When things just started to look like they were getting better,all of a sudden they just got worse for MCN Energy Group. After atough year in 1998 and the planned divestiture of its entireexploration and production division, MCN Energy Group saidyesterday it has discovered serious financial accountingmanipulation within its gas marketing subsidiary, CoEnergy Trading,and will have to recalculate its earnings going back to 1997.

MCN said it will delay filing its 1999 first quarter Form 10-Qwith the Securities and Exchange Commission pending completion of aspecial investigation of the operations of CoEnergy. It hasidentified transactions “in which its internal control systems wereoverridden, resulting in the recording of certain expenses inimproper periods.” With the assistance of Deloitte & ToucheLLP, its independent auditors, MCN is investigating the situationto determine the impact of these transactions. The company said itlikely will have to restate financial results for prior periods andrecalculate results for 1Q99. The analysis to date indicates 1997net income will be reduced, with offsetting increases made toresults reported in subsequent periods, including the first quarterof this year, in which MCN reported a 5% increase in net income to$85 million and 17% jump in revenues to $768 million.

“Our review of the situation is not complete, but it is veryimportant to note that what we have identified so far are instancesin which certain expenses were recorded in the wrong earningsperiods,” said MCN Chairman Alfred R. Glancy III. “Our findingsindicate this is not a situation involving commodity tradinglosses, falsely recorded revenues or any other issue that wouldaffect MCN’s financial position. Rather, it is a case of earningsmanipulation by certain individuals who are no longer with thecompany.”

Glancy said during a conference call that MCN discovered gaspurchase contacts in which the marking unit agreed to paysignificantly less than market prices for gas in 1997 in return forhigher market prices paid in later periods. That had the effect ofoverstating 1997 income by delaying accrual of the relatedexpenses. The information about the transactions was withheld fromMCN’s accounting department.

MCN spokesman Stewart Lawrence reiterated that the company didnot lose any money or report false revenues because of the scam,but money was shifted around to show immediate improved financialperformance. “They had an incentive to show great results, and thisis one way to falsely show great results” in the first year oftrading, he said.

Three employees, including two subsidiary officers, have beenterminated. Disciplinary action against other employees will likelybe forthcoming upon completion of the investigation, the companysaid. Guy Jarvis, currently vice president of CoEnergy, has assumedall operating responsibilities for the gas marketing subsidiary,which sells about 1.37 Bcf/d of gas and employs 24.

MCN Energy Group Inc. is a diversified energy holding companywith more than $4 billion in assets. Its principle subsidiary isMichigan Consolidated Gas, a gas distribution and transmissioncompany serving 1.2 million customers in more than 500 communitiesthroughout Michigan.

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