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 said lastweek it discovered serious financial accounting manipulation withinits gas marketing subsidiary, CoEnergy Trading, and will have torecalculate 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.” The company said it likely will have to restatefinancial results for prior periods and recalculate results for1Q99. The analysis to date indicates 1997 net income will bereduced, with offsetting increases made to results reported insubsequent periods, including the first quarter of this year, inwhich MCN reported a 5% increase in net income to $85 million and17% 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 marketing 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.

MCN Sells Midcontinent, Gulf E&ampP Assets

In other news last week, MCN said it agreed to sell the secondof its four exploration and production (E&ampP) packages to anunnamed buyer(s). The second package is made up of 150 Bcfe ofproved reserves in the Midcontinent and Gulf Coast regions and drewa total of $115 million.

The assets to be sold represent about 13% of the total assetsMCN put up for sale last year. About 80% of the reserves sold inthe second package were gas. Not included were MCN’s seismic dataand exploratory leasehold interests in the Cotton Valley PinnacleReef play in east Texas, the company said. Those assets apparentlywill be included in a later sale.

Last month, the company sold its first package of western E&ampPassets, including 220 Bcfe of reserves, for $165 million. Williams’exploration and production division bought most of the westernassets, including 184 Bcfe of proved reserves and 192,000undeveloped acres in the Rocky Mountain region for $106 million.MCN’s total E&ampP assets prior to the sales included 1.2 Tcf ofproved gas reserves with a book value of about $800 million. Stillto be sold are assets in Michigan and the Appalachian region. MCNintends to complete its E&ampP divestiture by mid-year.

The company announced plans to exit the E&ampP business lastsummer and took a $273 million one-time charge last year related tothe plan. “Exiting the E&ampP business is a key element of ourrefocused strategic direction, which entails a lower risk profile,”said MCN’s Glancy. “We expect to complete the sale of theMidcontinent/Gulf Coast package as well as the remaining twopackages around mid-year. Proceeds from these sales will allow usto strengthen MCN’s balance sheet by reducing our debt level andwill help fund 1999 capital investments that are expected to totalapproximately $650 million to $750 million.”

Glancy noted that each of the four packages has its ownattributes and will therefore sell at different proved reservemultiples. The Midcontinent/Gulf Coast package includes E&ampPproperties primarily dispersed throughout Texas and Oklahoma.

Negotiations continue with the lead bidders on the Michiganpackage, which primarily includes Antrim Shale gas, and theAppalachian package, which consists of coal-bed methane properties.Both of these packages have long-lived reserves.

Rocco Canonica

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