---



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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FORM 10-K

|           |  |  |                                                                                               
|---------- |  |  | ----------------------------------------------------------------------------------------------
|(Mark One) |  | 
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  | 
|[X]        |  |  | ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)       OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  | For the fiscal year ended December 31, 1999, or                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|           |  |  |                                                                                               
|[  ]       |  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _______

Commission file number 1-7310

Michigan Consolidated Gas Company, a Michigan corporation, meets the
conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and
is, therefore, filing this form with the reduced disclosure format.

MICHIGAN CONSOLIDATED GAS COMPANY
(Exact name of registrant as specified in its charter)



| |                                 |  |                     |  | 
| | ------------------------------- |  | ------------------- |  | 
| | Michigan                        |  | 38-0478040          |  | 
| | (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)

313-965-2430(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X

All of the registrants 10,300,000 outstanding shares of common stock, par
value $1 per share, are indirectly owned by MCN Energy Group Inc.



Documents
Incorporated by Reference: None



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|                            |  |                                                                                                                                                                                                                                                                                                                                                   
|--------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Antrim Gas                  |  | Natural gas produced from shallow wells in the Devonian
(Antrim) shale formations.                                                                                                                                                                                                                                                                
|                           
|                           
|                           
|                           
|End User Transportation     |  | A gas delivery service historically provided to
large-volume commercial and industrial customers who
purchase natural gas directly from producers or brokerage
companies. Under MichCons customer choice program that
began in 1999, this service is also provided to
residential customers and small-volume commercial and
industrial customers.
|                           
|                           
|                           
|                           
|FERC                        |  | Federal Energy Regulatory Commission; a federal agency
that determines the rates and regulations of interstate
pipelines.                                                                                                                                                                                                                         
|                           
|                           
|                           
|                           
|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.                                                                                                                                                                                                       
|                           
|                           
|                           
|                           
|MCN                         |  | MCN Energy Group Inc. and its 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.                                                                                                                                                                                                                            

ii



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GLOSSARY (CONCLUDED)

|                      |  |                                                                                                                                                           
|--------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|MPSC                  |  | Michigan Public Service Commission; a state agency that
regulates, among other things, the intrastate aspects of
the natural gas industry within Michigan.
|                     
|                     
|                     
|                     
|Normal Weather        |  | The average daily temperature within MichCons service
area during a recent 30-year period.                                                               
|                     
|                     
|                     
|                     
|Spot Market           |  | The buying and selling of natural gas on a short-term
basis, typically month-to-month.                                                                    
|                     
|                     
|                     
|                     
|Units of Measurement:
|                     
|                     
|                     
|                     
|Bcf                   |  | Billion cubic feet of gas.                                                                                                                                
|                     
|                     
|                     
|                     
|Mcf                   |  | Thousand cubic feet of gas.                                                                                                                               
|                     
|                     
|                     
|                     
|MMcf                  |  | Million cubic feet of natural gas.                                                                                                                        
|                     
|                     
|                     
|                     
|/d                    |  | Added to various units of measure to denote units per
day.                                                                                                

iii



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TABLE OF CONTENTS



|                                                                                             |  |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|ITEM 1. BUSINESS                                                                            
|ITEM 2. PROPERTIES                                                                          
|ITEM 3. LEGAL PROCEEDINGS                                                                   
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                 
|ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS               
|ITEM 6. SELECTED FINANCIAL DATA                                                             
|ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS                                                
|ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                         
|ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                         
|ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
|ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                 
|ITEM 11. EXECUTIVE COMPENSATION                                                             
|ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                     
|ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                     
|ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K                    
|SIGNATURES                                                                                  

TABLE OF CONTENTS

|           |  |                                                                                       |  |        |    | 
|---------- |  | ------------------------------------------------------------------------------------- |  | ------ | -- | 
|           |  |                                                                                       |  | PAGE  
|CONTENTS   |  |                                                                                       |  | NUMBER
|           |  |                                                                                       |  |       
|PART I    
|Item 1.    |  | Business                                                                              |  |        | 1  | 
|          
|          
|          
|          
|Item 2.    |  | Properties                                                                            |  |        | 13 | 
|          
|          
|          
|          
|Item 3.    |  | Legal Proceedings                                                                     |  |        | 14 | 
|          
|          
|          
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  |        | 16 | 
|          
|          
|          
|          
|PART II   
|          
|          
|          
|          
|Item 5.    |  | Market for Registrants Common Equity and Related Stockholder
Matters                 |  |        | 17
|          
|          
|          
|          
|Item 6.    |  | Selected Financial Data                                                               |  |        | 18 | 
|          
|          
|          
|          
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations |  |        | 19 | 
|          
|          
|          
|          
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |        | 29 | 
|          
|          
|          
|          
|Item 8.    |  | Financial Statements and Supplementary Data                                           |  |        | 30 | 
|          
|          
|          
|          
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure  |  |        | 56 | 
|          
|          
|          
|          
|PART III  
|          
|          
|          
|          
|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  |        | 57 | 
|          
|          
|          
|          
|Item 11.   |  | Executive Compensation                                                                |  |        | 58 | 
|          
|          
|          
|          
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  |        | 59 | 
|          
|          
|          
|          
|Item 13.   |  | Certain Relationships and Related Transactions                                        |  |        | 60 | 
|          
|          
|          
|          
|PART IV   
|          
|          
|          
|          
|Item 14.   |  | Exhibits, Financial Statement Schedule, and Reports on Form 8- K                      |  |        | 61 | 
|          
|          
|          
|          
|SIGNATURES |  |                                                                                       |  |        | 64 | 

iv



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FORWARD-LOOKING STATEMENTS

This Form 10-K includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve certain risks and uncertainties that may cause actual future results to
differ materially from those contemplated, projected, estimated or budgeted in
such forward-looking statements. Factors that may impact forward-looking
statements include, but are not limited to, the following: (i) the effects of
weather and other natural phenomena; (ii) increased competition from other
energy suppliers as well as alternative forms of energy; (iii) the capital
intensive nature of MichCons business; (iv) economic climate and growth in the
geographic areas in which MichCon does business; (v) the uncertainty of gas
reserve estimates; (vi) the timing and extent of changes in commodity prices for
natural gas, electricity and crude oil; (vii) conditions of capital markets and
equity markets; (viii) the effects of changes in governmental policies and
regulatory actions, including income taxes, environmental compliance and
authorized rates; (ix) the timing, nature and impact of Year 2000 activities;
and (x) the timing and completion of the pending merger.

PART I

ITEM 1. BUSINESS

Michigan Consolidated Gas Company (MichCon or the Company) is a Michigan
corporation organized in 1898 and with its predecessors, has been in business
for 150 years. MichCon, an indirect, wholly owned subsidiary of MCN Energy Group
Inc. (MCN), is a natural gas utility primarily engaged in the distribution and
transmission of natural gas in the State of Michigan. MichCon also has
subsidiaries involved in the gathering and transmission of natural gas in
northern Michigan. MichCon operates one of the largest natural gas distribution
and transmission systems in the United States and the largest in Michigan.
MichCons non-regulated operations are not significant.

MichCon serves approximately 1.2 million customers in the Detroit, Grand Rapids,
Ann Arbor, Traverse City, and Muskegon metropolitan areas and in various other
communities throughout Michigan. MichCon had approximately $2.3 billion in
assets at December 31, 1999 and revenues of approximately $1.1 billion in 1999.
On December 31, 1999, MichCon had 2,712 employees.

Pending Merger

MCN and DTE Energy Company (DTE) have signed a definitive merger agreement,
dated October 4, 1999, under which DTE will acquire all outstanding shares of
MCN common stock. The boards of directors and the shareholders of both companies
have approved the proposed merger. The transaction is subject to regulatory
approvals and other customary merger conditions. The transaction is expected to
close in mid-2000.

Financial and Operating Information

MichCons earnings for 1999 were a record $106.3 million, an increase of $29.3
million from 1998 earnings of $77.0 million. The comparison was impacted by
merger costs in 1999 and the write-down of certain gas gathering properties in
1998. The earnings improvement reflects contributions from MichCons new gas
sales program that began in January 1999 as well as the impact of more favorable
weather. The gas sales program allowed MichCon to continue its record of solid
financial performance producing returns on equity of 15.4% in 1999, 12.2% in
1998 and 13.3% in 1997.

1



---









ITEM 1. BUSINESS (CONTINUED)

Excluding the write-down, MichCon had 1998 earnings of $88.2 million, an
improvement of $9.2 million over 1997 earnings of $79.0 million. The earnings
comparison was impacted by variations in weather and cost-saving initiatives
resulting in significantly lower operating costs.

For a detailed discussion of MichCons results of operations refer to Item 7.
Managements Discussion &Analysis (MD&A), page 19 of this report. A discussion
of the services provided by MichCon, and the amount and percentage of revenue
contributed from such services follows:

|                            |  |      |           |      |  |      |       |   |  |   |           |  |  |  |       |   |  |   |           |  |  |  |       |  
|--------------------------- |  | ---- | --------- | ---- |  | ---- | ----- | - |  | - | --------- |  |  |  | ----- | - |  | - | --------- |  |  |  | ----- | -
|Revenue by Service         
|(in Thousands)              |  | 1999 |           | 1998 |  | 1997
|                            |  |      |           |      |  |     
|Gas Sales                   |  | $    | 907,471   |      |  |      | 79.9  | % |  | $ | 823,746   |  |  |  | 79.7  | % |  | $ | 1,062,794 |  |  |  | 84.8  | %
|                           
|                           
|                           
|                           
|End User Transportation     |  |      | 103,556   |      |  |      | 9.1   |   |  |   | 82,016    |  |  |  | 7.9   |   |  |   | 84,516    |  |  |  | 6.7   |  
|                           
|                           
|                           
|                           
|Intermediate Transportation |  |      | 57,783    |      |  |      | 5.1   |   |  |   | 63,218    |  |  |  | 6.1   |   |  |   | 55,221    |  |  |  | 4.4   |  
|                           
|                           
|                           
|                           
|Other                       |  |      | 66,929    |      |  |      | 5.9   |   |  |   | 64,678    |  |  |  | 6.3   |   |  |   | 51,148    |  |  |  | 4.1   |  
|                            |  |      |           |      |  |      |       |   |  |   |           |  |  |  |       |   |  |   |           |  |  |  |       |  
|                            |  | $    | 1,135,739 |      |  |      | 100.0 | % |  | $ | 1,033,658 |  |  |  | 100.0 | % |  | $ | 1,253,679 |  |  |  | 100.0 | %
|                            |  |      |           |      |  |      |       |   |  |   |           | 



| |  | Gas Sales-Includes the sale and delivery of natural gas primarily to
residential and small-volume commercial and industrial customers.                                                                                                                                                                                                                                                                                                                                                                                                                            
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | End User Transportation-A gas delivery service provided primarily to
large-volume commercial and industrial customers. Additionally, the service
is provided to residential customers, and small-volume commercial and
industrial customers who have elected to participate in MichCons
experimental three-year customer choice program that began in April 1999.
End user transportation customers purchase natural gas directly from
producers or brokerage companies and utilize MichCons pipeline network to
transport the gas to their facilities or homes.
| 
| |  | 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. Intermediate transportation customers utilize MichCons
gathering and high pressure transmission system to transport the gas to
storage fields, processing plants, pipeline interconnections or other
locations.                                                                                                                                                                          
| 
| |  | Other-Includes revenues from providing appliance maintenance, facility
development, meter reading, and other energy-related services.                                                                                                                                                                                                                                                                                                                                                                                                                             

MichCon expects to achieve modest revenue growth through initiatives to expand
its gas markets, its residential, commercial and industrial customer base, as
well as by providing new energy-related services that capitalize on its
expertise, capabilities and efficient systems.

|                            |  |      |       |      |  |      |       |  |  |  |       | 
|--------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|Operating Statistics (Bcf)  |  | 1999 |       | 1998 |  | 1997
|                            |  |      |       |      |  |     
|Gas Sales                   |  |      | 178.2 |      |  |      | 168.9 |  |  |  | 205.8 | 
|                           
|                           
|                           
|                           
|End User Transportation     |  |      | 151.7 |      |  |      | 140.1 |  |  |  | 145.0 | 
|                           
|                           
|                           
|                           
|Intermediate Transportation |  |      | 531.9 |      |  |      | 537.5 |  |  |  | 586.4 | 
|                            |  |      |       |      |  |      |       |  |  |  |       | 
|                           
|                           
|                           
|                           
|                            |  |      | 861.8 |      |  |      | 846.5 |  |  |  | 937.2 | 
|                            |  |      |       |      |  |      |       |  |  |  |       | 

2



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ITEM 1. BUSINESS (CONTINUED)

GAS SALES

Strategy and Competitive Environment

Competition in the gas sales market comes primarily from (1) other natural gas
providers, and (2) alternative fuels such as electricity, propane and, to a
lesser degree, oil and wood.

Other natural gas providers-MichCon has implemented its Regulatory Reform Plan,
which includes a comprehensive experimental three-year customer choice program.
The customer choice program began in April 1999, and approximately 70,000
customers chose to purchase natural gas from suppliers other than MichCon. Year
two and year three of the program begin April 1 of 2000 and 2001, respectively.
The number of customers allowed to participate in the program is limited to
150,000 in 2000 and 225,000 in 2001. There is also a volume limitation on
commercial and industrial participants of 20 billion cubic feet (Bcf) in 2000
and 30 Bcf in 2001.

The State of Michigan is continuing its initiatives designed to give all of
Michigans natural gas customers added choices and the opportunity to benefit
from lower gas costs resulting from competition. Natural gas choice legislation
is before the Michigan legislature, and if approved, would: (1) give any qualified gas supplier the
opportunity to compete; (2) phase in gas choice for all Michigan customers over
three to five years; and (3) replace the regulatory gas
commodity pricing process with one
based on market prices which allow all customers to get the benefits of
market-based pricing whether they elect to stay with their utility or choose
another gas commodity supplier. Natural gas choice legislation could become effective prior to
the end of MichCons three-year customer choice program that ends in March 2002,
and therefore accelerate the transition to a competitive natural gas market.

Alternative fuels-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.

MichCon continues to take steps to become the preferred provider of natural gas
and high-value energy services within Michigan in order to achieve competitive
financial results. To accomplish this, MichCon is positioning itself to respond
to changes in regulation and increased competition by reducing its cost of
operations, maintaining a safe and reliable system for customers, and focusing
on meeting the needs of the marketplace.

Business Developments

MichCon was able to achieve record earnings during 1999, primarily as a result
of margins generated under its new three-year gas sales program. As discussed in
detail in the Regulatory Reform Plan section on page 8 of this report, the gas
sales program allows MichCon to profit from its ability to purchase gas at less
than $2.95 per thousand cubic feet (Mcf). Gas sales margins are expected to be
lower in future years as MichCons fixed-price supplies in 2000 and 2001 are at
prices higher than those paid in 1999. Additionally, gas sales margins will
be impacted if additional customers choose to purchase their gas from other
suppliers.

The gas sales service in 1999 represented approximately 21% of total deliveries,
80% of total revenues and 65% of total gross margins.

3



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ITEM 1. BUSINESS (CONTINUED)

END USER TRANSPORTATION

Strategy and Competitive Environment

The primary focus of competition in this market is cost and reliability. Some
large commercial and industrial customers have the capacity to switch to
alternative fuel sources such as coal, electricity, oil and steam. If these
customers were to choose an alternative fuel source, they would not have a need
for MichCons end user transportation service. In addition, some of these
customers could bypass MichCons pipeline system and obtain gas directly from an
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. Since 1988, only one of MichCons industrial customers has
bypassed its distribution system. MichCon competes against alternative fuel
sources by providing competitive pricing and reliable supply through the use of
its extensive storage capacity.

Business Developments

As of December 1999, MichCon had end user transportation agreements with
customers representing annual volumes of 159.4 Bcf. Approximately 69% of these
volumes are under contracts that extend to 2001 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 2000 and relate to a large number of low-volume users with relatively low
price sensitivity.

MichCon 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 addition, almost all significant customers who
could bypass MichCons systems are under long-term transportation contracts. In
1999, approximately 18 Bcf of MichCons end user transportation deliveries were
to customers who chose natural gas over coal.

MichCon has implemented its experimental three-year customer choice program, and
approximately 70,000 customers have chosen to purchase natural gas from
suppliers other than MichCon in 1999. The number of customers allowed to
participate in the program is limited to 150,000 in 2000 and 225,000 in 2001.
MichCon will continue to transport and deliver the gas to the customers
premises or homes. Accordingly, these customers will be reflected as end user
transportation customers rather than gas sales customers.

In 1999, end user transportation services accounted for approximately 18% of
total gas deliveries, 9% of total revenues and 16% of total gross margins.

INTERMEDIATE TRANSPORTATION

Strategy and Competitive Environment

MichCons extensive transmission pipeline system has enabled it to generate
markets for transportation services for Michigan gas producers, marketers,
distribution companies and other pipeline companies that range from 500 to 600
Bcf annually. MichCon 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.

4



---



ITEM 1. BUSINESS (CONTINUED)

MichCon is in an excellent position to increase revenues by facilitating the
transportation of new supplies of western Canadian gas from Chicago to 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 Partnership. A MCN subsidiary has a 25% interest
in the $500 million Vector pipeline project. The Vector pipeline is scheduled to
be completed in November 2000, and will provide a transportation link for up to
1Bcf per day of new supply coming into the Chicago area to growing markets in
eastern Canada and the Midwest and Northeast United States. MichCon is pursuing
additional opportunities for transportation services that would further maximize
the use of its transmission infrastructure.

Business Developments

In 1997, MichCon expanded the transportation capacity of its northern Michigan
gathering system and further enhanced this gathering system by purchasing the
44-mile Thunder Bay pipeline. Additionally, MichCon placed into service a $91
million, 59-mile loop of its existing Milford-to-Belle-River Pipeline. This loop
has improved the overall reliability and efficiency of MichCon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 MichCons customers.
The pipeline expansions and acquisitions were needed to meet increased demand
for intermediate transportation services and to provide significant off-system
transportation opportunities.

In 1999, intermediate transportation services accounted for approximately 61% of
total gas deliveries, 5% of total revenues and 9% of total gross margins. While
intermediate transportation volumes are a significant part of total deliveries,
profit margins on this service are considerably less than margins on gas sales
and end user transportation services.

Effect of Weather

MichCons gas sales, end user transportation and intermediate transportation
volumes, revenues and net income are impacted by weather. Given the seasonal
nature of the business, revenues and net income are concentrated in the first
and fourth quarters of the calendar year. By the end of the first quarter, the
heating season is largely over, and MichCon typically incurs substantially
reduced revenues and earnings in the second quarter and losses in the third
quarter. The seasonal nature of MichCons operations has become more pronounced
as a result of its new gas sales program. Refer to Item 7.
MD&A, page 19 of
this report for additional discussion relating to the effect of weather.

Gas Supply

MichCon 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. As a result of MichCons
Regulatory Reform Plan, MichCon entered into new base supply contracts with its
suppliers in 1998, ensuring price stability and supply reliability. MichCons
geographic diversity of supply, coupled with its 124 Bcf of storage capacity,
ensures it will be able to meet the requirements of its existing and future
customers with reliable supplies of natural gas at a known cost. MichCon
benefits from the Regulatory Reform Plan by being able to profit on the sale of
gas as a result of: (1) the suspension of the Gas Cost Recovery (GCR) mechanism;
and (2) its ability to purchase gas at less than $2.95 per Mcf, which is the
fixed gas commodity component of its sales rate. MichCon has taken

5



---



ITEM 1. BUSINESS (CONTINUED)

advantage of this opportunity and secured a substantial portion of its expected
warmer-than-normal supply requirements in 2000 and 2001 at prices that help
ensure continued profit contributions. Refer to Regulatory, Rate and
Governmental Matters that follows for a discussion regarding the Regulatory
Reform Plan.

Following is a listing of MichCons sources of gas supply:

|                                   |                      |      |       |      |  |      |       |      |  |  |       |      | 
|---------------------------------- | -------------------- | ---- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|Gas Supply (Bcf)                   |                      | 1999 |       | 1998 |  | 1997
|                                   |                      |      |       |      |  |     
|Long Term:                        
|                                  
|                                  
|                                  
|                                  
|                                   | Michigan suppliers   |      |       | 99.4 |  |      |       | 94.4 |  |  |       | 97.7 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Interstate suppliers |      |       | 63.9 |  |      |       | 17.6 |  |  |       | 16.1 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Canadian suppliers   |      |       | 29.9 |  |      |       | 25.9 |  |  |       | 28.2 | 
|                                  
|                                  
|                                  
|                                  
|Spot Market                        |                      |      | 1.2   |      |  |      | 26.5  |      |  |  | 57.2  |     
|                                  
|                                  
|                                  
|                                  
|Exchange Gas Receipts (Deliveries) |                      |      | (7.5  | )    |  |      | 11.2  |      |  |  | (2.3  | )   
|                                   |                      |      |       |      |  |      |       |      |  |  |       |     
|                                   |                      |      | 186.9 |      |  |      | 175.6 |      |  |  | 196.9 |     
|                                   |                      |      |       |      |  |      |       |      |  |  |       |     

MichCon has long-term firm transportation agreements expiring on various dates
through 2011 with ANR Pipeline Company (ANR), Panhandle Eastern Pipeline Company
(Panhandle), Viking Gas Transmission Company (Viking) and Great Lakes Gas
Transmission Limited Partnership (Great Lakes). ANR was obligated to transport
for MichCon up to 375 MMcf/d of supply through October 1999. Effective in
November 1999, MichCons capacity with ANR was reduced 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 Coast, 117.5 MMcf/d
sourced in the Midcontinent and 50 MMcf/d from Canada. 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 with independent Michigan producers, which expire
on various dates through 2007. Many of these contracts originally tied prices to
spot market indices coupled with transport rates. As a result of an MPSC Order
and individually negotiated settlements, MichCon has successfully amended a
number of these contracts that were previously at above-market prices to a more
competitive level.

At December 31, 1999, 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 their lowest levels. The use of storage capacity also allows
MichCon to lower its peak-day entitlements, thereby reducing interstate pipeline
charges. MichCons gas distribution system has a maximum daily send out
capability of 3.0 Bcf, with the capacity to supply nearly 70% from underground
storage.

6



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ITEM 1. BUSINESS (CONTINUED)

Regulatory, Rate and Governmental Matters

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. MichCon is subject to the requirements of other regulatory agencies
with respect to safety, the environment and health.

7



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ITEM 1. BUSINESS (CONTINUED)

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 began April 1, 1999, with approximately 70,000 customers choosing
to purchase natural gas from suppliers other than MichCon. Year two and year
three of the program begin April 1 of 2000 and 2001, respectively. The number of
customers allowed to participate in the program is limited to 150,000 in 2000
and 225,000 in 2001. There is also a volume limitation on commercial and
industrial participants of 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 generate favorable margins.

The Regulatory Reform Plan also suspended the GCR mechanism for customers who
continue to purchase gas from MichCon, and fixed the gas price component of
MichCons sales rates at $2.95 per Mcf for the three-year period that began in
January 1999. The suspension of the GCR mechanism allows MichCon to profit from
its ability to purchase gas at less than $2.95 per Mcf. Prior to 1999, MichCon
did not generate earnings on the gas commodity portion of its operations. As
part of its gas acquisition strategy, MichCon has entered into fixed-price
contracts at costs below $2.95 per Mcf for a substantial portion of its expected
gas supply requirements through 2001. This strategy has produced favorable
margins in 1999 and is likely to continue producing favorable margins through
2001. The level of margins generated from selling gas will be affected by the
costs of gas supply and the number of customers who ultimately choose to
purchase gas from suppliers other than MichCon under the three-year customer
choice program.

The Plan also encompasses an income sharing mechanism that allows customers to
share in profits when actual returns on equity from utility operations exceed
predetermined thresholds. Although the Plan increases MichCons risk associated
with generating margins that cover its gas costs, management believes this Plan
will have a favorable impact on future earnings.

Proposed Legislation: The State of Michigan is continuing its initiatives
designed to give all of Michigans natural gas customers added choices and the
opportunity to benefit from lower gas costs resulting from competition. Natural
gas choice legislation is before the Michigan legislature and, if approved, would: (1) give any qualified gas supplier
the opportunity to compete; (2) phase in gas choice for all Michigan customers
over three to five years; and (3) replace the regulatory gas
commodity pricing process with
one based on market prices that allows all customers to get the benefits of
market-based pricing whether they elect to stay with their utility or choose
another gas commodity supplier. Natural gas choice legislation could become effective prior to
the end of MichCons three-year customer choice program that
ends in March 2002,
and therefore accelerate the transition to a competitive natural gas market.

General Rate Proceedings: MichCon received MPSC authorization to defer
manufactured gas plant (MGP) investigation and remediation costs in excess of
the $11.7 million previously reserved. In 1999, MichCon depleted the initial
reserve. Costs incurred in excess of the initial reserve are being 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
investigation and remediation costs incurred will be reviewed in a future rate
case.

MichCon filed an application with the MPSC in 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. The Michigan Attorney General appealed the
depreciation order. In June 1999, MichCon received a favorable ruling to this
appeal by the

8



---



ITEM 1. BUSINESS (CONTINUED)

Michigan Court of Appeals, which affirmed the MPSC order approving the lower
depreciation rates without a corresponding gas rate reduction.

9



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ITEM 1. BUSINESS (CONTINUED)

Gas Cost Recovery: Prior to 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 in January 1999, MichCons
Regulatory Reform Plan suspended the GCR mechanism and fixed 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 February 1999, MichCon filed its
final GCR reconciliation case covering gas costs incurred during 1998, which
indicates an overrecovery of $18 million, including interest. Management
believes that the 1998 gas costs were reasonable and prudent and that the MPSC
should approve the gas costs incurred. However, management cannot predict the
outcome of this proceeding. During the first quarter of 1999, MichCon refunded
the overrecovery to customers as a reduction in gas sales rates.

FERC Rate Matters: In February 1998, the
FERC approved a settlement agreement in an ANR rate case entitling MichCon to
refunds totaling $9.4 million. MichCon received $5.5 million of this refund in
April 1998 relating to certain 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.

Other Rate Matters: In March 2000, several shippers on MichCons northern
Michigan gathering system filed a complaint with the MPSC requesting that the
commission issue an order reducing the rate charged for Antrim gas
transportation services from 9 cents to approximately 3.9 to 3.1 cents per Mcf.
The complaint also requests refunds of approximately $21 million for prior
periods during which that rate has been in effect. Management
believes that the commission has no legal authority to order refunds associated with prior
periods. The shippers allege that without the reduced transportation rate,
MichCon would overcollect approximately $28.5 million over the next six years.
While any complaint about rates could result in a commission ordered reduction
in rates, managements preliminary assessment of the complaint is that it is
without merit.

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.

The State of Michigan provides 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 both the 1998 and 1999
fiscal years at $1.1 billion, compared to funding
of $1.0 billion for the 1997 fiscal year. The State of Michigans share of
LIHEAP funds was increased from $54 million in fiscal year 1998 to $59 million
in 1999. MichCon received $12.6 million of these funds in 1999, $.8 million less
than in 1998. Home Heating Credits assisted 69,000 MichCon customers in 1999,
compared to 73,000 in 1998. During 1999, President Clinton signed an
appropriations package that funds LIHEAP at $1.1 billion for fiscal year ending
in September 2000.

10



---



ITEM 1. BUSINESS (CONTINUED)

Environmental Matters

A discussion of environmental matters is included in Item 7, MD&A under the
heading Environmental Matters, page 24 of this report,
and in Item 8. Financial Statements and Supplementary Data, Note 7c
- Commitments and Contingencies under the heading Environmental Matters,
page 39 of this report.

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 that had expired. During
the 1994 to 1999 period, an additional 193 franchises expired. To date, 399
franchises have

11



---



ITEM 1. BUSINESS (CONCLUDED)

been renewed, including 9 renewed in 1998, accounting for gas sales volumes of
approximately 115 MMcf annually, and 8 renewed to date in 1999 representing 161
MMcf annually. Additionally, one new franchise was acquired in 1998. There were
no franchises lost during 1998 or 1999.

As for the 27 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 to remove its
property by any municipality in which
its franchise has expired, 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 (1) acquire and operate MichCons system, (2) construct a new system
or (3) grant a franchise to another privately owned utility to construct or
acquire its own distribution system.

Other Information

Collective Bargaining Agreements: 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 in December 2000.

Other: MichCon is involved in several residential and commercial community
development partnerships.

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 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 along the Detroit River. The development
consists of 35 acres of land, of which 12 are currently undeveloped.

12



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ITEM 2. PROPERTIES

MichCon operates natural gas distribution, transmission and storage facilities
in Michigan. At December 31, 1999, MichCons distribution system included 16,997
miles of distribution mains, 1,096,327 service lines and 1,219,256 active
meters. MichCon owns 2,651 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 properties are being fully
utilized, and new properties are being added to meet the expansion requirements
of existing areas. MichCons capital investments for 1999 totaled $136 million,
which compares with $153 million in 1998 and $155 million in 1997.

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 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 gathering line. Westside Pipeline Company, a wholly owned subsidiary of
MichCon Pipeline, owns an 83% interest in Jordan Valley Pipeline, a 14-mile
gathering line, and the Terra-Hayes Pipeline, an 18-mile 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 90 miles of gathering lines and a 2,400 horsepower compressor station.

The partners in Saginaw Bay Area Limited Partnership have agreed to dissolve the
partnership. Under the terms of the agreement, Saginaw Bay Pipeline Company
would receive the northern portion of the 126-mile gathering line and certain
other assets of the partnership in return for its partnership interest. In
February 2000, the agreement was approved by the MPSC. The dissolution is
expected to become effective by mid-2000.

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.

13



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ITEM 3. LEGAL PROCEEDINGS

In addition to the regulatory proceedings and other matters described in Item
1. Business, MichCon 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
Environmental Protection Agency (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 estimated the cost of the remedy to be approximately $.65
million. 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.
In December 1999, the EPA asked for recovery of its costs which totaled $5.1
million. The EPA has not taken any subsequent action against MichCon. The EPA
may sue MichCon to recover the costs it incurred at the site. If the EPA
institutes and prevails in such a suit, and if the court determines that MichCon
did not have sufficient cause to refuse 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.

Other

Since 1996, MichCon and 200 other natural gas transmission companies, producers,
gatherers and processors of natural gas from across the United States have been
defending claims filed by Jack Grynberg on behalf of the U.S.
Government under the False Claims Act, seeking unspecified damages for

14



---



ITEM 3. LEGAL PROCEEDINGS (CONCLUDED)

alleged underpayment of royalties on federal and Indian lands due to purported
improper measurement of gas. The initial suit was dismissed in 1997 and that
dismissal was affirmed by the District Court of Appeals in October 1998. Mr.
Grynberg refiled that suit in September 1997 in 77 separate federal district
courts. MichCon and MichCon Pipeline Company have been named in one suit in the
U.S. District Court, Eastern District of Michigan. In April 1999, the U.S.
Department of Justice declined intervention and subsequently, the 77 separate
cases were consolidated by the Multidistrict Litigation Panel for pre-trial
proceedings in Wyoming. The case is ongoing and MichCon and MichCon Pipeline are
defending against the case. Management believes that the claims lack merit.

In May 1999, a class action suit was filed in Kansas state court naming
approximately 200 pipeline companies and producers, seeking unspecified damages
for alleged underpayment of royalties due to purported mismeasurement of gas on
all natural gas purchased in the U.S. since 1974. MichCon and MichCon Pipeline
are among those named in this suit. The case was removed to U.S. District Court,
Southern Division of Kansas, where motions to transfer and to consolidate the
case with the Grynberg False Claims Act case have been filed. The company is
defending against these claims and believes they lack merit.

15



---



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Omitted per general instruction I (2) (c) of Form 10-K for wholly owned
subsidiaries (reduced disclosure format).

16



---



PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

All of the 10,300,000 issued and outstanding shares of common stock of MichCon,
par value $1 per share, are indirectly owned by MCN, and constitute 100% of the
voting securities of MichCon. Therefore, no market exists for MichCons common
stock.

MichCon paid cash dividends of $17.5 million in 1999, $46.1 million in 1998 and
$40.0 million in 1997 on its common stock.

17



---



ITEM 6. SELECTED FINANCIAL DATA

|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |       | 
|----------------------------------------------------- | ------------------ | ---- | --------- | ------- | - | ---- | --------- | ------- | - | ---- | --------- | --- |  | - | --------- | ------ |  | - | --------- | ----- | 
|Selected Financial Data                               |                    | 1999 |           | 1998    |   | 1997 |           | 1996    |   | 1995
|                                                      |                    |      |           |         |   |      |           |         |   |     
|(Dollars in thousands)                               
|Income Available for Common Stock                     |                    | $    | 106,336   |         |   | $    | 76,976    |         |   | $    | 79,020    |     |  | $ | 79,824    |        |  | $ | 71,488    |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Cash Dividends Declared on Common Stock               |                    | $    | 17,500    |         |   | $    | 46,084    |         |   | $    | 40,000    |     |  | $ | 11,263    |        |  | $ | 6,500     |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Return on Average Common Shareholders
Equity         |                    |      | 15.4      | %       |   |      | 12.2      | %       |   |      | 13.3      | %   |  |   | 14.7      | %      |  |   | 15.8      | %    
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Property, Plant and Equipment                         |                    | $    | 2,988,318 |         |   | $    | 2,889,020 |         |   | $    | 2,790,352 |     |  | $ | 2,668,294 |        |  | $ | 2,413,120 |      
|                                                     
|                                                     
|                                                     
|                                                     
|Less  accumulated depreciation and
depletion         |                    |      | 1,463,706 |         |   |      | 1,396,940 |         |   |      | 1,322,392 |     |  |   | 1,243,060 |        |  |   | 1,151,160 |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Net property, plant and equipment                     |                    | $    | 1,524,612 |         |   | $    | 1,492,080 |         |   | $    | 1,467,960 |     |  | $ | 1,425,234 |        |  | $ | 1,261,960 |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Total Assets                                          |                    | $    | 2,282,728 |         |   | $    | 2,172,525 |         |   | $    | 2,136,336 |     |  | $ | 2,058,344 |        |  | $ | 1,798,493 |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Capital Expenditures                                  |                    | $    | 135,933   |         |   | $    | 153,475   |         |   | $    | 155,208   |     |  | $ | 212,668   |        |  | $ | 235,767   |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Capitalization
Long-term debt                         |                    | $    | 677,517   |         |   | $    | 615,419   |         |   | $    | 611,763   |     |  | $ | 536,561   |        |  | $ | 501,396   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Long-term capital lease obligations                   |                    |      | 3,392     |         |   |      | 4,416     |         |   |      | 5,344     |     |  |   | 13,757    |        |  |   | 15,168    |      
|                                                     
|                                                     
|                                                     
|                                                     
|Common shareholders equity                           |                    |      | 735,502   |         |   |      | 646,843   |         |   |      | 616,024   |     |  |   | 577,004   |        |  |   | 489,821   |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Total capitalization                                  |                    | $    | 1,416,411 |         |   | $    | 1,266,678 |         |   | $    | 1,233,131 |     |  | $ | 1,127,322 |        |  | $ | 1,006,385 |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Sources of Operating Revenues
Gas sales               |                    | $    | 907,471   |         |   | $    | 853,463   |         |   | $    | 1,079,530 |     |  | $ | 1,058,499 |        |  | $ | 896,707   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Application of (provision for) refunds-net            |                    |      |          |         |   |      | (29,717   | )       |   |      | (16,736   | )   |  |   | 27,346    |        |  |   | 20,473    |      
|                                                     
|                                                     
|                                                     
|                                                     
|End user transportation                               |                    |      | 103,556   |         |   |      | 82,016    |         |   |      | 84,516    |     |  |   | 82,210    |        |  |   | 80,360    |      
|                                                     
|                                                     
|                                                     
|                                                     
|Intermediate transportation                           |                    |      | 57,783    |         |   |      | 63,218    |         |   |      | 55,221    |     |  |   | 48,570    |        |  |   | 31,913    |      
|                                                     
|                                                     
|                                                     
|                                                     
|Storage services                                      |                    |      | 3,906     |         |   |      | 7,243     |         |   |      | 7,630     |     |  |   | 6,956     |        |  |   | 8,857     |      
|                                                     
|                                                     
|                                                     
|                                                     
|Conservation and other assistance programs            |                    |      |          |         |   |      |          |         |   |      | (2,914    | )   |  |   | (2,483    | )      |  |   | 14,499    |      
|                                                     
|                                                     
|                                                     
|                                                     
|Other                                                 |                    |      | 63,023    |         |   |      | 57,435    |         |   |      | 46,432    |     |  |   | 37,687    |        |  |   | 28,004    |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Total operating revenues                              |                    | $    | 1,135,739 |         |   | $    | 1,033,658 |         |   | $    | 1,253,679 |     |  | $ | 1,258,785 |        |  | $ | 1,080,813 |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Disposition of Gas (MMcf)
Gas sales                   |                    |      | 178,202   |         |   |      | 168,906   |         |   |      | 205,760   |     |  |   | 217,672   |        |  |   | 206,951   |      
|                                                     
|                                                     
|                                                     
|                                                     
|End user transportation                               |                    |      | 151,715   |         |   |      | 140,051   |         |   |      | 144,963   |     |  |   | 146,662   |        |  |   | 145,288   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Intermediate transportation                           |                    |      | 531,913   |         |   |      | 537,532   |         |   |      | 586,496   |     |  |   | 527,510   |        |  |   | 341,550   |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|                                                      |                    |      | 861,830   |         |   |      | 846,489   |         |   |      | 937,219   |     |  |   | 891,844   |        |  |   | 693,789   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Company use and lost gas                              |                    |      | 5,687     |         |   |      | 4,811     |         |   |      | 3,896     |     |  |   | 5,746     |        |  |   | 2,990     |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Total disposition of gas                              |                    |      | 867,517   |         |   |      | 851,300   |         |   |      | 941,115   |     |  |   | 897,590   |        |  |   | 696,779   |      
|                                                      |                    |      |           |         |   |      |           |         |   |      |           |     |  |   |           |        |  |   |           |      
|Effect of Weather
Percent colder (warmer) than normal |                    |      | (9.0      | )%      |   |      | (19.3     | )%      |   |      | 0.8       | %   |  |   | 5.4       | %      |  |   | 0.3       | %    
|                                                     
|                                                     
|                                                     
|                                                     
|Increase (decrease) from normal in:                  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Gas markets (MMcf) |      |           | (18,732 | ) |      |           | (40,272 | ) |      |           | 589 |  |   |           | 10,909 |  |   |           | 1,488 | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net income         |      | $         | (18,592 | ) |      | $         | (35,314 | ) |      | $         | 467 |  |   | $         | 9,886  |  |   | $         | 1,415 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Utility Customers
Residential                         |                    |      | 1,066,249 |         |   |      | 1,104,033 |         |   |      | 1,092,334 |     |  |   | 1,087,450 |        |  |   | 1,077,668 |      
|                                                     
|                                                     
|                                                     
|                                                     
|Total                                                 |                    |      | 1,204,125 |         |   |      | 1,190,508 |         |   |      | 1,178,543 |     |  |   | 1,169,690 |        |  |   | 1,159,140 |      
|                                                     
|                                                     
|                                                     
|                                                     
|Employees                                             |                    |      | 2,712     |         |   |      | 2,724     |         |   |      | 2,867     |     |  |   | 3,062     |        |  |   | 3,128     |      

18



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

Record year results reflect earnings from new gas sales program and more
favorable weather  MichCons earnings for 1999 were $106.3 million, an increase
of $29.3 million from 1998 earnings of $77.0 million. As subsequently discussed,
the comparison was impacted by merger costs in 1999 and the write-down of
certain gas gathering properties in 1998. The earnings improvement reflects
contributions from the new gas sales program that began in January 1999 as well
as the impact of more favorable weather. The gas sales program allowed MichCon
to continue its record of solid financial performance producing returns on
equity of 15.4% in 1999, 12.2% in 1998 and 13.3% in 1997.

Excluding the write-down, MichCon had 1998 earnings of $88.2 million, an
improvement of $9.2 million over 1997 earnings of $79.0 million. The earnings
comparison was impacted by variations in weather and cost-saving initiatives
resulting in significantly lower operating costs.

|                            |  |                                   |       |                        |  |        |       |         |  |   |        |   |  |  |       |   
|--------------------------- |  | --------------------------------- | ----- | ---------------------- |  | ------ | ----- | ------- |  | - | ------ | - |  |  | ----- | --
|                            |  | Earnings Components (in Millions)
|                            |  |                                  
|                            |  | Comparing 1999 to 1998            |       | Comparing 1998 to 1997
|                            |  |                                   |       |                       
|                            |  | Dollar                            |       | Percent                |  | Dollar |       | Percent
|                            |  | Change                            |       | Change                 |  | Change |       | Change 
|                            |  |                                   |       |                        |  |        |       |        
|Operating Revenues          |  | $                                 | 102.0 |                        |  |        | 9.9   | %       |  | $ | (220.0 | ) |  |  | (17.6 | )%
|                           
|                           
|                           
|                           
|Cost of Gas                 |  |                                   | 32.4  |                        |  |        | 7.2   |         |  |   | (180.7 | ) |  |  | (28.6 | ) 
|                           
|                           
|                           
|                           
|Gross Margin                |  |                                   | 69.6  |                        |  |        | 12.0  |         |  |   | (39.3  | ) |  |  | (6.3  | ) 
|                           
|                           
|                           
|                           
|Operation and Maintenance   |  |                                   | 13.7  |                        |  |        | 5.4   |         |  |   | (30.2  | ) |  |  | (10.7 | ) 
|                           
|                           
|                           
|                           
|Depreciation and Depletion  |  |                                   | 6.0   |                        |  |        | 6.5   |         |  |   | (10.8  | ) |  |  | (10.4 | ) 
|                           
|                           
|                           
|                           
|Property and Other Taxes    |  |                                   | (10.2 | )                      |  |        | (18.4 | )       |  |   | (5.3   | ) |  |  | (8.7  | ) 
|                           
|                           
|                           
|                           
|Merger Costs                |  |                                   | 25.4  |                        |  |        | N/A   |         |  |   |       |   |  |  |      |   
|                           
|                           
|                           
|                           
|Property Write-down         |  |                                   | (24.8 | )                      |  |        | N/A   |         |  |   | 24.8   |   |  |  | N/A   |   
|                           
|                           
|                           
|                           
|Other Income and Deductions |  |                                   | 9.5   |                        |  |        | 21.7  |         |  |   | (5.9   | ) |  |  | (11.8 | ) 
|                           
|                           
|                           
|                           
|Income Tax Provision        |  |                                   | 20.7  |                        |  |        | 57.7  |         |  |   | (9.8   | ) |  |  | (21.6 | ) 
|                           
|                           
|                           
|                           
|Net Income                  |  |                                   | 29.3  |                        |  |        | 38.1  |         |  |   | (2.0   | ) |  |  | (2.6  | ) 

Gross Margin

Gross margin (operating revenues less cost of gas) increased $69.6 million in
1999 and decreased $39.3 million in 1998. The increase in 1999 is due primarily
to margins generated under MichCons new three-year gas sales program, which is
part of its Regulatory Reform Plan (Note 8b). Under the gas sales program that
began in January 1999, MichCons gas sales rates include a gas commodity
component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its
gas acquisition strategy, MichCon has entered into fixed-price contracts at
costs below $2.95 per Mcf for a substantial portion of its expected gas supply
requirements through 2001. This strategy is likely to continue producing
favorable margins. However, margins are expected to be lower in future years as
MichCons fixed-price supplies in 2000 and 2001 are at prices higher than those
paid in 1999. Additionally, margins will be impacted if additional customers
choose to purchase their gas from other suppliers under MichCons experimental
three-year customer choice program.

The gross margin comparisons were also affected by changes in gas sales and end
user transportation deliveries due primarily to variations in weather.
Additionally, gross margins in 1999 and 1998 reflect fluctuations in
intermediate transportation revenues as well as revenues from the continued
growth in other gas-related services.

19



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MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)

|                                             |                          |      |      |       |   |      |       |       |   |  |    |    |  |  |  |  | 
|-------------------------------------------- | ------------------------ | ---- | ---- | ----- | - | ---- | ----- | ----- | - |  | -- | -- |  |  |  |  | 
|Effect of Weather on Gas Market and Earnings |                          | 1999 |      | 1998  |   | 1997
|                                             |                          |      |      |       |   |     
|Percentage Colder (Warmer) Than Normal       |                          |      | (9.0 | )%    |   |      | (19.3 | )%    |   |  | .8 | % 
|                                            
|                                            
|                                            
|                                            
|Increase (Decrease) From Normal in:         
|                                            
|                                            
|                                            
|                                            
|                                             | Gas markets (in Bcf)     |      |      | (18.7 | ) |      |       | (40.3 | ) |  |    | .6 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Net income (in Millions) |      | $    | (18.6 | ) |      | $     | (35.3 | ) |  | $  | .5 | 

Gas Sales and end user transportationrevenues in total increased $105.2 million
in 1999, and decreased $241.5 million in 1998. Revenues were affected by
fluctuations in gas sales and end user transportation deliveries that increased
20.9 billion cubic feet (Bcf) in 1999, and decreased 41.8 Bcf in 1998. The
variations in gas sales and end user transportation deliveries were due
primarily to weather, which was 10.3% colder in 1999 and 20.1% warmer in 1998
compared to the previous years.

Revenues were also impacted by variations in the cost of the gas commodity
component of gas sales rates. As previously discussed, this gas commodity
component was fixed under MichCons new gas sales program at $2.95 per Mcf
beginning in January 1999. Prior to 1999, MichCons sales rates were set to
recover all of its reasonably and prudently incurred gas costs. Therefore, the
effect of any fluctuations in cost of gas sold prior to 1999 was substantially
offset by a change in gas sales revenues. The gas commodity component of
MichCons sales rates increased $.24 per Mcf (9%) in 1999 and decreased $.40 per
Mcf (13%) in 1998.

|                                 |                             |   |         |       |      |   |         |       |  |   |         |         | 
|-------------------------------- | --------------------------- | - | ------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ------- | 
|                                 |                             |   | 1999    |       | 1998 |   | 1997   
|                                 |                             |   |         |       |      |   |        
|Operating Revenues (in Millions)
|                                
|                                
|                                
|                                
|                                 | Gas Sales                   |   | $       | 907.5 |      |   | $       | 823.8 |  |   | $       | 1,062.8 | 
|                                
|                                
|                                
|                                
|                                 | End User Transportation     |   |         | 103.5 |      |   |         | 82.0  |  |   |         | 84.5    | 
|                                 |                             |   |         |       |      |   |         |       |  |   |         |        
|                                 |                             |   | 1,011.0 |       |      |   | 905.8   |       |  |   | 1,147.3 |        
|                                
|                                
|                                
|                                
|                                 | Intermediate Transportation |   |         | 57.8  |      |   |         | 63.2  |  |   |         | 55.2    | 
|                                
|                                
|                                
|                                
|                                 | Other                       |   |         | 66.9  |      |   |         | 64.7  |  |   |         | 51.2    | 
|                                 |                             |   |         |       |      |   |         |       |  |   |         |        
|                                 |                             | $ | 1,135.7 |       |      | $ | 1,033.7 |       |  | $ | 1,253.7 |        
|                                 |                             |   |         |       |      |   |         |       |  |   |         |        
|Gas Markets (Bcf)               
|                                
|                                
|                                
|                                
|                                 | Gas Sales                   |   |         | 178.2 |      |   |         | 168.9 |  |   |         | 205.8   | 
|                                
|                                
|                                
|                                
|                                 | End User Transportation     |   |         | 151.7 |      |   |         | 140.1 |  |   |         | 145.0   | 
|                                 |                             |   |         |       |      |   |         |       |  |   |         |        
|                                 |                             |   | 329.9   |       |      |   | 309.0   |       |  |   | 350.8   |        
|                                
|                                
|                                
|                                
|                                 | Intermediate Transportation |   |         | 531.9 |      |   |         | 537.5 |  |   |         | 586.4   | 
|                                 |                             |   |         |       |      |   |         |       |  |   |         |        
|                                 |                             |   | 861.8   |       |      |   | 846.5   |       |  |   | 937.2   |        
|                                 |                             |   |         |       |      |   |         |       |  |   |         |        

Intermediate transportation revenues decreased $5.4 million in 1999, and
increased $8.0 million in 1998. The 1999 decrease is due to customers shifting
volumes from a higher rate to a lower rate transportation route, lower fees
generated from tracking the transfer of gas title on MichCons transportation
system, as well as lower off-system volumes transported of 5.6 Bcf.

20



---



MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

The increase in intermediate transportation revenues in 1998 is due in part to
increased fees from tracking the transfer of gas title. Although intermediate
transportation revenues increased in 1998, volumes delivered decreased 48.9 Bcf,
reflecting lower off-system demand caused by the warmer weather and lower
volumes transported for fixed-fee customers. Transportation volumes for
fixed-fee customers may fluctuate significantly, however revenues from such
customers are not affected. While intermediate transportation volumes are a
significant part of total markets, profit margins on this service are
considerably less than margins on gas sales or for end user transportation
services.

Other operation revenues increased $2.2 million in 1999 and $13.5 million in
1998. The improvement in both periods is due 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 related to the
discontinuance of MichCons energy conservation programs.

Cost of Gas
Cost of gas is affected by variations in sales volumes and the cost of purchased
gas as well as related transportation costs. Under the Gas Cost Recovery (GCR)
mechanism that was in effect through 1998 (Note 8b), MichCons sales rates were
set to recover all of its reasonably and prudently incurred gas costs.
Therefore, fluctuations in cost of gas sold had little effect on gross margins.
Under MichCons new gas sales program, the gas commodity component of its sales
rates is fixed. Accordingly, beginning in 1999, changes in cost of gas sold
directly impact gross margins and earnings.

Cost of gas sold increased by $32.4 million in 1999 and decreased by $180.7
million in 1998, primarily as a result of varying weather-driven sales volumes.
The increase in 1999 attributable to weather was partially offset by a reduction
in gas sales volumes as a result of customers who have chosen to purchase their
gas from other suppliers under MichCons customer choice program. As previously
discussed, MichCon retains margins from these customers by continuing to
transport and deliver the gas to the customers premises. Cost of gas sold was
also impacted by average prices paid, which increased $.02 (1%) per Mcf in 1999,
and decreased $.40 (13%) per Mcf in 1998.

Other Operating ExpensesOperation and maintenance expenses increased $13.7 million in 1999 and declined
$30.2 million in 1998. The increase in 1999 is attributable to additional
computer system support costs associated with MichCons new customer information
system and higher injuries and damages costs. Operation and maintenance expenses
in 1998 benefited from an interstate pipeline company refund. Additionally, both
periods reflect managements continuing efforts to control operating costs. More
specifically, 1999 and 1998 reflect lower employee benefit costs, primarily
pension and retiree healthcare costs, as well as lower uncollectible gas
accounts expense.

MichCon 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 6%. The cost of the program and the related
savings were largely offsetting in 1998, but the program contributed to lower
operating costs in 1999. Since 1996, the number of employees has declined by 350
or 11%, while the number of customers has increased more than 30,000 or 3%.

MichCons uncollectible gas accounts expense declined $1.5 million in 1999 and
$8.7 million in 1998, reflecting the impact of weather on accounts receivable
balances, a more aggressive collection program, as well as the continuation of
home heating assistance funding obtained by low-income customers.

21



---



MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)

MichCon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 both the 1998 and 1999
fiscal years at $1.1 billion, compared to funding
of $1.0 billion for the 1997 fiscal year. The State of Michigans share of
LIHEAP funds was increased from $54 million in fiscal year 1998 to $59 million
in 1999. MichCon received $12.6 million of these funds in 1999, $.8 million less
than in 1998. Home Heating Credits assisted 69,000 MichCon customers in 1999,
compared to 73,000 in 1998. During 1999, President Clinton signed an
appropriations package that funds LIHEAP at $1.1 billion for fiscal year ending
in September 2000. Any future change in LIHEAP funding may impact MichCons
uncollectible gas accounts expense.

Depreciation and depletion increased by $6.0 million in 1999 and decreased by
$10.8 million in 1998. The increase in 1999 reflects higher plant balances
resulting from capital expenditures of $135.9 million in 1999 and $153.5 million
in 1998. The decrease in 1998 resulted from lower depreciation rates for utility
property, plant and equipment that became effective in January 1998.
Depreciation on higher plant balances partially offset the 1998 rate decrease.

Property and other taxes decreased $10.2 million in 1999 and $5.3 million in
1998. The decreases for both 1999 and 1998 are attributable to lower property
taxes resulting from a 1998 change in the calculation of the value of personal
property subject to taxation by local governments. MichCon has pending tax
appeals with various local governments to recover excess payments made in 1996
and 1997 based on the revised calculation. This calculation change, coupled with
the favorable impact of new valuation tables approved by the Michigan State Tax
Commission (STC) in November 1999, are expected to lower MichCons personal
property taxes by approximately $15 million annually beginning in 2000. Several
local governments have taken legal action against the State of Michigan to
prevent the STC from implementing the new valuation tables (Note 7a). The
decrease in property and other taxes in 1998 was also due to lower Michigan
Single Business Taxes resulting from a decrease in taxable income.

Merger Costs of $25.4 million in 1999 reflect legal, consulting, accounting,
employee benefit and other expenses associated with the pending merger between
MCN and DTE Energy Company (Note 2).

Property write-down of $24.8 million in 1998 reflects the impairment of certain
gas gathering properties in northern Michigan (Note 3). As a result of the need
to divert certain untreated gas away from the gathering system, a new gas
reserve analysis was performed. 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.

Other Income and Deductions
Other income and deductions increased $9.5 million in 1999 and decreased $5.9
million in 1998. The other income and deductions comparisons were affected by a
1998 change in minority interest due to the joint venture partners share of the
write-down of certain gas gathering properties (Note 3). The change in 1999 is
also attributable to lower interest income resulting from the repayment of funds
loaned to MCN.

Income Taxes
Income taxes increased $20.7 million in 1999 and decreased $9.8 million in 1998.
Income tax comparisons were affected by variations in pre-tax earnings and tax
credits. Income taxes in 1999 include amounts for the favorable resolution of
prior years tax issues.

22



---



MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)

Outlook
MichCons strategy is to expand its role as the preferred provider of natural
gas and high-value energy services within Michigan. Accordingly, MichCons
objectives are to grow its revenues and control its costs in order to deliver
strong shareholder returns and provide customers high-quality service at
competitive prices. Modest revenue growth will be achieved through initiatives
to expand MichCon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. Management is continually assessing ways to improve cost
competitiveness. Among other cost saving initiatives, MichCon has reduced its
net workforce each year since 1992.

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. MichCon 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.

MichCon has begun and plans to continue capitalizing on opportunities resulting
from the gas industry restructuring. MichCon has implemented its Regulatory
Reform Plan, which includes a comprehensive experimental three-year customer
choice program designed to offer all sales customers added choices and greater
price certainty. The customer choice program began in April 1999, and
approximately 70,000 customers chose to purchase natural gas from suppliers
other than MichCon. Year two and year three of the program begin April 1 of 2000
and 2001, respectively. The number of customers allowed to participate in the
program is limited to 150,000 in 2000 and 225,000 in 2001. There is also a
volume limitation on commercial and industrial participants of 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 generate favorable margins. However,
these margins will be lower than those generated in 1999 from the sale of gas to
such customers.

The Regulatory Reform Plan also suspended the GCR mechanism for customers who
continue to purchase gas from MichCon, and fixed the gas commodity component of
MichCons sales rates at $2.95 per Mcf for the three-year period that began in
January 1999. The suspension of the GCR mechanism allows MichCon to profit from
its ability to purchase gas at less than $2.95 per Mcf. Prior to 1999, MichCon
did not generate earnings on the gas commodity portion of its operations. As
part of its gas acquisition strategy, MichCon has entered into fixed-price
contracts at costs below $2.95 per Mcf for a substantial portion of its expected
gas supply requirements through 2001. This strategy produced favorable margins
in 1999 and is likely to continue producing favorable margins through 2001.
However, margins are expected to be lower in future years as MichCons
fixed-price supplies in 2000 and 2001 are at prices higher than those paid in
1999. The level of margins generated from selling gas will also be affected by
the number of customers who ultimately choose to purchase gas from suppliers
other than MichCon under the three-year customer choice program.

The Plan also encompasses an income sharing mechanism that allows customers to
share in profits when actual returns on equity from utility operations exceed
predetermined thresholds. Although the Plan increases MichCons risk associated
with generating margins that cover its gas costs, management believes this Plan
will continue to have a favorable impact on earnings.

The State of Michigan is continuing its initiatives designed to give all of
Michigans natural gas customers added choices and the opportunity to benefit
from lower gas costs resulting from competition. Natural gas choice legislation
is before the Michigan legislature, and if approved,

23



---



MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)

would: (1) give any qualified gas supplier the opportunity to
compete; (2) phase
in gas choice for all Michigan customers over three to five years; and (3)
replace the regulatory gas commodity pricing process with one based on market prices which
allow all customers to get the benefits of market-based pricing whether they
elect to stay with their utility or choose another gas commodity supplier. Natural gas choice
legislation could become effective prior to the end of MichCons three-year
customer choice program that ends in March 2002, and therefore accelerate the
transition to a competitive natural gas market.

As described in Note 8a to the consolidated financial statements, MichCon
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 MichCon discontinuing the application of SFAS No. 71 for all or part of its
business and would require the write-off of the portion of any regulatory asset
or liability that was no longer probable of recovery or refund. If MichCon were
to discontinue application of SFAS No. 71 for all of its operations as of
December 31, 1999, it would have an extraordinary non-cash increase to net
income of approximately $59.9 million. Factors that could give rise to the
discontinuance of SFAS No. 71 include (1) increasing competition that restricts
MichCon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.

Environmental MattersFormer manufactured gas plant sites  Prior to the construction of major natural
gas pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. MichCon owns, or previously owned, 16 such former
manufactured gas plant (MGP) sites.

During the mid-1980s, MichCon conducted preliminary environmental investigations
at 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).

MichCon is involved in an administrative proceeding before the EPA regarding one
of the former MGP sites. MichCon has executed an order with the EPA, pursuant to
which MichCon is legally obligated to investigate and remediate the MGP site.
MichCon is remediating four of the former MGP sites and conducting more
extensive investigations at six other former MGP sites. In 1998, MichCon
received state closure of one of the former MGP sites. 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. MichCon
and the MDEQ are in discussions on whether MichCon is a responsible party for
one other former MGP site.

In 1984, MichCon 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.

MichCon 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

24



---



of these studies, MichCon accrued an additional liability and a corresponding
regulatory asset of $32 million during 1995.

MichCon notified more than 40 current and former insurance carriers of the
environmental conditions at these former MGP sites. MichCon 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
non-settling 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. A settlement was
reached with a number of carriers with a portion of the
payment received in February 2000 and the remaining portion expected by
mid-2000. MCN is continuing negotiations with the two remaining insurance carriers.

During 1999, 1998, and 1997, MichCon spent $.7 million, $1.6 million and $.8
million, respectively, investigating and remediating these former MGP sites. At
December 31, 1999, the reserve balance is $31.4 million, of which $6.3 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 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.

Formerly owned storage field  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
adverse impact on MichCons financial statements.

CAPITAL RESOURCES AND LIQUIDITY

|                                                     |                      |      |     |        |   |      |      |        |   |   |     |        |  
|---------------------------------------------------- | -------------------- | ---- | --- | ------ | - | ---- | ---- | ------ | - | - | --- | ------ | -
|Cash and Cash Equivalents (in Millions)              |                      | 1999 |     | 1998   |   | 1997
|                                                     |                      |      |     |        |   |     
|Cash Flow Provided From (Used For):                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Operating activities |      | $   | 120.6  |   |      | $    | 217.9  |   |   | $   | 187.2  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Financing activities |      |     | 26.5   |   |      |      | (39.8  | ) |   |     | (16.2  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investing activities |      |     | (144.0 | ) |      |      | (185.8 | ) |   |     | (166.7 | )
|                                                     |                      |      |     |        |   |      |      |        |   |   |     |       
|Net Increase (Decrease) in Cash and Cash
Equivalents |                      | $    | 3.1 |        |   | $    | (7.7 | )      |   | $ | 4.3 |       
|                                                     |                      |      |     |        |   |      |      |        |   |   |     |       

Operating Activities
MichCons cash flow from operating activities decreased $97.3 million in 1999
and increased $30.7 million in 1998. Both years reflect changes in working
capital requirements and higher earnings after adjusting for noncash items
(depreciation, the property write-down and deferred taxes).

Financing Activities
MichCons cash flow related to financing activities increased $66.3 million in
1999 and decreased $23.6 million in 1998. The increase in 1999 is primarily due
to higher short-term borrowings and lower dividends paid to MCN. The decrease in
1998 reflects higher long-term debt repayments. A summary of

25



---



MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)

MichCons financing strategy to meet working capital requirements, as well as
its significant financing activities during the 1997-1999 period follows.

MichCon maintains a relatively consistent amount of cash and cash equivalents
through the use of short-term borrowings. Short-term borrowings are normally
reduced in the first part of each year as gas inventories are depleted and funds
are received from winter heating sales. During the latter part of each year,
MichCons short-term borrowings normally increase as funds are used to finance
increases in gas inventories and customer accounts receivable. To meet its
seasonal short-term borrowing needs, MichCon normally issues commercial paper
that is backed by credit lines with 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. The 364-day facility expires in July 2000, and the three-year
facility expires in July 2001. At December 31, 1999, commercial paper of $235.9
million was outstanding under this program.

During 1999, MichCon issued $110 million of senior secured notes (Note 6a).
Proceeds from the issuances were used to refinance long-term debt, short-term
obligations and for general corporate purposes. MichCon also repaid $68 million
of first mortgage bonds during 1999.

During 1998, MichCon issued $150 million of remarketable debt securities (Note
6a). Proceeds from these issuances were used to retire first mortgage bonds,
fund capital expenditures and for general corporate purposes. Also during 1998,
MichCon repaid $109.7 million of first mortgage bonds.

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, non-utility
subsidiaries of MichCon borrowed $40 million under a non-recourse credit
agreement that matures in 2005. Proceeds were used to finance the expansion of
the northern Michigan gathering system. During 1997, MichCon also repaid $67
million of long-term debt.

As of December 1999, MichCon had an outstanding shelf registration with $140
million remaining to be issued in the form of debt securities.

The following table sets forth the ratings as of December 31, 1999 for
securities issued by MichCon:

|                      |  |          |         |         |       |        |  |  |  |  |    | 
|--------------------- |  | -------- | ------- | ------- | ----- | ------ |  |  |  |  | -- | 
|                      |  | Standard |         |         |       | Duff & |  |  |  | 
|                      |  | & Poors  | Moody's | Phelp's | Fitch
|                      |  |          |         |         |      
|Commercial paper      |  |          | A2      |         |       | P1     |  |  |  |  | D1 | 
|                     
|                     
|                     
|                     
|First mortgage bonds  |  |          | A-      |         |       | A2     |  |  |  |  | A+ | 
|                     
|                     
|                     
|                     
|Senior secured notes* |  |          | AAA     |         |       | Aaa    |  |  |  |  |   | 



---

|* |  | Ratings based on insurance policy provided by MBIA Insurance Corporation
|- |  | ------------------------------------------------------------------------

Investing Activities
MichCons cash flow related to investing activities decreased $41.8 million in
1999, and increased $19.1 million in 1998. The comparisons for both years were
affected by lower capital expenditures and an investment in a trust.

MichCons capital expenditures totaled $135.9 million in 1999 and $153.5 million
in 1998, decreases of $17.6 million and $1.7 million from prior years. Capital
expenditures primarily represent the construction of new distribution lines to
attach new customers, new computer systems and improvements

26



---



MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)

to storage, distribution and transmission systems. Capital expenditures for 2000
are expected to total $125 million.

During 1998 and 1997, MichCon invested $28.2 million and $31.3 million,
respectively, in a Grantor Trust to meet future cash flow obligations related to
certain postretirement healthcare costs.

It is managements opinion that MichCon will have sufficient capital resources,
both internal and external, to meet anticipated capital requirements.

YEAR 2000
As a result of computer programs being written using two digits rather than four
digits to define the year, many programs that had time sensitive software had
the risk of recognizing a date using 00 as the year 1900 rather than the year
2000. This Year 2000 issue, if not addressed, could have caused computer systems
to malfunction, resulting in a material adverse impact on MCNs operations and
business processes.

MichCon, aware of the Year 2000 potential impact, initiated a corporate-wide
program in 1997 to have its mission critical business, and measurement and
control systems Year 2000 ready. MichCon completed the Year 2000 implementation
plan in October 1999 for its mission critical systems and therefore considered
these systems Year 2000 ready at that time.

MichCon has experienced no disruptions in its business operations as a result of
the Year 2000 issue and has had no significant computer errors related to the
Year 2000. The company continues to monitor its computer systems and business
operations for Year 2000 complications.

Costs associated with the Year 2000 issue totaled approximately $3.7 million
through December 1999. MichCon does not expect to incur any significant future
costs as a result of the Year 2000.

This Year 2000 disclosure is a Year 2000 Readiness Disclosure
under the Year
2000 Information and Readiness Disclosure Act. Therefore, MCN claims the full
protections established by the Act.

MARKET RISK INFORMATION
MichCons primary market risk arises from fluctuations in interest rates.
MichCon manages interest rate risk through the use of various derivative
instruments and limits the use of such instruments to hedging activities. If
MichCon did not use derivative instruments, its exposure to such risk would be
higher. A further discussion of MichCons risk management activities is included
in Note 11 to the Consolidated Financial Statements. MichCon is subject to
interest rate risk in connection with the issuance of variable- and fixed-rate
debt. In order to manage interest costs, MichCon uses interest rate swap
agreements to exchange fixed- and variable-rate interest payment obligations
over the life of the agreements without exchange of the underlying principal
amounts. MichCon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 MichCons debt and interest rate swaps, utilizing applicable forward interest
rates in effect at December 31, 1999. The sensitivity analysis involved
increasing and decreasing the forward rates by a hypothetical 10% and
calculating the resulting change in the fair values or cash flows of the
interest rate sensitive instruments.

27



---



MANAGEMENTS DISCUSSION AND ANALYSIS (CONCLUDED)

The results of the sensitivity model calculations follow:

|                           |                              |              |   |              |   |             |   |               |   |  |  |  |  |            |  |  |  |  |  |  |  | 
|-------------------------- | ---------------------------- | ------------ | - | ------------ | - | ----------- | - | ------------- | - |  |  |  |  | ---------- |  |  |  |  |  |  |  | 
|                           |                              |              |   | ASSUMING     |   | ASSUMING   
|                           |                              |              |   | A 10%        |   | A 10%       |   | FAVORABLE    
|                           |                              |              |   | INCREASE IN  |   | DECREASE IN |   | (UNFAVORABLE)
|MARKET RISK  (in millions) |                              | PRICES/RATES |   | PRICES/RATES |   | CHANGE IN  
|                           |                              |              |   |              |   |             |   |              
|Interest Rate Sensitive:  
|                           | Debt                        
|                           |  fixed rate                 |              | $ | 19.7         |   |             | $ | (19.7         | ) |  |  |  |  | Fair Value | 
|                           |  variable rate              |              | $ | (.5          | ) |             | $ | .5            |   |  |  |  |  | Cash Flow  | 
|                          
|                          
|                          
|                          
|                           | Swaps                       
|                           |  pay fixed/receive variable |              | $ | .2           |   |             | $ | (.2           | ) |  |  |  |  | Fair Value | 
|                           |  pay variable/receive fixed |              | $ | (1.9         | ) |             | $ | 1.9           |   |  |  |  |  | Fair Value | 

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, effective
for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 137 changes
the effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000.

SFAS No. 133 requires all derivatives to be recognized in the balance sheet as
either assets or liabilities measured at their fair value, and sets forth
conditions in which a derivative instrument may be designated as a hedge. The
Statement requires that changes in the fair value of derivatives be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivatives gains and losses to be
recorded to other comprehensive income or to offset related results on the
hedged item in earnings.

MichCon manages gas price risk and interest rate risk through the use of various
derivative instruments and limits the use of such instruments to hedging
activities. The effects of SFAS No. 133 on MichCons financial statements are
subject to fluctuations in the market value of hedging contracts which are, in
turn, affected by variations in gas prices and in interest rates. Accordingly,
management cannot quantify the effects of adopting SFAS No. 133 at this time.

28



---



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk is contained in Item
7. MD&A  Market Risk Information, page 27 of this report.

29



---



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

|                                                                               |  |  |      |  | 
|------------------------------------------------------------------------------ |  |  | ---- |  | 
|                                                                               |  |  | Page
|                                                                               |  |  |     
|Consolidated Statement of Income                                               |  |  | 31   | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Consolidated Statement of Financial Position                                   |  |  | 32   | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Consolidated Statement of Capitalization                                       |  |  | 33   | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Consolidated Statement of Cash Flows                                           |  |  | 34   | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Notes to the Consolidated Financial Statements                                 |  |  | 35   | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Independent Auditors Report                                                   |  |  | 53   | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Supplementary Financial Information  Quarterly Operating Results (Unaudited)  |  |  | 54   | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Financial Statement Schedule - Schedule II  Valuation and Qualifying Accounts |  |  | 55   | 

30



---



CONSOLIDATED STATEMENT OF INCOME

|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |         |  
|--------------------------------------------------------- | --------------------------------------------- | - | --------- | ------- | ---- | - | ---------------------- | ------- | - | - | --------- | ------- | -
|                                                          |                                               |   |           |         |      |   | Year ended December 31
|                                                          |                                               |   |           |         |      |   |                       
|                                                          |                                               |   | 1999      |         | 1998 |   | 1997                  
|                                                          |                                               |   |           |         |      |   |                       
|(in Thousands)                                           
|Operating Revenues
  Gas sales                            |                                               | $ | 907,471   |         |      | $ | 823,746                |         |   | $ | 1,062,794 |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Transportation and storage services (Note 13) |   |           | 165,245 |      |   |                        | 152,477 |   |   |           | 147,367 |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other (Note 13)                               |   |           | 63,023  |      |   |                        | 57,435  |   |   |           | 43,518  |  
|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |        
|                                                          |                                               |   | 1,135,739 |         |      |   | 1,033,658              |         |   |   | 1,253,679 |        
|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |        
|Operating Expenses
  Cost of gas                          |                                               |   | 483,925   |         |      |   | 451,529                |         |   |   | 632,229   |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Operation and maintenance (Note 13)           |   |           | 266,104 |      |   |                        | 252,397 |   |   |           | 282,640 |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Depreciation and depletion                    |   |           | 98,879  |      |   |                        | 92,883  |   |   |           | 103,703 |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Property and other taxes                      |   |           | 45,230  |      |   |                        | 55,438  |   |   |           | 60,744  |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Merger costs (Note 2)                         |   |           | 25,429  |      |   |                        |        |   |   |           |        |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Property write-down (Note 3)                  |   |           |        |      |   |                        | 24,800  |   |   |           |        |  
|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |        
|                                                          |                                               |   | 919,567   |         |      |   | 877,047                |         |   |   | 1,079,316 |        
|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |        
|Operating Income                                          |                                               |   | 216,172   |         |      |   | 156,611                |         |   |   | 174,363   |        
|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |        
|Other Income and (Deductions)
  Interest income (Note 13) |                                               |   | 2,604     |         |      |   | 5,688                  |         |   |   | 4,659     |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest on long-term debt                    |   |           | (47,265 | )    |   |                        | (44,884 | ) |   |           | (45,526 | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other interest expense                        |   |           | (8,626  | )    |   |                        | (12,113 | ) |   |           | (8,664  | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Minority interest (Note 3)                    |   |           | (1,020  | )    |   |                        | 5,727   |   |   |           | (1,882  | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity in earnings of joint ventures          |   |           | 1,976   |      |   |                        | 1,946   |   |   |           | 1,199   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other                                         |   |           | (1,016  | )    |   |                        | (182    | ) |   |           | 536     |  
|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |        
|                                                          |                                               |   | (53,347   | )       |      |   | (43,818                | )       |   |   | (49,678   | )      
|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |        
|Income Before Income Taxes                                |                                               |   | 162,825   |         |      |   | 112,793                |         |   |   | 124,685   |        
|                                                         
|                                                         
|                                                         
|                                                         
|Income Tax Provision (Note 14)                            |                                               |   | 56,489    |         |      |   | 35,817                 |         |   |   | 45,665    |        
|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |        
|Net Income                                                |                                               | $ | 106,336   |         |      | $ | 76,976                 |         |   | $ | 79,020    |        
|                                                          |                                               |   |           |         |      |   |                        |         |   |   |           |        



---

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

31



---



CONSOLIDATED STATEMENT OF FINANCIAL POSITION

|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |           |           | 
|------------------------------ | -------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | --------- | ----------- | --------- | ---- | --------- | --------- | --------- | 
|                               |                                                                                                                      |                                                                                               |           | December 31
|                               |                                                                                                                      |                                                                                               |           |            
|                               |                                                                                                                      |                                                                                               |           | 1999        |           | 1998
|                               |                                                                                                                      |                                                                                               |           |             |           |     
|(in Thousands)                
|                              
|                              
|                              
|                              
|ASSETS                        
|                              
|                              
|                              
|                              
|                               | Current Assets                                                                                                      
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Cash and cash equivalents                                                                     |           | $           | 9,705     |      |           | $         | 6,603     | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Accounts receivable, less allowance for doubtful accounts of
$17,777 and $8,928, respectively |           |             | 147,412   |      |           |           | 142,818   | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Accrued unbilled revenues                                                                     |           |             | 98,866    |      |           |           | 86,767    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Gas in inventory (Note 4)                                                                     |           |             | 74,150    |      |           |           | 56,969    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Property taxes assessed applicable to future periods                                          |           |             | 60,589    |      |           |           | 71,165    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Other                                                                                         |           |             | 31,594    |      |           |           | 30,169    | 
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               |                                                                                                                      |                                                                                               | 422,316   |             |           |      | 394,491   |          
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               | Deferred Charges and Other
Assets                                                                                   
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Investment in and advances to joint ventures                                                  |           |             | 19,115    |      |           |           | 19,343    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Long-term investments (Notes 10c and 12)                                                      |           |             | 67,210    |      |           |           | 65,556    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Deferred environmental costs (Notes 7c and 8a)                                                |           |             | 28,639    |      |           |           | 28,169    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Prepaid benefit costs (Note 10a)                                                              |           |             | 156,290   |      |           |           | 113,879   | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Other                                                                                         |           |             | 64,546    |      |           |           | 59,007    | 
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               |                                                                                                                      |                                                                                               | 335,800   |             |           |      | 285,954   |          
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               | Property, Plant and Equipment, at cost                                                                               |                                                                                               |           | 2,988,318   |           |      |           | 2,889,020 |          
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Less  Accumulated depreciation and depletion                                                 |           |             | 1,463,706 |      |           |           | 1,396,940 | 
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               |                                                                                                                      |                                                                                               | 1,524,612 |             |           |      | 1,492,080 |          
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               |                                                                                                                      | $                                                                                             | 2,282,728 |             |           | $    | 2,172,525 |          
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|LIABILITIES AND CAPITALIZATION
|                              
|                              
|                              
|                              
|                               | Current Liabilities                                                                                                 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Accounts payable                                                                              |           | $           | 93,549    |      |           | $         | 98,891    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Notes payable (Note 5)                                                                        |           |             | 237,785   |      |           |           | 221,169   | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Current portion of long-term debt and capital lease obligations (Notes 6a and 9)              |           |             | 27,984    |      |           |           | 58,288    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Federal income, property and other taxes payable                                              |           |             | 71,415    |      |           |           | 61,059    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Deferred gas cost recovery revenues (Note 8a)                                                 |           |             |          |      |           |           | 14,980    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Exchange gas payable                                                                          |           |             | 3,598     |      |           |           | 25,337    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Customer deposits                                                                             |           |             | 17,698    |      |           |           | 18,769    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Other                                                                                         |           |             | 64,741    |      |           |           | 67,222    | 
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               |                                                                                                                      |                                                                                               | 516,770   |             |           |      | 565,715   |          
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               | Deferred Credits and Other Liabilities                                                                              
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Deferred income taxes (Note 14)                                                               |           |             | 105,351   |      |           |           | 88,567    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Unamortized investment tax credit                                                             |           |             | 27,778    |      |           |           | 29,784    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Tax benefits amortizable to customers (Note 8a)                                               |           |             | 136,236   |      |           |           | 130,120   | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Accrued environmental costs (Note 7c)                                                         |           |             | 25,068    |      |           |           | 32,000    | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Minority interest                                                                             |           |             | 8,716     |      |           |           | 8,201     | 
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Other                                                                                         |           |             | 46,398    |      |           |           | 51,460    | 
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               |                                                                                                                      |                                                                                               | 349,547   |             |           |      | 340,132   |          
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               | Commitments and Contingencies (Notes 7, 8 and 9)                                                                    
|                              
|                              
|                              
|                              
|                               | Capitalization (see
accompanying statement)
Long-term debt, including capital lease obligations (Notes 6a, 9 and 11) |                                                                                               |           | 680,909     |           |      |           | 619,835   |          
|                              
|                              
|                              
|                              
|                               |                                                                                                                      | Common shareholders equity                                                                   |           |             | 735,502   |      |           |           | 646,843   | 
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               |                                                                                                                      |                                                                                               | 1,416,411 |             |           |      | 1,266,678 |          
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          
|                               |                                                                                                                      | $                                                                                             | 2,282,728 |             |           | $    | 2,172,525 |          
|                               |                                                                                                                      |                                                                                               |           |             |           |      |           |          

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

32



---



CONSOLIDATED STATEMENT OF CAPITALIZATION

|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                        |   |           |         |         |   | 
|----------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------- | --------- | ------- | ------- | - | --------- | ------- | ---------------------- | - | --------- | ------- | ------- | - | 
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         | Year Ended December 31
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                       
|                                                                                                                                                |                                                                               |                                 |           |         | 1999    |   | 1998      |         | 1997                  
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                       
|(in Thousands)                                                                                                                                 
|Long-Term Debt, excluding current requirements (Note 6a)First mortgage bonds,
interest payable semi-annually                                   
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 6.51% series due 1999           |           | $       |        |   |           | $       |                       |   |           | $       | 30,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 5.75% series due 2001           |           |         | 20,000  |   |           |         | 40,000                 |   |           |         | 60,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 8% series due 2002              |           |         | 17,314  |   |           |         | 17,314                 |   |           |         | 70,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 6.72% series due 2003           |           |         | 4,150   |   |           |         | 4,150                  |   |           |         | 4,150   |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 6.8% series due 2003            |           |         | 15,850  |   |           |         | 15,850                 |   |           |         | 15,850  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 9.125% series due 2004          |           |         |        |   |           |         | 18,000                 |   |           |         | 55,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 7.15% series due 2006           |           |         | 40,000  |   |           |         | 40,000                 |   |           |         | 40,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 7.21% series due 2007           |           |         | 30,000  |   |           |         | 30,000                 |   |           |         | 30,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 7.06% series due 2012           |           |         | 40,000  |   |           |         | 40,000                 |   |           |         | 40,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 8.25% series due 2014           |           |         | 80,000  |   |           |         | 80,000                 |   |           |         | 80,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 7.6% series due 2017            |           |         | 14,932  |   |           |         | 14,980                 |   |           |         | 14,990  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 7.5% series due 2020            |           |         | 29,352  |   |           |         | 29,641                 |   |           |         | 29,641  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 9.5% series due 2021            |           |         | 40,000  |   |           |         | 40,000                 |   |           |         | 40,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 6.75% series due 2023           |           |         | 15,982  |   |           |         | 16,617                 |   |           |         | 17,177  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 7% series due 2025              |           |         | 40,000  |   |           |         | 40,000                 |   |           |         | 40,000  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                | Remarketable securities, interest payable semi-annually
 6.2% series due 2038 |                                 |           | 75,000  |         |   |           | 75,000  |                        |   |           |        |        
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 6.45% series due 2038           |           |         | 75,000  |   |           |         | 75,000                 |   |           |         |        |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                | Senior notes, interest payable quarterly (Note 6a)
 6.85% series due 2038     |                                 |           | 54,863  |         |   |           |        |                        |   |           |        |        
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | 6.85% series due 2039           |           |         | 55,000  |   |           |         |                       |   |           |         |        |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                | Long-term capital lease obligations (Note 9)                                  |                                 |           | 3,392   |         |   |           | 4,416   |                        |   |           | 5,344   |        
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                | Other long-term debt                                                          |                                 |           | 27,465  |         |   |           | 36,126  |                        |   |           | 46,190  |        
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                | Net unamortized premium (discount)                                            |                                 |           | 2,609   |         |   |           | 2,741   |                        |   |           | (1,235  | )      
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                        |   |           |         |         |   | 
|                                                                                                                                                | Total                                                                         |                                 |           | 680,909 |         |   |           | 619,835 |                        |   |           | 617,107 |        
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                        |   |           |         |         |   | 
|Common Shareholders EquityCommon Stock, par value $1 per share -15,100,000
shares authorized and 10,300,000 shares outstanding for all periods |                                                                               |                                 | 10,300    |         |         |   | 10,300    |         |                        |   | 10,300    |        
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                        |   |           |         |         |   | 
|                                                                                                                                                | Additional Paid-In Capital                                                    |                                 |           | 230,399 |         |   |           | 230,399 |                        |   |           | 230,399 |        
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                | Retained Earnings
Balance  beginning of period                               |                                 |           | 406,144 |         |   |           | 375,325 |                        |   |           | 336,305 |        
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | Net income                      |           |         | 106,336 |   |           |         | 76,976                 |   |           |         | 79,020  |  
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                               
|                                                                                                                                                |                                                                               | Common stock dividends declared |           |         | (17,677 | ) |           |         | (46,157                | ) |           |         | (40,000 | )
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                        |   |           |         |         |   | 
|                                                                                                                                                |                                                                               | Balance  end of period         |           |         | 494,803 |   |           |         | 406,144                |   |           |         | 375,325 |  
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                        |   |           |         |         |   | 
|Total common shareholders equity                                                                                                               |                                                                               |                                 | 735,502   |         |         |   | 646,843   |         |                        |   | 616,024   |        
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                        |   |           |         |         |   | 
|Total capitalization                                                                                                                            |                                                                               | $                               | 1,416,411 |         |         | $ | 1,266,678 |         |                        | $ | 1,233,131 |        
|                                                                                                                                                |                                                                               |                                 |           |         |         |   |           |         |                        |   |           |         |         |   | 



The notes to the consolidated
Financial Statements are an integral part of this
statement.

| | 
| | 

33



---



CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |          |         |        |          |  
|------------------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------ | ------------------------------------------------------------------------ | ------- | ------ | -------- | -------- | ------- | ---------------------- | -------- | -------- | ------- | ------ | -------- | -
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         | Year Ended December 31
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                       
|(in
Thousands)                                                           |                                                                                         | 1999                                                 |                                      | 1998                                                                     |         | 1997  
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |       
|Cash Flow From Operating Activities                                      |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Net income                                                                              |                                                      | $                                    | 106,336                                                                  |         |        | $        | 76,976   |         |                        | $        | 79,020   |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Adjustments to reconcile net income to net cash flow provided
from operating activities
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         |                                                      |                                      | Depreciation and depletion                                               |         |        |          |          |         |                        |          |          |         |        |          |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         |                                                      |                                      | Per statement of income                                                  |         |        | 98,879   |          |         |                        | 92,883   |          |         |        | 103,703  |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         |                                                      |                                      | Charged to other accounts                                                |         |        | 8,892    |          |         |                        | 7,946    |          |         |        | 7,663    |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         |                                                      |                                      | Property write-down, net (Note 3)                                        |         |        |         |          |         |                        | 11,200   |          |         |        |         |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         |                                                      |                                      | Deferred income taxes  current                                          |         |        | 1,416    |          |         |                        | (961     | )        |         |        | (3,130   | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         |                                                      |                                      | Deferred income taxes and investment tax credit, net                     |         |        | 20,894   |          |         |                        | 15,005   |          |         |        | 10,853   |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         |                                                      |                                      | Other                                                                    |         |        | (823     | )        |         |                        | (4,430   | )        |         |        | (679     | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         |                                                      |                                      | Changes in assets and liabilities, exclusive of changes
shown separately |         |        | (115,005 | )        |         |                        | 19,299   |          |         |        | (10,167  | )
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|                                                                         |                                                                                         |                                                      |                                      | Net cash provided from operating activities                              |         |        | 120,589  |          |         |                        | 217,918  |          |         |        | 187,263  |  
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|Cash Flow From Financing
Activities                                      |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Issuance of long-term debt (Note 6a)                                                    |                                                      |                                      | 106,535                                                                  |         |        |          | 153,052  |         |                        |          | 124,051  |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Notes payable, net                                                                      |                                                      |                                      | 16,616                                                                   |         |        |          | (20,522  | )       |                        |          | (23,435  | )      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Retirement of long-term debt (Note 6a)                                                  |                                                      |                                      | (79,097                                                                  | )       |        |          | (126,292 | )       |                        |          | (76,854  | )      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Dividends paid                                                                          |                                                      |                                      | (17,500                                                                  | )       |        |          | (46,084  | )       |                        |          | (40,000  | )      
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|                                                                         |                                                                                         |                                                      |                                      | Net cash provided from (used for) financing activities                   |         |        | 26,554   |          |         |                        | (39,846  | )        |         |        | (16,238  | )
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|Cash Flow From Investing
Activities                                      |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Capital expenditures                                                                    |                                                      |                                      | (135,933                                                                 | )       |        |          | (153,475 | )       |                        |          | (155,208 | )      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other                                                                                   |                                                      |                                      | (8,108                                                                   | )       |        |          | (32,347  | )       |                        |          | (11,474  | )      
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|                                                                         |                                                                                         |                                                      |                                      | Net cash used for investing activities                                   |         |        | (144,041 | )        |         |                        | (185,822 | )        |         |        | (166,682 | )
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|Net Increase (Decrease) in
Cash and Cash Equivalents                     |                                                                                         |                                                      | 3,102                                |                                                                          |         |        | (7,750   | )        |         |                        | 4,343    |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Cash and Cash Equivalents,
January 1                                     |                                                                                         |                                                      | 6,603                                |                                                                          |         |        | 14,353   |          |         |                        | 10,010   |         
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|Cash and Cash Equivalents,
December 31                                   |                                                                                         | $                                                    | 9,705                                |                                                                          |         | $      | 6,603    |          |         | $                      | 14,353   |         
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|Changes in Assets and Liabilities, Exclusive of Changes
Shown Separately |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Accounts receivable, net                             |                                      | $                                                                        | (6,055  | )      |          | $        | 50,174  |                        |          | $        | (43,510 | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Accrued unbilled revenues                            |                                      |                                                                          | (12,099 | )      |          |          | 5,129   |                        |          |          | 15,481  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Accrued/deferred gas cost recovery revenues, net     |                                      |                                                                          | (14,980 | )      |          |          | 27,843  |                        |          |          | 14,810  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Gas in inventory                                     |                                      |                                                                          | (17,181 | )      |          |          | (16,768 | )                      |          |          | 28,008  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Property taxes assessed applicable to future periods |                                      |                                                                          | 10,576  |        |          |          | (6,338  | )                      |          |          | (4,235  | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Prepaid benefit costs, net                           |                                      |                                                                          | (42,411 | )      |          |          | (28,089 | )                      |          |          | (16,620 | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Accounts payable                                     |                                      |                                                                          | (5,342  | )      |          |          | (30,617 | )                      |          |          | (585    | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Federal income, property and other taxes payable     |                                      |                                                                          | 10,356  |        |          |          | (17,602 | )                      |          |          | (6,228  | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Exchange gas payable                                 |                                      |                                                                          | (21,739 | )      |          |          | 23,274  |                        |          |          | 2,063   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Other current assets and liabilities, net            |                                      |                                                                          | (1,701  | )      |          |          | 11,191  |                        |          |          | (2,353  | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         | Other deferred assets and liabilities, net           |                                      |                                                                          | (14,429 | )      |          |          | 1,102   |                        |          |          | 3,002   |       
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|                                                                         |                                                                                         | $                                                    | (115,005                             | )                                                                        |         | $      | 19,299   |          |         | $                      | (10,167  | )       
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|Supplemental Disclosures                                                
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Cash paid for:                                                                         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                         |                                                      | Interest, net of amounts capitalized |                                                                          | $       | 58,467 |          |          | $       | 56,250                 |          |          | $       | 52,172 |         
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         
|                                                                         |                                                                                         |                                                      | Federal income taxes                 |                                                                          | $       | 25,340 |          |          | $       | 27,090                 |          |          | $       | 46,984 |         
|                                                                         |                                                                                         |                                                      |                                      |                                                                          |         |        |          |          |         |                        |          |         





---

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

34



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF ACCOUNTING POLICIES

Company DescriptionMichigan Consolidated Gas Company (MichCon) is a public utility engaged in the
distribution and transmission of natural gas in the state of Michigan. MichCon
is subject to the accounting requirements of and rate regulation by the Michigan
Public Service Commission (MPSC) with respect to the distribution and intrastate
transportation of natural gas. The major services provided by MichCon are gas
sales, end user transportation and intermediate transportation. MichCon serves
more than 1.2 million residential, commercial and industrial customers
throughout Michigan. Its principal markets are located in the Detroit, Grand
Rapids, Ann Arbor, Traverse City, and Muskegon metropolitan areas. MichCons
non-regulated operations are not significant. MichCon is an indirect, wholly
owned subsidiary of MCN Energy Group Inc. (MCN).

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 1999 presentation.

Principles of ConsolidationThe consolidated financial statements include the
accounts of MichCon and all of its subsidiaries. Investments in 50% or less
owned entities have been accounted for under the equity method because MichCon
has significant but not controlling influence over these entities.

Revenues and Cost of GasMichCon 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.
Beginning in 1999, MichCon implemented a Regulatory Reform Plan, approved by the
MPSC. The Plan suspended the GCR mechanism and fixed the gas component of
MichCons sales rates for a three-year period that began in January 1999 (Notes
8b and 8c). Accordingly, MichCon no longer accrues revenues under this
mechanism.

Property, Plant and EquipmentProperty, plant and equipment is stated at cost
and includes amounts for labor, materials, overhead, and an allowance for funds
used during construction. Upon retirement, the cost of property, plant and
equipment and net removal costs are charged to accumulated depreciation.

MichCon records depreciation for a major portion of its property, plant and
equipment on the basis of straight-line rates prescribed by the MPSC. Unit of
production depreciation and depletion is used for certain production and
transmission property. Depreciation rates vary by class of property. The ratio
of the provision for depreciation to the average cost of depreciable property
was 3.5% in 1999 and 1998 and 4.1% in 1997.

35



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

Allowance for Funds Used during Construction  MichCon capitalizes an allowance
for both debt and equity funds used during construction in the cost of major
additions to utility plant. The total amount capitalized was $2,521,000,
$4,699,000 and $3,188,000 in 1999, 1998 and 1997, respectively.

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.

Income Taxes and Investment Tax Credit  Tax Benefits Amortizable to Customers
represents the net revenue equivalent of the difference in property-related
accumulated deferred income taxes computed in accordance with Statement of
Financial Accounting Standards (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 temporary differences reverse.

Investment tax credits relating to property placed into service were deferred
and are being credited to income over the life of the related property.

Consolidated Statement of Cash Flows  For purposes of this statement, MichCon
considers all highly liquid investments purchased with a maturity of three
months or less, to be cash equivalents.

2. MCN MERGER AGREEMENT WITH DTE ENERGY COMPANY

MCN and DTE Energy Company (DTE) have signed a definitive merger agreement,
dated October 4, 1999, under which DTE will acquire all outstanding shares of
MCN common stock. The boards of directors and the shareholders of both companies
have approved the proposed merger. The transaction is subject to regulatory
approvals and other customary merger conditions. The transaction is expected to
close in mid-2000 and will be accounted for as a purchase by DTE. The combined
company, which will be named DTE Energy Company and headquartered in Detroit,
will be the largest electric and gas utility in Michigan.

As a result of the pending merger, MCN incurred merger-related costs of which a
portion were allocated to MichCon. Additionally, MichCon directly incurred
merger-related costs. The merger-related costs include legal, accounting,
consulting, employee benefit and other expenses which had the effect of
decreasing 1999 earnings by $25,429,000 pre-tax ($16,530,000 net of taxes).

3. PROPERTY WRITE-DOWN

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

36



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

4. GAS IN INVENTORY

Inventory gas is priced on a last-in, first-out (LIFO) basis. At December 31,
1999, the replacement cost exceeded the $74,150,000 LIFO cost by $146,563,000.
At December 31, 1998, the replacement cost exceeded the $56,969,000 LIFO cost by
$151,381,000.

5. CREDIT FACILITIES AND SHORT-TERM BORROWINGS

At December 31, 1999, 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. The 364-day revolving credit
facility was renewed in July 1999. The three-year revolving credit facility
expires in July 2001. MichCon issues commercial paper in lieu of an equivalent
amount of borrowings under these lines of credit. Commercial paper outstanding
at December 31, 1999 and 1998 totaled $235,870,000 and $218,447,000 and was at
weighted average interest rates of 6.4% and 5.6%, respectively. This debt is
classified as short term. Fees are paid to compensate banks for lines of credit.

6. CAPITALIZATION

a. Long-Term Debt
In 1999, MichCon issued $55,000,000 of 6.85% senior secured notes, due June
2038, and $55,000,000 of 6.85% senior secured notes, due June 2039. These notes
are fall-away mortgage debt and, as such, are secured debt as long as
MichCons other first mortgage bonds are outstanding and become senior unsecured
debt thereafter. The notes are insured by a financial guaranty insurance policy
and are rated AAA or its equivalent by the major rating agencies. The notes are
redeemable at par on or after June 1, 2004.

In 1999, MichCon redeemed $18,000,000 of 9.125% first mortgage bonds, which were
due in September 2004.

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
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 the 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 or may be redeemed by MichCon at par. 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.

During 1997, non-utility subsidiaries of MichCon borrowed $40,000,000 under a
nonrecourse credit agreement. Under the 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, 1999 and 1998, $21,900,000 and $29,200,000
were outstanding at weighted average interest rates of 6.6% and 5.8%,
respectively.

37



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

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 5.9% for the year ended December 31, 1999. Swap
agreements of $40,000,000 through May 2005 have reduced the average cost of the
related debt from 7.1% to 5.5% for the year ended December 31, 1999. Swap
agreements of $12,000,000 through April 2000 have reduced the average cost of
the related debt from 8.3% to 4.1% for the year ended December 31, 1999. A
non-utility subsidiary of MichCon has an interest rate swap agreement on the
$12,333,000 outstanding balance of its project loan agreement at December 31,
1999 that effectively fixes the interest rate at 7.5% through February 2003.

Substantially all of the net utility properties of MichCon, totaling
approximately $1,243,000,000, 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, 1999 are $26,960,000 in 2000,
$26,560,000 in 2001, $23,674,000 in 2002, $25,960,000 in 2003, and $5,560,000 in
2004.

b. Cumulative Preferred and Preference Stock
MichCon is authorized to issue 7,000,000 shares of $1 per share par value
preferred stock and 4,000,000 shares of $1 per share par value preference stock.
At December 31, 1999, no issuances of preferred or preference stock were made
under these authorizations.

7. COMMITMENTS AND CONTINGENCIES

a. Personal Property Taxes
In 1998, MichCon began filing its personal property tax information with local
governments that reflected a change in the calculation of the value of personal
property subject to taxation. The revised calculation excludes intangible costs
from the value of personal property. A number of local governments have accepted
the revised calculation, and MichCon recorded lower property tax expense in 1999
and 1998 associated with the accepting governments. MichCon has also filed
appeals to recover excess payments made in 1996 and 1997 based on the revised
calculation. MichCon has pending tax appeals with local governments that have
not accepted the revised calculation.

Additionally, MichCon and other Michigan utilities have asserted that Michigans
valuation tables result in the substantial overvaluation of utility personal
property. Valuation tables are used to estimate the reduction in value of
personal property based on the propertys age. In November 1999, the Michigan
State Tax Commission (STC) approved new valuation tables that more accurately
recognize the value of utilities personal property. The new tables are
effective in 2000 and are expected to significantly reduce MichCons property
taxes. Based on past practice, MichCon expects to settle pending tax appeals
with local governments by applying the new tables retroactively, a solution
supported in the past by the STC.

Several local governments have taken legal action against the State of Michigan
to prevent the STC from implementing the new valuation tables. MichCons future
results of operations could be significantly affected if the valuation tables
are not upheld in court or MichCon is unsuccessful in its appeals.

b. Guaranty
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

38



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

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.

c. Environmental Matters
Former manufactured gas plant sites  Prior to the construction of major natural
gas pipelines, gas for heating and other uses was manufactured from processes
involving coal, coke or oil. MichCon owns, or previously owned, 16 such former
manufactured gas plant (MGP) sites.

During the mid-1980s, MichCon conducted preliminary environmental investigations
at 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).

MichCon is involved in an administrative proceeding before the EPA regarding one
of the former MGP sites. MichCon has executed an order with the EPA, pursuant to
which MichCon is legally obligated to investigate and remediate the MGP site.
MichCon is remediating four of the former MGP sites and is conducting more
extensive investigations at six other former MGP sites. In 1998, MichCon
received state closure of one of the former MGP sites. 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. MichCon
and the MDEQ are in discussions on whether MichCon is a responsible party for
one other former MGP site.

In 1984, MichCon 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.

MichCon 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
undiscounted 1995 costs. As a result of these studies, MichCon accrued an
additional liability and a corresponding regulatory asset of $32,000,000 during
1995.

MichCon notified more than 40 current and former insurance carriers of the
environmental conditions at these former MGP sites. MichCon 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
non-settling 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. A settlement was
reached with a number of carriers, with a portion of the
payment received in February 2000 and the remaining portion expected by
mid-2000. MichCon is continuing negotiations with the two remaining insurance carriers.

During 1999, 1998 and 1997, MichCon spent $724,000, $1,649,000 and $835,000,
respectively, investigating and remediating these former MGP sites. At December
31, 1999, the reserve balance was $31,368,000, of which $6,300,000 was
classified as current. Any significant change in assumptions, such as

39



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

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.

Formerly owned storage field  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 MichCon may have legal
responsibility for these costs. Management does not believe this matter will have
a material adverse impact on MichCons financial statements.

d. Commitments
MichCon has entered into long-term purchase and transportation contracts with
various suppliers and producers. In general, purchases are under fixed price and
volume contracts. MichCon has firm purchase commitments through 2002 for
approximately 296 Bcf of gas. MichCon expects that sales, based on
warmer-than-normal weather, will approximate its minimum purchase commitments.
MichCon has long-term transportation contracts with various pipeline companies
expiring on various dates through the year 2011. MichCon is committed to pay
demand charges of approximately $42,900,000 during 2000 related to firm
transportation agreements.

Capital investments for 2000 are expected to approximate $125,000,000 and
certain commitments have been made in connection with such capital investments.

e. Other

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

8. REGULATORY MATTERS

a. Regulatory Assets and Liabilities

MichCons 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 MichCons financial statements.
Regulatory assets represent costs that will be recovered from customers through
the ratemaking process. Regulatory liabilities represent benefits that will be
refunded to customers through reduced rates.

40



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

The following regulatory assets and liabilities were reflected in the
Consolidated Statement of Financial Position as of December 31:

|                        |                                        |      |         |         |  |   |         |         | 
|----------------------- | -------------------------------------- | ---- | ------- | ------- |  | - | ------- | ------- | 
|(in Thousands)          |                                        | 1999 |         | 1998   
|                        |                                        |      |         |        
|Regulatory Assets:     
|                       
|                       
|                       
|                       
|                        | Deferred environmental costs (Note 7c) |      | $       | 28,639  |  |   | $       | 28,169  | 
|                       
|                       
|                       
|                       
|                        | Unamortized loss on retirement of debt |      |         | 15,241  |  |   |         | 15,548  | 
|                       
|                       
|                       
|                       
|                        | Other                                  |      |         | 247     |  |   |         | 196     | 
|                        |                                        |      |         |         |  |   |         |        
|                        |                                        | $    | 44,127  |         |  | $ | 43,913  |        
|                        |                                        |      |         |         |  |   |         |        
|Regulatory Liabilities:
|                       
|                       
|                       
|                       
|                        | Tax benefits amortizable to customers  |      | $       | 136,236 |  |   | $       | 130,120 | 
|                       
|                       
|                       
|                       
|                        | Deferred gas cost recovery revenues    |      |         |        |  |   |         | 14,980  | 
|                       
|                       
|                       
|                       
|                        | Other                                  |      |         | 88      |  |   |         |        | 
|                        |                                        |      |         |         |  |   |         |        
|                        |                                        | $    | 136,324 |         |  | $ | 145,100 |        
|                        |                                        |      |         |         |  |   |         |        



| | 
| | 

MichCon currently has regulatory precedents and orders in effect which 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 MichCon 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 which was no longer probable of recovery or refund. If MichCon were to
have discontinued the application of SFAS No. 71 for all of its operations as of
December 31, 1999, it would have had an extraordinary, non-cash increase to net
income of approximately $59,900,000. Management believes that 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 and MichCon
implemented the Plan in January 1999. The Plan includes a new three-year gas
sales program under which MichCons gas sales rates include a gas commodity
component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its
gas acquisition strategy, MichCon has entered into fixed-price contracts at
costs below $2.95 per Mcf for a substantial portion of its expected gas supply
requirements through 2001.

The Plan also includes a comprehensive experimental three-year customer choice
program, which is subject to annual caps on the level of participation. The
customer choice program began in April 1999, with approximately 70,000 customers
choosing to purchase natural gas from suppliers other than MichCon. Plan years
begin April 1 of each year, and the number of customers allowed to participate
in the plan was limited to 75,000 in 1999 and is limited to 150,000 in 2000 and
225,000 in 2001. There is also a volume limitation on commercial and industrial
participants. The volume limitation for these participants was 10 Bcf in 1999
and is 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 generate favorable
margins. Various parties have challenged the MPSCs approval of the plan. While
management believes the plan will be upheld, there can be no assurance as to the
outcome.

c. Proposed Legislation

The State of Michigan is continuing its initiatives designed to give all of
Michigans natural gas customers added choices and the opportunity to
benefit from lower gas costs resulting from competition. Natural gas choice
legislation is before the Michigan legislature and, if approved,

41



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

would: (1) give any qualified gas supplier the
opportunity to compete; (2) phase in gas choice for all Michigan customers over
three to five years; and (3) replace the regulatory gas
commodity pricing process with one
based on market prices that allows all customers to get the benefits of
market-based pricing whether they elect to stay with their utility or choose
another gas commodity supplier. Natural gas choice legislation could become effective prior to the
end of MichCons three-year customer choice program that ends in March 2002, and
therefore accelerate the transition to a competitive natural gas market.

d. Gas Cost Recovery Proceedings

Prior to January 1999, the GCR mechanism allowed MichCon to recover its cost of
gas sold if the MPSC determined that such costs were reasonable and prudent. An
annual GCR reconciliation proceeding provided a review of gas costs incurred
during the previous year and determined whether 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. The
GCR process was suspended with the implementation of MichCons Regulatory Reform
Plan in January 1999.

In February 1999, MichCon filed its final GCR reconciliation case covering gas
costs incurred during 1998, which indicates an overrecovery of $18,000,000,
including interest. Management believes that 1998 gas costs were reasonable and
prudent and that the MPSC should approve the gas costs incurred. However,
management cannot predict the outcome of this proceeding. During the first
quarter of 1999, MichCon refunded the overrecovery to customers as a reduction
in gas sales rates.

e. Other Rate Matters

In March 2000, several shippers on MichCons northern Michigan gathering system
filed a complaint with the MPSC requesting that the commission issue an order
reducing the rate charged for Antrim gas transportation services from 9 cents to
approximately 3.9 to 3.1 cents per Mcf. The complaint also requests refunds of
approximately $21,000,000 for prior periods during which that rate has been in
effect. Management believes that the commission has no legal authority to order
refunds associated with prior periods. The shippers allege that without the
reduced transportation rate, MichCon would overcollect approximately $28,500,000
over the next six years. While any complaint about rates could result in
a commission ordered reduction in rates, managements preliminary assessment of
the complaint is that it is without merit.

9. CAPITAL AND OPERATING LEASES

MichCon leases certain property (principally a warehouse, office building and
parking structure) under capital lease arrangements expiring at various dates to
2006, with renewal options extending beyond that date. Portions of the office
building and parking structure are subleased to various tenants. Long-term
capital lease obligations are not significant.

Operating lease payments for the years ended December 31, 1999, 1998 and 1997 were $2,073,000, $2,050,000 and
$2,015,000 respectively.

42



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

10. RETIREMENT BENEFITS AND TRUSTEED ASSETS

a. Pension Plan Benefits

MichCon participates in separate defined benefit retirement plans for union and
nonunion employees which are maintained by MCN. The plans are noncontributory,
cover substantially all employees and 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
1999, 1998 or 1997 plan years were made.

Net pension credit for the years ended December 31 includes the following
components:

|                               |                      |      |         |        |   |      |         |        |   |   |         |        |  
|------------------------------ | -------------------- | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|(in
Thousands)                 |                      | 1999 |         | 1998   |   | 1997
|                               |                      |      |         |        |   |     
|Service Cost                   |                      | $    | 11,686  |        |   | $    | 9,719   |        |   | $ | 9,406   |       
|                              
|                              
|                              
|                              
|Interest Cost                  |                      |      | 34,764  |        |   |      | 36,195  |        |   |   | 34,408  |       
|                              
|                              
|                              
|                              
|Expected Return on Plan Assets |                      |      | (78,489 | )      |   |      | (71,780 | )      |   |   | (61,615 | )     
|                              
|                              
|                              
|                              
|Amortization of:              
|                              
|                              
|                              
|                              
|                               | Net gain             |      |         | (5,263 | ) |      |         | (6,479 | ) |   |         | (5,177 | )
|                              
|                              
|                              
|                              
|                               | Prior service cost   |      |         | 1,711  |   |      |         | 1,031  |   |   |         | (163   | )
|                              
|                              
|                              
|                              
|                               | Net transition asset |      |         | (4,821 | ) |      |         | (4,938 | ) |   |         | (4,993 | )
|                              
|                              
|                              
|                              
|Special Termination Benefits   |                      |      |        |        |   |      | 5,054   |        |   |   |        |       
|                              
|                              
|                              
|                              
|Settlements                    |                      |      | (1,999  | )      |   |      | (6,935  | )      |   |   | (3,250  | )     
|                               |                      |      |         |        |   |      |         |        |   |   |         |       
|Net Pension Credit             |                      | $    | (42,411 | )      |   | $    | (38,133 | )      |   | $ | (31,384 | )     
|                               |                      |      |         |        |   |      |         |        |   |   |         |       

43



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

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:

|                                                            |                      |      |            |          |   |   |            |          |  
|----------------------------------------------------------- | -------------------- | ---- | ---------- | -------- | - | - | ---------- | -------- | -
|(in Thousands)                                              |                      | 1999 |            | 1998    
|                                                            |                      |      |            |         
|Measurement Date                                            |                      |      | October 31 |          |   |   | October 31 |         
|                                                           
|                                                           
|                                                           
|                                                           
|Accumulated Benefit Obligation at the End of the Period     |                      | $    | 413,415    |          |   | $ | 441,296    |         
|                                                            |                      |      |            |          |   |   |            |         
|Projected Benefit Obligation at the Beginning of the Period |                      | $    | 534,836    |          |   | $ | 465,098    |         
|                                                           
|                                                           
|                                                           
|                                                           
|Service Cost                                                |                      |      | 11,686     |          |   |   | 9,719      |         
|                                                           
|                                                           
|                                                           
|                                                           
|Interest Cost                                               |                      |      | 34,764     |          |   |   | 36,195     |         
|                                                           
|                                                           
|                                                           
|                                                           
|Plan Amendments                                             |                      |      |           |          |   |   | 22,564     |         
|                                                           
|                                                           
|                                                           
|                                                           
|Actuarial (Gain) Loss                                       |                      |      | (67,795    | )        |   |   | 45,200     |         
|                                                           
|                                                           
|                                                           
|                                                           
|Special Termination Benefits                                |                      |      |           |          |   |   | 5,054      |         
|                                                           
|                                                           
|                                                           
|                                                           
|Settlements Due to Lump Sums                                |                      |      | (5,469     | )        |   |   | (20,639    | )       
|                                                           
|                                                           
|                                                           
|                                                           
|Regular Benefits                                            |                      |      | (29,400    | )        |   |   | (28,355    | )       
|                                                            |                      |      |            |          |   |   |            |         
|Projected Benefit Obligation at the End of the Period       |                      | $    | 478,622    |          |   | $ | 534,836    |         
|                                                            |                      |      |            |          |   |   |            |         
|Plan Assets at Fair Value at the Beginning of the Period    |                      | $    | 872,390    |          |   | $ | 814,548    |         
|                                                           
|                                                           
|                                                           
|                                                           
|Actual Return on Plan Assets                                |                      |      | 90,614     |          |   |   | 102,153    |         
|                                                           
|                                                           
|                                                           
|                                                           
|Settlements Due to Lump Sums                                |                      |      | (1,310     | )        |   |   | (15,956    | )       
|                                                           
|                                                           
|                                                           
|                                                           
|Regular Benefits                                            |                      |      | (29,400    | )        |   |   | (28,355    | )       
|                                                            |                      |      |            |          |   |   |            |         
|Plan Assets at Fair Value at the End of the Period          |                      | $    | 932,294    |          |   | $ | 872,390    |         
|                                                            |                      |      |            |          |   |   |            |         
|Funded Status of the Plans                                  |                      | $    | 453,672    |          |   | $ | 337,554    |         
|                                                           
|                                                           
|                                                           
|                                                           
|Unrecognized:                                              
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Net gain             |      |            | (291,309 | ) |   |            | (214,328 | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Prior service cost   |      |            | 17,587   |   |   |            | 19,298   |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Net transition asset |      |            | (23,660  | ) |   |            | (28,645  | )
|                                                            |                      |      |            |          |   |   |            |         
|Prepaid Pension Cost                                        |                      | $    | 156,290    |          |   | $ | 113,879    |         
|                                                            |                      |      |            |          |   |   |            |         



In determining the actuarial present value of the projected benefit obligation,
the weighted average discount rate was 7.5%, 6.5% and 7.5% for 1999, 1998 and
1997, respectively. The rate of increase in future compensation levels used was
5% for 1999, 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 both 1999 and 1998 and 9.25% for 1997.

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.

MichCon also sponsors defined contribution retirement savings plans.
Participation in one of these plans is available to substantially all union and
nonunion employees. MichCon matches employee contributions up to certain
predefined limits based upon salary and years of credited service. The cost of
these plans was $4,700,000 in 1999, $4,800,000 in 1998, and $5,200,000 in 1997.

44



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

b. Other Postretirement Benefits

MichCon 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 MichCon. 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, MichCon deferred its 1993 postretirement costs in excess of claims paid
(including the amortization of the initial transition obligation) until 1994,
when new rates to recover such costs became effective.

MichCons policy is to fund certain trusts to meet its postretirement
benefit obligations. Separate qualified Voluntary Employees
Beneficiary Association (VEBA) trusts exist for union and nonunion employees.
There were no contributions made to the VEBA trusts in 1999. Funding to the VEBA
trusts totaled $2,000,000 and $6,500,000 in 1998 and 1997, 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
both 1999 and 1998 and 9.1% for 1997.

Net postretirement cost for the years ended December 31 includes the following
components:

|                               |                           |      |         |        |   |      |         |        |   |   |         |        |  
|------------------------------ | ------------------------- | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|(in Thousands)                 |                           | 1999 |         | 1998   |   | 1997
|                               |                           |      |         |        |   |     
|Service Cost                   |                           | $    | 4,272   |        |   | $    | 3,699   |        |   | $ | 4,094   |       
|                              
|                              
|                              
|                              
|Interest Cost                  |                           |      | 16,180  |        |   |      | 16,423  |        |   |   | 17,430  |       
|                              
|                              
|                              
|                              
|Expected Return on Plan Assets |                           |      | (14,788 | )      |   |      | (13,482 | )      |   |   | (11,026 | )     
|                              
|                              
|                              
|                              
|Amortization of:              
|                              
|                              
|                              
|                              
|                               | Net gain                  |      |         | (4,484 | ) |      |         | (5,684 | ) |   |         | (4,872 | )
|                              
|                              
|                              
|                              
|                               | Net transition obligation |      |         | 12,702 |   |      |         | 12,702 |   |   |         | 13,391 |  
|                              
|                              
|                              
|                              
|Special Termination Benefits   |                           |      |        |        |   |      | 1,186   |        |   |   |        |       
|                               |                           |      |         |        |   |      |         |        |   |   |         |       
|Total Postretirement Cost      |                           |      | 13,882  |        |   |      | 14,844  |        |   |   | 19,017  |       
|                              
|                              
|                              
|                              
|Regulatory Adjustment          |                           |      |        |        |   |      |        |        |   |   | 4,863   |       
|                               |                           |      |         |        |   |      |         |        |   |   |         |       
|Net Postretirement Cost        |                           | $    | 13,882  |        |   | $    | 14,844  |        |   | $ | 23,880  |       
|                               |                           |      |         |        |   |      |         |        |   |   |         |       

45



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

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:

|                                                                             |                           |      |            |          |   |   |            |          |  
|---------------------------------------------------------------------------- | ------------------------- | ---- | ---------- | -------- | - | - | ---------- | -------- | -
|(in Thousands)                                                               |                           | 1999 |            | 1998    
|                                                                             |                           |      |            |         
|Measurement Date                                                             |                           |      | October 31 |          |   |   | October 31 |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Accumulated Postretirement Benefit Obligation at the Beginning of the Period |                           | $    | 248,937    |          |   | $ | 223,124    |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Service Cost                                                                 |                           |      | 4,272      |          |   |   | 3,699      |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Interest Cost                                                                |                           |      | 16,180     |          |   |   | 16,423     |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Plan Amendments                                                              |                           |      |           |          |   |   | (8,269     | )       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Actuarial (Gain) Loss                                                        |                           |      | (6,691     | )        |   |   | 24,320     |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Special Termination Benefits                                                 |                           |      |           |          |   |   | 1,186      |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Benefits Paid                                                                |                           |      | (12,315    | )        |   |   | (11,546    | )       
|                                                                             |                           |      |            |          |   |   |            |         
|Accumulated Postretirement Benefit Obligation at the End of the Period       |                           | $    | 250,383    |          |   | $ | 248,937    |         
|                                                                             |                           |      |            |          |   |   |            |         
|Plan Assets at Fair Value at the Beginning of the Period                     |                           | $    | 173,148    |          |   | $ | 151,645    |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Actual Return on Plan Assets                                                 |                           |      | 26,103     |          |   |   | 25,677     |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Company Contributions                                                        |                           |      | 2,000      |          |   |   | 6,500      |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Regular Benefits                                                             |                           |      | (11,720    | )        |   |   | (10,674    | )       
|                                                                             |                           |      |            |          |   |   |            |         
|Plan Assets at Fair Value at the End of the Period                           |                           | $    | 189,531    |          |   | $ | 173,148    |         
|                                                                             |                           |      |            |          |   |   |            |         
|Funded Status of the Plans                                                   |                           | $    | (60,852    | )        |   | $ | (75,789    | )       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Unrecognized:                                                               
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Net gain                  |      |            | (128,743 | ) |   |            | (116,191 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Net transition obligation |      |            | 175,305  |   |   |            | 188,026  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Contributions Made After Measurement Date                                    |                           |      |           |          |   |   | 2,000      |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Regular Benefits Made After Measurement Date                                 |                           |      |           |          |   |   | (11,720    | )       
|                                                                             |                           |      |            |          |   |   |            |         
|Accrued Postretirement Liability                                             |                           | $    | (14,290    | )        |   | $ | (13,674    | )       
|                                                                             |                           |      |            |          |   |   |            |         

---

The rate at which healthcare costs are assumed to increase is the most
significant factor in estimating MichCons postretirement benefit obligation.
MichCon used a rate of 8% for 2000, and a rate that gradually declines each year
until it stabilizes at 5% in 2005. A one percentage point increase in the
assumed rates would increase the accumulated postretirement benefit obligation
at December 31, 1999 by $33,559,000 (13%) and increase the sum of the service
and interest rate cost by $3,293,000 (16%) for the year then ended. A one
percentage point decrease in the assumed rates would decrease the accumulated
postretirement benefit obligation at December 31, 1999 by $29,320,000 (12%) and
decrease the sum of the service and interest rate cost by $2,838,000 (14%) for
the year then ended.

The discount rate used in determining the accumulated postretirement benefit obligation was 7.5%, 6.5% and 7.5%
for 1999, 1998 and 1997, respectively.

46



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

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

During 1998 and 1997, MichCon contributed $28,200,000 and $31,300,000 to a
Grantor Trust, respectively, which invested such proceeds in life insurance contracts and
income securities. MichCon did not make a contribution in 1999. Employees and retirees have no right, title or
interest in the assets of the Grantor Trust, and MichCon can revoke such trust
subject to providing the MPSC with prior notification.

11. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE FINANCIAL INSTRUMENTS

a. Natural Gas Price Hedging

As part of its gas acquisition strategy, MichCon has entered into firm-price
contracts for a substantial portion of its expected gas supply requirements
through 2001. During 1999, MichCon used natural gas swap agreements to manage
its exposure to the risk of market price fluctuations on variable-priced gas
purchase commitments, which effectively fixed the commodity rate portion of such
commitments. If MichCon did not use the natural gas swap agreements, its
exposure to such risk would have been higher. Although this strategy reduced
MichCons risk, it also limited potential gains from favorable changes in gas
prices.

Changes in the market value of the swap agreements were deferred and included in
inventory costs until the hedged transaction was completed, at which time the
realized gain or loss was included in the cost of gas. As of December 31, 1999,
MichCon did not have any swap contracts. As of December 31, 1998, MichCons
deferred loss from swap contracts was $3,313,000.

b. Interest Rate Hedging

In order to manage interest costs, MichCon uses interest rate swap agreements to
exchange fixed- and variable-rate interest payment obligations over the life of
the agreements without exchange of the underlying principal amounts. 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, unrealized 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, 1999, MichCon had interest rate swap agreements with notional
principal amounts totaling $104,333,000 (Note 6a) and a weighted average
remaining life of 3.3 years. At December 31, 1998, the notional principal
amounts of outstanding interest rate swaps totaled $106,100,000. 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.

47



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

12. FAIR VALUE OF FINANCIAL AND OTHER SIMILAR INSTRUMENTS

MichCon 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 MichCon could realize in a current market
exchange. The carrying amounts of certain financial instruments, such as notes
payable, customer deposits and notes receivable, approximate fair value.

The carrying amount and fair value of other financial instruments consist of the
following:

---

|                                      |                                                     |                        |   |            |   |           |   |            |      |           |   |         |   |  |   |         |      |  
|------------------------------------- | --------------------------------------------------- | ---------------------- | - | ---------- | - | --------- | - | ---------- | ---- | --------- | - | ------- | - |  | - | ------- | ---- | -
|                                      |                                                     |                        |   | 1999       |   | 1998     
|                                      |                                                     |                        |   |            |   |           |  
|                                      |                                                     |                        |   | Carrying   |   | Estimated |   | Carrying   |      | Estimated
|(in Thousands)                        |                                                     | Amount                 |   | Fair Value |   | Amount    |   | Fair Value
|                                      |                                                     |                        |   |            |   |           |   |           
|Assets:                              
|                                     
|                                     
|                                     
|                                     
|                                      | Long-term investments                               |                        | $ | 67,210     |   |           | $ | 67,210     |      |           | $ | 65,556  |   |  | $ | 65,556  |     
|                                     
|                                     
|                                     
|                                     
|Liabilities and Shareholders Equity:
|                                     
|                                     
|                                     
|                                     
|                                      | Long-term debt, excluding capital
lease obligations |                        |   | 677,517    |   |           |   | 651,080    |      |           |   | 615,419 |   |  |   | 668,063 |     
|                                     
|                                     
|                                     
|                                     
|Derivative Financial Instruments:    
|                                     
|                                     
|                                     
|                                     
|                                      | Natural gas swaps:
    with unrealized losses       |                        |   |           |   |           |   |           |      |           |   | (3,313  | ) |  |   | (3,313  | )   
|                                     
|                                     
|                                     
|                                     
|                                      | Interest rate swaps:
    with unrealized gains      |                        |   |           |   |           |   | 165        |      |           |   |        |   |  |   | 6,340   |     
|                                     
|                                     
|                                     
|                                     
|                                      |                                                     | with unrealized losses |   |            |  |           |   |            | (173 | )         |   |         |  |  |   |         | (696 | )



---

The fair values are determined based on the following:



| |  |  | Long-term investments  carrying amount approximates fair value taking into
consideration interests rates available to MichCon for investments with
similar provisions.                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Long-term debt  interest rates available to MichCon for issuance of debt
with similar terms and remaining maturities.                                                                                                             
|
| |  |  | Natural gas and interest rate swaps  estimated amounts that MichCon would
receive or pay to terminate the swap agreements, taking into account
current gas prices, interest rates and the credit-worthiness of the
counterparties.
|
| |  |  | Guaranty  management is unable to practicably estimate the fair value of
the Harbortown guaranty (Note 7b) due to the nature of the transaction.                                                                                  

The fair value estimates presented herein are based on information available to
management as of December 31, 1999 and 1998. Management is not aware of any
subsequent factors that would significantly affect the estimated fair value
amounts.

48



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

13. RELATED PARTY TRANSACTIONS

MichCon enters into transactions with affiliated companies to provide
transportation and storage services. Under a service agreement with MCN, MichCon
receives various tax, financial and legal services and provides construction,
engineering, human resources, information technology and other services. The
following is a summary of transactions with affiliated companies:

|               |                                                     |      |   |        |  |      |   |        |  |  |   |        | 
|-------------- | --------------------------------------------------- | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|(in Thousands) |                                                     | 1999 |   | 1998   |  | 1997
|               |                                                     |      |   |        |  |     
|Revenues:     
|              
|              
|              
|              
|               | Transportation and storage services                 |      | $ | 13,810 |  |      | $ | 11,566 |  |  | $ | 14,744 | 
|              
|              
|              
|              
|               | Other services                                      |      |   | 6,057  |  |      |   | 6,820  |  |  |   | 1,774  | 
|              
|              
|              
|              
|               | Interest revenue                                    |      |   | 390    |  |      |   | 1,502  |  |  |   |       | 
|              
|              
|              
|              
|Costs:        
|              
|              
|              
|              
|               | Corporate expenses, merger costs and other services |      |   | 30,809 |  |      |   | 10,634 |  |  |   | 20,179 | 



---

MichCons accounts receivable from affiliated companies totaled $11,509,000 and
$21,640,000, and accounts payable to affiliated companies totaled $18,850,000
and $11,501,000 at December 31, 1999 and 1998, respectively.

MichCon is a participant in an intercompany credit agreement whereby it can
borrow needed cash from and loan available cash to MCN and its subsidiaries. The
outstanding balance of notes receivable from affiliated companies at December
31, 1999 was $7,946,000 with interest at the prime rate of 8.5%. The outstanding
balance of notes receivable from affiliated companies at December 31, 1998 was
$3,249,000 with interest at the prime rate of 7.75%. The outstanding balance of
notes payable to affiliated companies at December 31, 1999 was $40,000. MichCon
had no outstanding balance of notes payable to affiliated companies at December
31, 1998.

49



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

14. SUMMARY OF INCOME TAXES

MichCon is part of the consolidated federal income tax return of MCN. The
federal income tax expense for MichCon and its subsidiaries is determined on an
individual company basis with no allocation of tax benefits or expenses from
other affiliates of MCN.

|                                                          |                        |                                                |        |        |        |      |        |        |        |   |        |        |        |  
|--------------------------------------------------------- | ---------------------- | ---------------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|(in
Thousands)                                            |                        | 1999                                           |        | 1998   |        | 1997
|                                                          |                        |                                                |        |        |        |     
|Effective Federal Income Tax Rate                         |                        |                                                | 34.4   | %      |        |      | 31.5   | %      |        |   | 36.4   | %     
|                                                          |                        |                                                |        |        |        |      |        |        |        |   |        |       
|                                                         
|                                                         
|                                                         
|                                                         
|Income Taxes Consist of:                                 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Current provision      |                                                | $      | 34,180 |        |      | $      | 27,768 |        |   | $      | 37,901 |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Deferred provision     |                                                |        | 24,316 |        |      |        | 11,010 |        |   |        | 9,607  |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Investment tax credits |                                                |        | (2,007 | )      |      |        | (2,961 | )      |   |        | (1,843 | )     
|                                                          |                        |                                                |        |        |        |      |        |        |        |   |        |       
|                                                          |                        | $                                              | 56,489 |        |        | $    | 35,817 |        |        | $ | 45,665 |       
|                                                          |                        |                                                |        |        |        |      |        |        |        |   |        |       
|Reconciliation Between Statutory and Actual Income Taxes:
|                                                         
|                                                         
|                                                         
|                                                         
|Statutory Federal Income Taxes at a Rate of 35%           |                        | $                                              | 56,989 |        |        | $    | 39,477 |        |        | $ | 43,640 |       
|                                                         
|                                                         
|                                                         
|                                                         
|Adjustments to Federal Tax Expense:                      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                        | Book over tax depreciation                     |        |        | 2,018  |      |        |        | 1,071  |   |        |        | 5,301  |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                        | Adjustments to taxes provided in prior periods |        |        | 850    |      |        |        | 1,080  |   |        |        | 300    |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                        | Investment tax credits                         |        |        | (2,007 | )    |        |        | (2,961 | ) |        |        | (1,843 | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                        | Other  net                                    |        |        | (1,361 | )    |        |        | (2,850 | ) |        |        | (1,733 | )
|                                                          |                        |                                                |        |        |        |      |        |        |        |   |        |       
|                                                          |                        | $                                              | 56,489 |        |        | $    | 35,817 |        |        | $ | 45,665 |       
|                                                          |                        |                                                |        |        |        |      |        |        |        |   |        |       

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.

50



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

The tax effect of temporary differences that gave rise to MichCons deferred tax
assets and liabilities consisted of the following:

|                                         |                                                                |      |         |        |  |   |         |        | 
|---------------------------------------- | -------------------------------------------------------------- | ---- | ------- | ------ |  | - | ------- | ------ | 
|(in Thousands)                           |                                                                | 1999 |         | 1998  
|                                         |                                                                |      |         |       
|Deferred Tax Assets:                    
|                                        
|                                        
|                                        
|                                        
|                                         | Employee benefits                                              |      | $       | 8,039  |  |   | $       | 5,406  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Uncollectibles                                                 |      |         | 6,222  |  |   |         | 3,125  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Vacation accrual                                               |      |         | 2,362  |  |   |         | 2,259  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Postretirement benefits                                        |      |         | 5,424  |  |   |         | 5,394  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Other                                                          |      |         | 1,227  |  |   |         | 1,351  | 
|                                         |                                                                |      |         |        |  |   |         |       
|                                         |                                                                |      | 23,274  |        |  |   | 17,535  |       
|                                         |                                                                |      |         |        |  |   |         |       
|Deferred Tax Liabilities:               
|                                        
|                                        
|                                        
|                                        
|                                         | Depreciation and other property related basis
differences, net |      |         | 54,202 |  |   |         | 51,965 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Pensions                                                       |      |         | 52,755 |  |   |         | 37,911 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Property taxes                                                 |      |         | 18,005 |  |   |         | 13,360 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Gas cost recovery undercollection                              |      |         |       |  |   |         | 57     | 
|                                        
|                                        
|                                        
|                                        
|                                         | Other                                                          |      |         | 14,330 |  |   |         | 12,060 | 
|                                         |                                                                |      |         |        |  |   |         |       
|                                         |                                                                |      | 139,292 |        |  |   | 115,353 |       
|                                         |                                                                |      |         |        |  |   |         |       
|Net Deferred Tax Liability               |                                                                |      | 116,018 |        |  |   | 97,818  |       
|                                        
|                                        
|                                        
|                                        
|Less: Net Deferred Tax Liability-Current |                                                                |      | 10,667  |        |  |   | 9,251   |       
|                                         |                                                                |      |         |        |  |   |         |       
|Net Deferred Tax Liability-Noncurrent    |                                                                | $    | 105,351 |        |  | $ | 88,567  |       
|                                         |                                                                |      |         |        |  |   |         |       

15. 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. Stock-based awards encourage a strategic focus of
long-term performance and have high employee retention value. Prior to 1999,
MichCons policy was to issue all stock based awards in the form of performance
units. In February 1999, MichCon revised its policy whereby 50% of any
stock-related awards will be in the form of stock options. The remaining 50% of
any awards will continue to be in the form of performance units. Pending the
results of the proposed merger, no awards will be made under the Plan in 2000.

During 1999, 1998 and 1997, MichCon granted 47,080, 125,016 and 102,750
performance units, respectively, with a weighted-average grant date fair value
of $17.25, $37.00 and $31.00 per unit, respectively. The performance units are
denominated in shares of MCN common stock. Under the terms of the Plan, 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 are
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 MichCon ceases.

In February 1999, MichCon granted 356,125 stock options with a grant date fair value of $2.67 per option. Each

51



---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

option allows the participant to purchase one share of MCN common stock at
$17.25, which was the market price of MCNs common shares on the grant date. The
options were set to vest ratably over the three years following date of grant
and expire in the tenth year following date of grant. During 1999, 28,875
options were forfeited and no options were exercised resulting in 327,250
options outstanding at December 31, 1999.

MichCon accounts for stock-based compensation awards under the fair value-based
method as prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation. Accordingly, the costs of performance units and stock options
awarded, generally measured at their fair value on the grant date, are recorded
as compensation expense over their vesting period.

As a result of MCN shareholders approving the pending merger with DTE (Note 2)
on December 20, 1999, provisions of the Stock Incentive Plan provided for the
immediate vesting of all performance units and stock options outstanding. The
performance unit grants outstanding vested at no less than 100%, and were based
on MCNs total shareholder return relative to its peer group at the date of the
shareholders vote. Subject to the stock ownership guidelines, participants had
a one-time choice to have the value of their options and performance units paid
in cash  at a weighted value of $25.12. Accordingly, MichCon adjusted 1999 compensation expense to reflect the
December 1999 value and the accelerated vesting of awards outstanding.

Stock-based compensation cost recognized during 1999 for all awards outstanding
totaled $8,692,000. A stock-based compensation benefit of $1,493,000 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 cost
recognized during 1997 totaled $7,430,000.

52



---



INDEPENDENT AUDITORS REPORT

Michigan Consolidated Gas Company:

We have audited the accompanying consolidated statements of financial position
of Michigan Consolidated Gas Company and subsidiaries (the Company) as of
December 31, 1999 and 1998, and the related consolidated statements of income,
cash flows and capitalization for each of the three years in the period ended
December 31, 1999. Our audits also included the consolidated financial statement
schedule listed in Item 8. These financial statements and the financial
statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles. Also, 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 shown therein.

Deloitte & Touche LLP
Detroit, Michigan
March 21, 2000

53



---



SUPPLEMENTARY FINANCIAL INFORMATION

Quarterly Operating Results (Unaudited)

Due to the seasonal nature of MichCons business, revenues and net income
tend to be higher in the first and fourth quarters of the calendar year.

|                        |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         | 
|----------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | 
|                        |  | First   |         | Second  |  | Third   |         | Fourth 
|                        |  | Quarter |         | Quarter |  | Quarter |         | Quarter
|                        |  |         |         |         |  |         |         |        
|(Thousands of Dollars) 
|                       
|                       
|                       
|                       
|1999                   
|                       
|                       
|                       
|                       
|Operating Revenue       |  | $       | 498,090 |         |  | $       | 185,555 |         |  | $ | 122,635 |   |  | $ | 329,459 | 
|                       
|                       
|                       
|                       
|Operating Income (Loss) |  |         | 139,123 |         |  |         | 23,745  |         |  |   | (4,405  | ) |  |   | 57,709  | 
|                       
|                       
|                       
|                       
|Net Income (Loss)       |  |         | 83,973  |         |  |         | 8,165   |         |  |   | (13,540 | ) |  |   | 27,738  | 
|                       
|                       
|                       
|                       
|1998                   
|                       
|                       
|                       
|                       
|Operating Revenue       |  | $       | 429,227 |         |  | $       | 172,787 |         |  | $ | 122,428 |   |  | $ | 309,216 | 
|                       
|                       
|                       
|                       
|Operating Income (Loss) |  |         | 109,669 |         |  |         | 15,962  |         |  |   | (25,997 | ) |  |   | 56,977  | 
|                       
|                       
|                       
|                       
|Net Income (Loss)       |  |         | 61,664  |         |  |         | 3,014   |         |  |   | (18,338 | ) |  |   | 30,636  | 

54



---



SCHEDULE II

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

(Thousands of Dollars)

|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |   |       
|----------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------------- | -------------------- | -------- | ---------- | -------- |  | -------- | --------------------- | ------------ | ---------- | -------- | ------ | --------- | -------------- |  | ------------- | ------------- | ------- | ------ | - | --- |  |  |  |  |  |  | - | ------ | ----- |  |  | - | ------
|Column A                                                                                                                            |                                               | Column B                        |                      | Column C |            | Column D |  | Column E |                      
|                                                                                                                                    |                                               |                                 | Additions            |          |           
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                      
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          | Provisions charged to |              | Deductions
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       | for Purposes
|                                                                                                                                    |                                               |                                 |                      |          | Balance at |          |  |          |                       |              |            |          |        |           | Utility Plant/ |  | for Which the |               | Balance
|                                                                                                                                    |                                               |                                 |                      |          | Beginning  |          |  |          |                       |              |            |          |        |           | Regulatory     |  |               | Reserves Were |         | at End
|Description                                                                                                                         |                                               | of Period                       |                      |          |            |          |  | Income   |                       | Asset        |            | Provided |        | of Period
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |         
|Year Ended December 31, 1999                                                                                                       
|Reserve Deducted From Assets in                                                                                                    
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    | Consolidated Statement of Financial Position:
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    |                                               | Allowance for doubtful accounts |                      | $        | 8,928      |          |  |          |                       |              |            | $        | 11,512 |           |                |  |               |               |         | $      |  |     |  |  |  |  |  |  | $ | 2,663  |       |  |  | $ | 17,777
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |  
|Reserve Included in Current Liabilities  Other and in Accrued Environmental
Costs in Consolidated Statement of Financial Position:
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    |                                               | Environmental testing           |                      | $        | 32,092     |          |  |          |                       |              |            | $        |       |           |                |  |               |               |         | $      |  |     |  |  |  |  |  |  | $ | 724    |       |  |  | $ | 31,368
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |  
|Reserves Included in Deferred Credits and
Other Liabilities  Other
in Consolidated Statement of Financial Position:               
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    |                                               |                                 | Injuries and damages |          | $          | 2,515    |  |          |                       |              |            |          | $      | 1,716     |                |  |               |               |         |        | $ | 416 |  |  |  |  |  |  |   | $      | 1,921 |  |  |   | $     
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |  
|Year Ended December 31, 1998                                                                                                       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Reserve Deducted From Assets in
Consolidated Statement of Financial Position:                                                      
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    |                                               | Allowance for doubtful accounts |                      | $        | 15,015     |          |  |          |                       |              |            | $        | 13,029 |           |                |  |               |               |         | $      |  |     |  |  |  |  |  |  | $ | 19,116 |       |  |  | $ | 8,928 
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |  
|Reserve Included in Current Liabilities  Other in Consolidated Statement of
Financial Position:                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    |                                               | Environmental testing           |                      | $        | 33,741     |          |  |          |                       |              |            | $        |       |           |                |  |               |               |         | $      |  |     |  |  |  |  |  |  | $ | 1,649  |       |  |  | $ | 32,092
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |  
|Reserves Included in Deferred Credits and
Other Liabilities  Other
in Consolidated Statement of Financial Position:               
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    |                                               |                                 | Injuries and damages |          | $          | 4,838    |  |          |                       |              |            |          | $      | (328      | )              |  |               |               |         |        | $ | 438 |  |  |  |  |  |  |   | $      | 2,433 |  |  |   | $     
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |  
|Year Ended December 31, 1997                                                                                                       
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|Reserve Deducted From Assets in
Consolidated Statement of Financial Position:                                                      
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    |                                               | Allowance for doubtful accounts |                      | $        | 17,707     |          |  |          |                       |              |            | $        | 21,680 |           |                |  |               |               |         | $      |  |     |  |  |  |  |  |  | $ | 24,372 |       |  |  | $ | 15,015
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |  
|Reserve Included in Current Liabilities  Other in Consolidated Statement of
Financial Position:                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                   
|                                                                                                                                    |                                               | Environmental testing           |                      | $        | 34,576     |          |  |          |                       |              |            | $        |       |           |                |  |               |               |         | $      |  |     |  |  |  |  |  |  | $ | 835    |       |  |  | $ | 33,741
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |  
|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 |  |  |   | $     
|                                                                                                                                    |                                               |                                 |                      |          |            |          |  |          |                       |              |            |          |        |           |                |  |               |               |         |        |   |     |  |  |  |  |  |  |   |        |       |  |  |  

55



---



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

56



---



PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT

Omitted per general instruction I (2) (c) of Form 10-K for wholly owned
subsidiaries (reduced disclosure format).

57



---



ITEM 11. EXECUTIVE COMPENSATION

Omitted per general instruction I (2) (c) of Form 10-K for wholly owned
subsidiaries (reduced disclosure format).

58



---



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

Omitted per general instruction I (2) (c) of Form 10-K for wholly owned
subsidiaries (reduced disclosure format).

59



---



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Omitted per general instruction I (2) (c) of Form 10-K for wholly owned
subsidiaries (reduced disclosure format).

60



---



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 the financial statements included herein, see the section
titled Financial Statements and Supplementary Data, page
30 in Part II, Item 8
of this Report.

2. For the financial statement schedule included herein, see the section titled
Financial Statements and Supplementary Data, page 30 in Part II, Item 8 of
this Report.

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.

61



---



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS
ON FORM 8-K (CONTINUED)

3. Exhibits, including those incorporated by reference:

|            |  |             | 
|----------- |  | ----------- | 
|Exhibit No. |  | Description
|            |  |            

|    |  |                                                                                         
|--- |  | ----------------------------------------------------------------------------------------
|3-1 |  | Restated Articles of Incorporation of MichCon (Exhibit 3-1 to March 31, 1993 Form 10-Q).

|    |  |                                                              
|--- |  | -------------------------------------------------------------
|3-2 |  | By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q).

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4-1 |  | 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, 1995 (Exhibit 4-2 to Registration Statement No. 33-59093);
Thirty-fourth Supplemental Indenture, dated November 1, 1996 (Exhibit 4-2 to Registration
Statement No. 333-16285), and Thirty-fifth Supplemental
Indenture, dated June 18, 1998 (Exhibit 4-2 to June 18, 1998 Form 8-K).

|    |  |                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4-2 |  | Senior Debt Securities Indenture between Michigan
Consolidated Gas Company and Citibank, N.A., as Trustee, dated June 1, 1998 (Exhibit 4.1 to Amendment No. 2 to
Registration Statement No. 333-56333); First Supplemental Indenture dated June 18, 1998 (Exhibit 4-1 to June 18, 1998 Form 8-K); and Second Supplemental Indenture dated June 9,
1999 (Exhibit 4-1 to June 4, 1999 Form 8-K)

|    |  |                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|4-3 |  | MichCon 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 MichCon.

|     |  |                                                                                                  
|---- |  | -------------------------------------------------------------------------------------------------
|10-1 |  | MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN Registration Statement No
33-21930-99).

|     |  |                                                                              
|---- |  | -----------------------------------------------------------------------------
|10-2 |  | Form of Employment Agreement (Exhibit 99-2 to MCNs June 30, 1997 Form 10-Q).

|     |  |                                                                                                           
|---- |  | ----------------------------------------------------------------------------------------------------------
|10-3 |  | MCN Energy Group Inc. Executive Annual Performance Plan, as
amended (Exhibit 4-3 to MCNs 1998 Form 10-K).

|     |  |                                                         
|---- |  | --------------------------------------------------------
|10-4 |  | MCN Energy Group Inc. Stock Incentive Plan, as amended.*

|     |  |                                                       
|---- |  | ------------------------------------------------------
|10-5 |  | MCN Executive Deferred Compensation Plan, as amended.*

|     |  |                                                                            
|---- |  | ---------------------------------------------------------------------------
|10-6 |  | MichCon Supplemental Death Benefit and Retirement Income Plan, as amended.*

|     |  |                                                                  
|---- |  | -----------------------------------------------------------------
|10-7 |  | MCN Energy
Group Inc.  Supplemental Retirement Plan, as amended.*

|     |  |                                                       
|---- |  | ------------------------------------------------------
|10-8 |  | MCN Mandatory Deferred Compensation Plan, as amended.*

|     |  |                                                              
|---- |  | -------------------------------------------------------------
|10-9 |  | MCN Energy Group Inc. Supplemental Savings Plan, as amended.*

62



---



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS
ON FORM 8-K (CONCLUDED)

|      |  |                                                                                                                                                                                                                                
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                
|     
|10-10 |  | MCN Energy Group Inc. Long-Term Incentive Performance Share Plan, as amended.*                                                                                                                                                 
|     
|     
|     
|     
|10-11 |  | MCN Energy Group Savings and Stock Ownership Plan, as amended (Exhibit 10-11 to 1998 Form
10-K).                                                                                                                               
|     
|     
|     
|     
|10-12 |  | MichCon Investment and Stock Ownership Plan, as amended (Exhibit 10-12 to 1998 Form 10-K).                                                                                                                                     
|     
|     
|     
|     
|10-13 |  | Reset Remarketing Agreement, dated as of June 23, 1998, by and between Michigan Consolidated
Gas Company and Salomon Brothers Inc. (Exhibit 10-1 to June 18, 1998 Form 8-K).                                                   
|     
|     
|     
|     
|10-14 |  | Reset Remarketing Agreement, dated as of June 23, 1998, by and between Michigan Consolidated
Gas Company and Merrill Lynch & Co./Merrill Lynch, Pierce, Fenner and Smith Incorporated
(Exhibit 10-2 to June 18, 1998 Form 8-K).
|     
|     
|     
|     
|12-1  |  | Computation of Ratio of Earnings to Fixed Charges.*                                                                                                                                                                            
|     
|     
|     
|     
|23-1  |  | Independent Auditors Consent  Deloitte & Touche LLP.*                                                                                                                                                                        
|     
|     
|     
|     
|24-1  |  | Powers of Attorney.*                                                                                                                                                                                                           
|     
|     
|     
|     
|27-1  |  | Financial Data Schedule.*                                                                                                                                                                                                      

(B) REPORTS ON FORM 8-K:

None.

______________________



|* |  | Indicates document filed herewith.
|- |  | ----------------------------------

References are to MichCons File No. 1-7310 for the MichCon documents
incorporated by reference and to MCNs File No. 1-10070 for the MCN documents
incorporated by reference.

63





---



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.

| |                                              
| | ---------------------------------------------
| | MICHIGAN CONSOLIDATED GAS
COMPANY(Registrant)
| |                                              
| | By:/s/Robert Kaslik                          
| | Robert KaslikController
March 28, 2000       

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.

|                     |  |                                                                           |  |               
|-------------------- |  | ------------------------------------------------------------------------- |  | --------------
|                     |  | TITLE                                                                     |  | DATE          
|                     |  |                                                                           |  |               
|*                    |  | Director and Chairman                                                     |  | March 28, 2000
|                    
|Alfred R. Glancy III
|                    
|                    
|                    
|                    
|*                    |  | Director, President and Chief Executive Officer                           |  | March 28, 2000
|                    
|Stephen E. Ewing    
|                    
|                    
|                    
|                    
|*                    |  | Director, Executive Vice President, Chief Financial Officer and Treasurer |  | March 28, 2000
|                    
|Howard L. Dow III   
|                    
|                    
|                    
|                    
|*                    |  | Director, Senior Vice President, General Counsel and Secretary            |  | March 28, 2000
|                    
|Daniel L. Schiffer  
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|/s/Robert Kaslik     |  | Controller                                                                |  | March 28, 2000
|                    
|Robert Kaslik       







|                                      
|--------------------------------------
|*By:/s/ Robert Kaslik                 
|Robert Kaslik
        Attorney-in-Fact





64



---



EXHIBIT INDEX

|            |  |             | 
|----------- |  | ----------- | 
|Exhibit No. |  | Description
|            |  |            

|    |  |                                                                                         
|--- |  | ----------------------------------------------------------------------------------------
|3-1 |  | Restated Articles of Incorporation of MichCon (Exhibit 3-1
to March 31, 1993 Form 10-Q).

|    |  |                                                              
|--- |  | -------------------------------------------------------------
|3-2 |  | By-Laws of MichCon (Exhibit 3-2 to March 31, 1993 Form 10-Q).

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4-1 |  | 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, 1995
(Exhibit 4-2 to Registration Statement No. 33-59093);
Thirty-fourth Supplemental Indenture, dated November 1, 1996
(Exhibit 4-2 to Registration Statement No. 333-16285), and
Thirty-fifth Supplemental Indenture, dated June 18, 1998
(Exhibit 4-2 to June 18, 1998 Form 8-K).

|    |  |                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4-2 |  | Senior Debt Securities Indenture between Michigan
Consolidated Gas Company and Citibank, N.A., as Trustee,
dated June 1, 1998 (Exhibit 4.1 to Amendment No. 2 to
Registration Statement No. 333-56333); First Supplemental
Indenture dated June 18, 1998 (Exhibit 4-1 to June 18, 1998
Form 8-K); and Second Supplemental Indenture dated June 9,
1999 (Exhibit 4-1 to June 4, 1999 Form 8-K).

|    |  |                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|4-3 |  | MichCon 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 MichCon.

|     |  |                                                                                                    |  | 
|---- |  | -------------------------------------------------------------------------------------------------- |  | 
|10-1 |  | MCN Stock Option Plan Post-Effective Amendment No. 1 (MCN
Registration Statement No. 33-21930-99).

|     |  |                                                                              
|---- |  | -----------------------------------------------------------------------------
|10-2 |  | Form of Employment Agreement (Exhibit 99-2 to MCNs June 30,
1997 Form 10-Q).

|     |  |                                                                                                           
|---- |  | ----------------------------------------------------------------------------------------------------------
|10-3 |  | MCN Energy Group Inc. Executive Annual Performance Plan, as
amended (Exhibit 4-3 to MCNs 1998 Form 10-K).

|     |  |                                                         
|---- |  | --------------------------------------------------------
|10-4 |  | MCN Energy Group Inc. Stock Incentive Plan, as amended.*

|     |  |                                                       
|---- |  | ------------------------------------------------------
|10-5 |  | MCN Executive Deferred Compensation Plan, as amended.*

|     |  |                                                                            
|---- |  | ---------------------------------------------------------------------------
|10-6 |  | MichCon Supplemental Death Benefit and Retirement Income
Plan, as amended.*

|     |  |                                                                 
|---- |  | ----------------------------------------------------------------
|10-7 |  | MCN Energy Group Inc. Supplemental Retirement Plan, as amended.*

|     |  |                                                       
|---- |  | ------------------------------------------------------
|10-8 |  | MCN Mandatory Deferred Compensation Plan, as amended.*

|     |  |                                                              
|---- |  | -------------------------------------------------------------
|10-9 |  | MCN Energy Group Inc. Supplemental Savings Plan, as
amended.*





---



|      |  |                                                                                                                                                                                                                                
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10-10 |  | MCN Energy Group Inc. Long-Term Incentive Performance Share Plan,
as amended.*                                                                                                                                                 
|     
|     
|     
|     
|10-11 |  | MCN Energy Group Savings and Stock Ownership Plan, as amended
(Exhibit 10-11 to 1998 Form 10-K).                                                                                                                               
|     
|     
|     
|     
|10-12 |  | MichCon Investment and Stock Ownership Plan, as amended (Exhibit
10-12 to 1998 Form 10-K).                                                                                                                                     
|     
|     
|     
|     
|10-13 |  | Reset Remarketing Agreement, dated as of June 23, 1998, by and
between Michigan Consolidated Gas Company and Salomon Brothers
Inc. (Exhibit 10-1 to June 18, 1998 Form 8-K).                                                   
|     
|     
|     
|     
|10-14 |  | Reset Remarketing Agreement, dated as of June 23, 1998, by and
between Michigan Consolidated Gas Company and Merrill Lynch &
Co./Merrill Lynch, Pierce, Fenner and Smith Incorporated (Exhibit
10-2 to June 18, 1998 Form 8-K).
|     
|     
|     
|     
|12-1  |  | Computation of Ratio of Earnings to Fixed Charges.*                                                                                                                                                                            
|     
|     
|     
|     
|23-1  |  | Independent Auditors Consent  Deloitte & Touche LLP.*                                                                                                                                                                        
|     
|     
|     
|     
|24-1  |  | Powers of Attorney.*                                                                                                                                                                                                           
|     
|     
|     
|     
|27-1  |  | Financial Data Schedule.*