<PAGE>   1

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              -------------------
                                AMENDMENT NO. 1

                            (THIS AMENDMENT NO. 1 IS
                         FILED TO RESTATE 1998 AND 1997
                             FINANCIAL INFORMATION)

                                   FORM 10-K/A

                 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  ___ No   X

     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 May 28, 1999 was $1.713
billion based on 85,655,381 outstanding shares and the closing price on that day
(New York Stock Exchange Composite Transactions).

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of MCN's February 1999 definitive Proxy Statement are incorporated
by reference in Part III.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                                    GLOSSARY

Antrim Gas............................     Natural gas produced from shallow
                                           wells in the Devonian (Antrim) shale
                                           formations.

Basis.................................     The differential that exists at any
                                           time between the futures price for a
                                           given commodity and a comparable or
                                           related regional cash market price.

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

<TABLE>
<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.....................................      22
  Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................      24
  Item 7A.  Quantitative and Qualitative Disclosures About Market
            Risk........................................................      37
  Item 8.   Financial Statements and Supplementary Data.................      38
  Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................      66
Part III
  Item 10.  Directors and Executive Officers of the Registrant..........      66
  Item 11.  Executive Compensation......................................      66
  Item 12.  Security Ownership of Certain Beneficial Owners and
            Management..................................................      66
  Item 13.  Certain Relationships and Related Transactions..............      66
Part IV
  Item 14.  Exhibits, Financial Statement Schedule, and Reports on Form
            8-K.........................................................      66
Signatures..............................................................      72
</TABLE>

                                       iii
<PAGE>   5

                           FORWARD-LOOKING STATEMENTS


     This Form 10-K/A (including certain other documents incorporated by
reference into this Form 10-K/A) 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

This form 10-K/A restates 1998 and 1997 financial information as described in
Note 1b to the Consolidated Financial Statements, page 44.

                                     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 Item 8, "Financial Statements and Supplementary Data," on page
38. 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 17.

- 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 $286.5 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 $13.7 million that
includes the effect of the unusual charges. Excluding these charges, MCN had
1998 earnings of $100.9 million, a decrease of $2.2 million from 1997. 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 $85.4 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 $9.5 million from 1997. These results reflect
reduced contributions from the Pipelines & Processing segment due to low energy
prices and higher losses from the Energy Marketing segment. 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 $9.4 million
from 1996, reflecting increased operating and joint venture income from the
Pipelines & Processing and Electric Power segments. Reduced Energy Marketing
contributions and 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 loss increased $1.3 million
to $3.6 million in 1998.  The increased loss in 1998 primarily reflects
unrealized losses associated with trading activities and higher gas storage
costs, partially offset by higher earnings from a significant increase in gas
sales volumes.  Additionally, the earnings comparison was affected as a result
of 1997 including $2.2 million of contributions from Energy Marketing's 25%
interest in a gas storage project that was sold in December 1997.

     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 contained in Item 8, Financial Statements and Supplementary Data,
page 59.












                                       21
<PAGE>   27
Item 6.  SELECTED FINANCIAL DATA (Unaudited)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
(in Thousands of Dollars - Except Per Share Amounts)         1998             1997           1996         1995           1994
NET INCOME (LOSS)                                         (Restated)*      (Restated)*
Continuing Operations:                                      Note 1b          Note 1b

<S>                                                     <C>             <C>             <C>          <C>           <C>
  Before unusual charges                                $   100,899     $   103,070     $    93,943  $    82,638   $    64,824
  Unusual charges                                          (114,576)             --              --           --            --
                                                        ----------------------------------------------------------------------
                                                            (13,677)        103,070          93,943       82,638        64,824
                                                        ----------------------------------------------------------------------
Discontinued Operations                                    (272,791)         30,159          56,397       14,118        12,944
                                                        ----------------------------------------------------------------------
                                                        $  (286,468)    $   133,229     $   150,340  $    96,756   $    77,768
                                                        ----------------------------------------------------------------------
CASH DIVIDENDS DECLARED                                 $    82,239     $    72,851     $    62,875  $    58,193   $    51,492
                                                        ----------------------------------------------------------------------
COMMON STOCK DATA
Basic Earnings Per Share:
  Continuing operations:
   Before unusual charges                               $      1.28     $      1.41     $      1.40  $      1.28   $      1.09
   Unusual charges                                            (1.45)             --              --           --            --
                                                        ----------------------------------------------------------------------
                                                               (.17)           1.41            1.40         1.28          1.09
  Discontinued operations                                     (3.46)            .41             .85          .21           .22
                                                        ----------------------------------------------------------------------
                                                        $     (3.63)    $      1.82     $      2.25  $      1.49   $      1.31
                                                        ----------------------------------------------------------------------

Diluted Earnings Per Share:
  Continuing operations:
   Before unusual charges                               $      1.28     $      1.39     $      1.39  $      1.27   $      1.09
   Unusual charges                                            (1.45)             --              --           --            --
                                                        ----------------------------------------------------------------------
                                                               (.17)           1.39            1.39         1.27          1.09
  Discontinued operations                                     (3.46)            .40             .84          .21           .21
                                                        ----------------------------------------------------------------------
                                                        $     (3.63)    $      1.79     $      2.23  $      1.48   $      1.30
                                                        ----------------------------------------------------------------------

Book Value Per Share                                    $      9.93     $     14.62     $     11.66  $     10.02   $      8.56

Return on Average Common Shareholders' Equity,
  Excluding Gain on Sale of Genix                             (29.6)%          13.8%          15.8%         16.5%         15.8
Average Common Shares Outstanding (000):
  Basic                                                      78,823          72,887          66,944       64,743        59,394
  Diluted                                                    78,823          75,435          67,521       65,144        59,481
Actual Common Shares Outstanding (000)                       79,725          78,232          67,304       66,370        59,788

PROPERTY, PLANT AND EQUIPMENT
Gas Distribution                                        $ 2,916,540     $ 2,813,434     $ 2,689,039  $ 2,496,711   $ 2,267,187
Diversified Energy                                           84,830          74,039          46,617       36,926        15,103
Discontinued Operations                                   1,040,047       1,299,301         981,901      626,917       322,535
                                                        ----------------------------------------------------------------------
                                                          4,041,417       4,186,774       3,717,557    3,160,554     2,604,825
Less - Accumulated Depreciation and Depletion             1,644,094       1,488,050       1,335,201    1,223,808     1,112,387
                                                        ----------------------------------------------------------------------
                                                        $ 2,397,323     $ 2,698,724     $ 2,382,356  $ 1,936,746   $ 1,492,438
                                                        ----------------------------------------------------------------------

ASSETS                                                  $ 4,392,898     $ 4,330,937     $ 3,633,404  $ 2,898,640   $ 2,240,973
                                                        ----------------------------------------------------------------------

CAPITAL INVESTMENTS                                     $   790,930     $   959,610     $   790,748  $  688,838    $   401,969
                                                        ----------------------------------------------------------------------

CAPITALIZATION
Long-Term Debt, Including Capital Lease Obligations     $ 1,307,168     $ 1,212,564     $ 1,252,040  $   993,407   $   685,519
Redeemable Cumulative Preferred Securities                  502,203         505,104         173,809       96,449        98,967
Common Shareholder's Equity                                 791,922       1,143,951         784,568      664,776       511,495
                                                        ----------------------------------------------------------------------
                                                        $ 2,601,293     $ 2,861,619     $ 2,210,417  $ 1,754,632   $ 1,295,981
                                                        ----------------------------------------------------------------------
OPERATING REVENUES
Diversified Energy                                      $   842,324     $   807,236     $   640,651  $   368,014   $   333,691
                                                        ----------------------------------------------------------------------
Gas Distribution:
  Gas sales                                                 838,876       1,080,104       1,102,957      931,940       968,998
  End user transportation                                    82,275          84,749          82,467       80,808        76,483
  Intermediate transportation                                63,218          55,221          48,570       41,985        39,391
  Other                                                      67,405          51,212          42,260       52,913        52,098
                                                        ----------------------------------------------------------------------
                                                          1,051,774       1,271,286       1,276,254    1,107,646     1,136,970
                                                        ----------------------------------------------------------------------
Less Intercompany Transactions                               13,904          14,688          13,427       12,441         9,837
                                                        ----------------------------------------------------------------------
                                                        $ 1,880,194     $ 2,063,834     $ 1,903,478  $ 1,463,219   $ 1,460,824
------------------------------------------------------------------------------------------------------------------------------

</TABLE>
*  Certain amounts have been restated primarily to record cost of gas expense,
   including trading losses, in the appropriate accounting periods as described
   in Note 1b to the Consolidated Financial Statements.






                                       22
<PAGE>   28


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                     1998         1997        1996          1995         1994
                                              ------------------------------------------------------------------
<S>                                             <C>           <C>          <C>          <C>          <C>
EFFECT OF WEATHER
DEGREE DAYS                                         5,471         6,818        7,170        6,777        6,489
Percent Colder (Warmer) Than Normal                 (19.3)%          .8%         5.4%          .3%        (4.2)%
Increase (Decrease) From Normal in:
  Gas markets (MMcf)                              (40,272)          589       10,909        1,488       (4,353)
  Net income (000)                              $ (35,314)    $     467    $   9,886    $   1,415    $  (3,984)
  Diluted earnings per share                    $    (.45)    $     .01    $     .15    $     .02    $    (.07)

OPERATING STATISTICS
  Diversified Energy(1):
   Pipelines & Processing:
     Gas processed (MMcf)
      Carbon dioxide treatment                     48,868        42,761       44,223       14,588        1,942
      Natural gas liquids removal                  45,082        21,764        7,446           --           --
                                              ----------------------------------------------------------------
                                                   93,950        64,525       51,669       14,588        1,942
                                              ----------------------------------------------------------------
     Methanol produced (thousand gallons)          60,446        60,810       10,545           --           --
     Transportation (MMcf)                        175,466       115,975       86,391        4,994        1,194

   Electric Power:
     Electricity sales (thousands of MWh)           3,805         1,843          709          272          194

   Energy marketing (MMcf):
     Gas sales                                    454,681       343,719      218,952      170,668      142,352
     Exchange gas deliveries                       11,061        15,109       22,586       16,462       13,301
                                              ----------------------------------------------------------------
                                                  465,742       358,828      241,538      187,130      155,653
                                              ----------------------------------------------------------------

  Gas distribution (MMcf):
     Gas sales                                    172,177       209,092      220,958      209,816      204,384
   End user transportation                        140,315       145,101      146,895      145,761      140,020
   Intermediate transportation                    537,532       586,496      527,510      374,428      322,969
                                              ----------------------------------------------------------------
                                                  850,024       940,689      895,363      730,005      667,373
                                               ----------------------------------------------------------------
  Discontinued Operations:
   Exploration & Production:
     Gas production (MMcf)                         82,040        78,218       57,202       31,420       16,513
     Oil production (Mbbl)                          2,635         3,346        1,086          388           85
     Gas and oil production (MMcf equivalent)      97,850        98,294       63,718       33,748       17,023

GAS DISTRIBUTION CUSTOMERS
Residential                                     1,117,977     1,105,749    1,100,101    1,090,039    1,073,306
Total                                           1,205,628     1,193,122    1,183,443    1,172,613    1,154,545

EMPLOYEES
Diversified Energy                                    213           289          243          219          190
Gas Distribution                                    2,773         2,920        3,117        3,183        3,328
----------------------------------------------------------------------------------------------------------------
</TABLE>

(1)Includes MCN's share of joint ventures




                                      23
<PAGE>   29
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

RESULTS OF OPERATIONS

Special investigation results in restatement - Subsequent to the issuance of
MCN's December 31, 1998 financial statements, certain matters came to
management's attention and resulted in a special investigation of prior years'
operations of CoEnergy Trading Company (CTC), MCN's non-utility energy marketing
subsidiary. As a result of the investigation, MCN identified that its internal
controls had been overridden and that certain transactions had not been properly
accounted for. Specifically, the investigation concluded that CTC had entered
into gas supply contracts and agreed to pay significantly less than market
prices in one period in return for above-market prices to be paid in subsequent
periods through March 2000. The effect of these transactions was to improperly
delay the accrual of cost of gas expenses, resulting in the overstatement of the
1998 net loss by $.5 million and the overstatement of 1997 net income by $8.6
million.

Additionally, the investigation identified that CTC had entered into certain
unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities, some of which remain in
effect through March 2000, were not accounted for properly using the required
mark-to-market method, under which unrealized gains and losses are recorded as
an adjustment to cost of gas. The effect of not properly marking to market these
transactions was the understatement of the 1998 net loss by $7.1 million and the
overstatement of 1997 net income by $.4 million. However, net income of $2.6
million and $1.8 million was realized and recorded in connection with these
trading activities in 1998 and 1997, respectively, resulting in a net loss of
$4.5 million in 1998 and net income of $1.4 million in 1997 from such
activities. From the inception of these trading activities in March 1997 through
March 1999, $5.7 million of net income was realized and recorded in connection
with these trading activities. However, marking these contracts to market, as
required, results in a previously unrecorded net unrealized loss of $8.4 million
through March 1999, indicating a net loss of $2.7 million from such activities.

Other items identified during the investigation resulted in the understatement
of the 1998 net loss by $.9 million and the overstatement of 1997 net income by
$.1 million.

As described in Note 1b to the Consolidated Financial Statements, the
accompanying consolidated financial statements for 1998 and 1997 have been
restated from those originally reported to properly account for the transactions
identified, resulting in an increase in the 1998 net loss of $7.5 million or
$.09 per diluted share and a decrease in 1997 net income of $9.1 million or $.12
per diluted share. The corrections did not have an impact on the liquidity or
cash flows of MCN. The financial information contained in Management's
Discussion and Analysis herein has been revised to reflect the impact of such
restatement.

Results for 1998 reflect losses from discontinued operations and unusual
charges - MCN experienced a net loss of $286.5 million or $3.63 per share in
1998. As subsequently discussed, 1998 results reflect losses from its
discontinued Exploration & Production (E&P) segment that totaled $272.8 million
or $3.46 per share as well as several unusual charges that totaled $114.6
million or $1.45 per share.

MCN had a loss from continuing operations of $13.7 million or $.17 per share,
which includes the effect of the unusual charges. Excluding these charges, MCN
had 1998 earnings of $100.9 million or $1.28 per share compared to 1997
earnings of $103.1 million or $1.39 per diluted share. The earnings comparisons
reflect reduced operating costs in the Gas Distribution segment, partially
offset by the effects of low energy prices, abnormally warm weather and higher
financing costs. MCN's earnings from continuing operations for 1997 increased
$9.1 million (diluted per share comparison was flat) from 1996, reflecting
improved contributions from the Diversified Energy group. Per share comparisons
were affected by an increase in the average number of shares outstanding due to
the June 1997 issuance of 9,775,000 shares of new common stock.


<TABLE>
<CAPTION>
---------------------------------------------------------------
(in Millions)                      1998      1997         1996
---------------------------------------------------------------
<S>                             <C>       <C>        <C>
Net Income (Loss)
Continuing Operations:
  Diversified Energy:
   Before unusual charges       $  12.5   $  22.0    $     12.6
  Unusual charges
   (Notes 2a & 3)                 (97.9)        -             -
                                -------------------------------
                                  (85.4)     22.0          12.6
                                -------------------------------
  Gas Distribution:
   Before unusual charges          88.4      81.1          81.4
   Unusual charges (Note 2b)      (16.7)        -             -
                                -------------------------------
                                   71.7      81.1          81.4
                                -------------------------------
Total from Continuing Operations:
  Before unusual charges          100.9     103.1          94.0
  Unusual charges (Notes 2 & 3)  (114.6)        -             -
                                -------------------------------
                                  (13.7)    103.1          94.0
                                -------------------------------
Discontinued Operations (Note 4):
  Income (loss) from operations  (272.8)     30.1          20.2
  Gain on sale                        -         -          36.2
                                -------------------------------
                                 (272.8)     30.1          56.4
                                -------------------------------
                                $(286.5)  $ 133.2    $    150.4
---------------------------------------------------------------
Diluted Earnings (Loss) Per Share
Continuing Operations:
  Diversified Energy:
   Before unusual charges       $   .16   $   .32    $      .19
   Unusual charges
     (Notes 2a & 3)               (1.24)        -             -
                                -------------------------------
                                  (1.08)      .32           .19
                                -------------------------------
  Gas Distribution:
   Before unusual charges          1.12      1.07          1.20
   Unusual charges (Note 2b)       (.21)        -             -
                                -------------------------------
                                    .91      1.07          1.20
                                -------------------------------
Total from Continuing Operations:
  Before unusual charges           1.28      1.39          1.39
  Unusual charges (Notes 2 & 3)   (1.45)        -             -
                                -------------------------------
                                   (.17)     1.39          1.39
                                -------------------------------
Discontinued Operations (Note 4):
  Income (loss) from operations   (3.46)      .40           .31
  Gain on sale                        -         -           .53
                                -------------------------------
                                  (3.46)      .40           .84
                                -------------------------------
                                $ (3.63)  $  1.79    $     2.23
---------------------------------------------------------------
</TABLE>


STRATEGIC DIRECTION - MCN's objective is to achieve competitive long-term
returns for its shareholders. MCN is pursuing a growth strategy by investing in
a diverse portfolio of energy-related projects. Inherent in this
portfolio-management strategy is the frequent review of internal and external
factors affecting the company's investments. Therefore, the pace of new
investments and the disposition of existing assets is subject to change.
Reflecting this strategy in 1998, MCN has: realigned the company in order to
improve operating efficiencies through a more streamlined organizational
structure; decided to sell its E&P oil and gas properties; and reduced its
planned capital investment levels to approximately $600 million to $750 million
annually, which will be invested primarily in North America. MCN will continue
to review the overall mix of its existing portfolio and the level of new
investments.

UNUSUAL CHARGES - As previously discussed, MCN recorded several unusual charges
in 1998, consisting of property write-downs, an investment loss and
restructuring charges, which reduced 1998 earnings by $114.6 million or $1.45
per share. A detailed discussion of each unusual charge by segment follows:

<TABLE>
<CAPTION>
UNUSUAL CHARGES                                                        1998
---------------------------------------------------------------------------
(in Millions, Except Per Share Amounts)                Net          Diluted
                                                    Income              EPS
---------------------------------------------------------------------------
<S>                                            <C>               <C>
Diversified Energy:
  Pipelines & Processing (Note 2a)             $     (89.5)      $    (1.13)
  Electric Power (Note 3)                             (1.6)            (.02)
  Corporate & Other (Note 3)                          (6.8)            (.09)
---------------------------------------------------------------------------
                                                     (97.9)           (1.24)
Gas Distribution (Note 2b)                           (16.7)            (.21)
---------------------------------------------------------------------------
                                               $    (114.6)      $    (1.45)
---------------------------------------------------------------------------
</TABLE>

Pipelines & Processing recorded a $133.8 million pre-tax ($87.0 million net of
taxes) write-off of its coal fines project. 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 the 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 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 generates negative cash flows. These
factors led to MCN's decision to record an impairment loss equal to the carrying
value of the plants, reflecting the likely inability to recover such costs. MCN
is currently negotiating 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 acquired out-of-service pipeline in Michigan. This
pipeline was acquired for future development, along with related easements and
rights-of-way. In connection with certain lease renewal options, MCN reviewed
the business alternatives for these assets and determined that their development
is unlikely. Accordingly, MCN has recorded an impairment loss equal to the
carrying value of these assets.

Electric Power recorded a $2.5 million pre-tax ($1.6 million net of taxes)
restructuring charge related to certain international power projects. The charge
was incurred as a result of refocusing MCN's strategic plan, particularly to
exit certain international power projects and to limit future capital
investments in developing countries to projects where it has existing
commitments.


                                       24
<PAGE>   30
Management's Discussion and Analysis

Corporate & Other recorded a $10.4 million pre-tax ($6.8 million net of taxes)
restructuring charge related to the corporate realignment designed to improve
operating efficiencies through a more streamlined organizational structure. The
realignment includes cost saving initiatives expected to reduce future operating
expenses by approximately $15 million per year. The realignment includes the
reduction of 37 positions resulting in severance and termination benefits of
$4.7 million pre-tax. Also included in the charge was $5.7 million pre-tax
relating to net lease expenses and the write-down of fixed assets consisting of
leasehold improvements, office equipment and information systems, which are no
longer being used by MCN. As of December 31, 1998, payments of $.7 million have
been charged against the restructuring accruals relating to severance and
termination benefits. These benefits will continue to be paid through 2000. The
remaining restructuring costs, primarily for net lease expenses, are expected to
be paid over the related lease terms that expire through 2006.

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.

   MCN also recorded 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 refocused strategic direction, MCN 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.

DIVERSIFIED ENERGY
Results impacted by unusual charges, financing costs and low energy prices - The
Diversified Energy group reported a loss in 1998 due to the property write-downs
and restructuring charges, as previously discussed. Excluding these unusual
items, Diversified Energy's earnings for 1998 declined by $9.5 million from
1997. These results reflect higher financing costs as well as reduced
contributions from the Pipelines & Processing segment due to low energy prices
and increased losses from the Energy Marketing segment. Partially offsetting the
decreases for 1998 was increased operating and joint venture income posted by
the Electric Power segment.

   Earnings for 1997 increased by $9.4 million from 1996, reflecting increased
operating and joint venture income from the Pipelines & Processing and Electric
Power segments. Reduced Energy Marketing contributions and higher financing
costs partially offset this growth.


<TABLE>
<CAPTION>

DIVERSIFIED ENERGY OPERATIONS
--------------------------------------------------------------------------------
(in Millions)                                  1998           1997        1996
                                          --------------------------------------
<S>                                       <C>               <C>       <C>
Operating Revenues*                       $    842.3        $  807.2  $  640.7
                                          ------------------------------------
Operating Expenses*
  Property write-downs (Note 2a)               137.7              --        --
  Restructuring charges (Note 3)                12.9              --        --
  Other                                        868.3           813.2     633.1
                                          ------------------------------------
                                             1,018.9           813.2     633.1
                                          ------------------------------------
Operating Income (Loss)                       (176.6)           (6.0)      7.6
                                          ------------------------------------
Equity in Earnings of Joint
  Ventures                                      61.2            46.6      16.6
                                          ------------------------------------

Other Income & (Deductions)*
  Interest income                                4.8             6.6       2.8
  Interest expense                             (21.9)          (10.7)     (7.9)
  Dividends on preferred securities            (17.6)          (14.4)     (5.0)
  Other                                         12.2            10.1       5.5
                                          ------------------------------------
                                               (22.5)           (8.4)     (4.6)
                                          ------------------------------------
Income (Loss) Before Income
  Taxes                                       (137.9)           32.2      19.6
Income Tax Provision (Benefit)                 (52.5)           10.2       7.0
                                          ------------------------------------
Net Income (Loss)
  Before unusual charges                        12.5            22.0      12.6
  Unusual charges (Notes 2a & 3)               (97.9)             --        --
                                          ------------------------------------
                                          $    (85.4)       $   22.0  $   12.6
                                          ------------------------------------
</TABLE>

*Includes intercompany transactions

Operating and Joint Venture Income
Operating and joint venture results, excluding the unusual charges, declined
$5.4 million in 1998 and increased $16.4 million in 1997. A discussion of each
business segment, its contributions and its outlook follows:


<TABLE>
<CAPTION>

OPERATING AND JOINT VENTURE INCOME (LOSS)
---------------------------------------------------------------------
(in Millions)                     1998            1997           1996
                              ---------------------------------------
Before Unusual Charges:
<S>                           <C>               <C>          <C>
  Pipelines & Processing      $     21.4        $ 29.1       $   10.7
  Electric Power                    26.0          18.1            4.6
  Energy Marketing                  (3.6)         (2.3)           9.4
  Corporate & Other                 (8.6)         (4.3)           (.5)
                              ---------------------------------------
                                    35.2          40.6           24.2
Unusual Charges (Notes 2a & 3)    (150.6)           --             --
                              ---------------------------------------
                              $   (115.4)       $ 40.6       $   24.2
                              ---------------------------------------
</TABLE>


Pipelines & Processing owns and invests in pipeline, gathering, processing and
related facilities in major supply areas, including the Midwest/Appalachia,
Midcontinent/Gulf Coast and Rocky Mountain regions.

     Pipelines & Processing operating and joint venture income, excluding the
write-offs, decreased $7.7 million in 1998. This decrease reflects lower
contributions from MCN's 25% interest in Lyondell Methanol Company, L.P.
(Lyondell), a limited partnership that owns a 248 million gallon-per-year
methanol production plant in Texas. Earnings from Lyondell reflect an
approximate 40% decrease in methanol prices during 1998 resulting in a $13
million unfavorable impact on joint venture income as compared to 1997. In
addition, the Pipelines & Processing segment incurred $9.1 million of operating
losses in 1998 related to the start up of the coal fines project. As discussed
earlier, the coal fines project was written-off during 1998 and is not expected
to have a significant impact on future earnings. Partially offsetting the effect
of lower methanol prices and coal fines losses were increased contributions from
gas pipeline and processing ventures.

                                       25
<PAGE>   31


Transportation volumes increased 59.5 Bcf or over 50% as a result of the
acquisition and expansion of pipeline facilities during 1997 and 1998. Gas
processed to remove carbon dioxide (CO2) 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.

<TABLE>
<CAPTION>

Pipelines & Processing Statistics*
--------------------------------------------------------------------------------
                                                    1998      1997         1996
--------------------------------------------------------------------------------
<S>                                                <C>       <C>          <C>

Methanol Produced (million gallons)                 60.4      60.8         10.5
Transportation (Bcf)                               175.5     116.0         86.4
Gas Processed (Bcf)
  CO2 treatment                                     48.9      42.8         44.2
  NGL removal                                       45.1      21.8          7.4

--------------------------------------------------------------------------------
</TABLE>
* Includes MCN's share of joint ventures

Operating and joint venture income increased by $18.4 million in 1997, primarily
reflecting income from the late 1996 acquisition of MCN's interest in Lyondell.
Additionally, Lyondell benefited from strong methanol prices during 1997.
Results for 1997 also reflect income from a 29.6 Bcf or 34% increase in
transportation volumes resulting from the acquisition and expansion of pipeline
facilities.

METHANOL PRICES*
per Gallon
                                   [BAR GRAPH]
<TABLE>
<CAPTION>
year
<S>           <C>         <C>
  96           97          98

44 cents     58 cents     36 cents
</TABLE>
*Estimated U.S. Gulf average

Outlook - Pipelines & Processing's expansion strategy will continue to focus on
investing in natural gas and gas liquid gathering, processing and transmission
facilities near areas of rapid reserve development or growing consumer markets.
This business segment acquired or advanced several pipeline and processing
ventures in 1998 that are expected to contribute to future operating results.
MCN has a 35% joint venture interest in Dauphin Island Gathering Partners
(DIGP), which is proceeding with the second phase of its expansion. The
expansion is expected to be completed during the first quarter of 1999 and will
increase the throughput capacity of the system to 1.1 billion cubic feet per day
(Bcf/d). Also, the Mobile Bay Processing Partners joint venture has constructed
a 600 million cubic feet per day (MMcf/d) gas processing plant at the Dauphin
Island system's onshore terminus in Alabama. MCN owns 43% of this venture, which
is expected to be in service in the first quarter of 1999. In addition, MCN has
partnership interests in three interstate pipeline projects. Portland Natural
Gas Transmission System (Portland), Millennium Pipeline and Vector Pipeline will
transport Canadian and U.S. natural gas volumes into the Northeast and Southeast
U.S. markets. MCN has a 21.4% interest in the Portland system, a 292-mile
pipeline that will transport up to 360 MMcf/d and is expected to be in-service
in early 1999. MCN has a 10.5% interest in the 442-mile Millennium Pipeline that
will have the capacity to transport 700 MMcf/d. MCN also has a 25% interest in
the 343-mile Vector Pipeline that is expected to transport up to 1 Bcf/d. Both
the Millennium and Vector Pipelines are subject to regulatory approval and
sufficient market development.
     MCN's Pipelines & Processing segment also has a 75% interest in an asphalt
manufacturing partnership that has completed construction of a plant designed to
produce annually up to 100,000 tons of high-quality asphalt. Additional
manufacturing plants may be built if market conditions warrant. During 1998, MCN
acquired a 49.9% interest in an asphalt distribution operation.
     Pipelines & Processing's future operating results are expected to be
favorably affected by an increase in gas volumes transported and processed as
well as an increase in asphalt manufactured and sold. Future results will also
be impacted by changes in gas processing margins, methanol and asphalt prices,
and transportation and gathering rates. Gas processing margins and methanol
prices were significantly lower in 1998 than in the past few years.

ELECTRIC POWER holds joint venture interests in electric power generation and
distribution facilities in the United States, India and Nepal. Electric Power
also provides fuel management services and supplies gas to power generation
facilities under long-term sales contracts.
   Electric Power operating and joint venture results, excluding restructuring
charges, increased $7.9 million in 1998 and $13.5 million in 1997. The increased
earnings for 1998 and 1997 reflect contributions from Midland Cogeneration
Venture L.P. (MCV), a limited partnership that owns a gas-fired cogeneration
facility capable of producing up to 1,370 megawatts (MW) of electricity and 1.35
million pounds per hour of process steam. MCN acquired an initial 18% interest
in MCV in the 1997 second quarter and an additional 5% interest in MCV in June
1998. In addition, earnings from MCV for 1997 include a favorable $2.8 million
pre-tax adjustment resulting from a change in accounting for property taxes.



                                       26
<PAGE>   32
MANAGEMENT'S DISCUSSION AND ANALYSIS

ELECTRICITY SALES*
In Thousands of MW Hours

                                 [BAR GRAPH]
<TABLE>
<CAPTION>

year                                              96        97        98
                                                 -----   -------   -------
<S>                                              <C>     <C>       <C>
                                                 708.9   1,843.3   3,805.0
- Domestic     - International
</TABLE>
*Includes MCN's share of joint ventures

   Also contributing to the 1998 and 1997 results were higher earnings from
MCN's 50%-owned, 123 MW Michigan Power cogeneration facility and contributions
from the 1997 acquisition of a 40% interest in Torrent Power Limited (TPL), an
Indian joint venture. Improved earnings from the Michigan Power facility are due
to a higher electricity sales rate under its long-term sales contract. TPL holds
minority interests in two electric distribution companies and a power generation
project in the state of Gujarat, India. The power generation project was formed
to build, own and operate a 655 MW dual-fuel facility. This facility began
partial operations in December 1997, and became fully operational in late 1998.

Outlook - MCN intends to expand its Electric Power business, primarily in
projects in North America. Under its refocused strategic plan, MCN has exited
certain international power projects and plans to limit future capital
investments in developing countries to projects where it has existing
commitments. In February 1999, MCN reached an agreement to sell its interest in
TPL for approximately $130 million (Note 5b). The sale is subject to certain
regulatory approvals and is expected to be completed by the third quarter of
1999. MCN will continue to pursue opportunities to acquire and sell properties
in order to optimize its portfolio.
   The Michigan Public Service Commission (MPSC) has issued its final order
regarding electric restructuring, which is being appealed. MCN has investments
in three Michigan electric power generation facilities that could be impacted by
electric restructuring.
   A number of projects were advanced or acquired in 1998 and are expected to
contribute to future results. In October 1998, MCN acquired a 48% interest in
the Carson cogeneration project, a 42 MW gas-fired cogeneration plant in
California. The plant sells electricity and steam under separate long-term
contracts. In addition, MCN has a 43% interest in the Mobile Bay cogeneration
project, a 40 MW natural gas-fired plant, which is expected to be placed into
service in the first quarter of 1999. In December 1997, MCN acquired a 65%
interest in a 36 MW hydroelectric power plant in Nepal. Construction on the $98
million project began in early 1997 and is scheduled to be completed in early
2000. MCN also has a 95% interest in the Cobisa-Person Power project, a joint
venture that will 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
mid-2000.
   Foreign currency translation adjustments relating to MCN's international
equity investments are included in Accumulated Other Comprehensive Loss, a
component of Common Shareholders' Equity. The foreign currency translation
adjustment through December 1998 primarily relates to the U.S. dollar and Indian
rupee exchange rate fluctuations from the TPL investment. MCN's financial
statements will continue to be affected by currency exchange rate fluctuations.
However, the expected sale of MCN's interest in TPL will significantly reduce
its foreign currency risk.

ENERGY MARKETING sells premium, reliable, primarily bundled energy services to
large-volume customers in the Midwest, Gulf Coast and Northeast United States
and eastern Canada. In addition, the segment holds market-area storage capacity
that adds value to its energy marketing activities.
   Energy Marketing operating and joint venture loss increased $1.3 million in
1998. The increased loss in 1998 primarily reflects unrealized losses associated
with trading activities (Note 1b) and higher gas storage costs, partially offset
by higher earnings from a significant increase in gas sales volumes.
Additionally, the earnings comparison was affected as a result of 1997 including
$2.2 million of contributions from Energy Marketing's 25% interest in a gas
storage project that was sold in December 1997. Operating and joint venture
income for 1997 decreased $11.7 million due to lower gas sales margins as well
as higher costs for storage capacity, which enhances Energy Marketing's ability
to offer reliable gas supply during peak winter months.

GAS SALES & EXCHANGE GAS
DELIVERIES*

In BcF
                                  [BAR GRAPH]
<TABLE>
<CAPTION>

year                                              96        97        98
                                                 -----     -----     -----
<S>                                              <C>       <C>      <C>
                                                 241.5     358.8     465.7
</TABLE>
*Includes MCN's share of joint ventures


   Energy Marketing's total gas sales and exchange deliveries increased 106.9
Bcf or 30% during 1998 and 117.3 Bcf or 49% for 1997. The increase in Energy
Marketing's gas sales volumes was driven by additional sales in each of the
company's market regions. Under exchange gas contracts, Energy Marketing accepts
gas from customers or delivers gas to customers, and gas is returned during a
subsequent period.




                                       27
<PAGE>   33
   MCN  has a 50% interest in a joint venture storage project that owns a 10 Bcf
storage facility. This storage facility is utilized by MCN's Energy Marketing
unit, in conjunction with third-party storage and pipeline capacity, to enhance
its ability to provide reliable gas sales and exchange gas services.
Outlook - MCN will focus on growing its Energy Marketing segment through
expansion of its coverage within existing markets as well as by entering new
markets through strategic alliances with other energy providers. Enhanced by its
ability to provide reliable and custom-tailored bundled services to large-volume
end users and utilities, MCN is positioned to capitalize on opportunities to
further expand its market base into the Northeast and Midwest United States and
eastern Canada.
    MCN  is in the process of converting a depleted natural gas reservoir into
a 42 Bcf storage facility. The storage field is expected to be completed by
mid-1999 and, therefore to be available for the 1999-2000 winter heating
season. The storage field will support Energy Marketing's operations by
enhancing its ability to offer a reliable gas supply during peak winter months.

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. MCN's Energy Marketing
business coordinates all of MCN's hedging activities to ensure compliance with
risk management policies that are periodically reviewed by MCN's Board of
Directors. Certain hedging gains or losses related to gas and oil production are
recorded by MCN's discontinued E&P operations. Gains and losses on gas and oil
production-related hedging transactions that are not recorded by MCN's E&P unit
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.

CORPORATE & OTHER operating and joint venture losses, excluding restructuring
charges, increased $4.3 million in 1998 and $3.8 million in 1997. The results
reflect increased administrative expenses associated with corporate management
activities. The Diversified Energy group was charged a larger portion of such
expenses beginning in 1997, to reflect its larger percentage of MCN. Operating
and joint venture losses in 1998 were partially offset by adjustments necessary
to reduce or eliminate accruals for employee incentive awards that are based on
MCN's operating or stock-price performance. The 1996 results benefited from a
$1.7 million pre-tax gain from the sale of land by a 50%-owned real estate joint
venture.

Other Income and Deductions
Other income and deductions increased $14.1 million in 1998 and $3.8 million in
1997. The increases reflect higher dividends resulting from the issuance of $332
million of preferred securities in 1997 and $80 million of preferred securities
in 1996. In addition, all periods reflect higher interest costs on increased
borrowings required to finance capital investments in the Diversified Energy
group.
   Other income and deductions comparisons also were affected by several gains
from the sale of properties. In 1998, a $6.0 million pre-tax gain was recorded
from the sale of certain gas sales contracts and a $3.9 million pre-tax gain was
recorded from the sale of a 50% interest in the 30 MW Ada cogeneration facility.
Other income and deductions for 1997 included a $3.2 million pre-tax gain from
the December 1997 sale of Diversified Energy's 25% interest in a gas storage
project, a $2.5 million pre-tax gain from the sale of pipeline assets as well as
gains related to DIGP. In a series of transactions during 1996, MCN sold 64% of
its 99% interest in the DIGP partnership, resulting in pre-tax gains totaling
$8.8 million, of which $2.4 million was deferred until 1997 when a related
option agreement expired unexercised.

Income Taxes
Income taxes decreased in 1998 and increased in 1997. Income taxes were impacted
by variations in pre-tax earnings. Income tax comparisons were also affected by
tax credits and stock-related tax benefits recorded in 1998, as well as the
generation of foreign income in 1998 that was not subject to U.S. or foreign tax
provisions.



GAS DISTRIBUTION
Results reflect unusual charges, warmer weather and cost-saving initiatives -
Gas Distribution's earnings for 1998 were affected by the property write-down
and investment loss, as previously discussed. Excluding these unusual charges,
the Gas Distribution group reported 1998 earnings of $88.4 million, an
improvement of $7.3 million over 1997. Earnings for 1997 were $81.1 million,
representing a slight decrease from 1996. 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.

<TABLE>
<CAPTION>

Gas Distribution Operations
--------------------------------------------------------------------------------
(in Millions)                     1998       1997             1996
--------------------------------------------------------------------------------
<S>                            <C>         <C>              <C>
Operating Revenues*
  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
  Other                            67.4         51.3             42.3
                               -------------------------------------------------
                                1,051.8      1,271.3          1,276.3
Cost of Gas                       462.1        642.0            646.3
                               -------------------------------------------------
Gross Margin                      589.7        629.3            630.0
                               -------------------------------------------------
Other Operating Expenses*
  Operation and maintenance       256.6        286.7            298.4
  Depreciation and depletion       93.8        104.4             98.8
  Property and other taxes         56.0         61.3             62.3
  Property write-down (Note 2b)    24.8            -                -
                               -------------------------------------------------
                                  431.2        452.4            459.5
                               -------------------------------------------------
Operating Income                  158.5        176.9            170.5
                               -------------------------------------------------
Equity in Earnings of Joint
  Ventures                          1.0          2.5              1.3
                               -------------------------------------------------

Other Income and (Deductions)*
  Interest income                   5.7          4.7              4.0
  Interest expense                (57.5)       (54.5)           (48.9)
  Investment loss (Note 2b)        (8.5)           -                -
  Minority interest                 5.7         (1.9)            (1.0)
  Other                             (.2)          .5             (1.8)
                               -------------------------------------------------
                                  (54.8)       (51.2)           (47.7)
                               -------------------------------------------------
Income Before Income Taxes        104.7        128.2            124.1
Income Tax Provision               33.0         47.1             42.7
                               -------------------------------------------------

Net Income
  Before unusual charges           88.4         81.1             81.4
  Unusual charges (Note 2b)       (16.7)           -                -
                               -------------------------------------------------
                               $   71.7    $    81.1        $    81.4
                               -------------------------------------------------
</TABLE>

*Includes intercompany transactions




                                       28
<PAGE>   34
MANAGEMENT'S DISCUSSION AND ANALYSIS

Gross Margin
Gross margins reflect abnormally warm weather - Gas Distribution gross margin
(operating revenues less cost of gas) decreased $39.6 million and $.7 million in
1998 and 1997, respectively, reflecting changes in gas sales and end user
transportation deliveries due primarily to abnormally warm weather in 1998 and
significantly colder weather in 1996. Additionally, gross margins in 1998 and
1997 were favorably affected by the continued growth in intermediate
transportation services as well as increased other operating revenues resulting
from providing gas-related services.

<TABLE>
<CAPTION>

Effect of Weather on Gas Markets and Earnings
--------------------------------------------------------------------------------
                                              1998         1997      1996
--------------------------------------------------------------------------------
<S>                                         <C>          <C>         <C>

Percentage Colder (Warmer)
  Than Normal                               (19.3)%         .8%      5.4%
Increase (Decrease) From Normal in:
  Gas markets (in Bcf)                      (40.3)          .6      10.9
  Net income (in Millions)                $ (35.3)       $  .5     $ 9.9
  Diluted earnings per share              $  (.45)       $ .01     $ .15
--------------------------------------------------------------------------------
</TABLE>

GAS SALES AND END USER TRANSPORTATION revenues in total decreased $243.6
million in 1998 and $20.6 million in 1997. Revenues were affected by
fluctuations in gas sales and end user transportation deliveries that decreased
by 41.7 Bcf to 312.5 Bcf in 1998 and decreased by 13.7 Bcf to 354.2 Bcf in 1997.
The decreases in gas sales and end user transportation deliveries for both
periods were due primarily to weather, which was 20.1% warmer in 1998 and 4.6%
warmer in 1997 compared to the previous years. The decrease in revenues in 1998
also reflects a reduction in gas sales rates resulting from lower gas costs. The
impact of reduced gas sales and transportation deliveries in 1997 was partially
offset by an increase in gas sales rates due to higher gas costs. As discussed
in the "Cost of Gas" section that follows, Gas Distribution's sales rates
through the end of 1998 were set to recover all of its reasonably and prudently
incurred gas costs. Therefore, the effect of any fluctuations in cost of gas
sold was substantially offset by a change in gas sales revenues.
   End  user transportation services are provided to large-volume commercial and
industrial customers who purchase gas directly from producers and brokers,
including MCN's Energy Marketing business, and contract with MichCon to
transport the gas to their facilities. Gas Distribution continues to enter into
multi-year, competitively priced transportation agreements with large-volume
users to maintain these gas markets over the long term.

GAS DISTRIBUTION VOLUMES/GROSS MARGIN COMPARISON

                                  [BAR GRAPH]

<TABLE>
<CAPTION>
                  Volumes           Gross Margins
Year              In Bcf            In Millions
----              -------           -------------
<S>               <C>               <C>
96                895.4             $  630.0
                                    $  614.8
97                940.7             $  629.3
                                    $  628.6
98                850.0             $  589.7
                                    $  644.0

</TABLE>

-  Gas Sales
-  End User Transportation
-  Intermediate Transportation
-  Other
Total Margins Weather Normalized

INTERMEDIATE TRANSPORTATION revenues increased by $8.0 million and $6.6 million
in 1998 and 1997, respectively, due in part to increased fees generated from the
transfer of gas title among and between intermediate transportation service
users and various gas owners. Intermediate transportation is a gas delivery
service provided to gas producers, gas brokers and other gas companies that own
the natural gas but are not the ultimate consumers.
   Although intermediate transportation revenues increased in 1998, volumes
delivered decreased 49.0 Bcf to 537.5 Bcf. Intermediate transportation
deliveries increased in 1997 by 59.0 Bcf to 586.5 Bcf. 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. Intermediate transportation
revenues and volumes delivered for both 1998 and 1997 reflect additional Antrim
gas volumes transported for Michigan gas producers and brokers. There has been a
significant increase in Michigan Antrim gas production over the past several
years, resulting in a growing demand by gas producers and brokers for
intermediate transportation services. In order to meet the increased demand, Gas
Distribution expanded the transportation capacity of its northern Michigan
gathering system in 1996. In December 1997, MichCon purchased an existing
pipeline system and further expanded the capacity of this system. Although
intermediate transportation volumes are a significant part of Gas Distribution's
total markets, profit margins on this service are considerably less than margins
on gas sales or for end user transportation services.

OTHER OPERATING REVENUES increased $16.1 million in 1998 and $9.0 million in
1997. The improvement in both periods is due in part to an increase in late
payment fees, appliance maintenance services and other gas-related services. The
comparisons are also impacted by unfavorable adjustments in 1997 and 1996
related to the discontinuance of MichCon's energy conservation programs.






                                       29
<PAGE>   35

Cost of Gas
Cost of gas is affected by variations in sales volumes and the costs of
purchased gas as well as related transportation costs. Under the Gas Cost
Recovery (GCR) mechanism in effect through 1998 (Note 7b), MichCon adjusted its
sales rates to recover all of its reasonably and prudently incurred gas costs.
Therefore, fluctuations in cost of gas sold had little effect on gross margins .
    Cost of gas sold decreased by $179.9 million in 1998 and by $4.3 million in
1997 as a result of lower sales volumes, primarily due to warmer weather. The
decrease in 1998 also reflects lower prices paid for gas purchased of $.40 (13%)
per thousand cubic feet (Mcf). Additionally, the decrease in 1997 was impacted
by supplier refunds, partially offset by higher prices paid for gas purchased of
$.19 per Mcf (7%).

Other Operating Expenses
OPERATION AND MAINTENANCE expenses declined by $30.1 million or 10% in 1998 and
$11.7 million or 4% in 1997. These reductions reflect management's continuing
efforts to control operating costs. More specifically, the reductions for both
1998 and 1997 reflect lower benefit costs, primarily pension and retiree
healthcare costs, as well as lower uncollectible gas accounts expense.
    Gas Distribution has streamlined its organizational structure over the past
several years while increasing its customer base and expanding energy services
to customers. MichCon implemented an early retirement program in early 1998
that reduced its net workforce by approximately 175 employees or 6%. The cost
of the program and the related savings were largely offsetting in 1998 but will
contribute to lower operating costs in future years. Since 1995, the number of
Gas Distribution employees has declined by 410 or 13%, while the number of
customers has increased over 30,000 or 3%.

GAS DISTRIBUTION - NUMBER OF CUSTOMERS SERVED BY EMPLOYEE

                                   [GRAPH]
<TABLE>
<CAPTION>
Year            96     97    98
<S>            <C>    <C>   <C>
               380    409   435
</TABLE>

   Gas Distribution's uncollectible gas accounts expense declined by $8.7
million in 1998 and $5.7 million in 1997 reflecting the impact of warmer weather
on accounts receivable balances, the successful implementation of a more
aggressive collection program as well as increased home heating assistance
funding obtained by low-income customers.

   Gas Distribution's uncollectible gas accounts expense is directly affected
by the level of government funded heating assistance its qualifying customers
receive. The State of Michigan provides this assistance in the form of Michigan
Home Heating Credits that are funded almost exclusively by the Federal
Low-Income Home Energy Assistance Program (LIHEAP). Congress approved funding
for the 1997 and 1998 fiscal years at $1 billion and $1.1 billion, respectively,
compared to funding of $.9 billion for the 1996 fiscal year. The State of
Michigan's share of LIHEAP funds was decreased from $64 million in fiscal year
1997 to $54 million in 1998. Gas Distribution received $13.4 million of these
funds in 1998, $.7 million more than in 1997. Home Heating Credits assisted
73,000 Gas Distribution customers in 1998, compared to 83,000 in 1997. During
1998, Congress approved a budget that maintains federal LIHEAP funding at $1.1
billion for fiscal year ending September 1999. Any future change in this funding
may impact Gas Distribution's uncollectible gas accounts expense.

DEPRECIATION AND DEPLETION decreased by $10.6 million in 1998 and increased by
$5.6 million in 1997. The decrease in 1998 resulted from lower depreciation
rates for MichCon's utility property, plant and equipment that became effective
in January 1998. Depreciation on higher plant balances partially offset the 1998
rate decrease and resulted in the increase in 1997. The higher plant balances
reflect capital expenditures of $158.0 million in 1998 and $157.7 million in
1997.

PROPERTY AND OTHER TAXES decreased by $5.3 million in 1998 and $1.0 million in
1997. The decreases for both 1998 and 1997 are attributable to lower property
taxes based on pending appeals of personal property tax assessments. If Gas
Distribution is unsuccessful in its appeals, that outcome is not expected to
have a significant adverse effect on its results of operations. The decrease in
1998 is also due to lower Michigan Single Business taxes resulting from a
decrease in taxable income. Property and other taxes increased in 1996 as a
result of higher plant balances.

PROPERTY WRITE-DOWN of $24.8 million in 1998 reflects the impairment of a
Michigan gas gathering system (Note 2b).

Equity in Earnings of Joint Ventures
Earnings from joint ventures decreased $1.5 million in 1998 due to increased
losses from Gas Distribution's 47.5% interest in a Missouri gas distribution
company that is expected to be sold in 1999. Earnings from joint ventures in
1997 increased $1.2 million reflecting increased contributions from the Blue
Lake gas storage project as a result of reduced operating and financing costs.

Other Income and Deductions
Other income and deductions increased $3.6 million in 1998 and $3.5 million in
1997. The increases reflect higher interest costs on increased borrowings
required to finance capital investments. MichCon issued $150 million of first
mortgage bonds in 1998 and $85 million of first mortgage bonds in 1997.
Additionally, non utility subsidiaries of MichCon borrowed $40 million in 1997
under a nonrecourse credit agreement. Accordingly, interest expense increased
$3.0 million in 1998 and $5.6 million in 1997. Other income and deductions in
1998 were also impacted by an unusual charge to write-down the investment in a
small natural-gas distribution company located in Missouri. Partially offsetting
these increases in 1998 was a change in minority interest reflecting joint
venture partner's share of the write-down of certain gas gathering properties
(Note 2b). Other income and deductions in 1998 were also affected by a gain
recorded from the sale of land as well as by an increase in the capitalization
of the cost of equity funds used during construction resulting from higher
construction balances.




                                       30

<PAGE>   36
MANAGEMENT'S DISCUSSION AND ANALYSIS


Income Taxes

Income taxes decreased in 1998 and increased in 1997. Income tax comparisons
were affected by variations in pre-tax earnings and by 1998 tax credits and a
provision for tax issues. Income taxes in 1997 and 1996 include amounts for the
favorable resolution of prior years' tax issues and tax credits.

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 manufactured gas plant (MGP) sites.
   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, MCN 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 costs 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, $.8 million and $.9
million, respectively, investigating and remediating these former MGP sites. At
December 31, 1998, the reserve balance is $35.1 million, of which $.1 million is
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 MCN'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 MCN's results of operations.
   In 1998, MichCon received written notification from ANR Pipeline Company
(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 this matter will have a material impact on MCN's
financial statements.

Outlook
Gas Distribution's strategy is to expand its role as the preferred provider of
natural gas and high-value energy services within Michigan. Accordingly, Gas
Distribution's objectives are to grow its revenues and control its costs in
order to deliver strong shareholder returns and provide customers high-quality
service at competitive prices. Revenue growth will be achieved through
initiatives to expand Gas Distribution's 900 Bcf of gas markets, its 1.2 million
residential, commercial and industrial customer base, as well as by providing
new energy-related services that capitalize on its expertise, capabilities and
efficient systems.
   Gas Distribution expects to provide natural gas to approximately 13,000 new
customers in 1999. Gas Distribution's market share for residential heating
customers in the communities it serves is approximately 80%. While this
saturation rate is high, growth opportunities exist through conversion of
existing homes from other fuels as well as from new construction. Gas
Distribution continues to expand industrial and commercial markets by
aggressively facilitating the use of existing gas technologies and equipment.
   Management is continually assessing ways to improve cost competitiveness.
Among other cost saving initiatives, MichCon implemented an early retirement
incentive program in 1998 that reduced its net workforce by approximately 6%.
Although this program did not have a material impact on 1998 net income, the
early retirement of employees is expected to contribute toward reducing
operating costs in future years.
   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 more price certainty. The overall package of regulatory changes connected
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.
   Gas Distribution plans to capitalize on opportunities resulting from the gas
industry restructuring by implementing MichCon's Regulatory Reform Plan, which
was approved by the MPSC in April 1998. The plan includes a comprehensive
experimental three-year customer choice program that offers all sales customers
added choices and greater price certainty. Beginning April 1, 1999, a limited
number of customers will have the option of purchasing natural gas from
suppliers other than MichCon. However, 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 commodity component of MichCon's
sales rates at $2.95 per Mcf for the three-year period beginning on January 1,
1999. Prior to






                                       31
<PAGE>   37
1999, MichCon did not generate earnings on the gas commodity portion of its
operations. However, under this plan, changes in the cost of gas will directly
impact gross margins and 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 contracts,
coupled with the use of MichCon's storage facilities, will substantially
mitigate risks from winter price and volume fluctuations.
   Also beginning in 1999 under the plan, an income sharing mechanism will allow
customers to share in profits when actual utility return on equity exceeds
predetermined thresholds. Although the plan increases MichCon's risk associated
with generating margins that cover its gas costs, management believes this
program will have a favorable impact on future earnings. In October 1998, the
MPSC denied a request for rehearing and affirmed its approval of the plan.
Various parties have appealed the MPSC's decision to the Michigan Court of
Appeals.
   Gas Distribution expects to continue growing revenues by offering a variety
of energy-related services, which includes 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.
   As described in Note 7a to the consolidated financial statements, MCN's Gas
Distribution segment complies with the provisions of Statement of Financial
Accounting Standards (SFAS), No. 71, "Accounting for the Effects of Certain
Types of Regulation." Future regulatory changes or changes in the competitive
environment could result in Gas Distribution discontinuing the application of
SFAS No. 71 for all or part of its business and require the write-off of the
portion of any regulatory asset or liability that was no longer probable of
recovery or refund. If Gas Distribution were to discontinue application of SFAS
No. 71 for all of its operations as of December 31, 1998, it would have an
extraordinary, noncash increase to net income of approximately $63.7 million.
Factors that could give rise to the discontinuance of SFAS No. 71 include (1)
increasing competition that restricts Gas Distribution's ability to establish
prices to recover specific costs, and (2) a significant change in the manner in
which rates are set by regulators from cost-based regulation to another form of
regulation. Based on a current evaluation of the various factors and conditions
that are expected to impact future regulation, management believes currently
available facts support the continued application of SFAS No. 71.

DISCONTINUED OPERATIONS
As part of its refocused strategic direction, MCN has decided to sell its E&P
properties and accordingly has classified this segment as a discontinued
operation. Bids on all gas and oil properties are expected to be received by
March 1999, with final agreements signed by mid-1999. The timing of any sales is
dependent upon receiving bids that reflect the long-term value of such
properties. The actual sales prices of the properties could be impacted by
changes in gas and oil prices. The anticipated net proceeds from the sale take
into account restructuring charges, including costs associated with employee
reductions and net lease expenses, as well as any anticipated gains or losses
from hedging contracts.
   MCN's discontinued E&P segment had a 1998 net loss of $272.8 million,
compared with net income of $30.1 million in 1997 and $18.6 million in 1996. The
1998 results included a total of $275.0 million of write-downs (Note 4a).
   In June 1996, MCN completed the sale of its computer operations subsidiary
for an adjusted sales price of $132.9 million, resulting in an after-tax gain of
$36.2 million (Note 4b).


CAPITAL RESOURCES AND LIQUIDITY

<TABLE>
<CAPTION>

CASH AND CASH EQUIVALENTS
----------------------------------------------------------------
(in Millions)                1998            1997          1996
                        ----------------------------------------
<S>                      <C>              <C>           <C>
Cash Flow Provided From
  (Used For):
  Operating activities     $  152.7       $  343.4      $  198.3
  Financing activities        497.8          522.8         440.4
  Investing activities       (673.0)        (857.2)       (627.5)
                        ----------------------------------------
Net Increase in Cash and
  Cash Equivalents
                           $  (22.5)      $    9.0      $   11.2
----------------------------------------------------------------
</TABLE>


OPERATING ACTIVITIES
MCN's cash flow from operating activities decreased $190.7 million during 1998
and increased $145.1 million during 1997. The decrease during 1998 was due
primarily to higher working capital requirements and a decline in earnings,
after adjusting for noncash items (depreciation, unusual charges and deferred
taxes). The increase in 1997 was primarily the result of lower working capital
requirements, as well as higher net income, after adjusting for noncash items
and nonoperating gains (Notes 2, 3, 4b and 5e).



FINANCING ACTIVITIES
MCN's cash flow from financing activities decreased $25.1 million during 1998.
The decrease reflects lower debt and equity issuances, net of debt repayments,
in 1998 compared to 1997 as a result of lower capital expenditures and
acquisitions. Cash flow from financing activities increased $82.5 million in
1997 as a result of higher issuances of common stock and preferred securities,
offset slightly by lower borrowings of long-term debt. The proceeds from the
issuances were used to finance higher capital investments during 1997.
   MCN typically relies on commercial paper and bank borrowings to finance
capital expenditures on a temporary basis until paid down with the proceeds from
the issuance of more permanent capital, such as long-term debt, preferred
securities and common stock. However, MCN will rely more on short-term financing
and less on permanent capital issuances during 1999. Proceeds from the expected
sale of MCN's E&P properties in 1999 will be used to repay commercial paper and
bank borrowings. A summary of MCN's significant financing activities for 1998
and financing plans for 1999 follows.
   In late 1998, MCN issued $100 million of preferred securities and borrowed
$260 million under a one-year term loan (Note 9). Proceeds were used to reduce
commercial paper, to fund capital investments by Diversified Energy and for
general corporate purposes. MCN intends to repay the term loan with proceeds
from the sale of its E&P properties.
   In 1997, MCN sold 9,775,000 shares of common stock in a public offering,
generating net proceeds of $276.6 million (Note 11a). In 1997, MCN issued $100
million of Private Institutional Trust Securities (PRINTS) and $100 million of
Single Point Remarketed Reset Capital Securities (SPRRCS) (Note 10a). In 1997,
MCN also issued 2,645,000 FELINE PRIDES, generating proceeds of $132.3 million
(Note 10a). The proceeds from these issuances were invested






                                       32
<PAGE>   38
MANAGEMENT'S DISCUSSION AND ANALYSIS

by MCN in its Diversified Energy group and were used to reduce short-term debt
incurred to fund capital investments.
   During 1998, MCN retired the PRINTS early because it determined other forms
of financing provide greater flexibility.
   In 1996, MCN issued $80 million of Trust Originated Preferred Securities
(TOPrS). Proceeds from the issuance were invested by MCN in its Diversified
Energy group and were used to reduce short-term debt incurred to fund capital
expenditures, for working capital requirements and for general corporate
purposes.
   In April 1996, MCN issued 5,865,000 Preferred Redeemable Increased Dividend
Equity Securities (Enhanced PRIDES) (Note 10c). The Enhanced PRIDES are
convertible securities that consist of a forward contract under which MCN is
obligated to sell, and the Enhanced PRIDES holders are obligated to purchase,
$135 million of MCN common stock in April 1999. It is anticipated that proceeds
from the conversion of the Enhanced PRIDES will be used to repay Diversified
Energy's medium-term notes that mature in May 1999.
   MCN traditionally has issued new shares of common stock pursuant to its
Direct Stock Purchase and Dividend Reinvestment Plan and various employee
benefit plans. During the 1996-1998 period, MCN issued 3,281,000 shares and
generated $55.3 million. Beginning in 1999, shares issued under these plans will
be acquired by MCN through open market purchases.
   As of December 1998, MCN had an outstanding shelf registration with
approximately $835.9 million remaining to be issued in the form of debt or
equity securities.
   The following table sets forth the current ratings for securities issued by
MCN and its subsidiaries:

<TABLE>
<CAPTION>
-------------------------------------------------------------
                     Standard               Duff &
                     & Poor's   Moody's     Phelps     Fitch
-------------------------------------------------------------
<S>                   <C>        <C>         <C>       <C>
MCN:
  FELINE PRIDES        BBB-       Ba1        BBB       BBB
  Enhanced PRIDES      BBB-      Baa3        BBB       BBB
  Preferred securities BBB-       Ba1        BBB       BBB
  SPRRCS               BBB+      Baa3        BBB+      BBB+

MCNIC:
  Commercial paper*     A2         P3         D2        F2
  Medium-term notes*   BBB       Baa3        BBB+      BBB

MichCon:
  Commercial paper      A2         P1         D1        F1
  First mortgage bonds  A-         A2          A+        A


-------------------------------------------------------------
</TABLE>
*Ratings based on MCN support agreement

DIVERSIFIED ENERGY
In 1998, Diversified Energy issued remarketable debt securities totaling $300
million (Note 9). Proceeds from these issuances were used to reduce short-term
debt incurred by the Diversified Energy group to fund capital investments and
for general corporate purposes.
   During 1998, a subsidiary of MCN Investment Corporation (MCNIC) retired early
a $100 million five-year term loan because it determined that other forms of
debt financing provide greater flexibility and lower costs.
   In 1998, MCNIC renewed its credit lines, which now allow for borrowings of up
to $200 million under a 364-day revolving credit facility and up to $200 million
under a three-year revolving credit facility. These facilities support MCNIC's
$400 million commercial paper program, which is used to finance capital
investments of the Diversified Energy group and working capital requirements of
its Energy Marketing operations. At December 31, 1998, commercial paper and bank
borrowings of $225.7 million were outstanding under this program.
   In 1997, MCNIC repaid $30 million of senior debt on its stated maturity date
and issued $150 million of medium-term notes, using the proceeds to repay
short-term debt and for general corporate purposes.
   In 1996, MCNIC issued $330 million of medium-term notes, using the proceeds
to repay commercial paper balances and for general corporate purposes.
   As of December 1998, MCNIC had an outstanding shelf registration with $620
million remaining to be issued in the form of debt securities.

GAS DISTRIBUTION
Gas Distribution maintains a relatively consistent amount of cash and cash
equivalents through the use of short-term borrowings.  Short-term borrowings are
normally reduced in the first part of each year as gas inventories are depleted
and funds are received from winter heating sales. During the latter part of each
year, Gas Distribution's short-term borrowings normally increase as funds are
used to finance increases in gas inventories and customer accounts receivable.
To meet its seasonal short-term borrowing needs, Gas Distribution normally
issues commercial paper that is backed by credit lines with several banks.
MichCon has established credit lines to allow for borrowings of up to $150
million under a 364-day revolving credit facility and up to $150 million under a
three-year revolving credit facility, both of which were renewed in July 1998.
At December 31, 1998, commercial paper of $218.4 million was outstanding under
this program.
   During 1998, MichCon issued $150 million of remarketable debt securities
(Note 9). Proceeds from these issuances were used to retire first mortgage
bonds, fund capital expenditures and for general corporate purposes. Also during
1998, MichCon redeemed through a tender offer $89.7 million and repaid $20
million of first mortgage bonds (note 9).
   During 1997, MichCon issued $85 million of first mortgage bonds. The funds
from this issuance were used to retire first mortgage bonds, fund capital
expenditures and for general corporate purposes. During 1997, nonutility
subsidiaries of MichCon borrowed $40 million under a nonrecourse credit
agreement that matures in 2005. Proceeds were used to finance the expansion of
the northern Michigan gathering system.
   During 1997, MichCon redeemed $17 million of long-term debt and also repaid
$50 million of first mortgage bonds.
   During 1996, MichCon issued first mortgage bonds totaling $70 million. The
proceeds were used to repay short-term obligations, finance capital expenditures
and for general corporate purposes. Also during 1996, MichCon repaid all amounts
owing under its Trust Demand Note program and did not renew this program which
allowed for borrowings of up to $25 million.
   As of December 1998, MichCon had an outstanding shelf registration with $250
million remaining to be issued in the form of debt securities.

INVESTING ACTIVITIES
MCN's cash used for investing activities decreased $184.2 million in 1998 and
increased $229.7 million in 1997. The decrease in 1998 was due primarily to
lower capital expenditures and acquisitions, partially offset by the repayment
of an advance by a Philippine power producer. The 1997 increase reflects higher
acquisitions and joint venture investments compared to 1996.
   Capital investments equaled $790.9 million in 1998 compared to $959.6 million
in 1997. The 1998 decrease reflects lower acquisitions as well as lower capital
expenditures for the





                                       33
<PAGE>   39
E&P properties. Partially offsetting this decrease were significantly higher
investments in Pipelines & Processing properties, as well as increased
investments in domestic and international power generation projects.

<TABLE>
<CAPTION>
CAPITAL INVESTMENTS
-------------------------------------------------------------------
(in Millions)                        1998           1997       1996
-------------------------------------------------------------------
<S>                               <C>            <C>       <C>
Consolidated Capital Expenditures:
  Diversified Energy              $  124.4       $  30.0   $   13.1
  Gas Distribution                   158.0         157.7      215.3
  Discontinued Operations            200.4         375.0      388.7
-------------------------------------------------------------------
                                     482.8         562.7      617.1
                                  ---------------------------------
MCN's Share of Joint
Venture Capital Expenditures:*
  Pipelines & Processing             219.9         152.2        5.2
  Electric Power                      12.0           7.4        5.5
  Energy Marketing                      .8           3.2         .2
  Gas Distribution                      .8           2.6        4.8
  Other                                 .1            .5         .3
-------------------------------------------------------------------
                                     233.6         165.9       16.0
                                  ---------------------------------
Acquisitions:
  Significant                         66.8         231.0      133.2
  Other                                7.7             -       24.4
-------------------------------------------------------------------
                                      74.5         231.0      157.6
                                  ---------------------------------
Total Capital Investments         $  790.9       $ 959.6   $  790.7
-------------------------------------------------------------------
</TABLE>
* A portion of joint venture capital expenditures is financed with joint venture
project debt.

   Total capital investments in 1998 were partially funded from the sale of
property and joint venture interests that totaled $47 million.

OUTLOOK
   1999 capital investments estimated at $750 million - MCN's refocused
strategic direction will result in capital investments in future years of
approximately $600 million to $750 million annually, allocated approximately 35%
within Pipelines & Processing, 40% in Electric Power and 25% within Gas
Distribution. MCN intends to grow by investing in a diverse portfolio of
energy-related projects, primarily in North America.
   The proposed level of investments for future years will increase capital
requirements materially in excess of internally generated funds and require the
issuance of additional debt and equity securities. MCN's actual capital
requirements will depend on proceeds received from the sale of assets. General
market conditions will dictate the timing and amount of future issuances. As it
expands its business, MCN's capitalization objective is to maintain its credit
ratings through a strong balance sheet. Its capitalization objective is a ratio
of 50% equity and 50% debt. It is management's opinion that MCN and its
subsidiaries will have sufficient capital resources, both internal and external,
to meet anticipated capital requirements.


YEAR 2000

Background - As a result of computer programs being written using two digits
rather than four digits to define the year, any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This Year 2000 issue, if not addressed, could cause computer
systems to malfunction and have a material adverse impact on MCN's operations
and business processes. The effects of the Year 2000 issue could be exacerbated
as a result of companies' dependence on partners, operators, suppliers and
government agencies.

PLAN AND STATE OF READINESS - MCN, aware of the Year 2000 potential impact,
initiated a business systems replacement program in 1995. Additionally, MCN
established a corporate-wide program in 1997 under the direction of a Year 2000
Project Office. The Year 2000 project is overseen by a vice president of the
company who reports regularly to the MCN Chairman and Board of Directors. MCN
has also retained the services of expert consultants to evaluate its Year 2000
program, and to independently assess and validate its processes. MCN has
implemented a four-phase Year 2000 approach consisting of: i) inventory -
identification of the components of MCN's systems, equipment and facilities;
ii) assessment - assessing Year 2000 readiness and prioritizing the risks of
items identified in the inventory phase; iii) remediation - upgrading, repairing
and replacing non-compliant systems, equipment and facilities; and iv) testing -
verifying items remediated. MCN is on schedule to have its mission critical
business systems, and measurement and control systems (including embedded
microprocessors) Year 2000 ready by mid-1999, as detailed below. MCN's business
systems primarily consist of general ledger, payroll, customer billing and
inventory control systems and their related hardware. MCN's measurement and
control systems primarily consist of the "SCADA" system, which measures and
monitors the transportation and distribution of gas, as well as regulators,
pressure controls and meters. The estimated completion status of these systems
and the projected status for the future follows:







<TABLE>
<CAPTION>
---------------------------------------------------------------

                 Inventory   Assessment   Remediation  Testing
                 ----------------------------------------------
<S>                 <C>       <C>            <C>       <C>
Business Systems
December 31, 1998   100%       95%            15%       15%
March 31, 1999      100%      100%            80%       70%
June 30, 1999       100%      100%           100%      100%
Measurement and
  Control Systems
December 31, 1998    98%       90%            70%       60%
March 31, 1999      100%      100%            95%       90%
June 30, 1999       100%      100%           100%      100%
---------------------------------------------------------------
</TABLE>

   MCN also has visited key partners, operators and suppliers to review their
Year 2000 issues and share information. To the extent that any of these parties
experience Year 2000 problems in their systems, MCN's operations may be
adversely affected. The majority of MCN's key partners, operators and suppliers
have represented to MCN that they have completed their Year 2000 inventory and
assessment phases. MCN is continuing to monitor the progress of these key
partners, operators and suppliers toward their completion of the remediation and
testing phases.
   COST OF REMEDIATION - Costs associated with the Year 2000 issue are not
expected to have a material adverse effect on MCN's results of operation,
liquidity or financial condition. The total costs are estimated to be between $5
million and $6 million, of which approximately $3.7 million was incurred through
December 1998. This estimate does not include MCN's share of Year 2000 costs
that may be incurred by partnerships and joint ventures.
   The anticipated costs are not higher due in part to the ongoing replacement
of significant older systems, particularly MichCon's customer information
system. MCN has made a substantial investment in new systems that are in process
of being installed, as well as those installed over the past few years. The
replacement of these systems and the customer information system, in particular,
was necessary to maintain a high level of cus-






                                       34

<PAGE>   40
MANAGEMENT'S DISCUSSION AND ANALYSIS

tomer satisfaction and to respond to changes in regulation and increased
competition within the energy industry. While the system replacements were not
accelerated due to Year 2000 issues, MCN expects the new systems to be Year 2000
ready.
Risk and Contingency Planning - MCN anticipates a smooth transition to the Year
2000. However, the failure to correct a material Year 2000 problem could result
in an interruption in or a failure of certain business activities and operations
such as: i) delivery of gas to customers; ii) control and operation of the
distribution system by electronic devices; iii) communication with customers for
purposes of service calls or inquiries; and iv) timely billing and collection.
The risk and impact of such failures is largely dependent on critical vendors
and the external infrastructure that includes telecommunications providers, gas
suppliers and project partners. The most reasonably likely worst case scenarios
would be the extended inability to deliver gas due to the failure of embedded
systems in the distribution process or the extended inability to communicate
with and respond to customers due to the loss of telecommunications. Such
failures could have a material adverse effect on MCN's results of operations,
liquidity and financial condition. Due to the uncertainty inherent in the Year
2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of
key partners, operators, suppliers and government agencies, MCN cannot certify
that it will be unaffected by Year 2000 complications. MCN has addressed the
Year 2000 risks of its business by prioritizing such risks based on the worst
case scenarios and their impact on the business. Focusing first on the safety
and welfare of MCN's customers and employees, the following two mission-critical
processes were identified: gas supply and distribution, and leak management
emergency response.
   While MCN believes it will be able to remediate and test all internal systems
that support these processes, it fully recognizes its dependence on partners,
operators, suppliers and government agencies. In order to reduce its Year 2000
risk, MCN is developing contingency plans for mission-critical processes in the
event of a Year 2000 complication. Through failure scenario identification,
MCN's approach is to develop reasonable and practical contingency plans to
maintain operations in case of non-performance. Ten contingency planning teams
have been established to address specific scenarios and mission critical
functions identified in support of the safety and welfare of customers and
employees. External suppliers have been contacted for their participation in the
contingency planning efforts for gas supply and transportation, and materials
management. Contingency plans for several essential gas transmission facilities
were tested during December 1998 under a "power outage" scenario and achieved
excellent results. Contingency plans will continue to be refined throughout 1999
as MCN works with partners, operators, suppliers and governmental agencies.


MARKET RISK INFORMATION

MCN's primary market risk arises from fluctuations in commodity prices, interest
rates and foreign exchange rates. MCN manages commodity price and interest rate
risk through the use of various derivative instruments and limits the use of
such instruments to hedging activities. If MCN did not use derivative
instruments, its exposure to such risk would be higher. A further discussion of
MCN's risk management activities is included in Note 14 to the Consolidated
Financial Statements.

COMMODITY PRICE RISK
MCN's exposure to commodity price risk arises from changes in natural gas,
natural gas liquids, oil and methanol prices throughout the United States and in
eastern Canada where MCN conducts sales and purchase transactions. MCN closely
monitors and manages its exposure to commodity price risk through a variety of
risk management techniques. Natural gas and oil futures and swap agreements are
used to manage MCN's exposure to the risk of market price fluctuations on gas
sale and purchase contracts, natural gas and oil production and gas inventories.
   A sensitivity analysis model was used to calculate the fair values of MCN's
natural gas and oil futures and swap agreements utilizing applicable forward
commodity rates in effect at December 31, 1998. The sensitivity analysis
involved increasing or decreasing the forward rates by a hypothetical 10% and
calculating the resulting unfavorable change in the fair values of the gas and
oil futures and swap agreements.

INTEREST RATE RISK
MCN is subject to interest rate risk in connection with the issuance of
variable- and fixed-rate debt and preferred securities. In order to manage
interest costs, MCN uses interest rate swap agreements to exchange fixed- and
variable-rate interest payment obligations over the life of the agreements
without exchange of the underlying principal amounts. MCN's exposure to interest
rate risk arises primarily from changes in U.S. Treasury rates and London
Inter-Bank Offered Rates (LIBOR).
   A sensitivity analysis model was used to calculate the fair values or cash
flows of MCN's debt and preferred securities, as well as its interest rate
swaps, utilizing applicable forward interest rates in effect at December 31,
1998. The sensitivity analysis involved increasing or decreasing the forward
rates by a hypothetical 10% and calculating the resulting unfavorable change in
the fair values or cash flows of the interest rate sensitive instruments.
   The results of the sensitivity model calculations follow:

MARKET RISK
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                                                  Unfavorable
(in Millions)                                  Amount              Change in
-----------------------------------------------------------------------------
<S>                                       <C>                     <C>
Commodity Price Sensitive:*
  Swaps - pay fixed/receive variable       $      53.6             Fair Value
        - pay variable/receive fixed       $      54.0             Fair Value
        - basis                            $       5.2             Fair Value
  Futures - Longs                          $       1.9             Fair Value
          - Shorts                         $        .1             Fair Value
Interest Rate Sensitive:
     Debt - fixed rate                     $     121.4             Fair Value
          - variable rate                  $        .6             Cash Flow
     Swaps - pay fixed/receive variable    $        .2             Fair Value
           - pay variable/receive fixed    $       2.8             Fair Value
-----------------------------------------------------------------------------
</TABLE>

*Includes only the risk related to the derivative instruments that serve as
hedges and does not include the related underlying hedged item.

   As discussed in Note 1b to the Consolidated Financial Statements, MCN's
non-utility energy marketing subsidiary entered into unauthorized gas purchase
and sale contracts for trading purposes. MCN is exposed to natural gas price
risk on such contracts that have not been effectively closed. At December 31,
1998, a 10% unfavorable change in basis would have reduced the fair value of
such open contracts that totaled 44 Bcf by $1.2 million. A 10% favorable change
in basis would have increased the fair value of such contracts by a
corresponding amount.

FOREIGN CURRENCY RISK
MCN is subject to foreign currency risk as a result of its investments in
foreign joint ventures, which are primarily located in India. MCN's foreign
currency risk arises from changes in the U.S. dollar and Indian rupee exchange
rates. MCN does not hedge its foreign currency risk and therefore will continue
to be affected by foreign currency exchange rate fluctuations. However, the
expected sale of MCN's interest in an Indian joint venture will significantly
reduce its foreign currency risk (Note 5b).






                                      35
<PAGE>   41


NEW ACCOUNTING PRONOUNCEMENTS

COMPUTER SOFTWARE - In March 1998, the Accounting Standards Executive Committee
(AcSEC) of the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires the
capitalization of internal-use software and specifically identifies which costs
should be capitalized and which costs should be expensed. The statement is
effective for fiscal years beginning after December 15, 1998. Management does
not expect the SOP to have a material impact on MCN's financial statements.

START-UP ACTIVITIES - In April 1998, the AcSEC issued SOP 98-5, "Reporting on
the Costs of Start-up Activities." SOP 98-5 requires start-up and
organizational costs to be expensed as incurred and is effective for fiscal
years beginning after December 15, 1998. Management does not expect the SOP to
have a material impact on MCN's financial statements.

DERIVATIVE AND HEDGING ACTIVITIES - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for fiscal years beginning after June 15, 1999.
SFAS No. 133 expands the definition of the types of contracts considered
derivatives, requires all derivatives to be recognized in the balance sheet as
either assets or liabilities measured at their fair value and sets forth
conditions in which a derivative instrument may be designated as a hedge. The
statement requires that changes in the fair value of derivatives be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to be recorded to other comprehensive income or to offset related results on
the hedged item in earnings.
   MCN manages commodity price risk and interest rate risk through the use of
various derivative instruments and predominantly limits the use of such
instruments to hedging activities. The effects of SFAS No. 133 on MCN's
financial statements are subject to fluctuations in the market value of hedging
contracts which are, in turn, affected by variations in gas and oil prices and
in interest rates. Management cannot quantify the effects of adopting SFAS No.
133 at this time.

ENERGY TRADING ACTIVITIES - In November 1998, the Emerging Issues Task Force
reached consensus on Issue No. 98-10, "Accounting for Energy Trading and Risk
Management Activities" (EITF 98-10), effective for fiscal years beginning after
December 15, 1998.  EITF 98-10 requires all energy trading contracts to be
recognized in the balance sheet as either assets or liabilities measured at
their fair value, with changes in fair value recognized currently in earnings.
Management does not expect EITF 98-10 to have a material impact on MCN's
financial statements.

FORWARD-LOOKING STATEMENTS

This Annual Report 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.


AVAILABLE INFORMATION

The following information is available without charge to shareholders and other
interested parties: the Annual Report; the Form 10-K Annual Report; the Form
10-Q Quarterly Reports and the Annual and Quarterly Statistical Supplements. To
request these publications, shareholders and other interested parties are
instructed to contact: MCN Investor Relations, 500 Griswold Street, Detroit,
Michigan 48226, (800) 548-4655. Information also is available on MCN's website
at http://www.mcnenergy.com.







                                      36
<PAGE>   42
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Quantitative and qualitative disclosures about market risk  is contained in
Item 7.  Management's Discussion and Analysis - Market Risk Information, page
35 of this report.
















                                      37
<PAGE>   43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Consolidated Statement of Financial Position, page 39

     Consolidated Statement of Operations, page 40

     Consolidated Statement of Cash Flows, page 41

     Consolidated Statement of Shareholders' Equity, page 42

     Notes to Consolidated Financial Statements, pages 43 through 64

     Notes to Consolidated Financial Statements:
     Quarterly Operating Results (Unaudited), page 59

     Independent Auditors' Report, page 65




                                       38
<PAGE>   44
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

<TABLE>
<CAPTION>



December 31 (in Thousands)                                                         1998        1997
                                                                                (Restated)  (Restated)
                                                                                  Note 1b     Note 1b

<S>                                                                           <C>          <C>
ASSETS
Current Assets
  Cash and cash equivalents, at cost (which approximates market value)        $   17,039   $   39,495
  Accounts receivable, less allowance for doubtful accounts of
     $9,665 and $15,711, respectively                                            400,120      405,924
  Accrued unbilled revenues                                                       87,888       93,010
  Gas in inventory                                                               147,387       56,777
  Property taxes assessed applicable to future periods                            72,551       67,879
  Accrued gas cost recovery revenues                                                   -       12,862
  Other                                                                           42,472       54,089
                                                                              -----------------------
                                                                                 767,457      730,036
                                                                              -----------------------
DEFERRED CHARGES AND OTHER ASSETS
  Deferred income taxes (Note 17)                                                 50,547            -
  Investments in debt and equity securities                                       69,705       97,521
  Deferred swap losses and receivables (Note 14a)                                 63,147       51,023
  Deferred environmental costs                                                    30,773       30,234
  Prepaid benefit costs (Note 16)                                                111,775       80,242
  Other                                                                           98,940       86,181
                                                                              -----------------------
                                                                                 424,887      345,201
                                                                              -----------------------
Investments in and Advances to Joint Ventures (Note 6)
  Pipelines & Processing                                                         521,711      323,597
  Electric Power                                                                 231,668      180,127
  Energy Marketing                                                                29,435       25,159
  Gas Distribution (Note 2b)                                                       1,478        8,841
  Other                                                                           18,939       19,252
                                                                              -----------------------
                                                                                 803,231      556,976
                                                                              -----------------------
Property, Plant and Equipment
  Pipelines & Processing (Note 2a)                                                48,706       47,037
  Gas Distribution (Note 2b)                                                   2,916,540    2,813,434
  Exploration & Production (Note 4a)                                           1,040,047    1,299,301
  Other                                                                           36,124       27,002
                                                                              -----------------------
                                                                               4,041,417    4,186,774
  Less - Accumulated depreciation and depletion                                1,644,094    1,488,050
                                                                              -----------------------
                                                                               2,397,323    2,698,724
                                                                              -----------------------
                                                                              $4,392,898   $4,330,937
                                                                              -----------------------

LIABILITIES AND CAPITALIZATION
Current Liabilities
  Accounts payable                                                            $  304,349   $  342,195
  Notes payable                                                                  618,851      401,726
  Current portion of long-term debt and capital lease obligations                269,721       36,878
  Federal income, property and other taxes payable                                69,465       86,826
  Deferred gas cost recovery revenues                                             14,980            -
  Gas payable                                                                     42,669        8,317
  Customer deposits                                                               18,791       16,382
  Other                                                                          108,310      101,630
                                                                              -----------------------
                                                                               1,447,136      993,954
                                                                              -----------------------
DEFERRED CREDITS AND OTHER LIABILITIES
  Deferred income taxes (Note 17)                                                      -      153,159
  Unamortized investment tax credit                                               30,056       33,046
  Tax benefits amortizable to customers                                          130,120      123,365
  Deferred swap gains and payables (Note 14a)                                     62,956       41,717
  Accrued environmental costs                                                     35,000       35,000
  Minority interest                                                               10,898       19,188
  Other                                                                           75,439       69,889
                                                                              -----------------------
                                                                                 344,469      475,364
                                                                              -----------------------
Commitments and Contingencies (Note 13)

CAPITALIZATION
  Long-term debt, including capital lease obligations (Note 9)                 1,307,168    1,212,564
  MCN-obligated mandatorily redeemable preferred securities of subsidiaries
   holding solely debentures of MCN (Note 10a)                                   502,203      505,104
  Common shareholders' equity (see accompanying statement)                       791,922    1,143,951
                                                                              -----------------------
                                                                               2,601,293    2,861,619
                                                                              -----------------------
                                                                              $4,392,898   $4,330,937
                                                                              -----------------------
</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.








                                      39
<PAGE>   45
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in Thousands, Except Per Share Amounts)         1998          1997            1996
                                                                      (Restated)    (Restated)
                                                                       Note 1b       Note 1b
-------------------------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>            <C>
OPERATING REVENUES
  Gas sales                                                        $ 1,669,676    $ 1,877,219    $ 1,737,373
  Transportation                                                       139,609        129,953        120,019
  Other                                                                 70,909         56,662         46,086
                                                                   -----------------------------------------
                                                                     1,880,194      2,063,834      1,903,478
                                                                   -----------------------------------------

OPERATING EXPENSES
  Cost of gas                                                        1,262,372      1,406,819      1,237,556
  Operation and maintenance                                            301,961        314,894        321,372
  Depreciation, depletion and amortization                              98,914        107,703        101,522
  Property and other taxes                                              59,503         63,483         64,970
  Property write-downs and restructuring charges (Notes 2 and 3)       175,341              -              -
                                                                   -----------------------------------------
                                                                     1,898,091      1,892,899      1,725,420
                                                                   -----------------------------------------

OPERATING INCOME (LOSS)                                                (17,897)       170,935        178,058
                                                                   -----------------------------------------

EQUITY IN EARNINGS OF JOINT VENTURES (NOTE 6)                           62,225         49,059         17,867
                                                                   -----------------------------------------
OTHER INCOME AND (DEDUCTIONS)
  Interest income                                                       10,467         11,006          7,027
  Interest on long-term debt                                           (60,643)       (56,198)       (47,799)
  Other interest expense                                               (18,806)        (8,783)        (9,164)
  Dividends on preferred securities of subsidiaries                    (17,613)       (14,433)        (5,001)
  Investment loss (Note 2b)                                             (8,500)             -              -
  Minority interest                                                      5,992         (1,964)        (1,059)
  Other (Note 5e)                                                       11,598         10,828          3,810
                                                                   -----------------------------------------
                                                                       (77,505)       (59,544)       (52,186)
                                                                   -----------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES           (33,177)       160,450        143,739
INCOME TAX PROVISION (BENEFIT)                                         (19,500)        57,380         49,796
                                                                   -----------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS                               (13,677)       103,070         93,943
DISCONTINUED OPERATIONS, NET OF TAXES (NOTE 4)                        (272,791)        30,159         56,397
                                                                   -----------------------------------------
NET INCOME (LOSS)                                                  $  (286,468)   $   133,229    $   150,340
------------------------------------------------------------------------------------------------------------

BASIC EARNINGS (LOSS) PER SHARE (Note 11d)
  Continuing operations                                            $      (.17)   $      1.41    $      1.40
  Discontinued operations (Note 4)                                       (3.46)           .41            .85
                                                                   -----------------------------------------
                                                                   $     (3.63)   $      1.82    $      2.25
------------------------------------------------------------------------------------------------------------

DILUTED EARNINGS (LOSS) PER SHARE (Note 11d)
  Continuing operations                                            $      (.17)   $      1.39    $      1.39
  Discontinued operations (Note 4)                                       (3.46)           .40            .84
                                                                   -----------------------------------------
                                                                   $     (3.63)   $      1.79    $      2.23
------------------------------------------------------------------------------------------------------------

AVERAGE COMMON SHARES OUTSTANDING
  Basic                                                                 78,823         72,887         66,944
------------------------------------------------------------------------------------------------------------
  Diluted                                                               78,823         75,435         67,521
                                                                   -----------------------------------------

DIVIDENDS DECLARED PER SHARE                                       $    1.0200    $     .9825    $     .9400
------------------------------------------------------------------------------------------------------------
</TABLE>

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





                                      40
<PAGE>   46
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (In Thousands)                                                          1998          1997           1996
                                                                                           (Restated)     (Restated)
                                                                                             Note 1b        Note 1b
                                                                                        ------------------------------------------
<S>                                                                                      <C>            <C>            <C>
CASH FLOW FROM OPERATING ACTIVITIES
  Net income (loss)                                                                      $ (286,468)    $ 133,229       $  150,340
  Adjustments to reconcile net income (loss) to net cash provided from
   operating activities
    Depreciation, depletion and amortization
      Per statement of operations                                                            98,914       107,703          101,522
      Charged to discontinued operations and other accounts                                  88,576        81,637           55,494
    Unusual charges from continuing and discontinued operations
     (Notes 2, 3 and 4a)                                                                    389,598             -                -
    Deferred income taxes - current                                                          (2,587)       (2,701)           8,061
    Deferred income taxes and investment tax credit, net                                     14,565        11,660           23,892
    Gain on sale of Genix, net of taxes (Note 4b)                                                 -             -          (36,176)
    Equity in earnings of joint ventures, net of distributions                              (40,360)      (16,511)          (2,506)
    Other                                                                                   (11,550)       (5,456)          (7,541)
                                                                                            (97,966)       33,823          (94,754)
    Changes in assets and liabilities, exclusive of changes shown separately           -------------------------------------------
                                                                                            152,722       343,384          198,332
      Net cash provided from operating activities                                      -------------------------------------------


CASH FLOW FROM FINANCING ACTIVITIES
  Notes payable, net                                                                        307,482        68,000           87,491
  Dividends paid                                                                            (82,239)      (72,851)         (62,875)
  Issuance of common stock (Note 11a)                                                        20,192       294,402           17,264
  Issuance of preferred securities (Note 10a)                                                96,850       326,521           77,218
  Issuance of long-term debt (Note 9)                                                       458,761       273,241          398,540
  Long-term commercial paper and bank borrowings (Note 9)                                    17,299      (261,822)         (62,835)
  Retirement of long-term debt and preferred securities (Notes 9 and 10a)                  (328,810)     (109,224)          (8,139)
  Other                                                                                       8,243         4,612           (6,249)
                                                                                       -------------------------------------------
    Net cash provided from financing activities                                             497,778       522,879          440,415
                                                                                       -------------------------------------------

CASH FLOW FROM INVESTING ACTIVITIES
  Capital expenditures                                                                     (482,775)     (561,354)        (610,323)
  Acquisitions (Note 5)                                                                     (42,429)     (166,553)        (133,201)
  Investment in debt and equity securities, net                                              17,831       (63,123)         (26,903)
  Investment in joint ventures                                                             (189,309)     (152,642)         (36,217)
  Sale of property and joint venture interests                                               47,185        67,365           36,621
  Sale of Genix (Note 4b)                                                                         -             -          132,889
  Other                                                                                     (23,459)       19,077            9,590
                                                                                       -------------------------------------------
    Net cash used for investing activities                                                 (672,956)     (857,230)        (627,544)
                                                                                       -------------------------------------------
  NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                      (22,456)        9,033           11,203
  CASH AND CASH EQUIVALENTS, JANUARY 1                                                       39,495        30,462           19,259
                                                                                       -------------------------------------------
  CASH AND CASH EQUIVALENTS, DECEMBER 31                                                  $  17,039     $  39,495       $   30,462
                                                                                       -------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------

CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
  Accounts receivable, net                                                                $  (6,653)    $ (49,017)      $  (66,183)
  Accrued unbilled revenues                                                                   5,122        15,499          (16,099)
  Gas in inventory                                                                          (90,610)       22,384           (7,398)
  Accrued/deferred gas cost recovery revenues, net                                           27,842        14,810          (28,250)
  Prepaid/accrued benefit costs, net                                                        (31,490)      (16,086)         (50,972)
  Accounts payable                                                                          (35,597)       24,273          102,711
  Federal income, property and other taxes payable                                          (17,333)      (10,820)         (19,587)
  Gas payable                                                                                34,352         5,524           (9,339)
  Other current assets and liabilities, net                                                   8,152         5,998           (5,146)
  Other deferred assets and liabilities, net                                                  8,249        21,258            5,509
                                                                                       -------------------------------------------
                                                                                          $ (97,966)    $  33,823          (94,754)
----------------------------------------------------------------------------------------------------------------------------------

</TABLE>
The notes to the consolidated financial statements are an integral part of this
statement.



                                       41


<PAGE>   47
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

Year Ended December 31 (in Thousands)                                           1998           1997           1996
                                                                             (Restated)     (Restated)
                                                                              Note 1b        Note 1b
<S>                                                                        <C>            <C>            <C>
COMMON SHAREHOLDERS' EQUITY (Note 11)
COMMON STOCK,
  par value $.01 per share - 100,000,000 shares authorized,
  79,724,542, 78,231,889 and 67,303,908 shares outstanding, respectively   $       797    $       782    $       673
                                                                           -----------------------------------------

ADDITIONAL PAID-IN CAPITAL
  Balance - beginning of period                                                806,997        493,078        445,828
  Common stock and performance units                                            25,969        313,485         47,326
  Other                                                                              -            434            (76)
                                                                           -----------------------------------------
  Balance - end of period                                                      832,966        806,997        493,078
                                                                           -----------------------------------------

ACCUMULATED OTHER COMPREHENSIVE LOSS
  Foreign Currency Translation Adjustment:
   Balance - beginning of period                                                (6,335)           (43)          (141)
   Net change in foreign currency translation adjustment (a)                    (6,554)        (6,292)            98
                                                                           -----------------------------------------
   Balance - end of period                                                     (12,889)        (6,335)           (43)
                                                                           -----------------------------------------
  Unrealized Losses on Securities:
   Balance - beginning of period                                                (1,184)             -              -
   Net change in unrealized losses on securities (a)                            (2,503)        (1,184)             -
                                                                           -----------------------------------------
   Balance - end of period                                                      (3,687)        (1,184)             -
                                                                           -----------------------------------------
                                                                               (16,576)        (7,519)           (43)
                                                                           -----------------------------------------

RETAINED EARNINGS
  Balance - beginning of period                                                365,730        305,352        218,425
  Net income (loss) (a)                                                       (286,468)       133,229        150,340
  Cash dividends declared                                                      (82,239)       (72,851)       (62,875)
  Other                                                                              -              -           (538)
                                                                           -----------------------------------------
  Balance - end of period                                                       (2,977)       365,730        305,352
                                                                           -----------------------------------------
YIELD ENHANCEMENT, CONTRACT AND ISSUANCE COSTS                                 (22,288)       (22,039)       (14,492)
                                                                           -----------------------------------------
                                                                           $   791,922    $ 1,143,951    $   784,568
 -------------------------------------------------------------------------------------------------------------------

(A) DISCLOSURE OF COMPREHENSIVE INCOME (LOSS) (Note 1):
  Net income (loss)                                                        $  (286,468)   $   133,229    $   150,340
  Other comprehensive income, net of taxes:
  Foreign Currency Translation Adjustment:
   Foreign currency translation gains (losses), net of taxes of
      $3,529, $3,388 and $53                                                    (6,554)        (6,292)            98
  Unrealized Losses on Securities:
   Unrealized losses on securities, net of taxes of $3,495, $637 and $-         (6,490)        (1,184)             -
   Reclassification of losses recognized in net income, net of taxes
      of $2,147 $- and $-                                                        3,987              -              -
--------------------------------------------------------------------------------------------------------------------
                                                                           $  (295,525)   $   125,753    $   150,438
--------------------------------------------------------------------------------------------------------------------
</TABLE>

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






                                      42
<PAGE>   48
Notes to Consolidated Financial Statements




1a. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY DESCRIPTION - MCN Energy Group Inc. (MCN) is a diversified energy
company with markets and investments throughout North America and in India and
Nepal. MCN operates through two major business groups, Diversified Energy and
Gas Distribution.

-  Diversified Energy, operating through MCN Investment Corporation (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 megawatts (MW) of gross capacity and investments in electric
   distribution facilities; Energy Marketing with total gas sales and exchange
   gas delivery markets of 465.7 billion cubic feet (Bcf) for 1998 and 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 trillion cubic feet equivalent 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 (Note
   4a).

-  Gas Distribution consists principally of Michigan Consolidated Gas Company
   (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 Michigan
   Public Service Commission (MPSC) with respect to the distribution and
   intrastate transportation of natural gas.

BASIS OF PRESENTATION - The accompanying consolidated financial statements were
prepared in conformity with generally accepted accounting principles. In
connection with their preparation, management was required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and the disclosure of contingent liabilities. Actual results could
differ from those estimates. Certain reclassifications have been made to prior
years' statements to conform to the 1998 presentation.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of MCN and certain consolidated subsidiaries and partnerships.
Investments in entities in which MCN has a controlling influence that it intends
to maintain are consolidated. Generally, investments in 50% or less owned
entities in which MCN has significant but not controlling influence, and
entities where control is temporary, have been accounted for under the equity
method.

REVENUES AND COST OF GAS - Gas Distribution accrues revenues for gas service
provided but unbilled at month end. Through December 31, 1998, MichCon's accrued
revenues included a component for cost of gas sold that was recoverable through
the gas cost recovery (GCR) mechanism. Prior to 1999, GCR proceedings before the
MPSC permitted MichCon to recover the prudent and reasonable cost of gas sold.
The overcollection of gas costs totaling $14,980,000 at December 31, 1998,
including interest, will be refunded to customers through reduced future rates.
   Beginning in 1999, MichCon implemented a Regulatory Reform Plan approved by
the MPSC. The plan suspends the GCR mechanism and fixes the gas commodity
component of MichCon's sales rates for the three-year period beginning
January 1, 1999.

SALES OF OWNERSHIP INTERESTS BY SUBSIDIARIES AND PARTNERSHIPS - MCN recognizes
gains or losses on the sale of stock by subsidiaries or the sale of partnership
interests. Such gains or losses represent the difference between MCN's share of
the consideration received and the historical book value of its investment.

COMPREHENSIVE INCOME - Effective January 1, 1998, MCN adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income. Comprehensive income is defined as the change in common shareholder's
equity during a period from transactions and events from nonowner sources,
including net income. Other items of comprehensive income include revenues,
expenses, gains and losses that are excluded from net income. Items of other
comprehensive income applicable to MCN and their accounting policies are as
follows:

-  Foreign Currency Translation Adjustments - MCN's foreign joint ventures use
   the local currency as the functional currency. As a result, MCN's investments
   in foreign entities are translated from foreign currencies into U.S. dollars
   using end-of-period exchange rates. Equity in earnings of foreign entities is
   translated at the average exchange rate prevailing during the month the
   respective earnings occur. Translation adjustments, net of deferred taxes,
   are excluded from net income and shown as a separate component of other
   comprehensive income until realized in net income upon sale or upon complete
   liquidation of the investment in the foreign entity.

-  Holding Gains and Losses on Available-for-Sale Securities - Unrealized
   holding gains and losses resulting from temporary changes in the fair value
   of MCN's available-for-sale securities are excluded from net income and
   reported as a separate component of other comprehensive income until realized
   in net income upon sale. If a fair value decline is judged to be other than
   temporary, the decline is recorded to net income.

PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, excluding E&P
property of MCN's discontinued business unit (Note 4a), is stated at cost and
includes amounts for labor, materials, overhead and an allowance for funds used
during construction. Unit of production depreciation and depletion is used for
certain Gas Distribution production and transmission property. All other
property, plant and equipment of MCN, excluding E&P property, is depreciated
over its useful life using the straight-line method. Depreciation rates vary by
class of property.
   The ratio of the provision for depreciation and depletion to the average cost
of depreciable property is as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------
                                1998       1997      1996
                             ----------------------------
<S>                             <C>        <C>       <C>
Pipelines & Processing          3.4%       3.5%      3.8%
Gas Distribution                3.5%       4.1%      4.4%
Other                          12.2%      12.3%     10.1%
---------------------------------------------------------
</TABLE>

   The unit of production method is used for calculating depreciation, depletion
and amortization (DD&A) on proved gas and oil properties related to MCN's
discontinued E&P segment. The average DD&A expense per thousand cubic feet
equivalent (Mcfe) was $.82, $.75 and $.70 in 1998, 1997 and 1996, respectively.

LONG-LIVED ASSETS - In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
MCN reviews its long-lived assets to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. MCN also reviews long-lived assets to be disposed
of to deter-






                                      43
<PAGE>   49


mine if the asset's carrying amount is in excess of its fair value
less the cost to sell.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - Gas Distribution capitalizes an
allowance for both debt and equity funds used during construction in the cost of
major additions to plant. Diversified Energy also capitalizes interest on debt
funds used during construction. The total amount capitalized was $19,938,000,
$18,190,000 and $14,631,000 in 1998, 1997 and 1996, respectively.

INCOME TAXES AND INVESTMENT TAX CREDITS - Tax Benefits Amortizable to Customers
represents the net revenue equivalent of the difference in property-related
accumulated deferred income taxes computed in accordance with SFAS No. 109,
"Accounting for Income Taxes," as compared to the amounts previously reflected
in setting utility rates. This amount is primarily due to current tax rates
being lower than the rates in effect when the original deferred taxes were
recorded and because of temporary differences, including accumulated investment
tax credits, for which deferred income taxes were not previously recorded in
setting utility rates. These net tax benefits are being amortized in accordance
with the regulatory treatment over the life of the related plant, as the related
temporary differences reverse.
   Investment tax credits relating to Gas Distribution property placed into
service were deferred and are being credited to income over the life of the
related property. Investment tax credits relating to Diversified Energy
operations were recorded to income in the year the related property was placed
into service.

DEFERRED DEBT COSTS - In accordance with MPSC regulations, MichCon defers
reacquisition and unamortized issuance costs of reacquired long-term debt when
such debt is refinanced. These costs are amortized over the term of the
replacement debt.

CONSOLIDATED STATEMENT OF CASH FLOWS - For purposes of this statement, MCN
considers all highly liquid investments, excluding restricted investments,
purchased with a maturity of three months or less to be cash equivalents. Other
cash and noncash investing and financing activities for the years ended
December 31 follow:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------
(in Thousands)                           1998        1997         1996
                                     ----------------------------------
<S>                                    <C>         <C>         <C>
Cash Paid During the Year for:
  Interest, net of
   amounts capitalized                 $117,162    $ 97,659    $ 74,775
  Federal income taxes                   12,175      30,300      19,934
Noncash Activities:
  Common stock and
   performance units                   $   288     $ 19,188    $  6,210
  Equity issued for acquisitions         5,409            -           -
  Foreign currency adjustment            6,554        6,292          98
  Unrealized losses
   on securities                         6,490        1,184           -
  Sale of joint ventures                     -        8,562           -
  Yield enhancement
   and contract costs                        -        2,702       8,243
  Property purchased
   under capital leases                      -        1,303       6,765
-----------------------------------------------------------------------
</TABLE>

1b. RESTATEMENT
Subsequent to the issuance of MCN's December 31, 1998 financial statements,
certain matters came to management's attention and resulted in a special
investigation of prior years' operations of CoEnergy Trading Company (CTC),
MCN's non-utility energy marketing subsidiary. As a result of the investigation,
MCN identified that its internal controls had been overridden and that certain
transactions had not been properly accounted for.  Specifically, the
investigation concluded that CTC had entered into gas supply contracts and
agreed to pay significantly less than market prices in one period in return for
above-market prices to be paid in subsequent periods through March 2000. The
effect of these transactions was to improperly delay the accrual of cost of
gas expenses, resulting in the overstatement of the 1998 net loss by $478,000
and the overstatement of 1997 net income by $8,585,000.

Additionally, the investigation identified that CTC had entered into certain
unauthorized gas purchase and sale contracts for trading purposes. The
unauthorized transactions violate MCN's risk-management policy that requires all
such activities to be reviewed and approved by a risk committee that reports
regularly to the MCN Board of Directors. The gas purchase and sale contracts
entered into in connection with trading activities, some of which remain in
effect through March 2000, were not accounted for properly using the required
mark-to-market method, under which unrealized gains and losses are recorded as
an adjustment to cost of gas. The effect of not properly accounting for these
transactions was the understatement of the 1998 net loss by $7,112,000 and the
overstatement of 1997 net income by $385,000. However, net income of $2,574,000
and $1,824,000 was realized and recorded in connection with these trading
activities in 1998 and 1997, respectively, resulting in a net loss of $4,538,000
in 1998 and net income of $1,439,000 in 1997 from such activities. From the
inception of these trading activities in March 1997 through March 1999,
$5,721,000 of net income was realized and recorded in connection with these
trading activities. However, marking these contracts to market, as required,
results in a previously unrecorded net unrealized loss of $8,435,000 through
March 1999, indicating a net loss of $2,714,000 from such activities.

Other items identified during the investigation resulted in the understatement
of the 1998 net loss by $879,000 and the overstatement of 1997 net income by
$107,000.

The accompanying consolidated financial statements have been restated from
amounts originally reported to properly account for the transactions
identified. A summary of the significant effects of the restatement of MCN's
1998 and 1997 financial statements is as follows:

<TABLE>
<CAPTION>
                                                        1998                          1997
                                             ---------------------------   ---------------------------
                                               PREVIOUSLY                    Previously
(in Thousands, Except Per Share Amounts)        REPORTED       RESTATED       Reported      Restated
                                             -------------  -------------  -------------  -------------
CONSOLIDATED STATEMENT OF OPERATIONS
<S>                                          <C>            <C>            <C>            <C>
Cost of Gas................................  $  1,250,815   $  1,262,372   $  1,392,856   $  1,406,819
Income (Loss)From Continuing
  Operations Before Income Taxes...........  $    (21,620)  $    (33,177)  $    174,413   $    160,450
Income Tax Provision (Benefit).............  $    (15,456)  $    (19,500)  $     62,266   $     57,380
Income (Loss) From Continuing
  Operations...............................  $     (6,164)  $    (13,677)  $    112,147   $    103,070
Net Income (Loss)..........................  $   (278,955)  $   (286,468)  $    142,306   $    133,229
Basic Earnings (Loss) Per Share............
  Continuing Operations....................  $       (.08)  $       (.17)  $       1.54   $       1.41
  Continuing and Discontinued
    Operations.............................  $      (3.54)  $      (3.63)  $       1.95   $       1.82
Diluted Earnings (Loss) Per Share..........
  Continuing Operations....................  $       (.08)  $       (.17)  $       1.51   $       1.39
  Continuing and Discontinued
    Operations.............................  $      (3.54)  $      (3.63)  $       1.91   $       1.79

CONSOLIDATED STATEMENT OF FINANCIAL
  POSITION
Accounts Receivable........................  $    397,298   $    400,120   $    404,448   $    405,924
Gas in Inventory...........................  $    149,797   $    147,387   $     56,777   $     56,777
Accounts Payable...........................  $    278,417   $    304,349   $    326,756   $    342,195
Federal Income, Property and Other Taxes
 Payable...................................  $     78,395   $     69,465   $     91,712   $     86,826
Common Shareholders' Equity................  $    808,512   $    791,922   $  1,153,028   $  1,143,951
</TABLE>

2. PROPERTY WRITE-DOWNS AND INVESTMENT LOSS

A. PIPELINES & PROCESSING
Property - During 1998, MCN recorded an impairment loss relating to its coal
fines project totaling $133,782,000 pre-tax ($86,959,000 net of taxes). In June
1998, MCN placed into operation six coal fines plants designed to recover
particles of coal that are a waste by-product of coal mining and then process
the 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 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 generates
negative cash flows. These factors led to MCN's decision to record an impairment
loss equal to the carrying value of the plants, reflecting the likely inability
to recover such costs. MCN is currently negotiating 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.
   In 1998, MCN also recorded an impairment loss of $3,899,000 pre-tax
($2,534,000 net of taxes) relating to an acquired out-of-service pipeline in
Michigan. This pipeline was acquired for future development, along with
easements and rights-of-way. In connection with certain lease renewal options,
MCN reviewed the business alternatives for these assets and determined that
their development is unlikely. Accordingly, MCN has recorded an impairment loss
equal to the carrying value of the assets.

B. GAS DISTRIBUTION
Property - During 1998, MichCon recognized a $24,800,000 pre-tax loss
($11,200,000 net of taxes and minority interest) from the write-down of a gas
gathering pipeline system. A new gas reserve analysis was performed in 1998 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.

Investment - During 1998, MCN recognized an $8,500,000 pre-tax ($5,525,000 net
of taxes) write-down of a joint venture investment in a small gas distribution
company located in Missouri. As a result of MCN's refocused strategic direction,
MCN 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.


3. RESTRUCTURING CHARGES

During 1998, MCN initiated a two-part corporate restructuring and recorded a
combined restructuring charge totaling $12,860,000 pre-tax ($8,358,000 net of
taxes).

Corporate - The first part, totaling $10,390,000 pre-tax, consists of a
corporate realignment designed to improve operating efficiencies through a more
streamlined organizational structure. The realignment includes the reduction of
37 positions resulting in severance and termination benefits of $4,714,000
pre-tax. Also included in the charge was $5,676,000 pre-tax relating to net
lease expenses and the write-down of fixed assets consisting of leasehold
improvements, office equipment and information systems, which are no longer used
by MCN. As of December 31, 1998, payments of $660,000 have been charged against
the restructuring accruals relating to severance and termination benefits. These
benefits will continue to be paid through 2000. The remaining restructuring
costs, primarily for net lease expenses, are expected to be paid



                                      44
<PAGE>   50

over the related lease terms, which expire through 2006.

Electric Power - The second part of the corporate restructuring relates to a
revised international investment strategy whereby MCN will primarily limit
future capital investments in developing countries to amounts required to
fulfill existing commitments. As a result of this revised strategy, MCN exited
certain international projects and recorded a charge of $2,470,000 pre-tax,
primarily related to capitalized costs that had been incurred on these exited
projects.


4. DISCONTINUED OPERATIONS

A. 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 $416,977,000
pre-tax ($271,035,000 net of taxes). Prior to being classified as discontinued
operations, these properties were accounted for under the full cost method. 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 $6,135,000 pre-tax ($3,987,000 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.
   As a result of its refocused strategic direction, MCN is committed to the
sale of its gas and oil properties, and expects the sale to be completed in
mid-1999. Bids on portions of its gas and oil properties were received in
January 1999, with bids on all properties expected by March 1999. Accordingly,
E&P has been accounted for as discontinued operations. Diversified Energy's
interest and preferred dividend expenses have been allocated to E&P based on its
ratio of total capital to that of Diversified Energy. The following financial
information summarizes E&P's operations:

<TABLE>
<CAPTION>

---------------------------------------------------------------------
(in Thousands)                                  1998           1997
                                         ----------------------------
Assets
<S>                                         <C>            <C>
  Accounts receivable, net                 $   74,273      $   53,675
  Property, plant and equipment, net          815,252       1,149,286
  Noncurrent deferred income taxes             96,006               -
  Other                                         2,670          34,852
                                         ----------------------------
                                           $  988,201      $1,237,813
---------------------------------------------------------------------
Liabilities
  Accounts payable                         $  59,063       $   69,266
  Long-term debt and capital lease
     obligations                                 929          112,784
  Noncurrent deferred income taxes                 -           60,537
  Other                                        9,458           15,905
                                        -----------------------------
                                           $  69,450       $  258,492
---------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>

-----------------------------------------------------------------------------
(in Thousands)                              1998          1997         1996
                                        -------------------------------------
Operating Revenues
<S>                                     <C>            <C>          <C>
  Non-affiliates                        $  150,504     $ 144,041    $  94,615
  Affiliates                                56,598        71,787       43,326
                                        -------------------------------------
                                           207,102       215,828      137,941
Operating Expenses, including
  property write-downs                     595,057       164,373      104,706
                                        -------------------------------------
Operating Income (Loss)                   (387,955)       51,455       33,235
                                        -------------------------------------
Other Income and (Deductions)
  Interest and preferred
   dividend expense                        (51,058)      (38,129)     (28,191)
  Other, including
   investment loss                           2,254         6,691          161
                                        -------------------------------------
                                           (48,804)      (31,438)     (28,030)
                                        -------------------------------------
Income (Loss) Before
  Income Taxes                            (436,759)       20,017        5,205
Income Taxes
  Current and deferred                    (153,483)        7,655        2,457
  Gas production tax credits               (10,485)      (17,797)     (15,878)
                                        -------------------------------------
                                          (163,968)      (10,142)     (13,421)
                                        -------------------------------------
Net Income (Loss)                       $ (272,791)    $  30,159    $  18,626
-----------------------------------------------------------------------------
</TABLE>

Intercompany transactions between MOG and other MCN subsidiaries are included in
the individual captions of the Consolidated Statement of Operations as
components of both continuing and discontinued operations.

B. 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 $132,900,000, resulting in an after-tax gain of $36,176,000. Genix's
1996 income from operations totaled $1,595,000 and has been accounted for as a
discontinued operation.


5. ACQUISITIONS AND DISPOSITIONS

A. BHOTE KOSHI POWER COMPANY
In 1997, MCN 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 $7,200,000 of its total equity
commitment of $20,100,000. The remaining equity commitment balance will be paid
in 1999 and 2000. The investment is accounted for under the equity method.

B. TORRENT POWER LIMITED
In 1997, MCN 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, MCN acquired preference shares in TPL,
bringing the total cost of the acquisitions to $121,200,000. The joint venture
holds 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 Ahmedabad and
has 550 MW of electric generating capacity. SECL provides electricity to the
city of Surat. GTEC owns and operates a 655 MW dual fuel generation facility
that became fully operational in December 1998. MCN accounts for its interest in
TPL under the equity method.









                                      45
<PAGE>   51

   In February 1999, MCN reached an agreement to sell its interest in TPL for
approximately $130,000,000. The sale is subject to certain regulatory approvals
and is expected to be completed by the third quarter of 1999.

C. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
MCN acquired an 18% general partnership interest in Midland Cogeneration Venture
Limited Partnership (MCV) during 1997 and acquired an additional 5% general
partnership interest in 1998. MCV is a partnership that leases and operates a
cogeneration facility in Midland, Michigan. The facility can produce up to 1,370
MW of electricity, as well as 1.35 million pounds per hour of process steam.
MCN's total acquisition cost in MCV is $73,000,000 and is accounted for under
the equity method. During 1997, MCV changed its method of accounting for
property taxes. As a result, MCN's pre-tax income from MCV was favorably
impacted by $2,800,000.

D. LYONDELL METHANOL COMPANY, L.P.
In 1996, MCN 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. MCNIC supplies a portion of the natural gas to the methanol
plant. The acquisition totaled $54,500,000 and is accounted for under the equity
method.

E. DAUPHIN ISLAND GATHERING PARTNERS
In early 1996, MCN acquired a 99% interest in Dauphin Island Gathering Partners
(DIGP) for $78,620,000. At the time of the acquisition, DIGP, the general
partnership, owned a 90-mile gas gathering system in the Mobile Bay area of
offshore Alabama. In mid-1996, MCN sold a 40% interest in the partnership to
PanEnergy Dauphin Island Company for $36,000,000. The sale resulted in a pre-tax
gain of $3,986,000.
   In late 1996, a 41% interest in the partnership was sold to three additional
partners resulting in a pre-tax gain of $4,796,000, of which $2,398,000 was
deferred until 1997 when a related option agreement expired unexercised. The
three additional partners paid for their interests by contributing to DIGP the
Main Pass Gathering System, a 57-mile offshore gas gathering system in the Gulf
of Mexico. As a result of the sales, MCN's ownership interest in DIGP was
reduced to 35%. MCN accounts for its interest in DIGP under the equity method.


6. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

MCN has equity interests in several joint ventures involved in the following
businesses: Pipelines & Processing - 10 1/2% to 80% owned; Electric Power - 23%
to 67 1/2% owned; Energy Marketing - 10% to 50% owned; Gas Distribution - 47
1/2% owned; and Real Estate & Other - 33% to 50% owned. MCN's share of
undistributed earnings in these joint ventures totaled $54,753,000 at December
31, 1998.
   The following is the combined summarized financial information of the joint
ventures. No provision for income taxes has been included, since income taxes
are paid directly by the joint venture participants.


<TABLE>
<CAPTION>

--------------------------------------------------------------------------
   (in Thousands)                      1998           1997          1996
                                    --------------------------------------
<S>                                 <C>           <C>            <C>
Operating Revenues                  $2,628,822    $1,598,208     $ 199,260
Operating Income                       385,821       348,544        56,076
Income Before Taxes                    205,961       197,453        30,194
--------------------------------------------------------------------------
MCN's Share of Operating Revenues
  Pipelines & Processing            $  276,613    $  144,823     $  36,927
  Electric Power                       315,516       168,051        40,731
  Energy Marketing                     317,342       249,954        23,864
  Real Estate & Other                   12,436         7,740         8,684
                                    --------------------------------------
                                    $  921,907    $  570,568     $ 110,206
--------------------------------------------------------------------------
MCN's Share of Operating
  Income (Loss)
   Pipelines & Processing           $   15,714    $   27,485     $  11,584
   Electric Power                       73,590        48,671         8,280
   Energy Marketing                      6,214         9,933         9,253
   Real Estate & Other                    (136)          645         1,387
                                    --------------------------------------
                                    $   95,382    $   86,734     $  30,504
--------------------------------------------------------------------------
MCN's Share of Income (Loss)
  Before Taxes
   Pipelines & Processing           $   29,987    $   28,551     $  10,590
   Electric Power                       28,546        12,655          (218)
   Energy Marketing                      4,681         7,379         6,197
   Real Estate & Other                    (989)          474         1,298
                                    --------------------------------------
                                    $   62,225    $   49,059     $  17,867
--------------------------------------------------------------------------

--------------------------------------------------------------------------
(in Thousands)                                       1998           1997
                                    --------------------------------------
Assets
  Current assets                                  $  612,023    $  717,346
  Noncurrent assets                                3,959,716     3,677,595
                                    --------------------------------------
                                                  $4,571,739    $4,394,941
                                    --------------------------------------
Liabilities and Joint Ventures' Equity
  Current liabilities                             $  439,357    $  590,234
  Noncurrent liabilities                           2,300,825     2,345,916
  Joint ventures' equity                           1,831,557     1,458,791
                                    --------------------------------------
                                                  $4,571,739    $4,394,941
--------------------------------------------------------------------------
MCN's Share of Total Assets
  Pipelines & Processing                          $  568,944    $  296,670
  Electric Power                                     722,038       691,202
  Energy Marketing                                    86,135        84,939
  Gas Distribution                                    23,149        22,626
  Real Estate & Other                                 35,921        38,826
                                    --------------------------------------
                                                  $1,436,187    $1,134,263
--------------------------------------------------------------------------
MCN's Share of Joint Ventures' Equity
  Pipelines & Processing                          $  434,310    $  259,116
  Electric Power                                     191,627       164,361
  Energy Marketing                                    27,748        21,715
  Gas Distribution                                     7,832         8,363
  Real Estate & Other                                 17,810        16,558
                                    --------------------------------------
                                                     679,327       470,113
Goodwill and Other(1)                                123,904        86,863
                                    --------------------------------------
MCN's Investment In and
  Advances to Joint Ventures                      $  803,231    $  556,976
--------------------------------------------------------------------------
</TABLE>

(1)  Primarily represents differences between MCN's carrying value and its share
     of the joint ventures' underlying equity interest that is amortized over
     the estimated useful lives of the related assets, which on a weighted
     average basis equaled 28 years.


7. REGULATORY MATTERS

A. REGULATORY ASSETS AND LIABILITIES
MCN's Gas Distribution operations are subject to the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." As a result,
several regulatory assets and liabilities are recorded in MCN's financial
statements. Regulatory assets represent costs that will be recovered from
customers through the








                                      46
<PAGE>   52


ratemaking process. Regulatory liabilities represent benefits that will be
refunded to customers through reduced rates.
   The following regulatory assets and liabilities were reflected in the
Consolidated Statement of Financial Position as of December 31:

<TABLE>
<CAPTION>

-------------------------------------------------------------------------
(in Thousands)                                   1998              1997
                                               --------------------------
Regulatory Assets
<S>                                            <C>             <C>
  Accrued gas cost recovery revenues           $       -       $   12,862
  Deferred environmental costs (Note 13b)         30,773           30,234
  Unamortized loss on retirement of debt          15,548           10,181
  Other                                              804            1,637
                                               --------------------------
                                               $  47,125       $   54,914
-------------------------------------------------------------------------
Regulatory Liabilities
  Deferred gas cost recovery revenues          $  14,980       $        -
  Tax benefits amortizable to customers          130,120          123,365
                                               --------------------------
                                               $ 145,100       $  123,365
-------------------------------------------------------------------------
</TABLE>

   Gas Distribution currently has regulatory precedents and orders in effect
that provide for the probable recovery or refund of its regulatory assets and
liabilities. Future regulatory changes or changes in the competitive environment
could result in Gas Distribution discontinuing the application of SFAS No. 71
for all or part of its business and require the write-off of the portion of any
regulatory asset or liability that was no longer probable of recovery or refund.
If MCN were to have discontinued the application of SFAS No. 71 for all of its
operations as of December 31, 1998, it would have had an extraordinary noncash
increase to net income of approximately $63,700,000. Management believes
currently available facts support the continued application of SFAS No. 71.

B. 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, which
is 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 commodity 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 earnings on the gas
commodity 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 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 based
upon applicable Michigan law the order will be upheld on appeal, there can be no
assurance as to the outcome.


8. GAS IN INVENTORY

Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31,
1998, the replacement cost exceeded the $147,387,000 LIFO cost by $152,961,000.
At December 31, 1997, the replacement cost exceeded the $56,777,000 LIFO cost by
$176,373,000.


9. CREDIT FACILITIES, SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Detailed information on long-term debt, excluding current requirements, is as
follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------
(In Thousands)                             1998         1997
                                         --------------------
<S>                                      <C>        <C>
First Mortgage Bonds,
  interest payable semi-annually
  6.51%  series due 1999                 $      -   $  30,000
  53/4%  series due 2001                   40,000      60,000
  8%     series due 2002                   17,314      70,000
  6.72%  series due 2003                    4,150       4,150
  6.80%  series due 2003                   15,850      15,850
  9 1/8% series due 2004                   18,000      55,000
  7.15%  series due 2006                   40,000      40,000
  7.21%  series due 2007                   30,000      30,000
  7.06%  series due 2012                   40,000      40,000
  8 1/4% series due 2014                   80,000      80,000
  7.6%   series due 2017                   14,980      14,990
  7 1/2% series due 2020                   29,641      29,641
  9 1/2% series due 2021                   40,000      40,000
  6 3/4% series due 2023                   16,617      17,177
  7%     series due 2025                   40,000      40,000
  Unamortized discount                     (1,130)     (1,235)
Remarketable Securities, interest
  payable semi-annually
  6.375% series due 2008                  100,000           -
  6.3% series due 2011                    100,000           -
  6.35% series due 2012                   100,000           -
  6.45% series due 2038                    75,000           -
  6.2% series due 2038                     75,000           -
  Unamortized premium                      10,551           -
Medium-Term Notes, interest payable
  semi-annually
  5.84% series due 1999                         -      80,000
  6.82% series due 1999                         -     130,000
  6.03% series due 2001                    60,000      60,000
  6.89% series due 2002                    90,000      90,000
  6.32% series due 2003                    60,000      60,000
  7.12% series due 2004                    60,000      60,000
Term Loan Due 2000,
  interest payable quarterly                    -     100,000
Commercial Paper and Bank Borrowings      107,656           -
Project Loan Due 2006,
  interest payable quarterly               12,320      14,080
Long-Term Capital Lease Obligations         5,345       7,702
Other Long-Term Debt                       25,874      45,209
                                      -----------------------
                                       $1,307,168  $1,212,564
-------------------------------------------------------------
</TABLE>






                                      47
<PAGE>   53



   Substantially all of the net utility properties of MichCon, totaling
approximately $1,240,000,000, are pledged as security for the payment of
outstanding first mortgage bonds.
   Maturities and sinking fund requirements during the next five years for
long-term debt outstanding at December 31, 1998 are $267,400,000 in 1999,
$27,000,000 in 2000, $86,600,000 in 2001, $113,700,000 in 2002 and $86,000,000
in 2003.

Diversified Energy - At December 31, 1998, MCNIC had credit lines permitting
borrowings of up to $200,000,000 under a 364-day revolving credit facility and
up to $200,000,000 under a three-year revolving credit facility, both of which
were renewed in July 1998. These facilities support MCNIC's $400,000,000
commercial paper program. MCNIC usually issues commercial paper in lieu of an
equivalent amount of borrowings under these lines of credit. Commercial paper
and bank borrowings outstanding at December 31, 1998 and 1997 totaling
$118,000,000 and $147,358,000, respectively, were classified as short-term. The
remaining 1998 commercial paper and bank borrowings of $107,656,000 were
classified as long-term. Commercial paper and bank borrowings outstanding as of
December 31, 1998 and 1997 were at weighted average interest rates of 6.4% and
6.2%, respectively. Fees are paid to compensate banks for lines of credit.
   In 1998, MCN issued $260,000,000 of debt under a one-year term loan facility,
due December 1999. Principal payments are required based on certain proceeds
received from the sale of E&P assets. Under the terms of the agreement, certain
alternative variable interest rates are available at the borrower's option. The
weighted average interest rate at December 31, 1998 was 6.2%.
   In 1998, MCNIC issued a total of $300,000,000 of remarketable debt securities
with various interest rates and maturity dates. These securities are senior
unsecured obligations of MCNIC and are subject to an MCN support agreement. The
securities are structured such that at a specified future remarketing date the
remarketing agents may elect to remarket the securities whereby the annual
interest rate will be reset. MCNIC received option premiums in return for the
remarketing option. If the remarketing agents elect not to remarket the
securities, MCNIC will be required to repurchase the securities at their
principal amounts. The option premiums received, net of financing costs
incurred, totaled $5,709,000 and are being amortized to income over the life of
the debt. The remarketing dates are in April 2001, 2002 and 2003.
   During 1998, MOG retired early a five-year $100,000,000 term loan.

Gas Distribution - At December 31, 1998, MichCon had credit lines permitting
borrowings of up to $150,000,000 under a 364-day revolving credit facility and
up to $150,000,000 under a three-year revolving credit facility, both of which
were renewed in July 1998. MichCon issues commercial paper in lieu of an
equivalent amount of borrowings under these lines of credit. Commercial paper
outstanding at December 31, 1998 and 1997 totaled $218,447,000 and $236,740,000
and was at weighted average interest rates of 5.6% and 5.8%, respectively. This
debt is classified as short-term. Fees are paid to compensate banks for lines of
credit.
   In 1998, MichCon issued a total of $150,000,000 of remarketable debt
securities with various interest rates. These securities are "fall-away
mortgage" debt and, as such, are secured debt as long as MichCon's current first
mortgage bonds are outstanding and become senior unsecured debt thereafter. The
securities are structured such that the interest rates of the issues can be
reset at various remarketing dates over the life of the debt. The initial
remarketing dates are in June 2003 and 2008. MichCon received option premiums in
return for granting options to underwriters to reset the interest rate for a
period of ten years at the initial remarketing dates. The option premiums
received, net of financing costs incurred, totaled $3,052,000 and are being
amortized to income over the initial interest and corresponding option periods.
If the underwriters elect not to exercise their reset options, the securities
become subject to the remarketing feature. If MichCon and the remarketing agent
cannot agree on an interest rate or the remarketing agent is unable to remarket
the securities, MichCon will be required to repurchase the securities at their
principal amounts.
   In 1998, MichCon redeemed through a tender offer $37,000,000 of the
outstanding $55,000,000 balance of 9 1/8% first mortgage bonds due 2004, and
$52,686,000 of the outstanding $70,000,000 balance of 8% first mortgage bonds
due 2002.
   During 1997, nonutility subsidiaries of MichCon borrowed $40,000,000 under a
nonrecourse credit agreement. Under terms of the agreement, certain alternative
variable interest rates are available at the borrowers' option during the life
of the agreement. Quarterly principal payments commenced in 1997, with a final
installment due November 2005. The loan is secured by a pledge of stock of the
borrowers and a security interest in certain of their assets. MichCon may be
required to support the credit agreement through limited capital contributions
to the subsidiaries if certain cash flow and operating targets are not met. At
December 31, 1998 and 1997, $29,200,000 and $36,400,000 were outstanding at
weighted average interest rates of 5.8% and 6.4%, respectively.
   MichCon has variable interest rate swap agreements with notional principal
amounts aggregating $92,000,000 in connection with its first mortgage bonds.
Swap agreements of $40,000,000 through May 2002 have reduced the average cost of
the related debt from 7.3% to 6.3% for the year ended December 31, 1998. Swap
agreements of $40,000,000 through May 2005 have reduced the average cost of the
related debt from 7.1% to 5.9% for the year ended December 31, 1998. Swap
agreements of $12,000,000 through April 2000 have reduced the average cost of
the related debt from 8.3% to 4.4% for the year ended December 31, 1998. A
nonutility subsidiary of MichCon has an interest rate swap agreement on the
$14,080,000 outstanding balance of its project loan agreement at December 31,
1998 that effectively fixes the interest rate at 7.5% through February 2003.


10. PREFERRED AND HYBRID SECURITIES

A. MCN-OBLIGATED MANDATORILY REDEEMABLE
   PREFERRED SECURITIES OF SUBSIDIARIES
MCN has established various trusts and a partnership formed for the sole purpose
of issuing preferred securities and lending the gross proceeds thereof to MCN.
The sole assets of the trusts and partnership are debentures of MCN with terms
similar to those of the related preferred securities.
   Summarized information for MCN-obligated mandatorily redeemable preferred
securities of subsidiaries holding solely debentures of MCN is as follows:








                                       48
<PAGE>   54

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
(in Thousands of Dollars, Except Per Share Amounts)                                  Liquidation  Maturity of    Earliest
                                                                                          Value   Underlying  Redemption
                                                                  1998        1997    Per Share     Security        Date
                                                             -----------------------------------------------------------
<S>                                                          <C>           <C>            <C>          <C>        <C>
MCN Financing I
  8 5/8% Trust Originated Preferred Securities               $   77,068    $   77,045     $   25       2036       2001
   (3,200,000 preferred securities)
   Dividends payable quarterly.
MCN Financing II
  8 5/8% Trust Preferred Securities                              96,669             -         25       2038       2003
   (4,000,000 preferred securities)
   Dividends payable quarterly.
MCN Financing V
  6.305% Private Institutional Trust Securities                       -        99,606      1,000          -          -
   (100,000 preferred securities)
   Dividends payable semi-annually.
MCN Financing VI
  6.85% Single Point Remarketed Reset Capital Securities         99,397        99,507      1,000       2037       1999
   (100,000 preferred securities)
   Dividends payable semi-annually.
MCN Michigan Ltd. Partnership
  9 3/8% Redeemable Cumulative Preferred Securities, Series A    96,819        96,696         25       2024       1999
   (4,000,000 preferred securities)
   Dividends payable monthly.
MCN Financing III
  8% FELINE PRIDES                                              132,250       132,250         50       2002       2002
   (2,645,000 FELINE PRIDES)
   Dividends payable quarterly.                              ----------    ----------
                                                             $  502,203    $  505,104
------------------------------------------------------------------------------------------------------------------------
</TABLE>

   The preferred securities carry similar provisions as described below.

   The preferred securities allow MCN the right to extend interest payment
periods on the debentures and, as a consequence, dividend payments on the
preferred securities can be deferred by the trusts and partnership during any
such interest payment period. In the event that MCN exercises this right, MCN
may not declare dividends on its common stock.
   In the event of default, holders of the preferred securities will be entitled
to exercise and enforce the trusts' and partnership's creditor rights against
MCN, which may include acceleration of the principal amount due on the
debentures. MCN has issued guaranties with respect to payments on the preferred
securities. These guaranties, when taken together with MCN's obligations under
the debentures, the related indenture, and the trust and partnership documents,
provide full and unconditional guaranties of the trusts' and partnership's
obligations under the preferred securities to the extent of the funds available
therefor.
   Financing costs for these issuances were deferred and are reflected as a
reduction in the carrying value of the preferred securities. These costs are
being amortized using the straight-line method over the estimated lives of the
related securities.
   In addition to the similar provisions previously discussed, specific terms of
the securities follow:

-  6.305% Private Institutional Trust Securities (PRINTS) - MCN redeemed the
   6.305% PRINTS during 1998.

-  6.85% Single Point Remarketed Reset Capital Securities - These preferred
   securities are structured such that at a specified future date, the rate
   reset date, the securities may be remarketed with a new liquidation
   preference value of $25 per security and the number of securities outstanding
   would adjust to 4,000,000. The annual dividend payment rate will be reset to
   reflect the lowest rate, less than or equal to a maximum rate, at which the
   securities can be remarketed at a price equal to their liquidation preference
   value. On the rate reset date, the terms of an equivalent amount of the MCN
   senior debentures will change to reflect the new terms of the remarketed
   preferred securities. The debentures will thereafter be subordinated and
   junior in right of payment to all senior obligations of MCN. The rate reset
   date for the securities is anticipated to be October 1999.

-  8% FELINE PRIDES - Each security initially consists of a stock purchase
   contract and a preferred security of MCN Financing III. Under each stock
   purchase contract, MCN is obligated to sell, and the FELINE PRIDES holder is
   obligated to purchase between 1.4132 and 1.7241 shares of MCN common stock in
   May 2000 for $50. The exact number of MCN common shares to be sold is
   dependent on the market value of a share in May 2000, but will not be less
   than 3,737,988 or more than 4,560,345 shares. MCN also is obligated to pay
   the FELINE PRIDES holders a quarterly contract adjustment payment at an
   annual rate of .75% of the stated amount. MCN has recorded the present value
   of the contract adjustment as a liability and a reduction to Common
   Shareholders' Equity on MCN's Consolidated Statement of Financial Position.
   The liability is reduced as the contract adjustment payments are made.
       Holders of the preferred securities are entitled to receive cumulative
   dividends at an annual rate of 7.25% of the liquidation preference value. The
   preferred securities are pledged as collateral to secure the FELINE PRIDES
   holders' obligation to purchase MCN common stock under the stock purchase
   contracts. Each holder has the right after issuance of the FELINE PRIDES to
   substitute for the preferred securities, zero coupon U.S. Treasury securities
   maturing in May 2000. Each FELINE PRIDES holder has the option to use the
   preferred securities, treasury securities or cash to satisfy the May 2000
   purchase contract commitment. The preferred securities are pledged as
   collateral to secure the FELINE PRIDES holders' obligation to purchase MCN
   common stock under the stock purchase contracts. Each holder has the right
   after issuance of the FELINE PRIDES to substitute for the preferred
   securities, zero coupon U.S. Treasury securities maturing in May 2000. Each







                                      49
<PAGE>   55


   FELINE PRIDES holder has the option to use the preferred securities, treasury
   securities or cash to satisfy the May 2000 purchase contract commitment.

B. PREFERRED SECURITIES
MCN is authorized to issue 25,000,000 shares of no par value preferred stock,
and MichCon is authorized to issue 7,000,000 shares of preferred stock with a
par value of $1 per share and 4,000,000 shares of preference stock with a par
value of $1 per share. At December 31, 1998, no issuances of preferred or
preference stock were made under these authorizations.

C. ENHANCED PRIDES
MCN has issued 5,865,000 of Preferred Redeemable Increased Dividend Equity
Securities (Enhanced PRIDES) that yield 8-3/4% with a stated amount of $23.00
per security. Each security represents a contract to purchase MCN common stock
in April 1999, or earlier under certain limited circumstances. As subsequently
discussed, proceeds from the issuance totaling approximately $135,000,000 were
used to acquire 6.5% U.S. Treasury notes underlying the security. The interest
from the Treasury notes passes through to the Enhanced PRIDES holder.
Accordingly, MCN received no cash from issuing the Enhanced PRIDES.
   Under each security, MCN is obligated to sell, and the Enhanced PRIDES holder
is obligated to purchase for $23.00, between .8333 of a share and one share of
MCN common stock. The exact number of MCN common shares to be sold is dependent
on the market value of a share in April 1999. However, the total number to be
sold will not be less than 4,887,500 shares or more than 5,865,000 shares.
   MCN also is obligated to pay the Enhanced PRIDES holders, semi-annually, a
yield enhancement payment at an annual rate of 2 1/4% of the stated amount. MCN
has recorded the present value of the yield enhancement payments as a liability
and a reduction to Common Shareholders' Equity on MCN's Consolidated Statement
of Financial Position. The liability is reduced when the yield enhancement
payments are paid. MCN has the right to defer the yield enhancement payments, in
which case MCN cannot declare dividends on its common stock until the yield
enhancement payments have been made. In addition, MCN has incurred costs in
conjunction with the issuance of the Enhanced PRIDES and similarly has recorded
the costs as a reduction to Common Shareholders' Equity.
   The Treasury notes underlying the securities are pledged as collateral to
secure the Enhanced PRIDES holders' obligation to purchase MCN common stock
under the stock purchase contract. At maturity in April 1999, the principal
received from the Treasury notes will be used to satisfy the Enhanced PRIDES
holders' obligation in full. Neither the Enhanced PRIDES nor the Treasury notes
are included on MCN's Consolidated Statement of Financial Position. However, the
issuance of common stock will be reflected when cash proceeds totaling
approximately $135,000,000 are received by MCN in April 1999.

11. COMMON STOCK AND EARNINGS
PER SHARE

A. COMMON STOCK
In 1998, MCN issued approximately 310,000 shares in conjunction with the
acquisition of heating, ventilating and air conditioning companies. In 1997, MCN
sold 9,775,000 shares of new common stock in a public offering, generating net
proceeds of $276,600,000.
   MCN has traditionally issued new shares of common stock pursuant to its
Direct Stock Purchase and Dividend Reinvestment Plan and various employee
benefit plans. The number of shares issued was approximately 1,190,000 in 1998,
1,165,000 in 1997, and 926,000 in 1996, generating net proceeds of $20,200,000,
$17,800,000 and $17,300,000, respectively. Beginning in 1999, shares issued
under these plans will be acquired by MCN through open market purchases.

B. STOCK INCENTIVE PLAN
MCN's Stock Incentive Plan authorizes the use of performance units, stock
options, restricted stock or other stock-related awards to key employees,
primarily management. MCN's current policy is to issue performance units, which
encourages a strategic focus on long-term performance and has a high employee
retention value. The performance units are denominated in shares of MCN common
stock and issued to employees based on total shareholder return over a six-year
period, as compared to a group of peer companies. The initial number of
performance units granted is based on total shareholder return relative to the
peer group during the previous three-year period. Participants receive dividend
equivalents on the units granted. The initial grants will be adjusted upward or
downward based on total shareholder return relative to the peer group for the
subsequent three-year period. The final awards are then payable in shares of
common stock or can be deferred. Participants must retain 50% of any common
shares paid until certain stock ownership guidelines are met. The deferred units
must be retained by the participants until their employment with MCN ceases.
   During 1998, 1997 and 1996, MCN granted 293,116, 245,340 and 301,616
performance units with a weighted average grant date fair value of $37.00,
$31.00 and $24.625 per unit, respectively. MCN accounts for stock-based
compensation awards under the fair value-based method as prescribed under SFAS
No. 123, "Accounting for Stock-Based Compensation," which was adopted in 1996.
Accordingly, the costs of performance units awarded, measured at their fair
value on the grant date, are being recorded as compensation expense and
Additional Paid-in Capital over their vesting period. MCN adjusts compensation
expense for changes in the number of performance units that are expected to
vest. A stock-based compensation benefit of $3,625,000 was recognized during
1998 for all awards outstanding as a result of a reduction in the number of
performance units expected to vest. Stock-based compensation costs recognized
during 1997 and 1996 for all awards outstanding totaled $15,070,000 and
$14,055,000, respectively. At December 31, 1998, there were 5,143,730 shares
available to be issued under the Stock Incentive Plan.
   In February 1999, MCN revised its policy whereby a portion of any
stock-related awards under the Stock Incentive Plan will be in the form of stock
options. The remaining portion of any awards will continue to be in the form of
performance units.

C. SHAREHOLDERS' RIGHTS PLAN
One preferred share purchase right is attached to each outstanding share of MCN
common stock. The rights are exercisable only







                                      50
<PAGE>   56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


upon certain triggering events and expire in July 2007. The rights, which cannot
be traded separately from MCN's common stock, are intended to maximize
shareholders' value in the event that MCN is acquired.

D. EARNINGS PER SHARE
MCN reports both basic and diluted earnings per share. Basic earnings per share
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share assumes the issuance of potential dilutive common shares outstanding
during the period and adjusts for changes in income and the repurchase of common
shares that would have occurred with proceeds from the assumed issuance. A
reconciliation of both calculations for continuing operations is shown below.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                       Wtd. Avg.        Earnings
(in Thousands, Except                                    Common       (Loss) Per
   Per Share Amounts)                Income(Loss)        Shares            Share
1998
<S>                                  <C>                <C>           <C>
Basic Loss Per Share                 $ (13,677)         78,823        $    (.17)
                                                                      ----------
Effect of Dilutive Securities                -               -
                                     -------------------------
Diluted Loss Per Share               $ (13,677)         78,823        $    (.17)
--------------------------------------------------------------------------------
1997
Basic Earnings Per Share             $ 103,070          72,887        $    1.41
                                                                      ----------
Effect of Dilutive Securities
  FELINE PRIDES                          1,688           1,021
  Enhanced PRIDES                          222             623
  Stock-based compensation plans             -             904
                                     -------------------------
Diluted Earnings Per Share           $ 104,980          75,435        $    1.39
--------------------------------------------------------------------------------
1996
Basic Earnings Per Share             $  93,943          66,944        $    1.40
                                                                      ----------
Effect of Dilutive Securities
  Enhanced PRIDES                           73              41
  Stock-based compensation plans             -             536
                                     -------------------------
Diluted Earnings Per Share           $  94,016          67,521        $    1.39
--------------------------------------------------------------------------------
</TABLE>


12. LEASES

MCN leases certain property (principally a warehouse, office building and
parking structure) under lease arrangements expiring at various dates to 2006,
with renewal options extending beyond that date. Portions of the office
buildings and parking structure are subleased to various tenants.
   In January 1998, MCN purchased one of its office buildings previously leased,
thereby eliminating the related long-term capital lease obligation. As a result,
the long-term capital lease obligation of $6,818,000 was reclassified as a
current capital lease obligation at December 31, 1997. Other long-term capital
lease obligations of MCN are not significant.
   Minimum rental commitments related to noncancelable operating leases
outstanding at December 31, 1998 are $5,952,000 in 1999, $5,072,000 in 2000,
$4,887,000 in 2001, $4,632,000 in 2002, $3,111,000 in 2003 and $5,735,000
thereafter.
   Total minimum lease payments for operating leases have not been reduced by
future minimum sublease rentals of $1,430,000 under noncancelable subleases.
   Operating lease payments for the years ended December 31, 1998, 1997 and 1996
were $6,774,000, $5,007,000 and $5,243,000, respectively.

13. COMMITMENTS AND CONTINGENCIES

A. GUARANTIES
MCN issued a guaranty in conjunction with a Genix building lease expiring no
later than 2010. The lease agreement does not allow MCN to transfer its
obligation under the guaranty to ACS, who acquired Genix in June 1996 (Note 4b).
However, ACS is obligated to reimburse MCN for any payments made as a result of
this guaranty. Obligations under the guaranty approximated $11,908,000 at
December 31, 1998.
   MCN has a 47.5% interest in a partnership that owns and operates a natural
gas transmission and distribution system located in southern Missouri. MCN has
issued a guaranty for the full amount of construction financing obtained by the
partnership and one of the parties to the partnership is obligated to reimburse
MCN for 50% of any payments made as a result of this guaranty. Borrowings
outstanding under the construction loan totaled $29,000,000 at December 31,
1998.
   A subsidiary of MichCon and an unaffiliated corporation have formed a series
of partnerships engaged in the construction and development of a residential
community on the Detroit riverfront (Harbortown). One of the partnerships
obtained $12,000,000 of tax-exempt financing due June 2004 through the Michigan
State Housing Development Authority. Both partners and their parent corporations
have issued guaranties for the full amount of this financing, and each parent
corporation has agreed to reimburse the other for 50% of any payments made as a
result of these guaranties.

B. 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 manufactured gas plant (MGP) sites.
   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 $11,700,000 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 $30,000,000 to $170,000,000 based on
undis-





                                      51
<PAGE>   57

counted 1995 costs. As a result of these studies, MCN accrued an additional
liability and a corresponding regulatory asset of $35,000,000 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, MCN 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 costs 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 $1,649,000, $835,000 and $900,000,
respectively, investigating and remediating these former MGP sites. At December
31, 1998, the reserve balance was $35,092,000, of which $92,000 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 MCN'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 MCN's results of operations.
   In 1998, MichCon received written notification from ANR Pipeline Company
(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, that 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.

C. COMMITMENTS
In 1997, MCN's 50%-owned partnership, Washington 10 Storage Partnership (W-10),
entered into a leveraged lease transaction to finance the conversion of a
depleted natural gas reservoir into a 42 Bcf storage facility. The storage
facility is expected to begin operations in mid-1999 and cost $160,000,000 to
develop. MCN has entered into a contract with W-10 to market 100% of the
capacity of the storage field through 2029. Under the terms of the marketing
contract, MCN is obligated to generate sufficient revenues to cover W-10's lease
payments and certain operating costs, which average approximately $16,000,000
annually. As of December 31, 1998, MCN had long-term contracts in place ranging
from 1999-2016 for approximately 40% of the field's capacity effectively
reducing its commitments under the marketing contract. A significant portion of
the remaining capacity is expected to be contracted by MCN's Energy Marketing
operations, thereby effectively enhancing its ability to offer a reliable gas
supply during peak winter months.
   To ensure a reliable supply of natural gas at competitive prices, MCN has
entered into long-term purchase and transportation contracts with various
suppliers and producers. In general, purchase prices are under fixed price and
volume contracts or formulas based on market prices. MCN has firm purchase
commitments through 2001 for approximately 641 Bcf of gas, approximately 487 Bcf
of which are Gas Distribution purchase commitments. MCN expects that sales will
exceed its minimum purchase commitments. MCN has long-term transportation and
storage contracts with various companies expiring on various dates through the
year 2016. MCN is also committed to pay demand charges of approximately
$105,286,000 during 1999 related to firm purchase and transportation agreements.
Of this total, approximately $54,248,000 relates to Gas Distribution.
   Capital investments for 1999 are expected to approximate $750,000,000.
Certain commitments have been made in connection with such capital investments.

D. OTHER
MCN is involved in certain legal and administrative proceedings before various
courts and governmental agencies concerning claims arising in the ordinary
course of business. Management cannot predict the final disposition of such
proceedings, but believes that adequate provision has been made for probable
losses. It is management's belief, after discussion with legal counsel, that the
ultimate resolution of those proceedings still pending will not have a material
adverse effect on MCN's financial statements.


14. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE FINANCIAL INSTRUMENTS

MCN manages commodity price and interest rate risk through the use of various
derivative instruments and predominantly limits the use of such instruments to
hedging activities. If MCN did not use derivative instruments, its exposure to
such risks would be higher. Although this strategy reduces risk, it also limits
potential gains from favorable changes in commodity prices and interest rates.
Derivative instruments also give rise to credit risks due to nonperformance by
counterparties. MCN's control procedures are designed to minimize overall
exposure to credit risk. MCN closely monitors the financial condition and credit
ratings of counterparties, diversifies its risk by having a significant number
of counterparties, and limits its counterparties to investment grade
institutions. MCN generally requires cash collateral when exposure to each
counterparty exceeds certain limits, and its agreements with each counterparty
generally allow for the netting of positive and negative positions.
   Commodity price and interest rate risks are actively monitored by a risk
control group to ensure compliance with MCN's risk management policies at both
the corporate and subsidiary levels. These policies, including related risk
limits, are regularly assessed to ensure their appropriateness given MCN's
objectives, strategies and current market conditions. MCN closely monitors and
manages its exposure to commodity price risk through a variety of risk
management techniques. MCN's objective is to manage its exposure to commodity
price risk to increase the likelihood of achieving targeted rates of return.
   Derivative instruments are reviewed periodically to ensure they continue to
effectively reduce exposure to commodity price and interest rate risks, and,
therefore, high correlation is maintained between changes in the fair value of
derivative instruments and the underlying items or transactions being hedged. In
the event that a derivative is no longer deemed effective or does not qualify
for hedge accounting, the instruments are recorded as an asset or liability at
fair value, with changes in fair value recorded to income.

A. COMMODITY PRICE HEDGING
Natural gas and oil futures, options and natural gas and oil swap agreements are
used to manage Diversified Energy's exposure to






                                      52
<PAGE>   58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


the risk of market price fluctuations on gas sale and purchase contracts, gas
and oil production and gas inventories. Changes in the market value of contracts
that hedge gas supply transactions are deferred and included in inventory costs
until the hedged transaction is completed, at which time the realized gain or
loss is included in the cost of gas. Market value changes of contracts that
hedge gas and oil sales transactions are also deferred and recorded as a
deferred credit or deferred charge until the hedged transaction is completed, at
which time the realized gain or loss is included as an adjustment to revenues.
Unrealized gains and losses on derivative contracts that are terminated or sold
continue to be deferred until such time as the initial hedged transactions are
completed. In the instance when a hedged item no longer exists or is no longer
probable of occurring, unrealized gains and losses would be included in income
unless the derivative is redesignated to a similar transaction and qualifies for
hedge accounting.
 The following assets and liabilities related to the use of gas and oil swap
agreements are reflected in the Consolidated Statement of Financial Position at
December 31.
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
(in Thousands)                                         1998           1997
--------------------------------------------------------------------------------
Deferred Swap Losses and Receivables
<S>                                               <C>            <C>
  Unrealized losses                               $  48,700      $  34,736
  Receivables                                        25,864         16,683
                                                  ------------------------
                                                     74,564         51,419
  Less - Current portion                             11,417            396
                                                  ------------------------
                                                  $  63,147      $  51,023
--------------------------------------------------------------------------------
Deferred Swap Gains and Payables
  Unrealized gains                                $  24,126      $  15,005
  Payables                                           54,525         41,164
                                                  ------------------------
                                                     78,651         56,169
  Less - Current portion                             15,695         14,452
                                                  ------------------------
                                                  $  62,956      $  41,717
--------------------------------------------------------------------------------
</TABLE>

   The following table of natural gas and oil swap agreements outstanding at
December 31 is summarized by fixed or variable prices to be received. Notional
amounts represent the volume of transactions valued at the fixed or variable
price that MCN has contracted to obtain. Notional amounts do not represent the
amounts exchanged by the parties to the swaps, and therefore do not reflect
MCN's exposure to commodity price or credit risks.
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
(in Thousands of Dollars)                              1998           1997
--------------------------------------------------------------------------------
Fixed Price Receiver
<S>                                               <C>            <C>
  Volumes (Bcf equivalent)                            280.9          447.5
  Notional value                                  $ 675,671      $ 994,159
  Latest maturity                                      2013           2013
--------------------------------------------------------------------------------
Variable Price Receiver
  Volumes (Bcf equivalent)                            364.0           39.5
  Notional value                                  $ 816,414      $  94,082
  Latest maturity                                      2006           2006
--------------------------------------------------------------------------------
</TABLE>

   In addition, at December 31, 1998, MCN had futures contracts that permit
settlement by delivery of the underlying commodity of 113.5 Bcf with unrealized
gains of $4,699,000. Futures contracts of 73.3 Bcf with unrealized gains of
$2,031,000 and 21.7 Bcf with unrealized losses of $10,120,000 were outstanding
at December 31, 1997.
   Collateral in the form of cash totaling $13,990,000 was provided under
hedging contracts at December 31, 1998.

B. TRADING ACTIVITIES
As discussed in Note 1b to the Consolidated Financial Statements, a special
investigation of MCN's non-utility energy marketing operations identified
certain unauthorized gas purchase and sale contracts that were entered into for
trading purposes. The unauthorized transactions violate MCN's risk-management
policy that requires all such activities to be reviewed and approved by a risk
committee that reports regularly to the MCN Board of Directors.  The purchase
and sale contracts entered into in connection with trading activities run
through March 2000 and are accounted for using the mark-to-market method, with
unrealized gains and losses recorded as an adjustment to cost of gas.

C. INTEREST RATE HEDGING
In order to manage interest costs, MCN uses interest rate swap agreements to
exchange fixed and variable rate interest payment obligations over the life of
the agreements without exchange of the underlying principal amounts. Interest
rate swaps are subject to market risk as interest rates fluctuate. The
difference to be received or paid on these agreements is accrued and recorded as
an adjustment to interest expense over the life of the agreements. The fair
value of the swap agreements and changes in the fair value as a result of
changes in market interest rates are not recognized in the financial statements.
In the event of an interest rate swap termination, any associated gains and
losses would be deferred and amortized as an adjustment to interest expense
related to the debt over the remaining term of the original contract life of the
terminated swap agreement. In the event of an early extinguishment of a
designated debt obligation, derivative gains and losses would be included in
income, unless the swap agreement is redesignated as a hedge of another
outstanding debt obligation with similar characteristics and qualifies for hedge
accounting.
   At December 31, 1998, MCN had interest rate swap agreements with notional
principal amounts totaling $186,100,000 (Note 9) and a weighted average
remaining life of 3.6 years. At December 31, 1997, the notional principal amount
of outstanding interest rate swaps totaled $288,000,000. The notional principal
amounts are used solely to calculate amounts to be paid or received under the
interest rate swap agreements and approximate the principal amount of the
underlying debt being hedged.


15. FAIR VALUE OF FINANCIAL AND OTHER SIMILAR INSTRUMENTS

MCN has estimated the fair value of its financial instruments using available
market information and appropriate valuation methodologies. Considerable
judgment is required in developing the estimates of the fair value of financial
instruments and, therefore, the values are not necessarily indicative of the
amounts that MCN could realize in a current market exchange. The carrying
amounts of certain financial instruments, such as notes payable, customer
deposits and notes receivable, are assumed to approximate fair value due to
their short-term nature.
   The carrying amount and fair value of other financial instruments consist of
the following:





                                      53
<PAGE>   59
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
   (in Thousands)                                1998                       1997
                               Carrying     Estimated     Carrying     Estimated
                                 Amount    Fair Value       Amount    Fair Value
--------------------------------------------------------------------------------
<S>                         <C>           <C>           <C>          <C>
Assets
Investment in debt
 and equity
  securities                $    69,705   $     69,705  $   97,521   $    97,521
Liabilities and
 Capitalization
Long-term debt,
 excluding capital
  lease obligations           1,301,823      1,358,371   1,204,862     1,251,883
Redeemable
 preferred securities           502,203        476,443     505,104       550,197
Derivative Financial
 and Other Similar
  Instruments (Note 14)
Natural gas & oil swaps
 with unrealized
  gains                          24,126         24,126      15,005        15,005
 with unrealized
  losses                         48,700         48,700      34,736        34,736
Natural gas & oil futures
 with unrealized
  gains                           4,699          4,699       2,031         2,031
 with unrealized
  losses                              -              -      10,120        10,120
Interest rate swaps
 with unrealized gains                           9,033                     5,006
 with unrealized losses                            696                       415
--------------------------------------------------------------------------------
</TABLE>

The fair values are determined based on the following:

Investment in debt and equity securities - carrying amount approximates fair
value taking into consideration interest rates available to MCN for investments
with similar terms.

Long-term debt - interest rates available to MCN for issuance of debt with
similar terms and remaining maturities.

Redeemable cumulative preferred securities - quoted market prices on the New
York Stock Exchange and interest rates available to MCN for issuance of
preferred securities with similar terms.

Natural gas and oil swaps and futures, and interest rate swaps- estimated
amounts that MCN would receive or pay to terminate the swap agreements and
futures, taking into account current gas and oil prices, interest rates and the
creditworthiness of the counterparties.

Guaranties (Note 13a) - Management is unable to practicably estimate the fair
value of the Southern Missouri, Genix and Harbortown guaranties due to the
nature of the transactions.

   The fair value estimates presented herein are based on information available
to management as of December 31, 1998 and 1997. Management is not aware of any
subsequent factors that would significantly affect the estimated fair value
amounts.


16. RETIREMENT BENEFITS AND TRUSTEED ASSETS

   In 1998, MCN adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," which standardizes the disclosure requirements
for pensions and other postretirement benefits.

A. PENSION PLAN BENEFITS
Separate defined benefit retirement plans are maintained for union and nonunion
employees. The plans are noncontributory, cover substantially all employees and
generally provide for normal retirement at age 65, but with the option to retire
earlier or later under certain conditions. The plans provide pension benefits
that are based on each employee's compensation and years of credited service.
Currently these plans meet the full funding limitations of the Internal Revenue
Code. Accordingly, no contributions for the 1998, 1997 or 1996 plan years were
made, and none is expected to be made for the 1999 plan year.
   Net pension credit for the years ended December 31 includes the following
components:

<TABLE>
<CAPTION>

----------------------------------------------------------------------
(in Thousands)                        1998         1997          1996
<S>                                   <C>          <C>           <C>
Service Cost                      $ 10,993    $  10,380     $  11,194
Interest Cost                       38,046       36,059        34,223
Expected Return on Plan Assets     (74,383)     (63,879)      (56,923)
Amortization of:
  Net gain                          (6,572)      (5,410)       (1,682)
  Prior service cost                 1,044         (149)         (156)
  Net transition asset              (5,023)      (5,080)       (5,040)
Special Termination Benefits         5,054            -             -
Settlements                         (7,300)      (3,266)            -
                                  ------------------------------------
Net Pension Credit                $(38,141)   $ (31,345)    $ (18,384)
----------------------------------------------------------------------
</TABLE>

   The following table sets forth a reconciliation of the obligations, assets
and funded status of the plans as well as the amounts recognized as prepaid
pension cost in the Consolidated Statement of Financial Position:

<TABLE>
<CAPTION>

----------------------------------------------------------------------
(in Thousands)                                      1998          1997
----------------------------------------------------------------------
Measurement Date                              October 31    October 31
Accumulated Benefit Obligation at
<S>                                           <C>           <C>
  the End of the Period                       $ 462,347     $  413,280
                                              ------------------------
Projected Benefit Obligation at
  the Beginning of the Period                 $ 489,779     $  450,912
Service Cost                                     10,993         10,380
Interest Cost                                    38,046         36,059
Plan Amendments                                  22,564              -
Actuarial Loss                                   45,879         26,357
Special Termination Benefits                      5,054              -
Settlements Due to Lump Sums                    (21,033)        (8,844)
Regular Benefits                                (28,782)       (25,085)
                                              ------------------------
Projected Benefit Obligation at
  the End of the Period                       $ 562,500     $  489,779
                                              ------------------------
Plan Assets at Fair Value at the
  Beginning of the Period                     $ 844,107     $  730,820
Actual Return on Plan Assets                    106,300        143,859
Settlements Due to Lump Sums                    (16,333)        (5,487)
Regular Benefits                                (28,782)       (25,085)
                                              ------------------------
Plan Assets at Fair Value
  at the End of the Period                    $ 905,292     $  844,107
                                              ------------------------
Funded Status of the Plans                    $ 342,792     $  354,328
Unrecognized
  Net gain                                     (221,245)      (244,405)
  Prior service cost                             19,448         (1,275)
  Net transition asset                          (29,220)       (35,014)
                                              ------------------------
Prepaid Pension Cost                          $ 111,775     $   73,634
                                              ------------------------

Prepaid Benefit Cost                          $ 114,275     $   75,921
Accrued Benefit Liability                        (2,500)        (2,287)
                                              ------------------------
Total Recognized                              $ 111,775     $   73,634
----------------------------------------------------------------------
</TABLE>






                                      54
<PAGE>   60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   In determining the actuarial present value of the projected benefit
obligation, the weighted average discount rate was 6.5%, 7.5% and 8% for 1998,
1997 and 1996, respectively. The rate of increase in future compensation levels
used was 5% for 1998 and 1997. The expected long-term rate of return on plan
assets, which are invested primarily in equity and fixed income securities, was
9.5% for 1998 and 9.25% for 1997 and 1996.
   In 1998, MichCon implemented an early retirement program under which
approximately 6% of its workforce retired in 1998 with incentives. The program
increased the projected benefit obligation and 1998 pension costs by $5,054,000.
   MCN also sponsors defined contribution retirement savings plans.
Participation in one of these plans is available to substantially all union and
nonunion employees. MCN matches employee contributions up to certain predefined
limits based upon salary and years of credited service. The cost of these plans
for continuing operations was $5,600,000 in 1998, $6,200,000 in 1997 and
$6,100,000 in 1996.

B. OTHER POSTRETIREMENT BENEFITS
MCN provides certain healthcare and life insurance benefits for retired
employees who may become eligible for these benefits if they reach retirement
age while working for MCN. These benefits are being accounted for under SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which requires the use of accrual accounting. Upon adoption of SFAS No. 106, MCN
deferred its 1993 postretirement costs related to Gas Distribution in excess of
claims paid until 1994, when new rates to recover such costs became effective.
   MCN's policy is to fund certain trusts to the extent its postretirement
benefit costs are recognized in Gas Distribution rates. Separate qualified
Voluntary Employees' Beneficiary Association (VEBA) trusts exist for union and
nonunion employees. Funding to the VEBA trusts totaled $2,200,000, $6,700,000
and $41,918,000 in 1998, 1997 and 1996, respectively. The expected long-term
rate of return on plan assets that are invested in life insurance policies,
equity securities and fixed income securities, was 9.8% for 1998 and 9.1% for
1997 and 1996.
   Net postretirement cost for the years ended December 31 includes the
following components:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
(in Thousands)                        1998       1997      1996
                                  -----------------------------------
<S>                                <C>        <C>              <C>
Service Cost                      $  4,044  $   4,354       $   4,541
Interest Cost                       16,891     17,857          16,826
Expected Return on Plan Assets     (13,570)   (11,082)         (9,872)
Amortization of:
  Net gain                          (5,723)    (4,933)         (4,332)
  Net transition obligation         12,898     13,587          13,587
Special Termination Benefits         1,186          -               -
                                  -----------------------------------
Total Postretirement Cost           15,726     19,783          20,750
Regulatory Adjustment                   43      4,907           7,553
                                  -----------------------------------
Net Postretirement Cost           $ 15,769  $  24,690       $  28,303
---------------------------------------------------------------------
</TABLE>

   The following table sets forth a reconciliation of the obligations, assets
and funded status of the plans as well as the amounts recorded as accrued
postretirement cost in the Consolidated Statement of Financial Position:

<TABLE>
<CAPTION>
------------------------------------------------------------------------
(in Thousands)                                      1998            1997
Measurement Date                              October 31      October 31
Accumulated Postretirement Benefit
<S>                                             <C>           <C>
  Obligation at the Beginning of the Period$     229,337       $ 223,214
Service Cost                                       4,044           4,354
Interest Cost                                     16,891          17,857
Plan Amendments                                   (8,269)              -
Actuarial (Gain) Loss                             24,660          (4,561)
Special Termination Benefits                       1,186               -
Benefits Paid                                    (11,702)        (11,527)
                                               -------------------------
Accumulated Postretirement Benefit
  Obligation at the End of the Period          $ 256,147       $ 229,337
                                               -------------------------
Plan Assets at Fair Value at the
  Beginning of the Period                      $ 152,405       $ 126,716
Actual Return on Plan Assets                      25,848          26,251
Company Contributions                              6,700           7,200
Regular Benefits                                 (10,674)         (7,762)
                                               -------------------------
Plan Assets at Fair Value at
  the End of the Period                        $ 174,279       $ 152,405
                                               -------------------------
Funded Status of the Plan                      $ (81,868)      $ (76,932)
Unrecognized
  Net gain                                      (116,959)       (125,827)
  Net transition obligation                      190,776         203,674
Contributions Made After
  Measurement Date                                2,200            6,700
Regular Benefits Made After
  Measurement Date                               (11,720)         (1,007)
                                               -------------------------
Accrued Postretirement Asset (Liability)       $ (17,571)      $   6,608
------------------------------------------------------------------------
</TABLE>

   The rate at which healthcare costs are assumed to increase is the most
significant factor in estimating MCN's postretirement benefit obligation. MCN
used a rate of 6% for 1999, and a rate that gradually declines each year until
it stabilizes at 5% in 2003. A one percentage point increase in the assumed
rates would increase the accumulated postretirement benefit obligation at
December 31, 1998 by $33,046,000 (13%) and increase the sum of the service and
interest rate cost by $3,057,000 (15%) for the year then ended. A one percentage
point decrease in the assumed rates would decrease the accumulated
postretirement benefit obligation at December 31, 1998 by $28,926,000 (11%) and
decrease the sum of the service and interest rate cost by $2,626,000 (13%) for
the year then ended.
   The discount rate used in determining the accumulated postretirement benefit
obligation was 6.5%, 7.5% and 8% for 1998, 1997 and 1996, respectively.
   In 1998, MichCon implemented an early retirement program under which
approximately 6% of its workforce retired in 1998 with incentives. The program
increased the postretirement benefit obligation and 1998 postretirement costs by
$1,186,000.

C. GRANTOR TRUST
MichCon has established a Grantor Trust and contributed $28,200,000 in 1998 and
$31,300,000 in 1997 to the trust, which invested such proceeds in life insurance
contracts and income securities. By funding the Grantor Trust and VEBA trusts
(Note 16b), MichCon is complying with MPSC directives that it fund various
trusts to the extent its postretirement benefit costs are recognized in Gas
Distribution rates. Employees and retirees have no right, title or interest in
the assets of the Grantor Trust and MichCon can revoke the trust subject to
providing the MPSC with prior notification.






                                      55

<PAGE>   61


17. SUMMARY OF INCOME TAXES

MCN files a consolidated federal income tax return. The income tax provisions or
benefits of MCN's subsidiaries are determined on an individual company basis.
The subsidiaries record income tax payable to or receivable from MCN resulting
from the inclusion of its taxable income or loss in MCN's consolidated tax
return.

<TABLE>
<CAPTION>
--------------------------------------------------------------------
(in Thousands)                        1998         1997         1996
                             ---------------------------------------
<S>                               <C>         <C>          <C>
Effective Federal Income Tax Rate    (59.6)%       35.5%        34.1%
--------------------------------------------------------------------
Income Taxes Consist of:
  Current                         $ 12,454    $  31,097       37,229
  Deferred, net                    (28,314)      28,256       14,445
  Tax credits, net                  (3,640)      (1,973)      (1,878)
                                  ----------------------------------
                                  $(19,500)   $  57,380    $  49,796
                                  ----------------------------------
Reconciliation Between Statutory
  and Actual Income Taxes
Statutory Federal Income
  Taxes at a Rate of 35%          $(11,612)   $  56,158    $  50,309
Adjustments to Federal Taxes
  Book over tax depreciation         1,071        5,301        6,367
  Adjustments to taxes provided in
   prior periods                      (406)      (1,405)      (4,433)
  Stock-related benefits            (1,095)           -            -
  Tax credits                       (3,640)      (1,973)      (1,878)
  Allowance for funds used
   during construction              (1,900)      (1,105)        (245)
  Undistributed foreign earnings    (1,244)           -            -

  Other, net                          (674)         404         (324)
                                  ----------------------------------
                                  $(19,500)   $  57,380    $  49,796
--------------------------------------------------------------------
</TABLE>

   No provision has been made for federal, state or foreign income taxes in 1998
related to approximately $3,553,000 of undistributed earnings of foreign
subsidiaries that are intended to be permanently reinvested. There were no
undistributed earnings of foreign subsidiaries in 1997 and 1996.
   Deferred tax assets and liabilities are recognized for the estimated future
tax effect of temporary differences between the tax basis of assets or
liabilities and the reported amounts in the financial statements. Deferred tax
assets and liabilities are classified as current or noncurrent according to the
classification of the related assets or liabilities. The alternative minimum tax
credits may be carried forward indefinitely.

   The tax effect of temporary differences that gave rise to MCN's deferred tax
assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
(in Thousands)                                            1998           1997
------------------------------------------------------------------------------
Deferred Tax Assets
<S>                                                  <C>            <C>
  Alternative minimum tax credit carryforward        $  71,519      $  60,121
  Vacation and other benefits                           17,745         20,846
  Postretirement benefits                                6,287              -
  Uncollectibles                                         3,234          4,771
  Restructuring charges                                  5,915              -
  Other                                                 20,257         11,985
                                                    --------------------------
                                                       124,957          97,723
------------------------------------------------------------------------------
Deferred Tax Liabilities
  Depreciation and other property-related
   basis differences, net                               12,978         200,216
  Pensions                                              36,751          24,027
  Property taxes                                        13,072          12,931
  Gas cost recovery undercollection                         57           4,502
  Postretirement benefits                                    -           2,768
  Other                                                 20,959          18,432
                                                     -------------------------
                                                        83,817         262,876
                                                     -------------------------
Net Deferred Tax Asset (Liability)                      41,140        (165,153)
Less: Net Deferred Tax Liability-Current                (9,407)        (11,994)
                                                     -------------------------
Net Deferred Tax Asset (Liability)-Noncurrent        $  50,547      $ (153,159)
------------------------------------------------------------------------------

</TABLE>
18. SEGMENT INFORMATION

In 1998, MCN adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which requires the reporting of business segments
based on the organizational structure used by management to assess performance
and make resource allocation decisions.

MCN is a diversified energy holding company with natural gas markets and
investments primarily in North America. MCN is organized into two business
groups, Diversified Energy and Gas Distribution. The groups operate four major
business segments as described in the Summary of Significant Accounting Policies
- Company Description (Note 1a).
   Information as to MCN's segments is set forth in the following tables. The
segments were determined based on the nature of their products and services and
how management reviews operating results. MCN evaluates segment performance
based on several factors, of which the primary measure is net income or loss.
Inter-segment sales are based on long-term fixed-price or index-price contracts.






                                      56
<PAGE>   62

<TABLE>
<CAPTION>


                                                            Diversified Energy
                                           ---------------------------------------------------------
                                             Pipelines &    Electric        Energy      Corporate &
(in Thousands)                               Processing     Power        Marketing         Other (a)
----------------------------------------------------------------------------------------------------

1998
<S>                                        <C>            <C>            <C>            <C>
Revenues From Unaffiliated Customers       $    20,856    $    52,062    $   767,068    $        --
Revenues From Affiliated Customers                 345         (4,931)       105,543             --
                                           --------------------------------------------------------
  Total operating revenues                      21,201         47,131        872,611             --
                                           --------------------------------------------------------
Depreciation, Depletion and Amortization         1,705            208          1,229          1,998

Operating Income (Loss)                       (146,264)        (5,021)        (5,987)       (19,162)
Equity in Earnings of Joint Ventures            29,987         28,546          2,401            308
                                           --------------------------------------------------------
  Operating and joint venture
   income (loss)                              (116,277)        23,525         (3,586)       (18,854)
                                           --------------------------------------------------------
Interest Income                                  1,001            944          1,676         53,100
Interest Expense (b)                           (14,382)        (2,021)        (5,726)       (51,813)
Income Taxes                                   (46,893)         8,212           (510)       (13,309)
Net Income (Loss)                              (82,240)        19,271         (1,037)       (21,405)

Total Assets                                   575,969        300,529        386,917         72,388
Investments In and Advances
  to Joint Ventures                            521,711        231,668         29,435         18,939
Capital Expenditures                           113,229          1,602          2,596          6,966
Capital Investments                            333,128         88,209          3,355          7,092
Significant Noncash Items:
  Property write-downs and restructuring
   charges (Notes 2 & 3)                      (137,681)        (2,470)            --        (10,390)
  Investment loss (Note 2)                          --             --             --             --
  Discontinued operations                           --             --             --             --
---------------------------------------------------------------------------------------------------
<CAPTION>

                                                          Discontinued
                                                     Gas   Operations     Eliminations    Consolidated
                                            Distribution   (Note 4)            & Other           Total
                                           -----------------------------------------------------------


                                           <C>            <C>            <C>               <C>
Revenues From Unaffiliated Customers       $ 1,040,208    $        --    $        --       $ 1,880,194
Revenues From Affiliated Customers              11,566             --       (112,523)               --
                                           -----------------------------------------------------------
  Total operating revenues                   1,051,774             --       (112,523)        1,880,194
                                           -----------------------------------------------------------

Depreciation, Depletion and Amortization        93,774             --             --            98,914

Operating Income (Loss)                        158,537             --             --           (17,897)
Equity in Earnings of Joint Ventures               983             --             --            62,225
                                           -----------------------------------------------------------
  Operating and joint venture
   income (loss)                               159,520             --             --            44,328
                                           -----------------------------------------------------------
Interest Income                                  5,716             --        (51,970)           10,467
Interest Expense (b)                           (57,477)            --         51,970           (79,449)
Income Taxes                                    33,000             --             --           (19,500)
Net Income (Loss)                               71,734       (272,791)            --          (286,468)

Total Assets                                 2,116,173        988,201        (47,279)        4,392,898
Investments In and Advances
  to Joint Ventures                              1,478             --             --           803,231
Capital Expenditures                           157,952        200,430             --           482,775
Capital Investments                            158,716        200,430             --           790,930
Significant Noncash Items:
  Property write-downs and restructuring
   charges (Notes 2 & 3)                       (24,800)            --             --          (175,341)
  Investment loss (Note 2)                      (8,500)            --             --            (8,500)
  Discontinued operations                           --       (423,112)            --          (423,112)
------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

                                                                 Diversified Energy
                                           --------------------------------------------------------
                                            Pipelines &      Electric         Energy    Corporate &
(in Thousands)                              Processing          Power      Marketing       Other(a)
                                           --------------------------------------------------------
1997
<S>                                        <C>            <C>            <C>              <C>
Revenues From Unaffiliated Customers       $     6,971    $    56,528    $   743,793      $      --
Revenues From Affiliated Customers                 397         (4,724)        92,921             --
                                           --------------------------------------------------------
  Total operating revenues                       7,368         51,804        836,714             --
                                           --------------------------------------------------------
Depreciation, Depletion and Amortization         1,153            (22)           915          1,220

Operating Income (Loss)                            585          5,377         (7,414)        (4,433)
Equity in Earnings of Joint Ventures            28,551         12,653          5,182            139
                                           --------------------------------------------------------
  Operating and joint venture income            29,136         18,030         (2,232)        (4,294)
                                           --------------------------------------------------------
Interest Income                                    109            278          2,332         37,202
Interest Expense (b)                            (8,436)          (165)        (4,920)       (30,585)
Income Taxes                                     8,721          6,341         (1,180)        (3,638)
Net Income (Loss)                               17,070         12,409         (1,308)        (6,186)

Total Assets                                   391,550        208,421        313,669         97,819

Investments In and Advances
         to Joint Ventures                     323,597        180,127         25,159         19,252
Capital Expenditures                            19,491          4,823            663          4,951
Capital Investments                            171,735        243,231          3,893          5,425
---------------------------------------------------------------------------------------------------
<CAPTION>







                                                            Discontinued
                                                   Gas        Operations  Eliminations    Consolidated
1997                                      Distribution          (Note 4)       & Other           Total
                                          ------------------------------------------------------------
<S>                                        <C>                    <C>     <C>              <C>
Revenues From Unaffiliated Customers       $ 1,256,542            $ -     $      --        $ 2,063,834
Revenues From Affiliated Customers              14,744             --      (103,338)                --
                                          ------------------------------------------------------------
  Total operating revenues                   1,271,286             --      (103,338)         2,063,834
                                          ------------------------------------------------------------
Depreciation, Depletion and Amortization       104,437             --            --            107,703

Operating Income (Loss)                        176,820             --            --            170,935
Equity in Earnings of Joint Ventures             2,534             --            --             49,059
                                          ------------------------------------------------------------
  Operating and joint venture income           179,354             --            --            219,994
                                          ------------------------------------------------------------
Interest Income                                  4,735             --       (33,650)            11,006
Interest Expense (b)                           (54,525)            --        33,650            (64,981)
Income Taxes                                    47,136             --            --             57,380
Net Income (Loss)                               81,085         30,159            --            133,229

Total Assets                                 2,167,637      1,237,813       (85,972)         4,330,937

Investments In and Advances
         to Joint Ventures                       8,841             --            --            556,976
Capital Expenditures                           157,732        374,997            --            562,657
Capital Investments                            160,329        374,997            --            959,610
------------------------------------------------------------------------------------------------------
</TABLE>



                                      57
<PAGE>   63
<TABLE>
<CAPTION>
                                                     Diversified Energy
-----------------------------------------------------------------------------------------------------
                                            Pipelines &   Electric         Energy         Corporate &
(in Thousands)                               Processing      Power      Marketing           Other (a)
-----------------------------------------------------------------------------------------------------
1996
<S>                                        <C>           <C>           <C>                 <C>
Revenues From Unaffiliated Customers       $    5,928    $   46,802    $  589,036          $       --
Revenues From Affiliated Customers                441        (4,660)       84,126                  --
                                           ----------------------------------------------------------
  Total operating revenues                      6,369        42,142       673,162                  --
                                           ----------------------------------------------------------
Depreciation, Depletion and Amortization          944           (90)          916                 938

Operating Income (Loss)                           134         4,823         5,142              (2,525)

Equity in Earnings (Loss)
  of Joint Ventures                            10,590          (211)        4,208               2,026
                                           ----------------------------------------------------------
  Operating and joint
   venture income (loss)                       10,724         4,612         9,350                (499)
                                           ----------------------------------------------------------

Interest Income                                   189            82           946              20,043
Interest Expense (b)                           (6,089)           --        (3,426)            (16,801)
Income Taxes                                    4,055         1,687         2,375              (1,058)
Net Income (Loss)                               7,117         3,159         5,574              (3,303)
Total Assets                                  220,943        47,611       310,732              40,714

Investments In and Advances
  to Joint Ventures                           177,026        27,233        34,408              20,046
Capital Expenditures                            6,865         2,086         1,114               2,987
Capital Investments                           157,663        19,641         1,364               2,997
-----------------------------------------------------------------------------------------------------
<CAPTION>

                                                       Discontinued
                                                  Gas   Operations    Eliminations       Consolidated
(in Thousands)                           Distribution     (Note 4)       & Other                Total
-----------------------------------------------------------------------------------------------------
1996
<S>                                        <C>           <C>           <C>                 <C>
Revenues From Unaffiliated Customers       $1,261,712    $       --    $       --          $1,903,478
Revenues From Affiliated Customers             14,542            --       (94,449)                  -
                                           ----------------------------------------------------------
  Total operating revenues                  1,276,254            --       (94,449)          1,903,478
                                           ----------------------------------------------------------
Depreciation, Depletion and Amortization       98,814            --            --             101,522

Operating Income (Loss)                       170,484            --            --             178,058

Equity in Earnings (Loss)
  of Joint Ventures                             1,254            --            --              17,867
                                           ----------------------------------------------------------
  Operating and joint
   venture income (loss)                      171,738            --            --             195,925
                                           ----------------------------------------------------------

Interest Income                                 3,967            --       (18,200)              7,027
Interest Expense (b)                          (48,847)           --        18,200             (56,963)
Income Taxes                                   42,737            --            --              49,796
Net Income (Loss)                              81,396        56,397            --             150,340
Total Assets                                2,086,325       963,273       (36,194)          3,633,404

Investments In and Advances
  to Joint Ventures                             6,675            --            --             265,388
Capital Expenditures                          215,317       388,719            --             617,088
Capital Investments                           220,393       388,690            --             790,748
-----------------------------------------------------------------------------------------------------
</TABLE>

(a) Corporate & Other includes administrative and financing expenses associated
    with corporate activities as well as development and management activities
    of real estate partnerships.

(b) Interest expense is allocated from Corporate & Other to each Diversified
    Energy segment based on an imputed debt structure reflective of the
    segments' related industry, except for interest allocated to discontinued
    operations.




                                       58
<PAGE>   64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. QUARTERLY OPERATING RESULTS (UNAUDITED)

Due to the seasonal nature of MCN's Gas Distribution operations, revenues, net
income and earnings per share tend to be higher in the first and fourth quarters
of the calendar year. Quarterly earnings per share may not total for the years,
since quarterly computations are based on weighted average common shares
outstanding during each quarter. There were 21,858 and 22,160 holders of record
of MCN common shares at December 31, 1998 and 1997, respectively.

Subsequent to the issuance of the December 31, 1998 financial statements, MCN
management determined that certain transactions were improperly recorded.
Certain amounts have been restated primarily to record cost of gas expense,
including trading losses, in the appropriate accounting periods as described in
Note 1b.  The effects of this restatement on each of the quarterly periods in
the years ended December 31, 1998 and 1997 are presented below.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                            First            Second         Third         Fourth
(in Thousands of Dollars - Except Per Share Amounts)       Quarter           Quarter       Quarter        Quarter         Year
----------------------------------------------------------------------------------------------------------------------------------
                                                      ----------------------------As Restated, Note 1b----------------------------
<S>                                                   <C>              <C>              <C>            <C>            <C>
1998
Operating Revenues                                     $      658,584  $       367,740  $    316,301   $   537,569    $  1,880,194
Operating Income (Loss):
  Before unusual charges                               $      107,893  $        13,883  $     (6,883)  $    42,551    $    157,444
  Unusual charges                                                  --               --      (175,341)           --        (175,341)
                                                      ----------------------------------------------------------------------------
                                                       $      107,893  $        13,883  $   (182,224)  $    42,551    $    (17,897)
                                                      ----------------------------------------------------------------------------
Operating and Joint Venture Income (Loss):
  Before unusual charges                               $      124,654  $        25,720  $     11,080   $    58,215    $    219,669
  Unusual charges                                                  --               --      (175,341)           --        (175,341)
                                                      ----------------------------------------------------------------------------
                                                       $      124,654  $        25,720  $   (164,261)  $    58,215    $     44,328
                                                      ----------------------------------------------------------------------------
Net Income (Loss)
  Continuing operations, before unusual charges        $       76,940  $         4,509  $     (5,508)  $    24,958    $    100,899
  Unusual charges                                                  --               --      (114,576)           --        (114,576)
  Discontinued operations                                       1,942         (217,132)      (56,640)         (961)       (272,791)
                                                      ----------------------------------------------------------------------------
                                                       $       78,882  $      (212,623) $   (176,724)  $    23,997    $   (286,468)
                                                      ----------------------------------------------------------------------------
Basic Earnings (Loss) Per Share:
  Continuing operations, before unusual charges        $          .98  $           .06  $       (.07)  $       .32    $       1.28
  Unusual charges                                                  --               --         (1.45)           --           (1.45)
  Discontinued operations                                         .03            (2.76)         (.72)         (.01)          (3.46)
                                                      ----------------------------------------------------------------------------
                                                       $         1.01  $         (2.70) $      (2.24)  $       .31    $      (3.63)
                                                      ----------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share:
  Continuing operations, before unusual charges        $          .93  $           .06  $       (.07)  $       .31    $       1.28
  Unusual charges                                                  --               --         (1.45)           --           (1.45)
  Discontinued operations                                         .02            (2.76)         (.72)         (.01)          (3.46)
                                                      ----------------------------------------------------------------------------
                                                       $          .95  $         (2.70) $      (2.24)  $       .30    $      (3.63)
                                                      ----------------------------------------------------------------------------
Dividends Paid Per Share                               $        .2550  $         .2550  $      .2550   $     .2550    $     1.0200
Average Daily Trading Volume                                  195,997          328,005       530,228       395,530         364,558
Price Per Share:
  High                                                 $      39.8750  $       39.8750  $    26.8125   $   20.8125    $    39.8750
  Low                                                  $      36.2500  $       24.7500  $    16.4375   $   16.8125    $    16.4375
  Close                                                $      37.3750  $       25.0000  $    17.0625   $   19.0625    $    19.0625
----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                            First            Second         Third         Fourth
(in Thousands of Dollars - Except Per Share Amounts)       Quarter           Quarter       Quarter        Quarter         Year
----------------------------------------------------------------------------------------------------------------------------------
                                                      ----------------------------As Previously Reported, Note 1b-----------------
<S>                                                    <C>             <C>              <C>            <C>            <C>
1998
Operating Revenues                                     $      658,584  $       367,740  $    316,301   $   537,569    $  1,880,194
Operating Income (Loss):
  Before unusual charges                               $      110,397  $        17,764  $     (7,540)  $    48,380    $    169,001
  Unusual charges                                                  --               --      (175,341)           --        (175,341)
                                                      ----------------------------------------------------------------------------
                                                       $      110,397  $        17,764  $   (182,881)  $    48,380    $    (6,340)
                                                      ----------------------------------------------------------------------------
Operating and Joint Venture Income (Loss):
  Before unusual charges                               $      127,158  $        29,601  $     10,423   $    64,044    $    231,226
  Unusual charges                                                  --               --      (175,341)           --        (175,341)
                                                      ----------------------------------------------------------------------------
                                                       $      127,158  $        29,601  $   (164,918)  $    64,044    $     55,885
                                                      ----------------------------------------------------------------------------
Net Income (Loss)
  Continuing operations, before unusual charges        $       78,568  $         7,032  $     (5,935)  $    28,747    $    108,412
  Unusual charges                                                  --               --      (114,576)           --        (114,576)
  Discontinued operations                                       1,942         (217,132)      (56,640)         (961)       (272,791)
                                                      ----------------------------------------------------------------------------
                                                       $       80,510  $      (210,100) $   (177,151)  $    27,786    $   (278,955)
                                                      ----------------------------------------------------------------------------
Basic Earnings (Loss) Per Share:
  Continuing operations, before unusual charges        $         1.00  $           .09  $       (.07)  $       .36    $       1.38
  Unusual charges                                                  --               --         (1.45)           --           (1.46)
  Discontinued operations                                         .03            (2.76)         (.72)         (.01)          (3.46)
                                                      ----------------------------------------------------------------------------
                                                       $         1.03  $         (2.67) $      (2.24)  $       .35    $      (3.54)
                                                      ----------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share:
  Continuing operations, before unusual charges        $          .95  $           .09  $       (.07)  $       .36    $       1.38
  Unusual charges                                                  --               --         (1.45)           --           (1.46)
  Discontinued operations                                         .02            (2.76)         (.72)         (.01)          (3.46)
                                                      ----------------------------------------------------------------------------
                                                       $          .97  $         (2.67) $      (2.24)  $       .35    $      (3.54)
                                                      ----------------------------------------------------------------------------
Dividends Paid Per Share                               $        .2550  $         .2550  $      .2550   $     .2550    $     1.0200
Average Daily Trading Volume                                  195,997          328,005       530,228       395,530         364,558
Price Per Share:
  High                                                 $      39.8750  $       39.8750  $    26.8125   $   20.8125    $    39.8750
  Low                                                  $      36.2500  $       24.7500  $    16.4375   $   16.8125    $    16.4375
  Close                                                $      37.3750  $       25.0000  $    17.0625   $   19.0625    $    19.0625







<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                            First            Second         Third         Fourth
(in Thousands of Dollars - Except Per Share Amounts)       Quarter           Quarter       Quarter        Quarter         Year
----------------------------------------------------------------------------------------------------------------------------------

                                                       -----------------------As Restated, Note lb--------------------------------
<S>                                                    <C>             <C>              <C>            <C>            <C>
1997
Operating Revenues                                     $      753,728  $       350,807  $    287,508   $   671,791    $  2,063,834
Operating Income (Loss)                                $      109,639  $        11,593  $    (13,449)  $    63,152    $    170,935
Operating and Joint Venture Income                     $      119,300  $        22,063  $      2,275   $    76,356    $    219,994
Net Income (Loss):
  Continuing operations                                $       69,885  $         1,366  $     (7,895)  $    39,714    $    103,070
  Discontinued operations                                      10,034            5,815         9,137         5,173          30,159
                                                      ----------------------------------------------------------------------------
                                                       $       79,919  $         7,181  $      1,242   $    44,887    $    133,229
                                                      ----------------------------------------------------------------------------
Basic Earnings (Loss) Per Share:
  Continuing operations                                $         1.03  $           .02  $       (.10)  $       .51    $       1.41
  Discontinued operations                                         .15              .08           .12           .06             .41
                                                      ----------------------------------------------------------------------------
                                                       $         1.18  $           .10  $        .02   $       .57    $       1.82
                                                      ----------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share:
  Continuing operations                                $         1.01  $           .02  $       (.10)  $       .49    $       1.39
  Discontinued operations                                         .15              .08           .12           .06             .40
                                                      ----------------------------------------------------------------------------
                                                       $         1.16  $           .10  $        .02   $       .55    $       1.79
                                                      ----------------------------------------------------------------------------
Dividends Paid Per Share                               $        .2425  $         .2425  $      .2425   $     .2550    $      .9825
Average Daily Trading Volume                                  102,659          153,859       159,057       149,650         141,765
Price Per Share:
  High                                                 $      32.6250  $       30.8125  $    33.0000   $   40.5000    $    40.5000
  Low                                                  $      28.1250  $       27.3750  $    30.3750   $   32.0000    $    27.3750
  Close                                                $      28.1250  $       30.6250  $    32.0000   $   40.3750    $    40.3750
----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                            First            Second         Third         Fourth
(in Thousands of Dollars - Except Per Share Amounts)       Quarter           Quarter       Quarter        Quarter         Year
----------------------------------------------------------------------------------------------------------------------------------
                                                       ----------------------------As Previously Reported, Note 1b----------------

<S>                                                    <C>             <C>              <C>            <C>            <C>
1997
Operating Revenues                                     $      753,728  $       350,807  $    287,508   $   671,791    $  2,063,834
Operating Income (Loss)                                $      112,485  $        14,508  $    (13,485)  $    71,390    $    184,898
Operating and Joint Venture Income                     $      122,146  $        24,978  $      2,239   $    84,594    $    233,957
Net Income (Loss):
  Continuing operations                                $       71,735  $         3,261  $     (7,918)  $    45,069    $    112,147
  Discontinued operations                                      10,034            5,815         9,137         5,173          30,159
                                                       ---------------------------------------------------------------------------
                                                       $       81,769  $         9,076  $      1,219   $    50,242    $    142,306
                                                       ---------------------------------------------------------------------------


Basic Earnings (Loss) Per Share:
  Continuing operations                                $         1.06  $           .05  $       (.10)  $       .58    $       1.54
  Discontinued operations                                         .15              .08           .12           .06             .41
                                                       ---------------------------------------------------------------------------
                                                       $         1.21  $           .13  $        .02   $       .64    $       1.95
                                                       ---------------------------------------------------------------------------

Diluted Earnings (Loss) Per Share:
  Continued operations                                 $         1.04  $           .05  $       (.10)  $       .56    $       1.51
  Discontinued operations                              $          .15              .08  $        .12           .06             .40
                                                       ---------------------------------------------------------------------------
                                                       $         1.19  $           .13  $        .02   $       .62    $       1.91
                                                       ---------------------------------------------------------------------------
Dividends Paid Per Share                               $        .2425  $         .2425         .2425         .2550           .9825
Average Daily Trading Volume                                  102,659          153,859       159,057       149,650         141,765
Price Per Share:
  High                                                 $      32.6250  $       30.8125  $    33.0000   $   40.5000    $    40.5000
  Low                                                  $      28.1250  $       27.3750  $    30.3750   $   32.0000    $    27.3750
  Close                                                $      28.1250  $       30.6250  $    32.0000   $   40.3750    $    40.3750
</TABLE>






                                      59
<PAGE>   65

20. CONSOLIDATING FINANCIAL STATEMENTS

Debt securities issued by MCNIC are subject to a support agreement between MCN
and MCNIC, under which MCN has committed to make payments of interest and
principal on MCNIC's securities in the event of failure to pay by MCNIC.
Restrictions in the support agreement prohibit recourse on the part of MCNIC's
investors against the stock and assets of MichCon. Under the terms of the
support agreement, the assets of MCN, other than MichCon, and the cash dividends
paid to MCN by any of its subsidiaries are available as recourse to holders of
MCNIC's securities. The carrying value of MCN's assets on an unconsolidated
basis, primarily investments in its subsidiaries other than MichCon, is
$970,072,000 at December 31, 1998.
    The following MCN consolidating financial statements are presented and
include separately MCNIC, MichCon and MCN and other subsidiaries. MCN has
determined that separate financial statements and other disclosures concerning
MCNIC are not material to investors. The other MCN subsidiaries represent
Citizens Gas Fuel Company, MCN Michigan Limited Partnership, MCN Financing I,
MCN Financing III, MCN Financing V, MCN Financing VI, MichCon Enterprises, Inc.
and Blue Lake Holdings, Inc. until its sale on December 31, 1997.

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF FINANCIAL POSITION                  MCN                                Eliminations
December 31, 1998                                        and Other                                         and   Consolidated
(in Thousands)                                        Subsidiaries         MCNIC       MichCon       Reclasses          Total
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>           <C>            <C>            <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents, at cost                   $     1,400    $     9,036   $     6,603    $      --      $    17,039
  Accounts receivable                                       10,039        265,312       151,746        (17,312)       409,785
   Less - Allowance for doubtful accounts                       84            653         8,928           --            9,665
                                                       ----------------------------------------------------------------------
   Accounts receivable, net                                  9,955        264,659       142,818        (17,312)       400,120
  Accrued unbilled revenues                                  1,121           --          86,767           --           87,888
  Gas in inventory                                            --           90,418        56,969           --          147,387
  Property taxes assessed applicable to
    future periods                                             214          1,172        71,165           --           72,551
  Other                                                      5,143         11,872        30,169         (4,712)        42,472
                                                       ----------------------------------------------------------------------
                                                            17,833        377,157       394,491        (22,024)       767,457
                                                       ----------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
  Deferred income taxes                                      3,305        128,807          --          (81,565)        50,547
  Investments in debt and equity securities                   --            3,548        65,556            601         69,705
  Deferred swap losses and receivables                        --           63,147          --             --           63,147
  Deferred environmental costs                               2,604           --          28,169           --           30,773
  Prepaid benefit costs                                       --             --         113,879         (2,104)       111,775
  Other                                                      9,401         26,870        59,007          3,662         98,940
                                                       ----------------------------------------------------------------------
                                                            15,310        222,372       266,611        (79,406)       424,887
                                                       ----------------------------------------------------------------------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
  AND SUBSIDIARIES                                       1,550,770        782,471        19,343     (1,549,353)       803,231
                                                       ----------------------------------------------------------------------

PROPERTY, PLANT AND EQUIPMENT, AT COST                      48,681      1,103,716     2,889,020           --        4,041,417
  Less - Accumulated depreciation and depletion             17,210        229,944     1,396,940           --        1,644,094
                                                       ----------------------------------------------------------------------
                                                            31,471        873,772     1,492,080           --        2,397,323
                                                       ----------------------------------------------------------------------
                                                       $ 1,615,384    $ 2,255,772   $ 2,172,525    $(1,650,783)   $ 4,392,898
-----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
  Accounts payable                                     $     4,123    $   218,851        98,891    $   (17,516)   $   304,349
  Notes payable                                            260,771        137,762       221,169           (851)       618,851
  Current portion of long-term debt and capital
    lease obligations                                         --          211,433        58,288           --          269,721
  Federal income, property and other taxes payable           1,441          6,965        61,059           --           69,465
  Deferred gas cost recovery revenues                         --             --          14,980           --           14,980
  Gas payable                                                 --           17,332        25,337           --           42,669
  Customer deposits                                             22           --          18,769           --           18,791
  Other                                                     18,337         25,276        67,222         (2,525)       108,310
                                                       ----------------------------------------------------------------------
                                                           284,694        617,619       565,715        (20,892)     1,447,136
                                                       ----------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
  Deferred income taxes                                    (10,308)          --          88,567        (78,259)          --
  Unamortized investment tax credit                            272           --          29,784           --           30,056
  Tax benefits amortizable to customers                       --             --         130,120           --          130,120
  Deferred swap gains and payables                            --           62,956          --             --           62,956
  Accrued environmental costs                                3,000           --          32,000           --           35,000
  Minority interest                                           --            2,697         8,201           --           10,898
  Other                                                     10,435         15,741        51,460         (2,197)        75,439
                                                       ----------------------------------------------------------------------
                                                             3,399         81,394       340,132        (80,456)       344,469
                                                       ----------------------------------------------------------------------
CAPITALIZATION
  Long-term debt, including capital lease obligations         --          687,333       619,835           --        1,307,168
  Redeemable preferred securities of subsidiaries          502,203           --            --             --          502,203
  Common shareholders' equity                              825,088        869,426       646,843     (1,549,435)       791,922
                                                       ----------------------------------------------------------------------
                                                         1,327,291      1,556,759     1,266,678     (1,549,435)     2,601,293
                                                       ----------------------------------------------------------------------
                                                       $ 1,615,384    $ 2,255,772   $ 2,172,525    $(1,650,783)   $ 4,392,898
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>







                                      60
<PAGE>   66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF FINANCIAL POSITION                       MCN                              Eliminations
December 31, 1997                                             and Other                                       and   Consolidated
(in Thousands)                                             Subsidiaries      MCNIC        MichCon       Reclasses          Total
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>           <C>            <C>            <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents, at cost                      $        23    $    25,119   $    14,353    $      --      $    39,495
  Accounts receivable                                          15,525        242,343       210,677        (46,910)       421,635
   Less - Allowance for doubtful accounts                          75            621        15,015           --           15,711
                                                          ----------------------------------------------------------------------
  Accounts receivable, net                                     15,450        241,722       195,662        (46,910)       405,924
  Accrued unbilled revenue                                      1,114           --          91,896           --           93,010
  Gas in inventory                                               --           16,576        40,201           --           56,777
  Property taxes assessed applicable to future periods            217          2,835        64,827           --           67,879
  Accrued gas cost recovery revenues                             --             --          12,862           --           12,862
  Other                                                         3,745         17,612        33,361           (629)        54,089
                                                          ----------------------------------------------------------------------
                                                               20,549        303,864       453,162        (47,539)       730,036
                                                          ----------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
  Investments in debt and equity securities                      --           62,060        35,110            351         97,521
  Deferred swap losses and receivables                           --           51,023          --             --           51,023
  Deferred environmental costs                                  2,535           --          27,699           --           30,234
  Prepaid benefit costs                                        (3,418)          --          85,790         (2,130)        80,242
  Other                                                         8,261         34,287        46,972         (3,339)        86,181
                                                          ----------------------------------------------------------------------
                                                                7,378        147,370       195,571         (5,118)       345,201
                                                          ----------------------------------------------------------------------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND
  SUBSIDIARIES                                              1,641,421        528,492        19,643     (1,632,580)       556,976
                                                          ----------------------------------------------------------------------

PROPERTY, PLANT AND EQUIPMENT, AT COST                         37,918      1,358,504     2,790,352           --        4,186,774
  Less - Accumulated depreciation and depletion                12,951        152,707     1,322,392           --        1,488,050
                                                          ----------------------------------------------------------------------
                                                               24,967      1,205,797     1,467,960           --        2,698,724
                                                          ----------------------------------------------------------------------
                                                          $ 1,694,315    $ 2,185,523   $ 2,136,336    $(1,685,237)   $ 4,330,937
--------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
  Accounts payable                                        $     4,385    $   254,391   $   130,267    $   (46,848)   $   342,195
  Notes payable                                                  --          163,113       241,691         (3,078)       401,726
  Current portion of long-term debt and capital
    lease obligations                                             365          1,557        34,956           --           36,878
  Federal income, property and other taxes payable                401          7,795        78,630           --           86,826
  Gas payable                                                    --            6,254         2,063           --            8,317
  Customer deposits                                                19           --          16,363           --
                                                                                                                          16,382
  Other                                                        13,599         22,944        65,717           (630)       101,630
                                                          ----------------------------------------------------------------------
                                                               18,769        456,054       569,687        (50,556)       993,954
                                                          ----------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
  Deferred income taxes                                        (4,642)        73,874        83,905             22        153,159
  Unamortized investment tax credit                               301           --          32,745           --           33,046
  Tax benefits amortizable to customers                           443           --         122,922           --          123,365
  Deferred swap gains and payables                               --           41,717          --             --           41,717
  Accrued environmental costs                                   3,000           --          32,000           --           35,000
  Minority interest                                              --            1,905        17,283           --           19,188
  Other                                                        10,792         16,586        44,663         (2,152)        69,889
                                                          ----------------------------------------------------------------------
                                                                9,894        134,082       333,518         (2,130)       475,364
                                                          ----------------------------------------------------------------------
CAPITALIZATION
   Long-term debt, including capital lease obligations           --          595,457       617,107           --        1,212,564

  Redeemable preferred securities of subsidiaries             505,104           --            --             --          505,104
  Common shareholders' equity                               1,160,548        999,930       616,024     (1,632,551)     1,143,951
                                                          ----------------------------------------------------------------------
                                                            1,665,652      1,595,387     1,233,131     (1,632,551)     2,861,619
                                                          ----------------------------------------------------------------------
                                                          $ 1,694,315    $ 2,185,523   $ 2,136,336    $(1,685,237)   $ 4,330,937
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>





                                       61
<PAGE>   67

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF OPERATIONS                           MCN                                 Eliminations
Twelve Months Ended December 31, 1998                     and Other                                          and   Consolidated
(in Thousands)                                          Subsidiaries      MCNIC         MichCon        Reclasses          Total
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>            <C>            <C>
OPERATING REVENUES                                      $    18,262    $   842,324    $ 1,033,658    $   (14,050)   $ 1,880,194
                                                        -----------------------------------------------------------------------

OPERATING EXPENSES
  Cost of gas                                                10,706        808,805        451,529         (8,668)     1,262,372
  Operation and maintenance                                 (10,207)        65,153        252,397         (5,382)       301,961
  Depreciation, depletion and amortization                    3,206          2,825         92,883           --           98,914
  Property and other taxes                                    1,719          2,346         55,438           --           59,503
  Property write-downs and restructuring charges              8,669        141,872         24,800           --          175,341
                                                        -----------------------------------------------------------------------
                                                             14,093      1,021,001        877,047        (14,050)     1,898,091
                                                        -----------------------------------------------------------------------
OPERATING INCOME (LOSS)                                       4,169       (178,677)       156,611           --          (17,897)
                                                        -----------------------------------------------------------------------

EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES
  AND SUBSIDIARIES                                         (274,771)        61,242          1,946        273,808         62,225
                                                        -----------------------------------------------------------------------
OTHER INCOME AND (DEDUCTIONS)
  Interest income                                            18,651          6,183          5,688        (20,055)        10,467
  Interest on long-term debt                                   (641)       (15,118)       (44,884)          --          (60,643)
  Other interest expense                                     (2,474)       (24,275)       (12,113)        20,056        (18,806)
  Dividends on preferred securities of subsidiaries            --             --             --          (17,613)       (17,613)
  Investment loss                                            (8,500)          --             --             --           (8,500)
  Minority interest                                            --              265          5,727           --            5,992
  Other                                                        (605)        12,385           (182)          --           11,598
                                                        -----------------------------------------------------------------------
                                                              6,431        (20,560)       (45,764)       (17,612)       (77,505)
                                                        -----------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
  INCOME TAXES                                             (264,171)      (137,995)       112,793        256,196        (33,177)
INCOME TAX PROVISION (BENEFIT)                               (2,829)       (52,488)        35,817           --          (19,500)
                                                        -----------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS                   (261,342)       (85,507)        76,976        256,196        (13,677)
DISCONTINUED OPERATIONS, NET OF TAXES                          --         (272,791)          --             --         (272,791)
                                                        -----------------------------------------------------------------------
NET INCOME (LOSS)                                          (261,342)      (358,298)        76,976        256,196       (286,468)
DIVIDENDS ON PREFERRED SECURITIES                            17,613           --             --          (17,613)          --
                                                        -----------------------------------------------------------------------

NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK            $  (278,955)   $  (358,298)   $    76,976    $   273,809    $  (286,468)
-------------------------------------------------------------------------------------------------------------------------------

Twelve Months Ended December 31, 1997
(in Thousands)
                                                        -----------------------------------------------------------------------
OPERATING REVENUES                                      $    17,607    $   807,236    $ 1,253,679        (14,688)   $ 2,063,834
                                                        -----------------------------------------------------------------------
OPERATING EXPENSES
  Cost of gas                                                 9,749        774,931        632,229        (10,090)     1,406,819
  Operation and maintenance                                   2,281         34,571        282,640         (4,598)       314,894
  Depreciation, depletion and amortization                    2,279          1,721        103,703           --          107,703
  Property and other taxes                                    1,679          1,060         60,744           --           63,483
                                                        -----------------------------------------------------------------------
                                                             15,988        812,283      1,079,316        (14,688)     1,892,899
                                                        -----------------------------------------------------------------------
OPERATING INCOME                                              1,619         (5,047)       174,363           --          170,935
                                                        -----------------------------------------------------------------------

EQUITY IN EARNINGS OF JOINT VENTURES AND SUBSIDIARIES       144,834         45,756          1,199       (142,730)        49,059
                                                        -----------------------------------------------------------------------
OTHER INCOME AND (DEDUCTIONS)
  Interest income                                            16,200          6,218          4,659        (16,071)        11,006
  Interest on long-term debt                                    408        (11,080)       (45,526)          --          (56,198)
  Other interest expense                                     (1,253)       (15,225)        (8,664)        16,359         (8,783)
  Dividends on preferred securities of subsidiaries            --             --             --          (14,433)       (14,433)
  Minority interest                                            --              (82)        (1,882)          --           (1,964)
  Other                                                          74         10,218            536           --           10,828
                                                        -----------------------------------------------------------------------
                                                             15,429         (9,951)       (50,877)       (14,145)       (59,544)
                                                        -----------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES       161,882         30,758        124,685       (156,875)       160,450
INCOME TAX PROVISION                                          2,573          9,142         45,665           --           57,380
                                                        -----------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS                           159,309         21,616         79,020       (156,875)       103,070
DISCONTINUED OPERATIONS, NET OF TAXES                          --           30,159           --             --           30,159
                                                        -----------------------------------------------------------------------
NET INCOME                                                  159,309         51,775         79,020       (156,875)       133,229
DIVIDENDS ON PREFERRED SECURITIES                            14,433           --             --          (14,433)          --
                                                        -----------------------------------------------------------------------

NET INCOME AVAILABLE FOR COMMON STOCK                   $   144,876    $    51,775    $    79,020    $  (142,442)   $   133,229
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>




                                      62
<PAGE>   68


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF OPERATIONS                             MCN                                  Eliminations
Twelve Months Ended December 31, 1996                       and Other                                           and  Consolidated
(in Thousands)                                            Susidiaries         MCNIC       MichCon         Reclasses         Total
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>            <C>            <C>            <C>
OPERATING REVENUES                                        $    17,469    $   640,651    $ 1,258,785    $   (13,427)   $ 1,903,478
                                                          -----------------------------------------------------------------------

OPERATING EXPENSES
  Cost of gas                                                   9,655        601,318        636,594        (10,011)     1,237,556
  Operation and maintenance                                       785         29,722        294,281         (3,416)       321,372
  Depreciation, depletion and amortization                      1,940          1,435         98,147           --          101,522
  Property and other taxes                                      2,134          1,074         61,762           --           64,970
                                                          -----------------------------------------------------------------------
                                                               14,514        633,549      1,090,784        (13,427)     1,725,420
                                                          -----------------------------------------------------------------------
OPERATING INCOME                                                2,955          7,102        168,001           --          178,058
                                                          -----------------------------------------------------------------------

EQUITY IN EARNINGS OF JOINT VENTURES AND SUBSIDIARIES         152,368         15,915            886       (151,302)        17,867
                                                          -----------------------------------------------------------------------
OTHER INCOME AND (DEDUCTIONS)
  Interest income                                               5,302          3,013          3,900         (5,188)         7,027
  Interest on long-term debt                                      114         (7,210)       (40,703)          --          (47,799)
  Other interest expense                                       (1,218)        (5,122)        (8,012)         5,188         (9,164)
  Dividends on preferred securities of subsidiaries              --             --             --           (5,001)        (5,001)
  Minority interest                                              --              (71)          (988)          --           (1,059)
  Other                                                           190          5,376         (1,756)          --            3,810
                                                          -----------------------------------------------------------------------
                                                                4,388         (4,014)       (47,559)        (5,001)       (52,186)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES         159,711         19,003        121,328       (156,303)       143,739
INCOME TAX PROVISION                                            1,814          6,496         41,486           --           49,796
                                                          -----------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS                             157,897         12,507         79,842       (156,303)        93,943
DISCONTINUED OPERATIONS, NET OF TAXES                            --           56,397           --             --           56,397
                                                          -----------------------------------------------------------------------
NET INCOME                                                    157,897         68,904         79,842       (156,303)       150,340
DIVIDENDS ON PREFERRED SECURITIES                               4,983           --               18         (5,001)          --
                                                          -----------------------------------------------------------------------

NET INCOME AVAILABLE FOR COMMON STOCK                     $   152,914    $    68,904    $    79,824    $  (151,302)   $   150,340
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Twelve Months Ended December 31, 1998
(in Thousands)
                                                          -----------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES                   $    72,476    $   (68,749)   $   217,918    $   (68,923)   $   152,722
                                                          -----------------------------------------------------------------------

CASH FLOW FROM FINANCING ACTIVITIES
  Notes payable, net                                          260,771         65,006        (20,522)         2,227        307,482
  Capital contributions received from affiliates, net            --          236,851           --         (236,851)          --
  Dividends paid                                              (82,239)          --          (46,084)        46,084        (82,239)
  Preferred securities dividends paid                         (17,613)          --             --           17,613           --
  Issuance of common stock                                     20,192           --             --             --           20,192
  Issuance of preferred securities                             96,850           --             --             --           96,850
  Issuance of long-term debt                                     --          305,709        153,052           --          458,761
  Long-term commercial paper and bank borrowings, net            --           17,299           --             --           17,299
  Retirement of long-term debt and preferred securities      (100,365)      (102,153)      (126,292)          --         (328,810)
  Other                                                          --            8,243           --             --            8,243
                                                          -----------------------------------------------------------------------

   Net cash provided from (used for) financing
     activities                                               177,596        530,955        (39,846)      (170,927)       497,778
                                                          -----------------------------------------------------------------------

CASH FLOW FROM INVESTING ACTIVITIES
  Capital expenditures                                        (11,024)      (318,276)      (153,475)          --         (482,775)
  Acquisitions                                                   --          (42,429)          --             --          (42,429)
  Investment in debt and equity securities, net                  --           48,527        (30,446)          (250)        17,831
  Investment in joint ventures and subsidiaries              (238,951)      (187,423)           214        236,851       (189,309)
  Sale of property and joint venture interests                  1,143         49,463           --           (3,421)        47,185
  Other                                                           137        (28,151)        (2,115)         6,670        (23,459)
                                                          -----------------------------------------------------------------------

   Net cash used for investing activities                    (248,695)      (478,289)      (185,822)       239,850       (672,956)
                                                          -----------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS            1,377        (16,083)        (7,750)          --          (22,456)
CASH AND CASH EQUIVALENTS, JANUARY 1                               23         25,119         14,353           --           39,495
                                                          -----------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, DECEMBER 31                    $     1,400    $     9,036    $     6,603    $      --      $    17,039
---------------------------------------------------------------------------------------------------------------------------------

</TABLE>





                                      63
<PAGE>   69

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS                         MCN                           Eliminations
Twelve Months Ended December 31, 1997                             and Other                                    and Consolidated
(in Thousands)                                                  Susidiaries      MCNIC       MichCon     Reclasses        Total
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>          <C>          <C>          <C>          <C>
NET CASH FLOW FROM OPERATING ACTIVITIES                           $  97,490    $ 148,242    $ 187,263    $ (89,611)   $ 343,384
                                                                  -------------------------------------------------------------

CASH FLOW FROM FINANCING ACTIVITIES
  Notes payable, net                                                   --         94,513      (23,435)      (3,078)      68,000
  Capital contributions received from (distributions paid to)
    affiliates, net                                                  (3,985)     603,150         --       (599,165)        --
  Dividends paid                                                    (72,851)        --        (40,000)      40,000      (72,851)
  Preferred securities dividends paid                               (31,090)        --           --         31,090         --
  Issuance of common stock                                          294,402         --           --           --        294,402
  Issuance of preferred securities                                  326,521         --           --           --        326,521
  Issuance of long-term debt                                           --        149,190      124,051         --        273,241
  Long-term commercial paper and bank borrowings, net                  --       (261,822)        --           --       (261,822)
  Retirement of long-term debt and preferred securities                 (55)     (32,315)     (76,854)        --       (109,224)
  Other                                                                --          4,612         --           --          4,612
                                                                  -------------------------------------------------------------

   Net cash provided from (used for) financing activities           512,942      557,328      (16,238)    (531,153)     522,879
                                                                  -------------------------------------------------------------

CASH FLOW FROM INVESTING ACTIVITIES
  Capital expenditures                                               (6,559)    (399,586)    (155,208)          (1)    (561,354)
  Acquisitions                                                         --       (166,553)        --           --       (166,553)
  Investment in debt and equity securities                             --        (48,441)     (31,375)      16,693      (63,123)
  Investment in joint ventures and subsidiaries                    (604,750)    (151,360)        (304)     603,772     (152,642)
  Sale of property and joint venture interests                         --         67,365         --           --         67,365
  Other                                                                  56       (1,484)      20,205          300       19,077
                                                                  -------------------------------------------------------------
   Net cash used for investing activities                          (611,253)    (700,059)    (166,682)     620,764     (857,230)
                                                                  -------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   (821)       5,511        4,343         --          9,033
CASH AND CASH EQUIVALENTS, JANUARY 1                                    844       19,608       10,010         --         30,462
                                                                  -------------------------------------------------------------

CASH AND CASH EQUIVALENTS, DECEMBER 31                            $      23    $  25,119    $  14,353    $    --      $  39,495
-------------------------------------------------------------------------------------------------------------------------------

Twelve Months Ended December 31, 1996
(in Thousands)

                                                                  -------------------------------------------------------------
Net Cash Flow From Operating Activities                           $  38,535    $  84,678    $ 101,694    $ (26,575)   $ 198,332
                                                                  -------------------------------------------------------------

CASH FLOW FROM FINANCING ACTIVITIES
  Notes payable, net                                                   --         19,000       68,491         --         87,491
  Capital contributions received from (distributions paid to)
    affiliates, net                                                  (3,069)      41,195        1,614      (39,740)        --
  Dividends paid                                                    (62,875)        --        (11,263)      11,263      (62,875)
  Preferred securities dividends paid                               (12,356)        --            (54)      12,410         --
  Issuance of common stock                                           17,264         --           --           --         17,264
  Issuance of preferred securities                                   77,218         --           --           --         77,218
  Issuance of long-term debt                                           --        328,895       69,645         --        398,540
  Long-term commercial paper and bank borrowings, net                  --        (62,835)        --           --        (62,835)
  Retirement of long-term debt and preferred securities                 (55)      (1,701)      (6,384)           1       (8,139)
  Other                                                              (6,249)        --           --           --         (6,249)
                                                                  -------------------------------------------------------------
   Net cash provided from financing activities                        9,878      324,554      122,049      (16,066)     440,415
                                                                  -------------------------------------------------------------

Cash Flow From Investing Activities
  Capital expenditures                                               (5,474)    (392,181)    (212,668)        --       (610,323)
  Acquisitions                                                         --       (133,201)        --           --       (133,201)
  Investment in debt and equity securities                             --        (11,313)     (15,590)        --        (26,903)
  Investment in joint ventures and subsidiaries                     (42,809)     (35,793)        (278)      42,663      (36,217)
  Sale of property and joint venture interest                          --         36,621         --           --         36,621
  Sale of Genix                                                        --        132,889         --           --        132,889
         Other                                                          546        2,732        6,334          (22)       9,590
                                                                  -------------------------------------------------------------
   Net cash used for investing activities                           (47,737)    (400,246)    (222,202)      42,641     (627,544)
                                                                  -------------------------------------------------------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                               676        8,986        1,541         --         11,203
CASH AND CASH EQUIVALENTS, JANUARY 1                                    168       10,622        8,469         --         19,259
                                                                  -------------------------------------------------------------
CASH AND CASH EQUIVALENTS, DECEMBER 31                            $     844    $  19,608    $  10,010    $    --      $  30,462
-------------------------------------------------------------------------------------------------------------------------------

</TABLE>




                                      64
<PAGE>   70
RESPONSIBILITIES FOR FINANCIAL STATEMENTS

The consolidated financial statements of MCN Energy Group Inc. were prepared by
management, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and, as such, include amounts based on judgments of management.
Financial information elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.

Management is further responsible for maintaining internal controls designed to
provide reasonable assurance that the books and records reflect the transactions
of MCN and its subsidiaries and that established policies and procedures are
carefully followed. Perhaps the most important feature in internal control is
that it is continually reviewed for its effectiveness and is augmented by a
strong internal audit program.

Deloitte & Touche LLP, independent certified public accountants, is engaged to
audit the consolidated financial statements of MCN and issue reports thereon.
Their audit is conducted in accordance with generally accepted auditing
standards that comprehend the consideration of internal control and tests of
transactions to the extent necessary to form an independent opinion on the
financial statements prepared by management.

MCN's Board of Directors, through its Audit Committee, is responsible for: (1)
ensuring that management fulfills its responsibilities in the preparation of the
consolidated financial statements, and (2) engaging the independent public
accountants. The Committee reviews the scope of the audits and the accounting
principles being applied in financial reporting. The independent public
accountants, representatives of management and the internal auditors meet
regularly (separately and jointly) with the Committee to review the activities
of each and to ensure that each is properly discharging its responsibilities.


Alfred R. Glancy III


Alfred R. Glancy III
Chairman, President and Chief Executive Officer



Howard L. Dow III


Howard L. Dow III
Senior Vice President, Treasurer
and Chief Financial Officer



Gerard Kabzinski


Gerard Kabzinski
Vice President and Controller


INDEPENDENT AUDITORS' REPORT

To the Board of Directors of MCN Energy Group Inc.:

We have audited the accompanying consolidated statements of financial position
of MCN Energy Group Inc. and subsidiaries (the "Company"), as of December 31,
1998 and 1997, and the related consolidated statements of operations, cash
flows, and shareholders' equity for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.

As discussed in Note 1b, the accompanying 1998 and 1997 financial statements
have been restated.

DELOITTE & TOUCHE LLP

Detroit, Michigan
February 25, 1999 (June 7, 1999 as to the effects of the matters described in
Note 1b)

                                      65
<PAGE>   71

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
None.
                                    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 included herein, see the
        section titled "Financial Statements and Supplementary Data" on page 38
        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.

                                       66
<PAGE>   72

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, June 7, 1999 as to the effects of the
matters described in Note 1b (which expresses an unqualified opinion and
includes an explanatory paragraph relating to the restatement described in Note
1b); such consolidated financial statements and report are included in the
Company's Annual Report on Form 10-K/A.  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.

DELOITTE & TOUCHE LLP
Detroit, Michigan
February 25, 1999 (June 7, 1999 as to the effects of the matters described in
Note 1b)

                                       67
<PAGE>   73

                                  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
    page 44.

(2) Reference is made to Note 13b to the Consolidated Financial Statements
    page 51.


                                       68
<PAGE>   74

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>

                                       69
<PAGE>   75

<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>

                                       70
<PAGE>   76

<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.*
   21-1    List of MCN Subsidiaries.
   23-1    Independent Auditors' Consent -- Deloitte & Touche LLP.*
   24-1    Powers of Attorney.
   24-2    Power of Attorney.*
   27-1    Financial Data Schedule-1998.*
   27-2    Financial Data Schedule-1997.*
</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.

                                       71
<PAGE>   77

                                   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
                                                       June 9, 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        June 9, 1999
---------------------------------------------    Chief Executive Officer
            Alfred R. Glancy III

                      *                          Senior Vice President, Treasurer         June 9, 1999
---------------------------------------------    and Chief Financial Officer
            Howard L. Dow III

           /s/ Gerard F. Kabzinski               Vice President and Controller            June 9, 1999
---------------------------------------------
             Gerard F. Kabzinski

                      *                          Director                                 June 9, 1999
---------------------------------------------
               James G. Berges

                      *                          Director                                 June 9, 1999
---------------------------------------------
              Stephen E. Ewing

                      *                          Director                                 June 9, 1999
---------------------------------------------
               Roger Fridholm

                      *                          Director                                 June 9, 1999
---------------------------------------------
             Frank M. Hennessey

                      *                          Director                                 June 9, 1999
---------------------------------------------
             Thomas H. Jeffs II

                      *                          Director                                 June 9, 1999
---------------------------------------------
             Helen O. Petrauskas

                      *                          Director                                 June 9, 1999
---------------------------------------------
               Howard F. Sims

                      *                          Director                                 June 9, 1999
---------------------------------------------
              Bill M. Thompson

        *By: /s/ GERARD F. KABZINSKI
   ---------------------------------------
             Gerard F. Kabzinski
              Attorney-in-Fact
</TABLE>

                                       72
<PAGE>   78

                                 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>   79

<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>   80

<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.*
   21-1    List of MCN Subsidiaries.
   23-1    Independent Auditors' Consent -- Deloitte & Touche LLP.*
   24-1    Powers of Attorney.
   24-2    Power of Attorney.*
   27-1    Financial Data Schedule-1998.*
   27-2    Financial Data Schedule-1997.*
</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.