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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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.

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

Common Stock, par value $.01 per share: 90,212,588

INDEX TO FORM 10-Q

For Quarter Ended September 30, 2000

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RESULTS OF OPERATIONS

Results reflect Energy Marketing losses, asset sales and increased Gas Distribution gross margins — MCN had a net loss for the 2000 third quarter of $24.9 million or $.28 per share compared with a net loss of $23.2 million or $.27 per share for the 1999 third quarter. Earnings for the 2000 nine-month period were $66.7 million or $.75 per diluted share compared to losses of $13.0 million or $.16 per share for the same 1999 period. Earnings for the 2000 twelve-month period were $60.8 million or $.69 per diluted share compared to earnings of $10.4 million or $.13 per diluted share in the corresponding 1999 period. As subsequently discussed, the comparability of earnings was affected by the impact of several unusual items, merger costs and an accounting change for start-up costs. Also affecting comparability was the implementation of mark-to-market accounting for storage-related trading activities in the 2000 second quarter, in combination with a change in accounting for inventory (Notes 3 and 4).

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Excluding the unusual items, merger costs and the accounting change for start-up costs, MCN’s earnings improved $2.0 million or $.03 per share in the 2000 quarter, and decreased $51.7 million or $.65 per diluted share in the 2000 nine-month period and $47.2 million or $.60 per diluted share in the 2000 twelve-month period, as compared to the corresponding 1999 periods. The earnings comparisons reflect losses within the Diversified Energy group and varying contributions from the Gas Distribution segment.

Inventory accounting change — As described in Note 3 to the Consolidated Financial Statements included herein, during the 2000 second quarter, MCN changed its method of accounting for inventory held by its Energy Marketing segment. The consolidated financial statements of prior periods have been restated to apply the new inventory accounting method retroactively. The effect of the accounting change impacted earnings as follows.

Pending merger — MCN 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 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. MCN recorded legal, accounting, employee benefit and other expenses associated with the merger which had the effect of reducing earnings by $1.5 million for the 2000 quarter, $3.4 million for the 2000 nine-month period and $26.0 million for the 2000 twelve-month period. MCN will incur additional merger-related costs during 2000.

Strategic direction — MCN’s objective is to achieve competitive long-term returns for its shareholders. In 1999, MCN significantly revised its strategic direction to focus on the Midwest-to-Northeast region and emphasize operational efficiencies and growth through the integration of existing businesses.

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. Although MCN intended to begin reporting its operating results based on the new segments in 2000, the new reporting has been delayed to 2001.

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

Midstream & Supply  consists of MCN’s non-regulated wholesale marketing activities. It also develops and manages MCN’s gas producing, gathering and processing facilities within the Midwest-to-Northeast target region. Additionally, it develops and manages storage and transmission facilities that are marketed to gas brokers, utilities and other wholesale customers.

Energy Marketing  consists of MCN’s non-regulated retail marketing activities as well as trading activities. The marketing activities primarily relate to industrial and commercial customers, both inside and outside the Gas Distribution segment’s service areas. The segment also provides

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full-service energy solutions to business customers. Trading activities are utilized to optimize the value of storage assets.

Power  develops and manages independent electric power projects.

Energy Holdings  manages and seeks to maximize the value of existing ventures outside MCN’s target region. It consists primarily of gas gathering and processing investments in major U.S. producing basins.

Unusual items — As discussed in MCN’s 1999 Annual Report on Form 10-K and Note 5 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, and investment and contract losses. The unusual items impacted earnings in the 1999 and 2000 periods as follows:

Diversified Energy

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*	Includes intercompany transactions

Operating and Joint Venture Income

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as losses in the Energy Marketing segment. Additionally, the 2000 periods were affected by increased Pipelines & Processing earnings.

Pipelines & Processing operating and joint venture results, excluding unusual items, increased $.8 million, $.9 million and $4.1 million in the 2000 quarter, nine- and twelve-month periods, respectively. Results for all three 2000 periods reflect increased contributions from the methanol production and gas processing ventures. Improved results from MCN’s 25%-owned methanol production venture are attributable to higher methanol prices, margins and volumes produced. Pipelines & Processing’s average methanol sales prices increased 66% in the 2000 quarter, 43% in the 2000 nine-month period and 37% in the 2000 twelve-month period. Methanol production rose .7 million, 9.6 million and 11.6 million gallons for the 2000 quarter, nine- and twelve-month periods, respectively, primarily due to the shutdown of the methanol plant for scheduled maintenance in March 1999. Gas processed to remove carbon dioxide and natural gas liquids (NGLs) decreased 6.9 billion cubic feet (Bcf) and 5.4 Bcf in the 2000 quarter and nine-month period, respectively, but increased 3.5 Bcf for the 2000 twelve-month period. Although processing volumes fluctuated, earnings from processing ventures increased due to improved processing margins. Additionally, the 2000 periods benefited from an increase in “allowance for funds used during construction” associated with the Vector Pipeline project. Pipelines & Processing holds a 25% interest in Vector Pipeline, an interstate pipeline expected to be operational in December 2000. The Vector Pipeline has capacity to transport up to 1 Bcf of gas per day.

Results for all three 2000 periods were unfavorably affected by lost earnings from the sale of interests in pipeline projects that were located in areas outside MCN’s target region. The 2000 periods also include increased losses from Pipelines & Processing’s interest in an asphalt manufacturing plant as well as reduced contributions from certain joint ventures that had fixed returns. The asphalt facility was designed to produce annually up to 100,000 tons of high-quality asphalt. The plant is experiencing technical difficulties in producing economical quantities of asphalt and, as a result, is encountering operating losses. MCN is aggressively working to resolve the technical issues. Pipelines & Processing recorded earnings in the 1999 periods from certain joint ventures where its allocated income was based on its share of the ventures’ earnings but not less than a predetermined fixed amount. Joint venture income from these investments in the 1999 periods was based on the

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fixed amounts. Under the joint venture agreements, the fixed amounts were lowered or eliminated in 2000.

*	Includes MCN’s share of joint ventures

Electric Power operating and joint venture results, excluding unusual items, decreased $5.7 million, $14.6 million and $14.7 million in the 2000 quarter, nine- and twelve-month periods, respectively. The declines in earnings for all three 2000 periods reflect lost earnings from the sale of interests in a number of power projects as a condition of MCN’s pending merger with DTE (Note 2). MCN sold its 23% interest in the 1,370 megawatt (MW) Midland Cogeneration Venture facility and its 33% interest in the 42 MW Carson Cogeneration facility in the 2000 first quarter. MCN sold its 50% interest in the 123 MW Michigan Power Project, its 50% interest in the 30 MW Ada Cogeneration facility and its 95% interest in the 140 MW Cobisa-Person facility in the 2000 second quarter. Also contributing to the 2000 twelve-month decrease was the sale in 1999 of MCN’s 40% interest in a joint venture that held minority interests in electric distribution companies and power generation facilities in India.

*	Includes MCN’s share of joint ventures

Energy Marketing operating and joint venture results, excluding unusual items, decreased $6.8 million, $46.4 million and $57.5 million in the 2000 quarter, nine- and twelve-month periods, respectively. The comparisons were affected by reduced gas sales margins, significantly higher reserves for potentially uncollectible accounts receivable balances, higher storage and transportation expenses, and fair value and mark-to-market accounting adjustments.

Energy Marketing’s gas sales margins generated from retail customers have declined in all three 2000 periods as a result of a decrease in gas sales and exchange gas deliveries primarily due to warmer weather and the exiting of two marketing joint ventures during 2000. Additionally, margins generated from wholesale customers have declined due to the narrowing or reversal of seasonal and geographical price differentials. As subsequently discussed, seasonal price differentials allow Energy Marketing to profit from its ability to purchase and store gas in the summer months and sell such gas in winter months. Geographical price differentials allow Energy Marketing to purchase lower

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priced gas in the Midcontinent/ Gulf Coast region, and transport and sell such gas at higher prices in the Midwest and Eastern regions. The lower price differentials have reduced the value of Energy Marketing’s storage and transportation assets.

*	Includes MCN’s share of joint ventures

Current natural gas prices are high when compared to historical periods. Higher prices, coupled with lower margins, have resulted in financial pressures for some of Energy Marketing’s customers. As a result of these financial pressures and a customer bankruptcy filing, Energy Marketing accrued $14.5 million in the 2000 second quarter for potentially uncollectible accounts receivable balances.

Energy Marketing’s results for the 2000 periods also include higher expenses for increased natural gas storage and transportation capacity. As discussed in MCN’s 1999 Annual Report on Form 10-K, Energy Marketing has marketing rights for 100% of the storage capacity of the 42 Bcf Washington 10 storage project, which was placed in operation in July 1999. Additionally, Energy Marketing added new firm transportation capacity in 1999 with the completion of the 292-mile Portland Natural Gas Transmission System.

As discussed in Notes 3 and 4 to the Consolidated Financial Statements included herein, Energy Marketing began trading activities upon changing its operating strategy in the 2000 second quarter to optimize the value of its storage assets. In connection with this change in strategy, Energy Marketing also changed to the “Fair Value” method of accounting for gas in inventory and implemented mark-to-market accounting for the related derivative financial and storage capacity contracts. The fair value accounting change and the mark-to-market adjustments had the effect of decreasing Energy Marketing’s operating and joint venture income by $8.0 million and $5.5 million for the 2000 quarter and twelve-month period, respectively, and increasing such income by $4.2 million for the 2000 nine-month period, compared to the same 1999 periods.