MCN Energy Group continued singing the blues to investors lastweek with an announcement that it canceled its Michigan E&Passet sale and took a huge financial loss during the secondquarter. But company officials promised to turn things around witha new executive leadership team and a narrower,vertically-integrated business strategy.

“Our newly announced strategy revolves around our ability tointegrate all of MCN’s operations within the Midwest-to-Northeastcorridor,” said CEO Alfred R. Glancy. “Gas production from ourMichigan properties is the first link of the value chain, sincemost of it is gathered, processed, transported, stored, marketedand/or distributed by our own affiliates.”

The decision to hold onto the Michigan production properties andE&P operations, however, reverses the course the company setout on last summer when it took a massive $220 million charge toexit E&P. As a result, the reversal triggered a wave ofaccounting changes during the second quarter, resulting in a $86.2million ($1.03/share) net loss and negative financial results goingforward.

The Michigan assets, which contain 500 Bcf of reserves andproduce 30 Bcf/year of Antrim Shale gas, were to be sold along withthe three other E&P packages that made up MCN’s entireexploration and production business (1.2 Tcf of reserves). WesternE&P properties were sold earlier this year for $165 million.And sales in the Midcontinent/Gulf Coast and Appalachian regionsare expected to go forward later this year. But the divestiture nowis expected to bring in only about half ($400 million) of what wasoriginally expected.

As a result, MCN expects financial performance for 1999 and 2000to be much lower than Wall Street estimates. Earnings are nowforecast to be between $1.10 and $1.15 per diluted share, excludingunusual items, this year compared analysts’ estimates of$1.47/share. Including the Michigan E&P operations, earningscould reach $1.30/share, MCN said, but that still would be 17 centsbelow Wall Street expectations.

And this is only the latest financial stumble for MCN. “Thestock’s down from $40 to $20/share over the past year,” oneexasperated investor noted during a conference call last week, “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?” Last quarter, thecompany discovered serious financial accounting manipulation withingas marketing subsidiary CoEnergy Trading and had to recalculateits earnings going back to 1997.

“What weight or focus did the board give when they were goingthrough this strategic review on the only option that appears clearto us will maximize shareholder value and that is a sale of thecompany?” the investor asked. “In the current environment with gasproperties going for three times book, which would be a significantincrease in the share price for MichCon-forgetting about anythingelse that you have-what weight [did the board place on thatpossibility]?”

“Speculating about M&A activity is something that we do notdo so I’m going to pass on that question,” said Glancy. He addedthat MCN management is “committed to making sure this does notcontinue to happen. We’ve all got substantial stock and ourinterests are aligned with shareholders.”

To get the company back on course, MCN management said it willemphasize achieving operational efficiencies and growth throughintegration of existing businesses rather than through a portfolioof diverse, non-operated energy investments. MCN intends toleverage 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 Glancy. “Our target market region spans theMidwest-to-Northeast corridor, an area in which we have a strongexisting and developing infrastructure, where energy needs aregrowing at rates far above the national average, and whereregulatory reform of the natural gas and electricity sectors isadvancing relatively quickly.”

The changes, however, didn’t satisfy the 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. “I don’t see how we’re not going fromreplacing unknown but expected transactional investment gains withunknown but expected operational gains when you haven’t had anoperational focus.”

“First of all we’re not going to change overnight,” Glancyresponded. “I think you are right in that instance. But what wewant to do and plan to do is to put on future assets a muchstronger operational focus than we’ve had historically.”

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.”

Rocco Canonica

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