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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

For the quarterly period ended March 31, 2000, or

[   ]

For the transition period from                     to                     

Commission file number 1-10070

MCN ENERGY GROUP INC.

(Exact name of registrant as specified in its charter)

Michigan

500 Griswold Street, Detroit, Michigan

48226

Registrant’s telephone number, including area code 313-256-5500

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  [X]             No  [   ]

     Number of shares outstanding of each of the registrant’s classes of common stock, as of May 12, 2000:

Common Stock, par value $.01 per share: 85,655,381

INDEX TO FORM 10-Q

For Quarter Ended March 31, 2000

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RESULTS OF OPERATIONS

Results for quarter reflect warmer weather, reduced contributions from MichCon’s gas sales program and Energy Marketing losses — MCN’s earnings for the 2000 first quarter were $58.9 million or $.67 per diluted share compared with earnings of $85.5 million or $1.02 per diluted share in the 1999 first quarter. MCN experienced a loss in the 2000 twelve-month period of $57.4 million or $.68 per share compared with a loss of $279.8 million or $3.54 per share in the same 1999 period. As subsequently discussed, the comparability of earnings was affected by the impact of several unusual items, merger costs and an accounting change.

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Excluding the unusual items, merger costs and accounting change, MCN’s earnings decreased $35.7 million or $.46 per diluted share in the 2000 first quarter and $55.8 million or $.75 per share in the 2000 twelve-month period, as compared to the corresponding 1999 periods. The earnings comparisons reflect losses within the Diversified Energy group, largely due to Energy Marketing’s operations, and reduced contributions from the Gas Distribution segment primarily resulting from warmer weather.

Strategic direction — MCN’s objective is to achieve competitive long-term returns for its shareholders. In 1999, MCN significantly revised its strategic direction that now includes: focusing on the Midwest-to-Northeast region; emphasizing operational efficiencies and growth through the integration of existing businesses; and reducing capital investment levels to approximately $150 million to $350 million annually.

To achieve the operating efficiencies expected from the new strategic direction, MCN is reorganizing into the following business segments: Gas Distribution; Midstream & Supply; Energy Marketing; Power; and Energy Holdings. MCN expects to begin reporting its operating results based on the new segments in 2000.

Gas Distribution is responsible for MCN’s regulated operations that serve more than 1.2 million customers in Michigan.

Midstream & Supply develops and manages MCN’s gas producing, gathering, processing, storage and transmission facilities within the Midwest-to-Northeast target region. It also integrates all of MCN’s gas-supply functions, including purchasing the commodity itself and aggregating the transportation and storage capacity required to deliver gas to the Gas Distribution, Energy Marketing and Power segments.

Energy Marketing consists of MCN’s non-regulated marketing activities primarily to industrial and commercial customers, both inside and outside the Gas Distribution segment’s service areas. The segment also provides full-service energy solutions to business customers.

Power develops and manages independent electric power projects that produce electricity and other useful forms of thermal energy, such as steam.

Energy Holdings manages and seeks to maximize the value of existing ventures outside MCN’s target region. It consists of gas gathering and processing investments in major U.S. producing basins, as well as non-regional electric power ventures.

Pending merger — MCN and DTE Energy Company (DTE) have 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 shareholders of both companies have approved the proposed merger. The transaction is subject to regulatory approvals and other customary merger conditions. While it still is possible for the merger to close in mid- to late 2000, discussions continue with the Federal Trade Commission and a final closing date cannot be determined with certainty. MCN recorded legal, accounting, employee benefit and other expenses associated with the merger which had the effect of reducing earnings by $.2 million for the 2000 first quarter and $22.9 million or $.27 per share for the 2000 twelve-month period. MCN will incur additional merger-related costs during 2000.

Unusual items — As discussed in MCN’s 1999 Annual Report on Form 10-K and Note 3 to the Consolidated Financial Statements included herein, MCN recorded several unusual items in the 2000 and 1999 periods, consisting of gains and losses on asset sales, property write-downs,

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investment and contract losses, and restructuring charges. The unusual items increased earnings in the 2000 and 1999 first quarters, and reduced earnings for the 2000 and 1999 twelve-month periods.

Diversified Energy

Results reflect Energy Marketing losses and asset sales — The Diversified Energy group’s losses were $7.7 million for the 2000 first quarter compared to earnings of $4.1 million for the same 1999 period. Diversified Energy had losses of $143.2 million in the 2000 twelve-month period compared to losses of $370.3 million in the corresponding 1999 period. The comparability of results was impacted by several unusual items and merger costs, as previously discussed. Excluding the unusual items and merger costs, Diversified Energy’s earnings declined by $18.2 million in the current quarter and $48.5 million in the current 2000 twelve-month period. The results for both 2000 periods

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reflect losses of the Energy Marketing segment and reduced earnings attributable to the sale of Exploration & Production (E&P) properties and joint venture interest in power projects.

*	Includes intercompany transactions

Operating and Joint Venture Income

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segments, as well as higher Corporate & Other expenses. Additionally, the 2000 periods were impacted by an increase in Pipelines & Processing earnings.

Pipelines & Processing operating and joint venture results, excluding unusual items, increased by $.9 million and $3.2 million for the 2000 first quarter and twelve-month period, respectively. The 2000 periods reflect increased earnings from MCN’s 25%-owned methanol production business resulting from higher methanol prices and margins as well as an increase in methanol volumes produced. Pipelines & Processing’s average methanol sales prices increased 24% for the 2000 first quarter and 11% for the 2000 twelve-month period. Methanol production rose 9.0 and 13.4 million gallons for the current quarter and twelve-month period, respectively, primarily due to the shut-down of the methanol plant for scheduled maintenance in March 1999. Additionally, Pipelines & Processing results for the 1999 twelve-month period were impacted by operating losses related to the start-up of its coal fines plants.

Pipelines & Processing operating and joint venture income also reflects contributions from new and expanded gas pipeline, gathering and processing ventures. Gas processed to remove natural gas liquids (NGLs) increased 8.6 Bcf and 38.0 Bcf in the 2000 first quarter and twelve-month period, respectively. In addition to higher volumes associated with new ventures, the increase was attributable to natural gas producers bypassing processing plants in the 1999 periods as a result of weaker NGL prices and associated processing margins. NGL prices have strengthened in the 2000 periods.

*	Includes MCN’s share of joint ventures

Electric Power operating and joint venture results, excluding unusual items, decreased $5.7 million and $10.7 million for the 2000 first quarter and twelve-month period, respectively. The decline in

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earnings for both periods reflects the January 2000 sale of MCN’s 23% interest in the 1,370 megawatt (MW) Midland Cogeneration Venture facility (Note 4b). Also contributing to the decrease in the 2000 twelve-month period was the sale of MCN’s interest in certain international power investments, specifically its interest in the Torrent Power Limited (TPL) venture. MCN had a 40% interest in TPL, an Indian joint venture that holds minority interests in electric distribution companies and power generation facilities in the state of Gujarat, India.

*	Includes MCN’s share of joint ventures

Energy Marketing operating and joint venture results, excluding unusual items, decreased $17.1 million for the 2000 first quarter and $29.5 million for the 2000 twelve-month period. The declines are due primarily to lower margins resulting from an increase in the cost of gas sold per thousand cubic feet (Mcf). Cost of gas sold includes the effect of the expected future cost of replacing gas withdrawn from storage inventory. The expected future cost of such gas is based on current forward-prices. As a result of rising gas prices, the estimated average purchase rate for 2000 rose significantly during the first quarter. Additionally, the impact of anticipated higher average gas prices during 2000 was magnified as a result of Energy Marketing temporarily withdrawing 8.5 Bcf more of gas from storage in the 2000 first quarter compared to the 1999 first quarter. In the 1999 first quarter, Energy Marketing met its sales commitments with spot market gas purchases, rather than storage volumes, at prices significantly lower than the estimated average purchase rate for 1999.

The decline in Energy Marketing operating and joint venture results for both 2000 periods is also attributable to higher costs associated with long-term transportation contracts. Additionally, the 2000 twelve-month period reflects higher storage costs, uncollectible expenses and costs associated with the June 1999 dissolution of the DTE-CoEnergy joint venture. Storage capacity, coupled with firm transportation capacity on interstate pipelines, enhances Energy Marketing’s ability to offer reliable gas supply during peak winter months.

Partially offsetting the decline in results for both 2000 periods were higher gas sales and exchange gas delivery volumes, which increased 45.8 Bcf in the current quarter and 155.8 Bcf in the current twelve-month period. These increases were due in part to the April 1999 acquisitions of two companies’ marketing operations that serve large commercial and industrial customers in the Midwest.

Energy Marketing’s future gas sales volumes will be impacted as a result of its exit from two marketing joint ventures during 2000. However, operating results are not expected to be significantly affected. Additionally, the higher 2000 gas prices previously discussed may result in liquidity concerns for natural gas brokers and marketers, including some of Energy Marketing’s customers.

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Energy Marketing has experienced delays in the receipt of cash from gas sales, resulting in higher accounts receivable balances.

*	Includes MCN’s share of joint ventures

Exploration & Production operating and joint venture income, excluding unusual items, decreased $5.4 million in the 2000 first quarter and $19.1 million in the 2000 twelve-month period. The decline reflects a reduction in overall gas and oil production of 15.9 Bcf equivalent in the current quarter and 41.7 Bcf equivalent in the current twelve-month period. The lower production levels are due primarily to the sale of MCN’s Western and Midcontinent/ Gulf Coast E&P properties in early and mid-1999, as well as the sale of its Appalachian properties in December 1999.

E&P results for 2000 were also impacted by an increase in production-related expenses and an increase in the overall average gas and oil sales prices. The increased production expenses reflect the higher costs of operating the E&P properties retained in Michigan. The increased average sales prices are due to higher industry prices for both natural gas and oil. The impact of higher natural gas and oil sales prices on E&P operating and joint venture income was mitigated by hedging with swap and futures agreements, as discussed in the “Risk Management Strategy” section that follows.

*	The average selling prices have been adjusted for amounts received or paid under hedging contracts

Risk management strategy — MCN manages commodity price risk primarily by utilizing futures, options and swap contracts to more fully balance its portfolio of gas and oil supply and sales agreements. MCN’s Energy Marketing business coordinates all of MCN’s hedging activities to ensure compliance with risk management policies that are periodically reviewed by MCN’s Board of Directors. Certain hedging gains or losses related to gas and oil production are recorded by MCN’s E&P operations. Gains and losses on gas and oil production-related hedging transactions that are not recorded by MCN’s E&P segment are recorded by Energy Marketing.

Corporate & Other operating and joint venture results, excluding unusual items, declined $1.5 million for the 2000 first quarter and improved $3.0 million for the 2000 twelve-month period. The current quarter decline primarily reflects adjustments recorded in the 1999 periods that reduced

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or eliminated accruals for employee incentive awards that are based on MCN’s operating or stock-price performance. The current twelve-month period results is attributable to a decrease in the proportion of administrative expenses associated with corporate management activities charged to Diversified Energy reflecting its declining percentage of MCN’s business.

Other Income and Deductions

Income Taxes

Outlook

Gas Distribution

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sales program. The decrease in earnings for the 2000 twelve-month period reflects warmer weather and higher financing costs, partially offset by increased contributions from the gas sales program.

*	Includes intercompany transactions

Gross Margin

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same 1999 period as a result of higher fixed-price supplies and the loss of approximately 70,000 customers who chose to purchase their gas from other suppliers under MichCon’s customer choice program that began in April 1999. Although MichCon has lost gas sales margins from these customers, distribution margins are retained as MichCon continues to transport and deliver the gas to the customers’ premises. MichCon’s fixed-price supplies for the remainder of 2000 as well as 2001 are at prices higher than those paid in 1999. Accordingly, margins in future periods are expected to be lower than those generated in 1999.

The increase in gross margins for the 2000 twelve-month period reflects higher margins generated under the gas sales program. As a result of the gas sales program beginning in January 1999, the 2000 twelve-month period includes a full year’s contribution, whereas the 1999 twelve-month period includes only three months of contributions. Gross margins for both the 2000 first quarter and the twelve-month period were also impacted by a decline in intermediate transportation revenues and revenues from other gas-related services.

Gas sales and end user transportation revenues in total decreased $52.3 million for the 2000 first quarter and $16.9 million for the 2000 twelve-month period. Revenues reflect a decline in gas sales volumes, partially offset by higher end user transportation deliveries. Gas sales volumes decreased 14.4 billion cubic feet (Bcf) in the 2000 first quarter and 17.3 Bcf in the 2000 twelve-month period due primarily to the warmer weather and customers who chose to purchase their gas from other suppliers under MichCon’s customer choice program. End user transportation deliveries increased 9.2 Bcf in the 2000 first quarter and 20.8 Bcf in the 2000 twelve-month period. The improvement includes volumes associated with customers participating in 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 increase in end user transportation volumes attributable to the customer choice program was the impact of warmer weather.

The revenue comparison for the twelve-month period was also 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

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costs. The gas commodity component of MichCon’s sales increased $.27 per Mcf (10%) for the 2000 twelve-month period.

*	Includes intercompany volumes

Intermediate transportation revenues decreased $.2 million in the 2000 first quarter and $2.4 million in the 2000 twelve-month period, whereas intermediate transportation deliveries increased 55.4 Bcf and 70.9 Bcf, respectively. A significant portion of the volume increase 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 decreased $3.5 million in the 2000 first quarter and increased $7.8 million in the 2000 twelve-month period. The current quarter reflects a decline in storage revenues, partially offset by an increase in late payment fees and revenues from providing appliance maintenance services. The increase in the current twelve-month period is attributable to revenues from the acquisition of three heating and cooling firms in October 1998, as well as higher late payment fees and appliance maintenance revenues.

Cost of Sales

Cost of sales decreased $31.5 million in the 2000 first quarter and $21.3 million in the 2000 twelve-month period, primarily due to a decline in gas sales volumes. As previously discussed, the decrease in sales volumes reflects the warmer weather and customers who have chosen to purchase gas from other suppliers under MichCon’s customer choice program. Partially offsetting the impact of lower sales volumes was an increase in the price paid for gas purchased of $.11 per Mcf (4%) in the 2000 first quarter and $.10 per Mcf (4%) in the 2000 twelve-month period. Additionally, the comparison was impacted by the cost of sales associated with the operations of the three heating and cooling companies acquired in October 1998.

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Other Operating Expenses

The increase in operation and maintenance expenses in the 2000 twelve-month period is due to additional computer system support costs associated with MichCon’s new customer information system and higher injuries and damages costs. Additionally, the increase reflects higher incentive payments to MichCon employees. The higher costs of these items more than offset the benefits from lower pension and retiree healthcare costs and environmental insurance proceeds.

Depreciation and depletion increased $1.5 million in the 2000 first quarter and $5.6 million in the 2000 twelve-month period reflecting depreciation on higher plant balances.

Property and other taxes increased $.6 million in the 2000 first quarter and decreased $10.6 million in the 2000 twelve-month period. The current twelve-month period reflects a change in the calculation of the value of personal property subject to taxation by local governments (Note 12a).

Unusual items of $33.3 million in the 1999 twelve-month period reflects a $24.8 million impairment of certain gas gathering properties in northern Michigan as well as an $8.5 million write-down of an investment in a small Missouri natural-gas distribution company (Note 3f).

Merger costs of $26.2 million in the 2000 twelve-month period include legal, consulting, accounting, employee benefit and other expenses associated with the pending merger between MCN and DTE Energy Company (Note 2).

Equity in Earnings of Joint Ventures

Other Income and Deductions

Income Taxes

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Outlook

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 that is 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 discussed in MCN’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. As part of its gas acquisition strategy, MichCon entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 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.

The plan increases MichCon’s risk associated with generating margins that cover its gas costs. The level of margins generated from selling gas will also be affected by differences between actual gas sales volumes and the volume of fixed-price gas supplies. Actual gas sales volumes 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.

Change in Accounting for Start-up Costs

CAPITAL RESOURCES AND LIQUIDITY

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Operating Activities

Financing Activities

MCN’s FELINE PRIDES securities mature on May 16, 2000. Each security initially represents a stock purchase contract and a preferred security. Under each stock purchase contract, MCN is obligated to sell, and the FELINE PRIDES holder is obligated to purchase between 1.4132 and 1.7241 shares of MCN common stock for $50. The exact number of MCN common shares to be sold is dependent on the market value of a share for the twenty days ending on May 12, 2000 and is expected to approximate 4,560,000 shares. Each FELINE PRIDES holder has the option to use the preferred securities, treasury securities or cash to satisfy the $50 purchase commitment. Accordingly, MCN cannot predict the amount of cash, if any, it will received upon issuing MCN common stock on May 16, 2000.

Diversified Energy

MCN received approximately $295.5 million during the 2000 first quarter from the sale of assets and joint venture interests which was used to repay outstanding debt. Proceeds from additional sales are expected in 2000 and will be used to repay outstanding borrowings and for general corporate purposes.

Gas Distribution

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in July 2001. During the first three months of 2000, MichCon repaid $158.4 million of commercial paper, leaving borrowings of $78.2 million outstanding under this program at March 31, 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.

Investing Activities

Capital investments equaled $54.5 million in the 2000 first quarter compared to $132.9 million for the same period in 1999. The 2000 investments include significantly lower levels of investments within the Diversified Energy Group.