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MCN Margins Fall, Customers Default

MCN Margins Fall, Customers Default

Unseasonally high natural gas prices have narrowed margins and caused defaults by unhedged marketer customers, resulting in a $24.4 million second quarter loss for MCN Energy Group's energy marketing division.

The loss includes $14.5 million in potentially uncollectible accounts, mainly from several smaller energy marketers who went short on gas and were caught by the high prices, according to Stewart Lawrence, MCN's director of investor relations. He would not reveal the names of the companies, but said they were marketers to industrial and possibly some residential customers. He said the losses were listed as uncollectible and acknowledged the possibility that some of the companies could end up in bankruptcy.

The current market conditions also are forcing MCN to change the valuation and use of its extensive market area storage assets.

In announcing its second quarter results last week, MCN said it had changed accounting for its storage inventory from last-in, first-out (LIFO) to the fair-value method, and adopted mark-to-market procedures for financial transactions based on storage. This reflects a change in operating strategy to maximize earnings from storage through financial rather than physical transactions. Because of the changes results are not comparable to prior years.

"The LIFO accounting method had the unusual effect of creating interim paper losses or gains," MCN Chairman Alfred Glancy III said in a prepared statement. "The new accounting treatment, on the other hand, serves to remove this variability: as the value of gas in inventory moves up or down, the value of financial transactions tied to those inventories tend to move in opposite directions and in similar amounts, largely canceling each other out."

The traditional practice of putting cheap gas in storage during the summer months to sell it for a higher price in the winter doesn't work when prices in August are 20 cents above the February futures price, MCN executives explained in an earnings conference call last Monday. Not only "seasonal, but geographic basis differentials are shrinking," Stewart said. This has resulted in "continued narrow margins, going from bad to worse" in the company's energy marketing division, which handles transportation and storage. Gas distribution also was affected by the higher priced gas purchases.

MCN, the parent of Michigan Consolidated Gas, reported an operating loss of $22 million or 25 cents a share, which was offset by asset sales that resulted in earnings on the plus side of $22.2 million or 25 cents a share.

A merger currently is pending between MCN and DTE Energy, parent of Detroit Edison, which would create the largest electric and gas utility in Michigan. The merger, announced Oct. 5, 1999, is expected to close before the end of this year. MCN recently sold cogeneration and gathering interests as part of its merger preparation.

Company officials participating in the teleconference Monday, including DTE representatives, said merger plans were progressing, with Federal Trade Commission review currently under way.

A prepared statement by DTE Chairman Anthony Early Jr. said MCN's performance was not a concern. "In our estimation, the long-term earnings power of these businesses is not significantly impacted by the conditions we are seeing in today's natural gas markets."

Ellen Beswick

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