MCN Energy said last week deliberate financial miscalculationsby several former employees at CoEnergy trading, its unregulatedgas marketing subsidiary, led to a net loss of $2.7 million,significantly lower earnings in 1997 and 1998, and slightly higherearnings in 1Q99.

MCN discovered the problem last month and fired three employees,including two subsidiary officers (see Daily GPI, May 18), forfalsely showing good financial results from marketing in the firstyear of operations to the detriment of later periods.

In the reporting periods from March 1997 through March 1999,$5.7 million of net income was realized and recorded in connectionwith certain trading contracts. However, marking these contracts tomarket, as required, results in a previously unrecorded loss of$8.4 million through March 1999, indicating a net loss of $2.7million. All of the contracts have since been closed out at minimaladditional expense.

“They didn’t put any dollars directly in their pockets otherthan probably getting bigger bonuses for performance,” said MCNspokesman Stewart Lawrence.

MCN said it is filing a revised 1999 first quarter Form 10-Q and1998 Form 10-K with the Securities and Exchange Commission. Thespecial investigation into the problem concluded that 1997 netincome from continuing operations, previously reported as $112.2million, or $1.51 per diluted share, must be restated downward to$103.1 million, or $1.39 per share; 1998 net income from continuingoperations, before unusual charges, previously reported as $108.4million, or $1.38 per share, must be restated downward to $100.9million, or $1.28 per share; and 1999 first quarter net income fromcontinuing operations, previously reported as $87.4 million, or$1.05 per diluted share, must be restated upward to $88.4 million,or $1.06 per share.

MCN-with the assistance of Deloitte & Touche LLP, itsindependent auditors-identified transactions in which the company’sinternal control systems were overridden and certain expenses wererecorded in improper periods. The investigation identified twoprimary issues. First, as previously announced, CoEnergy hadentered into gas supply contracts, agreeing to pay significantlyless than market prices in one period in return for above-marketprices to be paid in subsequent periods through March 2000.Additionally, the investigation found that CoEnergy had enteredinto certain unauthorized gas purchase and sale contracts fortrading purposes, thereby violating MCN’s risk-management policies.These trading contracts were not properly accounted for using therequired mark-to-market method, under which unrealized gains andlosses are recorded as an adjustment to cost of gas.

Rocco Canonica

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