included on your proxy card;
	•		by delivering a later dated proxy in the manner described in this proxy statement; or
	•		by attending the special meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy; you must vote in person at the meeting).

     If you voted by telephone or through the Internet, you can also revoke your proxy and change your vote by any of these methods or you can revoke your proxy and change your vote by telephone by calling 1-800-690-6903 or through the Internet at www.proxyvote.com before 11:59 p.m. on ___, 2007. If you decide to vote by completing, signing, dating and returning the enclosed proxy card, you should retain a copy of the voter control number found on the proxy card in the event that you later decide to revoke your proxy and change your vote by telephone or through the Internet. If you have instructed a broker or bank to vote your shares, you can revoke your proxy and change your vote by following the directions received from your broker or bank to change those instructions.

     All properly submitted proxies received by us before the special meeting that are not revoked prior to being voted at the special meeting will be voted at the special meeting in accordance with the instructions indicated on the proxies or, if no instructions were provided, “FOR” the Exchange Proposal.

     Postponements and Adjournments

     Whether or not a quorum is present, the special meeting may be adjourned by the chairman of the special meeting for the purpose of soliciting additional proxies or for other reasons as determined in the sole discretion of the chairman of the meeting. No notice need be given of an adjourned meeting provided that the time and place to which the meeting is adjourned are announced at the special meeting at which the adjournment is taken. However, if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to notice of the new record date in accordance with our bylaws.

     Solicitation of Proxies

     We will bear the expenses in connection with the solicitation of proxies. Arrangements will also be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation material to the beneficial owners of our Common Stock held of record by those persons, and we may reimburse them for their reasonable transaction and clerical expenses. Solicitation of proxies will be made principally by mail. Proxies may also be solicited in person, or by telephone, facsimile, email or other means of communication, by our officers and employees. These people will receive no additional compensation for these services, but will be reimbursed for any transaction expenses incurred by them in connection with these services. We have hired D.F. King & Co., Inc., a proxy solicitation firm, for assistance in connection with the solicitation of proxies for the special meeting at an anticipated cost not to exceed $6,500 plus an additional fee of $4.00 per incoming and outgoing telephone contact and telecom charges. In addition, we will reimburse reasonable out-of-pocket expenses to D.F. King & Co., Inc. for such items as mailing, copying, phone calls, faxes and other related items. In addition, we will indemnify against any losses arising out of that firm’s proxy soliciting services on our behalf, with certain exceptions.

     Shareholder List

     A list of shareholders entitled to vote at the special meeting will be available for examination by any of our shareholders at the special meeting for the duration of the special meeting.

     Questions and Additional Information

     If you have any questions about the Exchange Proposal or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please call our proxy solicitor, D.F. King & Co., Inc., toll-free at (800) 714-3312 or collect at (212) 269-5550.

     We were founded in 1950 as Southeastern Michigan Gas Company and, through a series of transactions, are now known as SEMCO Energy, Inc. We provide natural gas service to approximately 413,000 customers, with approximately 287,000 customers in Michigan, who are served by a division known as SEMCO Energy Gas Company, and 126,000 customers in Alaska, who are served by a division known as ENSTAR Natural Gas Company. We also own and operate businesses involved in propane distribution, intrastate pipelines and natural gas storage.

     Since 2003, our Board of Directors and members of management have regularly evaluated our business, operations, and long-term strategic plans and alternatives, including our prospects as an independent company. Beginning in 2003, our Board of Directors decided to focus our long-term strategic efforts on our core natural gas distribution business. This shift in strategic focus prompted efforts to market our discontinued construction services business, which was sold in September 2004, and we refocused our information technology business on meeting the needs of our natural gas distribution business, including the installation of a new customer information system for our Michigan operations in 2006.

     We also have sought to achieve our current long-term strategic objective by expanding our gas distribution business in an economical manner through system improvements and the addition of customers within our existing service territories. In addition to growing our business within our existing service territories, we have sought to make acquisitions of, or investments in, natural gas distribution businesses and assets, pipelines and storage facilities that provide attractive service territories and additional economies of scale. Our ability to execute this strategy successfully has been affected by increased competition for such assets and our relatively weak financial condition characterized by high levels of outstanding debt and the relatively low trading price of our Common Stock during this period.

     Our Board of Directors and management on various occasions discussed with Credit Suisse Securities (USA) LLC (“Credit Suisse”) our strategic plan and possible ways to enhance shareholder value as well as efforts to improve our financial condition, including debt refinancings and equity offerings. Credit Suisse has advised us in connection with various transactions over the last several years, including in connection with our offering of Common Stock and Series B Preferred Stock in 2005.

     In 2005 and during the first six months of 2006, we received inquiries from various strategic and financial investors expressing interest in discussing potential transactions with us. During this time, our Board of Directors had concluded that it was preferable for us to remain independent and pursue our long-term strategy. Consistent with its fiduciary obligations, our Board of Directors was generally willing to consider, however, proposed transactions that it believed were in the best interests of our shareholders. None of these initiatives moved beyond the early discussion stages.

     In late July 2006, we received an indication of interest regarding SEMCO Energy from Cap Rock Holding, which was informed that we were not for sale. When Cap Rock Holding continued to express interest in the potential purchase of us at a substantial premium to the then-current market price for our Common Stock, Cap Rock Holding was informed that it was free to submit any communications it might wish to make to our Board of Directors.

     On August 14, 2006, Cap Rock Holding submitted a letter to our Board of Directors expressing an initial indication of interest in acquiring all of our Common Stock for a price ranging from $8.00 to $9.00 per share in cash, subject to certain conditions, including a more detailed review of data on us and our financial and operational performance and other aspects of our business. The confidential, non-binding letter expressed Cap Rock Holding’s desire to enter into a confidentiality agreement and to commence a “due diligence” review of our business. Cap Rock Holding also indicated that it would withdraw its indication of interest if we solicited other offers at that time.

     On August 15, 2006, the Finance Committee of the Board of Directors, comprised of Dr. John M. Albertine (then-Chairman of our Board of Directors), Mr. Paul F. Naughton, the Chairman of the Finance Committee, Mr. Ben A. Stevens and Mr. John van Roden, Jr., held a regularly scheduled meeting, with members of management present. At this meeting, Mr. Schreiber informed the Finance Committee that he, Mr. Naughton, and Dr. Albertine had been sent an indication of interest from Cap Rock Holding dated August 14, 2006. The Finance Committee then discussed how this inquiry should be addressed, in light of the range of value suggested in the indication of interest and the fact that we had previously received inquiries from time to time from various strategic and financial investors. The Finance Committee then resolved that the Finance Committee would recommend to our Board of Directors that it conduct an evaluation of strategic alternatives for SEMCO Energy.

     On August 16, 2006, our Board of Directors held a regularly scheduled meeting. At this meeting, our Board of Directors discussed the indication of interest from Cap Rock Holding and the recommendation from the Finance Committee that our Board of Directors conduct a review of various strategic alternatives which might be available to us. After deliberation, our Board of Directors concluded that it should conduct such a review and evaluation. Our Board of Directors delegated the responsibility for conducting this review and evaluation to its Finance Committee, consistent with the Finance Committee’s charter (which provides that the Finance Committee’s duties include reviewing and assessing significant proposed transactions involving SEMCO Energy).

     The Finance Committee, together with members of management, interviewed three investment banking firms, including Credit Suisse, in late August 2006 to assist with the review of our strategic alternatives. The investment banking firms discussed with the Finance Committee possible strategic alternatives for us, which included: (i) executing our existing strategic plan, (ii) a sale of SEMCO Energy, (iii) a possible sale of our Alaska and Michigan assets separately, (iv) a recapitalization of SEMCO Energy, (iv) the acquisition of a smaller regional target, or (v) a strategic merger. The investment banking firms also discussed with the Finance Committee trends in the industry, such as high commodity prices and increased focus on energy conservation, which have had a negative effect on the industry’s financial performance and caused an increased focus on how revenues are collected from customers (known in the industry as “rate design”), and industry transactional activity. The Finance Committee subsequently decided to retain Credit Suisse to act as our financial advisor.

     On October 10, 2006, the Finance Committee convened a meeting with members of management and representatives of Troutman Sanders and Credit Suisse present. Credit Suisse reviewed with the Finance Committee our current business and general industry trends, certain potential strategic alternatives available to us and financial aspects of the indication of interest from Cap Rock Holding. After discussion, the Finance Committee determined that the indication of interest received from Cap Rock Holding merited further consideration by our Board of Directors and resolved to recommend to our Board of Directors that we enter into a confidentiality agreement with Cap Rock Holding, among other things, to facilitate the confidential exchange of financial and operating data and other information about SEMCO Energy.

     On October 25, 2006, our Board of Directors held a regularly scheduled meeting with members of management and representatives of Troutman Sanders and Credit Suisse present. The Finance Committee reported to the Board of Directors on the Finance Committee’s activities with respect to the Cap Rock Holding indication of interest. Credit Suisse reviewed with the Board of Directors the matters previously discussed with the Finance Committee on October 10, 2006, including a review of our current business and general industry trends, certain potential strategic alternatives available to us and financial aspects of the indication of interest from Cap Rock Holding. The Board of Directors discussed each of the potential strategic alternatives, including the potential benefits, risks and challenges of each alternative, and the likelihood of successfully executing each alternative. Following this discussion, a representative of Troutman Sanders reviewed with members of our Board of Directors their fiduciary obligations and the legal issues involved in deciding whether and how to proceed with a sale of SEMCO Energy. Following these discussions and based on the recommendation of the Finance Committee, our Board of Directors authorized members of management to negotiate and enter into a confidentiality

agreement with Cap Rock Holding. However, our Board of Directors indicated that it was not making any decision at that time to sell SEMCO Energy and that our Board of Directors and management would continue to pursue our then-current long-term strategic plan, including a satisfactory resolution of our then-pending base rate and rate design proceeding in Michigan.

     On November 7, 2006, we executed a confidentiality agreement with Cap Rock Holding to facilitate the confidential exchange of due diligence information.

     From November 7, 2006 through December 13, 2006, we provided Cap Rock Holding and its advisors with legal, financial, business, regulatory, operational, and other information in accordance with the terms of the confidentiality agreement, in response to their due diligence requests, and engaged in ongoing discussions with Cap Rock Holding and its advisors relating to these areas. During this timeframe, representatives of Cap Rock Holding reviewed due diligence information relating to us, including internal forecasts prepared by our management, and participated with members of management and our advisors in various meetings and conference calls to discuss this due diligence information.

     On December 14, 2006, Cap Rock Holding submitted to our Board of Directors a written offer, on a confidential, non-binding basis, to acquire pursuant to a statutory share exchange all of our Common Stock for $8.10 in cash per share and all of our Series B Preferred Stock on an as-converted basis, including associated make-whole premiums. Although the offer was subject to the negotiation of a mutually satisfactory exchange agreement, the offer was not subject to any additional due diligence. The closing of the transaction would not be subject to a financing condition and would not be conditioned upon the conclusion of our pending base rate and rate design proceeding. Under this proposal, Cap Rock Holding’s obligation to consummate the proposed transaction would be subject to customary closing conditions, including receipt of regulatory and shareholder approvals and no material adverse change in us, and any definitive agreement would include typical representations and warranties and covenants. The offer further specified that the definitive agreement between the parties would contain a standard “no-shop” provision with a limited “fiduciary out” as well as a termination fee of $19.0 million.

     On December 20, 2006, the Finance Committee convened a meeting, with Mr. Donald W. Thomason, Chairman of the Board of Directors, members of management and representatives of Troutman Sanders and Credit Suisse present. At this meeting, the Finance Committee reviewed the terms of the Cap Rock Holding offer with our advisors. Representatives of Credit Suisse reviewed with the Finance Committee financial aspects of the proposed transaction with Cap Rock Holding. The Finance Committee identified two key areas for improvement in the Cap Rock offer; namely, an increase in the proposed $8.10 offer price and a decrease in the $19.0 million termination fee.

     On December 28, 2006, our Board of Directors held a meeting to discuss the offer received from Cap Rock Holding with members of management and representatives of Troutman Sanders and Credit Suisse present. The Finance Committee provided a report to our Board of Directors and updated the directors on the activities undertaken by the Finance Committee since the receipt of the first indication of interest from Cap Rock Holding on August 14, 2006. Representatives of Troutman Sanders and Credit Suisse then reviewed with our Board of Directors the terms of the Cap Rock Holding offer.

     Our Board of Directors then excused Credit Suisse from the meeting, and Mr. Schreiber recused himself from the meeting and, additionally, from any further negotiations between us and Cap Rock Holding because of Cap Rock Holding’s stated desire to retain management in connection with any transaction. Our Board of Directors then authorized the Finance Committee, either directly, through Credit Suisse or otherwise (and with the assistance of counsel), to attempt to increase the $8.10 price per share offered by Cap Rock Holding and reduce the amount of the $19.0 million termination fee and to report back to our Board of Directors on the results of any such discussions. Our Board of Directors further noted that it was not making any decision at this time to sell SEMCO Energy and that our Board of Directors and management would continue to pursue our long-term strategic plan.

     On December 29, 2006, in accordance with the directives of our Board of Directors, representatives of Credit Suisse spoke with J. Russell Triedman, Chairman of the Board of Cap Rock

Holding, and requested an increase in the $8.10 per share offer price and a decrease in the $19.0 million termination fee.

     On January 2, 2007, Mr. Triedman informed Credit Suisse that Cap Rock Holding would agree to increase its offer price to $8.15 per share and reduce the termination fee to $9.5 million and that this offer was Cap Rock Holding’s “best and final offer.”

     On January 4, 2007, the Finance Committee convened a meeting with Mr. Thomason, Peter F. Clark, our general counsel, Michael V. Palmeri, our chief financial officer, and representatives of Troutman Sanders and Credit Suisse present. Mr. Naughton reported to the Finance Committee regarding the discussions that took place between Credit Suisse and Cap Rock Holding. Mr. Naughton reported that Cap Rock Holding had agreed to increase its offer from $8.10 to $8.15 per share and to reduce the amount of the proposed termination fee from $19 million to $9.5 million. The proposed purchase price amounted to a premium over the previous day’s closing price of the Common Stock of approximately 34%. Mr. Naughton also stated that Cap Rock Holding was prepared to move forward quickly with a transaction but that this offer had been expressed as Cap Rock Holding’s “best and final offer.” The Finance Committee then discussed whether Cap Rock Holding would withdraw its offer if we decided to seek other offers or conduct a “market check” of the price per share offered by Cap Rock Holding at this time. Representatives of Credit Suisse discussed with the Finance Committee that Cap Rock Holding had indicated that soliciting other offers or undertaking a market check at this time would likely result in the withdrawal of the Cap Rock Holding offer. The Finance Committee also discussed the option of including a “go-shop” provision in the definitive agreement, that would permit us to solicit proposals for a period of time after the execution of a definitive agreement. After further discussion, the Finance Committee instructed Mr. Naughton and Credit Suisse to propose to Cap Rock Holding that the definitive agreement contain a “go-shop” provision. The Finance Committee also instructed Mr. Clark, Troutman Sanders and Credit Suisse to seek the advice of Dykema Gossett PLLC (“Dykema”), legal advisors to our Board of Directors on Michigan law matters, with respect to the terms of the “go-shop” proposal and other aspects of the proposed transaction.

     Consistent with the direction of the Finance Committee and following consultation with Mr. Clark, Troutman Sanders and Dykema, Mr. Naughton and representatives of Credit Suisse spoke with representatives of Cap Rock Holding and proposed a 45-day “go-shop” period and a bifurcated termination fee of $7.5 million and $12.5 million, with the lower termination fee payable in the event that the definitive agreement was terminated in connection with a bidder participating in the “go-shop” process.

     On January 6, 2007, Mr. Triedman informed Mr. Naughton and representatives of Credit Suisse that Cap Rock Holding would agree to a 35-day “go-shop” with a bifurcated termination fee of $7.0 million and $12.0 million. This offer was made contingent on SEMCO Energy agreeing to a 30-day exclusivity agreement with Cap Rock Holding.

     On January 9, 2007, our Board of Directors held a meeting where members of management and representatives of Troutman Sanders, Dykema and Credit Suisse were present. The Finance Committee and our legal and financial advisors updated our Board of Directors on the status of the negotiations with Cap Rock Holding. At this meeting, our Board of Directors was informed that Cap Rock Holding had agreed to increase its offer from $8.10 per share to $8.15 per share and had agreed to a 35-day “go-shop” period with a bifurcated termination fee of $7.0 million and $12.0 million. Credit Suisse discussed with our Board of Directors financial aspects of the offer. Representatives from Troutman Sanders and Dykema then briefed our Board of Directors on their fiduciary obligations and explained the “go-shop” provision. For the reasons he had previously explained, Mr. Schreiber then excused himself from the meeting prior to our Board of Directors discussing the Cap Rock Holding proposal further. After further discussion, our Board of Directors approved resolutions authorizing entry into an exclusivity agreement with Cap Rock Holding and authorizing the Finance Committee to negotiate the terms of a definitive agreement with Cap Rock Holding but retaining authority to approve the final version of any definitive

agreement. In addition, since Mr. Thomas W. Sherman had recently rejoined the Board of Directors, the Board of Directors decided to appoint him as a member of the Finance Committee.

     On January 10, 2007, we and Cap Rock Holding entered into an exclusivity agreement, which provided that we would conduct negotiations, on an exclusive basis, with Cap Rock Holding for 30 days.

     Cap Rock Holding submitted its initial draft of the Exchange Agreement to us on January 12, 2007. Over the course of the next week, discussions occurred among Mr. Naughton, Mr. Clark and representatives of Troutman Sanders, Dykema and Credit Suisse regarding suggested revisions to the Exchange Agreement.

     On January 22, 2007, the Finance Committee held a meeting at which Mr. Thomason, Mr. Clark, Mr. Palmeri and representatives of Troutman Sanders, Dykema and Credit Suisse were present. At this meeting, the Finance Committee engaged Dykema to serve as special counsel for the Finance Committee. Troutman Sanders would continue to serve as legal advisor to us. Representatives of Troutman Sanders and Dykema provided the Finance Committee with a detailed review of the terms of the initial draft of the Exchange Agreement as well as changes that would be proposed to the draft Exchange Agreement.

     Over the next week, further negotiations were held between us and Cap Rock Holding and our respective legal and financial advisors. Cap Rock Holding distributed a revised draft of the Exchange Agreement on January 28, 2007.

     On January 30, 2007, the Finance Committee convened a meeting with Mr. Clark, Mr. Palmeri and representatives of Troutman Sanders, Dykema and Credit Suisse present to receive an update on the status of the negotiations. Representatives of Dykema reviewed with the Finance Committee the revised draft from Cap Rock Holding. The Finance Committee further discussed whether it should retain another investment bank to serve as the Finance Committee’s independent financial advisor. After discussion, the Finance Committee authorized Mr. Naughton to engage in further negotiations with Cap Rock Holding regarding the terms of the Exchange Agreement and resolved that, in view of Credit Suisse’s prior work for us and Mr. Schreiber’s prior employment with Credit Suisse, the Finance Committee should pursue the engagement of an independent financial advisor for the Finance Committee.

     At the direction of Mr. Naughton, Mr. Palmeri interviewed three investment banking firms during this period regarding their possible engagement as independent financial advisor for the Finance Committee. Mr. Naughton and Mr. Palmeri eventually agreed to recommend to the Finance Committee that BB&TCM be engaged to serve in this capacity. BB&TCM had performed no prior investment banking services for us.

     On January 31, 2007, a meeting in person in Bloomfield Hills, Michigan occurred among, Mr. Naughton, Mr. Clark, representatives of Troutman, Dykema and Credit Suisse and representatives of Cap Rock Holding and Cravath, Swaine & Moore LLP, counsel to Cap Rock Holding (“Cravath”). At this meeting, the parties reviewed the terms of the draft Exchange Agreement, including those related to the process for the “go-shop” period, situations in which the bifurcated termination fees would be payable, timing of the shareholders’ meeting to consider the transaction, deal protection provisions, the manner and circumstances in which SEMCO Energy could accept a potential superior proposal, our request for a reverse termination fee payable to us in certain events, and conditions to closing, including those related to obtaining regulatory approval. Upon the conclusion of this meeting, Cap Rock Holding delivered a proposal on the major outstanding issues for consideration by the Finance Committee and agreed that Cap Rock Holding would not conduct any discussions with management regarding the terms of their employment until after the end of the “go-shop” period.

     On January 31, 2007, an agreement in principle was reached, subject to Finance Committee approval, on an engagement letter with BB&TCM pursuant to which BB&TCM would furnish the Finance Committee with two opinions in connection with a possible sale transaction, one with respect to the fairness of the consideration to be received by the holders of our Common Stock and the other with respect to the fair value of the consideration to be received by the holders of our Series B Preferred Stock.

     On February 2, 2007, the Finance Committee held a meeting with Mr. Thomason, Mr. Clark, Mr. Palmeri and representatives of Troutman Sanders, Dykema, Ashburn and Mason, our Alaska regulatory counsel, and Credit Suisse present. The Finance Committee first heard a report from Ashburn and Mason on issues related to the Alaska regulatory approval process and then received an update from Mr. Naughton on the January 31^st negotiation session and the proposal from Cap Rock Holding for resolving all major outstanding issues. Mr. Naughton explained to the Finance Committee that Cap Rock Holding had raised significant issues relating to the terms of the “go-shop” and other “deal protection” matters. The Finance Committee developed a counterproposal, which included favorable changes to the “go-shop” provisions and related “deal protection” matters in exchange for bifurcated termination fees in the amount of $6.0 million and $14.0 million. The Finance Committee instructed Mr. Naughton and our advisors to deliver this counterproposal to Cap Rock Holding.

     Over the next several days, further negotiations occurred among Dykema, Troutman Sanders and Cravath, pursuant to which Cap Rock Holding proposed a bifurcated termination fee of $7.0 million and $19.0 million. The parties finally agreed to a bifurcated termination fee of $7.0 million and $15.5 million. Cap Rock Holding submitted a revised draft of the agreement on February 10, 2007.

     On February 12, 2007, the Finance Committee conducted a meeting with Mr. Thomason, Mr. Clark, Mr. Palmeri and representatives of Troutman Sanders, Dykema and BB&TCM present. Based on, among other things, internal forecasts prepared by our management, BB&TCM provided their preliminary financial analysis, regarding SEMCO Energy and discussed how this analysis compared to the offer received from Cap Rock Holding. Credit Suisse then joined the meeting. The Finance Committee then received an update from Mr. Naughton on the status of negotiations with Cap Rock Holding.

     On February 14, 2007, our Board of Directors convened a meeting with Mr. Clark, Mr. Palmeri and representatives of Troutman Sanders, Dykema and Credit Suisse present. The Finance Committee provided our Board of Directors with an update on the negotiations with Cap Rock Holding. Our Board of Directors gave guidance to our legal and financial advisors regarding how to proceed with Cap Rock Holding on the terms of the Exchange Agreement, and, over the next several days, the parties and their respective advisors substantially finalized the terms of the Exchange Agreement.

     On February 21, 2007, the Finance Committee and our Board of Directors held a joint meeting in Birmingham, Michigan. Members of management and representatives of Troutman Sanders, Dykema, Credit Suisse and BB&TCM were present. At this meeting, representatives of Troutman Sanders and Dykema reviewed with members of our Board of Directors the substantially final terms of the Exchange Agreement and their fiduciary obligations in considering and acting on the Exchange Agreement. Also at this meeting, Credit Suisse reviewed with our Board of Directors its financial analysis of the Common Stock Exchange Consideration. BB&TCM then separately reviewed with our Board of Directors its financial analysis of the Common Stock Exchange Consideration and Preferred Stock Exchange Consideration to be received in the Exchange. After considering the proposed terms of the Exchange Agreement and discussions with its and our legal and financial advisors, the Finance Committee unanimously resolved to recommend that our Board of Directors approve the Exchange Agreement and the Exchange and that our Board of Directors recommend that the holders of our Common Stock approve the Exchange Agreement.

     On February 22, 2007, our Board of Directors met in Birmingham, Michigan, with members of management and representatives of Troutman Sanders, Dykema, Credit Suisse and BB&TCM present. At this meeting, Credit Suisse rendered to our Board of Directors an oral opinion, confirmed by delivery of a written opinion dated February 22, 2007, to the effect that, as of that date and based on and subject to the matters described in the opinion, the Common Stock Exchange Consideration to be received by holders of Common Stock was fair, from a financial point of view, to such holders. BB&TCM rendered to our Board of Directors an oral opinion, which opinion was subsequently confirmed in writing, that, as of the date of the opinion and based on and subject to the various qualifications, factors, assumptions and

limitations described in its opinion, the Common Stock Exchange Consideration was fair, from a financial point of view, to such holders. In addition, BB&TCM delivered its oral opinion, which opinion was subsequently confirmed in writing, to our board of directors, to the effect that, as of the date of the opinion, based on and subject to various qualifications, factors, assumptions and limitations described in its opinion, the Preferred Stock Exchange Consideration has a fair value that is not less than the fair value of the Series B Preferred Stock as of the date of the opinion. Upon the recommendation of the Finance Committee and after further discussion, our Board of Directors voted to approve the Exchange Agreement and the Exchange and to recommend that the holders of our Common Stock approve the Exchange Agreement. In connection with this approval, our Board of Directors determined that the consideration to be received by the holders of our Series B Preferred Stock has a fair value that is not less than the fair value of the Series B Preferred Stock as of February 22, 2007. All of the members of the Board of Directors voted in favor of the Exchange Agreement and the Exchange, other than Mr. Ferris who voted against the transactions. Mr. Ferris cited his belief that our shareholders would be better served in the long-term if SEMCO Energy remained an independent company as his reason for opposing the transaction.

     On February 22, 2007, after the closing of trading on the NYSE, we, Parent and Cap Rock Holding completed and executed the Exchange Agreement.

     On February 23, 2007, prior to the opening of trading on the NYSE, we issued a press release announcing the execution of the Exchange Agreement.

     As of the date of this proxy statement, the 35-day “go-shop” period has expired. Prior to the announcement of the transaction with Cap Rock Holding, Credit Suisse, at the direction of our Board of Directors and the Finance Committee, identified strategic and financial bidders believed to be capable of, and potentially interested in, consummating a transaction with us. Subsequent to the announcement of the transaction with Cap Rock Holding, and at the direction of our Board of Directors, Credit Suisse contacted or was contacted by 49 of these parties. As of the date of this proxy statement, no party, other than Cap Rock Holding, has submitted a proposal to pursue a transaction with us.

     Finance Committee

     The Finance Committee of our Board of Directors, acting with the assistance of its own and our legal and financial advisors, evaluated and negotiated the Exchange Proposal, including the terms and conditions of the Exchange Agreement with Cap Rock Holding and Parent. At the time of these activities, the Finance Committee was comprised of four directors who were neither officers nor employees of SEMCO Energy and who meet the NYSE criteria for “independent directors.” The Finance Committee unanimously (1) determined that the Exchange Proposal is advisable, fair to, and in the best interest of, SEMCO Energy and its shareholders and (2) recommended to the Board of Directors that it approve the Exchange and the Exchange Agreement and recommend to holders of our Common Stock that they approve the Exchange Agreement.

     Board of Directors

     After careful consideration, at a meeting held on February 22, 2007, our Board of Directors, acting upon the unanimous recommendation of its Finance Committee:

•

determined that the Exchange and the Exchange Agreement are advisable, fair to, and in the best interests of, us and our shareholders;

	•		approved and adopted the Exchange and the Exchange Agreement; and
	•		recommended that holders of our Common Stock vote to approve the Exchange and the Exchange Agreement. See “Exchange—Background of the Exchange” for additional information on the recommendation of our Board of Directors.

     Our Board of Directors recommends that you vote “FOR” the Exchange Proposal at the special meeting and the postponement or adjournment of the special meeting, if necessary.

     In evaluating the Exchange Proposal, our Board of Directors relied on its knowledge of our business and information provided by our officers, as well as discussions with our legal and financial advisors, and considered our and our shareholders’ short-term and long-term interests and prospects. In determining that the Exchange Proposal is advisable, fair to, and in the best interests of, us and our shareholders and in making its recommendation and in approving and adopting the Exchange Proposal, our Board of Directors considered a number of reasons, including, but not limited to, the reasons described below.

     Business Considerations. Our Board of Directors considered the following business reasons and considerations:

	•		our current and historical financial condition and results of operations, including our prospects if we were to remain a publicly owned corporation and the risks inherent in remaining independent, including the ability to meet our internally prepared projections for future results of operations;
	•		our Board of Directors’ view of Cap Rock Holding’s financial condition and its ability to complete the Exchange, including the absence of a financing condition to Cap Rock Holding’s and Parent’s obligation to consummate the Exchange and the equity commitment from LGB to fund or cause to be funded the Exchange Consideration;
	•		the views expressed by our management regarding, among other things:

	•		our financial condition, results of operations, cash flows, business and prospects, including our prospects and the uncertainties facing us if we were to remain independent;
	•		the unlikelihood of achieving a higher value on a stand-alone basis in the long-term; and
	•		the strategic alternatives available to us and the associated advantages and disadvantages associated with those alternatives;

	•		recent trends affecting the gas distribution industry, such as increased conservation which has generally resulted in a decline in usage;
	•		the impact of our current non-investment grade credit rating upon our ability to execute significant acquisitions as part of our growth strategy for a period of time;
	•		the current strength and liquidity of equity and debt financing markets and the risk that such conditions could be less conducive to an acquisition of SEMCO Energy in the future;
	•		the fact that LGB had provided an equity commitment that backstops the performance by Cap Rock Holding and Parent of certain payment obligations; and

•

the general desirability of our continuing as a stand-alone operating entity.

     Financial Considerations. Our Board of Directors also considered the following financial reasons and considerations:

	•		the current and historical market prices of our Common Stock and the fact that the price of $8.15 per share to be paid under the Exchange Proposal represents a premium of approximately 35.8%, or $2.15, over the closing sale price of $6.00 for our Common Stock on the NYSE on February 22, 2007 (the last trading day before the public announcement that we and Cap Rock Holding and Parent had entered into the Exchange Agreement), and a premium of approximately 35.5% over the average closing price for our Common Stock for the 30 trading days ending on February 22, 2007;
	•		the belief of our Board of Directors that the Exchange Consideration represented the highest consideration that Cap Rock Holding and Parent were willing to pay for our capital stock;
	•		the form of consideration to be paid to our shareholders under the Exchange Proposal is cash, which will provide liquidity and certainty of value to our shareholders;
	•		Credit Suisse’s opinion, including its financial presentation, dated February 22, 2007, to our Board of Directors as to the fairness, from a financial point of view and as of the date of the opinion, of the Common Stock Exchange Consideration, as more fully described below under the caption “The Exchange—Opinions of Our Financial Advisors — Opinion of Credit Suisse Securities (USA) LLC”; and
	•		BB&TCM’s opinions, including its financial presentation, each dated February 22, 2007, to our Board of Directors that, as of the date of the opinions and based upon and subject to the various qualifications, factors, assumptions and limitations described in the opinions, (a) the Common Stock Exchange Consideration was fair, from a financial point of view, to such holders, and (b) the Preferred Stock Exchange Consideration has a fair value that is not less than the fair value of the Series B Preferred Stock as of the date thereof, each as more fully described below under the caption “The Exchange—Opinions of Our Financial Advisors — Opinion of BB&TCM.”

     Procedural Considerations. Our Board of Directors also considered certain procedural considerations including:

	•		the fact that negotiations were conducted under the oversight of the Finance Committee of our Board of Directors which is comprised solely of independent directors who are not employees of SEMCO Energy and who have no financial interest in the Exchange that is different from that of the shareholders of SEMCO Energy; and
	•		the fact that the Finance Committee of our Board of Directors retained and received advice from its own independent financial and legal advisors in evaluating, negotiating and recommending the terms of the Exchange Agreement.

     Other Transaction Considerations. Our Board of Directors also considered certain transaction-related reasons and considerations:

	•		the judgment of our Board of Directors, after reviewing strategic alternatives with the assistance of our management and financial advisors, that an alternative transaction that would provide a greater value to our shareholders was unlikely to be available;
	•		the terms and conditions of the Exchange Agreement would permit us to actively solicit alternative transactions for 35 days after the execution of the Exchange Agreement, and,

			after such 35-day period, continue discussions with certain persons or respond to unsolicited proposals under certain circumstances;
	•		the terms and conditions of the Exchange Agreement, including the parties’ representations, warranties and covenants, the conditions to their respective obligations, and the specified ability of the parties to terminate the Exchange Agreement;
	•		the provisions in the Exchange Agreement permitting the Board of Directors, under certain circumstances, to provide non-public information to, and engage in discussions with, third parties regarding alternative transactions and to terminate the Exchange Agreement to accept a superior company proposal, and the provisions in the Exchange Agreement permitting our Board of Directors, in the exercise of its fiduciary duties under applicable Michigan law, to terminate the Exchange Agreement in favor of a superior company proposal, subject to specified conditions, including payment to Parent of a termination fee of either $7.0 million or $15.5 million, depending on the timing and circumstances surrounding our termination of the Exchange Agreement, and up to $3.0 million of expenses;
	•		the judgment of our Board of Directors that, as a percentage of the Exchange Consideration, the potential payment of either a $7.0 million or $15.5 million termination fee and up to $3.0 million of expenses was reasonable and not likely to discourage a competing bidder from making a superior company proposal;
	•		the consideration by our Board of Directors, after consultation with counsel, of the likelihood that the Exchange would be approved by the requisite regulatory authorities, including the RCA, without the imposition of material conditions that would prevent or materially delay the Exchange or cause either party to exercise its right to terminate the Exchange Agreement and of the efforts of the parties required to obtain such approvals; and
	•		the provisions in the Exchange Agreement favorable to our employees, including the commitment by Cap Rock Holding to maintain SEMCO Energy’s headquarters in Port Huron, Michigan for two years after closing and to preserve substantially comparable employee pay and benefits for at least two years after closing.

     In its deliberations, our Board of Directors also recognized the following considerations and other potentially negative factors associated with the Exchange:

	•		the fact that in order to satisfy the conditions to the closing of the Exchange, the RCA must approve Cap Rock Holding’s application for the authority to acquire an indirect controlling interest in our ENSTAR division by issuing a final order that satisfies certain requirements set forth in the Exchange Agreement and the fact that the RCA may not take action to approve this application for a significant period of time;
	•		the difficulties and challenges inherent in completing the Exchange and obtaining the approval of the RCA without terms or conditions that would prevent or materially delay the Exchange or cause either party to exercise its right to terminate the Exchange Agreement or not consummate the Exchange;
	•		that certain provisions of the Exchange Agreement may have the effect of discouraging proposals for alternative transactions with us, including:

	•		the restriction on our ability to solicit proposals for alternative transactions after the expiration of the “go-shop” period; and
	•		the requirement that we provide Cap Rock Holding and Parent information with respect to proposals for alternative transactions and a five-day period in which to

match an otherwise superior company proposal before our Board of Directors may terminate the Exchange Agreement and accept the superior proposal;

	•		the fact that the Exchange Agreement prohibits us from soliciting other proposals after the expiration of the “go-shop” period and obligates us to pay to Parent a termination fee of either $7.0 million or $15.5 million, depending on the timing and circumstances surrounding our termination of the Exchange Agreement, and up to $3.0 million of expenses, if we terminate the Exchange Agreement to accept and ultimately consummate a superior company proposal, which may deter others from proposing an alternative transaction that may be more advantageous to our shareholders;
	•		the fact that we are entering into an agreement with Parent, which is a newly formed entity with essentially no assets;
	•		that one of our directors, Mr. Ferris, voted against the approval of the Exchange Agreement and the Exchange;
	•		that we will no longer exist as an independent company and our shareholders will no longer participate in our growth or the pursuit of our stand-alone business plan;
	•		the fact that gains from an all-cash transaction would be taxable to our shareholders for U.S. federal income tax purposes;
	•		the circumstances under which Parent may have the right to terminate the Exchange Agreement;
	•		the fact that, pursuant to the Exchange Agreement, we must generally conduct our business in the ordinary course and we are subject to a variety of other restrictions on the conduct of our business prior to the completion of the Exchange or termination of the Exchange Agreement; and
	•		the potential for diversion of management and employee attention and for employee attrition during the period prior to the completion of the Exchange and the potential effect on our business and relations with customers, service providers and other stakeholders.

     During its consideration of the transaction with Cap Rock Holding and Parent described above, our Board of Directors was also aware that some of our directors and executive officers may have interests in the Exchange that are different than or in addition to those of our shareholders generally, described under “The Exchange—Interests of Directors and Executive Officers in the Exchange.”

     This discussion of the information and reasons considered and given weight by our Board of Directors is not intended to be exhaustive, but is believed to address the material information and reasons considered by our Board of Directors. In view of the number and variety of these reasons, our Board of Directors did not find it practicable to make specific assessments of, or otherwise assign relative weights to, the specific reasons and analyses considered in reaching its determination. The determination to approve and adopt the Exchange Proposal was made after consideration of all of the reasons as a whole. In addition, individual members of our Board of Directors may have given different weights to different reasons in reaching their conclusions with respect to the Exchange.

     Opinion of Credit Suisse Securities (USA) LLC

     SEMCO Energy retained Credit Suisse to act as SEMCO Energy’s financial advisor in connection with the Exchange. In connection with Credit Suisse’s engagement, SEMCO Energy requested that Credit Suisse evaluate the fairness, from a financial point of view, of the Common Stock

Exchange Consideration. On February 22, 2007, at a meeting of our Board of Directors held to evaluate the Exchange, Credit Suisse rendered to our Board of Directors its oral opinion, which opinion was confirmed by delivery of a written opinion dated February 22, 2007, to the effect that, as of that date and based on and subject to the matters described in its opinion, the Common Stock Exchange Consideration was fair, from a financial point of view, to holders of Common Stock.

     The full text of Credit Suisse’s written opinion, dated February 22, 2007, to our Board of Directors, which sets forth, among other things, the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken by Credit Suisse in rendering its opinion, is attached as Annex B and is incorporated into this proxy statement by reference in its entirety. Holders of Common Stock are encouraged to read this opinion carefully in its entirety. Credit Suisse’s opinion was provided to our Board of Directors for its information in connection with its evaluation of the Common Stock Exchange Consideration and relates only to the fairness, from a financial point of view, of the Common Stock Exchange Consideration. Credit Suisse’s opinion does not address any other aspect of the Exchange and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act with respect to any matters relating to the Exchange. The summary of Credit Suisse’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the opinion.

     In arriving at its opinion, Credit Suisse reviewed the Exchange Agreement as well as certain publicly available business and financial information relating to SEMCO Energy. Credit Suisse also reviewed certain other information relating to SEMCO Energy, including financial forecasts, provided to or discussed with Credit Suisse by SEMCO Energy, and met with SEMCO Energy’s management to discuss SEMCO Energy’s business and prospects. Credit Suisse also considered certain financial and stock market data of SEMCO Energy and compared that data with similar data for other publicly held companies in businesses Credit Suisse deemed similar to that of SEMCO Energy. Credit Suisse also considered, to the extent publicly available, the financial terms of certain other business combinations and other transactions recently effected or announced. Credit Suisse also considered such other information, financial studies, analyses and investigations and financial, economic and market criteria which it deemed relevant.

     In connection with its review, Credit Suisse did not assume any responsibility for independent verification of any of the foregoing information and relied on such information being complete and accurate in all material respects. With respect to the financial forecasts for SEMCO Energy which Credit Suisse reviewed, SEMCO Energy’s management advised Credit Suisse, and Credit Suisse assumed, that such forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of SEMCO Energy’s management as to SEMCO Energy’s future financial performance. Credit Suisse also assumed, with SEMCO Energy’s consent, that, in the course of obtaining any regulatory or third party consents, approvals or agreements in connection with the Exchange, no delay, limitation, restriction or condition would be imposed that would have an adverse effect, in any respect material to Credit Suisse’s analyses, on SEMCO Energy or the Exchange and that the Exchange would be consummated in accordance with the terms of the Exchange Agreement without waiver, modification or amendment of any material term, condition or agreement. Credit Suisse was not requested to, and did not, make an independent evaluation or appraisal of SEMCO Energy’s assets or liabilities, contingent or otherwise, and Credit Suisse was not furnished with any such evaluations or appraisals. Credit Suisse’s opinion addressed only the fairness, from a financial point of view and as of the date of its opinion, to the holders of Common Stock of the Common Stock Exchange Consideration provided for in the Exchange and did not address any other aspect or implication of the Exchange or any other agreement, arrangement or understanding entered into in connection with the Exchange or otherwise. Credit Suisse was not requested to, and did not, prior to the date of its opinion, solicit third party indications of interest in acquiring all or any part of SEMCO Energy; however, Credit Suisse was requested to solicit such indications of interest from potential buyers for a limited period after the date of the Exchange Agreement as permitted under its provisions. Credit Suisse’s opinion was necessarily based upon information made

available to it as of the date of its opinion and financial, economic, market and other conditions as they existed and could be evaluated on the date of its opinion. Credit Suisse’s opinion did not address the relative merits of the Exchange as compared to alternative transactions or strategies that might be available to SEMCO Energy, nor did it address the underlying business decision of SEMCO Energy to proceed with the Exchange. Except as described above, SEMCO Energy imposed no other limitations on Credit Suisse with respect to the investigations made or procedures followed in rendering its opinion.

     In preparing its opinion to our Board of Directors, Credit Suisse performed a variety of financial and comparative analyses, including those described below. The summary of Credit Suisse’s analyses described below is not a complete description of the analyses underlying Credit Suisse’s opinion. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. Credit Suisse arrived at its ultimate opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis. Accordingly, Credit Suisse believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

     In its analyses, Credit Suisse considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond SEMCO Energy’s control. No company, transaction or business used in Credit Suisse’s analyses is identical or directly comparable to SEMCO Energy or the proposed Exchange, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed. The estimates contained in Credit Suisse’s analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Credit Suisse’s analyses are inherently subject to substantial uncertainty.

     Credit Suisse was not requested to, and it did not, recommend the specific consideration payable in the proposed Exchange, which consideration was determined through negotiations between SEMCO Energy and Cap Rock Holding, and the decision to enter into the Exchange Agreement was solely that of our Board of Directors. Credit Suisse’s opinion and financial analyses were only one of many factors considered by our Board of Directors in its evaluation of the proposed Exchange and should not be viewed as determinative of the views of our Board of Directors or management with respect to the Exchange or the consideration provided for in the Exchange.

     The following is a summary of the material financial analyses reviewed with our Board of Directors in connection with Credit Suisse’s opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand Credit Suisse’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Credit Suisse’s financial analyses.

     Selected Public Companies Analysis

     Credit Suisse reviewed financial and stock market information of SEMCO Energy and the following 14 selected publicly traded companies involved in the natural gas distribution industry:

•		AGL Resources Inc.
•		Atmos Energy Corporation
•		Chesapeake Utilities Corporation
•		EnergySouth, Inc.
•		The Laclede Group, Inc.
•		New Jersey Resources Corporation
•		Nicor Inc.
•		Northwest Natural Gas Company
•		Piedmont Natural Gas Company, Inc.
•		South Jersey Industries, Inc.
•		Southwest Gas Corporation
•		UGI Corporation
•		Vectren Corporation
•		WGL Holdings, Inc.

     Credit Suisse reviewed, among other things, enterprise values of the selected companies, calculated as market value based on closing stock prices on February 15, 2007, plus debt, less cash, as a multiple of calendar years 2006, 2007 and 2008 estimated earnings before interest, taxes, depreciation and amortization, referred to as EBITDA. Credit Suisse also reviewed closing stock prices of the selected companies on February 15, 2007, as a multiple of calendar years 2006, 2007 and 2008 estimated earnings per share, referred to as price-to-earnings, or P/E, multiples. Credit Suisse then applied a range of selected calendar years 2006, 2007 and 2008 EBITDA and P/E multiples derived from the selected companies to corresponding data of SEMCO Energy. Financial data of the selected companies were based on publicly available research analysts’ estimates, public filings and other publicly available information. Financial data of SEMCO Energy were based on internal data and estimates of SEMCO Energy’s management. This analysis indicated the following implied per share equity reference range for SEMCO Energy, as compared to the Common Stock Exchange Consideration:

     Selected Transactions Analysis

     Credit Suisse reviewed the transaction values of the following 14 transactions involving or related to local gas distribution companies:

     Credit Suisse reviewed, among other things, transaction values in the selected transactions, as a multiple of latest 12 months EBITDA. Credit Suisse then applied a range of selected latest 12 months EBITDA multiples derived from the selected transactions to SEMCO Energy’s calendar year 2006 EBITDA and calendar year 2007 estimated EBITDA (which was included in order to take into account the EBITDA impact of SEMCO Energy’s recently settled Michigan base rate and rate design case). Financial data of the selected transactions were based on publicly available information at the time of announcement of the relevant transaction. Financial data of SEMCO Energy were based on internal data and estimates of SEMCO Energy’s management. This analysis indicated the following implied per share equity reference range for SEMCO Energy, as compared to the Common Stock Exchange Consideration:

     Discounted Cash Flow Analysis

     Credit Suisse performed a discounted cash flow analysis of SEMCO Energy to calculate the estimated present value of the unlevered, after-tax free cash flows that SEMCO Energy could generate during calendar years 2007 through 2011 based on internal estimates of SEMCO Energy’s management. Credit Suisse calculated terminal values for SEMCO Energy by applying a range of terminal value EBITDA multiples of 8.0x to 9.5x to SEMCO Energy’s calendar year 2012 estimated EBITDA. The present value of the cash flows and terminal values was then calculated using discount rates ranging from 7.5% to 9.0%. This analysis indicated the following implied per share equity reference range for SEMCO Energy, as compared to the Common Stock Exchange Consideration:

     Miscellaneous

     SEMCO Energy selected Credit Suisse based on Credit Suisse’s qualifications, experience and reputation. Credit Suisse is an internationally recognized investment banking firm and is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes.

     Under the terms of Credit Suisse’s engagement, SEMCO Energy has agreed to pay Credit Suisse an aggregate fee of approximately $7.0 million for its financial advisory services in connection with the Exchange, a portion of which was paid in connection with the execution of the Exchange Agreement and a significant portion of which is contingent upon the consummation of the Exchange. In addition, SEMCO Energy has agreed to reimburse Credit Suisse for its reasonable expenses, including reasonable fees and expenses of legal counsel, and to indemnify Credit Suisse and related parties against certain liabilities and other items, including liabilities under the federal securities laws, arising out of its engagement.

     From time to time, Credit Suisse and its affiliates in the past have provided, currently are providing and in the future may provide, investment banking and other financial services to SEMCO Energy, Cap Rock Holding and LGB and its affiliates, for which services Credit Suisse and its affiliates have received, and expect to receive, compensation. In addition, Credit Suisse and certain of its affiliates and certain of their respective employees and certain private investment funds affiliated or associated with Credit Suisse and its affiliates have invested in affiliates of LGB. Credit Suisse is a full service securities firm engaged in securities trading and brokerage activities as well as providing investment banking and other financial services. In the ordinary course of business, Credit Suisse and its affiliates may acquire, hold or sell, for its and its affiliates’ own accounts and the accounts of customers, equity, debt and other securities and financial instruments (including bank loans and other obligations) of SEMCO Energy, LGB, Cap Rock Holding and any other entities that may be involved in the Exchange, as well as provide investment banking and other financial services to such companies. In addition, prior to becoming SEMCO Energy’s Chief Executive Officer and President in March 2004, Mr. Schreiber was employed by Credit Suisse.

     Opinions of BB&TCM

     Pursuant to an engagement letter dated January 31, 2007, the Finance Committee of the Board of Directors retained BB&T Capital Markets, a division of Scott & Stringfellow, Inc. (referred to as BB&TCM), to render certain opinions with respect to a possible transaction with Cap Rock Holding. At the February 12, 2007 meeting of the Finance Committee of the Board of Directors, BB&TCM presented its initial findings and on February 22, 2007 BB&TCM delivered its oral opinion to the Board of Directors, which was subsequently confirmed in writing, that, as of February 22, 2007, and based upon and subject to the assumptions, qualifications and limitations set forth in the written opinion, the Common Stock Exchange Consideration is fair, from a financial point of view, to the holders of the outstanding shares of our Common Stock. BB&TCM also delivered its oral opinion to the Board of Directors, which was subsequently confirmed in writing, that, as of February 22, 2007, and based on and subject to various qualifications, factors, assumptions and limitations described in the written opinion that the Preferred Stock Exchange Consideration has a fair value that is not less than the fair value of the Series B Preferred Stock as of the date of the opinion.

     The full text of BB&TCM’s written opinion with respect to the Common Stock is attached as Annex C to this proxy statement, and the full text of BB&TCM’s written opinion with respect to the Series B Preferred Stock is attached as Annex D to this proxy statement. You should read these opinions carefully and in their entirety. The summary of the opinions contained herein is qualified in its entirety by the full text of the opinions. The opinions set forth the assumptions made, some of the matters considered and qualifications to and limitations of the review undertaken by BB&TCM. The BB&TCM opinions are subject to the assumptions and conditions contained therein and are necessarily based on economic, market and other conditions and the information made available to BB&TCM as of the date of the BB&TCM opinions.

     In reading the discussion of the fairness opinions set forth below, you should be aware that BB&TCM’s opinions:

	•		were provided to the Finance Committee of the Board of Directors for its benefit and use;
	•		did not constitute a recommendation to the Finance Committee, our Board of Directors or any shareholder as to how to vote in connection with the transaction or otherwise; and
	•		did not address the underlying business decision to pursue the transaction, the relative merits of the transaction as compared to any alternative business strategies that might exist, the financing of the transaction or the effects of any other transaction in which SEMCO Energy might engage.

     In connection with rendering its opinions, BB&TCM:

	•		reviewed the Exchange Agreement and discussed with management and representatives of SEMCO Energy the proposed material terms of the Exchange Agreement;
	•		reviewed, among other public information, the SEMCO Energy’s annual reports, Forms 10-K and related financial information for the fiscal years ended December 31 of each of 2003, 2004 and 2005 and the Forms 10-Q for the quarters ended March 31, 2006, June 30, 2006, and September 30, 2006;
	•		reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of SEMCO Energy furnished to BB&TCM by our management (the “Projections”);
	•		met with certain members of our management to discuss SEMCO Energy’s businesses, operations, historical and projected financial results and future prospects;
	•		discussed with certain advisors of SEMCO Energy the terms of the transaction;
	•		reviewed the historical market prices and trading activity for our Common Stock and compared such prices and trading activity with those of certain publicly traded companies deemed to be relevant;
	•		compared the financial position and results of operations of SEMCO Energy with those of certain publicly traded companies deemed to be relevant;
	•		compared the proposed financial terms of the transaction with the financial terms of certain other business combinations deemed to be relevant;
	•		reviewed public information regarding the historical premiums paid by the purchaser in other business combinations relative to the closing market prices of the targets’ common stock one day

			prior to the announcement thereof, five days prior to the announcement thereof and thirty days prior to the announcement thereof;
	•		reviewed a discounted cash flow analysis of SEMCO Energy based upon the Projections; and
	•		reviewed other such financial studies and analyses and performed such other investigations and took into account such other matters as BB&TCM deemed to be material or otherwise necessary or appropriate, including an assessment of regulatory, economic, market and monetary conditions.

     BB&TCM relied upon and assumed, without independent verification, the accuracy and completeness of the financial and other information provided to or discussed with BB&TCM by our management or obtained by BB&TCM from public sources, including, without limitation, the Projections referred to above. With respect to the Projections, BB&TCM relied on representations of our management that such Projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of our management as to SEMCO Energy’s expected future performance. BB&TCM did not assume any responsibility for the independent verification of any such information, including, without limitation, the Projections, and BB&TCM further relied upon the assurances of our management that they are unaware of any facts that would make the information and Projections incomplete or misleading. Our Board of Directors reviewed the financial and other information provided to or discussed with BB&TCM for accuracy and completeness, and determined that BB&TCM’s reliance on such information was reasonable.

     In arriving at its opinions, BB&TCM did not perform or obtain any independent appraisal of SEMCO Energy’s assets or liabilities (contingent or otherwise); nor was BB&TCM furnished with any such appraisals. BB&TCM assumed that the Exchange will be consummated in a timely manner and in accordance with the terms of the Exchange Agreement without any limitations, restrictions, conditions, delays, amendments or modifications, regulatory or otherwise, that collectively would have a material effect on SEMCO Energy. BB&TCM was not authorized to solicit, nor did it solicit, indications of interest from any party; nor did it have any discussions with any party other than SEMCO Energy with respect to a transaction involving SEMCO Energy. Furthermore, BB&TCM did not negotiate the terms of the transaction (including the amount of the Exchange Consideration) and based its opinion solely on the terms of the Exchange Agreement as negotiated by others. Except as described above, SEMCO Energy imposed no other limitations on BB&TCM with respect to the investigations made or procedures followed in rendering its opinion.

     BB&TCM did not express any opinion as to the price or range of prices at which the shares of our Common Stock may trade subsequent to the announcement of the transaction.

     The following is a brief summary of the material financial analyses performed by BB&TCM and presented to the Finance Committee and the Board of Directors in connection with rendering its fairness opinion with respect to Common Stock which is attached as Annex C.

     Some of the financial analyses summarized below include summary data and information presented in tabular format. In order to understand fully the financial analyses, the summary data and tables must be read together with the full text of the analyses. Considering the summary data and tables alone could create a misleading or incomplete view of BB&TCM’s financial analyses.

     Comparison of Transaction Consideration to Historical Stock Prices

     BB&TCM compared the Common Stock Exchange Consideration to SEMCO Energy’s stock price on February 22, 2007, the 52-week high and SEMCO Energy’s stock price one month, three months, six months, one year, two years and three years preceding February 22, 2007.

     The table below summarizes the analysis.

Premium/(Discount) of the Consideration to be Received by the
Common Stockholders of $8.15 per Share Relative to:

     Premiums Paid Analysis

     BB&TCM reviewed purchase price premiums paid for the stock of (1) all publicly-traded companies acquired in 2006, and (2) all publicly-traded companies acquired in 2006 in transactions valued between $100 million and $1.0 billion. In this analysis, BB&TCM measured the median purchase price premiums paid by acquirors over the prevailing stock market prices of target companies one day, five days, and 30 days prior to the announcement of the transactions. To imply a value for our Common Stock, these premiums were applied to the prices of our Common Stock for the same periods relative to the public announcement of the $8.15 per share offer price on February 23, 2007.

     The premiums paid analysis of all public acquisitions announced in 2006 and the implied equity value per share based on the $6.00 per share price the day prior to the offering resulted in:

     The premiums paid analysis of all public acquisitions announced in 2006 valued between $100 million and $1.0 billion and the implied equity value per share based on the $6.00 per share price the day prior to the offering resulted in:

     The premium of the offer of $8.15 per share to holders of our Common Stock was:

     Calculation of SEMCO Energy’s Equity Value and Enterprise Value in the Transaction

     BB&TCM calculated the equity value and enterprise value for SEMCO Energy for purposes of analyzing the Common Stock Exchange Consideration. “Equity Value” is the consideration to be received by holders of our Common Stock of $8.15 per share (including calculating the value of in-the-money options with a deduction for the exercise prices and the value of the Series B Preferred Stock) and “Enterprise Value” is the sum of the Equity Value and SEMCO Energy’s total debt outstanding as of December 31, 2006, less SEMCO Energy’s cash balance as of such date.

     BB&TCM calculated multiples of SEMCO Energy’s Enterprise Value to (i) earnings before interest, taxes, depreciation and amortization, referred to in this summary as EBITDA, for the twelve months ended December 31, 2006, referred to in this summary as LTM EBITDA, and estimated EBITDA for the year ending December, 31, 2007, referred to in this summary as 2007E EBITDA; and (ii) SEMCO Energy’s earnings before interest and taxes, referred to in this summary as EBIT, for the twelve months ended December 31, 2006, referred to in this summary as LTM EBIT, and estimated for the year ending December, 31, 2007, referred to in this summary as 2007E EBIT. BB&TCM also calculated the multiple of SEMCO Energy’s equity value to tangible book value, referred to in this summary as “Tangible Book Value”, as of December 31, 2006.

     The table below summarizes the analysis.

     Discounted Cash Flow Analysis

     BB&TCM performed a discounted cash flow analysis based on the Projections.

     The discounted cash flow analysis is based on the projected future unlevered free cash flows of SEMCO Energy, after taking into consideration capital expenditures and working capital requirements. These cash flows are discounted back to a present value at a certain rate. BB&TCM added to the present value of the unlevered cash flows the present value of a calculated terminal value, which is designed to represent SEMCO Energy’s value after the forecast period. The discounted cash flow analysis yielded an equity value range of $6.84 per share to $7.91 per share of our Common Stock with a midpoint equity value of $7.39 per share utilizing a range of discount rates (8.7% – 10.7%) and an equity value range of $6.51 per share to $8.18 per share with a midpoint equity value of $7.39 per share of our Common Stock utilizing a range of terminal multiples (10.0x – 11.0x EBITDA).

     Comparable Company Analysis

     BB&TCM analyzed selected historical and projected operating information provided by our management, stock price performance data and valuation multiples for SEMCO Energy and compared this data to that of 14 publicly-traded companies deemed by BB&TCM to be generally comparable to SEMCO Energy. BB&TCM utilized the earnings forecasts for these companies from publicly-available data, First Call and selected Wall Street equity research reports. The publicly-traded companies with business or financial characteristics similar to SEMCO Energy and deemed generally comparable to SEMCO Energy were:

	•		AGL Resources
	•		Atmos Energy Corp.
	•		Chesapeake Utilities Corp.
	•		Delta Natural Gas Co.
	•		Energysouth Inc.
	•		Laclede Group, Inc.
	•		New Jersey Resources Corp.
	•		Nicor Inc.
	•		Northwest Natural Gas Co.
	•		Piedmont Natural Gas Co.
	•		South Jersey Industries Inc.
	•		Southwest Gas Corp.

	•		Vectren Corp.
	•		WGL Holdings Inc.

     BB&TCM reviewed, among other things, the comparable companies’ (i) Enterprise Value as a multiple of LTM EBITDA and estimated EBITDA for the year ending December 31, 2007; (ii) Enterprise Value as a multiple of LTM EBIT and estimated EBIT for the year ending December 31, 2007; and (iii) Equity Value as a multiple of Tangible Book Value as of the most recent publicly-available detailed balance sheet. The multiples were based on closing stock prices for the comparable companies on February 22, 2007.

     The table below summarizes the analysis.

     BB&TCM compared the multiples implied in the transaction of 10.0x LTM EBITDA, 9.5x estimated 2007 EBITDA, 15.2x LTM EBIT, 14.1x estimated 2007 EBIT, and 4.5x Tangible Book Value with the range and median of the comparable company multiples.

     Precedent Transactions Analysis

     BB&TCM analyzed 10 merger and acquisition transactions involving natural gas utilities which BB&TCM deemed generally comparable to SEMCO Energy and the Exchange. Transaction values range from $420 million to $11.8 billion and include transactions closed or announced from January 1, 2003 to February 22, 2007. BB&TCM reviewed, among other things, (i) the ratio of the target companies’ enterprise value implied in the respective transactions to target companies’ LTM EBITDA and EBIT; (ii) the ratio of the target companies’ equity value implied in the respective transactions to target companies’ tangible book value as of the time of the transaction; and (iii) the purchase price premiums paid by acquirors over the prevailing stock market prices of publicly-traded acquirees one day, five days, and 30 days prior to the announcement of the transactions.

     The precedent transactions in the BB&TCM analysis were:

	•		MDU Resources Group, Inc.’s pending acquisition of Cascade Natural Gas Corp;
	•		Babcock & Brown Infrastructure Group’s pending acquisition of Northwestern Corp.;
	•		National Grid PLC’s pending acquisition of KeySpan Corp.;
	•		WPS Resources Corp.’s acquisition of Peoples Energy Corp.;

	•		UGI Corporation’s acquisition of PG Energy, Inc.;
	•		WPS Resources Corp.’s acquisition of Minnesota Gas, Michigan Gas Utilities, Inc.;
	•		AGL Resources, Inc.’s acquisition of NUI Corporation;
	•		Atmos Energy Corporation’s acquisition of TXU Gas Company;
	•		Piedmont Natural Gas Company, Inc.’s acquisition of North Carolina Natural Gas Corporation; and
	•		ONEOK, Inc.’s acquisition of Southern Union Company (Texas Gas Distribution Assets).

     The table below summarizes the analysis.

     BB&TCM compared the multiples implied in the transaction of 10.0x LTM EBITDA, 15.2x LTM EBIT, and 4.5x Tangible Book Value, and the 35.8%, 37.0%, and 35.4% premiums paid one day, five days, and 30 days prior to the transaction, respectively, with the range and median of the precedent transactions.

     The preparation of a fairness opinion is a complex process and involves various judgments and determinations as to the most appropriate and relevant assumptions and financial analyses and the application of those methods to the particular circumstances involved. Such an opinion is therefore not readily susceptible to partial analysis or summary description, and taking portions of the analyses set out above, without considering the analysis as a whole, would in the view of BB&TCM, create an incomplete and misleading picture of the processes underlying the analyses considered in rendering the BB&TCM opinion. BB&TCM based its analysis on assumptions that it deemed reasonable, including assumptions concerning general business and economic conditions and industry-specific factors. BB&TCM did not form an opinion as to whether any individual analysis or factor, whether positive or negative, considered in isolation, supported or failed to support the BB&TCM opinion. In arriving at its opinions, BB&TCM considered the results of all its analyses and did not attribute any particular weight to any one analysis or factor. BB&TCM arrived at its ultimate opinions based on the results of all analyses undertaken by it and assessed as a whole and believes that the totality of the factors considered and analyses performed by BB&TCM in connection with its opinion operated collectively to support its determination as to the fairness, from a financial point of view, to the holders of the outstanding shares of Common Stock of SEMCO Energy of the Common Stock Exchange Consideration. The analyses performed by BB&TCM, particularly those based on estimates and Projections, are not necessarily indicative of actual values or

actual future results, which may be significantly more or less favorable than suggested by such analyses. None of the public companies used in the comparable company analysis described above are identical to SEMCO Energy, and none of the precedent transactions used in the precedent transactions analysis described above are identical to the Exchange. Accordingly, an analysis of publicly-traded comparable companies and precedent transactions is not mathematical; rather it involves complex considerations and judgments concerning the differences in financial and operating characteristics of the companies and precedent transactions and other factors that could affect the value of SEMCO Energy and the public trading values of the companies and precedent transactions to which they were compared. The analyses do not purport to be appraisals or to reflect the prices at which any securities may trade at the present time or at any time in the future.

     The BB&TCM opinions were just one of the many factors taken into consideration by the Finance Committee of our Board of Directors and our Board of Directors. Consequently, BB&TCM’s analysis should not be viewed as determinative of the decision of our Board of Directors with respect to the fairness, from a financial point of view, to the holders of our Common Stock of the Common Stock Exchange Consideration or its determination that the Preferred Stock Exchange Consideration has a fair value that is not less than the fair value of the Series B Preferred Stock as of the date of the opinion. Furthermore, the summary of the opinions contained herein does not constitute a recommendation to the Finance Committee, our Board of Directors or any shareholder as to how to vote in connection with the transaction or otherwise.

     BB&TCM was selected by the Finance Committee of our Board of Directors to render fairness opinions in connection with the transaction because of BB&TCM’s qualifications, expertise and reputation. BB&TCM is an internationally recognized investment banking and advisory firm. BB&TCM, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. In the ordinary course of its business, BB&TCM and its affiliates may actively trade the equity securities of SEMCO Energy for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short term position in such securities. In addition, BB&TCM’s equity research department published research notes on SEMCO Energy from time to time in the past two years.

     Pursuant to its engagement letter, the Finance Committee of our Board of Directors agreed to pay BB&TCM a total cash fee of $425,000, no part of which is contingent upon BB&TCM delivering a favorable opinions or the consummation of the Exchange. In addition to these amounts, BB&TCM will be reimbursed for certain expenses incurred in connection with its engagement. The Finance Committee of our Board of Directors also agreed to indemnify BB&TCM against certain liabilities arising out of or in connection with BB&TCM’s engagement.

     As of the effective time of the Exchange, all shares of our Common Stock will be transferred by operation of law to Parent in exchange for the right to receive $8.15 in cash, without interest, and all shares of our Series B Preferred Stock will be transferred by operation of law to Parent in exchange for the right to receive $213.07 in cash per share plus a make-whole premium to be calculated at closing in accordance with the terms of the Series B Preferred Stock, without interest. Holders of shares of our Common Stock and Series B Preferred Stock at the time of the completion of the Exchange will cease to have any rights as shareholders, except the right to receive the Exchange Consideration.

     Stock Options

     All outstanding options to purchase shares of Common Stock not exercised prior to the effective time of the Exchange will be canceled in the Exchange, with the holder of each such option becoming entitled to receive, in full satisfaction of the rights of such holder with respect thereto, an amount in cash equal to the excess (if any) of $8.15 per share over the exercise price per share of our Common Stock subject to such option, multiplied by the number of shares of our Common Stock subject to such option, less any withholding taxes, without interest. All outstanding options to purchase shares of Common Stock which have an exercise price equal to or greater than $8.15 per share will be canceled at the effective time of the Exchange.

     Restricted Stock Units and Restricted Share Awards

     At the effective time of the Exchange, all outstanding restricted stock units and restricted share awards of our Common Stock will vest, all restrictions upon such shares will lapse, and each outstanding restricted stock unit and restricted share award will be converted into the right to receive $8.15 in cash, less any withholding taxes, without interest.

     Director Shares and Director Stock Units

     At the effective time of the Exchange, each outstanding director share and director stock unit will be converted into the right to receive $8.15 in cash per share, less any withholding taxes, without interest. Such consideration will be invested in the Interest Fund and reflected in the Annual Sub-Account (as such terms are defined in the Director Plan) of the director on whose behalf such director share or director stock unit is held. Such consideration and any interest accrued thereon will be paid to such director in accordance with the distribution election such director has made under the Director Plan.

     Performance Share Units

     At the effective time of the Exchange, each outstanding performance share unit will be converted into the right to receive $8.15 in cash, less any withholding taxes, without interest.

     Members of our Board of Directors and certain of our executive officers have various interests in the Exchange described in this section that may be in addition to, or different from, the interests of our shareholders generally. You should keep this fact in mind when considering the recommendation of our Board of Directors for the approval of the Exchange Proposal. The members of our Board of Directors were aware of these interests and considered them at the time they approved the Exchange Proposal.

     The following table sets forth the cash proceeds that each of our directors and Messrs. Schreiber, Palmeri, Dubay, Clark and Smotherman, to whom we refer in this proxy statement as our executive officers, would receive from the conversion of their shares of Common Stock, options to purchase Common Stock, restricted shares, restricted stock units, performance share units, director shares and director stock units on consummation of the Exchange based upon his or her holdings as of March 31, 2007:

     Stock Options. The options to purchase shares of Common Stock held by our directors and executive officers as part of their compensation provide for accelerated vesting and exercisability upon a change in control. The consummation of the Exchange will be a “change in control” for these options. The following directors and executive officers will receive the respective listed amounts as a result of the cancellation of their outstanding options to purchase Common Stock and the payment of an amount in cash equal to the excess (if any) of $8.15 per share over the exercise price per share at the effective time of the Exchange. For more information regarding the terms of options to purchase our Common Stock, see “The Agreement and Plan of Share Exchange—Effect of the Exchange on Options and Other Stock Awards.”

     Restricted Stock Units. The restricted stock units (“RSUs”) held by our executive officers as part of their compensation provide for accelerated vesting and exercisability upon a change in control. The following directors and executive officers will receive the respective listed amount as a result of the conversion of their outstanding RSUs in exchange for the right to receive $8.15 per share at the effective time of the Exchange. For more information regarding the terms of our RSUs, see “The Exchange Agreement—Treatment of Awards Outstanding Under Our Stock Plans.”

     Performance Share Units. The performance share units (“PSUs”) held by our executive officers as part of their compensation provide for the immediate satisfaction of all performance criteria and the immediate award and exercisability of all PSUs upon a change in control. The following directors and executive officers will receive the respective listed amount as a result of the conversion of their outstanding PSUs in exchange for the right to receive $8.15 per unit at the effective time of the Exchange. For more information regarding the terms of our PSUs, see “The Exchange Agreement—Treatment of Awards Outstanding Under Our Stock Plans.”

     Restricted Share Awards. The restricted share awards held by our directors as part of their compensation provide for accelerated vesting and exercisability upon a change in control. The consummation of the Exchange will be a “change in control” for these restricted shares. The following directors will receive the respective listed amount as a result of the conversion of their outstanding restricted shares in exchange for the right to receive $8.15 per share at the effective time of the Exchange. For more information regarding the terms of our restricted share awards, see “The Exchange Agreement—Treatment of Awards Outstanding Under Our Stock Plans.”

     Director Shares. Under the Director Plan which provides for the issuance of director shares to our non-management directors, the director shares held by our directors become payable on the date the director ceases to serve as a director according to the following payment options: (a) lump sum upon (i) separation of service; (ii) January 1 of a specified year; or (iii) the earlier to occur of (i) or (ii); or (b) graduated annual payments of three or five years beginning upon separation of service. Accordingly, such deferred amounts will become due and payable upon a director’s ceasing to serve as a director in connection with the Exchange, or in accordance with the director’s distribution choice. It is anticipated that each non-management director will resign as a director of the SEMCO Energy effective at the effective time of the Exchange. Mr. Sherman was a director from 2002 to 2005 and deferred his director fees during that time. Mr. Sherman’s distribution began prior to his reappointment to the Board in 2006. Assuming they resign, the following directors will receive the respective listed amount as a result of the conversion of their outstanding director shares in exchange for the right to receive $8.15 per share at the effective time of the Exchange. For more information regarding the terms of our director shares, see “The Exchange Agreement—Treatment of Awards Outstanding Under Our Stock Plans.”