Accounting Scheme Shaves Millions from MCN's Results
MCN Energy said yesterday it has had to chop millions from its 1997
and 1998 earnings reports and raise slightly its 1Q99 results because
of deliberate financial miscalculations by several former employees at
CoEnergy trading, its unregulated gas marketing subsidiary. MCN
discovered the problem last month and fired three employees, including
two subsidiary officers (see Daily GPI, May
18), for falsely showing good financial results from marketing.
"They didn't put any dollars directly in their pockets other
than probably getting bigger bonuses for performance," said MCN
spokesman Stewart Lawrence.
MCN said it is filing a revised 1999 first quarter Form 10-Q and
1998 Form 10-K with the Securities and Exchange Commission. The
special investigation into the problem concluded that 1997 net
income from continuing operations, previously reported as $112.2
million, or $1.51 per diluted share, must be restated downward to
$103.1 million, or $1.39 per share; 1998 net income from continuing
operations, before unusual charges, previously reported as $108.4
million, or $1.38 per share, must be restated downward to $100.9
million, or $1.28 per share; and 1999 first quarter net income from
continuing 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, its
independent auditors-identified transactions in which the company's
internal control systems were overridden and certain expenses were
recorded in improper periods. The investigation identified two
primary issues. First, as previously announced, CoEnergy had
entered into gas supply contracts, agreeing to pay significantly
less than market prices in one period in return for above-market
prices to be paid in subsequent periods through March 2000.
Additionally, the investigation found that CoEnergy had entered
into certain unauthorized gas purchase and sale contracts for
trading purposes, thereby violating MCN's risk-management policies.
These trading contracts were not properly accounted for using the
required mark-to-market method, under which unrealized gains and
losses are recorded as an adjustment to cost of gas.
In the reporting periods from March 1997 through March 1999,
$5.7 million of net income was realized and recorded in connection
with these trading contracts. However, marking these contracts to
market, as required, results in a previously unrecorded net loss of
$8.4 million through March 1999, indicating a net loss of $2.7
million from such activities. All of the contracts have since been
effectively closed out at minimal additional expense.
"We are pleased to have completed our review promptly, and that
our investigation revealed that the problems, initially identified
by our internal auditing staff, were limited in size and scope,"
said MCN Chairman Alfred R. Glancy III. "Nonetheless, the situation
required disclosure and restatements of our 1997, 1998 and
first-quarter 1999 results."
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