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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.

Yes  [X]             No  [   ]

     Number of shares outstanding of each of the registrant’s classes of common stock, as of August 11, 2000:

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

INDEX TO FORM 10-Q

For Quarter Ended June 30, 2000

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RESULTS OF OPERATIONS

Results reflect Energy Marketing losses, asset sales and reduced contributions from MichCon’s gas sales program  — MCN’s earnings for the 2000 second quarter were $22.2 million or $.25 per diluted share compared with losses of $78.7 million or $.94 per share for the 1999 second quarter. Earnings for the 2000 six-month period were $91.7 million or $1.03 per diluted share compared to earnings of $10.2 million or $.12 per diluted share for the same 1999 period. Earnings for the 2000 twelve-month period were $62.5 million or $.72 per diluted share compared to losses of $149.0 million or $1.86 per 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 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 decreased $25.1 million or $.29 per diluted share in the 2000 quarter, $53.5 million or $.67 per diluted share in the 2000 six-month period and $53.9 million or $.71 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 as well as reduced contributions from the Gas Distribution segment.

Inventory accounting change — As described in Note 3 to the Consolidated Financial Statements included herein, in the 2000 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 increased 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. Because of the length of the FTC review, it appears unlikely that the transaction will be completed before the fourth quarter of 2000. MCN recorded legal, accounting, employee benefit and other expenses associated with the merger which had the effect of reducing earnings by $1.6 million for the 2000 quarter, $1.8 million for the 2000 six-month period and $24.5 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 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. Although MCN intended to begin reporting its operating results based on the new segments in 2000, the new reporting may be delayed to 2001.

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.

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Energy Marketing consists of MCN’s non-regulated 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 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 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 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, investment and contract losses, and restructuring charges. The unusual items increased earnings in the 2000 periods, and reduced earnings in the 1999 periods.

Diversified Energy

Results reflect Energy Marketing losses and asset sales — The Diversified Energy group’s earnings were $19.4 million and $22.2 million for the 2000 quarter and six-month period, respectively, compared to losses of $85.0 million and $77.5 million for the same 1999 periods. Diversified Energy had losses of $19.8 million in the 2000 twelve-month period compared to losses of $243.1 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 $22.3 million, $33.3 million and $40.2 million in the 2000 quarter, six- and twelve-month periods, respectively. The results for all three 2000 periods reflect losses of the Energy Marketing segment and reduced earnings attributable to the sale of properties and joint

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venture interests in the Exploration & Production (E&P), Pipelines & Processing and Electric Power segments.

*	Includes intercompany transactions

Operating and Joint Venture Income

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month periods include increased Pipelines & Processing earnings and a decline in earnings from the E&P segment.

Pipelines & Processing operating and joint venture results, excluding unusual items, decreased $.7 million in the 2000 quarter, and increased $.1 million and $3.9 million in the 2000 six- and twelve-month periods, respectively. Results for all three 2000 periods were unfavorably affected by 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 fixed amounts. Under the joint venture agreements, the fixed amounts were lowered or eliminated in 2000.

Pipelines & Processing’s improved operating and joint venture income for the 2000 six- and twelve-month periods reflects contributions from new and expanded gas pipeline, gathering and processing ventures. Gas processed to remove natural gas liquids (NGLs) increased .8 billion cubic feet (Bcf) and 19.7 Bcf in the 2000 six- and twelve-month periods, respectively. In addition to the higher volumes, the increased earnings are attributable to improved processing margins. The 2000 six- and twelve-month periods also reflect improved results from MCN’s 25%-owned methanol production venture resulting from higher methanol prices and margins as well as an increase in methanol volumes produced. Pipelines & Processing’s average methanol sales prices increased 33% in the 2000 six-month period and 25% in the 2000 twelve-month period. Methanol production rose

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8.9 million and 11.3 million gallons for the current six- and twelve-month periods, respectively, primarily due to the shutdown of the methanol plant for scheduled maintenance in March 1999.

*	Includes MCN’s share of joint ventures

Electric Power operating and joint venture results, excluding unusual items, decreased $3.2 million, $8.9 million and $10.9 million in the 2000 quarter, six- and twelve-month periods, respectively. The declines in earnings for all three 2000 periods reflect the sale of interests in a number of power projects which were sold 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. In addition, 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 decreases 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 $33.8 million, $39.8 million and $38.6 million in the 2000 quarter, six- and twelve-month periods, respectively. Results for all three 2000 periods were impacted 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 have declined in all three 2000 periods as a result of 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 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 and

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have continued into the 2000 third quarter. The decline in gas sales margins in the 2000 second quarter and six-month period is also attributable to a 56.7 Bcf and a 10.9 Bcf decrease in gas sales and exchange gas deliveries, respectively. The decline in gas sales and exchange gas deliveries is due in part to the exiting of two marketing joint ventures during 2000.

*	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 quarter for potentially uncollectible accounts receivable balances.

Energy’s 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 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 increasing Energy Marketing’s operating and joint venture income by $1.1 million, $12.2 million and $23.7 million for the 2000 quarter, six- and twelve-month periods, respectively, compared to the same 1999 periods.

The traditional value of storage assets resulted from the ability to buy natural gas and inject it into storage fields during the spring to early fall period when gas demand and prices are usually their lowest. The gas is withdrawn from storage and sold in the late fall-to-winter period when demand and gas prices are traditionally their highest. There has been a change in the natural gas pricing

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environment, including the narrowing or reversal of these summer-to-winter price differentials. In the 2000 quarter, Energy Marketing implemented a strategy of optimizing the value of its storage assets through financial instruments, while continuing to minimize its exposure to commodity price changes. These financial instruments and the related storage capacity contracts are considered energy trading activities under generally accepted accounting principles and are required to be marked-to-market with unrealized gains and losses recorded to earnings.

In conjunction with applying mark-to-market accounting to storage related financial instruments and capacity contracts, Energy Marketing changed its method of accounting for gas in inventory from the “Last In First Out” (LIFO) method to the “Fair Value” method. The Fair Value method allows Energy Marketing to revalue its gas in inventory each accounting period at current market prices, with unrealized gains and losses recorded to earnings. Fair Value accounting better aligns financial reporting for energy trading inventory with the way in which price risk is measured and managed as part of trading activities. Fair Value accounting for inventory, coupled with mark-to-market accounting for storage-related financial instruments and capacity contracts, is expected to remove or minimize earnings mismatches. As the value of gas in inventory increases or decreases, the value of the storage-related financial instruments is expected to move in the opposite direction and in similar amounts, thereby offsetting each other. As previously discussed, the change to Fair Value accounting required the financial statements of prior periods to be restated to apply the new accounting method retroactively.

Exploration & Production operating and joint venture income, excluding unusual items, increased $1.6 million in the 2000 quarter, and decreased $3.7 million and $9.4 million in the 2000 six- and twelve-month periods, respectively. Results for all three 2000 periods were impacted by a significant decline in overall gas production due 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. Gas and oil production decreased by 10.9 Bcf equivalent (Bcfe) in the 2000 quarter, 26.7 Bcfe in the 2000 six-month period and 43.3 Bcfe in the 2000 twelve-month period.

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 higher average sales prices in the 2000 quarter, coupled with significantly lower administrative and general expenses, more than offset the effects of the increased production costs and the drop in gas and oil production, resulting in the improvement in operating and joint venture income for the current quarter. The increased production expenses reflect higher severance taxes as a result of the increase in gas and oil sales prices. Additionally, the production expenses comparison reflects the sale of non-Michigan E&P properties that had lower operating costs. 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

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E&P operating and joint venture income was moderated by hedging with swap and futures agreements, as discussed in the “Risk Management Strategy” section that follows.