<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              -------------------
 
                                   FORM 10-K
 
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998       COMMISSION FILE NUMBER 1-10070
 
                             MCN ENERGY GROUP INC.
             (Exact name of registrant as specified in its charter)
 

                                             
                                              
                MICHIGAN                                       38-2820658
     (State or other jurisdiction of                        (I.R.S. Employer
     incorporation or organization)                        Identification No.)
 
 500 GRISWOLD STREET, DETROIT, MICHIGAN                          48226
(Address of principal executive offices)                      (Zip Code)

 
                                  313-256-5500
              (Registrant's telephone number, including area code)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                              NAME OF EACH EXCHANGE
                                                               ON WHICH REGISTERED
                    TITLE OF EACH CLASS                       ---------------------
<S>                                                          <C>
Common Stock, $.01 Par Value Per Share                       New York Stock Exchange
9 3/8% Cumulative Preferred Securities, Series A*            New York Stock Exchange
8 5/8% Trust Originated Preferred Securities**               New York Stock Exchange
8 3/4% Preferred Redeemable Increased Dividend Equity
  Securities                                                 New York Stock Exchange
8% FELINE PRIDES                                             New York Stock Exchange
8 5/8% Trust Preferred Securities***                         New York Stock Exchange
</TABLE>
 
-------------------
*   Issued by MCN Michigan Limited Partnership. The payments of dividends and
    payments on liquidation or redemption are guaranteed by MCN Energy Group
    Inc.
 
**  Issued by MCN Financing I. The payments of dividends and payments on
    liquidation or redemption are guaranteed by MCN Energy Group Inc.
 
*** Issued by MCN Financing II. The payments of dividends and payments on
    liquidation or redemption are guaranteed by MCN Energy Group Inc.
 

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:           None
 
     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  ___
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.
 
     The aggregate market value of MCN Energy Group Inc. Common Stock, $.01 par
value per share, held by non-affiliates as of February 26, 1999 was $1.421
billion based on 79,790,381 outstanding shares and the closing price on that day
(New York Stock Exchange Composite Transactions).
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
     Portions of MCN's 1998 Annual Report to Shareholders are incorporated by
reference in Part II, Items 5, 6, 7, 7A and 8 and portions of MCN's February
1999 definitive Proxy Statement are incorporated by reference in Part III.
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<PAGE>   2
 
                                    GLOSSARY
 
Antrim Gas............................     Natural gas produced from shallow
                                           wells in the Devonian (Antrim) shale
                                           formations.
 
Capital Investments...................     MCN's consolidated capital
                                           expenditures plus acquisitions and
                                           MCN's share of capital expenditures
                                           of joint ventures, less the minority
                                           partners share of consolidated
                                           capital expenditures.
 
Citizens..............................     Citizens Gas Fuel Company; a wholly
                                           owned natural gas distribution
                                           subsidiary of MCN in Adrian,
                                           Michigan.
 
Coalbed Methane.......................     Natural gas formed during the
                                           transformation of plant material into
                                           coal. Drilling a well into the coal
                                           and dewatering the coal seam will
                                           cause a reduction in pressure,
                                           releasing natural gas.
 
Cogeneration..........................     The production of electricity and
                                           another form of energy, usually
                                           steam, from a single fuel source such
                                           as natural gas.
 
Diversified Energy Group..............     MCN's pipeline and processing,
                                           electric power, and energy marketing
                                           businesses. MCN's exploration and
                                           production business has been
                                           classified as discontinued
                                           operations.
 
End User Transportation...............     A gas delivery service provided to
                                           large-volume commercial and
                                           industrial customers who purchase
                                           natural gas directly from producers
                                           or brokerage companies.
 
FERC..................................     Federal Energy Regulatory Commission;
                                           a federal agency that determines the
                                           interstate rates and regulations of
                                           interstate pipelines.
 
Gas Gathering.........................     The process of collecting natural gas
                                           from gas wells and then transporting
                                           the gas through pipelines to
                                           processing plants or major pipelines.
 
Gas Processing........................     For MCN, the removal of carbon
                                           dioxide and petroleum liquids from
                                           natural gas so it meets market
                                           quality standards.
 
Gas Storage...........................     The process of injecting, storing and
                                           withdrawing natural gas from a
                                           depleted underground natural gas
                                           field or salt cavern.
 
GCR...................................     Gas Cost Recovery; a process, in
                                           effect through 1998, by which
                                           MichCon, through annual gas cost
                                           proceedings before the Michigan
                                           Public Service Commission, was
                                           allowed to recover its reasonable and
                                           prudent cost of gas sold.
 
Intermediate Transportation...........     A gas delivery service provided to
                                           producers, brokers and other gas
                                           companies that own the natural gas,
                                           but are not the ultimate consumers.
 
                                        i
<PAGE>   3
                                    GLOSSARY
                                  (concluded)
 
Methanol..............................     A form of alcohol manufactured from
                                           various feedstocks, including natural
                                           gas, and used as a solvent,
                                           antifreeze and high octane fuel.
 
MCN...................................     MCN Energy Group Inc. and its
                                           subsidiaries.
 
MCNIC.................................     MCN Investment Corporation, a wholly
                                           owned subsidiary of MCN and the
                                           holding company of MCN's Diversified
                                           Energy Group subsidiaries.
 
MichCon...............................     Michigan Consolidated Gas Company; an
                                           indirect wholly owned natural gas
                                           distribution and intrastate
                                           transmission subsidiary of MCN.
 
MichCon Pipeline......................     MichCon Pipeline Co., a wholly owned
                                           subsidiary of MichCon that engages in
                                           pipeline projects through its
                                           subsidiaries.
 
MPSC..................................     Michigan Public Service Commission;
                                           the regulator of intrastate aspects
                                           of the natural gas industry within
                                           the State of Michigan.
 
Normal Weather........................     The average annual degree days in
                                           MCN's Gas Distribution service area
                                           during a recent 30-year period.
 
Spot Market...........................     Buying and selling natural gas on a
                                           short-term basis, typically month to
                                           month.
 
Units of Measurement
 
Bcf...................................     Billion cubic feet of gas.
 
MBbl..................................     Thousand barrels, which is a unit of
                                           measurement of oil and other
                                           petroleum liquids.
 
Mcf...................................     Thousand cubic feet of gas.
 
MMcf..................................     Million cubic feet of gas.
 
MW....................................     Megawatts, or million watts of
                                           electricity.
 
Tcf...................................     Trillion cubic feet of gas.
 
/d....................................     Added to various units of measurement
                                           to denote units per day.
 
/e....................................     Added to various units of measurement
                                           to facilitate comparison of the Btu
                                           content between natural gas, crude
                                           oil and condensate. It assumes a
                                           ratio of 6 Mcf of natural gas per
                                           barrel of oil or condensate.
 
                                       ii
<PAGE>   4
 
                               TABLE OF CONTENTS
 
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<CAPTION>
                                                                             PAGE
 CONTENTS                                                                   NUMBER
 --------                                                                   ------
<S>         <C>                                                             <C>
Part I
  Item 1.   Business....................................................       1
  Item 2.   Properties..................................................      18
  Item 3.   Legal Proceedings...........................................      19
  Item 4.   Submission of Matters to a Vote of Security Holders.........      19
            Executive Officers of the Registrant........................      20
Part II
  Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.........................................      21
  Item 6.   Selected Financial Data.....................................      21
  Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................      21
  Item 7A.  Quantitative and Qualitative Disclosures About Market
            Risk........................................................      21
  Item 8.   Financial Statements and Supplementary Data.................      21
  Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................      21
Part III
  Item 10.  Directors and Executive Officers of the Registrant..........      22
  Item 11.  Executive Compensation......................................      22
  Item 12.  Security Ownership of Certain Beneficial Owners and
            Management..................................................      22
  Item 13.  Certain Relationships and Related Transactions..............      22
Part IV
  Item 14.  Exhibits, Financial Statement Schedule, and Reports on Form
            8-K.........................................................      22
Signatures..............................................................      28
</TABLE>
 
                                       iii
<PAGE>   5
 
                           FORWARD-LOOKING STATEMENTS
 
     This Form 10-K (including certain other documents incorporated by reference
into this Form 10-K) includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve certain risks and uncertainties that may cause actual future results to
differ materially from those contemplated, projected, estimated or budgeted in
such forward-looking statements. Factors that may impact forward-looking
statements include, but are not limited to, the following: (i) the effects of
weather and other natural phenomena; (ii) increased competition from other
energy suppliers as well as alternative forms of energy; (iii) the capital
intensive nature of MCN's business; (iv) economic climate and growth in the
geographic areas in which MCN does business; (v) the uncertainty of gas and oil
reserve estimates; (vi) the timing and extent of changes in commodity prices for
natural gas, natural gas liquids, methanol, electricity and crude oil; (vii) the
nature, availability and projected profitability of potential projects and other
investments available to MCN; (viii) conditions of capital markets and equity
markets; (ix) changes in the economic and political climate and currencies of
foreign countries where MCN has invested or may invest in the future; (x) the
timing and results of major transactions, such as the sale of E&P properties;
(xi) the timing, nature and impact of Year 2000 activities; and (xii) the
effects of changes in governmental policies and regulatory actions, including
income taxes, environmental compliance and authorized rates.
 
                                       iv
<PAGE>   6
 
                                     PART I
 
ITEM 1. BUSINESS
 
     MCN, or the Company, is a diversified energy holding company with markets
and investments throughout North America and in India and Nepal. The operating
revenues, operating income, and identifiable assets of MCN's business segments
are included in the financial statements, incorporated by reference in Item 8,
"Financial Statements and Supplementary Data," on page 21. On December 31, 1998,
MCN and its subsidiaries had 2,986 employees.
 
MCN operates through two major business groups, Diversified Energy and Gas
Distribution.
 
- Diversified Energy, operating through MCNIC, is involved in the following
  segments: Pipelines & Processing with gathering, processing and transmission
  facilities near areas of rapid reserve development and growing consumer
  markets; Electric Power with investments in electric generation facilities in
  operation and under construction with a combined 2,986 MW of gross capacity
  and investments in electric distribution facilities; Energy Marketing with
  total gas sales and exchange gas delivery markets of 465.7 Bcf for 1998 with
  rights to 67 Bcf of storage capacity, of which 42 Bcf is currently under
  development. Diversified Energy also has investments in Exploration &
  Production (E&P) properties with 1.2 Tcf/e of proved gas and oil reserves at
  December 31, 1998. MCN expects to sell its E&P properties in 1999, and
  accordingly, has classified them as discontinued operations. See discussion on
  page 16.
 
- Gas Distribution consists principally of MichCon, a natural gas distribution
  and transmission company serving 1.2 million customers in more than 500
  communities throughout Michigan. MichCon is subject to the accounting
  requirements and rate regulation of the MPSC with respect to the distribution
  and intrastate transportation of natural gas. Slightly less than half of
  MichCon's labor force is covered by five collective bargaining agreements. In
  June 1998, MichCon successfully negotiated and signed three 3-year collective
  bargaining agreements. The remaining two agreements will expire December 2000.
 
RESULTS OF OPERATIONS
 
     MCN experienced a net loss of $279.0 million in 1998. As subsequently
discussed, 1998 results reflect losses from its discontinued E&P segment that
totaled $272.8 million as well as several unusual charges which totaled $114.6
million. MCN had a loss from continuing operations of $6.2 million that includes
the effect of the unusual charges. Excluding these charges, MCN had 1998
earnings of $108.4 million, a decrease of $3.8 million from 1997. The earnings
comparisons reflect the effects of low energy prices and abnormally warm
weather, partially offset by reduced operating costs in the Gas Distribution
segment. The charges for each business segment will be discussed further within
the related business segment information to follow.
 
                                        1
<PAGE>   7
 
                               DIVERSIFIED ENERGY
 
     The Diversified Energy group reported a loss of $77.9 million in 1998 due
to certain property write-downs and restructuring charges, which reduced 1998
earnings by $97.9 million. Excluding these unusual items, Diversified Energy's
earnings for 1998 declined by $11.1 million from 1997. These results reflect
reduced contributions from the Pipelines & Processing and the Energy Marketing
segments due to low energy prices. Additionally, the 1998 decrease is due to
higher financing costs as a result of additional capital needed to fund
investments. Partially offsetting the decreases for 1998 was increased operating
and joint venture income posted by the Electric Power segment. Earnings from
continuing operations for 1997 increased by $18.5 million from 1996, reflecting
increased operating and joint venture income from all of MCN's Diversified
Energy business segments. Higher financing costs in 1997 partially offset this
growth.
 
Diversified Energy -- Operating Statistics
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                               1998      1997      1996
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Pipelines & Processing*
  Methanol Produced (thousand gallons)......................   60,446    60,810    10,545
  Transportation (MMcf).....................................  175,466   115,975    86,391
  Gas Processed (MMcf):
     CO(2) Treatment........................................   48,868    42,761    44,223
     NGL Removal............................................   45,082    21,764     7,446
Electric Power*
  Electricity sales (thousands of MW hours).................    3,805     1,843       709
                                                              =======   =======   =======
Energy Marketing* (MMcf)
  Gas Sales.................................................  454,681   343,719   218,952
  Exchange Gas Deliveries...................................   11,061    15,109    22,586
                                                              -------   -------   -------
                                                              465,742   358,828   241,538
                                                              =======   =======   =======
</TABLE>
 
* Includes MCN's share of joint ventures
 
PIPELINES & PROCESSING
 
     Results for this business segment in 1998 were negatively affected by a
$133.8 million pre-tax ($87.0 million net of taxes) write-off of the coal fines
briquetting project and a $3.9 million pre-tax ($2.5 million net of taxes)
impairment related to a small Michigan pipeline. Excluding these charges,
operating and joint venture income was $21.4 million compared with $29.1 million
in 1997. The decrease in income reflects a $13 million reduction in revenues
resulting from an approximate 40% drop in methanol prices compared with 1997, as
well as $9.1 million of operating losses incurred by the coal fines project.
Including Pipelines & Processing's share of joint venture operations, gas
transportation volumes increased 51% to 175.5 Bcf in 1998 from 116.0 Bcf in
1997. Gas processed to remove carbon dioxide (CO(2)) increased 6.1 Bcf or 14% in
1998 and decreased slightly in 1997. Gas processed to remove natural gas liquids
(NGL) more than doubled, increasing 23.3 Bcf and 14.4 Bcf in 1998 and 1997,
respectively, due to the acquisition of processing facilities since 1996.
 
     In June 1998, MCN placed into operation six plants designed to recover
particles of coal that are a waste by-product of coal mining and then process
those particles to create coal briquettes for sale. The economic viability of
the venture is dependent on the briquettes qualifying for synthetic fuel tax
credits and MCN's ability to utilize or sell such credits. Although the plants
were placed in service by June 30, 1998, the date specified to qualify for the
tax credits, operating delays at the plants in the third quarter have
significantly increased the possibility that the Internal Revenue Service will
challenge the project's eligibility for tax credits. In addition, there is
uncertainty as to whether MCN can utilize or sell the credits. Without the
credits, the project is expected to generate negative cash flows. These factors
led to MCN's decision to record an
 
                                        2
<PAGE>   8
 
impairment loss of $133.8 million pre-tax ($87.0 million net of taxes), equal to
the carrying value of the plants and reflecting the likely inability to recover
such costs. The coal fines plants have been idled and are not expected to have
any significant impact on the company going forward. MCN is currently exploring
the sale of its interest in the coal fines project. Management does not expect
proceeds from the sale to be in excess of selling expenses and remediation
obligations.
 
     MCN also recorded an impairment loss of $3.9 million pre-tax ($2.5 million
net of taxes) relating to an out-of-service pipeline in Michigan that was
acquired for future development, along with related easements and rights-of-way.
MCN reviewed the business alternatives for these assets, and has determined that
their development is unlikely. Accordingly, MCN has recorded an impairment loss
equal to the carrying value of these assets.
 
     Pipelines & Processing intends to focus on investment opportunities in
North American producing regions that supply natural gas to meet growing demand.
This is a dynamic business, since gathering, transmission and processing
facilities continuously need to be built and expanded as new gas fields are
developed to replace and augment depleting reserves. Furthermore, much of the
growth in demand is expected within the Mid-Atlantic and New England regions.
These regions lack pipeline capacity and low-cost storage necessary to deliver
gas volumes to compete effectively with other fuels, primarily fuel oil, that
dominate these markets. The Portland Natural Gas Transmission System (PNGTS),
Millennium Pipeline (Millennium) and Vector Pipeline (Vector) interstate
pipeline projects are intended to fill a large portion of that need, and are
complemented by MCN's rights to significant storage capacity.
 
     Pipelines & Processing anticipates investing $1.1 billion to $1.3 billion
during the next five years, growing this business segment to more than $1.5
billion of net capital investment by 2003. Approximately $150 million of capital
investments are planned for 1999, which compares with $320 million invested in
1998. Pipelines & Processing plans to grow its gathering and processing
portfolio primarily through acquisitions and expansions of existing supply-area
ventures, and to build a transmission portfolio mainly through the construction
of new pipelines into growing markets.
 
     During 1998, the Dauphin Island Gathering Partners (DIGP) venture proceeded
with the second phase of its expansion, with completion expected in the 1999
first quarter. The project will raise this natural gas system's throughput
capacity to 1.1 Bcf/d, up from pre-expansion capacity of 680 MMcf/d. DIGP also
signed definitive agreements with producers in the Gulf of Mexico to commit
significant new deep-water natural gas supplies to the system. MCN owns 35% of
DIGP.
 
     Pipelines & Processing's other offshore gathering system, the one-third
owned 40-mile Blue Dolphin Pipeline, had an average throughput of 75 MMcfe/d
during 1998, compared with 92 MMcfe/d in 1997. Acquisition opportunities in the
area indicate potential to increase this system's throughput during 1999 and
beyond.
 
     Elsewhere in the Midcontinent/Gulf Coast region, Pipelines & Processing has
two natural gas gathering ventures with American Central Gas Companies, Inc.
Pipelines & Processing holds a 40% interest in each. In July 1997 the Foss Lake
Gathering System venture was created to own and operate a 150-mile low-pressure
system in the Anadarko Basin of western Oklahoma. This system currently gathers
approximately 47 MMcf/d and has a design capacity of 70 MMcf/d. In December 1997
the second venture was formed to own and operate the East Texas Gathering
system. This system primarily consists of 115 miles of gas gathering lines with
throughput capacity of about 200 MMcf/d. This system currently is gathering 102
MMcf/d with additional commitments of 70 MMcf/d to be added during 1999. It is
located in an area of significant drilling activity, providing opportunity for
rapid expansion.
 
     The Cardinal States Pipeline, which gathers and transports coalbed methane
in Appalachia, constructed a second 30-mile pipeline in 1998, doubling
throughput capacity to 220 MMcf/d to handle increasing production in the region.
MCN owns 50% of this system.
 
     Pipelines & Processing is a 50% partner in Copano Field Services L.P. In
mid-1998, Copano built a 15-mile lateral on its upper Gulf Coast system to
connect new gas production. Throughput capacity is
 
                                        3
<PAGE>   9
 
290 MMcf/d, while gas processing capacity is 25 MMcf/d. The system now has 695
miles of pipe. Efforts are underway to acquire or build new pipeline sections to
link the various non-contiguous Copano systems.
 
     Pipelines & Processing has a 33% interest in the Jonah Gas Gathering System
in Wyoming. This system has a capacity of 175 MMcf/d and had throughput of 18.2
Bcf during 1998, up from 12.6 Bcf in 1997.
 
     In September 1997, Pipelines & Processing created a partnership with Petro
Source Corporation to develop a CO(2) pipeline, processing plant and marketing
projects in support of enhanced oil recovery projects. As its first initiative,
the partnership in 1998 constructed an 82-mile, 100 MMcf/d CO(2) pipeline that
connects four gas treating plants to a distribution system servicing enhanced
oil recovery projects in the Permian Basin of west Texas. Pipelines & Processing
has a 33% interest in this Val Verde CO(2) pipeline, which was placed in service
during the fourth quarter of 1998. This pipeline currently is transporting 32
MMcf/d.
 
     At the DIGP system's onshore terminus in Alabama, the Mobile Bay Processing
Partnership (MBPP) joint venture has constructed a 600 MMcf/d gas processing
plant. Pipelines & Processing owns 43% of this venture, which is expected to be
in service in the first quarter of 1999. Related to but separate from this
processing plant, Pipelines & Processing holds a 7% interest in a newly
constructed, 210-mile, 80,000 barrel per day liquids pipeline that will deliver
natural gas liquids extracted by MBPP joint venture and other plants to southern
Louisiana markets.
 
     In 1996, Pipelines & Processing acquired a 25% interest in Lyondell
Methanol Company, L.P., a limited partnership that owns a 248 million
gallon-per-year methanol production plant in Texas. Pipelines & Processing
supplies a portion of the natural gas for the methanol plant. Pipelines &
Processing's share of methanol production in 1998 and 1997 was 60.4 and 60.8
million gallons, respectively, compared with initial production of 10.5 million
gallons in 1996. Depressed methanol prices in 1998 resulted in a $13 million
decrease in revenues.
 
     In Michigan, gas processing capacity was expanded to 195 MMcf/d, primarily
due to the acquisition of a new plant. Pipelines & Processing now has an average
interest of 89% in seven such plants that extract CO(2) from Antrim gas
production.
 
     The 292-mile PNGTS project started construction in June 1998 and is
expected to be in service during the first quarter of 1999. MCN owns a 21.4%
interest in this $423 million venture, which has the capability to transport up
to 360 MMcf/d from the Canadian border to the northeastern United States.
 
     Vector has become a front-runner among competing efforts to provide a new
strategic transportation link for 1 Bcf/d of new supply coming into the Chicago
area to growing markets in eastern Canada and along the Atlantic Seaboard.
Although this $450 million project's proposed completion has been delayed until
Fall 2000, a section of the system could be constructed this summer and placed
into service in late 1999. Pipelines & Processing holds a 25% interest in this
project. MichCon will lease a portion of its transmission system to the project,
thereby providing additional earnings to MCN while reducing Vector's cost and
environmental impact.
 
     Pipelines & Processing has a 10.5% interest in the Millennium Pipeline,
which is designed to essentially link up with Vector through the Dawn, Ontario
hub and run to New York City. This 442-mile, $685 million pipeline will carry
700 MMcf/d to serve markets on the Atlantic Seaboard.
 
     Pipelines & Processing formed the Crown Asphalt Distribution LLC joint
venture with Crown Energy Corp. in 1998. Pipelines & Processing has a 50%
interest in these asphalt distribution operations, which further enhances the
value of the MCN/Crown Energy Asphalt Ridge Joint Venture. The Asphalt Ridge
project, in which Pipelines & Processing holds a 75% interest, recently
completed construction of a 100,000 ton per year high-grade asphalt
manufacturing plant, at a total cost of $18 million, that is expected to begin
production in time for the 1999 paving season. Additional manufacturing plants
may be built if market conditions warrant.
 
                                        4
<PAGE>   10
 
ELECTRIC POWER
 
     The Electric Power unit operates through several wholly owned subsidiaries
of MCNIC, to pursue domestic and international power generation-related
opportunities. Power generation projects offer the potential for multiple
sources of income, such as long-term gas sales and transportation services, as
well as return on the investment in the facility itself, particularly in the
U.S.
 
     Excluding a $2.5 million pre-tax ($1.6 million net of taxes) restructuring
charge related to exiting several early-stage international projects, this
segment's operating and joint venture income totaled $26.0 million in 1998,
compared with $18.1 million in 1997. The 1997 earnings included a favorable $2.8
million property tax adjustment related to the Midland Cogeneration Venture
Limited Partnership (MCV) in Michigan. Increased contributions from Torrent
Power in India and our purchase in June of an additional 5% interest in MCV
accounted for the improved results. Also, partial operation of Torrent Power's
new 655 MW plant in 1998 helped the Electric Power segment to more than double
its net electricity production to 3.8 million MWh from 1.8 million MWh in 1997.
Net generating capacity climbed to 732 MW in 1998 from 546 MW in 1997.
 
     Electric Power is pursuing projects intended to meet growing demand for
electricity. The majority of new power generation facilities throughout North
America are expected to be gas-fired because of competitive and environmental
considerations, as well as the speed with which such facilities can be brought
on-line. Demand for new gas-fired generation facilities in the Midwest and along
the East Coast is being significantly increased by the shut-down of nuclear
plants in the United States and Canada that supply those areas. In addition,
U.S. electricity consumption has been growing at a 2.2% annual rate and is
estimated by government and industry sources to grow more than 30% by 2015. MCN
anticipates investing $1.2 billion to $1.5 billion in Electric Power during the
next five years. Approximately $400 million of capital investments by MCN are
planned in Electric Power for 1999, while $88 million was spent in 1998. The
Electric Power segment is not pursuing new international power projects in
developing countries, and it will move forward on a pending 330 MW project in
India only if expected returns remain strong.
 
     In October 1998, Electric Power acquired an approximate 48% interest in an
operating 42 MW gas-fired cogeneration plant in Carson, California. The
eight-year-old plant has a long-term contract to sell electricity to the local
utility and steam to a nearby industrial customer.
 
     During 1998, Electric Power acquired a 95% interest in the Cobisa-Person
Power project, a venture created to build, own and operate a 140 MW power plant
in Albuquerque, New Mexico. This gas-fired peaking plant is expected to be in
service by the summer of 2000 and is backed by a long-term power purchase
agreement with Public Service Company of New Mexico. The project will be
constructed at the site of a decommissioned power plant, keeping costs low and
accelerating its development.
 
     Electric Power acquired an initial 18% general partnership interest in MCV
in 1997 and an additional 5% general partnership interest in June 1998. MCV is a
partnership that leases and operates a cogeneration facility in Midland,
Michigan. The MCV facility, the nation's largest cogeneration facility, can
produce up to 1,370 MW of electricity and 1.35 million pounds per hour of
process steam for industrial use. Electric Power's investment totals $73.0
million. MCV sells electricity to Consumers Energy Co. and The Dow Chemical Co.
under long-term contracts. Dow Chemical and Dow Corning Corp. also purchase
process steam from the facility under long-term contracts.
 
     In 1997, Electric Power acquired an approximate 65% interest in Bhote Koshi
Power Company, a partnership that is constructing a 36 MW hydroelectric power
plant in Nepal. Construction of the plant began in early 1997 and is scheduled
to be completed in early 2000. At December 31, 1998, MCN had paid $7.2 million
of its total equity commitment of $20.1 million with the remainder to be paid in
1999 and 2000.
 
     In 1997, Electric Power acquired a 40% interest in the common equity of
Torrent Power Limited (TPL), a joint venture that holds minority interests in
electric distribution companies and power generation facilities located in the
state of Gujarat, India. In 1997 and 1998, Electric Power acquired preference
shares in TPL, bringing the total cost of Electric Power's TPL holdings to
$121.2 million. The joint venture has a 36% interest in Ahmedabad Electricity
Company Limited (AEC), a 43% interest in Surat Electricity Company Limited
(SECL) and a 42% interest in Gujarat Torrent Energy Corporation (GTEC). AEC
serves the city of
                                        5
<PAGE>   11
 
Ahmedabad and has 550 MW of electric generating capacity. SECL provides
electricity to the city of Surat. GTEC owns and operates a 655 MW power project
in Gujarat, India, that reached full commissioning during the fourth quarter of
1998.
 
     In February 1999, MCN reached an agreement to sell its interest in TPL for
approximately $130 million. The sale is subject to certain regulatory approvals
and is expected to be completed by the third quarter of 1999.
 
     The Mobile Bay cogeneration project is expected to be placed into service
along with the Mobile Bay Processing venture during the first quarter of 1999.
Electric Power owns 43% of this 40 MW, natural gas-fired plant, which will
provide electricity and thermal energy to the processing facility.
 
     In addition to these power generation facilities, Electric Power continues
to pursue a number of other opportunities. Among them are: a 220 MW peaking
plant in Columbus, Ohio; a 150 MW to 300 MW baseload facility in West Virginia;
a 100 MW peaking plant in New Mexico; and a 150 MW to 200 MW baseload facility
in New England. The size, load characteristics and location of each of these
proposed projects could change based upon actual market needs. Furthermore, new
projects continue to come to our attention, some of which will ultimately
materialize.
 
     Electric Power has a 50% interest in the Michigan Power Project, a 123 MW
cogeneration plant in Ludington, Michigan. The facility provides electricity to
Consumers Energy Corporation and steam to Dow Chemical under long-term
contracts. Electric Power also owns 50% of Ada Cogeneration, which owns and
operates a natural gas-fueled cogeneration facility in western Michigan. The Ada
facility generates up to 30 MW of electricity, which is sold to Consumers
Energy, and produces up to 50,000 pounds of steam per hour, which is sold to a
nearby commercial operation. Electric Power's business also includes a number of
small cogeneration units located at the operating facilities of large commercial
and industrial customers. Electric Power has long-term agreements for the sale
and transportation of natural gas to these units.
 
ENERGY MARKETING
 
     Energy Marketing's operating and joint venture income decreased $3.7
million to $8.0 million in 1998. Earnings for 1997 included $2.2 million
contributed from Energy Marketing's 25% interest in a gas storage project that
was sold in December 1997. Additionally, 1998 earnings reflect higher storage
costs and a decline in natural gas sales margins as a result of the abnormally
warm 1997-1998 winter. The impact of higher storage costs and lower margins was
partially offset by a significant increase in gas sales volumes.
 
     The Energy Marketing segment plans to grow primarily as a provider of
higher-valued energy supply and management services to markets in the Midwest
and eastern regions of the United States and Canada. These services generally
entail the bundling of energy supplies, transportation and often storage
capacity to provide energy to customers when and where needed in an efficient,
one-stop-shopping manner. Capital investments are anticipated to be immaterial
in 1999 as this segment is not capital intensive.
 
     New independent power plants represent a significant growth opportunity for
Energy Marketing. More than 50,000 MW of new gas-fired generating capacity has
been proposed nationwide. While not all of the new proposals will be successful,
each 1,000 MW of baseload capacity represents about 60 Bcf of potential annual
gas consumption, so power generation will be a key area of growth. This is
particularly the case in the Northeast, where significant new generating
capacity is needed.
 
     MCN's non-regulated energy marketing activities are directed by CoEnergy
Trading Company (CTC). CTC, a wholly owned subsidiary of MCNIC, is engaged in
the purchase and sale of natural gas to more than 700 commercial and industrial
users, as well as gas and electric utilities and other large-volume customers
throughout the Midwest, Gulf Coast and Northeast regions of the United States
and Canada. Through its offices located in Detroit, Michigan and Hartford,
Connecticut, CTC is able to offer buyers a bundled service by making
arrangements for the acquisition of the required gas volumes and delivery to
customers' facilities, and for all the necessary services in between. This
bundled service is more in demand during the winter months, when interstate
pipeline capacity in certain areas of the Northeast and Midwest is either
constrained
 
                                        6
<PAGE>   12
 
or uneconomical. CTC is able to better meet this demand through access to
storage fields and other physical assets owned by affiliates.
 
     CTC and its joint venture/marketing alliances compete against numerous
marketing companies. A diverse portfolio of short-, medium- and long-term sales
and supply contracts combined with access to reliable gas suppliers, storage
facilities and multiple pipeline connections enhances its competitive position.
Approximately one-third of CTC's sales are to its joint venture/marketing
alliances and other MCNIC affiliated companies, with another one-third to
Midwest markets, and the final one-third to Northeast and Canadian markets.
Approximately 25% of CTC's natural gas supply originates in the Midcontinent
with another 25% purchased within Michigan.
 
     CTC is involved in four joint venture/marketing alliances that expand its
market region and add other energy sources (e.g. electricity) to its market
portfolio. CTC's joint venture/marketing alliances are: 1) DTE-CoEnergy, L.L.C.;
2) U.S. CoEnergy Services; 3) Torch-CoEnergy, L.L.C.; and 4) Michigan Gas
Exchange, L.L.C. DTE-CoEnergy L.L.C. is jointly owned with DTE Energy Co.,
parent of Detroit Edison, and markets a wide range of energy services to
industrial, commercial and institutional customers. The alliance's target market
area spans the Great Lakes and Mid-Atlantic states, as well as the Province of
Ontario. Offerings include electricity and natural gas supplies, plus associated
energy and risk management services required to create cost-effective, bundled
energy packages tailored to meet individual customers' needs in a non-regulated
environment. U.S. CoEnergy Services is a partnership with U.S. Oil Company, Inc.
formed for the sale of natural gas, fuel oil and propane to target markets
within the State of Wisconsin. Torch-CoEnergy is a marketing alliance with Torch
Energy Advisors of Houston. This alliance links Torch's supply-aggregation and
marketing strengths in the Gulf Coast region with CTC's strong presence in
high-consumption markets. Michigan Gas Exchange, L.L.C. was formed with LaVanway
Capital & Trade Corporation to serve niche gas markets in the State of Michigan.
 
     Assisting CTC's marketing efforts is strategically selected pipeline
capacity that is used to deliver gas to its markets. CTC has firm transportation
service contracts on various pipeline systems totaling 400 MMcf/d, which is
supplemented by interruptible service as needed. CTC expects to enhance its
reserved pipeline capacity by purchasing firm transportation services on future
Pipelines & Processing projects. CTC expects to capture significant marketing
opportunities utilizing these new pipelines, to further enhance and complement
business opportunities for other MCN/MCNIC entities. For example, the Northeast
is the primary target market of three interstate pipeline projects in which
Pipelines & Processing is participating. CTC holds significant capacity in PNGTS
and the proposed Vector and Millennium pipelines that will be used to market
bundled gas services to power plants and other large customers.
 
     Storage provides a critical competitive ingredient to our bundled package
of gas marketing services, as it allows Energy Marketing to provide very
reliable service while keeping operating costs low. In southeast Michigan, the
development of Washington 10 Storage, which is strategically located in the
gateway to eastern Canada and the northeastern U.S., will significantly increase
the amount of gas storage capacity available to CTC to serve its markets. The
project is converting a depleted gas reservoir to a 42 Bcf storage facility.
Initial gas injection is scheduled for the spring of 1999, with the facility
expected to be fully operational in time for the 1999-2000 winter heating
season.
 
     Energy Marketing has a 50% interest in the 10 Bcf Washington 28 storage
field, located northeast of Detroit in Macomb County. In December 1997, Energy
Marketing sold its 25% share of the 46 Bcf Blue Lake gas storage project located
in northern Michigan. MichCon expects to maintain its 25% interest in the Blue
Lake venture.
 
     In total, with the addition of Washington 10, CTC will have rights to 67
Bcf of market-area storage capacity in 1999. CTC will use this storage in
conjunction with its 400 MMcf/d of firm and interruptible transportation
capacity on various pipelines to continue increasing its marketing presence in
the U.S. Midwest and Northeast, as well as in eastern Canada.
 
                                        7
<PAGE>   13
 
RISK MANAGEMENT STRATEGY
 
     MCN primarily manages commodity price risk by utilizing futures, options
and swap contracts to more fully balance its portfolio of gas and oil supply and
sales agreements. Energy Marketing 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 discontinued E&P operations. Gains
and losses on gas and oil production-related hedging transactions that are not
recorded by MCN's E&P group are recorded by Energy Marketing. In late 1998, MCN
began entering into offsetting positions for existing hedges of gas and oil
production from properties that are expected to be sold in 1999. MCN's risk
management strategy is being revised to reflect the change in its business that
will result from selling its E&P properties.
 
                                        8
<PAGE>   14
 
                                GAS DISTRIBUTION
 
GAS SALES AND TRANSPORTATION
 
     Gas Distribution serves customers in the Detroit, Grand Rapids, Ann Arbor,
Traverse City, Muskegon and Adrian metropolitan areas and in various other
communities throughout the State of Michigan. The following services are
provided by Gas Distribution:
 
     - Gas Sales -- Includes the sale and delivery of natural gas to residential
       and small-volume commercial customers.
 
     - End User Transportation -- Through this service, primarily large-volume
       commercial and industrial customers who purchase natural gas directly
       from producers or brokerage companies utilize the company's network to
       transport the gas to their facilities.
 
     - Intermediate Transportation -- Provides transportation service through
       the company's gathering and high pressure transmission system to
       producers, brokers and other local distribution companies that own the
       natural gas, but are not the ultimate consumer.
 
RESULTS OF OPERATIONS
 
     Gas Distribution's earnings for 1998 totaled $71.7 million, a decrease of
$9.4 million from 1997. Results for 1998 were affected by unusual charges
consisting of a property write-down and an investment loss as subsequently
discussed. Excluding the unusual charges, the Gas Distribution group reported
1998 earnings of $88.4 million, an improvement of $7.3 million over 1997.
Earnings comparisons were impacted by variations in weather and cost-saving
initiatives resulting in significantly lower operating costs. These cost-saving
initiatives allowed the Gas Distribution group to continue its record of solid
financial performance, producing returns on equity of 11.0% in 1998 and 13.2% in
1997.
 
     Gas Distribution's earnings for 1998 were negatively affected by a property
write-down and an investment loss. Gas Distribution recorded a $24.8 million
pre-tax ($11.2 million, net of taxes and minority interest), write-down of
certain gas gathering properties. A new gas reserve analysis was performed to
determine the impact of the diversion of certain untreated gas away from the
gathering system. This 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. Also recorded
was an $8.5 million pre-tax ($5.5 million net of taxes) loss from the write-down
of an investment in a Missouri gas distribution company. As a result of MCN's
 
                                        9
<PAGE>   15
 
refocused strategic direction, Gas Distribution expects to sell this investment
in 1999. The write-down represents the amount by which the carrying value
exceeded the estimated fair value of the investment.
 
<TABLE>
<CAPTION>
                                                                1998        1997        1996
                                                              --------    --------    --------
<S>                                                           <C>         <C>         <C>
REVENUES (in millions of dollars)
Gas Sales...................................................  $  838.9    $1,080.1    $1,102.9
End User Transportation.....................................      82.3        84.7        82.5
Intermediate Transportation.................................      63.2        55.2        48.6
                                                              --------    --------    --------
  Total Sales and Transportation............................     984.4     1,220.0     1,234.0
Other.......................................................      67.4        51.3        42.3
                                                              --------    --------    --------
  Total Operating Revenues..................................  $1,051.8    $1,271.3    $1,276.3
                                                              ========    ========    ========
MARKETS (Bcf)
Gas Sales...................................................     172.2       209.1       221.0
End User Transportation.....................................     140.3       145.1       146.9
Intermediate Transportation.................................     537.5       586.5       527.5
                                                              --------    --------    --------
  Total Sales and Transportation............................     850.0       940.7       895.4
                                                              ========    ========    ========
</TABLE>
 
NOTE: Intermediate transportation volumes include intercompany transactions.
 
     Gas Distribution expects to continue growing revenues by offering a variety
of energy-related services, which include appliance maintenance and home safety.
Additionally, Gas Distribution began participating in Michigan's $1.2 billion
per year heating, ventilation and air conditioning market with the October 1998
acquisition of three companies specializing in the sale, installation and
servicing of residential and commercial heating and cooling systems. The
acquired companies have total revenues of approximately $20 million per year.
 
     EFFECT OF WEATHER: Gas Distribution's gas sales and end user transportation
volumes, revenues and net income are impacted by weather. Given the seasonal
nature of the business, revenues and net income tend to be higher in the first
and fourth quarters of the calendar year.
 
Effect of Weather on Gas Markets and Earnings
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                               1998     1997    1996
                                                              ------    ----    -----
<S>                                                           <C>       <C>     <C>
Percentage Colder (Warmer) Than Normal......................   (19.3)%   0.8%     5.4%
Increase (Decrease) From Normal in:
  Gas Markets (in Bcf)......................................   (40.3)    0.6     10.9
  Net Income (in millions)..................................  $(35.3)   $0.5    $ 9.9
</TABLE>
 
     GAS SALES: Revenues decreased $241.2 million in 1998 due primarily to
weather which was 20.1% warmer in 1998, and a reduction in gas sales rates
resulting from lower gas costs. This market represents approximately 20% of
total deliveries and produced 64% of Gas Distribution's gross profit margin. The
average margin per Mcf from gas sales was improved significantly to $2.16 in
1998 from $2.07 in 1997.
 
     Competition in the gas sales market comes primarily from alternative fuels
such as electricity, propane and, to a lesser degree, oil and wood, and other
natural gas providers in a few areas. Natural gas continues to be the preferred
fuel for Michigan residences and businesses. Nearly every residential and
commercial developer in MichCon's service territories selects natural gas in new
construction because of the convenience, cleanliness and price advantage of
natural gas compared to propane, fuel oil and other alternative fuels. Service
and price are the primary factors affecting this market.
 
     Gas Distribution continues to take steps to become the preferred provider
of natural gas and high-value energy services within Michigan and to achieve
competitive financial results. To accomplish this, MichCon will increase
penetration of existing markets by focusing on meeting the needs of customers
and the
 
                                       10
<PAGE>   16
 
marketplace, will continue efforts to reduce cost of gas and operating costs,
and will take advantage of profitable opportunities to expand to new geographic
areas.
 
     The challenges and opportunities resulting from increased competition in
the natural gas industry have been a catalyst for MPSC action in the development
of major reforms in utility regulation aimed at giving all customers added
choices and greater price certainty. The overall package of regulatory changes
associated with the gas industry restructuring is expected to generate
additional revenue and cost savings opportunities. Gas Distribution is
positioning itself to respond to changes in regulation and increased competition
by reducing its cost of operations while maintaining a safe and reliable system
for customers. See "Regulation and Rates" on page 14 for a discussion regarding
Regulatory Reform.
 
     Gas Distribution's Market Expansion Program is intended to spur demand for
natural gas in areas currently not served. The program primarily targets
residential and small-volume commercial markets. By financing the cost of main
extensions, this program makes it easier for users of higher-cost fuels, such as
propane and fuel oil, to switch to natural gas for space heat and other
applications. This program accounted for over 12,000 of the nearly 95,000 new
customers added during the past four years. In 1998, three new areas of Michigan
were served by MichCon, bringing the total number of new areas added since the
program's inception in 1984 to 140.
 
     Cost of gas sold per Mcf for 1998 was $2.71, a decrease of $.40 (13%) from
1997. Cost of gas sold per Mcf for 1997 increased from 1996 by $.19 (7%).
 
     Gas Distribution owns a 47.5% interest in Southern Missouri Gas Company,
L.P. which was formed in November 1996. The initial phase of system construction
was completed in 1997 at a cost of approximately $40 million. As of December 31,
1998 the system was comprised of a 441-mile pipeline system and served
approximately 7,000 customers. As a result of MCN's refocused strategic
direction, Gas Distribution has decided to sell this investment. Gas
Distribution recorded a $5.5 million, net of taxes, loss from the write-down of
this investment to reflect its estimated fair value. The write-down represents
the amount by which the carrying value exceeded the estimated fair value of the
investment.
 
     END USER TRANSPORTATION: Deliveries decreased slightly to 140.3 Bcf in 1998
due to warmer weather. In 1998, this market accounted for approximately 17% of
total gas deliveries and produced approximately 14% of Gas Distribution's gross
profit margin.
 
     At December 31, 1998, MichCon had end user transportation agreements
representing annual volumes of 154 Bcf. Approximately 53% of these volumes are
under contracts that extend to 2000 or beyond and include the majority of the
large, and most price-sensitive, customers. Contracts for the remaining volumes
are typically one-year contracts that expire at various times during 1999 and
relate to a large number of low-volume users with relatively low price
sensitivity.
 
     Through technical and financial assistance, industrial and commercial
customers have been encouraged to increase their use of natural gas. The natural
gas-fueled power generation market accounted for approximately 31 Bcf of gas
deliveries in both 1998 and 1997. Gas engine driven technologies, along with
industrial process and heating, ventilation and air conditioning (HVAC)
conversion applications in certain businesses, also provide significant
opportunities for conversion to natural gas-powered equipment. The efficiencies
and price competitiveness of natural gas can significantly reduce operating
costs for customers, generally offsetting in a relatively short period of time
the typically higher initial cost of gas-burning equipment.
 
     Gas Distribution continues to be successful in converting customers'
facilities to natural gas from alternative fuels and in retaining those
customers after conversion. Also, it has not experienced any significant fuel
switching by its customers in recent years. In 1998, approximately 23 Bcf of
MichCon's transportation deliveries were to customers who substituted natural
gas for coal.
 
     The primary focus of competition in this market is cost. Some large
commercial and industrial customers have the capacity to switch to alternative
fuel sources such as coal, electricity, oil and steam. In addition, some of
these customers could bypass Gas Distribution's distribution system and obtain
gas directly from an
 
                                       11
<PAGE>   17
 
interstate pipeline company. However, cost differentials must be sufficient to
offset the costs, risks and loss of service flexibility associated with fuel
switching or bypass. During 1998, none of Gas Distribution's industrial
customers bypassed its distribution system. Gas Distribution competes against
alternative fuel sources by providing competitive pricing and reliable supply
through the use of the Company's extensive storage capacity and multiple supply
sources. Almost all significant customers who could bypass MichCon are under
long-term transportation contracts.
 
     The MPSC has approved a direct access program for the state's two largest
electric utilities, which began in mid-1998, and allows large electric users to
directly purchase lower priced electricity. The program is not expected to
materially impact the competitiveness of natural gas.
 
     INTERMEDIATE TRANSPORTATION: This service accounts for approximately 63% of
total gas deliveries, however, due to the lower costs and therefore rates
applicable to this service, it represents only 11% of gross profit margin. The
decrease in intermediate transportation deliveries in 1998 reflects lower
off-system demand caused by the warmer weather and lower volumes transported for
fixed-fee customers. Although transported volumes for fixed-fee customers may
fluctuate, revenues from such customers are not affected.
 
     In 1998, through efficient use of transmission and storage assets as well
as upstream supply, Gas Distribution sold significant short-term services
resulting in increased revenues from 1997. Gas Distribution's extensive
transmission pipeline system has enabled it to increase the volumes transported
for Michigan gas producers, marketers, distribution companies and other
pipelines. Gas Distribution operates in a pivotal geographic location with links
to major interstate pipelines that reach markets elsewhere in the Midwest, the
eastern United States and eastern Canada. Michigan Antrim gas production has
increased significantly over the past several years, resulting in a growing
demand by gas producers and brokers for intermediate transportation services.
 
     In 1997, in order to meet the increased demand, Gas Distribution expanded
the transportation capacity of its northern Michigan gathering system. In
December 1997, MichCon Pipeline purchased Thunder Bay Pipeline for approximately
$13 million. During 1998, 175 Bcf was transported on this system, of which
Thunder Bay contributed 31.7 Bcf.
 
     In January 1997, Gas Distribution placed into service a $91 million,
59-mile loop of its existing Milford-to-Belle River Pipeline. This new loop has
improved the overall reliability and efficiency of Gas Distribution's gas
storage and transmission system by mitigating the risk associated with the
disruption of the existing pipeline or other facilities used to supply gas to
Gas Distribution's customers. In addition, the pipeline provides significant
off-system transportation opportunities as discussed below.
 
     Gas Distribution is in an excellent position to increase revenues through
providing transportation of new supplies of western Canadian gas, coming into
the Chicago area beginning in December 1998, to third-party pipelines serving
growing markets in eastern Canada and the northeast United States. In December
1997, MichCon entered into a long-term facility lease of its Milford-to-Belle
River Pipeline to the Vector Pipeline to effectuate transportation of Chicago
supplies to Dawn, Ontario, a significant Canadian natural gas market hub.
Currently, Vector is contemplating completing its proposed project in two
phases. Phase One would be the construction of approximately 19 miles of 42"
pipeline by November 1, 1999 from Gas Distribution's Belle River Mills
Compressor station to Dawn, Ontario. The remainder of Vector is scheduled to be
completed in October 2000. Gas Distribution is reviewing the possibility of
providing transportation service to Vector for Phase One services to be
delivered at Vector's proposed Belle River receipt point. Additional
opportunities for transportation services are being pursued which will further
maximize the use of Gas Distribution's transmission infrastructure.
 
     Gas Distribution is negotiating with Washington 10 Storage Corporation to
provide transportation services to and from the storage field in southeastern
Michigan which is expected to be in service by mid-1999. In addition, Gas
Distribution has identified firm, long-term capacity, available in late 1999,
between its southern interconnections with ANR Pipeline Company (ANR) at Willow
Run and Consumers Energy at Northville to various interconnections at the
U.S./Canadian border near the St. Clair River. Gas Distribution
 
                                       12
<PAGE>   18
 
is soliciting offers for this capacity in the first quarter of 1999. Gas
Distribution also is investigating other firm and interruptible transportation
services for incremental revenue opportunities.
 
ENERGY ASSISTANCE PROGRAMS
 
     Energy assistance programs funded by the federal government and the State
of Michigan, including the Home Heating Credit for low-income customers and the
Family Independence Agency's State Emergency Relief Program, remain critical to
MichCon's ability to control its uncollectible gas account expenses. MichCon has
historically obtained favorable regulatory treatment of its uncollectible gas
account costs, including those related to these energy assistance programs.
 
     MichCon receives a significant amount of its heating assistance funding
through the Federal Low-Income Home Energy Assistance Program (LIHEAP) which
funds the State of Michigan's Home Heating Credit program. In 1998 Congress
provided $1.1 billion for LIHEAP funding for the 1998 fiscal year and
supplemented it with a $300 million emergency fund that could be tapped only
upon order of the President. Michigan received $54 million of the total $1.1
billion that was released in 1998. MichCon received $13.4 million through this
program in 1998. Home Heating Credits assisted 73,000 MichCon customers in 1998.
Congress voted to continue LIHEAP for federal fiscal years 1999 and 2000. For
federal fiscal year 1999, which began October 1, 1998, Congress maintained
LIHEAP funding at $1.1 billion and again authorized a $300 million emergency
fund. In addition, Congress appropriated $1.1 billion for federal Fiscal Year
2000 which is subject to revision during budget deliberations.
 
GAS SUPPLY
 
     Gas Distribution obtains its natural gas supply from various sources in
different geographic areas (the Gulf Coast, the Midcontinent, Canada, and
Michigan) under agreements that vary in both pricing and terms. Looking forward
to MichCon's Regulatory Reform Plan, in 1998 MichCon issued and signed new base
supply contracts with its suppliers, ensuring price stability and supply
reliability (see "Regulation and Rates" on page 14 for a discussion regarding
MichCon's plan). Gas Distribution's geographic diversity of supply ensures that
MichCon will be able to meet the requirements of its existing and future
customers with reliable supplies of natural gas at a known cost, free from the
potentially severe swings of a volatile gas market. Whereas prior to 1999, under
GCR regulation, gas supply costs were a non-profit passthrough of prudently
incurred costs. Beginning January 1, 1999, MichCon has the ability to take full
advantage of its assets and expertise to generate profits from gas supply
operations. By fixing the gas cost component of MichCon's sales rates at
$2.95/Mcf for three years, customers benefit from greater price certainty while
MichCon can take advantage of opportunities to secure lower priced gas supplies.
MichCon has secured 100% of its 1999 warmer than normal weather requirements and
approximately 90% of its 2000 and 2001 similar requirements at prices that help
ensure profit contributions from gas supply operations.
 
     Citizens serves approximately 15,000 customers and is served by two
interstate pipelines, Panhandle Eastern Pipe Line Company (Panhandle) and ANR.
MCNIC Michigan Holdings, Inc., an affiliate intrastate pipeline company,
connects ANR to Citizens' distribution system. During 1998, nearly all of
Citizens' purchases were from CTC, an affiliated company.
 
Gas Distribution -- Sources of Gas Supply (Bcf)
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                1998     1997     1996
                                                                ----     ----     ----
<S>                                                             <C>      <C>      <C>
Michigan Producers..........................................     41.9     66.0     86.3
Interstate Suppliers........................................     29.0     13.8     14.5
Canadian Suppliers..........................................     31.7     31.3     37.3
Spot Market.................................................     76.3     89.1     94.0
                                                                -----    -----    -----
                                                                178.9    200.2    232.1
                                                                =====    =====    =====
</TABLE>
 
     Gas Distribution purchased 23% of its 1998 supply from Michigan producers,
59% from producers in the southern and midcontinent regions of the United States
and 18% from Canadian producers. These supplies are
 
                                       13
<PAGE>   19
 
complemented by 124 Bcf of working storage capacity from storage fields owned
and operated by MichCon in Michigan, of which 36 Bcf is leased to others,
including 17 Bcf with an affiliate.
 
     MichCon has long-term firm transportation agreements, expiring on various
dates through 2011, with ANR, Panhandle, Viking Gas Transmission Company
(Viking) and Great Lakes Gas Transmission Limited Partnership (Great Lakes). ANR
is obligated to transport for MichCon 375 MMcf/d of supply from April through
October 1999. Effective November 1, 1999, MichCon's ANR capacity reduces to 285
MMcf/d. The capacity reduction results in roughly $13 million in annual cost
savings. ANR capacity delivers 117.5 MMcf/d of supply sourced in the Gulf, 117.5
MMcf/d sourced in the Midcontinent and 50 MMcf/d is Canadian supply. Viking
transports 50 MMcf/d of Canadian supply to the ANR system for delivery to
MichCon and Panhandle transports 2 MMcf/d of Gulf Coast supply from the ANR
system for delivery to MichCon. Additional Canadian supplies of 30 MMcf/d are
delivered through firm transport agreements with Great Lakes.
 
     MichCon has supply contracts, expiring on various dates through 2007, with
independent Michigan producers. Many of these contracts originally tied prices
to spot market indices coupled with transport rates. MichCon, as a result of a
recent MPSC Order and individually negotiated settlements, has successfully
amended a number of these contracts that were previously at above market prices
to a more competitive level.
 
     At December 31, 1998, MichCon owned and operated four natural gas storage
fields in Michigan with a working storage capacity of approximately 124 Bcf.
These facilities play an important role in providing reliable and cost-effective
service. MichCon uses its storage capacity to supplement its supply during the
winter months, replacing the gas in April through October when demand and prices
are generally at the lowest levels. The use of storage capacity also allows
MichCon to lower its peak-day entitlement, thereby reducing interstate pipeline
charges during the winter months. During 1998, MichCon's maximum one-day sendout
exceeded 2.1 Bcf, of which approximately 68% came from its underground storage
fields. MichCon's gas distribution system has a maximum daily sendout capability
of 2.8 Bcf, with the capacity to supply nearly 70% from underground storage.
 
REGULATION AND RATES
 
     MichCon is subject to the jurisdiction of the MPSC as to various phases of
its operations, including gas sales and transportation rates, service and
accounting. Citizens' rates are set by the Adrian Gas Rate Commission, a
municipal commission. Other various phases of its operations are subject to the
jurisdiction of the MPSC. Both MichCon and Citizens are subject to the
requirements of other regulatory agencies with respect to safety, the
environment and health.
 
     REGULATORY REFORM PLAN: In April 1998, the MPSC approved MichCon's
Regulatory Reform Plan. The plan includes a comprehensive experimental
three-year customer choice program open to all of MichCon's 1.2 million
residential and commercial customers, subject to annual caps on the level of
participation. The customer choice program begins April 1, 1999, when up to
75,000 customers will have the option of purchasing natural gas from suppliers
other than MichCon. Up to 75,000 additional customers can be added April 1 of
each of the next two years, eventually allowing up to 225,000 customers the
option to choose a gas supplier other than MichCon. MCN's gas marketing
affiliates also participate as alternative suppliers under the program. In each
of the three plan years, there is also a volume limitation on commercial and
industrial participants. The volume limitation for these participants is 10 Bcf
in 1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon will continue to transport
and deliver the gas to the customers' premises at prices that maintain its
existing sales margins.
 
     The plan also suspends the GCR mechanism for customers who continue to
purchase gas from MichCon and fixes the gas price component of MichCon's sales
rates at $2.95 per Mcf for the three-year period beginning on January 1, 1999.
Prior to January 1999, MichCon did not generate any earnings nor generally incur
any unrecovered costs on the gas supply portion of its operations. However,
under this plan, changes in cost of gas will directly impact earnings. As part
of its gas acquisition strategy, MichCon has entered into firm-price contracts
for a substantial portion of its expected gas supply requirements for the next
three years. These
 
                                       14
<PAGE>   20
 
contracts, coupled with the use of MichCon's storage facilities, will
substantially mitigate risks from winter price and volume fluctuations.
 
     Also beginning in 1999, the plan established an income sharing mechanism
that will allow customers to share in profits if actual utility return on equity
exceeds predetermined thresholds. In October 1998, the MPSC denied a rehearing
and affirmed its approval of the plan. Various parties have appealed the MPSC's
decision to the Michigan Court of Appeals. While management believes that the
order will be upheld based upon applicable Michigan law, there can be no
assurance as to the outcome.
 
     GENERAL RATE PROCEEDINGS: MichCon received authorization to defer
manufactured gas plant (MGP) investigation and remediation costs in excess of
the $11.7 million previously reserved by MichCon. The remaining balance of this
initial reserve at December 31, 1998 is approximately $0.1 million. Any excess
costs are to be deferred and amortized over a 10-year period beginning in the
year subsequent to the year environmental investigation and remediation costs
are paid. The recovery of any remediation costs incurred will be reviewed in a
future rate case.
 
     MichCon filed an application with the MPSC in October 1996 requesting
authority to decrease depreciation rates from an average rate of 4.1% to 3.5%.
In December 1997, the MPSC issued an order approving a reduction in annual
depreciation costs by more than $16 million. While the Michigan Attorney General
has appealed the depreciation order, management believes the MPSC order
approving the lower depreciation rates without a corresponding gas rate
reduction will be upheld.
 
     In 1994, Citizens entered into a rate agreement with the municipal
commission that sets Citizens' rates. Under the terms of this agreement which
went into effect in January 1995, Citizens received a 3% rate increase and its
rates were frozen for five years. The rate agreement which expires in January
2000, provides Citizens' customers with known prices and the company with an
opportunity to control costs and continue to earn a reasonable rate of return.
 
     GAS COST RECOVERY (GCR): Prior to January 1, 1999, the GCR process allowed
MichCon to recover its cost of gas sold if the MPSC determined that such costs
were reasonable and prudent. As previously discussed, beginning January 1, 1999,
the MichCon plan suspends the GCR mechanism and fixes the gas commodity
component of MichCon's sales rate at $2.95 per Mcf for three years.
 
     The GCR process included an annual Gas Supply and Cost Review, in which the
MPSC approved maximum monthly GCR factors. A subsequent annual GCR
reconciliation proceeding provided a review of gas costs incurred during the
year, determined whether approved gas costs had been overcollected or
undercollected and, as a result, whether a refund or surcharge, including
interest, was required to be returned to or collected from GCR customers. In
September 1998, a settlement regarding MichCon's 1997 GCR Reconciliation Case
was approved by the MPSC indicating a net underrecovery of approximately $13
million, including interest. In April 1998, the MPSC issued an order in
MichCon's 1998 GCR Plan Case approving a $3.20 per Mcf maximum GCR factor
including the net underrecovery for 1997 referred to above. MichCon's 1998 GCR
overrecovery is approximately $15 million, including interest of $2.3 million.
Pursuant to the terms of the plan that approved suspension of the GCR clause,
MichCon will refund the overrecovery through surcharge credits during January
through March 1999. In February 1997, MichCon filed its 1996 GCR reconciliation
case indicating a net underrecovery of approximately $28 million, including
interest. The total 1996 underrecovery was rolled into MichCon's 1997 GCR cost
recovery. In September 1997, the MPSC issued an order finding that all of
MichCon's 1996 gas costs were reasonable and prudent.
 
     FERC RATE MATTERS: In February 1998, FERC approved a settlement agreement
in an ANR rate case entitling MichCon to refunds totaling $9.4 million. In April
1998, MichCon received $5.5 million relating to transportation services provided
by ANR to MichCon. In June 1998, MichCon received the remaining refund, which
was reflected as a reduction to MichCon's cost of gas.
 
ENVIRONMENTAL MATTERS
 
     Prior to the construction of major natural gas pipelines, gas for heating
and other uses was manufactured from processes involving coal, coke or oil. MCN
owns, or previously owned, 17 such former MGP sites.
                                       15
<PAGE>   21
 
     During the mid-1980s, preliminary environmental investigations were
conducted at these former MGP sites, and some contamination related to the
by-products of gas manufacturing was discovered at each site. The existence of
these sites and the results of the environmental investigations have been
reported to the Michigan Department of Environmental Quality (MDEQ). None of
these former MGP sites is on the National Priorities List prepared by the U.S.
Environmental Protection Agency (EPA).
 
     MCN is involved in an administrative proceeding before the EPA regarding
one of the former MGP sites. MCN has executed an order with the EPA, pursuant to
which MCN is legally obligated to investigate and remediate the MGP site. MCN is
remediating five of the former MGP sites and conducting more extensive
investigations at four other former MGP sites. In 1998, MichCon completed the
remediation of one of the former MGP sites, which was confirmed by the MDEQ.
Additionally, the MDEQ has determined with respect to one other former MGP site
that MichCon is not a responsible party for the purpose of assessing remediation
expenditures.
 
     In 1984, MCN established an $11.7 million reserve for environmental
investigation and remediation. During 1993, MichCon received MPSC approval of a
cost deferral and rate recovery mechanism for investigation and remediation
costs incurred at former MGP sites in excess of this reserve.
 
     MCN employed outside consultants to evaluate remediation alternatives for
these sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. The findings of these investigations indicate that
the estimated total expenditures for investigation and remediation activities
for these sites could range from $30 million to $170 million based on
undiscounted 1995 costs. As a result of these studies, MCN accrued an additional
liability and a corresponding regulatory asset of $35 million during 1995.
 
     MCN notified more than 50 current and former insurance carriers of the
environmental conditions at these former MGP sites. MCN concluded settlement
negotiations with certain carriers in 1996 and 1997 and has received payments
from several carriers. In October 1997, MichCon filed suit against major
nonsettling carriers seeking recovery of incurred costs and a declaratory
judgment of the carriers' liability for future costs of environmental
investigation and remediation at former MGP sites. Discovery is ongoing in the
case, and a preliminary trial date has been scheduled for August 1999.
 
     During 1998, 1997 and 1996, MCN spent $1.6 million, $0.8 million and $0.9
million, respectively, investigating and remediating these former MGP sites. At
December 31, 1998, the reserve balance is $35.1 million, of which $0.1 million
was classified as current. Any significant change in assumptions, such as
remediation techniques, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs for the sites
and, therefore, have an effect on MichCon's financial position and cash flows.
However, management believes that insurance coverage and the cost deferral and
rate recovery mechanism approved by the MPSC will prevent environmental costs
from having a material adverse impact on MichCon's results of operations.
 
     In 1998, MichCon received written notification from ANR, alleging that
MichCon has responsibility for a portion of the costs associated with responding
to environmental conditions present at a natural gas storage field in Michigan
currently owned and operated by an affiliate of ANR. At least some portion of
the natural gas storage field was formerly owned by MichCon. MichCon is
evaluating ANR's allegations to determine whether and to what extent, if any, it
may have legal responsibility for these costs. Management does not believe that
this matter will have a material impact on MCN's financial statements.
 
FRANCHISES
 
     MichCon operates in more than 530 cities, villages and townships under
franchises or permits that typically are revocable at will and have a 30-year
maximum duration. In 1993, MichCon began a structured process to renew or
re-establish formal franchises in 233 municipalities. During the period between
January 1994 and December 1998, an additional 184 franchises expired. To date,
391 franchises have been renewed, including nine renewed in 1998 that account
for gas sales volumes of approximately 115 MMcf annually. Additionally, one new
franchise was acquired. There were no franchises lost during 1998.
 
                                       16
<PAGE>   22
 
     As for the 26 franchises that are currently expired, MichCon's gas
distribution systems are rightfully occupying the streets with the consent or
acquiescence of the municipalities. While MichCon could be ordered by any
municipality in which its franchise has expired to remove its property, it could
lose ownership only by its consent and the payment of an agreed upon price, or
by condemnation and the payment of the fair value of such property. Should any
of these municipalities seek to terminate MichCon's operations therein and
substitute another gas utility operation, publicly or privately owned, the
municipality must either (i) acquire and operate MichCon's system, (ii)
construct a new system or (iii) grant a franchise to another privately owned
utility to construct or acquire its own distribution system.
 
     Citizens operates in cities and townships in and around Adrian, Michigan
under franchises or permits that are revocable, have a 30-year maximum duration,
and provide for municipal rate setting. In November 1995, the residents of
Adrian voted favorably on granting a 30-year renewal franchise to Citizens.
There were 3 franchise renewals during 1998.
 
                            DISCONTINUED OPERATIONS
 
MCNIC OIL & GAS COMPANY
 
     During 1998, MCN recognized write-downs of its gas and oil properties held
by its E&P business unit, MCNIC Oil & Gas Company (MOG), totaling $417 million
pre-tax ($271 million net of taxes). Such properties were accounted for under
the full-cost method of accounting prior to being classified as a discontinued
operation. The write-downs were due primarily to lower oil and gas prices and
the under-performance of certain exploration properties. Under the full-cost
method of accounting as prescribed by the Securities and Exchange Commission,
MCN's capitalized exploration and development costs exceeded the full cost
"ceiling," resulting in the excess being written off to income. The ceiling is
the sum of discounted future net cash flows from the production of proved gas
and oil reserves, and the lower of cost or estimated fair value of unproved
properties, net of related income tax effects. Future net cash flows are
required to be estimated based on end-of-quarter prices and costs, unless
contractual arrangements exist. A significant portion of the write-down was due
to lower-than-expected exploratory drilling results.
 
     In 1998, MCN also recognized a $6.1 million pre-tax ($4.0 million net of
taxes) loss from the write-down of an investment in the common stock of an E&P
company. The loss is due to a decline in the fair value of the securities which
is not considered temporary.
 
     MCN is in the process of selling substantially all of the gas and oil
properties, and expects the sale to be completed in 1999. Accordingly, E&P has
been accounted for as discontinued operations.
 
THE GENIX GROUP, INC.
 
     In 1996, MCN completed the sale of its computer operations subsidiary, The
Genix Group, Inc. (Genix), to Affiliated Computer Services, Inc. for an adjusted
sales price of $132.9 million, resulting in an after-tax gain of $36.2 million.
Genix's 1996 income from operations totaled $1.6 million and has been accounted
for as a discontinued operation.
 
                                     OTHER
 
     MCN is involved in several residential and commercial community development
partnerships.
 
     MCNIC Gas Storage Company, a 100% owned subsidiary of MCNIC, holds a 50%
limited partnership interest in The Orchards Golf Limited Partnership. The
Orchards golf course is above the Washington 28 storage field, located north of
Detroit. The partnership was formed in 1991 and developed approximately 450
acres of land in Washington Township, Michigan. The acreage consists of an
18-hole championship golf course of approximately 200 acres and residential
development of the remaining 250 acres.
 
     MichCon Development Company, a 100% owned subsidiary of MichCon, holds
between a 33% and a 50% interest in various partnerships related to the
Harbortown development. The Harbortown development is
                                       17
<PAGE>   23
 
a mixed use development consisting of a 60,000 square foot retail shopping
center, a 63 slip marina, 273 rental units and 80 low-rise condominiums located
in Detroit along the Detroit River. The development consists of 35 acres of
land, of which 12 are currently undeveloped.
 
ITEM 2. PROPERTIES
 
     MCN, through its principal subsidiaries, owns or leases, under long-term
leases, office space in Detroit and Grand Rapids, Michigan, Houston, Texas,
Denver, Colorado, and Hartford, Connecticut. MCN's facilities are suitable and
adequate for their intended use. MCN's capital investments for 1998 totaled $791
million and for 1999 are anticipated to be approximately $750 million.
 
GAS DISTRIBUTION
 
     MichCon operates natural gas distribution, transmission and storage
facilities in Michigan. At December 31, 1998, MichCon's distribution system
included 16,722 miles of distribution mains, 1,083,607 service lines and
1,202,722 active meters. MichCon owns 2,604 miles of transmission and production
lines that deliver natural gas to the distribution districts and interconnect
its storage fields with the sources of supply and the market areas. MichCon also
owns properties relating to four underground storage fields with an aggregate
storage capacity of approximately 124 Bcf. Additionally, MichCon owns district
office buildings, service buildings and gas receiving and metering stations. In
January 1998, MichCon purchased its principal office building in Detroit, the
Guardian Building, ending its long-term capital lease obligation. MichCon
occupies its principal office building in Grand Rapids under a long-term lease.
Portions of these buildings are subleased to affiliates and others.
 
     Most of MichCon's properties are held in fee, by easement, or under lease
agreements expiring at various dates to 2006, with renewal options extending
beyond that date. The principal plants and properties of MichCon are held
subject to the lien of MichCon's Indenture of Mortgage and Deed of Trust under
which MichCon's First Mortgage Bonds are issued. Some existing properties are
being fully utilized and new properties are being added to meet the requirements
of expansion into new areas. Gas Distribution's capital expenditures for 1998
totaled $159 million and for 1999 are anticipated to be approximately $170
million.
 
     The Saginaw Bay Pipeline Company, a wholly owned subsidiary of MichCon
Pipeline, owns a 66 2/3% interest in the Saginaw Bay Area Limited Partnership,
which owns substantially all of the properties used in the conduct of its
business, primarily a 126-mile major gathering line. The Saginaw Bay Lateral
Company, a wholly owned subsidiary of MichCon Pipeline, owns a 46% interest in
the Saginaw Bay Lateral Limited Partnership, which owns substantially all of the
properties used in the conduct of its business, primarily lateral lines related
to the Saginaw Bay major gathering line. Westside Pipeline Company, a wholly
owned subsidiary of MichCon Pipeline, owns an 82.62% interest in Jordan Valley
Pipeline, a 14-mile major gathering line, and the Terra-Hayes Pipeline, an
18-mile major gathering line. MichCon Gathering Company, a wholly owned
subsidiary of MichCon Pipeline, owns substantially all of the properties used in
the conduct of its business, including 44.7-mile, 8.6-mile, 11-mile and
25.2-mile major gathering lines and a 2,400 horsepower compressor station.
 
     Thunder Bay Gathering Company, a wholly owned subsidiary of MichCon
Pipeline, owns substantially all of the properties used in the conduct of its
business, including 44 miles of gathering lines.
 
     Citizens owns all of the properties used in the conduct of its utility
business. Included in these properties is a gas distribution system, a two-story
office building in downtown Adrian and a one-story service center.
 
DIVERSIFIED ENERGY
 
     In addition to Gas Distribution, MCN is involved in joint ventures that own
property primarily associated with gas gathering, processing, transmission and
storage, electric power generation and distribution and real estate. The
majority of these investments are in unconsolidated joint ventures and
partnerships in which Diversified Energy has an ownership interest of less than,
or equal to, 50%.
 
                                       18
<PAGE>   24
 
     During 1998, Electric Power acquired a 95% interest in the Cobisa-Person
Power project, a joint venture created to build, own and operate a 140 MW power
plant in Albuquerque, New Mexico. This $60 million gas-fired peaking plant is
expected to be in service by the summer of 2000 and is backed by a long-term
power purchase agreement with Public Service Company of New Mexico. The project
will be constructed at the site of a decommissioned power plant, keeping costs
low and accelerating its development.
 
ITEM 3. LEGAL PROCEEDINGS
 
     In addition to Gas Distribution's regulatory proceedings and other matters
described in Item 1, "Business," MCN also is involved in a number of lawsuits
and administrative proceedings in the ordinary course of business with respect
to taxes, environmental matters, contracts, personal injury, property damage
claims and other matters.
 
ENVIRONMENTAL
 
     In 1994, MichCon received a general notice of liability letter from the EPA
stating that it was one of two potentially responsible parties at the Lower
Ecorse Creek Superfund site in Wyandotte, Michigan. The EPA requested that
MichCon conduct a remedial investigation and feasibility study at that site.
MichCon investigated its prior activities in the area and the EPA's bases for
its conclusion, and concluded that it was not responsible for contamination
discovered at that site. MichCon informed the EPA of this belief and did not
undertake the requested activities.
 
     In September 1996, the EPA sent MichCon a second general notice of
liability letter for the site and demanded reimbursement of approximately $2.3
million in past costs, plus interest. The EPA then issued MichCon and the other
potentially responsible party a unilateral administrative order under section
106 of the Comprehensive Environmental Response Compensation and Liability Act
to implement the remedy. The EPA estimates the cost of the remedy to be
approximately $650,000. MichCon again reviewed the EPA's bases for determining
that it is a potentially responsible party and concluded again that it was not
responsible for contamination discovered at that site and informed the EPA of
its decision. The EPA has not taken any subsequent action against MichCon. The
EPA may sue MichCon to force compliance with the order or may implement the
remedy and then sue MichCon for recovery of all incurred costs. If the EPA
institutes and prevails in such a suit and if the court determines that MichCon
did not have sufficient cause to comply with the order, the court may impose
civil penalties and punitive damages. Management believes that MichCon was not
responsible for contamination at the site and has sufficient cause not to comply
with this order and that the resolution of this matter will not have a material
adverse effect on MichCon's financial statements.
 
ENERGY CONSERVATION PROGRAMS
 
     In July 1998, the Wayne County Michigan Circuit Court approved a settlement
of two class action lawsuits in relation to a discontinued energy conservation
program. There were 46,000 class members. The notice of settlement was sent in
June 1998 to the class members. Terms of the settlement included capped co-
payments for the repair of chimney damages or the installation of a chimney
liner and a reduced price for a carbon monoxide detector purchased from MichCon.
The request for reimbursement period ended on October 9, 1998, at which time
only 30 class members participated in the settlement. Claims totaling $3,105
were paid out in November 1998. MichCon is continuing its lawsuit against
certain of the manufacturers, contractors and installers of the plaintiffs'
furnaces.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None.
 
                                       19
<PAGE>   25
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information with respect to all executive officers of MCN as of February
26, 1999 is set forth below. Such officers are appointed by the Board of
Directors for terms expiring at the next annual meeting of shareholders,
scheduled to be held April 28, 1999.
 
<TABLE>
<CAPTION>
          NAME AND POSITION              AGE    BUSINESS EXPERIENCE DURING PAST FIVE YEARS
          -----------------              ---    ------------------------------------------
<S>                                      <C>    <C>
Alfred R. Glancy III                     60     Current position since September 1992; Chairman, Chief
  Chairman, President, Chief                    Executive Officer and Director since August 1988;
  Executive Officer and Director                Chairman and Director of MCN Investment since 1988;
                                                Chairman and Director of MichCon since 1984 and 1981,
                                                respectively; Chief Executive Officer of MichCon from
                                                1984 to September 1992.
Stephen E. Ewing                         54     Current position since September 1992; President and
  President and Chief Executive                 Chief Operating Officer from August 1988 to September
  Officer of MichCon and Director               1992; Director since August 1988; President and
                                                Director of MichCon since 1985 and 1984, respectively;
                                                Chief Operating Officer of MichCon from 1985 to
                                                September 1992.
Howard L. Dow III                        43     Current position since September 1998; Senior Vice
  Senior Vice President and Treasurer           President, Treasurer, and Chief Financial Officer of
                                                MichCon since April 1998; Vice President, Chief
                                                Financial Officer, Finance and Regulatory Affairs of
                                                MichCon since October 1996; Vice President Marketing
                                                and Regulatory Affairs and Chief Financial Officer of
                                                MichCon since 1995; Vice President of Marketing and
                                                Regulatory Affairs since July 1993; Vice President
                                                Rates and Regulatory Affairs of MichCon since March
                                                1990; Director of MichCon since 1995.
William K. McCrackin                     65     Current position since August 1988; Treasurer from
  Vice Chairman, Chief Financial                August 1988 to September 1992; Director of MCN
  Officer and Director                          Investment since 1988; Vice Chairman of MichCon from
                                                March 1986 to September 1992; Chief Financial Officer
                                                of MichCon from 1985 to September 1992; Director of
                                                MichCon since 1984.
Daniel L. Schiffer                       55     Current position since September 1995; Vice President,
  Senior Vice President, General                General Counsel and Secretary of MCN since April 1989;
  Counsel and Secretary                         General Counsel and Secretary of MCN since August 1988;
                                                Vice President and General Counsel of MichCon from July
                                                1991 to September 1992; Director of MichCon from
                                                January 1989 to September 1998.
Joseph T. Williams                       61     Current position since June 1998; President and Chief
  President and Chief Executive                 Executive Officer of MCNIC Oil & Gas Company from July
  Officer of MCNIC                              1997 to June 1998; Vice Chairman and Chief Executive
                                                Officer of Enserch Exploration Inc. from June 1995 to
                                                February 1996; President and Chief Executive Officer of
                                                PG&E Resources Company from March 1989 to June 1995;
                                                Director of MCNIC since August 1997.
</TABLE>
 
                                       20
<PAGE>   26
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     MCN Common Stock is traded on the New York Stock Exchange. On February 26,
1999 there were 21,714 holders of record of MCN Common Stock. Information
regarding the market price of MCN Common Stock and related security holder
matters is incorporated by reference herein from the section titled "Selected
Financial Data" in MCN's 1998 Annual Report to Shareholders, pages 62 and 63.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     Information required pursuant to this item is incorporated by reference
herein from the section titled "Selected Financial Data" in MCN's 1998 Annual
Report to Shareholders, pages 62 and 63.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     Information required pursuant to this item is incorporated by reference
herein from the section titled "Management's Discussion and Analysis" in MCN's
1998 Annual Report to Shareholders, pages 23 through 35.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
     Information required pursuant to this item is incorporated by reference
herein from the section titled "Management's Discussion and Analysis -- Market
Risk Information" in MCN's 1998 Annual Report to Shareholders, page 34.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     Information required pursuant to this item is incorporated by reference
herein from the following sections of MCN's 1998 Annual Report to Shareholders.
The consolidated statement of operations, cash flows and shareholders' equity
are for each of the years ended December 31, 1998, 1997 and 1996 and the
consolidated statement of financial position is as of December 31, 1998 and
1997.
 
     Consolidated Statement of Financial Position, page 37
 
     Consolidated Statement of Operations, page 36
 
     Consolidated Statement of Cash Flows, page 38
 
     Consolidated Statement of Shareholders' Equity, page 39
 
     Notes to Consolidated Financial Statements, pages 40 through 61
 
     Selected Financial Data, pages 62 and 63
 
     Independent Auditors' Report, page 64
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     None.
 
                                       21
<PAGE>   27
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information set forth in the section titled "Proposal 1 -- Election of
Directors" in MCN's February 1999 definitive Proxy Statement is incorporated by
reference herein.
 
     Information concerning the executive officers of MCN is set forth in the
section titled "Executive Officers of the Registrant" on page 20 in Part I of
this Report.
 
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
 
     The information set forth in the section titled "Filings Under Section 16
(a)" in MCN's February 1999 definitive Proxy Statement is incorporated by
reference herein.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information set forth in the sections titled "Compensation of Directors
and Executive Officers" and "Report of the Compensation Committee of the Board
of Directors on Executive Compensation" in MCN's February 1999 definitive Proxy
Statement is incorporated by reference herein.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information set forth in the section titled "Beneficial Security
Ownership of Directors, Nominees and Executive Officers" in MCN's February 1999
definitive Proxy Statement is incorporated by reference herein.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information set forth in the sections titled "Executive Compensation"
and "Other Compensation Matters" in MCN's February 1999 definitive Proxy
Statement is incorporated by reference herein.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
 
(A) LIST OF DOCUMENTS FILED AS PART OF THE REPORT:
 
     1. For a list of financial statements incorporated by reference, see the
        section titled "Financial Statements and Supplementary Data" on page 21
        in Part II, Item 8 of this Report.
 
     2. The Financial Statement Schedules for each of the three years in the
        period ended December 31, 1998, unless otherwise noted, are included
        herein in response to Part II, Item 8:
 
          Independent Auditors' Report
 
     SCHEDULE
 
          II -- Valuation and Qualifying Accounts
 
     Schedules other than those referred to above are omitted as not applicable
or not required, or the required information is shown in the financial
statements or notes thereto.
 
                                       22
<PAGE>   28
 
INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors of MCN Energy Group Inc.:
 
     We have audited the consolidated financial statements of MCN Energy Group
Inc. and subsidiaries (the "Company"), as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998, and have issued
our report thereon dated February 25, 1999; such consolidated financial
statements and report are included in your 1998 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of the Company, listed in Item 14.
This consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
 
Detroit, Michigan
February 25, 1999
 
                                       23
<PAGE>   29
 
                                  SCHEDULE II
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                             (THOUSANDS OF DOLLARS)
 
<TABLE>
<CAPTION>
                      COLUMN A                           COLUMN B          COLUMN C           COLUMN D      COLUMN E
                                                                          ADDITIONS
                                                                     --------------------
                                                                          PROVISIONS         DEDUCTIONS
                                                                          CHARGED TO        FOR PURPOSES    BALANCE
                                                        BALANCE AT   --------------------   FOR WHICH THE    AT END
                                                        BEGINNING              REGULATORY   RESERVES WERE      OF
                     DESCRIPTION                        OF PERIOD    INCOME      ASSET        PROVIDED       PERIOD
-----------------------------------------------------   ----------   -------   ----------   -------------   --------
<S>                                                     <C>          <C>       <C>          <C>             <C>
                                                                                        YEAR ENDED DECEMBER 31, 1998
                                                        ------------------------------------------------------------
Reserves deducted from assets in Consolidated
  Statement of Financial Position:
    Allowance for doubtful accounts..................    $15,711     $13,302    $     0        $19,348      $ 9,665
                                                         =======     =======    =======        =======      =======
Reserves included in Current Liabilities -- Other and
  Deferred Credits and Other Liabilities -- Other in
  Consolidated Statement of Financial Position:
    Restructuring Charge (1).........................    $     0     $10,390    $     0        $   660      $ 9,730
                                                         =======     =======    =======        =======      =======
Reserves included in Current Liabilities -- Other and
  in Accrued Environmental Costs in Consolidated
  Statement of Financial Position:
    Environmental testing(2).........................    $36,741     $     0    $     0        $ 1,649      $35,092
                                                         =======     =======    =======        =======      =======
Reserves included in Deferred Credits and Other
  Liabilities -- Other in Consolidated Statement of
  Financial Position:
    Injuries and damages.............................    $ 4,838     $  (328)   $   438        $ 2,433      $ 2,515
                                                         =======     =======    =======        =======      =======
                                                                      YEAR ENDED DECEMBER 31, 1997
                                                        ------------------------------------------------------------
Reserves deducted from assets in Consolidated
  Statement of Financial Position:
    Allowance for doubtful accounts..................    $18,487     $21,847    $     0        $24,623      $15,711
                                                         =======     =======    =======        =======      =======
Reserves included in Current Liabilities -- Other and
  in Accrued Environmental Costs in Consolidated
  Statement of Financial Position:
    Environmental testing (2)........................    $37,576     $     0    $     0        $   835      $36,741
                                                         =======     =======    =======        =======      =======
Reserves included in Deferred Credits and Other
  Liabilities -- Other in Consolidated Statement of
  Financial Position:
    Injuries and damages.............................    $ 9,182     $ 1,400    $   608        $ 6,352      $ 4,838
                                                         =======     =======    =======        =======      =======
                                                                      YEAR ENDED DECEMBER 31, 1996
                                                        ------------------------------------------------------------
Reserves deducted from assets in Consolidated
  Statement of Financial Position:
    Allowance for doubtful accounts..................    $13,765     $29,425    $     0        $24,703      $18,487
                                                         =======     =======    =======        =======      =======
Reserves included in Current Liabilities -- Other and
  in Accrued Environmental Costs in Consolidated
  Statement of Financial Position:
    Environmental testing (2)........................    $38,451     $     0    $     0        $   875      $37,576
                                                         =======     =======    =======        =======      =======
Reserves included in Deferred Credits and Other
  Liabilities -- Other in Consolidated Statement of
  Financial Position:
    Injuries and damages.............................    $ 8,013     $ 3,052    $   674        $ 2,557      $ 9,182
                                                         =======     =======    =======        =======      =======
</TABLE>
 
---------------
 
NOTES:
 
(1) Reference is made to Note 3 to the Consolidated Financial Statements of
    MCN's 1998 Annual Report to Shareholders, page 41.
 
(2) Reference is made to Note 13b to the Consolidated Financial Statements of
    MCN's 1998 Annual Report to Shareholders, page 48.
 
                                       24
<PAGE>   30
 
3. Exhibits, Including Those Incorporated by Reference.
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
    3-1    Articles of Incorporation of MCN Energy Group Inc. (Exhibit
           3-1 to March 31, 1998 Form 10-Q).
    3-2    By-Laws of MCN Energy Group Inc., as amended (Exhibit 3-2 to
           MCN's 1997 Form 10-K).
    3-3    Certificate of Limited Partnership of MCN Michigan Limited
           Partnership (Exhibit 4-6 to Registration Statement No.
           33-55665).
    3-4    Certificate of Trust of MCN Financing I (Exhibit 4-11 to
           Registration Statement No. 333-01521).
    3-5    Certificate of Trust of MCN Financing III (Exhibit 4-16 to
           Registration Statement No. 333-21175).
    4-1    Rights Plan (Exhibit 28-1 to December 20, 1989 Form 8-K and
           Exhibit 4 to July 23, 1997 Form 8-K).
    4-2    Senior Debt Securities Indenture between MCN Energy Group
           Inc. and NBD Bank, N.A., as Trustee, dated September 1, 1994
           (Exhibit 4-4 to Registration Statement No. 33-55665); First
           Supplemental Indenture, dated June 4, 1997 (Exhibit 4-2 to
           MCN's 1997 Form 10-K).
    4-3    Subordinated Debt Securities Indenture between MCN Energy
           Group Inc. and NBD Bank, N.A., as Trustee, dated September
           1, 1994 (Exhibit 4-5 to Registration Statement No.
           33-55665); First Supplemental Indenture, dated April 17,
           1996 (Exhibit 4-18 to Amendment No. 2 to Registration
           Statement No. 333-01521); and Second Supplemental Indenture,
           dated July 24, 1996 (Exhibit 5-2 to July 24, 1996 Form 8-K).
    4-4    MichCon's Indenture of Mortgage and Deed of Trust dated
           March 1, 1944 (Exhibit 7-D to Registration Statement No.
           2-5252); Twenty-ninth Supplemental Indenture, dated July 15,
           1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth
           Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1
           to September 27, 1991 Form 8-K); Thirty-first Supplemental
           Indenture, dated December 15, 1991 (Exhibit 4-1 to February
           28, 1992 Form 8-K); Thirty-second Supplemental Indenture,
           dated January 5, 1993 (Exhibit 4-1 to 1992 Form 10-K);
           Thirty-third Supplemental Indenture, dated May 1, 1996
           (Exhibit 4-2 to Registration Statement No. 33-59093); and
           Thirty-fourth Supplemental Indenture, dated November 1, 1996
           (Exhibit 4-2 to Registration Statement No. 333-16285).
    4-5    Debt Securities Indenture between MCN Investment Corp. and
           NBD Bank, N.A., as Trustee, dated September 1, 1995 (Exhibit
           4-1 to Registration Statement No. 33-63311).
    4-6    MCN hereby agrees to furnish to the SEC, upon request, a
           copy of any instruments defining the rights of holders of
           long-term debt issued by MCN or its subsidiaries.
    4-7    Form of Guarantee Agreement with Respect to Preferred
           Securities of MCN Michigan Limited Partnership (Exhibit 4-8
           to Registration Statement No. 33-55665).
    4-8    Amended and Restated Limited Partnership Agreement of MCN
           Michigan Limited Partnership (Exhibit 4-1 to October 26,
           1994 Form 8-K).
    4-9    Form of MCN Energy Group Inc. Series A Subordinated
           Deferrable Interest Debt Security for $100,000,000 (Exhibit
           4-6 to October 26, 1994 Form 8-K).
   4-10    Form of MCN Energy Group Inc. Series A Subordinated
           Deferrable Interest Debt Security for $1,100,000 (Exhibit
           4-7 to October 26, 1994 Form 8-K).
   4-11    Purchase Contract Agreement dated April 22, 1996 between MCN
           Energy Group Inc. and The First National Bank of Chicago, as
           Purchase Contract Agent (Exhibit 4-9 to April 22, 1996 Form
           8-K).
   4-12    Pledge Agreement dated April 22, 1996 among MCN Energy Group
           Inc., Chemical Bank, as Collateral Agent, and The First
           National Bank of Chicago, as Purchase Contract Agent
           (Exhibit 4-10 to April 22, 1996 Form 8-K).
</TABLE>
 
                                       25
<PAGE>   31
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<C>        <S>
   4-13    Form of Preferred Redeemable Increased Dividend Equity
           Securities Certificate (Exhibit 4-13 to MCN's 1997 Form
           10-K).
   4-14    Amended and Restated Declaration of Trust of MCN Financing
           I, dated as of July 24, 1996 (Exhibit 5-1 to July 24, 1996
           Form 8-K).
   4-15    Preferred Securities Guarantee Agreement, dated as of July
           26, 1996, between MCN and Wilmington Trust Company (Exhibit
           5-4 to July 24, 1996 Form 8-K).
   4-16    Form of Preferred Security of MCN Financing I (Exhibit 4-13
           to MCN's 1997 Form 10-K).
   4-17    Purchase Contract Agreement dated March 25, 1997 between MCN
           and The First National Bank of Chicago, as Purchase Contract
           Agent (Exhibit 5-5 to March 19, 1997 Form 8-K).
   4-18    Pledge Agreement dated March 25, 1997 among MCN, Chase
           Manhattan Bank, as Collateral Agent, and The First National
           Bank of Chicago, as Purchase Contract Agent (Exhibit 5-6 to
           March 19, 1997 Form 8-K).
   4-19    Form of FELINE PRIDES Certificate (Exhibit 4-19 to MCN's
           1997 Form 10-K).
   4-20    Amended and Restated Declaration of Trust of MCN Financing
           III, dated as of March 19, 1997 (Exhibit 5-2 to March 19,
           1997 Form 8-K).
   4-21    Preferred Securities Guarantee Agreement, dated as of March
           19, 1997, between MCN and Wilmington Trust Company (Exhibit
           5-4 to March 19, 1997 Form 8-K).
   4-22    Form of Preferred Security of MCN Financing III (Exhibit
           4-22 to MCN's 1997 Form 10-K).
   10-1    MCN Stock Option Plan Post-Effective Amendment No. 1
           (Registration Statement No. 33-21930-99).
   10-2    Form of Employment Agreement (Exhibit 99-2 to June 30, 1997
           Form 10-Q).
   10-3    MCN Energy Group Inc. Executive Annual Performance Plan (As
           amended effective January 1, 1998).*
   10-4    MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to
           March 31, 1995 Form 10-Q).
   10-5    Special Retention Agreement between MCN Energy Group Inc.
           and Rai P. Bhargava (Exhibit 10-1 to June 30, 1995 Form
           10-Q).
   10-6    MCN Executive Deferred Compensation Plan, as amended
           (Exhibit 10-1 to September 30, 1996 Form 10-Q).
   10-7    MichCon Supplemental Death Benefit and Retirement Income
           Plan (Exhibit 10-2 to September 30, 1996 Form 10-Q).
   10-8    MichCon Supplemental Retirement Plan (Exhibit 10-3 to
           September 30, 1996 Form 10-Q).
   10-9    MCN Energy Group Inc. Mandatory Deferred Compensation Plan,
           as amended (Exhibit 10-11 to 1996 Form 10-K).
  10-10    MCN Energy Group Inc. Supplemental Savings Plan (Exhibit
           10-12 to 1996 Form 10-K).
  10-11    MCN Energy Group Inc. Nonemployee Directors' Compensation
           Plan, as amended (Exhibit 99-1 to June 30, 1997 Form 10-Q).
  10-12    MCN Energy Group Inc. Long-Term Incentive Performance Share
           Plan (As amended and restated October 1, 1997).*
  10-13    Special Retention Agreement -- William K. McCrackin (Exhibit
           10-1 to September 30, 1998 Form 10-Q).
  10-14    MCN Energy Group Savings and Stock Ownership Plan (As
           amended and restated effective as of January 1, 1998).*
  10-15    MichCon Investment and Stock Ownership Plan (As amended and
           restated effective as of January 1, 1998).*
</TABLE>
 
                                       26
<PAGE>   32
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<C>        <S>
   12-1    Computation of Ratio of Earnings to Fixed Charges for MCN
           Energy Group Inc.*
   12-2    Computation of Ratio of Earnings to Fixed Charges for MCN
           Investment Corporation.*
   13-1    MCN Energy Group Inc. 1998 Annual Report to Shareholders.*
   21-1    List of MCN Subsidiaries.*
   23-1    Independent Auditors' Consent -- Deloitte & Touche LLP.*
   24-1    Powers of Attorney.*
   27-1    Financial Data Schedule.*
</TABLE>
 
---------------
 * Indicates document filed herewith.
 
References are to MCN (File No. 1-10070) for documents incorporated by
reference.
 
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference.
 
(B) REPORTS ON FORM 8-K:
 
     MCN filed a report on Form 8-K dated November 13, 1998, under Item 5, with
respect to the offering by MCN Financing II of its 8 5/8% Trust Preferred
Securities (TRUPS) pursuant to the registration statement of the registrant and
MCN Financing II, among others, on Form S-3 (No. 333-47139) filed with the
Securities and Exchange Commission under the Securities Act of 1933. The
following documents were filed as Exhibits thereto:
 
     - Underwriting Agreement dated November 13, 1998 with respect to the TRUPS.
 
     - Amended and Restated Declaration of Trust of MCN Financing II, dated as
       of November 18, 1998.
 
     - Fourth Supplemental Indenture, dated as of November 18, 1998, between MCN
       and NBD Bank.
 
     - Preferred Securities Guarantee Agreement, dated as of November 18, 1998,
       between MCN and Wilmington Trust Company.
 
                                       27
<PAGE>   33
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
 
                                                  MCN ENERGY GROUP INC.
 
                                          --------------------------------------
                                                       (Registrant)
 
                                          By:    /s/ Gerard F. Kabzinski
 
                                            ------------------------------------
                                                    Gerard F. Kabzinski
                                               Vice President and Controller
                                                       March 11, 1999
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
 
<TABLE>
<CAPTION>
                                                                 TITLE                         DATE
                                                                 -----                         ----
<C>                                              <S>                                      <C>
 
                      *                          Director, Chairman, President and        March 11, 1999
---------------------------------------------    Chief Executive Officer
            Alfred R. Glancy III
 
                      *                          Director, Vice Chairman and Chief        March 11, 1999
---------------------------------------------    Financial Officer
            William K. McCrackin
 
           /s/ Gerard F. Kabzinski               Vice President and Controller            March 11, 1999
---------------------------------------------
             Gerard F. Kabzinski
 
                      *                          Director                                 March 11, 1999
---------------------------------------------
               James G. Berges
 
                      *                          Director                                 March 11, 1999
---------------------------------------------
              Stephen E. Ewing
 
                      *                          Director                                 March 11, 1999
---------------------------------------------
               Roger Fridholm
 
                      *                          Director                                 March 11, 1999
---------------------------------------------
             Frank M. Hennessey
 
                      *                          Director                                 March 11, 1999
---------------------------------------------
             Thomas H. Jeffs II
 
                      *                          Director                                 March 11, 1999
---------------------------------------------
             Helen O. Petrauskas
 
                      *                          Director                                 March 11, 1999
---------------------------------------------
               Howard F. Sims
 
                      *                          Director                                 March 11, 1999
---------------------------------------------
              Bill M. Thompson
 
        *By: /s/ GERARD F. KABZINSKI
   ---------------------------------------
             Gerard F. Kabzinski
              Attorney-in-Fact
</TABLE>
 
                                       28
<PAGE>   34
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<C>        <S>
    3-1    Articles of Incorporation of MCN Energy Group Inc. (Exhibit
           3-1 to March 31, 1998 Form 10-Q).
    3-2    By-Laws of MCN Energy Group Inc., as amended (Exhibit 3-2 to
           MCN's 1997 Form 10-K).
    3-3    Certificate of Limited Partnership of MCN Michigan Limited
           Partnership (Exhibit 4-6 to Registration Statement No.
           33-55665).
    3-4    Certificate of Trust of MCN Financing I (Exhibit 4-11 to
           Registration Statement No. 333-01521).
    3-5    Certificate of Trust of MCN Financing III (Exhibit 4-16 to
           Registration Statement No. 333-21175).
    4-1    Rights Plan (Exhibit 28-1 to December 20, 1989 Form 8-K and
           Exhibit 4 to July 23, 1997 Form 8-K).
    4-2    Senior Debt Securities Indenture between MCN Energy Group
           Inc. and NBD Bank, N.A., as Trustee, dated September 1, 1994
           (Exhibit 4-4 to Registration Statement No. 33-55665); First
           Supplemental Indenture, dated June 4, 1997 (Exhibit 4-2 to
           MCN's 1997 Form 10-K).
    4-3    Subordinated Debt Securities Indenture between MCN Energy
           Group Inc. and NBD Bank, N.A., as Trustee, dated September
           1, 1994 (Exhibit 4-5 to Registration Statement No.
           33-55665); First Supplemental Indenture, dated April 17,
           1996 (Exhibit 4-18 to Amendment No. 2 to Registration
           Statement No. 333-01521); and Second Supplemental Indenture,
           dated July 24, 1996 (Exhibit 5-2 to July 24, 1996 Form 8-K).
    4-4    MichCon's Indenture of Mortgage and Deed of Trust dated
           March 1, 1944 (Exhibit 7-D to Registration Statement No.
           2-5252); Twenty-ninth Supplemental Indenture, dated July 15,
           1989 (Exhibit 4-1 to July 27, 1989 Form 8-K); Thirtieth
           Supplemental Indenture, dated September 1, 1991 (Exhibit 4-1
           to September 27, 1991 Form 8-K); Thirty-first Supplemental
           Indenture, dated December 15, 1991 (Exhibit 4-1 to February
           28, 1992 Form 8-K); Thirty-second Supplemental Indenture,
           dated January 5, 1993 (Exhibit 4-1 to 1992 Form 10-K);
           Thirty-third Supplemental Indenture, dated May 1, 1996
           (Exhibit 4-2 to Registration Statement No. 33-59093); and
           Thirty-forth Supplemental Indenture, dated November 1, 1996
           (Exhibit 4-2 to Registration Statement No. 333-16285).
    4-5    Debt Securities Indenture between MCN Investment Corp. and
           NBD Bank, N.A., as Trustee, dated September 1, 1995 (Exhibit
           4-1 to Registration Statement No. 33-63311).
    4-6    MCN hereby agrees to furnish to the SEC, upon request, a
           copy of any instruments defining the rights of holders of
           long-term debt issued by MCN or its subsidiaries.
    4-7    Form of Guarantee Agreement with Respect to Preferred
           Securities of MCN Michigan Limited Partnership (Exhibit 4-8
           to Registration Statement No. 33-55665).
    4-8    Amended and Restated Limited Partnership Agreement of MCN
           Michigan Limited Partnership (Exhibit 4-1 to October 26,
           1994 Form 8-K).
    4-9    Form of MCN Energy Group Inc. Series A Subordinated
           Deferrable Interest Debt Security for $100,000,000 (Exhibit
           4-6 to October 26, 1994 Form 8-K).
   4-10    Form of MCN Energy Group Inc. Series A Subordinated
           Deferrable Interest Debt Security for $1,100,000 (Exhibit
           4-7 to October 26, 1994 Form 8-K).
   4-11    Purchase Contract Agreement dated April 22, 1996 between MCN
           Energy Group Inc. and The First National Bank of Chicago, as
           Purchase Contract Agent (Exhibit 4-9 to April 22, 1996 Form
           8-K).
   4-12    Pledge Agreement dated April 22, 1996 among MCN Energy Group
           Inc., Chemical Bank, as Collateral Agent, and The First
           National Bank of Chicago, as Purchase Contract Agent
           (Exhibit 4-10 to April 22, 1996 Form 8-K).
</TABLE>
<PAGE>   35
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<C>        <S>
   4-13    Form of Preferred Redeemable Increased Dividend Equity
           Securities Certificate (Exhibit 4-13 to MCN's 1997 Form
           10-K).
   4-14    Amended and Restated Declaration of Trust of MCN Financing
           I, dated as of July 24, 1996 (Exhibit 5-1 to July 24, 1996
           Form 8-K).
   4-15    Preferred Securities Guarantee Agreement, dated as of July
           26, 1996, between MCN and Wilmington Trust Company (Exhibit
           5-4 to July 24, 1996 Form 8-K).
   4-16    Form of Preferred Security of MCN Financing I (Exhibit 4-13
           to MCN's 1997 Form 10-K).
   4-17    Purchase Contract Agreement dated March 25, 1997 between MCN
           and The First National Bank of Chicago, as Purchase Contract
           Agent (Exhibit 5-5 to March 19, 1997 Form 8-K).
   4-18    Pledge Agreement dated March 25, 1997 among MCN, Chase
           Manhattan Bank, as Collateral Agent, and The First National
           Bank of Chicago, as Purchase Contract Agent (Exhibit 5-6 to
           March 19, 1997 Form 8-K.)
   4-19    Form of FELINE PRIDES Certificate (Exhibit 4-19 to MCN's
           1997 Form 10-K).
   4-20    Amended and Restated Declaration of Trust of MCN Financing
           III, dated as of March 19, 1997 (Exhibit 5-2 to March 19,
           1997 Form 8-K).
   4-21    Preferred Securities Guarantee Agreement, dated as of March
           19, 1997, between MCN and Wilmington Trust Company (Exhibit
           5-4 to March 19, 1997 Form 8-K).
   4-22    Form of Preferred Security of MCN Financing III (Exhibit
           4-22 to MCN's 1997 Form 10-K).
   10-1    MCN Stock Option Plan Post-Effective Amendment No. 1
           (Registration Statement No. 33-21930-99).
   10-2    Form of Employment Agreement (Exhibit 99-2 to June 30, 1997
           Form 10-Q).
   10-3    MCN Energy Group Inc. Executive Annual Performance Plan (As
           amended effective January 1, 1998).*
   10-4    MCN Energy Group Inc. Stock Incentive Plan (Exhibit 10-1 to
           March 31, 1995 Form 10-Q).
   10-5    Special Retention Agreement between MCN Energy Group Inc.
           and Rai P. Bhargava (Exhibit 10-1 to June 30, 1995 Form
           10-Q).
   10-6    MCN Executive Deferred Compensation Plan, as amended
           (Exhibit 10-1 to September 30, 1996 Form 10-Q).
   10-7    MichCon Supplemental Death Benefit and Retirement Income
           Plan (Exhibit 10-2 to September 30, 1996 Form 10-Q).
   10-8    MichCon Supplemental Retirement Plan (Exhibit 10-3 to
           September 30, 1996 Form 10-Q).
   10-9    MCN Energy Group Inc. Mandatory Deferred Compensation Plan,
           as amended (Exhibit 10-11 to 1996 Form 10-K).
  10-10    MCN Energy Group Inc. Supplemental Savings Plan (Exhibit
           10-12 to 1996 Form 10-K).
  10-11    MCN Energy Group Inc. Nonemployee Directors' Compensation
           Plan, as amended (Exhibit 99-1 to June 30, 1997 Form 10-Q).
  10-12    MCN Energy Group Inc. Long-Term Incentive Performance Share
           Plan (As amended and restated October 1, 1997).*
  10-13    Special Retention Agreement -- William K. McCrackin (Exhibit
           10-1 to September 30, 1998 Form 10-Q).
  10-14    MCN Energy Group Savings and Stock Ownership Plan (As
           amended and restated effective as of January 1, 1998).*
  10-15    MichCon Investment and Stock Ownership Plan (As amended and
           restated effective as of January 1, 1998).*
</TABLE>
<PAGE>   36
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<C>        <S>
   12-1    Computation of Ratio of Earnings to Fixed Charges for MCN
           Energy Group Inc.*
   12-2    Computation of Ratio of Earnings to Fixed Charges for MCN
           Investment Corporation.*
   13-1    MCN Energy Group Inc. 1998 Annual Report to Shareholders.*
   21-1    List of MCN Subsidiaries.*
   23-1    Independent Auditors' Consent -- Deloitte & Touche LLP.*
   24-1    Powers of Attorney.*
   27-1    Financial Data Schedule.*
</TABLE>
 
---------------
 * Indicates document filed herewith.
 
References are to MCN (File No. 1-10070) for documents incorporated by
reference.
 
References are to MichCon (File No. 1-7310) for MichCon documents incorporated
by reference.