Michigan Consolidated Gas 10-Q 2000 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                       OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 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 (State or other jurisdiction of incorporation or organization)	38-0478040 (I.R.S. Employer Identification No.)
500 Griswold Street, Detroit, Michigan (Address of principal executive offices)	48226 (Zip Code)

Registrant’s telephone number, including area code313-965-2430

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  X       No _____

      Number of shares outstanding of each of the registrant’s classes of common stock, as of August 14, 2000:

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

INDEX TO FORM 10-Q

FOR QUARTER ENDED JUNE 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

ii

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" -->

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

RESULTS OF OPERATIONS
Results reflect reduced contributions from gas sales program- MichCon’s earnings were $4.0 million and $70.9 million for the 2000 quarter and six-month period, respectively, resulting in decreases of $4.2 million and $21.2 million from the comparable 1999 periods. Earnings for the 2000 twelve-month period were $85.1 million, a decrease of $19.3 million from the corresponding 1999 period. 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). The 1999 twelve-month period includes the write-down of a gas gathering pipeline (Note 3). Excluding the merger costs and write-down, earnings for the 2000 quarter, six- and twelve-month periods decreased $3.5 million, $20.3 million and $13.0 million, respectively, over the corresponding 1999 periods. The earnings declines for the 2000 quarter and six-month period reflect reduced contributions from the gas sales program. Warmer weather and higher financing costs drove the earnings decline in the 2000 twelve-month period and contributed to the decline in the 2000 six-month period.

Earnings Components (Dollars in Millions)
Comparing 2000 to 1999

	Quarter						6 Months						12 Months
	$			%			$			%			$			%
	Change			Change			Change			Change			Change			Change
Operating Revenues		1.9			1.0			(53.4	)		(7.8	)		(33.0	)		(3.0	)
Cost of Gas		9.7			16.1			(22.1	)		(7.2	)		(23.4	)		(4.8	)
Gross Margin		(7.8	)		(6.2	)		(31.3	)		(8.3	)		(9.6	)		(1.5	)
Operation and Maintenance		(5.5	)		(8.6	)		(9.0	)		(6.9	)		(2.7	)		(1.0	)
Depreciation and Depletion		1.3			5.3			2.6			5.3			5.2			5.4
Property and Other Taxes		.9			7.0			1.4			4.6			(8.7	)		(15.7	)
Merger Costs (Note 2)		1.1			N/A			1.4			N/A			26.9			N/A
Property Write-down (Note 3)		—			—			—			—			(24.8	)		N/A
Other Income and Deductions		.9			7.6			2.7			11.4			14.0			33.4
Income Tax Provision		(2.2	)		(56.1	)		(9.2	)		(19.6	)		(.2	)		(.3	)
Net Income		(4.2	)		(51.2	)		(21.2	)		(23.0	)		(19.3	)		(18.5	)

Gross Margin
Gross margin (operating revenues less cost of gas) decreased $7.8 million, $31.3 million and $9.6 million in the 2000 quarter, six- and twelve-month periods, respectively. Gross margins for the 2000 quarter and six-month period reflect lower margins generated under MichCon’s three-year gas sales program which began in January 1999 (Note 4a). Under the gas sales program, 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-price contracts at an average cost below $2.95 per Mcf for a substantial portion of its expected gas supply requirements in 2000 and approximately 65% of such requirements in 2001. However, gas sales margins in the 2000 first and second quarters were lower than the same 1999 periods as a result of higher fixed-price supplies.

Gross margins for the 2000 twelve-month period include higher margins generated under MichCon’s gas sales program. As a result of the gas sales program beginning in January 1999, the 2000 twelve-

1

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

month period includes a full year’s contribution, whereas the 1999 twelve-month period includes only six months of contributions.

Gross margins for all three 2000 periods were 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.

Gross margins for all three 2000 periods were also impacted by varying weather which was 13.3% colder in the 2000 quarter, and 5.2% and .6% warmer in the 2000 six- and twelve-month periods, respectively, compared to the same 1999 periods. Additionally, the 2000 periods reflect a provision for customer refunds (Note 4b), 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						6 Months						12 Months
		2000			1999			2000			1999			2000			1999
Percentage Colder (Warmer) Than Normal			(8.1)	%		(21.4)	%		(13.0)	%		(7.8)	%		(12.2)	%		(11.6)	%
Increase (Decrease) From Normal in:
	Gas markets (in Bcf)		(1.9	)		(5.3	)		(18.0	)		(10.4	)		(26.4	)		(25.4	)
	Net income (in Millions)	$	(1.7	)	$	(5.1	)	$	(16.7	)	$	(10.3	)	$	(25.0	)	$	(23.7	)

Gas sales and end user transportation revenuesin total increased $3.4 million for the 2000 quarter, and decreased $49.5 million and $29.2 million for the 2000 six- and twelve-month periods, respectively. Revenues for the 2000 quarter reflect an increase in gas sales volumes and end user transportation deliveries due primarily to more normal weather. The 2000 six- 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 13.6 billion cubic feet (Bcf) in the 2000 six-month period and 16.1 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 14.7 Bcf in the 2000 six-month period and 25.6 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 2000 six- and twelve-month periods’ increase in end user transportation volumes attributable to the customer choice program was the impact of warmer weather.

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MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

The gas sales revenues comparison was impacted by a $2.4 million provision for customer refunds recorded in the 2000 quarter, and the end user transportation comparison was affected by the temporary shutdown of an industrial customer’s plant in the 1999 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 $.12 per Mcf (4%) for the 2000 twelve-month period.

	Quarter				6 Months				12 Months
	2000		1999		2000		1999		2000		1999
Gas Markets (in Millions)
Gas Sales	$	134.1	$	133.0	$	504.8	$	568.7	$	843.6	$	902.0
End User Transportation		25.6		23.3		64.4		50.0		118.0		88.8
		159.7		156.3		569.2		618.7		961.6		990.8
Intermediate Transportation		12.7		13.9		27.2		28.6		56.3		58.0
Other		15.0		15.4		33.8		36.3		64.3		66.5
	$	187.4	$	185.6	$	630.2	$	683.6	$	1,082.2	$	1,115.3
Gas Markets (in Bcf)
Gas Sales		24.3		23.6		101.0		114.6		164.6		180.7
End User Transportation		37.3		31.8		88.9		74.2		166.4		140.8
		61.6		55.4		189.9		188.8		331.0		321.5
Intermediate Transportation		111.7		135.0		294.6		262.3		564.1		503.0
		173.3		190.4		484.5		451.1		895.1		824.5

Intermediate transportation revenuesdecreased $1.2 million, $1.4 million and $1.7 million in the 2000 quarter, six- and twelve-month periods, respectively. Although revenues declined slightly, the related deliveries fluctuated significantly, decreasing 23.3 Bcf in the 2000 quarter, and increasing 32.3 Bcf and 61.1 Bcf in the 2000 six- 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 revenuesdecreased $.4 million, $2.5 million and $2.2 million in the 2000 quarter, six- and twelve-month periods, respectively. Revenues in the 2000 six- and twelve-month periods reflect a decline in storage revenues, 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

3

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

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 $9.7 million in the 2000 quarter, and decreased $22.1 million and $23.4 million in the 2000 six- 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 an increase in the price paid for gas purchased of $.10 per Mcf (4%) in the 2000 quarter and $.11 per Mcf (4%) in both the 2000 six- and twelve-month periods.

Other Operating Expenses
Operation and maintenanceexpenses decreased $5.5 million, $9.0 million and $2.7 million in the 2000 quarter, six- and twelve-month periods, respectively. The decreases are attributable to lower employee benefit costs, primarily pension costs. The 2000 six- 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 at former manufactured gas plant sites.

Partially offsetting the improvement in the 2000 twelve-month period were additional computer system support costs associated with MichCon’s new customer information system, higher injuries and damages costs, and higher employee incentive payments.

Depreciation and depletionincreased $1.3 million, $2.6 million and $5.2 million in the 2000 quarter, six- and twelve-month periods, respectively, reflecting depreciation on higher plant balances.

Property and other taxesincreased $.9 million and $1.4 million in the 2000 quarter and six-month period, respectively, and decreased $8.7 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 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 6a).

Merger costsof $1.1 million, $1.4 million and $26.9 million in the 2000 quarter, six- 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).

4

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

Property write-downof $24.8 million in the 1999 twelve-month period reflects the impairment of certain gas gathering properties in northern Michigan (Note 3).

Other Income and Deductions
Other income and deductions increased $.9 million, $2.7 million and $14.0 million in the 2000 quarter, six- and twelve-month periods, respectively. All three 2000 periods reflect 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 interest capitalized relating to construction activities. 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. Other income and deductions in the 1999 twelve-month period include a change in minority interest reflecting the joint venture partners’ share of the write-down of the gas gathering properties (Note 3).

Income Taxes
Income taxes for all three 2000 periods were impacted by a decrease in pre-tax earnings. Income tax comparisons were also affected by the favorable resolution of prior years’ tax issues.

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 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 a result of fewer natural gas marketers participating due to higher gas prices.

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 cost below $2.95 per Mcf for a substantial portion of its expected supply requirements in 2000 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 through open-market gas purchases, supplemented with gas from storage. 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

5

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

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. Although MichCon supports customer choice initiatives, management 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. MichCon is unable to adjust its sales prices to levels that are responsive to changes in the marketplace. Given the current environment of high gas prices, MichCon could incur losses on incremental volumes associated with unexpected demand, such as volumes resulting from colder weather or additional gas sales customers. MichCon is exploring its options to minimize its exposure to price risk, including supplementing its fixed-price supplies with heavier reliance on withdrawals from storage and seeking regulatory or legislative reform.

CAPITAL RESOURCES AND LIQUIDITY

		6 Months
Cash and Cash Equivalents (in Millions)		2000			1999
Cash Flow Provided From (Used For):
	Operating activities	$	275.0		$	222.6
	Financing activities		(235.1	)		(159.7	)
	Investing activities		(46.6	)		(58.7	)
Net Increase (Decrease) in Cash and Cash Equivalents		$	(6.7	)	$	4.2

Operating Activities
Cash flow provided from operating activities increased $52.4 million during the 2000 six-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).

Financing Activities
Cash flow used for financing activities increased $75.4 million during the 2000 six-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. This increase was partially offset by a reduction 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

6

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)

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 six months of 2000, MichCon repaid $194.1 million of commercial paper, leaving borrowings of $41.8 million outstanding under this program at June 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 2000, MichCon paid a $25 million dividend to MCN.

Investing Activities
MichCon’s cash used for investing activities decreased $12.1 million in the 2000 six-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 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 six-month period, there were no 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.

7

MANAGEMENT’S DISCUSSION AND ANALYSIS (CONCLUDED)

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 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.

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CONSOLIDATED STATEMENT OF INCOME (Unaudited)

			Three Months Ended						Six Months Ended
			June 30						June 30
			2000			1999			2000			1999
(in Thousands)
Operating Revenues			$	187,488		$	185,555		$	630,235		$	683,645
Operating Expenses
	Cost of gas			70,108			60,410			286,628			308,761
	Operation and maintenance			58,412			63,942			122,475			131,488
	Depreciation and depletion			26,063			24,758			52,007			49,366
	Property and other taxes			13,591			12,700			32,581			31,162
	Merger costs (Note 2)			1,079			—			1,426			—
	Property write-down (Note 3)			—			—			—			—
		Total operating expenses		169,253			161,810			495,117			520,777
Operating Income				18,235			23,745			135,118			162,868
Other Income and (Deductions)
	Interest income			846			946			1,572			1,945
	Interest on long-term debt			(12,111	)		(11,525	)		(24,384	)		(22,491	)
	Other interest expense			(1,860	)		(1,181	)		(4,869	)		(3,836	)
	Minority interest (Note 3)			(127	)		(266	)		(266	)		(523	)
	Equity in earnings of joint ventures			599			572			1,186			1,013
	Other			140			(177	)		460			287
		Total other income and (deductions)		(12,513	)		(11,631	)		(26,301	)		(23,605	)
Income Before Income Taxes				5,722			12,114			108,817			139,263
Income Tax Provision				1,735			3,949			37,890			47,125
Net Income			$	3,987		$	8,165		$	70,927		$	92,138

[Additional columns below]

[Continued from above table, first column(s) repeated]

			Twelve Months Ended
			2000			1999
(in Thousands)
Operating Revenues			$	1,082,329		$	1,115,289
Operating Expenses
	Cost of gas			461,792			485,189
	Operation and maintenance			257,091			259,795
	Depreciation and depletion			101,520			96,312
	Property and other taxes			46,649			55,345
	Merger costs (Note 2)			26,855			—
	Property write-down (Note 3)			—			24,800
		Total operating expenses		893,907			921,441
Operating Income				188,422			193,848
Other Income and (Deductions)
	Interest income			2,231			5,699
	Interest on long-term debt			(49,158	)		(44,656	)
	Other interest expense			(9,659	)		(10,801	)
	Minority interest (Note 3)			(763	)		6,347
	Equity in earnings of joint ventures			2,149			2,009
	Other			(843	)		(601	)
		Total other income and (deductions)		(56,043	)		(42,003	)
Income Before Income Taxes				132,379			151,845
Income Tax Provision				47,254			47,409
Net Income			$	85,125		$	104,436

CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)

		Three Months Ended				Six Months Ended
		June 30				June 30
(in Thousands)		2000		1999		2000		1999
Balance — Beginning of Period		$	561,743	$	472,440	$	494,803	$	406,144
	Add — Net income		3,987		8,165		70,927		92,138
			565,730		480,605		565,730		498,282
	Deduct — Common stock dividends declared		—		—		—		17,677
Balance — End of Period		$	565,730	$	480,605	$	565,730	$	480,605

[Additional columns below]

[Continued from above table, first column(s) repeated]

		Twelve Months Ended
		June 30
(in Thousands)		2000		1999
Balance — Beginning of Period		$	480,605	$	440,003
	Add — Net income		85,125		104,436
			565,730		544,439
	Deduct — Common stock dividends declared		—		63,834
Balance — End of Period		$	565,730	$	480,605

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

9

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

			June 30				December 31
			2000		1999		1999
(in Thousands)
ASSETS
	Current Assets
		Cash and cash equivalents	$	3,039	$	10,823	$	9,705
		Accounts receivable, less allowance for doubtful accounts of $19,261, $13,492 and $17,777, respectively		141,455		142,017		147,412
		Accrued unbilled revenues		18,244		20,302		98,866
		Gas in inventory (Note 5)		52,796		43,892		74,150
		Property taxes assessed applicable to future periods		38,460		48,473		60,589
		Other		36,422		34,512		31,594
				290,416		300,019		422,316
	Deferred Charges and Other Assets
		Investment in and advances to joint ventures		19,777		19,853		19,115
		Long-term investments		68,162		66,202		67,210
		Deferred environmental costs		26,169		28,404		28,639
		Prepaid benefit costs		184,835		134,590		156,290
		Other		63,678		66,758		64,546
				362,621		315,807		335,800
	Property, Plant and Equipment, at cost			3,022,964		2,942,856		2,988,318
		Less — Accumulated depreciation and depletion		1,509,079		1,445,967		1,463,706
				1,513,885		1,496,889		1,524,612
			$	2,166,922	$	2,112,715	$	2,282,728
LIABILITIES AND SHAREHOLDER’S EQUITY
	Current Liabilities
		Accounts payable	$	92,391	$	89,662	$	93,549
		Notes payable		42,869		28,319		237,785
		Current portion of long-term debt and capital lease obligations		26,077		46,135		27,984
		Gas inventory equalization (Note 5)		43,012		22,774		—
		Federal income, property and other taxes payable		72,464		86,097		71,415
		Exchange gas payable		577		20,845		3,598
		Customer deposits		15,604		15,830		17,698
		Other		48,414		43,125		64,741
				341,408		352,787		516,770
	Deferred Credits and Other Liabilities
		Deferred income taxes		125,965		103,198		105,351
		Unamortized investment tax credit		26,822		28,823		27,778
		Tax benefits amortizable to customers		134,996		128,869		136,236
		Accrued environmental costs		24,463		31,704		25,068
		Minority interest		1,035		8,363		8,716
		Other		63,210		51,663		46,398
				376,491		352,620		349,547
	Long-Term Debt, including capital lease obligations			642,594		686,004		680,909
	Commitments and Contingencies (Note 6)
	Common Shareholder’s Equity
		Common stock		10,300		10,300		10,300
		Additional paid-in capital		230,399		230,399		230,399
		Retained earnings		565,730		480,605		494,803
				806,429		721,304		735,502
			$	2,166,922	$	2,112,715	$	2,282,728

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

10

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

					Six Months Ended
					June 30
(in Thousands)					2000			1999
Cash Flow From Operating Activities
	Net income				$	70,927		$	92,138
	Adjustments to reconcile net income to net cash flow provided from operating activities
				Depreciation and depletion Per statement of income		52,007			49,366
				Charged to other accounts		4,822			4,390
				Deferred income taxes — current		(8,236	)		(11,003	)
				Deferred income taxes and investment tax credit, net		18,418			12,419
				Other		(8,769	)		(1,388	)
				Changes in assets and liabilities, exclusive of changes shown separately		145,851			76,700
				Net cash provided from operating activities		275,020			222,622
Cash Flow From Financing Activities
	Issuance of long-term debt (Note 6a)					—			106,535
	Notes payable, net					(194,916	)		(192,850	)
	Retirement of long-term debt					(40,156	)		(55,918	)
	Dividends paid					—			(17,500	)
				Net cash used for financing activities		(235,072	)		(159,733	)
Cash Flow From Investing Activities
	Capital expenditures					(49,446	)		(58,097	)
	Other					2,832			(572	)
				Net cash used for investing activities		(46,614	)		(58,669	)
Net Increase (Decrease) in Cash and Cash Equivalents						(6,666	)		4,220
Cash and Cash Equivalents, January 1						9,705			6,603
Cash and Cash Equivalents, June 30					$	3,039		$	10,823
Changes in Assets and Liabilities, Exclusive of Changes
	Shown Separately
		Accounts receivable, net			$	1,029		$	(609	)
		Gas inventory equalization				43,012			22,774
		Accrued unbilled revenues				80,622			66,465
		Accrued/deferred gas cost recovery revenues, net				3,229			(15,153	)
		Gas in inventory				21,354			13,077
		Property taxes assessed applicable to future periods				22,129			22,692
		Prepaid benefit costs, net				(28,545	)		(20,711	)
		Accounts payable				(1,158	)		(9,229	)
		Federal income, property and other taxes payable				1,049			25,038
		Exchange gas payable				(3,021	)		(4,492	)
		Other current assets and liabilities, net				(13,394	)		(18,647	)
		Other deferred assets and liabilities, net				19,545			(4,505	)
					$	145,851		$	76,700
Supplemental Disclosures
	Cash paid for:
			Interest, net of amounts capitalized		$	30,636		$	30,314
			Federal income taxes		$	1,490		$	13,224

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

11

Notes to the Consolidated Financial Statements

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. Because of the length of the FTC review, it appears unlikely that the transaction will be completed before the fourth quarter of 2000.

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 $1,079,000 pre-tax ($701,000 net of taxes), $1,426,000 pre-tax ($927,000 net of taxes) and $26,855,000 pre-tax ($17,456,000 net of taxes) for the three-, six- and twelve-month periods ended June 30, 2000, respectively.

3. PROPERTY WRITE-DOWN

As discussed in MichCon’s 1999 Annual Report on Form 10-K, MichCon recorded a $24,800,000 pre-tax ($11,200,000 net of taxes and minority interest) write-down of certain gas gathering properties in the third quarter of 1998. An analysis revealed that projected cash flows from the gathering system were not sufficient to cover the system’s carrying value. Therefore, an impairment loss was recorded representing the amount by which the carrying value of the system exceeded its estimated fair value.

4. 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).

12

Notes to the Consolidated Financial Statements (Continued)

As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at an average cost below $2.95 per Mcf for a substantial portion of its expected supply requirements in 2000 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.

On August 4, 2000, the MPSC issued an order establishing a proceeding to obtain information regarding the experience gained from the customer choice programs of Michigan utilities. The information will be used by the MPSC to determine the future regulatory environment following the conclusion of the current regulatory reform programs. The MPSC is expected to issue an order on its findings during October 2000.

b. Gas Cost Recovery Proceedings
The Gas Cost Recovery (GCR) process was suspended with the implementation of MichCon’s Regulatory Reform Plan in January 1999. In February 1999, MichCon filed its final 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 July 2000, MichCon began refunding the additional overrecovery to customers as a reduction in gas sales rates.

c. Other Rate Matters
As discussed in MichCon’s Annual Report on Form 10-K, several shippers on MichCon’s northern Michigan gathering system filed a complaint with the MPSC requesting that the commission issue an order reducing the rate charged for Antrim gas transportation services from $.09 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 approximately $4,500,000. Management will vigorously defend its proposed rate of $.088 per Mcf, however, it is unable to predict the eventual outcome of this complaint.

13

Notes to the Consolidated Financial Statements (concluded)

5. GAS IN INVENTORY

Inventory gas is priced on a last-in, first-out (LIFO) basis. In anticipation that interim inventory reductions will be replaced prior to year end, the cost of gas for net withdrawals from inventory is recorded at the estimated average purchase rate for the calendar year. The excess of these charges over the LIFO cost is credited to the gas inventory equalization account. During interim periods when there are net injections to inventory, the equalization account is reversed.

6. 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 that 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 utilities’ personal property. The new tables are 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 on June 21 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. 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.

14

Notes to the Consolidated Financial Statements (concluded)

7. 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.

15

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 June 30, 2000 and 1999, the related condensed consolidated statements of income and retained earnings for the three, six and twelve-month periods ended June 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the six-month periods ended June 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
August 14, 2000

16

EXHIBITS AND REPORTS ON FORM 8-K" -->

OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

Exhibit
Number	Description
12-1	Computation of Ratio of Earnings to Fixed Charges
15-1	Letter re Unaudited Interim Financial Information
27-1	Financial Data Schedule

      (b) Reports on Form 8-K

              None.

17

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: August 14, 2000 By: /s/ ROBERT KASLIK
Robert Kaslik
Controller

18

Exhibit Index

Exhibit No.	Description
12-1	Computation of Ratio of Earnings to Fixed Charges
15-1	Letter re Unaudited Interim Financial Information
27-1	Financial Data Schedule