<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                        -------------------------------
 
                                   FORM 10-Q
 
(MARK ONE)
 
[X]             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997, 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 1-10070
 
                             MCN ENERGY GROUP INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                                         <C>
                      MICHIGAN                                                   38-2820658
           (State or other jurisdiction of                                    (I.R.S. Employer
           incorporation or organization)                                    Identification No.)
       500 GRISWOLD STREET, DETROIT, MICHIGAN                                       48226
      (Address of principal executive offices)                                   (Zip Code)
</TABLE>
 
Registrant's telephone number, including area code 313-256-5500
 
                                   NO CHANGES
   (Former name, former address and former fiscal year, if changed since last
                                    report.)
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
                      Yes  [X]                    No  [ ]
 
     Number of shares outstanding of each of the registrant's classes of common
stock, as of July 31, 1997:
 
     Common Stock, par value $.01 per share: 77,961,899
 
================================================================================
<PAGE>   2
 
                               INDEX TO FORM 10-Q
 
                        FOR QUARTER ENDED JUNE 30, 1997
 
<TABLE>
<CAPTION>
                                                                 PAGE
                                                                NUMBER
                                                                ------
<S>                                                             <C>
COVER.......................................................        i
INDEX.......................................................       ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements................................       12
Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations.................        1
PART II -- OTHER INFORMATION
Item 2. Changes in Securities...............................       28
Item 6. Exhibits and Reports on Form 8-K....................       28
SIGNATURE...................................................       29
</TABLE>
 
                                       ii
<PAGE>   3
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
 
Second quarter earnings increase to record high -- MCN's earnings from
continuing operations for the 1997 quarter increased 75% or $3.9 million over
the second quarter of 1996. Earnings from continuing operations for the 1997
six- and twelve-month periods increased $6.6 million and $3.9 million,
respectively, over the comparable 1996 periods. As discussed below, this
performance primarily reflects the success of the strategies implemented by the
Diversified Energy group.
 
MCN's earnings comparisons were also affected by income from discontinued
operations. As discussed in the "Discontinued Operations" section that follows,
MCN sold The Genix Group, Inc. (Genix) during the second quarter of 1996.
 
<TABLE>
<CAPTION>
                                                       QUARTER          6 MONTHS           12 MONTHS
                                                    -------------    ---------------    ----------------
                                                    1997    1996     1997      1996      1997      1996
                                                    ----    -----    -----    ------    ------    ------
<S>                                                 <C>     <C>      <C>      <C>       <C>       <C>
NET INCOME (in Millions)
Continuing Operations:
  Diversified Energy............................    $7.9    $ 4.4    $25.8    $ 12.2    $ 44.8    $ 22.0
  Gas Distribution..............................     1.2       .8     65.0      72.0      74.4      93.3
                                                    ----    -----    -----    ------    ------    ------
                                                     9.1      5.2     90.8      84.2     119.2     115.3
                                                    ----    -----    -----    ------    ------    ------
Discontinued Operations:
  Income from operations........................      --       .6       --       1.6        --       3.4
  Gain on sale..................................      --     36.2       --      36.2        --      36.2
                                                    ----    -----    -----    ------    ------    ------
                                                      --     36.8       --      37.8        --      39.6
                                                    ----    -----    -----    ------    ------    ------
                                                    $9.1    $42.0    $90.8    $122.0    $119.2    $154.9
                                                    ====    =====    =====    ======    ======    ======
EARNINGS PER SHARE
Continuing Operations:
  Diversified Energy............................    $.11    $ .07    $ .38    $  .18    $  .67    $  .33
  Gas Distribution..............................     .02      .01      .96      1.08      1.10      1.40
                                                    ----    -----    -----    ------    ------    ------
                                                     .13      .08     1.34      1.26      1.77      1.73
                                                    ----    -----    -----    ------    ------    ------
Discontinued Operations:
  Income from operations........................      --      .01       --       .03        --       .06
  Gain on sale..................................      --      .54       --       .54        --       .54
                                                    ----    -----    -----    ------    ------    ------
                                                      --      .55       --       .57        --       .60
                                                    ----    -----    -----    ------    ------    ------
                                                    $.13    $ .63    $1.34    $ 1.83    $ 1.77    $ 2.33
                                                    ====    =====    =====    ======    ======    ======
</TABLE>
 
Strategic direction -- MCN's objective is to achieve superior, long-term returns
for its shareholders. To accomplish this, MCN will aggressively invest in a
diverse portfolio of domestic and international energy-related projects. The
success of this strategy will be demonstrated by the growth of MCN's earnings
and the total return to its shareholders over time.
 
DIVERSIFIED ENERGY
 
Earnings continue to rise -- The Diversified Energy group reported an increase
in earnings of $3.5 million for the 1997 quarter from the comparable 1996
period. Earnings for the 1997 six- and twelve-month periods increased $13.6
million and $22.8 million, respectively. Increased earnings were driven
primarily by significantly higher levels of operating and joint venture income,
partially offset by increased financing costs
 
                                        1
<PAGE>   4
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
associated with additional capital needed to fund investments. Diversified
Energy continues to provide an increasing portion of MCN's earnings,
contributing 38% for the twelve months ended June 30, 1997, double the
contribution in the comparable 1996 period.
 
<TABLE>
<CAPTION>
                                                    QUARTER             6 MONTHS           12 MONTHS
                                                ----------------    ----------------    ----------------
                                                 1997      1996      1997      1996      1997      1996
                                                ------    ------    ------    ------    ------    ------
<S>                                             <C>       <C>       <C>       <C>       <C>       <C>
DIVERSIFIED ENERGY OPERATIONS (in Millions)
Operating Revenues*.........................    $177.1    $131.6    $437.3    $389.1    $782.7    $613.9
Operating Expenses*.........................     164.4     129.2     407.4     374.3     726.7     587.9
                                                ------    ------    ------    ------    ------    ------
Operating Income............................      12.7       2.4      29.9      14.8      56.0      26.0
                                                ------    ------    ------    ------    ------    ------
Equity in Earnings of Joint Ventures........       9.4       4.6      22.9       8.3      31.2      10.8
                                                ------    ------    ------    ------    ------    ------
Other Income & (Deductions)*
  Interest income...........................       1.0        .9       2.0       1.8       3.2       3.4
  Interest expense..........................      (9.5)     (7.9)    (19.6)    (15.4)    (32.9)    (22.7)
  Dividends on preferred securities of
     subsidiaries...........................      (7.4)     (2.3)    (11.6)     (4.7)    (19.3)     (9.5)
  Gains related to DIGP.....................        --       3.5        --       3.5       2.9       3.5
  Other.....................................       (.1)      (.3)      2.7       (.9)      2.6        .4
                                                ------    ------    ------    ------    ------    ------
                                                 (16.0)     (6.1)    (26.5)    (15.7)    (43.5)    (24.9)
                                                ------    ------    ------    ------    ------    ------
Income Before Income Taxes..................       6.1        .9      26.3       7.4      43.7      11.9
                                                ------    ------    ------    ------    ------    ------
Income Taxes
  Current and deferred provision............       2.3        .5       8.7       3.1      15.1       4.2
  Federal tax credits.......................      (4.1)     (4.0)     (8.2)     (7.9)    (16.2)    (14.3)
                                                ------    ------    ------    ------    ------    ------
                                                  (1.8)     (3.5)       .5      (4.8)     (1.1)    (10.1)
                                                ------    ------    ------    ------    ------    ------
Net Income..................................    $  7.9    $  4.4    $ 25.8    $ 12.2    $ 44.8    $ 22.0
                                                ======    ======    ======    ======    ======    ======
</TABLE>
 
* Includes intercompany transactions
 
OPERATING AND JOINT VENTURE INCOME
 
Operating and joint venture income increased $15.1 million for the 1997 quarter
and $29.7 million and $50.4 million for the six- and twelve-month periods,
respectively. The increases reflect improved contributions from all the
Diversified Energy operating businesses, particularly Exploration & Production
(E&P) operations.
 
<TABLE>
<CAPTION>
                                                         QUARTER           6 MONTHS         12 MONTHS
                                                      --------------    --------------    --------------
                                                      1997     1996     1997     1996     1997     1996
                                                      -----    -----    -----    -----    -----    -----
<S>                                                   <C>      <C>      <C>      <C>      <C>      <C>
OPERATING AND JOINT VENTURE INCOME (in Millions)
Exploration & Production..........................    $12.9    $ 6.7    $31.0    $13.2    $51.0    $24.6
Pipelines & Processing............................      6.1      1.9     13.3      4.4     19.7      5.1
Energy Marketing, Gas Storage & Power
  Generation......................................      3.7     (2.8)    10.7      4.7     20.0      7.3
Corporate & Other.................................      (.6)     1.2     (2.2)      .8     (3.5)     (.2)
                                                      -----    -----    -----    -----    -----    -----
                                                      $22.1    $ 7.0    $52.8    $23.1    $87.2    $36.8
                                                      =====    =====    =====    =====    =====    =====
</TABLE>
 
EXPLORATION & PRODUCTION operating and joint venture income increased $6.2
million for the 1997 quarter and $17.8 million and $26.4 million for the six-and
twelve-month periods, respectively. The results reflect a significant increase
in the level of gas and oil produced due to the development and acquisition of
interests in properties during 1995 and 1996. Gas and oil production increased
9.7 billion cubic feet (Bcf) equivalent in
 
                                        2
<PAGE>   5
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
the quarter, nearly a 70% increase from the comparable 1996 level. Results in
the 1997 six- and twelve-month periods also include a $4.7 million gain related
to the sale of certain undeveloped properties.
 
<TABLE>
<CAPTION>
                                              QUARTER               6 MONTHS             12 MONTHS
                                          ----------------      ----------------      ----------------
                                           1997      1996        1997      1996        1997      1996
                                          ------    ------      ------    ------      ------    ------
<S>                                       <C>       <C>         <C>       <C>         <C>       <C>
EXPLORATION & PRODUCTION STATISTICS
Gas Production (Bcf)....................    19.5      13.2        38.2      25.6        69.7      43.9
Oil Production (Mmbbl)..................      .8        .2         1.3        .4         2.0        .6
Gas and Oil Production (Bcf
  equivalent)...........................    24.0      14.3        46.0      27.8        81.9      47.5
Average Gas Selling Price (per Mcf).....  $ 1.93    $ 2.19      $ 2.31    $ 2.30      $ 2.31    $ 2.00
Effect of Hedging (per Mcf).............    (.04)     (.29)       (.34)     (.31)       (.36)      .02
                                          ------    ------      ------    ------      ------    ------
Overall Average Gas Sales Price (per
  Mcf)..................................  $ 1.89    $ 1.90      $ 1.97    $ 1.99      $ 1.95    $ 2.02
                                          ======    ======      ======    ======      ======    ======
Average Oil Sales Price (per Bbl)*......  $17.47    $18.80      $18.07    $18.04      $19.20    $17.40
</TABLE>
 
*Average oil sales prices have been adjusted for amounts received or paid under
financial hedging contracts
 
E&P operating and joint venture results were also affected by fluctuations in
natural gas and oil sales prices, which were mitigated by the effect of hedging
with swap and futures agreements. These hedging agreements are used to manage
Diversified Energy's exposure to the risk of market price fluctuations.
Additionally, E&P's operating results were affected by higher average production
costs per Mcf equivalent.
 
PIPELINES & PROCESSING operating and joint venture income increased $4.2 million
for the 1997 quarter and increased $8.9 million and $14.6 million for the six-
and twelve-month periods, respectively. The increases primarily reflect income
from the December 1996 acquisition of a 25% interest in Lyondell Methanol
Company, L.P. (Lyondell), a limited partnership that owns and operates a 248
million gallon per year methanol production plant in Texas. Earnings from
Lyondell have benefited from higher than expected methanol prices during 1997.
Pipeline & Processing results also reflect a higher level of volumes treated
through gas processing plants, as well as increases in transportation deliveries
due to the acquisition of additional pipeline interests during late 1995 and
1996. These increases in transportation volumes were partially offset by reduced
volumes resulting from the sale of a portion of MCN's interest in Dauphin Island
Gathering Partners (DIGP) during 1996 (Note 2c).
 
<TABLE>
<CAPTION>
                                              QUARTER               6 MONTHS             12 MONTHS
                                          ----------------      ----------------      ----------------
                                           1997      1996        1997      1996        1997      1996
                                          ------    ------      ------    ------      ------    ------
<S>                                       <C>       <C>         <C>       <C>         <C>       <C>
PIPELINES & PROCESSING STATISTICS*
Gas Processed (Bcf).....................    13.4       9.5        23.2      18.7        48.7      27.1
Methanol Produced (million gallons).....    14.6        --        29.9        --        40.4        --
Transportation (Bcf)....................    29.4      19.2        48.3      40.3        94.4      44.6
</TABLE>
 
*Includes MCN's share of joint ventures
 
ENERGY MARKETING, GAS STORAGE & POWER GENERATION operating and joint venture
income increased $6.5 million for the 1997 quarter and increased $6.0 million
and $12.7 million for the six- and twelve-month periods, respectively. The
increase in earnings during the quarter resulted from a 55% increase in gas
sales and exchange deliveries as well as slightly higher gas sales margins. The
increases in earnings for the 1997 six- and twelve-month periods were due to
increases in gas sales and exchange deliveries of 33% and 24%, respectively,
partially offset by lower gas sales margins. Also contributing to the 1997
results were earnings from the April 1997 acquisition of an 18.1% interest in
Midland Cogeneration Venture L.P., a limited partnership that owns a gas-fired
cogeneration facility capable of producing approximately 1,370 megawatts (MW) of
electricity and 1.35 million pounds per hour of process steam (Note 2b).
 
                                        3
<PAGE>   6
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
<TABLE>
<CAPTION>
                                                          QUARTER          6 MONTHS         12 MONTHS
                                                        ------------    --------------    --------------
                                                        1997    1996    1997     1996     1997     1996
                                                        ----    ----    -----    -----    -----    -----
<S>                                                     <C>     <C>     <C>      <C>      <C>      <C>
ENERGY MARKETING STATISTICS (BCF)*
Gas Sales...........................................    72.4    42.7    160.6    113.5    266.0    208.1
Exchange Deliveries.................................     1.3     4.9     10.0     14.3     18.3     21.4
                                                        ----    ----    -----    -----    -----    -----
                                                        73.7    47.6    170.6    127.8    284.3    229.5
                                                        ====    ====    =====    =====    =====    =====
</TABLE>
 
* Includes MCN's share of joint ventures
 
Additionally, Power Generation experienced higher earnings from its investment
in the 50%-owned, 123 MW Michigan Power cogeneration facility due to an increase
in electricity sales rates under its long-term sales contract. Results for 1997
also reflect increased earnings from the 30 MW Ada cogeneration facility as a
result of Power Generation's acquisition of the 1% general partnership interest
in the fourth quarter of 1996.
 
RISK MANAGEMENT STRATEGY -- MCN primarily manages commodity price risk by
utilizing futures, options and swap contracts to more closely balance its
portfolio of supply and sales agreements. MCN has hedged most of its gas and oil
production not covered by long-term, fixed-price sales obligations. MCN's Energy
Marketing group coordinates all of MCN's hedging activities to ensure compliance
with risk management policies established by MCN's Board of Directors. Certain
hedging gains or losses related to gas and oil production are recorded by MCN's
E&P operations. Gains and losses on gas-related hedging transactions that are
not recorded by MCN's E&P group are absorbed by Energy Marketing.
 
CORPORATE & OTHER operating and joint venture losses reflect administrative
expenses associated with corporate management activities. The Diversified Energy
group has been charged a larger portion of such expenses, reflecting its growing
percentage of MCN. The 1996 periods include a $1.7 million gain from the sale of
land by a 50%-owned real estate joint venture.
 
OTHER INCOME AND DEDUCTIONS
 
The 1997 quarter, six- and twelve-month periods reflect higher interest costs on
increased borrowings required to finance capital investments in the Diversified
Energy group. In addition, the 1997 periods reflect dividends on $80 million of
preferred securities issued in July 1996, $132 million of preferred securities
issued in March 1997 and $200 million of preferred securities issued in June
1997.
 
Other income and deductions for the 1997 twelve-month period, as well as the
1996 quarter, six- and twelve-month periods, includes gains related to DIGP
(Note 2c). In a series of transactions during 1996, MCN sold 64% of its 99%
interest in the DIGP partnership, resulting in pre-tax gains totaling $8.8
million, of which $2.4 million was deferred until the third quarter of 1997 when
the related option agreement expired unexercised. Other income and deductions
for the 1997 six- and twelve- month periods also includes gains on the sale of
pipeline assets.
 
INCOME TAXES
 
The current and deferred income tax provisions for all periods reflect increases
in pre-tax earnings. These taxes were reduced by an increase in the level of gas
production tax credits generated from E&P projects.
 
OUTLOOK
 
MCN plans to continue aggressively growing its E&P reserve base in known
producing areas, generating attractive returns and developing reliable,
long-term gas supplies. MCN will also continue to make investments in natural
gas and gas liquid gathering and processing facilities near these known
producing areas, concentrating on those with the highest growth potential.
Additionally, MCN will focus on expanding its
 
                                        4
<PAGE>   7
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Energy Marketing coverage within existing markets as well as entering new
markets through strategic alliances with other energy providers. MCN's Power
Generation business is expected to make significant investments in international
projects over the next several years as evidenced by its acquisition of a 40%
interest in a joint venture in India (Note 2a). MCN is currently evaluating
various other projects that could add significantly to its international
portfolio.
 
GAS DISTRIBUTION
 
Results reflect solid financial performance -- The Gas Distribution group
reported an increase in earnings of $.4 million for the 1997 quarter, reflecting
improved gross margins resulting from higher gas sales and transportation
deliveries due in part to colder weather. Results for the 1997 quarter also
reflect lower operation and maintenance expenses, partially offset by higher
depreciation and financing costs. Earnings decreased $7.0 million and $18.9
million for the 1997 six- and twelve-month periods, respectively, reflecting
reduced gross margins due to warmer weather as well as higher operating expenses
and financing costs.
 
<TABLE>
<CAPTION>
                                                 QUARTER             6 MONTHS             12 MONTHS
                                             ----------------    ----------------    --------------------
                                              1997      1996      1997      1996       1997        1996
                                             ------    ------    ------    ------    --------    --------
<S>                                          <C>       <C>       <C>       <C>       <C>         <C>
GAS DISTRIBUTION OPERATIONS (in Millions)
Operating Revenues*
  Gas sales..............................    $168.3    $185.6    $649.9    $673.5    $1,079.5    $1,073.9
  End user transportation................      19.4      18.7      45.4      45.1        82.7        83.5
  Intermediate transportation............      13.3      11.4      28.1      22.8        53.9        44.6
  Other..................................      12.0       9.6      23.9      22.5        43.6        48.8
                                             ------    ------    ------    ------    --------    --------
                                              213.0     225.3     747.3     763.9     1,259.7     1,250.8
Cost of Gas..............................      84.7     101.2     391.7     403.7       634.3       609.0
                                             ------    ------    ------    ------    --------    --------
Gross Margin.............................     128.3     124.1     355.6     360.2       625.4       641.8
                                             ------    ------    ------    ------    --------    --------
Other Operating Expenses*
  Operation and maintenance..............      70.6      72.3     145.8     142.2       302.0       289.3
  Depreciation, depletion and
     amortization........................      26.6      25.0      52.3      49.5       101.6        94.8
  Property and other taxes...............      16.2      15.5      34.1      33.9        62.6        61.2
                                             ------    ------    ------    ------    --------    --------
                                              113.4     112.8     232.2     225.6       466.2       445.3
                                             ------    ------    ------    ------    --------    --------
Operating Income.........................      14.9      11.3     123.4     134.6       159.2       196.5
                                             ------    ------    ------    ------    --------    --------
Equity in Earnings of Joint Ventures.....        .9        .2       1.9        .6         2.6         1.3
                                             ------    ------    ------    ------    --------    --------
Other Income and (Deductions)*
  Interest income........................       1.3        .6       2.5       1.2         5.3         3.4
  Interest expense.......................     (13.8)    (11.2)    (28.0)    (23.8)      (53.1)      (47.1)
  Minority interest......................       (.6)      (.4)      (.9)      (.7)       (1.2)       (1.9)
  Other..................................       (.1)       .6        .5       (.2)       (1.0)       (4.2)
                                             ------    ------    ------    ------    --------    --------
                                              (13.2)    (10.4)    (25.9)    (23.5)      (50.0)      (49.8)
                                             ------    ------    ------    ------    --------    --------
Income Before Income Taxes...............       2.6       1.1      99.4     111.7       111.8       148.0
Income Taxes.............................       1.4        .3      34.4      39.7        37.4        54.7
                                             ------    ------    ------    ------    --------    --------
Net Income...............................    $  1.2    $   .8    $ 65.0    $ 72.0    $   74.4    $   93.3
                                             ======    ======    ======    ======    ========    ========
</TABLE>
 
* Includes intercompany transactions
 
                                        5
<PAGE>   8
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
GROSS MARGIN
 
Gross margin reflects varying weather -- Gas Distribution gross margin
(operating revenues less cost of gas) increased $4.2 million for the 1997
quarter and decreased $4.6 million and $16.4 million for the six- and
twelve-month periods, respectively. These varying results are primarily due to
fluctuations in gas sales and end user transportation deliveries that were
driven by the colder weather during the 1997 quarter and the warmer weather
during the 1997 six- and twelve-month periods. All periods were affected by
increased revenues as a result of the continued growth in intermediate
transportation services.
 
<TABLE>
<CAPTION>
                                                     QUARTER           6 MONTHS          12 MONTHS
                                                 ---------------     -------------     --------------
                                                 1997      1996      1997     1996     1997     1996
                                                 -----     -----     ----     ----     ----     -----
<S>                                              <C>       <C>       <C>      <C>      <C>      <C>
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS
Percentage Colder (Warmer) than Normal........    21.9%     13.6%    1.9 %    7.3 %    2.0 %      7.4%
Increase (Decrease) from Normal in:
  Gas markets (in Bcf)........................     4.6       3.2     1.5      8.6      3.8       14.8
  Net income (in Millions)....................   $ 4.1     $ 2.9    $1.3     $7.8     $3.4      $13.3
  Earnings per share..........................   $ .06     $ .04    $.02     $.12     $.05      $ .20
</TABLE>
 
GAS SALES AND END USER TRANSPORTATION revenues in total decreased $16.6 million
and $23.3 million in the 1997 quarter and six-month period and increased $4.8
million in the 1997 twelve-month period. The decrease in revenues for the
quarter reflects a reduction in gas sales rates driven by lower gas costs as
subsequently discussed. This decrease in revenues attributable to reduced gas
sales rates was partially offset by increased revenues from higher deliveries
due to the colder weather in the 1997 quarter. The decreased revenues for the
1997 six-month period reflect lower gas sales and end user transportation
deliveries primarily due to the warmer weather in the 1997 period as compared to
the same 1996 period, partially offset by an increase in the gas cost recovery
rate. The 1997 twelve-month period increase in revenues is primarily the result
of a gas cost recovery rate increase, substantially offset by lower volumes due
to warmer weather.
 
<TABLE>
<CAPTION>
                                                        QUARTER           6 MONTHS         12 MONTHS
                                                     --------------    --------------    --------------
                                                     1997     1996     1997     1996     1997     1996
                                                     -----    -----    -----    -----    -----    -----
<S>                                                  <C>      <C>      <C>      <C>      <C>      <C>
GAS DISTRIBUTION MARKETS (in Bcf)
Gas Sales.........................................    35.3     34.6    129.9    138.2    212.7    225.5
End User Transportation...........................    32.7     32.0     77.1     79.5    144.5    149.4
                                                     -----    -----    -----    -----    -----    -----
                                                      68.0     66.6    207.0    217.7    357.2    374.9
Intermediate Transportation*......................   141.6    110.3    282.2    258.3    551.4    448.3
                                                     -----    -----    -----    -----    -----    -----
                                                     209.6    176.9    489.2    476.0    908.6    823.2
                                                     =====    =====    =====    =====    =====    =====
</TABLE>
 
*Includes intercompany volumes
 
INTERMEDIATE TRANSPORTATION revenues increased $1.9 million in the quarter and
$5.3 million and $9.3 million in the 1997 six- and twelve-month periods,
respectively. Due primarily to the recent expansion of its northern Michigan
gathering system, MichCon was able to transport an additional 15.3 Bcf, 32.9 Bcf
and 108.8 Bcf in the 1997 quarter, six- and twelve-month periods, respectively.
Intermediate transportation volumes for the 1997 quarter and twelve-month period
were impacted by increased deliveries to two major fixed-fee customers. Volumes
transported in the six-month period for these two customers reflected a
decrease. Although volumes associated with these customers have varied, the
related revenues were not significantly affected.
 
OTHER OPERATING REVENUES increased $2.4 million in the 1997 quarter and $1.4
million in the six-month period due to increased gas processing revenues and
increased revenues associated with maintaining customers' natural gas furnaces
and appliances. Other operating revenues decreased $5.2 million in the 1997
twelve-month period due to
 
                                        6
<PAGE>   9
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
a reduction in conservation revenues resulting from the discontinuance of
MichCon's energy conservation programs which also impacted the quarter and
six-month period. As discussed in the "Operation and Maintenance" section that
follows, this decrease in revenues is offset by a corresponding decrease in
expenses related to the conservation programs.
 
COST OF GAS
 
Cost of gas is affected by variations in sales volumes and cost of gas rates.
Through the Gas Cost Recovery (GCR) mechanism, MichCon's rates are set to
recover 100% of prudently and reasonably incurred gas costs. Therefore,
fluctuations in total gas costs have little or no effect on gross margins and
earnings.
 
Cost of gas sold decreased in the 1997 quarter and six-month period and
increased in the twelve-month period. The decrease in market prices paid for gas
resulted in a decrease in the cost of gas sold per thousand cubic feet of $.49
(16%) in the 1997 three-month period. The increase in market prices paid for gas
resulted in an increase in the cost of gas sold per thousand cubic feet of $.15
(5%) and $.25 (9%) in the 1997 six- and twelve-month periods, respectively. The
rate increase in the 1997 six-month period was more than offset by lower volumes
due to warmer weather. The rate increase in the 1997 twelve-month period was
partially offset by lower volumes due to warmer weather.
 
OTHER OPERATING EXPENSES
 
OPERATION AND MAINTENANCE expenses decreased for the 1997 quarter and increased
for the 1997 six- and twelve-month periods. Operation and maintenance expenses
were affected in all periods by lower benefit costs, primarily pension and
retiree healthcare costs. The 1997 quarter further benefited from a decrease in
uncollectible gas accounts expense, which was partially offset by an increase in
operating expenses related to the increase in intermediate transportation
volumes as previously discussed. For the 1997 six-month period, the decrease in
benefit costs was more than offset by increased operating expenses related to
intermediate transportation services. The increase in the 1997 twelve-month
period is due to higher uncollectible gas accounts expense as well as the
increased operating expenses related to intermediate transportation services. As
previously discussed, the discontinuance of MichCon's energy conservation
programs reduced expenses in all 1997 periods.
 
DEPRECIATION AND DEPLETION for the 1997 quarter, six- and twelve-month periods
increased due to higher plant balances reflecting capital expenditures of $456.8
million over the past two calendar years. Depreciation and depletion expenses
are expected to increase in future years due to additional capital investments.
MichCon filed an application with the MPSC to lower its depreciation rates,
which could partially offset the anticipated increase in depreciation expense in
future years.
 
PROPERTY AND OTHER TAXES increased in the 1997 periods due to an increase in the
Michigan single business tax which is partially offset by a reduction in
property taxes.
 
OTHER INCOME AND DEDUCTIONS
 
The 1997 quarter, six- and twelve-month periods reflect higher interest costs on
increased long-term debt required to finance capital investments in the Gas
Distribution group.
 
INCOME TAXES
 
Income taxes changed primarily as a result of variations in earnings. Income
taxes also were affected by the favorable resolution of prior years' tax issues.
 
                                        7
<PAGE>   10
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
OUTLOOK
 
Gas Distribution's strategy is to grow revenues and reduce its costs in order to
maintain strong returns and provide customers with quality service at
competitive prices. Revenue growth will be achieved through the expansion of its
residential, commercial and industrial customer base. In 1997, Gas Distribution
is concentrating on adding new customers in current service areas including
increased penetration of previous expansion areas. Gas Distribution will
continue initiatives to increase productivity and improve customer services in
order to strengthen its competitive position in the gas industry. Management is
continually assessing ways to improve cost competitiveness. Among the cost
savings initiatives, Gas Distribution and other Michigan utilities are exploring
opportunities to share the cost of common, duplicative functions in order to
obtain greater efficiencies and increase customer value.
 
DISCONTINUED OPERATIONS
 
In June 1996, MCN completed the sale of its computer operations subsidiary,
Genix, to Affiliated Computer Services, Inc., resulting in an after-tax gain of
$36.2 million. Although Genix had experienced significant growth in revenues and
operating income over the past several years, MCN's focused strategy is to
invest in energy-related projects that generate higher rates of return.
 
CAPITAL RESOURCES AND LIQUIDITY
 
OPERATING ACTIVITIES
 
MCN's cash flow from operating activities increased $76.8 million during the
1997 six-month period from the comparable 1996 period. The increase was due
primarily to higher net income, after adjusting for depreciation, deferred taxes
and nonoperating gains and a decrease in working capital requirements.
 
FINANCING ACTIVITIES
 
In June 1997, MCN sold 9,775,000 shares of common stock in a public offering,
generating net proceeds of $276.6 million (Note 3d). Proceeds from this issuance
were used to fund capital expenditures, to repay short-term obligations and for
general corporate purposes.
 
In June 1997, MCN issued, through wholly owned trusts, 100,000 Private
Institutional Trust Securities and 100,000 Single Point Remarketed Reset Capital
Securities (Note 3c). Net proceeds of $199.1 million from these issuances were
invested by MCN in its Diversified Energy group and were used to reduce
short-term debt incurred to fund capital expenditures. The securities are
currently rated the equivalent of "A-"or "baa1" by the major rating agencies.
 
In March 1997, MCN issued 2,645,000 FELINE PRIDES generating net proceeds of
$127.4 million (Note 3b). Proceeds from the issuance were used to reduce
short-term debt incurred by the Diversified Energy group to fund capital
investments and for general corporate purposes. The FELINE PRIDES are currently
rated the equivalent of "BBB+" by the major rating agencies.
 
MCN issues new shares of common stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan and various employee benefit plans. During 1997, MCN
anticipates the issuance of new shares of common stock pursuant to these plans,
generating approximately $19 million. During the first six months of 1997,
issuances under these plans generated proceeds of $9.4 million.
 
DIVERSIFIED ENERGY
 
In June 1997, MCNIC repaid $30 million of senior debt on its stated maturity
date.
 
In January 1997, MCNIC issued $150 million of medium-term notes using the
proceeds to repay short-term debt and for general corporate purposes.
 
                                        8
<PAGE>   11
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
MCNIC has established credit lines for borrowings of up to $100 million under a
364-day revolving credit facility and up to $300 million under a three-year
revolving credit facility, both of which expire in July 1998. These facilities
support MCNIC's $400 million commercial paper program, which is used to finance
capital investments of the Diversified Energy group and working capital
requirements of its gas marketing operations. During the first six months of
1997, MCNIC repaid $329.8 million of commercial paper. At June 30, 1997, there
were no borrowings outstanding under this program. A portion of the credit lines
equaling $42 million has been temporarily restricted in connection with a
potential acquisition by one of MCN's international joint ventures (Note 2a).
 
GAS DISTRIBUTION
 
Cash and cash equivalents normally increase and short-term debt is reduced in
the first part of each year as gas inventories are depleted and funds are
received from winter heating sales. During the latter part of the year, cash and
cash equivalents normally decrease 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 which 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. During the
first six months of 1997, MichCon repaid $238.3 million of commercial paper. At
June 30, 1997, there were no borrowings outstanding under this program.
 
During May 1997, MichCon issued $85 million of first mortgage bonds under its
existing shelf registrations. The funds from this issuance were used to retire
first mortgage bonds, fund capital expenditures and for general corporate
purposes.
 
During April 1997, subsidiaries of MichCon borrowed $40 million under a
nonrecourse credit agreement that matures in 2005. Proceeds were used to finance
the expansion of the northern Michigan gathering system.
 
During May and June 1997, MichCon redeemed $17 million of long-term debt prior
to maturity. MichCon also repaid $50 million of first mortgage bonds on its
stated maturity date in May 1997.
 
MichCon has available a Trust Demand Note program that allows it to borrow up to
$25 million. At June 30, 1997, there were no borrowings outstanding under this
program.
 
INVESTING ACTIVITIES
 
Capital investments increased $120.6 million (39%) in the 1997 six-month period
over the same period in 1996. The 1997 investments include higher levels of
investments in E&P properties and joint venture pipeline facilities as well as
the acquisition of an interest in Indian power generation projects and a
domestic cogeneration facility. The 1996 investments include the DIGP
acquisition. In the third quarter of 1997, MCN
 
                                        9
<PAGE>   12
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
sold E&P assets for approximately $31 million. The proceeds from the sale will
be reinvested in E&P operations, primarily in offshore properties.
 
<TABLE>
<CAPTION>
                                                                 6 MONTHS
                                                              ---------------
                                                               1997     1996
                                                              ------   ------
<S>                                                           <C>      <C>
CAPITAL INVESTMENTS (in Millions)
Consolidated Capital Expenditures:
  Diversified Energy........................................  $173.9   $142.8
  Gas Distribution..........................................    59.1     74.6
  Discontinued Operations...................................      --      6.5
                                                              ------   ------
                                                               233.0    223.9
                                                              ------   ------
MCN's Share of Joint Venture Capital Expenditures:
  Pipelines & Processing....................................    42.8       .4
  Energy Marketing, Gas Storage & Power Generation..........     2.4       .3
  Other.....................................................     1.6      3.1
                                                              ------   ------
                                                                46.8      3.8
                                                              ------   ------
Acquisitions (Note 2)*......................................   147.1     78.6
                                                              ------   ------
Total Capital Investments...................................  $426.9   $306.3
                                                              ======   ======
</TABLE>
 
*Includes MCN's share of GTEC debt existing at the date of acquisition (Note 2a)
 
OUTLOOK
 
Capital investments in 1997 are expected to reach $1.1 billion -- MCN's
strategic direction is to grow significantly by investing in a portfolio of
energy-related projects. For 1997, MCN anticipates investing approximately $900
million in Diversified Energy and the remainder in Gas Distribution. Within
Diversified Energy, approximately $450 million will be invested in E&P projects
for drilling operations and the acquisition of additional reserves. Diversified
Energy will invest the remaining $450 million in gas gathering, gas processing
and power generation projects.
 
As MCN continues to pursue its strategy of diversifying through a portfolio of
energy-related projects, it will routinely evaluate the value and strategic
benefits of selling its assets. MCN is currently negotiating the sale of certain
Diversified Energy assets to unlock their appreciated value. Proceeds from any
sale will be used to acquire or develop other energy-related assets and
therefore capital investments would be increased accordingly.
 
The proposed level of investments for the remainder of 1997 increases capital
requirements materially in excess of internally generated funds and requires the
issuance of additional debt. MCN's actual capital requirements and general
market conditions will dictate the nature, timing and amount of future
issuances. It is management's opinion that MCN and its subsidiaries will have
sufficient capital resources, both internal and external, to meet anticipated
capital requirements.
 
In August 1997, President Clinton signed a bill that will reduce taxes collected
by the United States over the next five years. MCN is currently assessing the
exact impact of this legislation on its future tax liabilities. Although the
bill is not expected to significantly change MCN's tax expense, it will have an
impact on the timing of tax payments. It is anticipated that MCN will realize a
significant benefit in cash flows from a deferral in taxes paid over the next
five years as a result of this legislation.
 
                                       10
<PAGE>   13
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
 
NEW ACCOUNTING PRONOUNCEMENTS
 
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share"
and SFAS No. 129, "Disclosure of Information about Capital Structure", which are
effective for MCN's year end 1997 financial statements. SFAS No. 128 simplifies
the standards for computing earnings per share (EPS), replaces primary EPS with
a newly defined basic EPS and modifies the computation of diluted EPS. SFAS No.
129 continues previous requirements to disclose certain information about an
entity's capital structure. MCN does not expect the application of these
statements to have a material effect on its financial statements.
 
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" which are effective for financial statements for periods beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS No. 131 establishes
standards for reporting information about operating segments in annual and
interim financial statements. MCN is in the process of evaluating the effect of
applying these statements.
 
In 1996, the Emerging Issues Task Force of the FASB reached a consensus that the
cost associated with modifying internal use software for the year 2000 should be
expensed as incurred. MCN has established processes for evaluating and managing
the risks and costs associated with this issue on the financial position and
results of operations of MCN and its subsidiaries. MCN is assessing the extent
of necessary modifications to its computer software, as well as that of its
partners and operators.
 
FORWARD-LOOKING STATEMENTS
 
Statements included throughout the Quarterly Report on Form 10-Q which are not
historical in nature are 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 including, among others, the following: (i) the
effects of weather and other natural phenomena; (ii) increased competition from
other energy suppliers as well as alternative forms of energy; (iii) the capital
intensive nature of MCN's business; (iv) economic climate and growth in the
geographic areas in which MCN does business; (v) the uncertainty of gas and oil
reserve estimates; (vi) the timing and extent of changes in commodity prices for
natural gas, electricity and crude oil; (vii) the nature, availability and
projected profitability of potential projects and other investments available to
MCN; (viii) conditions of capital markets and equity markets and (ix) changes in
the economic and political climate in foreign countries where MCN has invested
or may invest in the future.
 
                                       11
<PAGE>   14
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                    THREE MONTHS
                                                        ENDED             SIX MONTHS ENDED         TWELVE MONTHS ENDED
                                                      JUNE 30,                JUNE 30,                  JUNE 30,
                                                 -------------------   -----------------------   -----------------------
                                                   1997       1996        1997         1996         1997         1996
                                                 --------   --------   ----------   ----------   ----------   ----------
<S>                                              <C>        <C>        <C>          <C>          <C>          <C>
OPERATING REVENUES.............................  $387,925   $354,464   $1,176,686   $1,145,102   $2,028,852   $1,851,903
                                                 --------   --------   ----------   ----------   ----------   ----------
OPERATING EXPENSES
  Cost of gas..................................   200,020    199,068      699,565      711,497    1,181,646    1,084,415
  Operation and maintenance....................    95,265     88,080      193,686      174,432      391,234      346,426
  Depreciation, depletion and amortization.....    45,484     35,520       88,941       70,318      164,613      129,338
  Property and other taxes.....................    19,756     18,064       41,228       39,416       76,239       69,177
                                                 --------   --------   ----------   ----------   ----------   ----------
                                                  360,525    340,732    1,023,420      995,663    1,813,732    1,629,356
                                                 --------   --------   ----------   ----------   ----------   ----------
OPERATING INCOME...............................    27,400     13,732      153,266      149,439      215,120      222,547
                                                 --------   --------   ----------   ----------   ----------   ----------
EQUITY IN EARNINGS OF JOINT VENTURES...........    10,470      4,842       24,831        8,885       33,813       12,063
                                                 --------   --------   ----------   ----------   ----------   ----------
OTHER INCOME AND (DEDUCTIONS)
  Interest income..............................     2,164      1,604        4,376        3,149        8,461        6,576
  Interest on long-term debt...................   (21,069)   (16,386)     (40,051)     (32,525)     (74,043)     (57,005)
  Other interest expense.......................    (1,894)    (2,734)      (6,624)      (6,835)     (11,053)     (13,072)
  Dividends on preferred securities of
    subsidiaries...............................    (7,329)    (2,345)     (11,558)      (4,707)     (19,225)      (9,502)
  Gains related to DIGP (Note 2c)..............        --      3,488           --        3,488        2,896        3,488
  Minority interest............................      (614)      (371)        (967)        (736)      (1,290)      (2,059)
  Other........................................      (441)       250        2,580         (995)         955       (3,263)
                                                 --------   --------   ----------   ----------   ----------   ----------
                                                  (29,183)   (16,494)     (52,244)     (39,161)     (93,299)     (74,837)
                                                 --------   --------   ----------   ----------   ----------   ----------
INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES..........................     8,687      2,080      125,853      119,163      155,634      159,773
INCOME TAX PROVISION (BENEFIT).................      (389)    (3,127)      35,008       34,902       36,481       44,509
                                                 --------   --------   ----------   ----------   ----------   ----------
INCOME FROM CONTINUING OPERATIONS..............     9,076      5,207       90,845       84,261      119,153      115,264
                                                 --------   --------   ----------   ----------   ----------   ----------
DISCONTINUED OPERATIONS, NET OF TAXES (Note 2d)
  Income from operations.......................        --        582           --        1,595           --        3,446
  Gain on sale.................................        --     36,176           --       36,176           --       36,176
                                                 --------   --------   ----------   ----------   ----------   ----------
                                                       --     36,758           --       37,771           --       39,622
                                                 --------   --------   ----------   ----------   ----------   ----------
NET INCOME.....................................  $  9,076   $ 41,965   $   90,845   $  122,032   $  119,153   $  154,886
                                                 ========   ========   ==========   ==========   ==========   ==========
EARNINGS PER SHARE
  Continuing operations........................  $    .13   $    .08   $     1.34   $     1.26   $     1.77   $     1.73
                                                 --------   --------   ----------   ----------   ----------   ----------
  Discontinued operations (Note 2d)
    Income from operations.....................        --        .01           --          .03           --          .06
    Gain on sale...............................        --        .54           --          .54           --          .54
                                                 --------   --------   ----------   ----------   ----------   ----------
                                                       --        .55           --          .57           --          .60
                                                 --------   --------   ----------   ----------   ----------   ----------
                                                 $    .13   $    .63   $     1.34   $     1.83   $     1.77   $     2.33
                                                 ========   ========   ==========   ==========   ==========   ==========
AVERAGE COMMON SHARES OUTSTANDING..............    68,179     66,893       67,865       66,730       67,507       66,467
                                                 ========   ========   ==========   ==========   ==========   ==========
DIVIDENDS DECLARED PER SHARE...................  $  .2425   $  .2325   $    .4850   $    .4650   $    .9600   $    .9200
                                                 ========   ========   ==========   ==========   ==========   ==========
</TABLE>
 
            CONSOLIDATED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                    THREE MONTHS
                                                        ENDED             SIX MONTHS ENDED         TWELVE MONTHS ENDED
                                                      JUNE 30,                JUNE 30,                  JUNE 30,
                                                 -------------------   -----------------------   -----------------------
                                                   1997       1996        1997         1996         1997         1996
                                                 --------   --------   ----------   ----------   ----------   ----------
<S>                                              <C>        <C>        <C>          <C>          <C>          <C>
BALANCE -- Beginning of period.................  $370,361   $283,046   $  305,352   $  218,425   $  309,467   $  215,801
ADD -- Net income..............................     9,076     41,965       90,845      122,032      119,153      154,886
                                                 --------   --------   ----------   ----------   ----------   ----------
                                                  379,437    325,011      396,197      340,457      428,620      370,687
DEDUCT -- Cash dividends declared on common
  stock........................................    16,499     15,544       32,832       30,990       64,717       61,220
        Other..................................       368         --          795           --        1,333           --
                                                 --------   --------   ----------   ----------   ----------   ----------
BALANCE -- End of period.......................  $362,570   $309,467   $  362,570   $  309,467   $  362,570   $  309,467
                                                 ========   ========   ==========   ==========   ==========   ==========
</TABLE>
 
The notes to the consolidated financial statements are an integral part of these
                                  statements.
 
                                       12
<PAGE>   15
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                        JUNE 30,            DECEMBER 31,
                                                                ------------------------    ------------
                                                                   1997          1996           1996
                                                                ----------    ----------    ------------
<S>                                                             <C>           <C>           <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents, at cost (which approximates
    market value)...........................................    $  150,084    $   55,489     $   30,462
  Accounts receivable, less allowance for doubtful accounts
    of $24,186, $18,726 and $18,487, respectively...........       286,364       293,850        362,596
  Accrued unbilled revenues.................................        16,369        16,692        108,509
  Accrued gas cost recovery revenues........................        14,072        42,026         27,672
  Gas in inventory (Note 5).................................        62,896        28,033         79,161
  Property taxes assessed applicable to future periods......        39,228        36,575         62,966
  Gas receivable............................................        21,465        24,533         18,062
  Other.....................................................        31,617        26,425         34,800
                                                                ----------    ----------     ----------
                                                                   622,095       523,623        724,228
                                                                ----------    ----------     ----------
DEFERRED CHARGES AND OTHER ASSETS
  Investment in and advances to joint ventures..............       410,437       189,479        265,388
  Deferred swap losses and receivables (Note 6).............        47,071        35,605         65,051
  Deferred postretirement benefit costs.....................         2,559        10,060          5,559
  Deferred environmental costs..............................        30,680        31,016         31,233
  Prepaid benefit costs.....................................        59,223        45,959         59,248
  Other.....................................................       107,718        95,188        100,341
                                                                ----------    ----------     ----------
                                                                   657,688       407,307        526,820
                                                                ----------    ----------     ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
  Exploration & Production..................................     1,144,628       711,264        981,901
  Pipelines & Processing....................................        28,618        26,146         27,895
  Gas Distribution..........................................     2,729,303     2,559,713      2,689,039
  Other.....................................................        20,307        15,968         18,722
                                                                ----------    ----------     ----------
                                                                 3,922,856     3,313,091      3,717,557
  Less -- Accumulated depreciation and depletion............     1,409,089     1,265,603      1,335,201
                                                                ----------    ----------     ----------
                                                                 2,513,767     2,047,488      2,382,356
                                                                ----------    ----------     ----------
                                                                $3,793,550    $2,978,418     $3,633,404
                                                                ==========    ==========     ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable..........................................    $  199,422    $  191,183     $  317,922
  Notes payable (Note 4)....................................         2,452        77,291        336,126
  Current portion of long-term debt and capital lease
    obligations.............................................        30,429        84,642         84,747
  Gas inventory equalization (Note 5).......................        66,679        53,955             --
  Federal income, property and other taxes payable..........        66,948        89,017         97,646
  Customer deposits.........................................        12,005         9,864         12,881
  Other.....................................................        78,608        93,622         97,873
                                                                ----------    ----------     ----------
                                                                   456,543       599,574        947,195
                                                                ----------    ----------     ----------
DEFERRED CREDITS AND OTHER LIABILITIES
  Accumulated deferred income taxes.........................       177,412       145,648        149,838
  Unamortized investment tax credit.........................        33,982        35,858         34,919
  Tax benefits amortizable to customers.....................       115,634       113,631        116,496
  Deferred swap gains and payables (Note 6).................        35,696        35,717         48,365
  Accrued environmental costs...............................        35,000        35,000         35,000
  Minority interest.........................................        18,308        18,440         17,911
  Other.....................................................        67,501        93,186         73,263
                                                                ----------    ----------     ----------
                                                                   483,533       477,480        475,792
                                                                ----------    ----------     ----------
LONG-TERM DEBT, including capital lease obligations (Note
  3a).......................................................     1,219,141     1,048,268      1,252,040
                                                                ----------    ----------     ----------
MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
  SUBSIDIARIES HOLDING SOLELY DEBENTURES OF MCN (Notes 3b
  and 3c)...................................................       504,993        96,511        173,809
                                                                ----------    ----------     ----------
COMMITMENTS AND CONTINGENCIES (Notes 2a and 7)
COMMON SHAREHOLDERS' EQUITY (Note 3d)
  Common stock..............................................           779           670            673
  Additional paid-in capital................................       788,757       461,257        493,469
  Retained earnings.........................................       362,570       309,467        305,352
  Yield enhancement, contract and issuance costs (Notes 3b
    and 3c).................................................       (22,035)      (14,220)       (14,492)
  Unearned compensation.....................................          (731)         (589)          (434)
                                                                ----------    ----------     ----------
                                                                 1,129,340       756,585        784,568
                                                                ----------    ----------     ----------
                                                                $3,793,550    $2,978,418     $3,633,404
                                                                ==========    ==========     ==========
</TABLE>
 
The notes to the consolidated financial statements are an integral part of this
                                   statement.
 
                                       13
<PAGE>   16
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              ---------------------
                                                                1997        1996
                                                              ---------   ---------
<S>                                                           <C>         <C>
CASH FLOW FROM OPERATING ACTIVITIES
  Net income................................................  $  90,845   $ 122,032
  Adjustments to reconcile net income to net cash provided
    from operating activities
    Depreciation, depletion and amortization
      Per statement of income...............................     88,941      70,318
      Charged to other accounts.............................      3,756       7,149
    Deferred income taxes -- current........................    (18,552)        727
    Deferred income taxes and investment tax credit, net....     25,775      17,776
    Gains on sale of Genix and DIGP (Notes 2c and 2d).......         --     (38,443)
    Equity in earnings of joint ventures, net of
     distributions..........................................     (4,127)     (1,610)
    Other...................................................       (971)     (1,496)
    Changes in assets and liabilities, exclusive of changes
     shown separately.......................................    139,294      71,660
                                                              ---------   ---------
         Net cash provided from operating activities........    324,961     248,113
                                                              ---------   ---------
CASH FLOW FROM FINANCING ACTIVITIES
  Notes payable, net........................................   (331,274)   (168,344)
  Common stock dividends paid...............................    (32,832)    (30,990)
  Issuance of common stock (Note 3d)........................    286,018       8,848
  Issuance of preferred securities (Notes 3b and 3c)........    326,521          --
  Issuance of long-term debt (Note 3a)......................    273,241     398,434
  Long-term commercial paper, net...........................   (261,822)   (264,007)
  Retirement of long-term debt..............................   (102,969)     (5,353)
  Other.....................................................       (532)     (5,978)
                                                              ---------   ---------
         Net cash provided from (used for) financing
           activities.......................................    156,351     (67,390)
                                                              ---------   ---------
CASH FLOW FROM INVESTING ACTIVITIES
  Capital expenditures......................................   (232,764)   (217,088)
  Acquisitions (Notes 2a, 2b and 2c)........................   (105,133)    (78,620)
  Sale of Genix (Note 2d)...................................         --     137,500
  Investment in joint ventures..............................    (40,758)     (8,151)
  Sale of investment in joint ventures (Note 2c)............         --      31,500
  Return of investment in joint ventures....................      4,000          --
  Other.....................................................     12,965      (9,634)
                                                              ---------   ---------
         Net cash used for investing activities.............   (361,690)   (144,493)
                                                              ---------   ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................    119,622      36,230
CASH AND CASH EQUIVALENTS, JANUARY 1........................     30,462      19,259
                                                              ---------   ---------
CASH AND CASH EQUIVALENTS, JUNE 30..........................  $ 150,084   $  55,489
                                                              =========   =========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
  SHOWN SEPARATELY
  Accounts receivable, net..................................  $  74,606   $   1,191
  Accrued unbilled revenues.................................     92,140      75,718
  Accrued gas cost recovery revenues........................     13,600     (42,026)
  Gas in inventory..........................................     16,265      43,730
  Accounts payable..........................................   (118,500)    (17,873)
  Gas inventory equalization................................     66,679      53,955
  Federal income, property and other taxes payable..........    (30,698)    (27,201)
  Other current assets and liabilities......................     21,315      13,298
  Deferred assets and liabilities...........................      3,887     (29,132)
                                                              ---------   ---------
                                                              $ 139,294   $  71,660
                                                              =========   =========
SUPPLEMENTAL DISCLOSURES
  Cash paid during the year for:
    Interest, net of amounts capitalized....................  $  40,966   $  36,467
    Federal income taxes....................................     22,500      11,434
  Noncash investing activities:
    Property purchased under capital leases.................  $     273   $   6,765
</TABLE>
 
The notes to the consolidated financial statements are an integral part of this
                                   statement.
 
                                       14
<PAGE>   17
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
1. GENERAL
 
The accompanying consolidated financial statements should be read in conjunction
with MCN's 1996 Annual Report on Form 10-K. Certain reclassifications have been
made to the prior year's financial statements to conform with the 1997
presentation. In the opinion of management, the unaudited information furnished
herein reflects all adjustments (consisting of only recurring adjustments or
accruals) necessary for a fair presentation of the financial statements for the
periods presented.
 
Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as
representative of revenues, expenses, net income and earnings per share for all
or any part of the balance of the current year or succeeding periods.
 
2. ACQUISITIONS AND DISPOSITIONS
     
     a. TORRENT POWER PRIVATE LIMITED
 
     In March 1997, MCN acquired a 40% interest in Torrent Power Private Limited
     (TPPL), an India joint venture that holds minority interests in electric
     companies and power generation facilities located in the state of Gujarat,
     India. The total cost of the acquisition was approximately $57,000,000, of
     which $50,400,000 was paid through June 1997. The remainder is expected to
     be paid in the second half of 1997. Specifically, the joint venture has a
     21% interest in Ahmedabad Electricity Company Limited (AEC), a 43% interest
     in Surat Electricity Company Limited (SEC) and a 30% interest in Gujarat
     Torrent Energy Corporation (GTEC). AEC serves the city of Ahmedabad and has
     550 megawatts (MW) of electric generating capacity. SEC provides
     electricity to the city of Surat. GTEC is currently constructing a 655 MW
     dual fuel generation facility, the first phase of which is expected to be
     operational in late 1997 and fully completed by the end of 1998. In
     addition to equity investments, the construction of this facility will be
     funded through nonrecourse project financing of which the portion
     attributable to MCN's existing interest will be approximately $60,000,000.
 
     In June 1997, MCN entered into an agreement to obtain a sufficient number
     of preference shares in TPPL to meet TPPL's cash requirements to acquire
     additional interests in AEC and GTEC. In August 1997, TPPL acquired an
     additional 10% interest in AEC for $21,000,000. In the second half of 1997,
     TPPL will make a public offer to AEC's shareholders to acquire up to an
     additional 20% interest in AEC for approximately $42,000,000. TPPL is
     currently negotiating to acquire further interests in AEC and GTEC.
 
     b. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
 
     During the second quarter of 1997, MCN purchased an 18.1% general
     partnership interest in Midland Cogeneration Venture Limited Partnership
     (MCV), a partnership that leases and operates a cogeneration facility in
     Midland, Michigan. The facility can produce up to 1,370 MW of electricity,
     as well as 1.35 million pounds per hour of process steam. The investment
     totaled $54,750,000 and is accounted for under the equity method.
 
     c. DAUPHIN ISLAND GATHERING PARTNERS
 
     As discussed in MCN's 1996 Annual Report on Form 10-K, MCN acquired in the
     first quarter of 1996 a 99% interest in Dauphin Island Gathering Partners
     (DIGP), a general partnership that owns a 90-mile gas gathering system in
     the Mobile Bay area of offshore Alabama. In June of 1996, MCN sold a 35%
     interest in DIGP for a pre-tax gain of $3,488,000. An additional 5%
     interest was sold in the third quarter of 1996, generating a pre-tax gain
     of $498,000. In December 1996, a 41% interest in the partnership was sold
     to three additional partners resulting in a pre-tax gain of $4,796,000, of
     which $2,398,000 was deferred until the third quarter of 1997 when the
     related option agreement expired unexercised.
 
                                       15
<PAGE>   18
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
     D. THE GENIX GROUP, INC.
 
     As discussed in MCN's 1996 Annual Report on Form 10-K, MCN completed the
     sale of its computer operations subsidiary, The Genix Group, Inc., to
     Affiliated Computer Services, Inc. in June 1996. The sale resulted in an
     after-tax gain of $36,176,000.
 
3. CAPITALIZATION
 
     A. LONG-TERM DEBT
 
     The following long-term debt was issued during the first half of 1997 (in
     thousands):
 
<TABLE>
<CAPTION>
 ISSUE DATE            DESCRIPTION           AMOUNT ISSUED
----------------------------------------------------------
<S>            <C>                           <C>
January 1997   MCNIC Medium-Term Notes
                 6.89%, due January 2002        $90,000
                 7.12%, due January 2004        $60,000
----------------------------------------------------------
May 1997       MichCon First Mortgage Bonds
                 7.21%, due May 2007            $30,000
                 7.06%, due May 2012            $40,000
                 7.60%, due May 2017            $15,000
----------------------------------------------------------
</TABLE>
 
     During April 1997, MichCon subsidiaries borrowed $40,000,000 under a
     nonrecourse credit agreement at an average interest rate of 6.45%. 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 June 1997 with the final
     installment due November 2005. The loan is secured by a pledge of the stock
     of the borrowers and a security interest in certain of their assets.
 
     MichCon entered into variable interest rate swap agreements with notional
     principal amounts aggregating $80,000,000 in connection with the first
     mortgage bonds issued in May 1997. Swap agreements of $40,000,000 through
     May 2002 have reduced the average cost of debt from 7.31% to 6.30% for the
     two months ended June 30, 1997. Swap agreements of $40,000,000 through May
     2005 have reduced the average cost of debt from 7.06% to 5.90% for the two
     months ended June 30, 1997.
 
     In the second quarter of 1997, MichCon redeemed early $5,000,000 of 9.5%
     first mortgage bonds and $12,000,000 of 9.75% unsecured notes. As discussed
     in MCN's 1996 Annual Report on Form 10-K, MichCon had a variable interest
     rate swap through April 2000 on the $12,000,000 unsecured notes. This
     agreement reduced the cost of debt of the fixed-rate unsecured notes from
     9.75% to 5.77% for the six months ended June 30, 1997. This swap has been
     redesignated as a hedge of other outstanding first mortgage bonds.
 
     B. FELINE PRIDES
 
     In March 1997, MCN issued 2,645,000 FELINE PRIDES yielding 8% with a stated
     amount of $50 per security. Each security initially consists of a stock
     purchase contract and a preferred security of MCN Financing III.
 
     Under each stock purchase contract, MCN is obligated to sell and the FELINE
     PRIDES holder is obligated to purchase in May 2000 for $50, between 1.4132
     and 1.7241 shares of MCN common stock. The exact number of MCN common
     shares to be sold is dependent on the market value of a share in May 2000,
     but will not be less than 3,737,988 or more than 4,560,345 shares. MCN is
     also obligated to pay the FELINE PRIDES holders a quarterly contract
     adjustment payment at an annual rate of .75% of
 
                                       16
<PAGE>   19
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
     the stated amount. MCN has recorded the present value of the contract
     adjustment payments, totaling $2,661,015, as a liability and a reduction to
     Common Shareholders' Equity on MCN's Consolidated Statement of Financial
     Position. The liability is reduced as the contract adjustment payments are
     made. MCN has the right to defer the contract adjustment payments, in which
     case MCN cannot declare dividends on its common stock until the contract
     adjustment payments have been made. In addition, MCN has incurred costs of
     approximately $4,900,000 in conjunction with the issuance and similarly has
     recorded these costs as a reduction to Common Shareholders' Equity.
 
     MCN Financing III, a business trust wholly owned by MCN, was formed for the
     sole purpose of issuing preferred securities and lending the gross proceeds
     thereof to MCN. In March 1997, the trust issued 2,645,000 shares of 7.25%
     redeemable preferred securities, at the liquidation preference value of $50
     per share. The trust invested the $132,250,000 of gross proceeds from the
     issuance of the preferred securities, as well as $4,090,250 of proceeds
     from the issuance of common securities to MCN, in an equivalent amount of
     7.25% Junior Subordinated Debentures of MCN. The $136,340,250 of Junior
     Subordinated Debentures are due May 2002 and are the sole assets of the
     trust. Upon maturity of the debentures, the trust is required to redeem the
     preferred securities.
 
     Holders of the preferred securities are entitled to receive cumulative
     dividends at an annual rate of 7.25% of the liquidation preference value.
     Dividends are payable quarterly and in substance are tax deductible by MCN.
     MCN has the right to extend interest payment periods on the debentures for
     successive periods through the May 2002 maturity date. As a consequence,
     quarterly dividend payments on the preferred securities can be deferred by
     the trust during any such interest payment period. In the event that MCN
     exercises this right, MCN may not declare dividends on its common stock.
 
     In the event of default, holders of the preferred securities will be
     entitled to exercise and enforce the trust's creditor rights against MCN,
     which may include acceleration of the principal amount due on the
     debentures. MCN has issued a guaranty with respect to payments on the
     preferred securities. This guaranty, taken together with MCN's obligations
     under the debentures, the related indenture, and the trust documents,
     provides a full and unconditional guaranty of the trust's obligations under
     the preferred securities to the extent the trust has funds available
     therefor.
 
     The preferred securities are pledged as collateral to secure the FELINE
     PRIDES holders' obligation to purchase MCN common stock under the stock
     purchase contracts. Each holder has the right after issuance of the FELINE
     PRIDES to substitute for the preferred securities, zero coupon U.S.
     Treasury Securities maturing in May 2000. Each FELINE PRIDES holder has the
     option to use the preferred securities or the treasury securities to
     satisfy the May 2000 purchase contract commitment.
 
     C. PREFERRED SECURITIES
 
     In 1997, MCN Financing V and MCN Financing VI, business trusts wholly owned
     by MCN, were formed for the sole purpose of issuing preferred securities
     and lending the gross proceeds thereof to MCN. In June 1997, MCN Financing
     V issued 100,000 Private Institutional Trust Securities (PRINTS) and MCN
     Financing VI issued 100,000 Single Point Remarketed Reset Capital
     Securities (SPRRCS), both at their liquidation preference value of $1,000
     per security. The trusts invested the $200,000,000 of gross proceeds from
     the issuances of the preferred securities, as well as $6,186,000 of
     proceeds from the issuances of common securities to MCN, in an equivalent
     amount of senior debentures of MCN. The $206,186,000 of senior debentures
     are due 2037, are on terms substantially the same as the preferred
     securities and are the sole assets of the trusts.
 
     The preferred securities are structured such that at a specified future
     date, the rate reset date, the securities may be remarketed with a new
     liquidation preference value of $25 per security. The annual dividend
     payment rate will be reset to reflect the lowest rate, less than or equal
     to a maximum rate, at which the securities can be remarketed at a price
     equal to their liquidation preference value. On the rate
 
                                       17
<PAGE>   20
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
     reset date, the terms of an equivalent amount of the MCN senior debentures
     will change to reflect the new terms of the remarketed preferred
     securities. The debentures will thereafter be subordinated and junior in
     right of payment to all senior obligations of MCN. The rate reset dates for
     the PRINTS and SPRRCS are anticipated to be June 1, 1998 and October 28,
     1999, respectively.
 
     Prior to the rate reset date, holders of the PRINTS and SPRRCS are entitled
     to receive cumulative dividends at annual rates of 6.305% and 6.85% of the
     liquidation preference value, respectively. Dividends are in substance tax
     deductible by MCN and are payable semi-annually until the rate reset date,
     after which they will become payable quarterly. Financing costs were
     deferred and reflected as a reduction in the carrying value of the
     preferred securities. These costs are being amortized using the
     straight-line method over 40 years.
 
     Subsequent to the rate reset date, MCN has the right to extend interest
     payment periods on the debentures for up to 20 consecutive quarters through
     the June 2037 maturity date. As a consequence, dividend payments on the
     preferred securities can be deferred by the trusts during any such interest
     payment period. In the event that MCN exercises this right, MCN may not
     declare dividends on its common stock. With MCN's consent, the preferred
     securities are redeemable at the option of the trusts, in whole or in part,
     on the rate reset date or at any time after the fifth anniversary of the
     rate reset date. In addition, upon maturity of the debentures, the trusts
     are required to redeem the preferred securities.
 
     In the event of default, holders of the preferred securities will be
     entitled to exercise and enforce the trust's creditor rights against MCN,
     which may include acceleration of the principal amount due on the
     debentures. MCN has issued guaranties with respect to payments on the
     preferred securities. These guaranties, when taken together with MCN's
     obligations under the debentures, the related indenture, and the trust
     documents, provide full and unconditional guaranties of the trusts'
     obligations under the preferred securities.
 
     In June 1997, MCN entered into a one-year variable interest rate swap
     agreement with a notional amount of $100,000,000. The swap agreement
     effectively reduced the PRINTS fixed dividend rate from 6.305% to 5.94%
     through June 30, 1997.
 
     D. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
 
     In June 1997, MCN sold 9,775,000 shares of new common stock in a public
     offering, generating net proceeds of $276,600,000.
 
     Under the MCN Shareholder's Rights Plan, one preferred share purchase right
     is attached to each outstanding share of common stock. In July 1997, the
     MCN Board of Directors amended the Plan which, among other changes,
     extended the expiration of the rights to July 2007. The rights, which
     cannot be traded separately from MCN's common stock, are designed to
     protect shareholders from coercive or unfair tactics and are therefore
     exercisable only upon certain triggering events.
 
4. LINES OF CREDIT
 
As discussed in MCN's 1996 Annual Report on Form 10-K, MichCon and MCNIC
maintain credit lines that allow for borrowings of up to $250,000,000 under
364-day revolving credit facilities and up to $450,000,000 under three-year
revolving credit facilities. These credit lines, totaling $700,000,000, support
their commercial paper programs. No borrowings were outstanding under these
lines as of June 30, 1997. The 364-day revolving credit facilities were renewed
in July 1997. The three-year revolving credit facilities expire in July 1998.
 
In July 1997, the MCNIC Board of Directors approved a resolution to temporarily
restrict $42,000,000 of the MCNIC credit facility to support TPPL's public offer
to purchase additional interest in AEC (Note 2a).
 
                                       18
<PAGE>   21
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
5. GAS IN INVENTORY
 
Inventory gas is priced on a last-in, first-out (LIFO) basis. In anticipation
that interim inventory reductions will be replaced prior to year end, the cost
of gas for net withdrawals from inventory is generally recorded at the estimated
average purchase rate for the calendar year. The excess of these charges over
the LIFO cost is credited to the gas inventory equalization account. During
interim periods when there are net injections to inventory, the equalization
account is reversed. Approximately 51.2 billion cubic feet (Bcf) and 49.7 Bcf of
gas was in inventory at June 30, 1997 and 1996, respectively.
 
6. COMMODITY SWAP AGREEMENTS
 
As discussed in MCN's 1996 Annual Report on Form 10-K, MCN manages commodity
price risk through the use of various derivative instruments and limits the use
of such instruments to hedging activities. If MCN did not use derivative
instruments, its exposure to such risk would be higher. Although this strategy
reduces risk, it also limits potential gains from favorable changes in commodity
prices. Natural gas and oil swap agreements are used to manage exposure to the
risk of market price fluctuations on gas sale contracts and gas and oil
production. Market value changes of swap contracts are recorded as deferred
gains or losses until the hedged transactions are completed, at which time the
realized gains or losses are included as adjustments to revenues. The offsets to
the unrealized losses are recorded as deferred payables and the offsets to the
unrealized gains are recorded as deferred receivables.
 
The following assets and liabilities related to the use of gas and oil swap
agreements are reflected in the Consolidated Statement of Financial Position:
 
<TABLE>
<CAPTION>
                                                                     JUNE 30,         DECEMBER 31,
                                                                ------------------    ------------
                                                                 1997       1996          1996
(in Thousands)                                                  -------    -------    ------------
<S>                                                             <C>        <C>        <C>
DEFERRED SWAP LOSSES AND RECEIVABLES
  Unrealized losses.........................................    $24,890    $17,734     $   53,166
  Deferred receivables......................................     22,181     17,871         11,885
                                                                -------    -------     ----------
                                                                $47,071    $35,605     $   65,051
                                                                =======    =======     ==========
DEFERRED SWAP GAINS AND PAYABLES
  Unrealized gains..........................................    $18,504    $15,394     $    5,519
  Deferred payables.........................................     33,420     25,575         64,641
                                                                -------    -------     ----------
                                                                 51,924     40,969         70,160
  Less -- Current portion...................................     16,228      5,252         21,795
                                                                -------    -------     ----------
                                                                $35,696    $35,717     $   48,365
                                                                =======    =======     ==========
</TABLE>
 
7. COMMITMENTS AND CONTINGENCIES
 
In July 1997, MCN's 50%-owned partnership, Washington 10 Storage Partnership
(W-10), entered into a leveraged lease transaction to finance the conversion of
a depleted natural gas reservoir into a 42 Bcf storage facility. The storage
facility is expected to begin operations in mid-1999 and cost $160,000,000. MCN
has entered into a contract with W-10 to market 100% of the capacity of the
storage field through 2029. Under the terms of the marketing contract, MCN is
obligated to generate sufficient revenues to cover W-10's lease payments and
certain operating costs, which average approximately $16,000,000 annually. As of
June 30, 1997, MCN has long-term contracts in place for approximately 40% of the
field's capacity thereby reducing its commitments under the marketing contract.
A significant portion of the remaining capacity is expected to be contracted by
MCN's Energy Marketing operations, thereby enhancing its ability to offer a
reliable gas supply during peak winter months.
 
                                       19
<PAGE>   22
 
                     MCN ENERGY GROUP INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
MCN is involved in certain legal and administrative proceedings before various
courts and governmental agencies concerning claims arising in the ordinary
course of business. Management cannot predict the final disposition of such
proceedings, but believes that adequate provision has been made for probable
losses. It is management's belief, after discussion with legal counsel, that the
ultimate resolution of those proceedings still pending will not have a material
adverse effect on MCN's financial statements.
 
8. CONSOLIDATING FINANCIAL STATEMENTS
 
Debt securities issued by MCNIC are subject to a support agreement between MCN
and MCNIC, under which MCN has committed to make payments of interest and
principal on MCNIC's securities in the event of failure to pay by MCNIC. Under
the terms of the support agreement, the assets of MCN, other than MichCon, and
any cash dividends paid to MCN by any of its subsidiaries are available as
recourse to holders of MCNIC's securities. The carrying value of MCN's assets on
an unconsolidated basis, primarily investments in its subsidiaries other than
MichCon, is $1,075,459,000 at June 30, 1997.
 
The following MCN consolidating financial statements are presented and include
separately MCNIC, MichCon and MCN and other subsidiaries. MCN has determined
that separate financial statements and other disclosures concerning MCNIC are
not material to investors. The other MCN subsidiaries represent Citizens Gas
Fuel Company, Blue Lake Holdings, Inc., MCN Michigan Limited Partnership, MCN
Financing I, MCN Financing III, MCN Financing V and MCN Financing VI.
 
                                       20
<PAGE>   23
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                        MCN                                   ELIMINATIONS
                                                     AND OTHER                                     AND           CONSOLIDATED
                                                    SUBSIDIARIES     MCNIC      MICHCON     RECLASSIFICATIONS       TOTALS
                                                    ------------    --------    --------    -----------------    ------------
                                                                        THREE MONTHS ENDED JUNE 30, 1997
                                                    -------------------------------------------------------------------------
<S>                                                 <C>             <C>         <C>         <C>                  <C>
OPERATING REVENUES..............................      $ 3,153       $177,187    $209,800        $ (2,215)          $387,925
                                                      -------       --------    --------        --------           --------
OPERATING EXPENSES
  Cost of gas...................................        1,616        117,061     83,031           (1,688)           200,020
  Operation and maintenance.....................          602         25,796     69,394             (527)            95,265
  Depreciation, depletion and amortization......          575         18,485     26,424               --             45,484
  Property and other taxes......................          331          3,284     16,141               --             19,756
                                                      -------       --------    --------        --------           --------
                                                        3,124        164,626    194,990           (2,215)           360,525
                                                      -------       --------    --------        --------           --------
OPERATING INCOME................................           29         12,561     14,810               --             27,400
                                                      -------       --------    --------        --------           --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
  SUBSIDIARIES..................................       10,335          9,324        331           (9,520)            10,470
                                                      -------       --------    --------        --------           --------
OTHER INCOME AND (DEDUCTIONS)
  Interest income...............................        7,574            845      1,277           (7,532)             2,164
  Interest on long-term debt....................           71         (9,566)   (11,574)              --            (21,069)
  Other interest expense........................         (268)        (7,300)    (1,858)           7,532             (1,894)
  Dividends on preferred securities of
    subsidiaries................................           --             --         --           (7,329)            (7,329)
  Minority interest.............................           --            (19)      (595)              --               (614)
  Other.........................................           29           (166)      (304)              --               (441)
                                                      -------       --------    --------        --------           --------
                                                        7,406        (16,206)   (13,054)          (7,329)           (29,183)
                                                      -------       --------    --------        --------           --------
INCOME BEFORE INCOME TAXES......................       17,770          5,679      2,087          (16,849)             8,687
INCOME TAX PROVISION (BENEFIT)..................          624         (2,169)     1,156               --               (389)
                                                      -------       --------    --------        --------           --------
NET INCOME......................................       17,146          7,848        931          (16,849)             9,076
DIVIDENDS ON PREFERRED SECURITIES...............        7,329             --         --           (7,329)                --
                                                      -------       --------    --------        --------           --------
NET INCOME AVAILABLE FOR COMMON STOCK...........      $ 9,817       $  7,848    $   931         $ (9,520)          $  9,076
                                                      =======       ========    ========        ========           ========
 
<CAPTION>
                                                                        THREE MONTHS ENDED JUNE 30, 1996
                                                    -------------------------------------------------------------------------
<S>                                                 <C>             <C>         <C>         <C>                  <C>
OPERATING REVENUES..............................      $ 2,939       $131,643    $222,327        $ (2,445)          $354,464
                                                      -------       --------    --------        --------           --------
OPERATING EXPENSES
  Cost of gas...................................        1,540         99,905     99,681           (2,058)           199,068
  Operation and maintenance.....................          628         16,628     71,212             (388)            88,080
  Depreciation, depletion and amortization......          480         10,300     24,740               --             35,520
  Property and other taxes......................          302          2,379     15,004              379             18,064
                                                      -------       --------    --------        --------           --------
                                                        2,950        129,212    210,637           (2,067)           340,732
                                                      -------       --------    --------        --------           --------
OPERATING INCOME (LOSS).........................          (11)         2,431     11,690             (378)            13,732
                                                      -------       --------    --------        --------           --------
EQUITY IN EARNINGS OF JOINT VENTURES AND
  SUBSIDIARIES..................................       42,810          4,446        260          (42,674)             4,842
                                                      -------       --------    --------        --------           --------
OTHER INCOME AND (DEDUCTIONS)
  Interest income...............................        2,393            946        634           (2,369)             1,604
  Interest on long-term debt....................           (9)        (6,153)   (10,269)              45            (16,386)
  Other interest expense........................          (96)        (4,067)      (940)           2,369             (2,734)
  Dividends on preferred securities of
    subsidiaries................................           --             --         --           (2,345)            (2,345)
  Gains related to DIGP.........................           --          3,488         --               --              3,488
  Minority interest.............................           --            (17)      (354)              --               (371)
  Other.........................................           98           (336)       159              329                250
                                                      -------       --------    --------        --------           --------
                                                        2,386         (6,139)   (10,770)          (1,971)           (16,494)
                                                      -------       --------    --------        --------           --------
INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES...........................       45,185            738      1,180          (45,023)             2,080
INCOME TAX PROVISION (BENEFIT)..................          209         (3,665)       329               --             (3,127)
                                                      -------       --------    --------        --------           --------
INCOME FROM CONTINUING OPERATIONS...............       44,976          4,403        851          (45,023)             5,207
                                                      -------       --------    --------        --------           --------
DISCONTINUED OPERATIONS, NET OF TAXES
  Income from operations........................           --            582         --               --                582
  Gain on sale..................................           --         36,176         --               --             36,176
                                                      -------       --------    --------        --------           --------
                                                           --         36,758         --               --             36,758
                                                      -------       --------    --------        --------           --------
NET INCOME......................................       44,976         41,161        851          (45,023)            41,965
DIVIDENDS ON PREFERRED SECURITIES...............        2,345             --         --           (2,345)                --
                                                      -------       --------    --------        --------           --------
NET INCOME AVAILABLE FOR COMMON STOCK...........      $42,631       $ 41,161    $   851         $(42,678)          $ 41,965
                                                      =======       ========    ========        ========           ========
</TABLE>
 
                                       21
<PAGE>   24
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                          MCN                                ELIMINATIONS
                                                       AND OTHER                                  AND          CONSOLIDATED
                                                      SUBSIDIARIES    MCNIC     MICHCON    RECLASSIFICATIONS      TOTALS
                                                      ------------   --------   --------   -----------------   ------------
                                                                         SIX MONTHS ENDED JUNE 30, 1997
                                                      ---------------------------------------------------------------------
<S>                                                   <C>            <C>        <C>        <C>                 <C>
OPERATING REVENUES..................................    $ 10,090     $437,341   $737,245       $  (7,990)       $1,176,686
                                                        --------     --------   --------       ---------        ----------
OPERATING EXPENSES
  Cost of gas.......................................       5,429      313,378   386,304           (5,546)          699,565
  Operation and maintenance.........................         656       51,975   143,499           (2,444)          193,686
  Depreciation, depletion and amortization..........       1,127       35,889    51,925               --            88,941
  Property and other taxes..........................       1,029        6,264    33,935               --            41,228
                                                        --------     --------   --------       ---------        ----------
                                                           8,241      407,506   615,663           (7,990)        1,023,420
                                                        --------     --------   --------       ---------        ----------
OPERATING INCOME....................................       1,849       29,835   121,582               --           153,266
                                                        --------     --------   --------       ---------        ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
  SUBSIDIARIES......................................      91,982       22,484       641          (90,276)           24,831
                                                        --------     --------   --------       ---------        ----------
OTHER INCOME AND (DEDUCTIONS)
  Interest income...................................      11,922        1,814     2,486          (11,846)            4,376
  Interest on long-term debt........................         212      (17,949)  (22,314)              --           (40,051)
  Other interest expense............................        (498)     (13,223)   (4,749)          11,846            (6,624)
  Dividends on preferred securities of
    subsidiaries....................................          --           --        --          (11,558)          (11,558)
  Minority interest.................................          --          (34)     (933)              --              (967)
  Other.............................................         (27)       2,710      (103)              --             2,580
                                                        --------     --------   --------       ---------        ----------
                                                          11,609      (26,682)  (25,613)         (11,558)          (52,244)
                                                        --------     --------   --------       ---------        ----------
INCOME BEFORE INCOME TAXES..........................     105,440       25,637    96,610         (101,834)          125,853
INCOME TAX PROVISION (BENEFIT)......................       1,566          (44)   33,486               --            35,008
                                                        --------     --------   --------       ---------        ----------
NET INCOME..........................................     103,874       25,681    63,124         (101,834)           90,845
DIVIDENDS ON PREFERRED SECURITIES...................      11,558           --        --          (11,558)               --
                                                        --------     --------   --------       ---------        ----------
NET INCOME AVAILABLE FOR COMMON STOCK...............    $ 92,316     $ 25,681   $63,124        $ (90,276)       $   90,845
                                                        ========     ========   ========       =========        ==========
                                                                         SIX MONTHS ENDED JUNE 30, 1996
                                                      ---------------------------------------------------------------------
OPERATING REVENUES..................................    $ 10,146     $389,012   $753,719       $  (7,775)       $1,145,102
                                                        --------     --------   --------       ---------        ----------
OPERATING EXPENSES
  Cost of gas.......................................       5,311      313,528   398,397           (5,739)          711,497
  Operation and maintenance.........................         814       35,672   139,983           (2,037)          174,432
  Depreciation, depletion and amortization..........         948       20,237    49,133               --            70,318
  Property and other taxes..........................         863        4,941    33,612               --            39,416
                                                        --------     --------   --------       ---------        ----------
                                                           7,936      374,378   621,125           (7,776)          995,663
                                                        --------     --------   --------       ---------        ----------
OPERATING INCOME....................................       2,210       14,634   132,594                1           149,439
                                                        --------     --------   --------       ---------        ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
  SUBSIDIARIES......................................     122,652        7,906       495         (122,168)            8,885
                                                        --------     --------   --------       ---------        ----------
OTHER INCOME AND (DEDUCTIONS)
  Interest income...................................       4,793        1,876     1,219           (4,739)            3,149
  Interest on long-term debt........................         (19)     (12,514)  (19,925)             (67)          (32,525)
  Other interest expense............................        (110)      (7,689)   (3,775)           4,739            (6,835)
  Dividends on preferred securities of
    subsidiaries....................................          --           --        --           (4,707)           (4,707)
  Gains related to DIGP.............................          --        3,488        --               --             3,488
  Minority interest.................................          --          (34)     (702)              --              (736)
  Other.............................................        (190)        (623)     (249)              67              (995)
                                                        --------     --------   --------       ---------        ----------
                                                           4,474      (15,496)  (23,432)          (4,707)          (39,161)
                                                        --------     --------   --------       ---------        ----------
INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES...............................     129,336        7,044   109,657         (126,874)          119,163
INCOME TAX PROVISION (BENEFIT)......................       1,309       (5,173)   38,766               --            34,902
                                                        --------     --------   --------       ---------        ----------
INCOME FROM CONTINUING OPERATIONS...................     128,027       12,217    70,891         (126,874)           84,261
                                                        --------     --------   --------       ---------        ----------
DISCONTINUED OPERATIONS, NET OF TAXES
  Income from operations............................          --        1,595        --               --             1,595
  Gain on sale......................................          --       36,176        --               --            36,176
                                                        --------     --------   --------       ---------        ----------
                                                              --       37,771        --               --            37,771
                                                        --------     --------   --------       ---------        ----------
NET INCOME..........................................     128,027       49,988    70,891         (126,874)          122,032
DIVIDENDS ON PREFERRED SECURITIES...................       4,689           --        18           (4,707)               --
                                                        --------     --------   --------       ---------        ----------
NET INCOME AVAILABLE FOR COMMON STOCK...............    $123,338     $ 49,988   $70,873        $(122,167)       $  122,032
                                                        ========     ========   ========       =========        ==========
</TABLE>
 
                                       22
<PAGE>   25
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      MCN                                  ELIMINATIONS
                                                   AND OTHER                                    AND          CONSOLIDATED
                                                  SUBSIDIARIES    MCNIC      MICHCON     RECLASSIFICATIONS      TOTALS
                                                  ------------   --------   ----------   -----------------   ------------
                                                                     TWELVE MONTHS ENDED JUNE 30, 1997
                                                  -----------------------------------------------------------------------
<S>                                               <C>            <C>        <C>          <C>                 <C>
OPERATING REVENUES..............................    $ 17,413     $782,770   $1,242,311       $ (13,642)       $2,028,852
                                                    --------     --------   ----------       ---------        ----------
OPERATING EXPENSES
  Cost of gas...................................       9,773      557,190      624,501          (9,818)        1,181,646
  Operation and maintenance.....................         627       96,633      297,797          (3,823)          391,234
  Depreciation, depletion and amortization......       2,119       61,555      100,939              --           164,613
  Property and other taxes......................       2,300       11,854       62,085              --            76,239
                                                    --------     --------   ----------       ---------        ----------
                                                      14,819      727,232    1,085,322         (13,641)        1,813,732
                                                    --------     --------   ----------       ---------        ----------
OPERATING INCOME................................       2,594       55,538      156,989              (1)          215,120
                                                    --------     --------   ----------       ---------        ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
  SUBSIDIARIES..................................     121,698       30,493        1,032        (119,410)           33,813
                                                    --------     --------   ----------       ---------        ----------
OTHER INCOME AND (DEDUCTIONS)
  Interest income...............................      19,804        3,158        5,167         (19,668)            8,461
  Interest on long-term debt....................         345      (31,363)     (43,092)             67           (74,043)
  Other interest expense........................      (1,606)     (20,129)      (8,986)         19,668           (11,053)
  Dividends on preferred securities of
    subsidiaries................................          --           --           --         (19,225)          (19,225)
  Gains related to DIGP.........................          --        2,896           --              --             2,896
  Minority interest.............................          --          (71)      (1,219)             --            (1,290)
  Other.........................................         353        2,279       (1,610)            (67)              955
                                                    --------     --------   ----------       ---------        ----------
                                                      18,896      (43,230)     (49,740)        (19,225)          (93,299)
                                                    --------     --------   ----------       ---------        ----------
INCOME BEFORE INCOME TAXES......................     143,188       42,801      108,281        (138,636)          155,634
INCOME TAX PROVISION (BENEFIT)..................       2,071       (1,796)      36,206              --            36,481
                                                    --------     --------   ----------       ---------        ----------
NET INCOME......................................     141,117       44,597       72,075        (138,636)          119,153
DIVIDENDS ON PREFERRED SECURITIES...............      19,225           --           --         (19,225)               --
                                                    --------     --------   ----------       ---------        ----------
NET INCOME AVAILABLE FOR COMMON STOCK...........    $121,892     $ 44,597   $   72,075       $(119,411)       $  119,153
                                                    ========     ========   ==========       =========        ==========
                                                                     TWELVE MONTHS ENDED JUNE 30, 1996
                                                  -----------------------------------------------------------------------
OPERATING REVENUES..............................    $ 16,827     $620,098   $1,227,752       $ (12,774)       $1,851,903
                                                    --------     --------   ----------       ---------        ----------
OPERATING EXPENSES
  Cost of gas...................................       8,879      484,675      600,192          (9,331)        1,084,415
  Operation and maintenance.....................       1,970       63,496      284,404          (3,444)          346,426
  Depreciation, depletion and amortization......       1,807       34,151       93,380              --           129,338
  Property and other taxes......................       1,424        7,818       59,935              --            69,177
                                                    --------     --------   ----------       ---------        ----------
                                                      14,080      590,140    1,037,911         (12,775)        1,629,356
                                                    --------     --------   ----------       ---------        ----------
OPERATING INCOME................................       2,747       29,958      189,841               1           222,547
                                                    --------     --------   ----------       ---------        ----------
EQUITY IN EARNINGS OF JOINT VENTURES AND
  SUBSIDIARIES..................................     156,912       10,142          858        (155,849)           12,063
                                                    --------     --------   ----------       ---------        ----------
OTHER INCOME AND (DEDUCTIONS)
  Interest income...............................       9,589        3,582        3,203          (9,798)            6,576
  Interest on long-term debt....................         (52)     (17,825)     (39,606)            478           (57,005)
  Other interest expense........................        (139)     (15,234)      (7,177)          9,478           (13,072)
  Dividends on preferred securities of
    subsidiaries................................          --           --           --          (9,502)           (9,502)
  Gains related to DIGP.........................          --        3,488           --              --             3,488
  Minority interest.............................          --       (1,356)        (702)             (1)           (2,059)
  Other.........................................        (298)         725       (3,534)           (156)           (3,263)
                                                    --------     --------   ----------       ---------        ----------
                                                       9,100      (26,620)     (47,816)         (9,501)          (74,837)
                                                    --------     --------   ----------       ---------        ----------
INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES...........................     168,759       13,480      142,883        (165,349)          159,773
INCOME TAX PROVISION (BENEFIT)..................       2,132      (10,054)      52,431              --            44,509
                                                    --------     --------   ----------       ---------        ----------
INCOME FROM CONTINUING OPERATIONS...............     166,627       23,534       90,452        (165,349)          115,264
                                                    --------     --------   ----------       ---------        ----------
DISCONTINUED OPERATIONS, NET OF TAXES
  Income from operations........................          --        3,446           --              --             3,446
  Gain on sale..................................          --       36,176           --              --            36,176
                                                    --------     --------   ----------       ---------        ----------
                                                          --       39,622           --              --            39,622
                                                    --------     --------   ----------       ---------        ----------
NET INCOME......................................     166,627       63,156       90,452        (165,349)          154,886
DIVIDENDS ON PREFERRED SECURITIES...............       9,377           --          125          (9,502)               --
                                                    --------     --------   ----------       ---------        ----------
NET INCOME AVAILABLE FOR COMMON STOCK...........    $157,250     $ 63,156   $   90,327       $(155,847)       $  154,886
                                                    ========     ========   ==========       =========        ==========
</TABLE>
 
                                       23
<PAGE>   26
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
           CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                           MCN                                    ELIMINATIONS
                                                        AND OTHER                                      AND          CONSOLIDATED
                                                       SUBSIDIARIES     MCNIC       MICHCON     RECLASSIFICATIONS      TOTALS
                                                       ------------   ----------   ----------   -----------------   ------------
                                                                                     JUNE 30, 1997
                                                       -------------------------------------------------------------------------
<S>                                                    <C>            <C>          <C>          <C>                 <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents, at cost.................   $   34,834    $  130,108   $   18,355      $   (33,213)      $  150,084
  Accounts receivable................................        9,497       117,845      196,815          (13,607)         310,550
    Less -- Allowance for doubtful accounts..........           71           673       23,442               --           24,186
                                                        ----------    ----------   ----------      -----------       ----------
  Accounts receivable, net...........................        9,426       117,172      173,373          (13,607)         286,364
  Accrued unbilled revenue...........................          211            --       16,158               --           16,369
  Accrued gas cost recovery revenues.................           --            --       14,072               --           14,072
  Gas in inventory...................................           --        26,397       36,499               --           62,896
  Property taxes assessed applicable to future
    periods..........................................           87         1,256       37,885               --           39,228
  Gas receivable.....................................           --        11,875        9,589                1           21,465
  Other..............................................        3,733        17,439       19,755           (9,310)          31,617
                                                        ----------    ----------   ----------      -----------       ----------
                                                            48,291       304,247      325,686          (56,129)         622,095
                                                        ----------    ----------   ----------      -----------       ----------
DEFERRED CHARGES AND OTHER ASSETS
  Investments in and advances to joint ventures and
    subsidiaries.....................................    1,599,396       380,038       19,731       (1,588,728)         410,437
  Deferred swap losses and receivables...............           --        47,071           --               --           47,071
  Deferred postretirement benefit costs..............          673            --        1,886               --            2,559
  Deferred environmental costs.......................        3,000            --       27,680               --           30,680
  Prepaid benefit costs..............................       (3,607)           --       64,737           (1,907)          59,223
  Other..............................................        7,758        48,531       54,324           (2,895)         107,718
                                                        ----------    ----------   ----------      -----------       ----------
                                                         1,607,220       475,640      168,358       (1,593,530)         657,688
                                                        ----------    ----------   ----------      -----------       ----------
PROPERTY, PLANT AND EQUIPMENT, at cost...............       34,778     1,181,156    2,706,922               --        3,922,856
  Less -- Accumulated depreciation and depletion.....       12,016       115,016    1,282,057               --        1,409,089
                                                        ----------    ----------   ----------      -----------       ----------
                                                            22,762     1,066,140    1,424,865               --        2,513,767
                                                        ----------    ----------   ----------      -----------       ----------
                                                        $1,678,273    $1,846,027   $1,918,909      $(1,649,659)      $3,793,550
                                                        ==========    ==========   ==========      ===========       ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable...................................   $    2,720    $  104,157   $  105,822      $   (13,277)      $  199,422
  Notes payable......................................            1           600       38,366          (36,515)           2,452
  Current portion of long-term debt and capital
    lease obligations................................          420         1,497       28,512               --           30,429
  Gas inventory equalization.........................           --            (6)      66,685               --           66,679
  Federal income, property and other taxes payable...          955         1,439       73,638           (9,084)          66,948
  Customer deposits..................................           20            --       11,985               --           12,005
  Other..............................................       11,081        21,911       45,842             (226)          78,608
                                                        ----------    ----------   ----------      -----------       ----------
                                                            15,197       129,598      370,850          (59,102)         456,543
                                                        ----------    ----------   ----------      -----------       ----------
DEFERRED CREDITS AND OTHER LIABILITIES
  Accumulated deferred income taxes..................       (2,453)      101,144       78,701               20          177,412
  Unamortized investment tax credit..................          316            --       33,666               --           33,982
  Tax benefits amortizable to customers..............          202            --      115,432               --          115,634
  Deferred swap gains and payables...................           --        35,696           --               --           35,696
  Accrued environmental costs........................        3,000            --       32,000               --           35,000
  Minority interest..................................           --           238       18,070               --           18,308
  Other..............................................       11,933        16,897       40,578           (1,907)          67,501
                                                        ----------    ----------   ----------      -----------       ----------
                                                            12,998       153,975      318,447           (1,887)         483,533
                                                        ----------    ----------   ----------      -----------       ----------
LONG-TERM DEBT, including capital lease
  obligations........................................           --       589,656      629,484                1        1,219,141
                                                        ----------    ----------   ----------      -----------       ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES......      504,993            --           --               --          504,993
                                                        ----------    ----------   ----------      -----------       ----------
COMMON SHAREHOLDERS' EQUITY
  Common stock.......................................          780             5       10,300          (10,306)             779
  Additional paid-in capital.........................      791,448       825,982      230,399       (1,059,072)         788,757
  Retained earnings..................................      375,623       146,811      359,429         (519,293)         362,570
  Yield enhancement, contract and issuance costs.....      (22,035)           --           --               --          (22,035)
  Unearned compensation..............................         (731)           --           --               --             (731)
                                                        ----------    ----------   ----------      -----------       ----------
                                                         1,145,085       972,798      600,128       (1,588,671)       1,129,340
                                                        ----------    ----------   ----------      -----------       ----------
                                                        $1,678,273    $1,846,027   $1,918,909      $(1,649,659)      $3,793,550
                                                        ==========    ==========   ==========      ===========       ==========
</TABLE>
 
                                       24
<PAGE>   27
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
           CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                          MCN                                    ELIMINATIONS
                                                       AND OTHER                                      AND          CONSOLIDATED
                                                      SUBSIDIARIES     MCNIC       MICHCON     RECLASSIFICATIONS      TOTALS
                                                      ------------   ----------   ----------   -----------------   ------------
                                                                                    JUNE 30, 1996
                                                      -------------------------------------------------------------------------
<S>                                                   <C>            <C>          <C>          <C>                 <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents, at cost................    $     33     $   46,590   $    8,866       $      --        $   55,489
  Accounts receivable...............................       3,269        104,273      211,071          (6,037)          312,576
    Less -- Allowance for doubtful accounts.........          74            430       18,222              --            18,726
                                                        --------     ----------   ----------       ---------        ----------
  Accounts receivable, net..........................       3,195        103,843      192,849          (6,037)          293,850
  Accrued unbilled revenue..........................         138             --       16,554              --            16,692
  Accrued gas cost recovery revenues................          --             --       42,026              --            42,026
  Gas in inventory..................................          --          2,794       25,238               1            28,033
  Property taxes assessed applicable to future
    periods.........................................          78          1,321       35,176              --            36,575
  Gas receivable....................................          --         15,468        9,065              --            24,533
  Other.............................................       1,836          2,028       24,618          (2,057)           26,425
                                                        --------     ----------   ----------       ---------        ----------
                                                           5,280        172,044      354,392          (8,093)          523,623
                                                        --------     ----------   ----------       ---------        ----------
DEFERRED CHARGES AND OTHER ASSETS
  Investments in and advances to joint ventures and
    subsidiaries....................................     875,107        160,597       20,377        (866,602)          189,479
  Deferred swap losses and receivables..............          --         35,605           --              --            35,605
  Deferred postretirement benefit costs.............         717             --        9,342               1            10,060
  Deferred environmental costs......................       3,000             --       28,016              --            31,016
  Prepaid benefit costs.............................          --             --       50,640          (4,681)           45,959
  Other.............................................       8,940         36,540       48,341           1,367            95,188
                                                        --------     ----------   ----------       ---------        ----------
                                                         887,764        232,742      156,716        (869,915)          407,307
                                                        --------     ----------   ----------       ---------        ----------
PROPERTY, PLANT AND EQUIPMENT, at cost..............      28,881        743,382    2,540,829              (1)        3,313,091
  Less -- Accumulated depreciation and depletion....      10,051         55,681    1,199,871              --         1,265,603
                                                        --------     ----------   ----------       ---------        ----------
                                                          18,830        687,701    1,340,958              (1)        2,047,488
                                                        --------     ----------   ----------       ---------        ----------
                                                        $911,874     $1,092,487   $1,852,066       $(878,009)       $2,978,418
                                                        ========     ==========   ==========       =========        ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable..................................    $  6,405     $   95,276   $   94,102       $  (4,600)       $  191,183
  Notes payable.....................................          --         19,000       58,291              --            77,291
  Current portion of long-term debt and capital
    lease obligations...............................          55         31,409       53,177               1            84,642
  Gas inventory equalization........................          --            660       53,295              --            53,955
  Federal income, property and other taxes
    payable.........................................        (361)        24,663       64,715              --            89,017
  Customer deposits.................................          19             --        9,845              --             9,864
  Other.............................................       6,596         33,999       55,084          (2,057)           93,622
                                                        --------     ----------   ----------       ---------        ----------
                                                          12,714        205,007      388,509          (6,656)          599,574
                                                        --------     ----------   ----------       ---------        ----------
DEFERRED CREDITS AND OTHER LIABILITIES
  Accumulated deferred income taxes.................      (1,087)        63,863       82,872              --           145,648
  Unamortized investment tax credit.................         346             --       35,512              --            35,858
  Tax benefits amortizable to customers.............         183             --      113,449              (1)          113,631
  Deferred swap gains and payables..................          --         35,717           --              --            35,717
  Accrued environmental costs.......................       3,000             --       32,000              --            35,000
  Minority interest.................................          --            269       18,171              --            18,440
  Other.............................................      26,624         14,351       56,892          (4,681)           93,186
                                                        --------     ----------   ----------       ---------        ----------
                                                          29,066        114,200      338,896          (4,682)          477,480
                                                        --------     ----------   ----------       ---------        ----------
LONG-TERM DEBT, including capital lease
  obligations.......................................         420        495,504      552,345              (1)        1,048,268
                                                        --------     ----------   ----------       ---------        ----------
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES.....      96,511             --           --              --            96,511
                                                        --------     ----------   ----------       ---------        ----------
COMMON SHAREHOLDERS' EQUITY
  Common stock......................................         670              5       10,300         (10,305)              670
  Additional paid-in capital........................     467,795        175,557      230,399        (412,494)          461,257
  Retained earnings.................................     319,507        102,214      331,617        (443,871)          309,467
  Yield enhancement, contract and issuance costs....     (14,220)            --           --              --           (14,220)
  Unearned compensation.............................        (589)            --           --              --              (589)
                                                        --------     ----------   ----------       ---------        ----------
                                                         773,163        277,776      572,316        (866,670)          756,585
                                                        --------     ----------   ----------       ---------        ----------
                                                        $911,874     $1,092,487   $1,852,066       $(878,009)       $2,978,418
                                                        ========     ==========   ==========       =========        ==========
</TABLE>
 
                                       25
<PAGE>   28
 
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
           CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      MCN                                       ELIMINATIONS
                                                   AND OTHER                                         AND           CONSOLIDATED
                                                  SUBSIDIARIES      MCNIC        MICHCON      RECLASSIFICATIONS       TOTALS
                                                  ------------    ----------    ----------    -----------------    ------------
                                                                                DECEMBER 31, 1996
                                                  -----------------------------------------------------------------------------
<S>                                               <C>             <C>           <C>           <C>                  <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents, at cost..........     $      844     $   19,608    $   10,010        $      --         $   30,462
  Accounts receivable.........................         19,824        198,777       187,143          (24,661)           381,083
    Less -- Allowance for doubtful accounts...             70            710        17,707               --             18,487
                                                   ----------     ----------    ----------        ---------         ----------
  Accounts receivable, net....................         19,754        198,067       169,436          (24,661)           362,596
  Accrued unbilled revenue....................          1,132             --       107,377               --            108,509
  Accrued gas cost recovery revenues..........             --             --        27,672               --             27,672
  Gas in inventory............................             --         11,251        67,910               --             79,161
  Property taxes assessed applicable to future
    periods...................................            195          2,179        60,592               --             62,966
  Gas receivable..............................             --         16,045         2,017               --             18,062
  Other.......................................          1,973         12,270        21,008             (451)            34,800
                                                   ----------     ----------    ----------        ---------         ----------
                                                       23,898        259,420       466,022          (25,112)           724,228
                                                   ----------     ----------    ----------        ---------         ----------
DEFERRED CHARGES AND OTHER ASSETS
  Investments in and advances to joint
    ventures and subsidiaries.................        954,479        236,057        19,479         (944,627)           265,388
  Deferred swap losses and receivables........             --         65,051            --               --             65,051
  Deferred postretirement benefit costs.......            696             --         4,863               --              5,559
  Deferred environmental costs................          3,000             --        28,233               --             31,233
  Prepaid benefit costs.......................             --             --        64,307           (5,059)            59,248
  Other.......................................          4,204         45,104        50,206              827            100,341
                                                   ----------     ----------    ----------        ---------         ----------
                                                      962,379        346,212       167,088         (948,859)           526,820
                                                   ----------     ----------    ----------        ---------         ----------
PROPERTY, PLANT AND EQUIPMENT, at cost........         31,967      1,017,296     2,668,294               --          3,717,557
  Less -- Accumulated depreciation and
    depletion.................................         10,983         81,158     1,243,060               --          1,335,201
                                                   ----------     ----------    ----------        ---------         ----------
                                                       20,984        936,138     1,425,234               --          2,382,356
                                                   ----------     ----------    ----------        ---------         ----------
                                                   $1,007,261     $1,541,770    $2,058,344        $(973,971)        $3,633,404
                                                   ==========     ==========    ==========        =========         ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable............................     $    5,745     $  205,073    $  130,725        $ (23,621)        $  317,922
  Notes payable...............................             --         71,000       265,126               --            336,126
  Current portion of long-term debt and
    capital lease obligations.................             55         31,460        53,232               --             84,747
  Federal income, property and other taxes
    payable...................................            280         12,578        84,788               --             97,646
  Customer deposits...........................             21             --        12,860               --             12,881
  Other.......................................          9,315         25,701        63,309             (452)            97,873
                                                   ----------     ----------    ----------        ---------         ----------
                                                       15,416        345,812       610,040          (24,073)           947,195
                                                   ----------     ----------    ----------        ---------         ----------
DEFERRED CREDITS AND OTHER LIABILITIES
  Accumulated deferred income taxes...........         (1,625)        74,940        76,523               --            149,838
  Unamortized investment tax credit...........            331             --        34,588               --             34,919
  Tax benefits amortizable to customers.......            183             --       116,313               --            116,496
  Deferred swap gains and payables............             --         48,365            --               --             48,365
  Accrued environmental costs.................          3,000             --        32,000               --             35,000
  Minority interest...........................             --            306        17,604                1             17,911
  Other.......................................         15,902         18,466        43,954           (5,059)            73,263
                                                   ----------     ----------    ----------        ---------         ----------
                                                       17,791        142,077       320,982           (5,058)           475,792
                                                   ----------     ----------    ----------        ---------         ----------
LONG-TERM DEBT, including capital lease
  obligations.................................            365        701,357       550,318               --          1,252,040
                                                   ----------     ----------    ----------        ---------         ----------
REDEEMABLE PREFERRED SECURITIES OF
  SUBSIDIARIES................................        173,809             --            --               --            173,809
                                                   ----------     ----------    ----------        ---------         ----------
COMMON SHAREHOLDERS' EQUITY
  Common stock................................            673              5        10,300          (10,305)               673
  Additional paid-in capital..................        497,472        231,389       230,399         (465,791)           493,469
  Retained earnings...........................        316,661        121,130       336,305         (468,744)           305,352
  Yield enhancement, contract and issuance
    costs.....................................        (14,492)            --            --               --            (14,492)
  Unearned compensation.......................           (434)            --            --               --               (434)
                                                   ----------     ----------    ----------        ---------         ----------
                                                      799,880        352,524       577,004         (944,840)           784,568
                                                   ----------     ----------    ----------        ---------         ----------
                                                   $1,007,261     $1,541,770    $2,058,344        $(973,971)        $3,633,404
                                                   ==========     ==========    ==========        =========         ==========
</TABLE>
 
                                       26
<PAGE>   29
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                   MCN                                     ELIMINATIONS
                                                AND OTHER                                       AND           CONSOLIDATED
                                               SUBSIDIARIES      MCNIC       MICHCON     RECLASSIFICATIONS       TOTALS
                                               ------------    ---------    ---------    -----------------    ------------
                                                                     SIX MONTHS ENDED JUNE 30, 1997
                                               ---------------------------------------------------------------------------
<S>                                            <C>             <C>          <C>          <C>                  <C>
NET CASH FLOW FROM OPERATING ACTIVITIES....     $  65,486      $  34,994    $ 273,766        $ (49,285)        $ 324,961
                                                ---------      ---------    ---------        ---------         ---------
CASH FLOW FROM FINANCING ACTIVITIES
  Notes payable, net.......................             1        (68,000)    (226,760)         (36,515)         (331,274)
  Capital contributions received from
    (distributions paid to) affiliates,
    net....................................        (1,058)       594,607           --         (593,549)               --
  Common stock dividends paid..............       (32,832)            --      (40,000)          40,000           (32,832)
  Preferred securities dividends paid......       (11,558)            --           --           11,558                --
  Issuance of common stock.................       286,018             --           --               --           286,018
  Issuance of preferred securities.........       326,521             --           --               --           326,521
  Issuance of long-term debt...............            --        149,190      124,051               --           273,241
  Long-term commercial paper, net..........            --       (261,822)          --               --          (261,822)
  Retirement of long-term debt.............            --        (30,740)     (72,229)              --          (102,969)
  Other....................................          (532)            --           --               --              (532)
                                                ---------      ---------    ---------        ---------         ---------
    Net cash provided from (used for)
      financing activities.................       566,560        383,235     (214,938)        (578,506)          156,351
                                                ---------      ---------    ---------        ---------         ---------
CASH FLOW FROM INVESTING ACTIVITIES
  Capital expenditures.....................        (3,050)      (172,290)     (57,423)              (1)         (232,764)
  Acquisitions.............................            --       (105,133)          --               --          (105,133)
  Investment in joint ventures and
    subsidiaries...........................      (595,107)       (40,514)        (184)         595,047           (40,758)
  Return of investment in joint ventures
    and subsidiaries.......................            --          4,468           --             (468)            4,000
  Other....................................           101          5,740        7,124               --            12,965
                                                ---------      ---------    ---------        ---------         ---------
    Net cash used for investing
      activities...........................      (598,056)      (307,729)     (50,483)         594,578          (361,690)
                                                ---------      ---------    ---------        ---------         ---------
NET INCREASE IN CASH AND CASH
  EQUIVALENTS..............................        33,990        110,500        8,345          (33,213)          119,622
CASH AND CASH EQUIVALENTS, JANUARY 1.......           844         19,608       10,010               --            30,462
                                                ---------      ---------    ---------        ---------         ---------
CASH AND CASH EQUIVALENTS, JUNE 30.........     $  34,834      $ 130,108    $  18,355        $ (33,213)        $ 150,084
                                                =========      =========    =========        =========         =========
 
                                                                     SIX MONTHS ENDED JUNE 30, 1996
                                               ---------------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES....     $  21,924      $  74,528    $ 163,577        $ (11,916)        $ 248,113
                                                ---------      ---------    ---------        ---------         ---------
CASH FLOW FROM FINANCING ACTIVITIES
  Notes payable, net.......................            --        (30,000)    (138,344)              --          (168,344)
  Capital contributions received from
    (distributions paid to) affiliates,
    net....................................          (524)       (14,642)       1,614           13,552                --
  Common stock dividends paid..............       (30,990)            --       (7,000)           7,000           (30,990)
  Preferred securities dividends paid......        (4,689)            --          (54)           4,743                --
  Issuance of common stock.................         8,848             --           --               --             8,848
  Issuance of long-term debt...............            --        328,789       69,645               --           398,434
  Long-term commercial paper, net..........            --       (264,007)          --               --          (264,007)
  Retirement of long-term debt.............            --         (1,008)      (4,347)               2            (5,353)
  Other....................................        (5,978)            --           --               --            (5,978)
                                                ---------      ---------    ---------        ---------         ---------
    Net cash provided from (used for)
      financing activities.................       (33,333)        19,132      (78,486)          25,297           (67,390)
                                                ---------      ---------    ---------        ---------         ---------
CASH FLOW FROM INVESTING ACTIVITIES
  Capital expenditures.....................        (2,216)      (141,048)     (73,823)              (1)         (217,088)
  Acquisitions.............................            --        (78,620)          --               --           (78,620)
  Sale of Genix............................            --        137,500           --               --           137,500
  Investment in joint ventures and
    subsidiaries...........................        (1,614)        (8,211)          --            1,674            (8,151)
  Sale of investment in joint ventures.....            --         31,500           --               --            31,500
  Return of investment in joint ventures
    and subsidiaries.......................        14,642             --           --          (14,642)               --
  Other....................................           462          1,187      (10,871)            (412)           (9,634)
                                                ---------      ---------    ---------        ---------         ---------
    Net cash provided from (used for)
      investing activities.................        11,274        (57,692)     (84,694)         (13,381)         (144,493)
                                                ---------      ---------    ---------        ---------         ---------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS..............................          (135)        35,968          397               --            36,230
CASH AND CASH EQUIVALENTS, JANUARY 1.......           168         10,622        8,469               --            19,259
                                                ---------      ---------    ---------        ---------         ---------
CASH AND CASH EQUIVALENTS, JUNE 30.........     $      33      $  46,590    $   8,866        $      --         $  55,489
                                                =========      =========    =========        =========         =========
</TABLE>
 
                                       27
<PAGE>   30
 
                               OTHER INFORMATION
 
CHANGES IN SECURITIES
 
     On July 23, 1997, MCN amended its Rights Agreement related to its Preferred
Share Purchase Rights. The amendment extends the expiration date of the Rights
Agreement from January 2000 to July 2007 and changes the purchase price for each
one one-hundredth of a preferred share purchasable pursuant to the exercise of a
right from $35 to $150. The amendment was filed on a Form 8-K dated July 23,
1997.
 
EXHIBITS AND REPORTS ON FORM 8-K
 
     (a) Exhibits
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                               DESCRIPTION
------    ------------------------------------------------------------------
<S>       <C>
12-1      Computation of Ratio of Earnings to Fixed Charges for MCN Energy
          Group Inc.
12-2      Computation of Ratio of Earnings to Fixed Charges for MCN
          Investment Corporation.
27-1      Financial Data Schedule.
99-1      MCN Energy Group Inc. Nonemployee Directors' Compensation Plan (as
          amended and restated effective March 1, 1997).
99-2      MCN Energy Group Inc. Form of Employment Agreement (as amended and
          restated effective July 1, 1997).
</TABLE>
 
     (b) Reports on Form 8-K
 
        MCN filed a report on Form 8-K dated June 24, 1997, under Item 5, with
        respect to the offering of its Common Stock (par value $.01 per share)
        in which the Form of U.S. Purchase Agreement and Form of International
        Purchase Agreement were filed as Exhibits.
 
        MCN filed an additional report on Form 8-K dated July 23, 1997, under
        Item 5, with respect to the amendment of its Rights Agreement. The
        following document was filed as an Exhibit thereto:
 
           - Amendment, dated as of July 23, 1997, to the Rights Agreement,
             dated as of December 20, 1989, between MCN Energy Group Inc. (then
             doing business as MCN Corporation) and National Bank of Detroit, as
             Rights Agent.
 
                                       28
<PAGE>   31
 
                                   SIGNATURE
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
                                          MCN ENERGY GROUP INC.
 
Date: August 8, 1997                      By:         /s/ Harold Gardner
                                            ------------------------------------
                                                         Harold Gardner
                                                   Vice President, Controller
                                                  and Chief Accounting Officer
 
                                       29
<PAGE>   32
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<C>        <S>
   12-1    Computation of Ratio of Earnings to Fixed Charges for MCN
           Energy Group Inc.
   12-2    Computation of Ratio of Earnings to Fixed Charges for MCN
           Investment Corporation.
   27-1    Financial Data Schedule.
   99-1    MCN Energy Group Inc. Nonemployee Directors' Compensation
           Plan (as amended and restated effective March 1, 1997).
   99-2    MCN Energy Group Inc. Form of Employment Agreement (as
           amended and restated effective July 1, 1997).
</TABLE>