MCN Energy Group surprised observers and angered some investorsyesterday by announcing the cancellation of its Michigan E&Psale and a sharp change in strategic direction to a more regionalfocus from a national one.

MCN said a sudden price reduction by the winning bidder for itsMichigan producing properties prompted it to remove the assets fromthe auction block and reincorporate them into a new regionalstrategy. It still plans on going forward with its other twoE&P asset sales, but the retention of its Michigan assets andits E&P operations was a costly move. It triggered a wave ofaccounting changes on MCN’s books, resulting in a $86.2 million($1.03/share) net loss for the second quarter and negativefinancial results going forward. This new financial trouble is thelatest in a series of disappointing news from the company. Lastquarter, MCN discovered serious financial accounting manipulationwithin gas marketing subsidiary CoEnergy Trading and had torecalculate its earnings going back to 1997.

Last year, MCN announced it was discontinuing exploration andproduction as part of a corporate restructuring plan and took amassive $221 million second quarter charge. The Michigan assets, whichcontain 500 Bcf of reserves and produce 30 Bcf/year of Antrim Shalegas, were to be sold along with the three other E&P packages thatmade up MCN’s entire exploration and production business (1.2 Tcf ofreserves). The western E&P properties sold earlier this year for$165 million (see Daily GPI April16). The entire divestiture was expected to bring in about $800million, but now MCN expects proceeds to be about half that.

In addition, it said financial results for 1999 and 2000 will beadversely affected. Earnings are expected to be between $1.10 and$1.15 per diluted share, excluding unusual items, this yearcompared to $1.47/share analysts had estimated. With E&Poperations included, earnings could reach $1.30/share, MCN said,but that still would be 17 cents below Wall Street expectations.

Had the E&P business remained a discontinued operation, MCNwould have reported income from continuing operations, excludingunusual charges, of $4.8 million or $0.06 per share, essentiallyflat with comparable 1998 second-quarter results, the company said.Unusual charges totaled $83.4 million or $1 per share in 2Q99 and$220.5 million or $2.80 per share in 2Q98.

To get the company back on course, MCN launched a new strategicdirection focused on regional rather than continental operations,with an emphasis on achieving operational efficiencies and growththrough integration of existing businesses rather than through aportfolio of diverse, non-operated energy investments. MCN intendsto leverage its core asset base, including its Michigan E&Pproperties, its Michigan Consolidated Gas utility, its large gasstorage holdings and its pipeline investments in Vector, Millenniumand Portland Natural Gas Transmission.

“We have adopted an integrated approach that we believe willresult in significant operational efficiencies and synergies acrossour businesses,” said CEO Al Glancy. “Our target market regionspans the Midwest-to-Northeast corridor, an area in which we have astrong existing and developing infrastructure, where energy needsare growing at rates far above the national average, and whereregulatory reform of the natural gas and electricity sectors isadvancing relatively quickly. Our decision to retain the Michigangas production properties was based on two factors: first, theirobvious fit within our new strategy; and second, a very recentlowering of the bid for the properties, which changed what wouldhave been a good deal for shareholders into an unacceptable price.”

The changes, however, didn’t satisfy one angry investor. “Idon’t think a new integrated strategy makes any sense whatsoevergiven that you don’t operate or control any of the assets outsideof the regulated utility that you are talking about getting thesynergies from,” he said during a conference call. “I don’t see howwe’re not going from replacing unknown but expected transactionalinvestment gains with unknown but expected operational gains whenyou haven’t had an operational focus.”

“First of all we’re not going to change overnight. I think youare right in that instance,” Glancy responded. “But what we want todo and plan to do is to put on future assets a much strongeroperational focus than we’ve had historically.”

Still exasperated, the investor asked why MCN’s board hasn’tjust sold the company. “What weight or focus did the board givewhen they were going through this strategic review on the onlyoption that appears clear to us will maximize shareholder value andthat is a sale of the company?” he asked. “In the currentenvironment with gas properties going for three times book, whichwould be a significant increase in the share price for MichCon –forgetting about anything else that you have — what weight [didthe board place on that possibility]?”

“Speculating about M&A activity is something that we do notdo so I’m going to pass on that question,” said Glancy.

“The stock’s down from $40 to $20/share over the past year, andwe’ve gone through call after call after call of disappointmentsboth in results, accounting irregularities, irregularities atCoEnergy [Trading]. Why should we as shareholders feel confidentthat this isn’t going to continue to happen?”

“I think this management is committed to making sure this doesnot continue to happen. We’ve all got substantial stock and ourinterests are aligned with shareholders,” Glancy said.

He said the company will continue pursuing new pipeline,electric power and energy marketing ventures, with an emphasis onoperating projects that enhance other MCN businesses within theMidwest-to-Northeast corridor. Execution of the new strategicdirection is expected to improve MCN’s earnings and reduce its needfor external capital, Glancy said. He said capital expenditures,previously expected to range from $600 million to $750 million peryear, now are expected to be $500 million in 1999 and about $300million in each 2000 and 2001.

The new strategy also includes a new organizational structureand the appointment of Stephen Ewing as president and COO. Ewingcontinues as president and CEO of Michigan Consolidated Gas, wherehe has served in positions of increasing responsibility since 1971.In addition, CFO and Treasurer Lee Dow becomes an executive vicepresident.

“This is the right strategy to carry MCN through the industry’sevolution,” said Glancy. “We have the organizational flexibility torespond to the changing marketplace and capture emergingopportunities, while remaining highly focused geographically andoperationally. I look forward to reporting the results of theseefforts.”

©Copyright 1999 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.