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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) OCTOBER 28, 1998
MCN ENERGY GROUP INC
(Exact name of registrant as specified in its charter)
MICHIGAN 1-10070 38-2820658
State of Incorporation (Commission File (I.R.S. Employer
Number) Identification No.)
500 GRISWOLD STREET, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(313) 256-5500
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ITEM 5. Other Events
On October 28, 1998 MCN Energy Group Inc. issued the following press release:
MCN ENERGY GROUP INC. REPORTS
THIRD-QUARTER RESULTS, UNVEILS STRATEGIC PLAN
Detroit, Oct. 28, 1998 - MCN Energy Group Inc. (NYSE:MCN), in announcing a
third-quarter net loss and several charges, today said its board of directors
has approved a refocused strategic plan designed to restore the company's
record of solid financial performance. The board also approved a continuation
of the current $.255 per share quarterly dividend on the company's common stock.
MCN Chairman, President and CEO Alfred R. Glancy III said the third
quarter marks a turning point as the company sets its strategic direction and
lays the groundwork for rebuilding shareholder value.
THE STRATEGIC PLAN
"In our pursuit of rapid growth of the Diversified Energy segment during the
past couple years, we entered projects that added earnings volatility and risk
beyond the levels initially intended," Glancy said "Specifically, natural gas
and oil exploration ventures - primarily in the Midcontinent/Gulf Coast region
- - and our coal fines briquetting project have not performed as anticipated."
Glancy provided a detailed outline of MCN's recent actions and its
refocused strategic plan:
"In August, we announced our intent to sell the Exploration & Production
(E&P) unit, an effort that is proceeding on schedule. In September, we
outlined a corporate realignment that is expected to remove approximately $15
million a year from our operating expenses. Today, we are announcing a special
charge for the coal fines project and write-downs for several smaller
investments that are not likely to prove economic over the long term. These
are in addition to the previously announced third-quarter restructuring charges
and E&P ceiling test write-down. We have put all of these issues behind us and
are well positioned for improved performance.
"Now, we are launching a refocused strategic direction that emphasizes
steady growth through projects that offer more predictable, long-term earnings
streams in areas that we know well. This plan entails more modest - but still
substantial - capital investment levels of approximately $600 million to $700
million annually, compared with previous plans exceeding $1 billion a year.
Those investments will be allocated approximately 25 percent within the Gas
Distribution segment, 35 percent within Pipelines & Processing and 40 percent
within Energy Marketing, Storage and Electric Power, primarily in North America.
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"The strategic direction we plan to pursue during the next five years
is not unlike the one we established in 1992, but incorporates a number of key
lessons learned. Excluding the difficulties encountered with the E&P unit and
the coal fines project, we have achieved excellent performance from our
Diversified Energy businesses through a disciplined portfolio-management
investment strategy. Those successes are the ones we now plan to replicate. Our
Gas Distribution segment, which comprises more than half of MCN's overall
portfolio, represents a solid utility business that provides substantial
stability to our earnings base. It also holds the potential for excellent
earnings growth over the next several years due to new regulatory initiatives
and market opportunities.
"Overall, we see a bright future for MCN Energy Group," Glancy
concluded. "While there is no denying that the past several months have been the
most difficult in our company's history, and the third-quarter charges are tough
pills to swallow, MCN has a proud history of achievement and a clear vision for
the future. MCN employees own more than 6 percent of the company's common stock,
and you can be sure we are committed to rebuilding value for all shareholders."
THIRD-QUARTER RESULTS
MCN reported a third-quarter net loss, excluding unusual items, of $8.0 million,
or $0.10 per diluted share, compared with earnings of $ 1.2 million, or $0.02
per share, in the 1997 third quarter. The lower results primarily reflect the
impact of continued weak energy prices on the Diversified Energy segment,
partially offset by reduced seasonal losses from lower operating costs in the
Gas Distribution segment.
The company's third-quarter net loss totaled $177.2 million, or $2.24 per
diluted share, which included $169.2 million, or $2.14 per share, of unusual
items consisting of: an $87.0 million, or $1.10 per share, special charge for
the coal fines project; a write-down of $54.6 million, or $0.69 per share,
incurred by the company's E&P unit due to full-cost-accounting rules, which
require a "ceiling test" that imputes the value of oil and gas reserves based on
current or contract prices at the end of the quarter rather than on their
anticipated long-term value; restructuring charges of $8.4 million, or $0.11 per
share, primarily from a corporate realignment designed to lower operating costs
by approximately $15 million annually; and write-downs totaling $19.2 million,
or $0.24 per share, recorded for other impaired investments.
For the first nine months of 1998, net income, excluding unusual
charges, was $82.9 million, or $1.05 per diluted share, compared with $92.1
million, or $1.27 per share, for the comparable 1997 period.
Diversified Energy
The Diversified Energy group recorded a break-even 1998 third-quarter, excluding
unusual charges, compared with $17.8 million, or $0.23 per diluted share, earned
a year earlier. The group's 1998 third-quarter results and activities include:
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- EXPLORATION & PRODUCTION -- Excluding the ceiling test write-down,
operating and joint venture income was $6.5 million, compared with $16.0
million for the 1997 third quarter. Gas and oil production was 24.3 billion
cubic feet equivalent (Bcfe), down from 25.6 Bcfe in the third quarter of 1997,
primarily due to the sale of certain producing oil properties since late 1997.
MCN previously announced it intends to sell this unit in whole or part. Bids on
all the E&P properties are expected no later than February 1999.
- PIPELINES & PROCESSING -- Operating and joint venture income,
excluding the coal fines project charge and the write-down of a Midwest pipeline
investment, was $3.5 million in the 1998 third quarter, compared with $7.8
million in the corresponding period last year. The decrease reflects a 46
percent fall in methanol prices compared with the 1997 third quarter, as well as
operating costs incurred by the coal fines project.
Efforts to achieve briquette sales from the coal fines project
succeeded in October as operating difficulties were remedied. However, delays in
MCN's project, the defeat of federal legislation proposing to extend the
required in-service deadline for such synthetic-fuel projects, and uncertainty
regarding the company's ability to utilize synthetic-fuel tax credits led to the
impairment of MCN's investment
Meanwhile, several pipeline and processing joint ventures have
progressed. In the Gulf of Mexico, Dauphin Island Gathering Partners (DIGP)
proceeded with its second phase of expansion, which will increase its total
natural gas throughput capacity when completed to 1.1 billion cubic feet per
day (Bcf/d), up from pre-expansion capacity of 680 million cubic feet per day
(MMcf/d). DIGP, 35 percent of which is owned by MCN, also signed definitive
agreements in September with producers in the Gulf of Mexico to commit
significant new deep-water natural gas supplies to the gathering system.
At the DIGP system's onshore terminus in Alabama, Mobile Bay Processing
Partners is constructing a 600 MMcf/d gas processing plant, with completion
expected in the first quarter of 1999. The company owns 43 percent of the
project.
Cardinal States Pipeline, which gathers and transports coalbed methane
in Appalachia, continued construction of a second 32-mile pipeline that will
double throughput capacity to 200 MMcf/d to handle increasing production in the
region. MCN owns 50 percent of this system.
In West Texas, the 82-mile, 100 MMcf/d, 33 percent MCN-owned Val Verde
pipeline was placed into service in August, transporting carbon dioxide to
enhanced oil recovery projects in the Permian Basin.
The company's one-third-owned Jonah gas gathering system in Wyoming is
operating at its full capacity of 175 MMcf/d and pursuing plans to expand
capacity to 325 MMcf/d during 1999.
In Utah, the company in July formed the Crown Asphalt Distribution, LLC
joint venture with Crown Energy Corp., acquiring asphalt distribution operations
for approximately $14 million. These operations further enhance the value of the
MCN/Crown Energy Asphalt Ridge joint venture, which recently completed
construction of its first asphalt manufacturing plant.
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Furthermore, the Vector Pipeline project in September and October received
two preliminary federal regulatory approvals that make it a front-runner among
competing efforts to provide a new strategic transportation link for up to 1
Bcf/d of natural gas from western Canada and the United States to growing
markets in the Midwest and Northeast regions of the United States and eastern
Canada. Final approvals are expected in the first quarter of 1999, with
construction scheduled to begin shortly thereafter. MCN holds a 25 percent
interest in this project.
-- ENERGY MARKETING, GAS STORAGE & ELECTRIC POWER -- Excluding a $2.5
million restructuring charge related to exiting certain international power
projects, this unit's operating and joint venture income totaled $8.3 million
compared with $8.1 million in the 1997 third quarter. The 1997 quarter included
a favorable $2.8 million property tax adjustment related to the Midland
Cogeneration Venture (MCV) in Michigan. Increased contributions from
international power projects and the company's additional 5 percent interest in
MCV were partially offset by increased gas storage costs incurred by marketing
operations. Natural gas sales and exchange deliveries rose 42 percent to 114.5
Bcf primarily due to increased volumes marketed in the Midcontinent/Gulf Coast
supply area and in the midwestern United States.
A number of electric power projects were announced or advanced in the third
quarter. The company's Mobile Bay Power venture, a 40 megawatt (MW) gas-fired
cogeneration facility near Mobile Bay, Ala., is expected to start operation in
the first quarter of 1999. The plant, in which MCN has a 43 percent interest,
will provide electricity and thermal energy to the Mobile Bay Processing
Partners venture.
The company in July became a 95 percent partner in a venture to build, own
and operate a 140 MW power plant in Albuquerque, N.M. The Cobisa-Person Power
project, a gas-fired peaking plant, is expected to be in service by the summer
of 2000 and is backed by a long-term power purchase agreement with the Public
Service Co. of New Mexico. The project will be constructed at the site of a
decommissioned power plant, keeping costs low and accelerating its development.
Several additional power projects currently being pursued could begin
contributing to earnings within a year or two.
GAS DISTRIBUTION
The Gas Distribution group typically records losses from seasonally lower
demand in the third quarter. Excluding unusual charges related to the
write-down of a gas distribution investment in Missouri and a gas gathering
system in Michigan, this unit's 1998 third-quarter loss was $7.8 million, or
$0.10 per diluted share, compared with a new loss of $16.6 million, or $0.21
per share, in the same period a year before. The improvement resulted from
operating cost reductions. Total gas sales and transportation volumes in the
1998 third quarter fell to 175.3 Bcf from 207.6 Bcf a year earlier. The decline
primarily was due to lower volumes transported for customers who pay a fixed
fee for intermediate transportation capacity regardless of actual usage, so
revenues were not affected.
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Through the first nine months of 1998, Gas Distribution added
approximately 12,000 new retail customers. It also continued aggressively
marketing its extensive intrastate pipeline capacity to gas producers and
marketers.
Gas Distribution is expected to benefit beginning in 1999 from new
revenue-generating opportunities, most notably through Michigan Consolidated
Gas Company's recently approved three-year natural gas sales program. Among
other things, the program provides an incentive for MichCon to reduce its
purchased gas cost below $2.95 per thousand cubic feet, which would generate
profits from a service that has historically been income-neutral. To date,
MichCon has been able to contract for a substantial portion of its expected gas
requirements at prices that help ensure profit contributions from this service.
MichCon will share a portion of such profits with customers if its return on
equity exceeds certain levels approved by the Michigan Public Service
Commission.
CAPITAL INVESTMENTS
Capital investments of about $640 million in the first nine months of 1998 were
made approximately 83 percent within the Diversified Energy group and the
remaining 17 percent within the Gas Distribution group.
MCN Energy Group Inc. is a diversified energy holding company with
approximately $4 billion of assets, and with markets and investments throughout
North America and in Asia. The company operates through two major business
groups: Diversified Energy, operating through MCN Investment Corporation, is
involved in oil and gas exploration and production, natural gas gathering,
transmission, processing and storage, energy marketing, electric power
generation and distribution, and other energy-related businesses; Gas
Distribution consists principally of Michigan Consolidated Gas Company, a
natural gas distribution and transmission company serving 1.2 million customers
in more than 500 communities throughout Michigan. Information about MCN Energy
Group is available on the World Wide Web at http://www.mcnenergy.com.
Statements included in this news release that are not historical in nature are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements involve certain risks and uncertainties that may
cause actual future results to differ materially from those contemplated,
projected, estimated or budgeted in such forward-looking statements. A
discussion of these risks and uncertainties is included in the company's
periodic reports filed with the Securities and Exchange Commission.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MCN ENERGY GROUP INC.
Date: October 28, 1998 By: /s/ Howard L. Dow III
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Howard L. Dow III
Senior Vice President and Treasurer
