MICHIGAN CONSOLIDATED GAS CO /MI/, 10-Q, 2000-11-14

MICHIGAN CONSOLIDATED GAS CO /MI/
10-Q, 2000-11-14
NATURAL GAS DISTRIBUTION

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_______________________

FORM 10-Q

(Mark One)


	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)




	OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000, or


	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)




	OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 1-7310

MICHIGAN CONSOLIDATED GAS COMPANY
(Exact name of registrant as specified in its charter)


Michigan		38-0478040




(State or other jurisdiction of		(I.R.S. Employer




incorporation or organization)		Identification No.)












500 Griswold Street, Detroit, Michigan		48226




(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code 313-965-2430

No Changes
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes				No

Number of shares outstanding of each of the registrant’s classes of common stock, as of November 10, 2000:

Common Stock, par value $1.00 per share: 10,300,000

TABLE OF CONTENTS


COVER
INDEX
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 1. FINANCIAL STATEMENTS
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM&NBSP;8-K
SIGNATURE
Letter Re Unaudited Interim Financial Information
Financial Data Schedule

Index To Form 10-Q

For Quarter Ended September 30, 2000


		Page
		Number

COVER			i








































INDEX			ii








































PART I — FINANCIAL INFORMATION




Item 1. Financial Statements			9




Item 2. Management’s Discussion and Analysis of Financial




	Condition and Results of Operations		1








































PART II — OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K			17








































SIGNATURE			18

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Results reflect seasonal loss, improved gross margins, and lower operation and maintenance costs – MichCon reported a net loss of $8.8 million for the 2000 third quarter, a $4.7 million improvement compared to a loss of $13.5 million for the same 1999 period. MichCon typically records third quarter losses due to seasonally lower demand for natural gas during the summer months. Earnings for the 2000 nine- and twelve-month periods were $62.1 million and $89.9 million, respectively, resulting in decreases of $16.5 million and $19.4 million from the comparable 1999 periods. As subsequently discussed, the 2000 periods include costs associated with the merger between MichCon’s parent company, MCN Energy Group Inc. (MCN), and DTE Energy Company (Note 2). Excluding the merger costs, results improved $5.8 million for the 2000 quarter, and declined $14.4 million and $0.8 million for the 2000 nine- and twelve-month periods, respectively. Results for the 2000 quarter reflect improved gross margins due to more favorable weather and increased contributions from the gas sales program, as well as lower operation and maintenance costs. Earnings for the 2000 nine-month period reflect warmer weather and reduced contributions from the gas sales program. Earnings for the 2000 twelve-month period were also impacted by warmer weather, which was substantially offset by lower operating costs.

Earnings Components (Dollars in Millions)
Comparing 2000 to 1999


	Quarter						9 Months						12 Months

	$			%			$			%			$			%
	Change			Change			Change			Change			Change			Change

Operating Revenues		9.6			7.9			(43.8	)		(5.4	)		(23.5	)		(2.1	)




Cost of Gas		6.1			21.8			(16.0	)		(4.7	)		(14.3	)		(3.0	)




Gross Margins		3.5			3.7			(27.8	)		(5.9	)		(9.2	)		(1.5	)




Operation and Maintenance		(4.7	)		(7.5	)		(13.7	)		(7.1	)		(12.5	)		(4.7	)




Depreciation and Depletion		1.8			7.5			4.4			6.0			5.8			5.9




Property and Other Taxes		1.1			9.1			2.5			5.8			(7.7	)		(13.9	)




Merger Costs (Note 2)		1.7			N/A			3.2			N/A			28.6			N/A




Other Income and Deductions		(1.1	)		(7.4	)		1.7			4.7			3.2			5.9




Income Tax Provision		.2			4.6			(9.4	)		(21.9	)		(7.2	)		(13.2	)




Net Income or Loss		4.7			34.9			(16.5	)		(21.0	)		(19.4	)		(17.7	)

Gross Margins

Gross margins (operating revenues less cost of gas) increased $3.5 million for the 2000 quarter, and decreased $27.8 million and $9.2 million in the 2000 nine- and twelve-month periods, respectively. Gross margins reflect varying contributions from MichCon’s three-year gas sales program and the impact of weather variations.

Gross margins for the 2000 quarter include higher margins generated under MichCon’s three-year gas sales program. However, such margins for the 2000 nine- and twelve-month periods declined from the corresponding 1999 periods. Under the gas sales program which began in January 1999 (Note 3a), MichCon’s gas sales rates include a gas commodity component fixed at $2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy, MichCon has entered into fixed-

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

price contracts at an average cost below $2.95 per Mcf for approximately 90% of its gas supply requirements in 2000 assuming normal weather, and approximately 65% of such requirements in 2001. As discussed in the “Cost of Gas” section that follows, gas sales margins in the 2000 quarter were higher than the 1999 quarter as a result of lower cost of gas. However, margins in the 2000 nine- and twelve-month periods were lower than the same 1999 periods due to higher fixed-price supplies. The 2000 twelve-month period includes a full year’s contribution from the gas sales program which began in January 1999, whereas the 1999 twelve-month period includes only nine months of contributions. The impact of higher priced supplies in the 2000 twelve-month period was mitigated by the effects of such contributions.

Gross margins variations for all three 2000 periods were also affected by the number of customers who chose to purchase their gas from other suppliers under MichCon’s three-year customer choice program. Year one of this program began in April 1999, with approximately 70,000 customers choosing to participate. Year two commenced in April 2000, with the number of customers participating declining to approximately 55,000. Distribution margins are retained from these customers as MichCon continues to transport and deliver the gas to the customers’ premises.

Additionally, gross margins fluctuations for all three 2000 periods were impacted by varying weather which was slightly colder in the 2000 quarter, and 3.5% and .5% warmer in the 2000 nine- and twelve-month periods, respectively, compared to the same 1999 periods. The 2000 nine- and twelve-month periods also reflect a provision for customer refunds (Note 3b), as well as a decline in intermediate transportation revenues and revenues from other gas-related services.

Effect of Weather on Gas Markets and Earnings

Quarter 9 Months 12 Months

2000 1999 2000 1999 2000 1999

Percentage Colder (Warmer) Than Normal N/M N/M (12.0 )% (8.5 )% (11.2 )% (10.7 )%

Increase (Decrease) From Normal in:

Gas markets (in Bcf) .6 (.7 ) (17.4 ) (11.1 ) (25.0 ) (24.6 )

Net income (in Millions) $ .6 $ (.7 ) $ (16.2 ) $ (11.0 ) $ (23.8 ) $ (23.2 )

N/M – Not meaningful

Gas sales and end user transportation revenues in total increased $11.1 million for the 2000 quarter, and decreased $38.3 million and $18.3 million for the 2000 nine- and twelve-month periods, respectively. Revenues for the 2000 quarter reflect a 2.6 billion cubic feet (Bcf) increase in gas sales volumes due primarily to colder weather, partially offset by a 1.4 Bcf decrease in end user transportation deliveries. The 2000 nine- and twelve-month periods reflect a decline in gas sales revenues due to lower sales volumes, partially offset by higher end user transportation revenues due to increased deliveries. Gas sales volumes decreased 11.0 Bcf in the 2000 nine-month period and 11.2 Bcf in the 2000 twelve-month period due primarily to warmer weather and customers who chose to purchase their gas from other suppliers under MichCon’s customer choice program. End user transportation deliveries increased 13.3 Bcf in the 2000 nine-month period and 20.3 Bcf in the 2000 twelve-month period. The improvement includes volumes associated with customers participating in

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

the customer choice program who are reflected as end user transportation customers rather than gas sales customers. Accordingly, gas sales revenues have decreased, partially offset by an increase in end user transportation revenues, resulting in a net decrease in total operating revenues due to the gas commodity component included in gas sales rates. Partially offsetting the 2000 nine- and twelve-month periods’ increase in end user transportation volumes attributable to the customer choice program was the impact of warmer weather.

The gas sales revenues comparison for the nine and twelve-month periods was impacted by a $2.4 million provision for customer refunds recorded in the 2000 second quarter, and the end user transportation comparison for the same periods was affected by the temporary shutdown of an industrial customer’s plant in the 1999 second quarter.

Additionally, the gas sales revenues comparison for the twelve-month period was impacted by the cost of the gas commodity component of gas sales rates. As previously discussed, this gas commodity component was fixed under MichCon’s gas sales program at $2.95 per Mcf beginning in January 1999. Prior to 1999, MichCon’s sales rates were set to recover all of its reasonably and prudently incurred gas costs. The gas commodity component of MichCon’s sales increased $.08 per Mcf (3%) for the 2000 twelve-month period.


	Quarter				9 Months				12 Months

	2000		1999		2000		1999		2000		1999

Gas Markets (in Millions)




Gas Sales	$	85.5	$	73.0	$	590.3	$	641.6	$	856.2	$	896.4




End User Transportation		21.0		22.4		85.4		72.4		116.5		94.6

		106.5		95.4		675.7		714.0		972.7		991.0




Intermediate Transportation		12.2		14.1		39.4		42.8		54.4		57.6




Other		13.6		13.1		47.4		49.5		64.9		66.9

	$	132.3	$	122.6	$	762.5	$	806.3	$	1,092.0	$	1,115.5

Gas Markets (in Bcf)




Gas Sales		12.8		10.2		113.8		124.8		167.3		178.5




End User Transportation		31.3		32.7		120.2		106.9		165.1		144.8

		44.1		42.9		234.0		231.7		332.4		323.3




Intermediate Transportation		132.1		128.3		426.7		390.7		567.8		497.5

		176.2		171.2		660.7		622.4		900.2		820.8

Intermediate transportation revenues decreased $1.9 million, $3.4 million and $3.2 million in the 2000 quarter, nine- and twelve-month periods, respectively. Although revenues declined, the related deliveries rose significantly, increasing 3.8 Bcf, 36.0 Bcf and 70.3 Bcf in the 2000 quarter, nine- and twelve-month periods, respectively. A significant portion of the volume variations was for customers who pay a fixed fee for intermediate transportation capacity regardless of actual usage. Although volumes associated with these fixed-fee customers may vary, the related revenues are not affected. The decrease in intermediate transportation revenues is due to non fixed-fee customers shifting volumes from a higher rate to a lower rate transportation route.

Other operating revenues increased $.5 million in the 2000 quarter, and decreased $2.1 million and $2.0 million in the 2000 nine-

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

and twelve-month periods, respectively. Revenues in the 2000 nine- and twelve-month periods reflect a decline in storage and facility development services, partially offset by an increase in late payment fees and revenues from providing appliance maintenance services.

Cost of Gas

Cost of gas is affected by variations in sales volumes and cost of purchased gas as well as related transportation costs. Under the Gas Cost Recovery (GCR) mechanism that was in effect through December 1998, MichCon’s sales rates were set to recover all of its reasonably and prudently incurred gas costs. Therefore, fluctuations in cost of gas sold had little effect on gross margins. Under MichCon’s gas sales program, the gas commodity component of its sales rates is fixed. Accordingly, beginning in January 1999, changes in cost of gas sold directly impact gross margins and earnings.

Cost of gas sold increased $6.1 million in the 2000 quarter, and decreased $16.0 million and $14.3 million in the 2000 nine- and twelve-month periods, respectively. The cost of gas variations primarily reflects weather-driven sales volumes as well as changes in sales volumes associated with customers who have chosen to purchase gas from other suppliers under MichCon’s customer choice program. Also impacting cost of gas sold was the price paid for gas sold which decreased $.20 per Mcf (7%) in the 2000 quarter, and increased $.08 per Mcf (3%) and $.07 per Mcf (3%) in the 2000 nine- and twelve-month periods, respectively. The cost of gas increase in the 2000 quarter is also attributable to higher lost gas expenses.

Other Operating Expenses

Operation and maintenance expenses decreased $4.7 million, $13.7 million and $12.5 million in the 2000 quarter, nine- and twelve-month periods, respectively. The decreases are attributable to lower employee benefit costs, primarily pension costs. The 2000 nine- and twelve-month periods also benefited from the receipt of insurance proceeds resulting from the settlement of environmental claims with certain insurance carriers. As discussed in MichCon’s 1999 Annual Report on Form 10-K, the settlement has allowed MichCon to recover previously incurred costs and resolved the carriers’ liabilities for future costs of environmental investigation and remediation.

Partially offsetting the improvement in the 2000 twelve-month period were higher injuries and damages costs.

Depreciation and depletion increased $1.8 million, $4.4 million and $5.8 million in the 2000 quarter, nine- and twelve-month periods, respectively, reflecting depreciation on higher plant balances.

Property and other taxes increased $1.1 million and $2.5 million in the 2000 quarter and nine-month period, respectively, and decreased $7.7 million in the 2000 twelve-month period. All three 2000 periods were impacted by taxes on higher plant balances. However, the effect of higher plant balances in the 2000 twelve-month period was more than offset by a change in the calculation of the value of personal property subject to taxation by local taxing jurisdictions. MichCon has pending tax appeals with various local taxing jurisdictions to recover excess payments made in prior years based on the revised calculation. This calculation change, coupled with the favorable impact of new valuation tables approved by the Michigan State Tax Commission (STC) in November 1999, is expected to lower MichCon’s personal property taxes by approximately $8 million annually

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

beginning in July 2000. Several local taxing jurisdictions have taken legal action against the State of Michigan to prevent the STC from implementing the new valuation tables (Note 4a).

Merger costs of $1.7 million, $3.2 million and $28.6 million in the 2000 quarter, nine- and twelve-month periods, respectively, include legal, consulting, accounting, employee benefit and other expenses associated with the pending merger between MCN and DTE Energy Company (Note 2).

Other Income and Deductions

Other income and deductions decreased $1.1 million in the 2000 quarter, and increased $1.7 million and $3.2 million in the 2000 nine- and twelve-month periods, respectively. The comparison for all three periods was impacted by an increase in 2000 investment income. The 2000 nine- and twelve-month periods were also impacted by higher interest costs primarily due to an increase in the average balance of long-term debt outstanding, interest on customer refunds as well as a decline in construction related capitalized interest. Additionally, the other income and deductions increase in the 2000 twelve-month period is attributable to lower interest income resulting from the repayment of funds loaned to MCN.

Income Taxes

Income taxes for all three 2000 periods were impacted by variations in pre-tax earnings. Income taxes in the 2000 periods were also affected by the favorable resolution of prior years’ tax issues. Additionally, the 1999 twelve-month period includes higher investment tax credits.

Outlook

MichCon’s strategy is to expand its role as the preferred provider of natural gas and high-value energy services within Michigan. Accordingly, MichCon’s objectives are to increase revenues and control costs in order to deliver strong shareholder returns and provide customers with high-quality service at competitive prices.

MichCon has begun, and plans to continue, capitalizing on opportunities resulting from the gas industry restructuring. MichCon is currently operating under its Regulatory Reform Plan, which includes a comprehensive experimental three-year customer choice program designed to offer all sales customers added choices and greater price certainty. Year two of the customer choice program began April 1, 2000, and approximately 55,000 customers have chosen to purchase natural gas from suppliers other than MichCon. There are approximately 15,000 fewer customers participating in year two of the plan than in year one as a result of fewer natural gas marketers participating due to higher gas prices. Current gas prices are substantially higher than the $2.95 per Mcf rate available to customers under MichCon’s customer choice program, thereby hindering gas marketers’ ability to compete with MichCon for such customers.

As discussed in MichCon’s 1999 Annual Report on Form 10-K, the Regulatory Reform Plan also suspended the GCR mechanism for customers who continue to purchase gas from MichCon, and fixed the gas commodity component of MichCon’s sales rates at $2.95 per Mcf. The suspension of the GCR mechanism allows MichCon to profit from its ability to purchase gas at less than $2.95 per Mcf. The plan also increases MichCon’s risk associated with generating margins that cover its gas costs. As part of its gas acquisition strategy, MichCon entered into fixed-price contracts at an average

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

cost below $2.95 per Mcf for approximately 90% of its supply requirements in 2000 assuming normal weather, and approximately 65% of such requirements in 2001. However, margins are expected to be lower in future periods as MichCon’s fixed-price supplies in 2000 and 2001 are at prices higher than those paid in 1999. MichCon expects to meet its remaining gas supply requirements for 2000 and 2001 by withdrawing gas from storage, supplemented with purchases at market prices. Margins in future periods could decline further if gas prices remain at their current levels, which are high compared to historical periods. The level of margins generated from selling gas will also be affected by actual gas sales volumes, which will fluctuate as a result of changes in weather, and the number of customers who ultimately choose to purchase gas from suppliers other than MichCon.

The State of Michigan is continuing its initiatives designed to give all of Michigan’s natural gas customers added choices and the opportunity to benefit from lower gas costs resulting from competition. In October 2000, the Michigan Public Service Commission (MPSC) issued an order that provides uniform terms and conditions for a new voluntary customer choice program in Michigan. Key aspects of the order include: i) continuing customer choice on a permanent and expanding basis with all of MichCon’s customers eligible to participate in the program by the end of a three-year phase-in period; ii) eliminating fixed commodity rates in favor of GCR rates that reflect market prices; and iii) investigating the potential unbundling of additional services offered by Michigan gas utilities.

MichCon supports customer choice initiatives but is concerned with the structure of the current three-year customer choice and gas sales programs, which fixed the gas commodity component of its sales rates at $2.95 per Mcf. Therefore, MichCon is evaluating the option of seeking MPSC approval to terminate year three of the existing customer choice program and implement the new permanent program in April 2001. This would include eliminating the fixed $2.95 per Mcf rate and lifting the suspension of MichCon’s GCR. Absent a modification to its choice program, MichCon plans to supplement existing fixed price supply with withdrawals from storage to mitigate the effect of current high market prices.

CAPITAL RESOURCES AND LIQUIDITY


		9 MONTHS

Cash and Cash Equivalents (in Millions)		2000			1999

Cash Flow Provided From (Used For):




	Operating activities	$	231.3		$	177.3




	Financing activities		(138.4	)		(76.1	)




	Investing activities		(91.4	)		(95.9	)

Net Increase in Cash and Cash Equivalents		$	1.5		$	5.3

Operating Activities

Cash flow provided from operating activities increased $54.0 million during the 2000 nine-month period compared to the same 1999 period. The increase was due primarily to lower working capital requirements, partially offset by a decrease in earnings, after adjusting for non-cash items (depreciation and deferred taxes).

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

Financing Activities

Cash flow used for financing activities increased $62.3 million during the 2000 nine-month period compared to the same 1999 period. The increase is due to the repayment of more short- and long-term debt, net of new debt issuances, and an increase in dividends paid to MCN. A summary of MichCon’s financing strategies, as well as its significant financing activities follows.

MichCon maintains a relatively consistent amount of cash and cash equivalents through the use of short-term borrowings. Short-term borrowings are normally reduced in the first part of each year as gas inventories are depleted and funds are received from winter heating sales. During the latter part of the year, MichCon’s short-term borrowings normally increase as funds are used to finance increases in gas inventories and customer accounts receivable. To meet its seasonal short-term borrowing needs, MichCon normally issues commercial paper that is backed by credit lines with several banks. MichCon has established credit lines to allow for borrowings under a 364-day revolving credit facility and a three-year revolving credit facility. The 364-day facility was renewed in July 2000 and was increased from $150 million to $200 million. The three-year facility totals $150 million and expires in July 2001. During the first nine months of 2000, MichCon repaid $45.5 million of commercial paper, leaving borrowings of $190.4 million outstanding under this program at September 30, 2000.

In March 2000, MichCon repaid $12.3 million of term debt of a non-utility subsidiary that was scheduled to mature in 2006. Additionally, MichCon repaid $20 million of first mortgage bonds that matured in May 2000.

In July and September 2000, MichCon paid dividends to MCN totaling $50.0 million.

Investing Activities

MichCon’s cash used for investing activities decreased $4.5 million in the 2000 nine-month period compared to the same 1999 period. The decrease was due primarily to lower capital expenditures. Capital expenditures primarily represent the construction of distribution lines to attach new customers, new computer systems and improvements to existing storage, distribution, and transmission systems.

It is management’s opinion that MichCon will have sufficient capital resources, both internal and external, to meet anticipated capital requirements.

MARKET RISK INFORMATION

MichCon has market risk arising from fluctuations in natural gas prices. MichCon manages natural gas price risk by entering into fixed-price contracts for a large portion of its expected supply requirements. If MichCon did not enter into these fixed-price supply contracts, its exposure to such risk would be substantially higher. See the “Outlook” section for a further discussion of MichCon’s market risks.

As discussed in MichCon’s 1999 Annual Report on Form 10-K, MichCon also has market risk arising from
fluctuations in interest rates. MichCon is subject to interest rate risk in connection with the issuance of variable and fixed-rate debt. MichCon manages interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities. MichCon

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONCLUDED)

uses interest rate swap agreements to exchange fixed- and variable-rate interest payment obligations over the life of the agreements without exchange of the underlying principal amounts. During the 2000 nine-month period, there have been no events or factors that have caused any material changes to MichCon’s interest rate risk.

NEW ACCOUNTING PRONOUNCEMENTS

Derivative and Hedging Activities - In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133.” SFAS No. 137 changes the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.

SFAS No. 133 requires all derivatives to be recognized in the balance sheet as either assets or liabilities measured at their fair value, and sets forth conditions in which a derivative instrument may be designated as a hedge. The Statement requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to be recorded to other comprehensive income or to offset related results on the hedged item in earnings.

MichCon manages interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities. The effects of SFAS No. 133 on MichCon’s financial statements are subject to fluctuations in the market value of hedging contracts, which are, in turn, affected by variations in interest rates. Accordingly, management cannot quantify the effects of adopting SFAS No. 133 at this time.

MichCon initiated a corporate-wide plan in 1998 to address the issues associated with adopting SFAS No. 133. The plan consists of: i) inventorying and categorizing derivatives; ii) assessing risk management policies and determining the effectiveness of hedging methodologies; iii) modeling the impact of hedging strategies; and iv) assessing processes and technology requirements. MichCon does not expect any complications in completing the plan or having the related computer systems operational by the end of 2000.

Revenue Recognition – In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements.” SAB No. 101 summarized certain of the SEC’s views in applying generally accepted accounting principles to recognizing revenues. SAB No. 101 will be effective for MichCon in the fourth quarter of 2000. Management does not expect SAB No. 101 to have a material effect on MichCon’s financial statements.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties as set forth in MichCon’s 1999 Annual Report on Form 10-K.

CONSOLIDATED STATEMENT OF INCOME (Unaudited)


			Three Months Ended						Nine Months Ended						Twelve Months Ended
			September 30						September 30						September 30

			2000			1999			2000			1999			2000			1999

(in Thousands)




Operating Revenues			$	132,269		$	122,635		$	762,504		$	806,280		$	1,091,963		$	1,115,496

Operating Expenses




	Cost of gas			34,332			28,187			320,960			336,948			467,937			482,233




	Operation and maintenance			57,778			62,486			180,253			193,974			252,383			264,859




	Depreciation and depletion			25,995			24,192			78,002			73,558			103,323			97,531




	Property and other taxes			13,281			12,175			45,862			43,337			47,755			55,433




	Merger costs (Note 2)			1,725			—			3,151			—			28,580			—

		Total operating expenses		133,111			127,040			628,228			647,817			899,978			900,056

Operating Income (Loss)				(842	)		(4,405	)		134,276			158,463			191,985			215,440

Other Income and (Deductions)




	Interest income			371			916			1,943			2,861			1,686			4,976




	Interest on long-term debt			(11,896	)		(12,537	)		(36,280	)		(35,028	)		(48,517	)		(46,218	)




	Other interest expense			(2,194	)		(1,184	)		(7,063	)		(5,020	)		(10,669	)		(9,984	)




	Minority interest			(146	)		(282	)		(412	)		(805	)		(627	)		(985	)




	Equity in earnings of joint ventures			503			444			1,689			1,457			2,208			1,942




	Other			1,107			(590	)		1,567			(303	)		854			(1,720	)

		Total other income and (deductions)		(12,255	)		(13,233	)		(38,556	)		(36,838	)		(55,065	)		(51,989	)

Income (Loss) Before Income Taxes				(13,097	)		(17,638	)		95,720			121,625			136,920			163,451




Income Tax Provision (Benefit)				(4,286	)		(4,098	)		33,604			43,027			47,066			54,217

Net Income (Loss)			$	(8,811	)	$	(13,540	)	$	62,116		$	78,598		$	89,854		$	109,234

CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)


		Three Months Ended						Nine Months Ended				Twelve Months Ended
		September 30						September 30				September 30

(in Thousands)		2000			1999			2000		1999		2000		1999

Balance — Beginning of Period		$	565,730		$	480,605		$	494,803	$	406,144	$	467,065	$	421,665




	Add — Net income (loss)		(8,811	)		(13,540	)		62,116		78,598		89,854		109,234

			556,919			467,065			556,919		484,742		556,919		530,899




	Deduct — Common stock dividends declared




	Cash dividends		50,000			—			50,000		17,500		50,000		63,584




	Dividends in kind and other		9,689			—			9,689		177		9,689		250

Balance — End of Period		$	497,230		$	467,065		$	497,230	$	467,065	$	497,230	$	467,065

The notes to the consolidated financial statements are an integral part of these statements.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)


			September 30				December 31

			2000		1999		1999

(in Thousands)




ASSETS




	Current Assets




		Cash and cash equivalents	$	11,225	$	11,880	$	9,705




		Accounts receivable, less allowance for doubtful accounts of $15,114, $14,396 and $17,777, respectively		98,792		97,038		147,412




		Accrued unbilled revenues		25,059		21,178		98,866




		Gas in inventory		80,553		110,170		74,150




		Materials and supplies		13,537		13,017		13,612




		Property taxes assessed applicable to future periods		27,628		37,692		60,589




		Other		13,919		25,592		17,982

				270,713		316,567		422,316

	Deferred Charges and Other Assets




		Investment in and advances to joint ventures		19,702		19,766		19,115




		Long-term investments		69,089		66,653		67,210




		Deferred environmental costs		26,271		28,522		28,639




		Prepaid benefit costs		199,186		146,534		156,290




		Other		58,125		64,528		64,546

				372,373		326,003		335,800

	Property, Plant and Equipment, at cost			3,056,570		2,973,747		2,988,318




		Less — Accumulated depreciation and depletion		1,533,157		1,464,931		1,463,706

				1,523,413		1,508,816		1,524,612

			$	2,166,499	$	2,151,386	$	2,282,728

LIABILITIES AND SHAREHOLDER’S EQUITY




	Current Liabilities




		Accounts payable	$	72,473	$	112,090	$	93,549




		Notes payable		190,582		132,465		237,785




		Current portion of long-term debt and capital lease obligations		24,809		28,059		27,984




		Federal income, property and other taxes payable		39,776		51,591		71,415




		Customer deposits		15,713		15,762		17,698




		Other		49,815		65,527		68,339

				393,168		405,494		516,770

	Deferred Credits and Other Liabilities




		Deferred income taxes		135,974		104,778		105,351




		Unamortized investment tax credit		26,345		28,258		27,778




		Tax benefits amortizable to customers		138,357		136,906		136,236




		Accrued environmental costs		24,173		27,373		25,068




		Minority interest		649		8,570		8,716




		Other		67,061		48,757		46,398

				392,559		354,642		349,547

	Long-Term Debt, including capital lease obligations			642,843		683,486		680,909

	Contingencies (Note 4)




	Common Shareholder’s Equity




		Common stock		10,300		10,300		10,300




		Additional paid-in capital		230,399		230,399		230,399




		Retained earnings		497,230		467,065		494,803

				737,929		707,764		735,502

			$	2,166,499	$	2,151,386	$	2,282,728

The notes to the consolidated financial statements are an integral part of this statement.

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)


					Nine Months Ended
						September 30

(in Thousands)						2000			1999

Cash Flow From Operating Activities




	Net income					$	62,116		$	78,598




	Adjustments to reconcile net income to net cash flow provided




		from operating activities




			Depreciation and depletion




				Per statement of income			78,002			73,558




				Charged to other accounts			7,582			6,627




			Deferred income taxes — current				(10,667	)		(19,284	)




			Deferred income taxes and investment tax credit, net				31,311			21,471




			Other				(3,931	)		(1,273	)




			Changes in assets and liabilities, exclusive of changes




				shown separately			66,866			17,646

				Net cash provided from operating activities			231,279			177,343

Cash Flow From Financing Activities




	Issuance of long-term debt						—			106,535




	Notes payable, net						(47,203	)		(88,704	)




	Retirement of long-term debt						(41,142	)		(76,479	)




	Dividends paid						(50,000	)		(17,500	)

				Net cash used for financing activities			(138,345	)		(76,148	)

Cash Flow From Investing Activities




	Capital expenditures						(86,095	)		(94,296	)




	Other						(5,319	)		(1,622	)

				Net cash used for investing activities			(91,414	)		(95,918	)

Net Increase in Cash and Cash Equivalents							1,520			5,277




Cash and Cash Equivalents, January 1							9,705			6,603

Cash and Cash Equivalents, September 30						$	11,225		$	11,880

Changes in Assets and Liabilities, Exclusive of Changes




	Shown Separately




		Accounts receivable, net				$	43,539		$	44,197




		Accrued unbilled revenues					73,807			65,589




		Accrued/deferred gas cost recovery revenues, net					173			(15,153	)




		Gas in inventory					(6,403	)		(53,201	)




		Property taxes assessed applicable to future periods					32,961			33,473




		Prepaid benefit costs, net					(42,896	)		(32,655	)




		Accounts payable					(21,076	)		13,199




		Federal income, property and other taxes payable					(31,639	)		(9,468	)




		Exchange gas payable					(267	)		(19,574	)




		Other current assets and liabilities, net					(9,890	)		869




		Other deferred assets and liabilities, net					28,557			(9,630	)

						$	66,866		$	17,646

Supplemental Disclosures




	Cash paid for:




		Interest, net of amounts capitalized				$	34,744		$	41,265

		Federal income taxes				$	1,490		$	23,543

	Noncash investing and financing activities:




		Dividends in kind and other				$	9,689		$	177

The notes to the consolidated financial statements are an integral part of this statement.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. GENERAL

The accompanying consolidated financial statements should be read in conjunction with MichCon’s 1999 Annual Report on Form 10-K. Certain reclassifications have been made to the prior year’s financial statements to conform to the 2000 presentation. In the opinion of management, the unaudited information furnished herein reflects all adjustments necessary for a fair presentation of the financial statements for the periods presented.

Because of seasonal and other factors, revenues, expenses and net income for the interim periods should not be construed as representative of revenues, expenses and net income for all or any part of the balance of the current year or succeeding periods.

2. MCN MERGER AGREEMENT WITH DTE ENERGY COMPANY
As discussed in MichCon’s 1999 Annual Report on Form 10-K, MCN Energy Group Inc. (MCN), parent company of MichCon, and DTE Energy Company (DTE) signed a definitive merger agreement, dated October 4, 1999, under which DTE will acquire all outstanding shares of MCN common stock. The boards of directors and the shareholders of both companies have approved the proposed merger. The transaction is subject to regulatory approvals and other customary merger conditions. Both companies continue their discussions with the Federal Trade Commission (FTC) in connection with its review of the proposed merger.

The FTC staff raised concerns regarding the loss of possible competition between DTE and MCN in their coincident retail distribution areas. To address these concerns, MCN agreed to transfer a property interest to a unit of Exelon, previously Unicom Corp., allowing for the utilization of up to 20 billion cubic feet (Bcf) of natural gas transportation capacity annually on MichCon’s system in the applicable distribution area. The agreement is subject to regulatory approvals and consummation of the merger. Specific terms regarding the ultimate utilization of capacity under the agreement are still being discussed with the FTC. Management believes that the proposal will be the basis for addressing the FTC’s concerns. While management cannot predict the timing or outcome of the FTC's review, the companies are targeting a first quarter 2001 closing date for the merger.

As a result of the pending merger, MCN incurred merger-related costs, a portion of which were allocated to MichCon. Additionally, MichCon incurred merger-related costs. The merger-related costs include legal, accounting, consulting, employee benefit and other expenses that had the effect of decreasing earnings by $1,725,000 pre-tax ($1,121,000 net of taxes), $3,151,000 pre-tax ($2,048,000 net of taxes) and $28,580,000 pre-tax ($18,577,000 net of taxes) for the three-, nine- and twelve-month periods ended September 30, 2000, respectively.

3. REGULATORY MATTERS

a. Regulatory Reform Plan
As discussed in MichCon’s 1999 Annual Report on Form 10-K, MichCon implemented its Regulatory Reform Plan in January 1999. The plan includes a three-year gas sales program under which MichCon’s gas sales rates include a gas commodity component that is fixed at $2.95 per thousand cubic feet (Mcf). As

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at an average cost below $2.95 per Mcf for approximately 90% of its expected supply requirements in 2000 assuming normal weather, and approximately 65% of such requirements in 2001.

The plan also includes a comprehensive experimental three-year customer choice program, which is subject to annual caps on the level of participation. The customer choice program began in April 1999, with approximately 70,000 customers choosing to purchase natural gas from suppliers other than MichCon. Year two of the plan began in April 2000, and the number of customers participating decreased to approximately 55,000. MichCon continues to transport and deliver gas to these customers’ premises at prices that generate favorable margins.

In addition, the plan encompasses an income sharing mechanism that allows customers to share profits when actual returns on equity exceed predetermined thresholds. MichCon filed its income sharing report with the Michigan Public Service Commission (MPSC) on March 31, 2000, using the MPSC approved formula, indicating that no income sharing was required for 1999. The MPSC staff has requested a hearing on this matter. Management believes that no income sharing is required.

In August 2000, the MPSC issued an order establishing a proceeding to obtain information regarding the experience gained from the customer choice programs of MichCon and other participating Michigan utilities. The information was used by the MPSC to determine the future regulatory environment following the conclusion of the current regulatory reform programs. In October 2000, the MPSC issued an order that provides uniform terms and conditions for a new voluntary gas customer choice program in Michigan. Key aspects of the order include: i) continuing customer choice on a permanent and expanding basis with all of MichCon’s customers eligible to participate in the program by the end of a three-year phase-in period; ii) eliminating fixed commodity rates in favor of Gas Cost Recovery (GCR) rates that reflect market prices; and iii) investigating the potential unbundling of additional services offered by Michigan gas utilities. Management is currently evaluating the order and may seek MPSC approval to terminate year three of the existing customer choice program and implement the permanent program in April 2001. This would include eliminating the fixed $2.95 per Mcf rate and lifting the suspension of MichCon’s GCR.

b. Gas Cost Recovery Proceedings
The GCR process was suspended with the implementation of MichCon’s Regulatory Reform Plan in January 1999. In February 1999, MichCon filed its GCR reconciliation case covering gas costs incurred during 1998 indicating an overrecovery of $18,000,000, including interest. During the first quarter of 1999, MichCon refunded the overrecovery to customers. In July 2000, the MPSC issued an order on this case indicating that an additional $3,200,000, including $740,000 of interest, had been overrecovered. In the third quarter of 2000, MichCon refunded the additional overrecovery to customers as a reduction in gas sales rates.

c. Other Rate Matters
As discussed in MichCon’s 1999 Annual Report on Form 10-K, several shippers on MichCon’s northern Michigan gathering system filed a complaint requesting that the MPSC issue an order reducing the rate charged for Antrim gas transportation services from $.090 per Mcf to approximately $.039 to $.031 per Mcf. The complaint also included a request for refunds of approximately $21,000,000 for periods during which the rate was in effect. The presiding MPSC administrative law judge found that no refunds are required. The MPSC staff has proposed a rate of $.049 per Mcf which would result in an annual revenue reduction of

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

approximately $4,500,000. Management will vigorously defend its proposed rate of $.088 per Mcf, however, it is unable to predict the outcome of this complaint.

4. CONTINGENCIES

a. Personal Property Taxes
As discussed in MichCon’s 1999 Annual Report on Form 10-K, in 1998, MichCon began filing its personal property tax information with local taxing jurisdictions which reflected a change in the calculation of the value of personal property subject to taxation. The revised calculation excludes intangible costs from the value of personal property. A number of local taxing jurisdictions have accepted the revised calculation, and MichCon recorded lower property tax expense in 1999 and 1998 associated with the accepting taxing jurisdictions. MichCon has also filed appeals to recover excess payments made in 1996 and 1997 based on the revised calculation. MichCon has pending tax appeals with local taxing jurisdictions that have not accepted the revised calculation.

Additionally, MichCon and other Michigan utilities have asserted that Michigan’s valuation tables result in the substantial overvaluation of utility personal property. Valuation tables established by the Michigan State Tax Commission (STC) are used to estimate the reduction in value of personal property based on the property’s age. In November 1999, the STC approved new valuation tables that more accurately recognize the value of a utility's personal property. The new tables became effective in 2000 and are being used for current year assessments in most jurisdictions. However, several local taxing jurisdictions have taken legal action attempting to prevent the STC from implementing the new valuation tables and have continued to prepare assessments based on the superceded tables. The legal actions regarding the appropriateness of the new tables are currently before the Michigan Tax Tribunal (MTT), which issued an order in June 2000 stating that the tables are presumed to be correct, thus assigning the burden of proving otherwise to the taxing jurisdictions. A trial is scheduled for December 2000. The legal action, along with possible additional appeals by local taxing jurisdictions, could delay expected recoveries related to the new valuation tables until 2001.

MichCon will seek to apply the new tables retroactively and to ultimately settle the pending tax appeals related to prior periods. This is a solution supported by the STC in the past. MichCon’s future results of operations could be significantly affected if the valuation tables are not upheld in court or MichCon is unsuccessful in its appeals.

b. Mercury Regulators
As a result of the increasing public concern regarding mercury contamination in homes served by other utilities and because new more sensitive mercury detection equipment exists, MichCon launched a proactive and voluntary program in September 2000 to ensure its mercury handling procedures are safe, effective and protect public health. During the years 1936 to 1959, some of the regulators MichCon installed in customer homes contained a small amount of mercury which is used to help measure the pressure of gas flowing into a meter. Less than 15% of MichCon’s more than one million residential customers have ever had this type of regulator.

The regulators operate safely, however when a regulator is removed there is a potential for an accidental release of mercury. MichCon employees are trained in the safe removal of these regulators, which are disposed of through an environmental recycling and waste disposal company.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The new mercury detection equipment made available by the Environmental Protection Agency will enable MichCon to re-test 35 homes where an accidental release of mercury occurred in the 1990’s. Even though MichCon immediately cleaned these homes, this new equipment enables MichCon to confirm the effectiveness of the procedures. MichCon intends to implement a testing program to conduct statistical sampling of homes in which mercury-containing regulators may once have existed, and is currently working on details for this program in conjunction with appropriate state and federal agencies. Management believes the possibility is remote that customers have been exposed to unsafe levels of mercury from MichCon’s equipment. Management cannot predict the final disposition of this matter, but does not believe it will have a significant effect on MichCon’s financial statements.

c. Legal and Administrative Proceedings
MichCon is involved in certain legal and administrative proceedings before various courts and governmental agencies concerning claims arising in the ordinary course of business. Management cannot predict the final disposition of such proceedings, but believes that adequate provision has been made for probable losses. It is management’s belief, after discussion with legal counsel, that the ultimate resolution of those proceedings still pending will not have a material adverse effect on MichCon’s financial statements.

5. LINES OF CREDIT AND LONG-TERM DEBT

MichCon has established credit lines to allow for borrowings under a 364-day revolving credit facility and a three-year revolving credit facility. The 364-day facility was renewed in July 2000 and was increased from $150,000,000 to $200,000,000. The three-year facility totals $150,000,000 and expires in July 2001.

In March 2000, MichCon repaid $12,320,000 of a non-utility subsidiary’s term debt that was scheduled to mature in 2006.

INDEPENDENT ACCOUNTANTS’ REPORT

To the Board of Directors of
Michigan Consolidated Gas Company:

We have reviewed the accompanying condensed consolidated statements of financial position of Michigan Consolidated Gas Company and subsidiaries (the “Company”) as of September 30, 2000 and 1999, the related condensed consolidated statements of income and retained earnings for the three, nine and twelve-month periods ended September 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to the financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial position of the Company as of December 31, 1999, and the related consolidated statements of income, capitalization, and cash flows for the year then ended (not presented herein); and in our report dated March 21, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 1999 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

DELOITTE & TOUCHE LLP

Detroit, Michigan
November 13, 2000

Other Information

Exhibits and Reports on Form 8-K

(a) Exhibits


Exhibit
Number		Description

15-1 27-1		Letter re Unaudited Interim Financial Information Financial Data Schedule

(b) Reports on Form 8-K

None.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		MICHIGAN CONSOLIDATED GAS COMPANY

Date: November 13, 2000		By: /s/ Robert Kaslik

		Robert Kaslik
		Controller

EXHIBIT INDEX


EXHIBIT
NUMBER		DESCRIPTION

15-1 27-1		Letter re Unaudited Interim Financial Information Financial Data Schedule

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