MCN Energy 10-Q 1999 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1999, or

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number 1-10070

MCN ENERGY GROUP INC.

(Exact name of registrant as specified in its charter)

Michigan

(State or other jurisdiction of

incorporation or organization)

500 Griswold Street, Detroit, Michigan

(Address of principal executive offices)

38-2820658

(I.R.S. Employer

Identification No.)

48226

(Zip Code)

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 30, 1999:

Common Stock, par value $.01 per share: 85,655,381

TABLE OF CONTENTS

INDEX TO FORM 10-Q

For Quarter Ended June 30, 1999

	Page
	Number
COVER		i
INDEX		ii
PART I  — FINANCIAL INFORMATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
Financial Statements		22
PART II — OTHER INFORMATION
Item 5. Other Information		44
Item 6. Exhibits and Reports on Form 8-K		48
SIGNATURE		49

ii

MCN ENERGY GROUP INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

Results lower due to unusual charges, partially offset by earnings from new gas sales program — MCN had a net loss for the 1999 second quarter of $86.3 million or $1.03 per share compared with a net loss of $212.6 million or $2.70 per share in the same 1998 quarter. MCN experienced a net loss in the 1999 six-and twelve-month periods of $.7 million or $.01 per share and $153.4 million or $1.91 per share, respectively, compared with a net loss of $133.7 million or $1.70 per share and $87.6 million or $1.12 per share for the same 1998 periods. As subsequently discussed, the comparability in earnings was affected by non-recurring items consisting of an accounting change and several unusual charges. The unusual charges include losses on the sale of properties, property write-downs, investment losses and restructuring charges.

		Quarter						6 Months						12 Months
		1999			1998			1999			1998			1999			1998
(in Millions, Except Per Share Amounts)
Net Income (Loss)
Diversified Energy:
	Before unusual charges	$	(9.2	)	$	5.1		$	(5.1	)	$	21.3		$	(11.7	)	$	51.4
	Unusual charges (Note 2)		(83.4	)		(220.4	)		(83.4	)		(220.4	)		(235.8	)		(220.4	)
			(92.6	)		(215.3	)		(88.5	)		(199.1	)		(247.5	)		(169.0	)
Gas Distribution:
	Before unusual charges		6.3			2.7			90.6			65.4			113.7			81.4
	Unusual charges (Note 2e)		—			—			—			—			(16.7	)		—
			6.3			2.7			90.6			65.4			97.0			81.4
Total Before Accounting Change:
	Before unusual charges		(2.9	)		7.8			85.6			86.7			102.0			132.8
	Unusual charges (Note 2)		(83.4	)		(220.4	)		(83.4	)		(220.4	)		(252.5	)		(220.4	)
			(86.3	)		(212.6	)		2.2			(133.7	)		(150.5	)		(87.6	)
Cumulative Effect of Accounting Change, Net of Taxes (Note 4)			—			—			(2.9	)		—			(2.9	)		—
		$	(86.3	)	$	(212.6	)	$	(.7	)	$	(133.7	)	$	(153.4	)	$	(87.6	)
Diluted Earnings (Loss) Per Share
Diversified Energy:
	Before unusual charges	$	(.11	)	$	.07		$	(.06	)	$	.27		$	(.15	)	$	.66
	Unusual charges (Note 2)		(1.00	)		(2.80	)		(1.01	)		(2.80	)		(2.94	)		(2.82	)
			(1.11	)		(2.73	)		(1.07	)		(2.53	)		(3.09	)		(2.16	)
Gas Distribution:
	Before unusual charges		.08			.03			1.10			.83			1.42			1.04
	Unusual charges (Note 2e)		—			—			—			—			(.21	)		—
			.08			.03			1.10			.83			1.21			1.04
Total Before Accounting Change:
	Before unusual charges		(.03	)		.10			1.04			1.10			1.27			1.70
	Unusual charges (Note 2)		(1.00	)		(2.80	)		(1.01	)		(2.80	)		(3.15	)		(2.82	)
			(1.03	)		(2.70	)		.03			(1.70	)		(1.88	)		(1.12	)
Cumulative Effect of Accounting Change (Note 4)			—			—			(.04	)		—			(.03	)		—
		$	(1.03	)	$	(2.70	)	$	(.01	)	$	(1.70	)	$	(1.91	)	$	(1.12	)

1

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

Excluding the non-recurring items, MCN had a net loss of $2.9 million for the 1999 quarter and earnings of $85.6 million and $102.0 million for the 1999 six-and twelve-month periods, respectively, resulting in decreases of $10.7 million, $1.1 million and $30.8 million from the corresponding 1998 periods. The comparisons reflect losses in the Diversified Energy group resulting from the decline in earnings in the Exploration & Production (E&P) segment due to the disposition of assets as well as increased financing costs. The decline in Diversified Energy’s results was partially offset by increased contributions from the Gas Distribution segment resulting from its new gas sales program and the favorable impact of more normal weather in the 1999 six-month period. Also affecting the comparability for the six-and twelve-month periods were gains recorded by the Diversified Energy group in 1998 from the sale of certain assets.

As discussed in Note 3 to the Consolidated Financial Statements included herein and in MCN’s 1998 Annual Report on Form 10-K/ A, MCN conducted a special investigation of prior years’ operations of CoEnergy Trading Company, its non-utility energy marketing subsidiary, subsequent to the issuance of its December 31, 1998 financial statements. As a result of the investigation, MCN identified that its internal control systems had been overridden and that certain transactions had not been properly accounted for. The accompanying consolidated financial statements for the 1998 periods have been restated from those originally reported to properly account for the transactions identified. The restatements result in an increase in net loss of $2.5 million or $.03 per share, $4.2 million or $.05 per share and $9.5 million or $.12 per share for the 1998 second quarter, six- and twelve-month periods, respectively. The corrections did not have an impact on the liquidity or cash flows of MCN. The financial information contained in Management’s Discussion and Analysis herein has been revised to reflect the impact of such restatement.

Strategic direction — MCN’s objective is to achieve competitive, long-term returns for its shareholders. Consistent with this objective, MCN announced in August 1999 a significantly revised strategic direction that includes: focusing on the Midwest-to-Northeast region rather than on North America; emphasizing operational efficiencies and growth through the integration of existing businesses rather than building a portfolio of diverse, non-operated energy investments; retaining its natural gas producing properties in Michigan while going forward with the sale of its other exploration and production oil and gas properties; and reducing capital investment levels to approximately $500 million in 1999 and to $300 million in 2000 and 2001.

Unusual charges — MCN recorded several unusual charges in the 1999 second quarter as well as the 1998 second and third quarters, consisting of losses on the sale of properties, property write-downs, investment losses and restructuring charges (Note  2).

2

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

A discussion of each unusual charge by segment follows:

		Quarter						6 Months						12 Months
		1999			1998			1999			1998			1999			1998
(in Millions, Except Per Share Amounts)
Unusual Charges
Diversified Energy:
	Pipelines & Processing	$	—		$	—		$	—		$	—		$	(89.5	)	$	—
	Electric Power		—			—			—			—			(1.6	)		—
	Exploration & Production		(83.4	)		(220.4	)		(83.4	)		(220.4	)		(138.0	)		(220.4	)
	Corporate & Other		—			—			—			—			(6.7	)		—
			(83.4	)		(220.4	)		(83.4	)		(220.4	)		(235.8	)		(220.4	)
Gas Distribution			—			—			—			—			(16.7	)		—
		$	(83.4	)	$	(220.4	)	$	(83.4	)	$	(220.4	)	$	(252.5	)	$	(220.4	)
Diluted Loss Per Share		$	(1.00	)	$	(2.80	)	$	(1.01	)	$	(2.80	)	$	(3.15	)	$	(2.82	)

Pipelines & Processing

Property Write-Downs: In the third quarter of 1998, MCN recorded a $133.8 million pre-tax ($87.0 million net of taxes) write-off of its coal fines project. The economic viability of the project is dependent on coal briquettes produced from six coal fines plants qualifying for synthetic fuel tax credits and MCN’s ability to utilize or sell such credits. Although the plants were in service by June 30, 1998, the date specified to qualify for the tax credits, operating delays at the plants in the 1998 third quarter have significantly increased the possibility that the Internal Revenue Service (IRS) will challenge the project’s eligibility for tax credits. In addition, there was uncertainty as to whether MCN could utilize or sell the credits. These factors led to MCN’s decision to record an impairment loss equal to the carrying value of the plants, reflecting the likely inability to recover such costs. MCN is seeking to maximize the value of its investment in the coal fines project, and in May 1999 filed a request with the IRS seeking a factual determination that its coal fines plants were in service on June 30, 1998. Management is unable to predict what action the IRS will take on its request.

In the third quarter of 1998, MCN also recorded an impairment loss of $3.9 million pre-tax ($2.5 million net of taxes) relating to an acquired out-of-service pipeline in Michigan. MCN reviewed the business alternatives for this asset and determined that its development is unlikely. Accordingly, MCN recorded an impairment loss equal to the carrying value of this asset.

Electric Power

Restructuring Charge: In the third quarter of 1998, MCN recorded a $2.5 million pre-tax ($1.6 million net of taxes) restructuring charge related to certain international power projects. The charge was incurred as a result of refocusing MCN’s strategic plan, particularly to exit certain international power projects.

Exploration & Production

Property Write-Downs: In the second quarter of 1999, MCN recognized a $52.0 million pre-tax ($33.8 million net of taxes) write-down of its gas and oil properties under the full cost method of accounting, due primarily to an unfavorable revision in the timing of production of proved gas and

3

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

oil reserves as well as reduced expectations of sales proceeds on unproved acreage. Under the full cost method of accounting as prescribed by the Securities and Exchange Commission, MCN’s capitalized exploration and production costs at June 30, 1999 exceeded the full cost “ceiling,” resulting in the excess being written off to income. The ceiling is the sum of discounted future net cash flows from the production of proved gas and oil reserves, and the lower of cost or estimated fair value of unproved properties, net of related income tax effects.

In the second and third quarters of 1998, MCN recognized write-downs of its gas and oil properties totaling $333.0 million pre-tax ($216.4 million net of taxes) and $83.9 million pre-tax ($54.6 million net of taxes), respectively. The write-downs were also the result of MCN’s capitalized exploration and production costs exceeding the full cost ceiling.

Losses on Sale of Properties: In the second quarter of 1999, MCN recognized losses from the sale of its Western and Midcontinent/ Gulf Coast E&P properties totaling $68.8 million pre-tax ($44.7 million net of taxes).

Loss on Investment: In the second quarter of 1999, MCN recognized a $7.5 million pre-tax ($4.9 million net of taxes) loss from the write-down of an investment in the common stock of an E&P company. MCN had also recognized a $6.1 million pre-tax loss ($4.0 million net of taxes) from the write-down of this investment during the second quarter of 1998. The losses were due to declines in the fair value of the securities that are not considered temporary. MCN has no carrying value in this investment after the write-downs.

Corporate & Other

Restructuring Charge: In the third quarter of 1998, MCN recorded a $10.4 million pre-tax ($6.7 million net of taxes) restructuring charge related to the corporate realignment designed to improve operating efficiencies through a more streamlined organizational structure. The realignment included cost saving initiatives expected to reduce future operating expenses.

Gas Distribution

Property Write-Downs: In the third quarter of 1998, MCN recorded a $24.8 million pre-tax ($11.2 million net of taxes and minority interest) write-down of certain gas gathering properties. An analysis revealed that projected cash flows from the gathering system were not sufficient to cover the system’s carrying value. Therefore, an impairment loss was recorded representing the amount by which the carrying value of the system exceeded its estimated fair value.

Loss on Investment: In the third quarter of 1998, MCN also recorded an $8.5 million pre-tax loss ($5.5 million net of taxes) from the write-down of an investment in a Missouri gas distribution company that MCN expects to sell in 2000. The write-down represents the amount by which the carrying value exceeded the estimated fair value of the investment.

4

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

Diversified Energy

Results reflect unusual charge and reduced E&P contributions — The Diversified Energy group had a net loss of $92.6 million for the 1999 second quarter compared to a net loss of $215.3 million for the same 1998 period. Diversified Energy had net losses of $88.5 million and $247.5 million in the 1999 six- and twelve-month periods, respectively, compared to losses of $199.1 million and $169.0 million in the corresponding 1998 periods. As previously discussed, results for all 1999 and 1998 periods were impacted by the unusual charges. Excluding the unusual charges, Diversified Energy had losses of $9.2 million, $5.1 million and $11.7 million for the 1999 quarter, six- and twelve-month periods, respectively, compared to earnings of $5.1 million, $21.3 million and $51.4 million for the same 1998 periods. The results for all 1999 periods reflect the impact of lower E&P gas and oil production on operating and joint venture income as well as higher financing costs. The earnings comparisons for the six- and twelve-month periods were also affected by gains recorded in 1998 from the sale of certain assets. Additionally, Diversified Energy’s results for the 1999 six- and twelve-month periods reflect the impact of lower methanol prices and methanol production on the Pipelines & Processing segment.

		Quarter						6 Months						12 Months
		1999			1998			1999			1998			1999			1998
(in Millions)
Diversified Energy Operations
Operating Revenues*		$	298.0		$	233.2		$	591.5		$	505.1		$	1,079.2		$	1,019.1
Operating Expenses*
	Property write-downs and restructuring charges (Note 2)		52.0			333.0			52.0			333.0			286.5			333.0
	Other		302.3			227.0			581.8			493.8			1,077.6			986.4
			354.3			560.0			633.8			826.8			1,364.1			1,319.4
Operating Loss			(56.3	)		(326.8	)		(42.3	)		(321.7	)		(284.9	)		(300.3	)
Equity in Earnings of Joint Ventures			11.6			11.8			23.6			28.2			56.6			58.3
Other Income & (Deductions)*
	Interest income		1.5			1.1			2.0			4.4			2.8			9.1
	Interest expense		(15.4	)		(11.8	)		(32.2	)		(21.7	)		(64.8	)		(34.3	)
	Dividends on preferred securities of subsidiaries		(10.4	)		(9.2	)		(20.7	)		(19.0	)		(38.1	)		(38.5	)
	Loss on sale of E&P properties (Note 2c)		(68.8	)		—			(68.8	)		—			(68.8	)		—
	Loss on E&P investment (Note 2c)		(7.5	)		(6.1	)		(7.5	)		(6.1	)		(7.5	)		(6.1	)
	Other		3.8			.3			10.0			13.0			17.2			20.6
			(96.8	)		(25.7	)		(117.2	)		(29.4	)		(159.2	)		(49.2	)
Loss Before Income Taxes			(141.5	)		(340.7	)		(135.9	)		(322.9	)		(387.5	)		(291.2	)
Income Tax Benefit			(48.9	)		(125.4	)		(47.4	)		(123.8	)		(140.0	)		(122.2	)
Net Income (Loss)
	Before unusual charges		(9.2	)		5.1			(5.1	)		21.3			(11.7	)		51.4
	Unusual charges (Note 2)		(83.4	)		(220.4	)		(83.4	)		(220.4	)		(235.8	)		(220.4	)
		$	(92.6	)	$	(215.3	)	$	(88.5	)	$	(199.1	)	$	(247.5	)	$	(169.0	)

*  Includes intercompany transactions

Operating and Joint Venture Income

Operating and joint venture results for the 1999 quarter, six- and twelve-month periods (excluding the unusual charges) decreased from the comparable 1998 periods by $10.7 million, $6.2 million

5

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

and $32.8 million, respectively. Results for all 1999 periods reflect reduced contributions from the Pipelines & Processing and E&P segments, partially offset by lower Corporate & Other expenses. The Electric Power segment had reduced contributions in the current quarter and six-month period. Energy Marketing had a larger loss in the current quarter and improved results in the current six-month period.

		Quarter						6 Months						12 Months
		1999			1998			1999			1998			1999			1998
Operating and Joint Venture Income (Loss)
Before Unusual Charges:
	Pipelines & Processing	$	4.6		$	6.1		$	9.6		$	15.6		$	15.4		$	31.3
	Electric Power		3.9			6.9			11.4			12.4			25.0			24.7
	Energy Marketing		(2.3	)		(.2	)		2.9			.3			(1.0	)		(1.2	)
	Exploration & Production		.2			8.1			8.2			16.9			20.3			44.0
	Corporate & Other		.9			(2.9	)		1.2			(5.7	)		(1.5	)		(7.8	)
			7.3			18.0			33.3			39.5			58.2			91.0
Unusual Charges (Note 2)			(52.0	)		(333.0	)		(52.0	)		(333.0	)		(286.5	)		(333.0	)
		$	(44.7	)	$	(315.0	)	$	(18.7	)	$	(293.5	)	$	(228.3	)	$	(242.0	)

Pipelines & Processing operating and joint venture results (excluding the write-offs recorded in the 1998 third quarter) decreased by $1.5 million, $6.0 million and $15.9 million for the 1999 quarter, six- and twelve-month periods, respectively. The 1999 quarter reflects start-up expenditures associated with new projects and a decline in the “allowance for funds used during construction” (AFUDC) associated with MCN’s 16%-owned Portland Natural Gas Transmission System, as it was placed in service in the first quarter of 1999. The 1999 six- and twelve-month periods also reflect reduced earnings from MCN’s 25%-owned methanol production business resulting from lower methanol prices as well as lower methanol volumes produced. Earnings from the methanol production business benefited from strong methanol prices during 1997 and early 1998, but prices have since weakened. Pipelines & Processing’s average methanol sales prices declined 22% for the current six-month period and 37% for the 1999 twelve-month period. Methanol production declined 5.4 million gallons for the 1999 six-month period and 6.2 million gallons for the 1999 twelve-month period due primarily to the shutdown of the methanol plant for scheduled maintenance in March 1999. Additionally, Pipelines & Processing results for the 1999 twelve-month period were impacted by $9.1 million of operating losses related to the start-up of the coal fines plants (Note 2a).

Pipelines & Processing operating and joint venture income was also affected by an increase in transportation volumes for all 1999 periods due to new gas gathering ventures and the expansion of existing pipeline projects. Volumes transported increased for the 1999 quarter, six- and twelve-month periods by 10.7 billion cubic feet (Bcf), 16.9 Bcf and 40.6 Bcf, respectively. Pipelines & Processing results were also higher in all 1999 periods due to an increase in gas processed to remove natural gas liquids (NGLs). Gas processed to remove NGLs increased 10.5 Bcf, 9.0 Bcf and 16.9 Bcf in the 1999 quarter, six- and twelve-month periods, respectively, reflecting volumes associated with the acquisition and development of additional processing facilities. Pipelines & Processing operations include an increase in gas processed to remove carbon dioxide (CO₂). The volume of CO₂ gas treated increased 1.7 Bcf, 2.3 Bcf and 8.0 Bcf in the 1999 quarter, six- and twelve-month periods, respectively. However, earnings were not significantly affected by these

6

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

increases, since under the terms of Pipelines & Processing’s CO₂ processing contracts, revenues are not volume sensitive.

			Quarter				6 Months				12 Months
			1999		1998		1999		1998		1999		1998
Pipelines & Processing Statistics*
	Methanol Produced (Million Gallons)			16.8		14.8		24.9		30.3		55.0		61.2
	Transportation (Bcf)			53.0		42.3		101.1		84.2		192.4		151.8
	Gas Processed (Bcf):
		Carbon Dioxide Treatment		12.9		11.2		25.8		23.5		51.1		43.1
		Natural Gas Liquids Removal		22.6		12.1		31.5		22.5		54.1		37.2
				35.5		23.3		57.3		46.0		105.2		80.3

*  Includes MCN’s share of joint ventures

Pipelines & Processing has also recorded earnings from certain joint venture investments where it is allocated income based on its share of the ventures’ earnings but not less than a predetermined fixed amount. Joint venture income recorded from these investments through June 1999 was based on the fixed amount. Under the joint venture agreements, the fixed amount will be lowered or eliminated in 2000.

Pipelines & Processing has a 75% interest in an asphalt manufacturing partnership that recently completed construction of a plant designed to produce annually up to 100,000 tons of high-quality asphalt. The plant is experiencing some technical difficulties in producing economical quantities of asphalt. MCN is aggressively working to resolve the technical issues.

In 1998, MCN advanced approximately $18 million to a developer of a natural gas-based fertilizer project in the United Arab Emirates. The advance was structured as an interest bearing loan with the possibility of being converted into an equity investment in the project. Under MCN’s new strategic direction, it is no longer likely that it will make an equity interest in the project. While the advance is due in September 1999, the project is being developed slower than initially anticipated and MCN’s continuing role in the project is under negotiation.

Electric Power operating and joint venture results (excluding the restructuring charges recorded in the 1998 third quarter) decreased by $3.0 million and $1.0 million in the 1999 quarter and six-month period, respectively, and increased by $.3 million in the 1999 twelve-month period. Results for all 1999 periods were unfavorably affected by an uncollectible expense provision associated with a customer in bankruptcy. Additionally, the 1999 periods were impacted by higher start-up expenditures associated with new ventures as well as reduced contributions from MCN’s international power investments, specifically its interest in the Torrent Power Limited (TPL) venture, which holds minority interests in electric distribution companies and power generation facilities in the state of Gujarat, India. In February 1999, MCN reached an agreement to sell its 40% interest in TPL for approximately $130 million. Earnings from TPL for 1999 have been deferred due to the pending sale that is expected to be completed in August 1999. MCN does not expect to incur any significant gains or losses relating to the TPL sale.

Electric Power’s earnings comparison also was impacted by increased contributions from the 1,370 megawatt (MW) Midland Cogeneration Venture (MCV) facility reflecting an increase in MCN’s interest in the MCV partnership from 18% to 23% in June 1998. Earnings from the MCV partnership for the 1999 six-and twelve-month periods include a favorable $2.1 million pre-tax

7

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

adjustment for the resolution of a number of contract issues with the electricity purchaser. Also contributing favorably to the 1999 results were higher earnings from MCN’s 50%-owned, 123 MW Michigan Power cogeneration facility due to higher electricity capacity payments received under its long-term sales contract.

		Quarter				6 Months				12 Months
		1999		1998		1999		1998		1999		1998
(Thousands of MW hours)*
Electric Power
	Electricity Sales — Domestic		691.1		581.0		1,392.0		1,204.0		2,704.6		2,471.0
	Electricity Sales — International		—		298.9		—		537.6		750.7		538.1
			691.1		879.9		1,392.0		1,741.6		3,455.3		3,009.1

*  Includes MCN’s share of joint ventures

Energy Marketing operating and joint venture results decreased $2.1 million for the 1999 quarter, and improved $2.6 million and $.2 million for the 1999 six-and twelve-month periods, respectively. Results for all 1999 periods were impacted by higher costs for natural gas transportation and storage capacity, higher uncollectible expense as well as costs associated with the June 1999 dissolution of the DTE-CoEnergy joint venture.

The 1999 periods were also affected by improved margins due to an increase in total gas sales and exchange deliveries of 41.1 Bcf, 62.9 Bcf and 115.1 Bcf during the 1999 quarter, six- and twelve-month periods, respectively. The increase in gas sales is due in part to the April 1999 acquisition of existing marketing operations that significantly increased Energy Marketing’s level of sales to large commercial and industrial customers in the Midwest. The comparisons of earnings for all periods were also affected by losses associated with trading activities (Note 3). Additionally, the twelve-month period comparison was impacted by the December 1997 sale of Energy Marketing’s 25% interest in a gas storage project, that contributed $1.0 million of joint venture income in the 1998 twelve-month period.

		Quarter				6 Months				12 Months
		1999		1998		1999		1998		1999		1998
(Bcf)*
Energy Marketing
	Gas Sales		144.5		103.3		282.6		218.5		518.8		401.7
	Exchange Gas Deliveries		.1		.2		5.6		6.8		9.9		11.9
			144.6		103.5		288.2		225.3		528.7		413.6

*  Includes MCN’s share of joint ventures

The Washington 10 storage project, for which MCN markets 100% of the 42 Bcf of storage capacity, was completed and placed into operation in July 1999. Completion of the storage field in time for the 1999-2000 winter heating season enhances Energy Marketing’s ability to offer a reliable gas supply during peak winter months.

Exploration & Production operating and joint venture results (excluding the unusual charges recorded in the 1999 second quarter, 1998 second quarter and the 1998 third quarter) decreased by $7.9 million, $8.7 million and $23.7 million for the 1999 quarter, six- and twelve-month periods, respectively. These results reflect a decline in overall gas and oil production of 7.6 billion cubic feet equivalent (Bcfe) in the 1999 quarter, 10.9 Bcfe in the 1999 six-month period and 17.7 Bcfe in the 1999 twelve-month period. The decrease in gas and oil production is due primarily to the sale of MCN’s Western properties in April 1999. Gas and oil production in future 1999 periods will also be

8

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

lower than the comparable 1998 periods due to the expected sale of other non-Michigan E&P properties by the end of 1999.

E&P results for all 1999 periods were also impacted by an increase in production-related expenses and variations in gas and oil sales prices. Production expenses increased per thousand cubic feet (Mcf) equivalent by $.22, $.09 and $.11 for the 1999 quarter, six- and twelve-month periods, respectively. Gas prices increased by $.19 per Mcf in the 1999 second quarter, by $.16 per Mcf in the current six-month period and by $.13 per Mcf in the 1999 twelve-month period. Oil prices increased by $.55 per barrel (Bbl) in the 1999 quarter, but declined by $1.21 per Bbl and $3.02 per Bbl in the current six- and twelve-month periods, respectively. The impact of fluctuations in natural gas and oil sales prices on E&P operating and joint venture income was mitigated by hedging with swap and futures agreements, as discussed in the “Risk Management Strategy” section that follows.

	Quarter					6 Months					12 Months
	1999		1998			1999		1998			1999		1998
Exploration & Production Statistics
Gas Production (Bcf)		15.7		20.6			35.3		41.1			76.2		81.1
Oil Production (million Bbl)		.3		.8			.8		1.6			1.5		3.7
Gas and Oil Production (Bcf equivalent)		17.6		25.2			40.0		50.9			85.4		103.1
Average Gas Selling Price (per Mcf)	$	2.18	$	2.07		$	1.99	$	2.09		$	2.02	$	2.23
Effect of Hedging (per Mcf)		.01		(.07	)		.20		(.06	)		.09		(.25	)
Overall Average Gas Sales Price (per Mcf)	$	2.19	$	2.00		$	2.19	$	2.03		$	2.11	$	1.98
Average Oil Sales Price (per Bbl)	$	12.94	$	10.49		$	11.38	$	11.83		$	10.86	$	14.07
Effect of Hedging (per Bbl)		.44		2.34			.58		1.34			.92		.73
Overall Average Oil Sales Price (per Bbl)	$	13.38	$	12.83		$	11.96	$	13.17		$	11.78	$	14.80

Risk management strategy — MCN manages commodity price risk by utilizing futures, options and swap contracts to more fully balance its portfolio of gas and oil supply and sales agreements. In late 1998, MCN began entering into offsetting positions for existing hedges of gas and oil production from properties that have been or were expected to be sold in 1999. MCN’s risk management strategy is being revised to reflect the change in its business that will result from its new strategic direction as previously discussed. Additionally, as a result of the special investigation, MCN is taking additional steps to ensure compliance with risk management policies that are periodically reviewed by the Board of Directors.

Corporate & Other operating and joint venture results (excluding the restructuring charges recorded in the 1998 third quarter) improved $3.8 million, $6.9 million and $6.3 million for the 1999 quarter, six- and twelve-month periods, respectively. These improvements reflect adjustments that reduce or eliminate accruals for employee incentive awards that are based on MCN’s operating or stock price performance.

Other Income and Deductions

Other income and deductions for the 1999 quarter, six- and twelve-month periods reflect unfavorable changes of $71.1 million, $87.8 and $110.0 million, respectively. The comparability of other income and deductions for all periods is affected by unusual charges consisting of losses from the sale of E&P properties and the write-down of an E&P investment. Other income and deductions for all 1999 periods reflect higher interest expense due to an increase in borrowings required to finance capital investments in the Diversified Energy group. The 1999 six- and twelve-month periods

9

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

include lower interest income due to the collection in March 1998 of a $46 million advance made to a Philippine independent power producer. Other income in the 1999 periods includes a $3.1 million pre-tax gain recorded in the 1999 second quarter from the sale of a pipeline facility. Other income in the 1998 six- and twelve-month periods includes $9.9 million of pre-tax gains recorded in the 1998 first quarter from the sale of certain gas sales contracts and a 50% interest in the 30 MW Ada cogeneration facility. Other income for the 1998 twelve-month period includes a $3.2 million pre-tax gain from the December 1997 sale of Diversified Energy’s 25% interest in a gas storage project.

Income Taxes

The variations in income taxes for all 1999 periods reflect fluctuations in pre-tax results. Income tax comparisons were also affected by tax credits and stock-related tax benefits recorded in 1998, as well as the generation of foreign income in 1998 that was not subject to U.S. or foreign tax provisions.

Outlook

MCN’s new strategic direction emphasizes achieving operational efficiencies and growth through integration of existing businesses. MCN will continue pursuing new pipeline, electric power and energy marketing ventures, with an emphasis on operating projects that enhance MCN businesses within the Midwest-to-Northeast corridor. MCN will continue to manage and seek to maximize the value of existing ventures outside the target region.

To achieve the operating efficiencies expected from the new strategic direction, MCN is working to reorganize its Diversified Energy group into the segments detailed below. Financial information beginning by year-end 1999 will be presented based on these new segments.

•  Midstream & Supply develops and manages MCN’s gas producing, gathering, processing, storage and transmission facilities within the Midwest-to-Northeast target region. It also integrates all of MCN’s gas supply functions, including purchasing the commodity itself and aggregating the transportation and storage capacity required to deliver the gas to the Gas Distribution, Energy Marketing and Power segments and other, non-affiliated wholesale customers.

•  Energy Marketing consists of MCN’s non-regulated marketing activities to industrial, commercial and residential customers, both inside and outside the Gas Distribution segment’s service area. Energy Marketing also will provide full-service energy solutions to business customers.

•  Power develops and manages independent electric power projects.

•  Energy Holdings manages and seeks to maximize the value of existing ventures outside MCN’s target region. It primarily consists of gas gathering and processing investments in major U.S. producing basins.

10

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

Gas Distribution

Results reflect earnings from new gas sales program — Gas Distribution’s earnings were $6.3 million and $90.6 million for the 1999 second quarter and six-month period, respectively, resulting in increases of $3.6 million and $25.2 million from the comparable 1998 periods. Earnings for the 1999 twelve-month period were $97.0 million, which included $16.7 million of unusual charges. Excluding the unusual charges, earnings for the 1999 twelve-month period were $113.7 million, an increase of $32.3 million over the corresponding 1998 period. Earnings for all 1999 periods reflect contributions from the new gas sales program as subsequently discussed. The 1999 six-month period also reflects the impact of more favorable weather.

		Quarter						6 Months						12 Months
		1999			1998			1999			1998			1999			1998
(in Millions)
Gas Distribution Operations
Operating Revenues*
	Gas sales	$	135.6		$	126.0		$	578.6		$	499.0		$	918.6		$	929.1
	End user transportation		23.4			18.3			50.2			43.3			89.2			82.7
	Intermediate transportation		13.9			15.9			28.6			33.8			58.0			60.9
	Other		19.6			15.1			44.8			34.6			77.5			61.9
			192.5			175.3			702.2			610.7			1,143.3			1,134.6
Cost of Sales			65.7			58.8			321.4			279.5			504.0			529.8
Gross Margin			126.8			116.5			380.8			331.2			639.3			604.8
Other Operating Expenses*
	Operation and maintenance		67.7			62.8			138.2			125.9			268.9			266.8
	Depreciation, depletion and amortization		25.1			23.6			50.0			46.3			97.5			98.4
	Property and other taxes		12.9			14.1			31.5			31.6			55.9			58.8
	Property write-down (Note 2e)		—			—			—			—			24.8			—
			105.7			100.5			219.7			203.8			447.1			424.0
Operating Income			21.1			16.0			161.1			127.4			192.2			180.8
Equity in Earnings of Joint Ventures			.6			(.1	)		1.0			.4			1.6			1.0
Other Income and (Deductions)*
	Interest income		.8			1.0			1.8			2.0			5.5			4.2
	Interest expense		(12.7	)		(12.6	)		(26.5	)		(28.0	)		(56.0	)		(55.0	)
	Investment loss (Note 2e)		—			—			—			—			(8.5	)		—
	Minority interest		(.2	)		(.5	)		(.5	)		(1.2	)		6.4			(2.2	)
	Other		(.3	)		.6			.1			.7			(.7	)		1.2
			(12.4	)		(11.5	)		(25.1	)		(26.5	)		(53.3	)		(51.8	)
Income Before Income Taxes			9.3			4.4			137.0			101.3			140.5			130.0
Income Taxes			3.0			1.7			46.4			35.9			43.5			48.6
Net Income
	Before unusual charges		6.3			2.7			90.6			65.4			113.7			81.4
	Unusual charges (Note 2e)		—			—			—			—			(16.7	)		—
		$	6.3		$	2.7		$	90.6		$	65.4		$	97.0		$	81.4

*  Includes intercompany transactions

Gross Margin

Gross margin (operating revenues less cost of sales) increased $10.3 million, $49.6 million and $34.5 million in the 1999 quarter, six- and twelve-month periods, respectively. The increase is due primarily to margins generated under MichCon’s new three-year gas sales program, which is part of

11

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

its Regulatory Reform Plan (Note 5a). Under the gas sales program that began in January 1999, MichCon’s gas sales rates include a gas commodity component that is fixed at $2.95 per Mcf. As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. This strategy is likely to continue producing favorable margins in each of the three years.

Gross margins for the 1999 six-month period also reflect higher gas sales resulting from colder weather compared to the same 1998 period. Additionally, gross margins for all 1999 periods reflect revenues from the continued growth in other gas-related services as well as revenues and cost of sales associated with the three heating and cooling firms acquired in October 1998.

Gas Distribution’s operations are seasonal, with gross margins and earnings concentrated in the first and fourth quarters of each calendar year. By the end of the first quarter, the heating season is largely over, and Gas Distribution typically incurs substantially reduced gross margins and earnings in the second quarter and losses in the third quarter. The seasonal nature of Gas Distribution’s operations is expected to be more pronounced as a result of MichCon’s new gas sales program.

			Quarter						6 Months						12 Months
			1999			1998			1999			1998			1999			1998
Effect of Weather on Gas Markets and Earnings
	Percent Warmer Than Normal			(21.4	)%		(24.8	)%		(7.8	)%		(20.1	)%		(11.6	)%		(12.9	)%
	Decrease From Normal in:
		Gas Markets (Bcf)		(5.3	)		(6.1	)		(10.4	)		(25.3	)		(25.4	)		(26.2	)
		Net Income (Millions)	$	(5.1	)	$	(5.3	)	$	(10.3	)	$	(22.0	)	$	(23.7	)	$	(22.8	)
		Diluted Earnings Per Share	$	(.06	)	$	(.07	)	$	(.13	)	$	(.28	)	$	(.29	)	$	(.29	)

Gas sales and end user transportation revenues in total increased by $14.7 million and $86.5 million for the 1999 quarter and six-month period, respectively, and decreased by $4.0 million for the 1999 twelve-month period. Revenues were affected by fluctuations in gas sales and end user transportation deliveries that increased by .1 Bcf and 12.7 Bcf in the current quarter and six-month period, respectively, and decreased by .2 Bcf in the 1999 twelve-month period. The fluctuations in gas sales and end user transportation deliveries were due primarily to weather, which was colder in all the 1999 periods compared to the corresponding 1998 periods. The effect of more favorable weather on deliveries in the 1999 twelve-month period was more than offset by a decrease in end user transportation deliveries as a result of the temporary shut-down of an industrial customer’s plant.

Revenues were also impacted by variations in the cost of the gas commodity component of gas sales rates. As previously discussed, this gas commodity component was fixed under MichCon’s new gas sales program at $2.95 per Mcf beginning in January 1999. Prior to 1999, MichCon’s sales rates were set to recover all of its reasonably and prudently incurred gas costs. The gas commodity component of MichCon’s sales increased $.20 per Mcf (7%) and $.18 per Mcf (6%) for the 1999

12

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

quarter and six-month period, respectively, and decreased $.12 per Mcf (4%) for the 1999 twelve-month period.

		Quarter				6 Months				12 Months
		1999		1998		1999		1998		1999		1998
(Bcf)
Gas Distribution
	Gas Sales		24.1		24.7		116.6		104.7		184.1		183.9
	End User Transportation		31.8		31.1		74.4		73.6		141.1		141.5
			55.9		55.8		191.0		178.3		325.2		325.4
	Intermediate Transportation*		135.0		148.4		262.4		296.8		503.1		601.2
			190.9		204.2		453.4		475.1		828.3		926.6

*  Includes intercompany volumes

Additionally, gas sales and end user transportation revenues in total were impacted by MichCon’s three-year customer choice program, which is also part of its Regulatory Reform Plan. Under the customer choice program that began in April 1999, approximately 70,000 or 6% of its customers are purchasing natural gas from suppliers other than MichCon. However, MichCon continues to transport and deliver the gas to the customers’ premises at prices that maintain its previously existing sales margins on these services. MichCon’s customers who have chosen to purchase their gas from other suppliers are reflected as end user transportation customers rather than gas sales customers. Accordingly, gas sales revenues have decreased, partially offset by an increase in end user transportation revenues, resulting in a net decrease in total operating revenues due to the gas commodity component included in gas sales rates.

Intermediate transportation revenues decreased $2.0 million, $5.2 million and $2.9 million in the 1999 quarter, six- and twelve-month periods, respectively. Intermediate transportation revenues reflect lower off-system volumes of 13.4 Bcf, 34.4 Bcf and 98.1 Bcf in the 1999 quarter, six-and twelve-month periods, respectively. A significant portion of the volume decrease was for customers who pay a fixed fee for intermediate transportation capacity regardless of actual usage. Although volumes associated with these fixed-fee customers may vary, the related revenues are not affected. The decrease in intermediate transportation revenues for all 1999 periods is due in part to an adjustment in 1998 of revenues related to fees generated from tracking the transfer of gas title on MichCon’s transportation system. The decrease for all 1999 periods is also due to customers shifting volumes from a higher rate to a lower rate transportation route.

Other operating revenues increased $4.5 million, $10.1 million and $15.6 million in the 1999 quarter, six-and twelve-month periods, respectively. The improvements are due to an increase in facility development and appliance maintenance services, late payment fees and other gas-related services. Additionally, all 1999 periods reflect revenues from the acquisition of three heating and cooling firms in October 1998.

Cost of Sales

Cost of sales is affected by variations in gas sales volumes and the cost of purchased gas as well as related transportation costs. Under the Gas Cost Recovery (GCR) mechanism that was in effect through December 1998 (Note 5b), MichCon’s sales rates were set to recover all of its reasonably and prudently incurred gas costs. Therefore, fluctuations in cost of gas sold had little effect on gross margins. Under MichCon’s new gas sales program, the gas commodity component of its sales rates

13

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

is fixed. Accordingly, beginning in January 1999, changes in cost of gas sold directly impact gross margins and earnings.

Cost of sales increased $6.9 million and $41.9 million in the 1999 quarter and six-month period, respectively, and decreased $25.8 million in the 1999 twelve-month period. The increase in the current quarter and six-month period was due primarily to higher weather-driven gas sales volumes. Cost of sales was also impacted by a decrease in average prices paid for gas of $.05 per Mcf (2%) in the 1999 six-month period and $.27 per Mcf (9%) in the current twelve-month period. Prices paid for gas sold in the 1999 second quarter increased by $.01 per Mcf. Additionally, all 1999 periods reflect cost of sales associated with the operations of the three heating and cooling firms acquired in October 1998.

Other Operating Expenses

Operation and maintenance expenses increased $4.9 million, $12.3 million and $2.1 million in the 1999 quarter, six- and twelve-month periods, respectively. The increases are due in part to additional computer system support costs associated with MichCon’s new customer information system as well as advertising costs associated with MichCon’s new gas sales program. Additionally, the 1999 quarter increase reflects higher uncollectible gas accounts expense due to higher gas sales revenues. The increase in the 1999 twelve-month period was tempered due to lower employee benefit costs, primarily pension and retiree healthcare costs, as well as lower uncollectible gas accounts expense. The 1998 six- and twelve-month periods benefited from an interstate pipeline company refund.

Depreciation and depletion increased $1.5 million and $3.7 million in the 1999 quarter and six-month period, respectively, and decreased $.9 million in the 1999 twelve-month period. Depreciation on higher plant balances impacted all 1999 periods. Additionally, the twelve-month period comparison reflects the effect of lower depreciation rates for MichCon’s utility property, plant and equipment that became effective in January 1998.

Property and other taxes decreased $1.2 million, $.1 million and $2.9 million in the 1999 quarter, six- and twelve-month periods, respectively. The improvement in all 1999 periods is attributable to lower property taxes. The 1999 quarter and twelve-month periods were also impacted by lower Michigan Single Business Tax resulting from an increase in capital acquisitions deductions.

Property write-down of $24.8 million in the 1999 twelve-month period represents the impairment of a Michigan gas gathering system (Note 2e).

Equity in Earnings of Joint Ventures

Equity in earnings of joint ventures increased $.7 million in the 1999 quarter and $.6 million in both the 1999 six- and twelve-month periods. The improvement is due to losses recorded in the 1998 periods from Gas Distribution’s 47.5% interest in a Missouri gas distribution company. The investment was written down to fair value in the third quarter of 1998, and no additional losses have since been recorded as a result of the expected sale of the investment in 2000.

Other Income and Deductions

Other income and deductions changed unfavorably by $.9 million and $1.5 million in the 1999 quarter and twelve-month period, respectively, and changed favorably by $1.4 million in the current six-month period. All 1998 periods were impacted by gains from the sale of property. The 1999 quarter and twelve-month period include slightly higher interest costs. Other income and deductions

14

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

in the 1999 twelve-month period also reflect an unusual charge to write down the investment in a small natural gas distribution company located in Missouri (Note 2e). Also impacting other income and deductions in the 1999 twelve-month period was a change in minority interest reflecting the joint venture partners’ share of the write-down of the Michigan gas gathering properties (Note 2e).

Income Taxes

Income taxes for all 1999 periods were impacted by an increase in pre-tax earnings. Income tax comparisons for the 1999 six- and twelve-month periods were also affected by the favorable resolution of prior years’ tax issues as well as the flow-through effect of certain book-to-tax temporary differences. The 1998 six- and twelve-month periods include stock-related tax benefits.

Outlook

Gas Distribution’s strategy is to aggressively expand its role as the preferred provider of natural gas and high-value energy services within Michigan. Accordingly, Gas Distribution’s objectives are to increase revenues and control costs in order to deliver strong shareholder returns and provide customers with high-quality service at competitive prices.

Gas Distribution has begun, and plans to continue capitalizing on opportunities resulting from the gas industry restructuring. MichCon is currently implementing its Regulatory Reform Plan, which includes a comprehensive experimental three-year customer choice program which is designed to offer all sales customers added choices and greater price certainty. Beginning April 1, 1999, a limited number of customers have the option of purchasing natural gas from suppliers other than MichCon. However, MichCon will continue to transport and deliver the gas to the customers’ premises at prices that maintain its previously existing sales margins on these services. The Plan also suspended the GCR mechanism for customers who continue to purchase gas from MichCon and fixed the gas commodity component of MichCon’s sales rates at $2.95 per Mcf for the three-year period that began in January 1999. The suspension of the GCR mechanism allows MichCon to profit from its ability to purchase gas at less than $2.95 per Mcf. Also beginning in 1999, an income sharing mechanism allows customers to share in profits when actual returns on equity from utility operations exceed predetermined thresholds. The impact of weather and expenses incurred in the second half of 1999 will determine the actual amount of profits, if any, to be shared with customers.

Gas Distribution also plans to grow revenues and earnings by offering a variety of energy-related services, which include appliance maintenance. Growth in revenues is expected from the three heating and cooling firms acquired in October 1998 that have been integrated under MichCon Home Services, which is expanding its customer base and range of services.

Changes in Accounting

In the 1999 first quarter, MCN adopted Statement of Position (SOP) 98-5, “Reporting on the Costs of Start-up Activities” issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. SOP 98-5 requires start-up and organizational costs to be expensed as incurred. This change in accounting principle resulted in the write-off of start-up and organization costs capitalized as of December 31, 1998. The cumulative effect of the change was to decrease earnings by $2.9 million for the 1999 six- and twelve-month periods.

In the 1999 first quarter, MCN adopted the Emerging Issues Task Force consensus on Issue No. 98-10, “Accounting for Energy Trading and Risk Management Activities” (EITF 98-10). EITF 98-10 requires all energy trading contracts to be recognized in the balance sheet as either

15

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

assets or liabilities measured at their fair value, with changes in fair value recognized in earnings. Adoption of EITF 98-10 did not have a material impact on MCN’s financial statements.

CAPITAL RESOURCES AND LIQUIDITY

		6 Months
		1999			1998
(in Millions)
Cash and Cash Equivalents
Cash Flow Provided From (Used For):
	Operating activities	$	290.9		$	275.2
	Financing activities		(249.3	)		62.1
	Investing activities		(38.6	)		(295.8	)
Net Increase in Cash and Cash Equivalents		$	3.0		$	41.5

Operating Activities

MCN’s cash flow from operating activities increased $15.7 million during the 1999 six-month period as compared to the same 1998 period. The increase was due primarily to increased earnings, after adjusting for non-cash items (depreciation, unusual charges and deferred taxes), partially offset by higher working capital requirements.

Financing Activities

MCN’s cash flow related to financing activities decreased $311.4 million during the 1999 six-month period compared to the same 1998 period. The change primarily reflects lower debt issuances and higher debt repayments, partially offset by an increase in equity issuances, in the 1999 six-month period. A summary of MCN’s significant financing activities and financing plans during 1999 follows.

Prior to mid-February 1999, MCN issued new shares of common stock pursuant to its Dividend Reinvestment and Stock Purchase Plan and various employee benefit plans. MCN generated $.2 million in the 1999 six-month period and $10.4 million in the same 1998 period from common stock issuances under these plans. Beginning in mid-February 1999, shares issued under these plans are being acquired by MCN through open market purchases.

MCN’s 5,865,000 of Preferred Redeemable Increased Dividend Equity Securities (Enhanced PRIDES) matured in April 1999. Each security represented a contract to purchase one share of MCN common stock. Upon conversion of the Enhanced PRIDES, MCN received cash proceeds totaling approximately $135.0 million. The proceeds were used to repay a $130.0 million medium-term note of Diversified Energy that came due in May 1999.

In March 1999, MCN entered into a $150 million revolving credit agreement that expires in October 1999. Borrowings under the credit agreement will be used to fund capital investments and for general corporate purposes. There was $40 million outstanding under this credit agreement at June 30, 1999.

Diversified Energy

The Diversified Energy group maintains credit lines that allow for borrowings of up to $200 million under a 364-day revolving credit facility and up to $200 million under a three-year revolving credit facility. These facilities support Diversified Energy’s commercial paper program, which is used to

16

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

finance capital investments and to finance Energy Marketing’s working capital requirements. The 364-day facility was renewed in July 1999. During the first six months of 1999, Diversified Energy’s commercial paper and bank borrowings outstanding increased by $112.1 million, leaving borrowings of $337.8 million outstanding under this program at June 30, 1999.

MCN received approximately $165 million in April 1999 from the sale of its Western E&P properties and approximately $65 million in August 1999 from the sale of its Midcontinent/ Gulf Coast E&P properties. Proceeds from the sales were used to repay outstanding debt at the MCN Corporate and Diversified Energy levels. Proceeds from the sale of additional non-Michigan E&P properties are expected by the end of 1999 and will be used to repay outstanding borrowings and for general corporate purposes.

MCN repaid $80 million of medium-term notes and $130 million of medium-term notes that came due in February 1999 and May 1999, respectively.

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 that is backed by credit lines with several banks. MichCon has established credit lines that allow for borrowings of up to $150 million under a 364-day revolving credit facility and up to $150 million under a three-year revolving credit facility. The 364-day facility was renewed in July 1999. During the first six months of 1999, MichCon repaid $194.1 million of commercial paper, leaving borrowings of $24.3 million outstanding under this program at June 30, 1999.

During the 1999 quarter, MichCon issued approximately $110 million of debt (Note 9) and repaid $50 million of first mortgage bonds.

Investing Activities

MCN’s cash used for investing activities decreased $257.2 million in the 1999 six-month period as compared to the same 1998 period. The decrease was due primarily to lower capital investments and proceeds from the sale of property and investments.

17

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

Capital investments equaled $263.8 million in the 1999 six-month period compared to $443.7 million for the same period in 1998. The 1999 investments include significantly lower levels of investments in E&P properties, pipeline and processing ventures and gas distribution facilities.

		6 Months
		1999		1998
(in Millions)
Capital Investments
Consolidated Capital Expenditures:
	Diversified Energy	$	104.5	$	202.5
	Gas Distribution		58.4		75.2
			162.9		277.7
MCN’s Share of Joint Venture Capital Expenditures:(1)
	Pipelines & Processing		51.1		94.3
	Energy Marketing, Gas Storage & Electric Power		15.1		11.9
	Other		.1		.5
			66.3		106.7
Acquisitions:(2)			34.6		59.3
Total Capital Investments		$	263.8	$	443.7

(1)  A portion of joint venture capital expenditures is financed with joint venture debt

(2)  Includes MCN’s share of certain debt existing at the date of acquisitions

Total capital investments were partially funded from the sale of certain E&P properties and joint venture investments that totaled approximately $200 million in the 1999 six-month period.

Outlook

1999 capital investments to approximate $500 million — MCN’s new strategic direction is to grow in its targeted region by investing in energy-related projects. For 1999, MCN anticipates investing approximately $500 million, of which 70% is expected to be within the Diversified Energy group.

The proposed level of investments for 2000 and each of the next several years will approximate $300 million and is expected to be financed primarily with internally generated funds. No issuance of incremental equity securities is expected for the next few years. It is management’s opinion that MCN and its subsidiaries will have sufficient capital resources to meet anticipated capital and operating requirements.

YEAR 2000

As discussed in MCN’s 1998 Annual Report on Form 10-K/ A, MCN has implemented a corporate-wide, four-phase Year 2000 approach consisting of: i) inventory — identification of the components of MCN’s systems, equipment and facilities; ii) assessment — assessing Year 2000 readiness and prioritizing the risks of items identified in the inventory phase; iii) remediation — upgrading, repairing and replacing non-compliant systems, equipment and facilities; and iv) testing — verifying items remediated. MCN is on schedule to have its mission-critical business systems, and measurement and control systems (including embedded microprocessors) Year 2000 ready as detailed below. The extension of the program reflects MCN’s determination that additional testing and remediation is appropriate for some critical business and control systems for both MCN and its partners and vendors. The decision to retain the Michigan E&P properties has also made it

18

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

necessary to extend the testing timeline for a few business systems. The estimated completion status of these systems and the projected status for the future follows:

		Inventory			Assessment			Remediation			Testing
Business Systems:
	June 30, 1999		100	%		100	%		90	%		80	%
	September 30, 1999		100	%		100	%		100	%		98	%
	November 30, 1999		100	%		100	%		100	%		100	%
Measurement and Control Systems:
	June 30, 1999		100	%		100	%		98	%		98	%
	September 30, 1999		100	%		100	%		100	%		100	%

Costs associated with the Year 2000 issue are not expected to have a material adverse effect on MCN results of operation, liquidity and financial condition. The total costs are estimated to be between $5 million and $6 million, of which approximately $4.2 million was incurred through June 1999. This estimate does not include MCN’s share of Year 2000 costs that may be incurred by partnerships and joint ventures. The anticipated costs are not higher due in part to the ongoing replacement of significant old systems. New systems in process of being installed, as well as those installed over the past few years, are Year 2000 ready. These systems were necessary to maintain a high level of customer satisfaction and to respond to changes in regulation and increased competition within the energy industry.

MCN anticipates a smooth transition to the Year 2000. However, the failure to correct a material Year 2000 problem could result in an interruption in or a failure of certain business activities and operations. Such interruptions or failures could have a material adverse effect on MCN’s results of operations, liquidity and financial condition. Due to the uncertainty inherent in the Year 2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of key partners, operators, suppliers and government agencies, MCN cannot certify that it will be unaffected by Year 2000 complications.

In order to reduce its Year 2000 risk, MCN is developing contingency plans for mission-critical processes in the event of a Year 2000 complication. Contingency plans for several essential gas transmission facilities continue to be tested under a “power outage” scenario and have achieved excellent results. Contingency plans will continue to be refined throughout 1999 as MCN works with partners, operators, suppliers and governmental agencies.

MARKET RISK INFORMATION

As discussed in MCN’s 1998 Annual Report on Form 10-K/ A, MCN manages commodity price and interest rate risk through the use of various derivative instruments and limits the use of such instruments to hedging activities. A discussion and analysis of the events and factors that have changed MCN’s commodity price, interest rate and foreign currency risk during the 1999 six-month period follows.

Commodity Price Risk

Natural gas and oil futures, options and swap agreements are used to manage Diversified Energy’s exposure to the risk of market price fluctuations on gas sale and purchase contracts, gas and oil production and gas inventories. MCN has entered into offsetting positions for existing hedges of E&P’s gas and oil production from properties that have been or were expected to be sold in 1999. As

19

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

a result of entering into the offsetting positions, as well as changes in commodity prices that occurred during the 1999 six-month period, there have been significant changes in the outcome of the sensitivity analysis performed for commodity price risk at June 30, 1999 as compared to December 31, 1998.

A sensitivity analysis calculates the change in fair values of MCN’s natural gas and oil futures and swap agreements given a hypothetical 10% increase or decrease in commodity prices utilizing applicable forward commodity rates in effect at the end of the reporting period.

The results of the sensitivity analysis calculations follow:

	June 30, 1999						December 31, 1998
	Assuming			Assuming			Assuming			Assuming
	a 10%			a 10%			a 10%			a 10%
	Increase in			Decrease in			Increase in			Decrease in
	Commodity			Commodity			Commodity			Commodity
	Prices			Prices			Prices			Prices
(in Millions)
Commodity Price Sensitive:*
Swaps: Pay fixed/receive variable	$	85.2		$	(85.2	)	$	53.6		$	(53.6	)
Pay variable/receive fixed	$	(76.6	)	$	76.6		$	(54.0	)	$	54.0
Futures: Longs	$	6.3		$	(6.3	)	$	1.9		$	(1.9	)
Shorts	$	(7.4	)	$	7.4		$	(.1	)	$	.1

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

Interest Rate Risk

MCN is subject to interest rate risk in connection with the issuance of variable and fixed-rate debt and preferred securities. In order to manage interest costs and risk, MCN uses interest rate swap agreements to exchange fixed and variable-rate interest payment obligations over the life of the agreements without exchange of the underlying principal amounts. During the 1999 six-month period, there have not been any events or factors that have caused any significant changes to MCN’s interest rate risk.

Foreign Currency Risk

MCN is subject to foreign currency risk as a result of its investments in foreign joint ventures, which are located in India, Nepal and United Arab Emirates. During August 1999, MCN expects to complete the sale of its interest in TPL that is located in India for approximately $130 million. This sale will significantly reduce MCN’s foreign currency risk.

NEW ACCOUNTING PRONOUNCEMENTS

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

SFAS No. 133 requires all derivatives to be recognized in the balance sheet as either assets or liabilities measured at their fair value and sets forth conditions in which a derivative instrument may

20

MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

be designated as a hedge. The Statement requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to be recorded to other comprehensive income or to offset related results on the hedged item in earnings.

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

FORWARD-LOOKING STATEMENTS

The Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties as set forth in MCN’s 1998 Annual Report on Form 10-K/A.

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

AVAILABLE INFORMATION

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

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MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

		June 30,				December 31,
				1998
				(Restated)
		1999		Note 3		1998
(in Thousands)
ASSETS
Current Assets
	Cash and cash equivalents, at cost (which approximates market value)	$	20,076	$	80,999	$	17,039
	Accounts receivable, less allowance for doubtful accounts of $15,847, $14,682 and $9,655, respectively		326,648		327,653		400,120
	Accrued unbilled revenues		20,516		15,725		87,888
	Gas in inventory (Note 7)		122,536		103,671		147,387
	Property taxes assessed applicable to future periods		50,595		44,526		72,551
	Other		46,419		76,972		42,472
			586,790		649,546		767,457
Deferred Charges and Other Assets
	Deferred income taxes		28,136		—		50,547
	Investments in debt and equity securities		70,516		48,967		69,705
	Deferred swap losses and receivables (Note 13)		64,567		63,123		63,147
	Deferred environmental costs		31,174		30,468		30,773
	Prepaid benefit costs		132,805		88,711		111,775
	Other		114,501		91,037		98,940
			441,699		322,306		424,887
Investments in and Advances to Joint Ventures
	Pipelines & Processing		568,921		429,846		521,711
	Electric Power		248,456		215,648		231,668
	Energy Marketing		27,299		23,873		29,435
	Gas Distribution (Note 2e)		1,978		8,822		1,478
	Other		18,694		19,029		18,939
			865,348		697,218		803,231
Property, Plant and Equipment
	Pipelines & Processing (Note 2a)		46,902		112,138		48,706
	Exploration & Production (Note 2c)		753,357		1,066,673		1,040,047
	Gas Distribution (Note 2e)		2,970,482		2,867,494		2,916,540
	Other		65,139		32,875		36,124
			3,835,880		4,079,180		4,041,417
	Less — Accumulated depreciation and depletion		1,685,079		1,562,383		1,644,094
			2,150,801		2,516,797		2,397,323
		$	4,044,638	$	4,185,867	$	4,392,898

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

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MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

		June 30,						December 31,
					1998
					(Restated)
		1999			Note 3			1998
(in Thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable	$	252,791		$	317,893		$	304,349
	Notes payable		346,809			149,697			618,851
	Current portion of long-term debt and capital lease obligations		46,351			269,690			269,721
	Gas inventory equalization (Note 7)		22,967			15,490			—
	Federal income, property and other taxes payable		43,201			79,376			69,465
	Deferred gas cost recovery revenues (Note 5b)		—			29,139			14,980
	Gas payable		38,848			40,277			42,669
	Customer deposits		15,856			14,924			18,791
	Interest payable		22,416			29,073			30,314
	Other		62,135			38,034			77,996
			851,374			983,593			1,447,136
Deferred Credits and Other Liabilities
	Deferred income taxes		—			43,176			—
	Unamortized investment tax credit		29,082			32,109			30,056
	Tax benefits amortizable to customers		128,869			123,444			130,120
	Deferred swap gains and payables (Note 13)		62,617			50,014			62,956
	Accrued environmental costs		34,704			35,000			35,000
	Minority interest		10,529			19,166			10,898
	Other		74,857			115,498			75,439
			340,658			418,407			344,469
Long-Term Debt, including capital lease obligations (Note 9)			1,463,756			1,405,252			1,307,168
MCN-Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries Holding Solely Debentures of MCN			502,232			405,428			502,203
Contingencies (Note 12)
Common Shareholders’ Equity
	Common stock (Note 9)		855			789			797
	Additional paid-in capital (Note 9)		966,956			816,286			832,966
	Retained earnings (deficit)		(45,400	)		190,548			(2,977	)
	Accumulated other comprehensive loss (Note 11)		(13,505	)		(12,148	)		(16,576	)
	Yield enhancement, contract and issuance costs		(22,288	)		(22,288	)		(22,288	)
			886,618			973,187			791,922
		$	4,044,638		$	4,185,867		$	4,392,898

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

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MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

		Three Months Ended						Six Months Ended						Twelve Months Ended
		June 30,						June 30,						June 30,
					1998						1998						1998
					(Restated)						(Restated)						(Restated)
		1999			Note 3			1999			Note 3			1999			Note 3
(in Thousands, except Per Share Amounts)
Operating Revenues		$	488,784		$	406,214		$	1,285,370		$	1,107,674		$	2,208,394		$	2,138,855
Operating Expenses
	Cost of sales		314,948			228,249			788,833			652,545			1,342,062			1,282,252
	Operation and maintenance		98,477			91,629			200,427			186,503			403,339			386,158
	Depreciation, depletion and amortization		42,162			46,458			87,337			91,247			175,580			183,918
	Property and other taxes		16,270			17,838			37,928			38,713			68,768			72,976
	Property write-downs and restructuring charges (Note 2)		52,000			333,022			52,000			333,022			311,296			333,022
			523,857			717,196			1,166,525			1,302,030			2,301,045			2,258,326
Operating Income (Loss)			(35,073	)		(310,982	)		118,845			(194,356	)		(92,651	)		(119,471	)
Equity in Earnings of Joint Ventures			12,166			11,837			24,624			28,598			58,251			59,426
Other Income and (Deductions)
	Interest income		2,369			1,815			3,865			6,163			8,595			12,953
	Interest on long-term debt		(21,604	)		(19,424	)		(43,506	)		(37,953	)		(92,899	)		(73,072	)
	Other interest expense		(6,682	)		(4,822	)		(15,317	)		(11,663	)		(28,058	)		(16,322	)
	Dividends on preferred securities of subsidiaries		(10,334	)		(9,230	)		(20,669	)		(18,984	)		(38,055	)		(38,516	)
	Loss on sale of E&P properties (Note 2c)		(68,798	)		—			(68,798	)		—			(68,798	)		—
	Investment losses (Notes 2c and 2e)		(7,456	)		(6,135	)		(7,456	)		(6,135	)		(15,956	)		(6,135	)
	Recognition of deferred loss related to discontinued operations subsequently retained (Note 6)		(1,982	)		—			—			—			—			—
	Minority interest (Note 2e)		(420	)		(635	)		(739	)		(1,245	)		6,498			(2,242	)
	Other		5,701			1,272			10,374			13,961			15,974			22,140
			(109,206	)		(37,159	)		(142,246	)		(55,856	)		(212,699	)		(101,194	)
Income (Loss) Before Income Taxes			(132,113	)		(336,304	)		1,223			(221,614	)		(247,099	)		(161,239	)
Income Tax Benefit			(45,873	)		(123,681	)		(952	)		(87,873	)		(96,547	)		(73,627	)
Income (Loss) Before Cumulative Effect of Accounting Change			(86,240	)		(212,623	)		2,175			(133,741	)		(150,552	)		(87,612	)
Cumulative Effect of Accounting Change, Net of Taxes (Note 4)			—			—			(2,872	)		—			(2,872	)		—
Net Loss		$	(86,240	)	$	(212,623	)	$	(697	)	$	(133,741	)	$	(153,424	)	$	(87,612	)
Basic Earnings (Loss) Per Share (Note 10)
	Before cumulative effect of accounting change	$	(1.03	)	$	(2.70	)	$	.03		$	(1.70	)	$	(1.88	)	$	(1.12	)
	Cumulative effect of accounting change (Note 4)		—			—			(.04	)		—			(.03	)		—
		$	(1.03	)	$	(2.70	)	$	(0.01	)	$	(1.70	)	$	(1.91	)	$	(1.12	)
Diluted Earnings (Loss) Per Share (Note 10)
	Before cumulative effect of accounting change	$	(1.03	)	$	(2.70	)	$	.03		$	(1.70	)	$	(1.88	)	$	(1.12	)
	Cumulative effect of accounting change (Note 4)		—			—			(.04	)		—			(.03	)		—
		$	(1.03	)	$	(2.70	)	$	(0.01	)	$	(1.70	)	$	(1.91	)	$	(1.12	)
Average Common Shares Outstanding
	Basic		83,413			78,758			81,424			78,563			80,242			78,303
	Diluted		83,413			78,758			82,514			78,563			80,242			78,303
Dividends Declared Per Share		$	.2550		$	.2550		$	.5100		$	.5100		$	1.0200		$	1.0075

CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT) (Unaudited)

	Three Months Ended						Six Months Ended						Twelve Months Ended
	June 30,						June 30,						June 30,
				1998						1998						1998
				(Restated)						(Restated)						(Restated)
	1999			Note 3			1999			Note 3			1999			Note 3
(in Thousands)
Balance — Beginning of period	$	62,775		$	424,157		$	(2,977	)	$	365,730		$	190,548		$	358,825
Add — Net loss		(86,240	)		(212,623	)		(697	)		(133,741	)		(153,424	)		(87,612	)
		(23,465	)		211,534			(3,674	)		231,989			37,124			271,213
Deduct — Cash dividends declared		21,935			20,986			41,726			41,441			82,524			80,665
Balance — End of period	$	(45,400	)	$	190,548		$	(45,400	)	$	190,548		$	(45,400	)	$	190,548

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

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MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

				Six Months Ended
				June 30,
							1998
							(Restated)
				1999			Note 3
(in Thousands)
Cash Flow From Operating Activities
	Net loss			$	(697	)	$	(133,741	)
	Adjustments to reconcile net loss to net cash provided from operating activities Depreciation, depletion and amortization
			Per statement of operations		87,337			91,247
			Charged to other accounts		4,423			4,020
		Unusual charges, net of taxes (Note 2)			83,365			220,452
		Cumulative effect of accounting change, net of taxes (Note 4)			2,872			—
		Deferred income taxes — current			(2,266	)		(11,994	)
		Deferred income taxes and investment tax credit, net			65,246			10,356
		Equity in earnings of joint ventures, net of distributions			(8,256	)		(17,715	)
		Other			(1,118	)		(4,798	)
		Changes in assets and liabilities, exclusive of changes shown separately			60,062			117,393
			Net cash provided from operating activities		290,968			275,220
Cash Flow From Financing Activities
	Notes payable, net				(272,042	)		(161,672	)
	Dividends paid				(41,726	)		(41,441	)
	Issuance of common stock (Note 9)				135,120			10,374
	Reacquisition of common stock				(783	)		—
	Issuance of long-term debt (Note 9)				106,535			460,161
	Long-term commercial paper and bank borrowings				92,344			109,643
	Retirement of long-term debt and preferred securities (Note 9)				(268,773	)		(323,454	)
	Other				—			8,506
			Net cash provided from (used for) financing activities		(249,325	)		62,117
Cash Flow From Investing Activities
	Capital expenditures				(159,880	)		(277,655	)
	Acquisitions				(31,153	)		(36,731	)
	Investment in debt and equity securities, net				(2,597	)		44,241
	Investment in joint ventures				(39,991	)		(96,647	)
	Sale of property and joint venture interests				200,705			81,026
	Return of investment in joint ventures				1,193			4,801
	Other				(6,883	)		(14,868	)
			Net cash used for investing activities		(38,606	)		(295,833	)
Net Increase in Cash and Cash Equivalents					3,037			41,504
Cash and Cash Equivalents, January 1					17,039			39,495
Cash and Cash Equivalents, June 30				$	20,076		$	80,999
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
	Accounts receivable, net			$	72,787		$	66,451
	Accrued unbilled revenues				67,372			77,285
	Accrued/deferred gas cost recovery revenues, net				(19,795	)		42,001
	Gas in inventory				24,851			(46,894	)
	Accounts payable				(46,758	)		(32,753	)
	Gas inventory equalization				22,967			15,490
	Federal income, property and other taxes payable				(35,194	)		(7,422	)
	Gas payable				(3,821	)		38,214
	Interest payable				(7,898	)		612
	Prepaid benefit costs, net				(20,422	)		(7,818	)
	Other current assets and liabilities, net				15,088			(17,883	)
	Other deferred assets and liabilities, net				(9,115	)		(9,890	)
				$	60,062		$	117,393
Supplemental Disclosures
	Cash paid during the year for:
		Interest, net of amounts capitalized		$	71,640		$	47,166
		Federal income taxes		$	3,550		$	11,700

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

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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 1998 Annual Report on Form 10-K/ A. Certain reclassifications have been made to the prior year’s financial statements to conform with the 1999 presentation. In the opinion of management, the unaudited information furnished herein reflects all adjustments necessary for a fair presentation of the financial statements for the periods presented.

Because of seasonal and other factors, revenues, expenses, 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.  UNUSUAL CHARGES

As discussed in MCN’s 1998 Annual Report on Form 10-K/ A, MCN recorded several unusual charges in 1998, consisting of property write-downs, investment losses, and restructuring charges. In June 1999, MCN recorded additional unusual charges related to the Exploration & Production (E&P) segment, which had previously been classified as discontinued operations (Note 6). A discussion of each unusual charge by segment follows:

     a.  Pipelines & Processing

Property Write-Downs: In the third quarter of 1998, MCN recorded a $133,782,000 pre-tax ($86,959,000 net of taxes) write-off of its coal fines project. The economic viability of the project is dependent on coal briquettes produced from six coal fines plants qualifying for synthetic fuel tax credits and MCN’s ability to utilize or sell such credits. Although the plants were in service by June 30, 1998, the date specified to qualify for the tax credits, operating delays at the plants in the 1998 third quarter have significantly increased the possibility that the Internal Revenue Service (IRS) will challenge the project’s eligibility for tax credits. In addition, there was uncertainty as to whether MCN could utilize or sell the credits. These factors led to MCN’s decision to record an impairment loss equal to the carrying value of the plants, reflecting the likely inability to recover such costs. MCN is seeking to maximize the value of its investment in the coal fines project, and in May 1999 filed a request with the IRS seeking a factual determination that its coal fines plants were in service on June 30, 1998. Management is unable to predict what action the IRS will take on its request.

In the third quarter of 1998, MCN also recorded an impairment loss of $3,899,000 pre-tax ($2,534,000 net of taxes) relating to an acquired out-of-service pipeline in Michigan. MCN reviewed the business alternatives for this asset and determined that its development is unlikely. Accordingly, MCN recorded an impairment loss equal to the carrying value of this asset.

     b.  Electric Power

Restructuring Charge: In the third quarter of 1998, MCN recorded a $2,470,000 pre-tax ($1,605,000 net of taxes) restructuring charge related to certain international power projects. The charge was incurred as a result of refocusing MCN’s strategic plan, particularly to exit certain international power projects.

26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     c.  Exploration and Production

Property Write-Downs: In the second quarter of 1999, MCN recognized a $52,000,000 pre-tax ($33,800,000 net of taxes) write-down of its gas and oil properties under the full cost method of accounting, due primarily to an unfavorable revision in the timing of the production of proved gas and oil reserves as well as reduced expectations of sales proceeds on unproved acreage. Under the full cost method of accounting as prescribed by the Securities and Exchange Commission, MCN’s capitalized exploration and production costs at June 30, 1999 exceeded the full cost “ceiling,” resulting in the excess being written off to income. The ceiling is the sum of discounted future net cash flows from the production of proved gas and oil reserves, and the lower of cost or estimated fair value of unproved properties, net of related income tax effects.

In the second and third quarters of 1998, MCN recognized write-downs of its gas and oil properties totaling $333,022,000 pre-tax ($216,465,000 net of taxes) and $83,955,000 pre-tax ($54,570,000 net of taxes), respectively. The write-downs were also the result of MCN’s capitalized exploration and production costs exceeding the full cost ceiling.

Losses on Sale of Properties: In the second quarter of 1999, MCN recognized losses from the sale of its Western and Midcontinent/ Gulf Coast E&P properties totaling $68,798,000 pre-tax ($44,719,000 net of taxes).

Loss on Investment: In the second quarter of 1999, MCN recognized a $7,456,000 pre-tax loss ($4,846,000 net of taxes) from the write-down of an investment in the common stock of an E&P company. MCN had also recognized a $6,135,000 pre-tax loss ($3,987,000 net of taxes) from the write-down of this investment during the second quarter of 1998. The losses were due to declines in the fair value of the securities that are not considered temporary. MCN has no carrying value in this investment after the write-downs.

     d.  Corporate & Other

Restructuring Charge: In the third quarter of 1998, MCN recorded a $10,390,000 pre-tax ($6,753,000 net of taxes) restructuring charge related to the corporate realignment designed to improve operating efficiencies through a more streamlined organizational structure. The realignment includes cost saving initiatives expected to reduce future operating expenses. As of June 30, 1999, payments of $2,224,000 have been charged against the restructuring accruals relating to severance and termination benefits. These benefits will continue to be paid through 2000. The remaining restructuring costs, primarily for net lease expenses, are expected to be paid over the related lease terms that expire through 2006.

     e.  Gas Distribution

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

Loss on Investment: In the third quarter of 1998, MCN also recorded an $8,500,000 pre-tax ($5,525,000 net of taxes) loss from the write-down of an investment in a Missouri gas

27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

distribution company that MCN expects to sell in 2000. The write-down represents the amount by which the carrying value exceeded the estimated fair value of the investment.

3.  RESTATEMENT

As discussed in MCN’s 1998 Annual Report on Form 10-K/ A, subsequent to the issuance of MCN’s December 31, 1998 financial statements, certain matters came to management’s attention and resulted in a special investigation of prior years’ operations of CoEnergy Trading Company (CTC), MCN’s non-utility energy marketing subsidiary. As a result of the investigation, MCN identified that its internal controls had been overridden and that certain transactions had not been properly accounted for. Specifically, the investigation concluded that CTC had entered into gas supply contracts and agreed to pay significantly less than market prices in one period in return for above-market prices to be paid in subsequent periods through March 2000. The effect of these transactions was to improperly delay the accrual of cost of gas expenses, resulting in the understatement of net loss for the 1998 second quarter, six- and twelve-month periods by $2,234,000, $1,364,000 and $6,471,000, respectively.

Additionally, the investigation identified that CTC had entered into certain unauthorized gas purchase and sale contracts for trading purposes. The unauthorized transactions violate MCN’s risk-management policy that requires all such activities to be reviewed and approved by a risk committee that reports regularly to the MCN Board of Directors. The gas purchase and sale contracts entered into in connection with trading activities, some of which remain in effect through March 2000, were not accounted for properly using the required mark-to-market method, under which unrealized gains and losses are recorded as an adjustment to cost of gas. The effect of not properly accounting for these transactions was the understatement of net loss for the 1998 second quarter, six- and twelve-month periods by $268,000, $2,744,000 and $2,926,000, respectively. However, net income of $276,000, $1,187,000 and $2,613,000 was realized and recorded in connection with these trading activities in the 1998 second quarter, six- and twelve-month periods, respectively, resulting in net income of $8,000 in the 1998 second quarter, a net loss of $1,557,000 in the 1998 six-month period and a net loss of $313,000 in the 1998 twelve-month period from such activities. From the inception of these trading activities in March 1997 through June 1999, $2,714,000 of net loss was realized and recorded in connection with these trading activities. All of the contracts were effectively closed in June 1999.

Other items identified during the investigation resulted in the understatement of net loss for the 1998 second quarter, six- and twelve-month periods by $21,000, $43,000 and $86,000, respectively.

28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The 1998 information in the accompanying consolidated financial statements has been restated from amounts originally reported to properly account for the transactions identified. A summary of the significant effects of the restatement on MCN’s June 30, 1998 financial statements is as follows:

		Three Months Ended						Six Months Ended						Twelve Months Ended
		June 30, 1998						June 30, 1998						June 30, 1998
		Previously						Previously						Previously
		Reported			Restated			Reported			Restated			Reported			Restated
(in Thousands, Except Per Share Amounts)
Consolidated Statement of
	Operations
Cost of Sales		$	224,368		$	228,249		$	646,160		$	652,545		$	1,267,665		$	1,282,252
Loss Before Income Taxes		$	(332,423	)	$	(336,304	)	$	(215,229	)	$	(221,614	)	$	(146,652	)	$	(161,239	)
Income Tax Benefit		$	(122,323	)	$	(123,681	)	$	(85,639	)	$	(87,873	)	$	(68,523	)	$	(73,627	)
Net Loss		$	(210,100	)	$	(212,623	)	$	(129,590	)	$	(133,741	)	$	(78,129	)	$	(87,612	)
Basic Loss Per Share		$	(2.67	)	$	(2.70	)	$	(1.65	)	$	(1.70	)	$	(1.00	)	$	(1.12	)
Diluted Loss Per Share		$	(2.67	)	$	(2.70	)	$	(1.65	)	$	(1.70	)	$	(1.00	)	$	(1.12	)

		June 30, 1998
		Previously
		Reported		Restated
Consolidated Statement of
	Financial Position
Accounts Receivable		$	318,620	$	327,653
Gas in Inventory		$	114,071	$	103,671
Accounts Payable		$	298,912	$	317,893
Federal Income, Property and Other Taxes Payable		$	86,496	$	79,376
Common Shareholders’ Equity		$	986,415	$	973,187

4.  ACCOUNTING FOR START-UP ACTIVITIES

In January 1999, MCN adopted Statement of Position (SOP) 98-5, “Reporting on the Costs of Start-up Activities,“ issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. SOP 98-5 requires start-up and organizational costs to be expensed as incurred. This change in accounting principle resulted in the write-off of start-up and organization costs capitalized as of December 31, 1998. The cumulative effect of the change was to decrease earnings by $4,418,000 pre-tax ($2,872,000 net of taxes) for the six- and twelve-month periods ended June 30, 1999.

5.  REGULATORY MATTERS

     a.  Regulatory Reform Plan

As discussed in MCN’s 1998 Annual Report on Form 10-K/A, MichCon implemented its Regulatory Reform Plan in January 1999. The plan includes a new three-year gas sales program under which MichCon’s gas sales rates include a gas commodity component that is fixed at $2.95 per thousand cubic feet (Mcf). As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001.

29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The plan also includes a comprehensive experimental three-year customer choice program, which is subject to annual caps on the level of participation. The customer choice program began in April 1999, with approximately 70,000 customers choosing to purchase natural gas from suppliers other than MichCon. Plan years begin April 1 of each year, and the number of customers allowed to participate in the plan is limited to 75,000 in 1999, 150,000 in 2000 and 225,000 in 2001. There is also a volume limitation on commercial and industrial participants. The volume limitation for these participants is 10 billion cubic feet (Bcf) in 1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon will continue to transport and deliver the gas to the customers’ premises at prices that maintain its previously existing sales margins on these services. Various parties have appealed the Michigan Public Service Commission’s (MPSC) approval of the plan. While management believes the plan will be upheld on appeal, there can be no assurance as to the outcome.

     b.  Gas Cost Recovery Proceedings

Prior to January 1999, the Gas Cost Recovery (GCR) process allowed MichCon to recover its cost of gas sold if the MPSC determined that such costs were reasonable and prudent. An annual GCR reconciliation proceeding provided a review of gas costs incurred during the previous year and determined whether gas costs had been overcollected or undercollected, and as a result, whether a refund or surcharge, including interest, was required to be returned to or collected from GCR customers. The GCR process was suspended with the implementation of MichCon’s Regulatory Reform Plan in January 1999.

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

6.  DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED

In December 1998, MCN accounted for its E&P segment as a discontinued operation as a result of its decision to sell all of its gas and oil properties. In August 1999, management announced its intention to retain its natural gas producing properties in Michigan. Accordingly, E&P’s operating results for prior periods have been reclassified from discontinued operations to continuing operations. The decision to retain these properties was based on the interaction of two factors. MCN significantly revised its strategic direction. Key aspects of the new corporate strategy include a Midwest-to-Northeast regional focus rather than a North American focus, and an emphasis on achieving operational efficiencies and growth through the integration of existing businesses. Shortly thereafter, the bid for the Michigan properties was lowered significantly. The lower price was unacceptable, especially in light of MCN’s new strategic direction.

In accordance with Emerging Issues Task Force (EITF) Issue No. 85-36, “Discontinued Operations with Expected Gain and Interim Operating Losses,” E&P’s operating results for the first quarter of 1999 were initially deferred until the sale of all E&P properties was completed. Prior to the lowering of the bid for the Michigan properties, management expected that the disposition of all of the E&P properties would result in a gain. As a result of MCN’s decision to retain its Michigan

30

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

E&P properties, the deferred loss of $1,982,000 pre-tax ($1,288,000 net of taxes) was recorded in the second quarter of 1999.

Additionally, the E&P segment recorded several unusual charges in the 1999 and 1998 periods (Note 2c). Included in these unusual charges for 1999 was the loss on the sale of the Western and Midcontinent/ Gulf Coast properties. Proceeds from the sale of these properties totaled approximately $265,000,000. At December 31, 1998, the Western and Midcontinent/ Gulf Coast properties had 360 billion cubic feet equivalent of proven reserves. MCN will continue selling its other non-Michigan E&P oil and gas properties.

Under EITF Issue No. 87-24, “Allocation of Interest to Discontinued Operations,” Diversified Energy’s interest and preferred dividend expenses were allocated to the discontinued E&P segment based on its ratio of total capital to that of Diversified Energy. The interest and preferred dividend expenses have been reallocated to the E&P segment based on an imputed debt structure reflective of its industry as is done with MCN’s other segments.

The following financial information summarizes E&P’s operations:

		Three Months Ended						Six Months Ended						Twelve Months Ended
		June 30,						June 30,						June 30,
		1999			1998			1999			1998			1999			1998
(in Thousands)
Operating Revenues		$	37,918		$	53,101		$	87,417		$	108,713		$	185,806		$	223,434
Operating Loss		$	(51,824	)	$	(324,864	)	$	(43,774	)	$	(316,132	)	$	(115,596	)	$	(290,951	)
Net Income (Loss):
	Before Unusual Charges	$	3,657		$	7,241		$	3,657		$	13,061		$	12,267		$	34,330
	Unusual Charges (Note 2c)		(83,365	)		(220,452	)		(83,365	)		(220,452	)		(137,935	)		(220,452	)
		$	(79,708	)	$	(213,211	)	$	(79,708	)	$	(207,391	)	$	(125,668	)	$	(186,122	)

7.  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 changes 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 95.7 Bcf and 90.7 Bcf of gas was in inventory at June 30, 1999 and 1998, respectively.

31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.  CREDIT FACILITIES AND SHORT-TERM BORROWINGS

In March 1999, MCN entered into a $150,000,000 revolving credit agreement that expires in October 1999. Borrowings under the credit agreement are at variable rates.

MCN Investment Corporation (MCNIC) and MichCon maintain credit lines that allow for borrowings of up to $350,000,000 under 364-day revolving credit facilities and up to $350,000,000 under three-year revolving credit facilities. These credit lines totaling $700,000,000 support their commercial paper programs. The 364-day revolving credit facilities were renewed in July 1999. The three-year revolving credit facilities expire in July 2001.

As discussed in MCN’s 1998 Annual Report on Form 10-K/ A, MCN borrowed $260,000,000 under a one-year term loan facility, due December 31, 1999. Principal payments are required based on certain proceeds received from the sale of E&P assets. As of June 30, 1999, MCN had repaid $143,000,000 of the facility.

9.  ENHANCED PRIDES AND LONG-TERM DEBT

As discussed in MCN’s 1998 Annual Report on Form 10-K/ A, MCN issued 5,865,000 of Preferred Redeemable Increased Dividend Equity Securities (Enhanced PRIDES) in 1996. Each security represented a contract to purchase one share of MCN common stock. The Enhanced PRIDES were converted into MCN common stock in April 1999, and as a result MCN received cash proceeds totaling approximately $135,000,000. These proceeds were used to repay a $130,000,000 medium-term note that came due in May 1999. Also in February 1999, MCN repaid an $80,000,000 medium-term note.

In June 1999, MichCon issued $55,000,000 of 6.85% senior secured notes, due June 2038, and 55,000,000 of 6.85% senior secured notes, due June 2039. The notes are insured by a financial guaranty insurance policy and are rated AAA or its equivalent by the major rating agencies. The notes are redeemable on or after June 1, 2004.

32

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.  EARNINGS PER SHARE COMPUTATION

MCN reports both basic and diluted earnings per share. Basic EPS is computed by dividing income before cumulative effect of accounting change by the weighted average number of common shares outstanding during the period. Diluted EPS assumes the issuance of potential dilutive common shares outstanding during the period and adjusts for changes in income and the repurchase of common shares that would have occurred with proceeds from the assumed issuance. A reconciliation of both calculations is shown below.

			Net Income (Loss)						Weighted
			Before Cumulative						Average
			Effect of						Common				Earnings
			Accounting Change						Shares				Per Share
			1999			1998			1999		1998		1999			1998
(in Thousands, Except Per Share Amounts)
Three Months Ended June 30
	Basic EPS		$	(86,240	)	$	(212,623	)		83,413		78,758	$	(1.03	)	$	(2.70	)
	Effect of Dilutive Securities:*
		FELINE PRIDES		—			—			—		—
		Enhanced PRIDES		—			—			—		—
		Stock-based compensation plans		—			—			—		—
	Diluted EPS		$	(86,240	)	$	(212,623	)		83,413		78,758	$	(1.03	)	$	(2.70	)
Six Months Ended June 30
	Basic EPS		$	2,175		$	(133,741	)		81,424		78,563	$	.03		$	(1.70	)
	Effect of Dilutive Securities:*
		FELINE PRIDES		—			—			—		—
		Enhanced PRIDES		—			—			—		—
		Stock-based compensation plans		—			—			1,090		—
	Diluted EPS		$	2,175		$	(133,741	)		82,514		78,563	$	.03		$	(1.70	)
Twelve Months Ended June 30
	Basic EPS		$	(150,552	)	$	(87,612	)		80,242		78,303	$	(1.88	)	$	(1.12	)
	Effect of Dilutive Securities:*
		FELINE PRIDES		—			—			—		—
		Enhanced PRIDES		—			—			—		—
		Stock-based compensation plans		—			—			—		—
	Diluted EPS		$	(150,552	)	$	(87,612	)		80,242		78,303	$	(1.88	)	$	(1.12	)

*  Except for the 1999 six-month period, the potentially dilutive securities have been excluded from the diluted EPS calculation since their inclusion would have been antidilutive.

33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.  COMPREHENSIVE INCOME

MCN reports comprehensive income, which is defined as the change in common shareholder’s equity during a period from transactions and events from non-owner sources, including net income. Total comprehensive income for the applicable periods is as follows:

				Three Months Ended						Six Months Ended						Twelve Months Ended
				June 30,						June 30,						June 30,
				1999			1998			1999			1998			1999			1998
(in Thousands)
Comprehensive Income (Loss)
Net Loss				$	(86,240	)	$	(212,623	)	$	(697	)	$	(133,741	)	$	(153,424	)	$	(87,612	)
Other Comprehensive Income (Loss), Net of Taxes:
		Foreign currency translation adjustment			(898	)		(5,314	)		(616	)		(5,813	)		(1,357	)		(12,092	)
		Unrealized loss on securities:
			Unrealized losses during period		(642	)		(1,736	)		(1,159	)		(2,803	)		(4,846	)		(3,987	)
			Less: Reclassification for losses recognized in net income		4,846			3,987			4,846			3,987			4,846			3,987
					4,204			2,251			3,687			1,184			—			—
	Total Other Comprehensive Income (Loss), Net of Taxes				3,306			(3,063	)		3,071			(4,629	)		(1,357	)		(12,092	)
	Total Comprehensive Income (Loss)			$	(82,934	)	$	(215,686	)	$	2,374		$	(138,370	)	$	(154,781	)	$	(99,704	)

12.  CONTINGENCIES

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

34

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.  COMMODITY SWAP AGREEMENTS

MCN’s Diversified Energy and Gas Distribution groups manage commodity price risk through the use of various derivative instruments and predominately limit the use of such instruments to hedging activities. The following assets and liabilities related to the use of gas and oil swap agreements are reflected in the Consolidated Statement of Financial Position:

		June 30,				December 31,
		1999		1998		1998
(in Thousands)
Deferred Swap Losses and Receivables
	Unrealized losses	$	42,556	$	55,042	$	48,700
	Receivables		31,156		8,786		25,864
			73,712		63,828		74,564
	Less — Current portion		9,145		705		11,417
		$	64,567	$	63,123	$	63,147
Deferred Swap Gains and Payables
	Unrealized gains	$	24,822	$	5,626	$	24,126
	Payables		51,720		62,545		54,525
			76,542		68,171		78,651
	Less — Current portion		13,925		18,157		15,695
		$	62,617	$	50,014	$	62,956

35

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.  SEGMENT INFORMATION

MCN is organized into two business groups, Diversified Energy and Gas Distribution. The groups operate five major business segments, as set forth in the following table.

		Three Months Ended						Six Months Ended						Twelve Months Ended
		June 30,						June 30,						June 30,
		1999			1998			1999			1998			1999			1998
(in Thousands)
Revenues From Unaffiliated Customers:
	Pipelines & Processing	$	5,426		$	6,205		$	11,331		$	8,438		$	23,749		$	11,474
	Electric Power		12,980			12,568			25,123			22,246			50,008			47,498
	Energy Marketing		253,081			175,153			495,693			389,666			873,095			801,565
	Exploration & Production		25,457			38,474			54,371			81,350			123,525			153,224
	Gas Distribution		191,840			173,814			698,852			605,974			1,138,017			1,125,094
			488,784			406,214			1,285,370			1,107,674			2,208,394			2,138,855
Revenues From Affiliated Customers:
	Pipelines & Processing		928			62			1,102			236			1,211			395
	Energy Marketing		25,938			25,966			44,023			49,975			99,591			96,147
	Exploration & Production		12,461			14,627			33,046			27,363			62,281			70,210
	Gas Distribution		666			1,460			3,334			4,710			5,259			9,541
			39,993			42,115			81,505			82,284			168,342			176,293
Eliminations			(39,993	)		(42,115	)		(81,505	)		(82,284	)		(168,342	)		(176,293	)
Consolidated Operating Revenues		$	488,784		$	406,214		$	1,285,370		$	1,107,674		$	2,208,394		$	2,138,855
Net Income (Loss):
	Pipelines & Processing	$	1,782		$	2,776		$	3,457		$	7,243		$	(85,485	)	$	16,779
	Electric Power		2,970			4,957			7,371			12,663			14,913			22,375
	Energy Marketing		(2,742	)		(568	)		(387	)		2,843			(4,268	)		2,945
	Exploration & Production		(79,708	)		(213,211	)		(79,708	)		(207,391	)		(125,668	)		(186,122	)
	Gas Distribution		6,340			2,714			90,633			65,370			96,997			81,388
	Corporate & Other		(14,882	)		(9,291	)		(19,191	)		(14,469	)		(47,041	)		(24,977	)
			(86,240	)		(212,623	)		2,175			(133,741	)		(150,552	)		(87,612	)
	Cumulative effect of accounting change		—			—			(2,872	)		—			(2,872	)		—
Consolidated Net Loss		$	(86,240	)	$	(212,623	)	$	(697	)	$	(133,741	)	$	(153,424	)	$	(87,612	)

15.  CONSOLIDATING FINANCIAL STATEMENTS

Debt securities issued by MCN Investment Corporation (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, which primarily consists of investments in subsidiaries other than MichCon, is $878,334,000 at June 30, 1999.

The following MCN consolidating financial statements are presented and include separately MCNIC, MichCon and MCN and other subsidiaries. MCN has determined that separate financial statements and other disclosures concerning MCNIC are not material to investors. The other MCN subsidiaries represent Citizens Gas Fuel Company, MCN Michigan Limited Partnership, MCN Financing I, MCN Financing II, MCN Financing III, MCN Financing V, MCN Financing VI, MichCon Enterprises, Inc. and Blue Lake Holdings, Inc., until its sale on December 31, 1997.

36

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)

		MCN									Eliminations
		and Other									and			Consolidated
		Subsidiaries			MCNIC			MichCon			Reclasses			Total
		Three Months Ended June 30, 1999
(in Thousands)
Operating Revenues		$	6,908		$	297,912		$	185,555		$	(1,591	)	$	488,784
Operating Expenses
	Cost of sales		5,233			250,736			60,410			(1,431	)		314,948
	Operation and maintenance		591			34,130			63,942			(186	)		98,477
	Depreciation, depletion and amortization		973			16,431			24,758			—			42,162
	Property and other taxes		389			3,187			12,700			(6	)		16,270
	Property write-downs and restructuring charges		—			52,000			—			—			52,000
			7,186			356,484			161,810			(1,623	)		523,857
Operating Income (Loss)			(278	)		(58,572	)		23,745			32			(35,073	)
Equity in Earnings (Losses) of Joint Ventures and Subsidiaries			(83,493	)		11,594			572			83,493			12,166
Other Income and (Deductions)
	Interest income		16,336			1,471			946			(16,384	)		2,369
	Interest on long-term debt		250			(10,329	)		(11,525	)		—			(21,604	)
	Other interest expense		(3,150	)		(13,375	)		(1,181	)		11,024			(6,682	)
	Dividends on preferred securities of subsidiaries		—			—			—			(10,334	)		(10,334	)
	Loss on sale of E&P properties		—			(68,798	)		—			—			(68,798	)
	Investment losses		—			(7,456	)		—			—			(7,456	)
	Recognition of deferred loss related to discontinued operations subsequently retained		—			(1,982	)		—			—			(1,982	)
	Minority interest		—			(154	)		(266	)		—			(420	)
	Other		(127	)		6,040			(177	)		(35	)		5,701
			13,309			(94,583	)		(12,203	)		(15,729	)		(109,206	)
Income (Loss) Before Income Taxes			(70,462	)		(141,561	)		12,114			67,796			(132,113	)
Income Tax Provision (Benefit)			(967	)		(48,855	)		3,949			—			(45,873	)
Net Income (Loss)			(69,495	)		(92,706	)		8,165			67,796			(86,240	)
Dividends on Preferred Securities			10,334			—			—			(10,334	)		—
Net Income (Loss) Available for Common Stock		$	(79,829	)	$	(92,706	)	$	8,165		$	78,130		$	(86,240	)
		Three Months Ended June 30, 1998
Operating Revenues		$	2,487		$	233,228		$	172,787		$	(2,288	)	$	406,214
Operating Expenses
	Cost of sales		1,322			170,955			57,512			(1,540	)		228,249
	Operation and maintenance		100			30,409			61,868			(748	)		91,629
	Depreciation, depletion and amortization		693			22,273			23,492			—			46,458
	Property and other taxes		538			3,347			13,953			—			17,838
	Property write-downs and restructuring charges		—			333,022			—			—			333,022
			2,653			560,006			156,825			(2,288	)		717,196
Operating Income (Loss)			(166	)		(326,778	)		15,962			—			(310,982	)
Equity in Earnings (Losses) of Joint Ventures and Subsidiaries			(209,940	)		11,859			361			209,557			11,837
Other Income and (Deductions)
	Interest income		9,527			971			822			(9,505	)		1,815
	Interest on long-term debt		162			(9,073	)		(10,513	)		—			(19,424	)
	Other interest expense		(210	)		(12,163	)		(1,891	)		9,442			(4,822	)
	Dividends on preferred securities of subsidiaries		—			—			—			(9,230	)		(9,230	)
	Investment losses		—			(6,135	)		—			—			(6,135	)
	Minority interest		—			(34	)		(398	)		(203	)		(635	)
	Other		(541	)		1,025			585			203			1,272
			8,938			(25,409	)		(11,395	)		(9,293	)		(37,159	)
Income (Loss) Before Income Taxes			(201,168	)		(340,328	)		4,928			200,264			(336,304	)
Income Tax Provision (Benefit)			(360	)		(125,235	)		1,914			—			(123,681	)
Net Income (Loss)			(201,808	)		(215,093	)		3,014			200,264			(212,623	)
Dividends on Preferred Securities			9,230			—			—			(9,230	)		—
Net Income (Loss) Available for Common Stock		$	(210,038	)	$	(215,093	)	$	3,014		$	209,494		$	(212,623	)

37

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)

		MCN									Eliminations
		and Other									and			Total
		Subsidiaries			MCNIC			MichCon			Reclasses			Consolidated
		Six Months Ended June 30, 1999
(in Thousands)
Operating Revenues		$	18,572		$	591,479		$	683,645		$	(8,326	)	$	1,285,370
Operating Expenses
	Cost of sales		12,638			473,037			308,761			(5,603	)		788,833
	Operation and maintenance		(834	)		72,496			131,488			(2,723	)		200,427
	Depreciation, depletion and amortization		1,807			36,164			49,366			—			87,337
	Property and other taxes		777			5,989			31,162			—			37,928
	Property write-downs and restructuring charges		—			52,000			—			—			52,000
			14,388			639,686			520,777			(8,326	)		1,166,525
Operating Income (Loss)			4,184			(48,207	)		162,868			—			118,845
Equity in Earnings of Joint Ventures and Subsidiaries			560			23,611			1,013			(560	)		24,624
Other Income and (Deductions)
	Interest income		21,629			1,988			1,945			(21,697	)		3,865
	Interest on long-term debt		461			(21,476	)		(22,491	)		—			(43,506	)
	Other interest expense		(7,312	)		(25,867	)		(3,836	)		21,698			(15,317	)
	Dividends on preferred securities of subsidiaries		—			—			—			(20,669	)		(20,669	)
	Loss on sale of E&P properties		—			(68,798	)		—			—			(68,798	)
	Investment losses		—			(7,456	)		—			—			(7,456	)
	Minority interest		—			(216	)		(523	)		—			(739	)
	Other		(258	)		10,346			287			(1	)		10,374
			14,520			(111,479	)		(24,618	)		(20,669	)		(142,246	)
Income (Loss) Before Income Taxes			19,264			(136,075	)		139,263			(21,229	)		1,223
Income Tax Provision (Benefit)			(708	)		(47,369	)		47,125						(952	)
Income (Loss) Before Cumulative Effect of Accounting Change			19,972			(88,706	)		92,138			(21,229	)		2,175
Cumulative Effect of Accounting Change, Net of Taxes			—			(2,872	)		—			—			(2,872	)
Net Income (Loss)			19,972			(91,578	)		92,138			(21,229	)		(697	)
Dividends on Preferred Securities			20,669			—			—			(20,669	)		—
Net Income (Loss) Available for Common Stock		$	(697	)	$	(91,578	)	$	92,138		$	(560	)	$	(697	)

		Six Months Ended June 30, 1998
Operating Revenues		$	8,669		$	505,082		$	602,014		$	(8,091	)	$	1,107,674
Operating Expenses
	Cost of sales		4,443			377,736			275,101			(4,735	)		652,545
	Operation and maintenance		240			65,529			124,090			(3,356	)		186,503
	Depreciation, depletion and amortization		1,339			43,971			45,937			—			91,247
	Property and other taxes		1,171			6,287			31,255			—			38,713
	Write-down of E&P properties		—			333,022			—			—			333,022
			7,193			826,545			476,383			(8,091	)		1,302,030
Operating Income (Loss)			1,476			(321,463	)		125,631			—			(194,356	)
Equity in Earnings (Losses) of Joint Ventures and Subsidiaries			(130,687	)		28,166			950			130,169			28,598
Other Income and (Deductions)
	Interest income		19,572			4,165			1,934			(19,508	)		6,163
	Interest on long-term debt		403			(15,637	)		(22,719	)		—			(37,953	)
	Other interest expense		(659	)		(25,403	)		(5,148	)		19,547			(11,663	)
	Dividends on preferred securities of subsidiaries		—			—			—			(18,984	)		(18,984	)
	Loss on sale of E&P properties		—			—			—			—			—
	Investment losses		—			(6,135	)								(6,135	)
	Minority interest					(102	)		(1,143	)					(1,245	)
	Other		(507	)		13,762			706			—			13,961
			18,809			(29,350	)		(26,370	)		(18,945	)		(55,856	)
Income (Loss) Before Income Taxes			(110,402	)		(322,647	)		100,211			111,224			(221,614	)
Income Tax Provision (Benefit)			244			(123,650	)		35,533			—			(87,873	)
Net Income (Loss)			(110,646	)		(198,997	)		64,678			111,224			(133,741	)
Dividends on Preferred Securities			18,984			—			—			(18,984	)		—
Net Income (Loss) Available for Common Stock		$	(129,630	)	$	(198,997	)	$	64,678		$	130,208		$	(133,741	)

38

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)

		MCN									Eliminations
		and Other									and			Consolidated
		Subsidiaries			MCNIC			MichCon			Reclasses			Total
		Twelve Months Ended June 30, 1999
(in Thousands)
Operating Revenues		$	28,165		$	1,079,225		$	1,115,289		$	(14,285	)	$	2,208,394
Operating Expenses
	Cost of sales		18,901			847,508			485,189			(9,536	)		1,342,062
	Operation and maintenance		(11,281	)		159,574			259,795			(4,749	)		403,339
	Depreciation, depletion and amortization		3,674			75,594			96,312			—			175,580
	Property and other taxes		1,325			12,098			55,345			—			68,768
	Property write-downs and restructuring charges		8,669			277,827			24,800			—			311,296
			21,288			1,372,601			921,441			(14,285	)		2,301,045
Operating Income (Loss)			6,877			(293,376	)		193,848			—			(92,651	)
Equity in Earnings (Losses) of Joint Ventures and Subsidiaries			(143,524	)		56,687			2,009			143,079			58,251
Other Income and (Deductions)
	Interest income		20,708			4,432			5,699			(22,244	)		8,595
	Interest on long-term debt		(583	)		(47,660	)		(44,656	)		—			(92,899	)
	Other interest expense		(9,127	)		(49,094	)		(10,801	)		40,964			(28,058	)
	Dividends on preferred securities of subsidiaries		—			—			—			(38,055	)		(38,055	)
	Loss on sale of E&P properties		—			(68,798	)		—			—			(68,798	)
	Investment losses		(8,500	)		(7,456	)		—			—			(15,956	)
	Minority interest		—			151			6,347			—			6,498
	Other		(356	)		16,932			(601	)		(1	)		15,974
			2,142			(151,493	)		(44,012	)		(19,236	)		(212,699	)
Income (Loss) Before Income Taxes			(134,505	)		(388,182	)		151,845			123,743			(247,099	)
Income Tax Provision (Benefit)			(3,781	)		(140,175	)		47,409			—			(96,547	)
Income (Loss) Before Cumulative Effect of Accounting Change			(130,724	)		(248,007	)		104,436			123,743			(150,552	)
Cumulative Effect of Accounting Change, Net of Taxes			—			(2,872	)		—			—			(2,872	)
Net Income (Loss)			(130,724	)		(250,879	)		104,436			123,743			(153,424	)
Dividends on Preferred Securities			38,055			—			—			(38,055	)		—
Net Income (Loss) Available for Common Stock		$	(168,779	)	$	(250,879	)	$	104,436		$	161,798		$	(153,424	)

		Twelve Months Ended June 30, 1998
Operating Revenues		$	16,186		$	1,019,010		$	1,118,448		$	(14,789	)	$	2,138,855
Operating Expenses
	Cost of gas		8,763			761,742			521,026			(9,279	)		1,282,252
	Operation and maintenance		1,865			126,572			263,231			(5,510	)		386,158
	Depreciation, depletion and amortization		2,491			83,712			97,715			—			183,918
	Property and other taxes		1,821			13,091			58,064			—			72,976
	Property write-downs and restructuring charges		—			333,022			—			—			333,022
			14,940			1,318,139			940,036			(14,789	)		2,258,326
Operating Income			1,246			(299,129	)		178,412			—			(119,471	)
Equity in Earnings (Losses) of Joint Ventures and Subsidiaries			(77,835	)		58,038			1,508			77,715			59,426
Other Income and (Deductions)
	Interest income		40,507			8,729			4,107			(40,390	)		12,953
	Interest on long-term debt		599			(27,740	)		(45,931	)		—			(73,072	)
	Other interest expense		(1,414	)		(46,562	)		(9,063	)		40,717			(16,322	)
	Dividends on preferred securities of subsidiaries		—			—			—			(38,516	)		(38,516	)
	Investment loss		—			(6,135	)		—			—			(6,135	)
	Minority interest		—			(150	)		(2,092	)		—			(2,242	)
	Other		(406	)		21,201			1,345			—			22,140
			39,286			(50,657	)		(51,634	)		(38,189	)		(101,194	)
Income (Loss) Before Income Taxes			(37,303	)		(291,748	)		128,286			39,526			(161,239	)
Income Tax Provision (Benefit)			1,251			(122,590	)		47,712			—			(73,627	)
Net Income (Loss)			(38,554	)		(169,158	)		80,574			39,526			(87,612	)
Dividends on Preferred Securities			38,516			—			—			(38,516	)		—
Net Income (Loss) Available for Common Stock		$	(77,070	)	$	(169,158	)	$	80,574		$	78,042		$	(87,612	)

39

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)

			MCN								Eliminations
			and Other								and			Consolidated
			Subsidiaries			MCNIC			MichCon		Reclasses			Total
			June 30, 1999
(in Thousands)
ASSETS
Current Assets
	Cash and cash equivalents, at cost		$	434		$	8,819		$	10,823	$	—		$	20,076
	Accounts receivable			7,065			193,029			155,509		(13,611	)		341,992
		Less — Allowance for doubtful accounts		79			1,773			13,492		—			15,344
	Accounts receivable, net			6,986			191,256			142,017		(13,611	)		326,648
	Accrued unbilled revenues			214			—			20,302		—			20,516
	Gas in inventory			—			78,644			43,892		—			122,536
	Property taxes assessed applicable to future periods			170			1,952			48,473		—			50,595
	Other			4,555			58,586			34,512		(51,234	)		46,419
				12,359			339,257			300,019		(64,845	)		586,790
Deferred Charges and Other Assets
	Deferred income taxes			10,660			120,966			—		(103,490	)		28,136
	Investments in debt and equity securities			—			3,714			66,202		600			70,516
	Deferred swap losses and receivables			—			64,567			—		—			64,567
	Deferred environmental costs			2,770			—			28,404		—			31,174
	Prepaid benefit costs			—			—			134,590		(1,785	)		132,805
	Other			13,806			29,983			66,758		3,954			114,501
				27,236			219,230			295,954		(100,721	)		441,699
Investments in and Advances to Joint Ventures and Subsidiaries				1,526,376			843,517			19,853		(1,524,398	)		865,348
Property, Plant and Equipment, at cost				48,752			844,272			2,942,856		—			3,835,880
	Less — Accumulated depreciation and depletion			18,684			220,428			1,445,967		—			1,685,079
				30,068			623,844			1,496,889		—			2,150,801
			$	1,596,039		$	2,025,848		$	2,112,715	$	(1,689,964	)	$	4,044,638
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable		$	6,148		$	168,281		$	89,662	$	(11,300	)	$	252,791
	Notes payable			156,440			162,886			28,319		(836	)		346,809
	Current portion of long-term debt and capital lease obligations			—			216			46,135		—			46,351
	Gas inventory equalization			—			193			22,774		—			22,967
	Federal income, property and other taxes payable			(387	)		2,450			86,097		(44,959	)		43,201
	Deferred gas cost recovery revenues			—			—			—		—			—
	Gas payable			—			18,003			20,845		—			38,848
	Customer deposits			26			—			15,830		—			15,856
	Interest payable			1,486			11,680			9,250		—			22,416
	Other			13,833			17,007			33,875		(2,580	)		62,135
				177,546			380,716			352,787		(59,675	)		851,374
Deferred Credits and Other Liabilities
	Deferred income taxes			—			—			103,198		(103,198	)		—
	Unamortized investment tax credit			259			—			28,823		—			29,082
	Tax benefits amortizable to customers			—			—			128,869		—			128,869
	Deferred swap gains and payables			—			62,617			—		—			62,617
	Accrued environmental costs			3,000			—			31,704		—			34,704
	Minority interest			—			2,166			8,363		—			10,529
	Other			12,879			12,685			51,663		(2,370	)		74,857
				16,138			77,468			352,620		(105,568	)		340,658
Long-Term Debt, including capital lease obligations				—			777,752			686,004		—			1,463,756
Redeemable Preferred Securities of Subsidiaries				502,232			—			—		—			502,232
Common Shareholders’ Equity
	Common stock			855			5			10,300		(10,305	)		855
	Additional paid-in capital			966,956			1,080,379			230,399		(1,310,778	)		966,956
	Retained earnings (deficit)			(45,400	)		(276,967	)		480,605		(203,638	)		(45,400	)
	Accumulated other comprehensive loss			—			(13,505	)		—		—			(13,505	)
	Yield enhancement, contract and issuance costs			(22,288	)		—			—		—			(22,288	)
				900,123			789,912			721,304		(1,524,721	)		886,618
			$	1,596,039		$	2,025,848		$	2,112,715	$	(1,689,964	)	$	4,044,638

40

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)

			MCN								Eliminations
			and Other								and			Consolidated
			Subsidiaries			MCNIC			MichCon		Reclasses			Total
			June 30, 1998
(in Thousands)
ASSETS
Current Assets
	Cash and cash equivalents, at cost		$	53		$	60,914		$	20,032	$	—		$	80,999
	Accounts receivable			16,343			193,634			150,380		(18,022	)		342,335
		Less — Allowance for doubtful accounts		97			453			14,132		—			14,682
	Accounts receivable, net			16,246			193,181			136,248		(18,022	)		327,653
	Accrued unbilled revenues			225			—			15,500		—			15,725
	Gas in inventory			—			68,054			35,617		—			103,671
	Property taxes assessed applicable to future periods			98			1,276			43,152		—			44,526
	Other			2,815			45,819			28,408		(70	)		76,972
				19,437			369,244			278,957		(18,092	)		649,546
Deferred Charges and Other Assets
	Investments in debt and equity securities			—			12,084			36,532		351			48,967
	Deferred swap losses and receivables			—			63,123			—		—			63,123
	Deferred environmental costs			2,534			—			27,934		—			30,468
	Prepaid benefit costs			630			—			95,008		(6,927	)		88,711
	Other			8,956			32,424			52,612		(2,955	)		91,037
				12,120			107,631			212,086		(9,531	)		322,306
Investments in and Advances to Joint Ventures and Subsidiaries				1,374,445			667,961			20,436		(1,365,624	)		697,218
Property, Plant and Equipment, at cost				42,928			1,192,544			2,843,708		—			4,079,180
	Less — Accumulated depreciation and depletion			14,274			191,267			1,356,842		—			1,562,383
				28,654			1,001,277			1,486,866		—			2,516,797
			$	1,434,656		$	2,146,113		$	1,998,345	$	(1,393,247	)	$	4,185,867
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable		$	6,752		$	240,244		$	89,329	$	(18,432	)	$	317,893
	Notes payable			—			147,822			4,067		(2,192	)		149,697
	Current portion of long-term debt and capital lease obligations			—			211,486			58,204		—			269,690
	Gas inventory equalization			—			12			15,478		—			15,490
	Federal income, property and other taxes payable			543			(2,098	)		80,931		—			79,376
	Deferred gas cost recovery revenues			—			—			29,139		—			29,139
	Gas payable			—			13,279			26,998		—			40,277
	Customer deposits			24			—			14,900		—			14,924
	Interest payable			1,686			17,032			10,355		—			29,073
	Other			5,860			5,317			26,886		(29	)		38,034
				14,865			633,094			356,287		(20,653	)		983,593
Deferred Credits and Other Liabilities
	Deferred income taxes			(4,549	)		(41,824	)		89,549		—			43,176
	Unamortized investment tax credit			286			—			31,823		—			32,109
	Tax benefits amortizable to customers			—			—			123,444		—			123,444
	Deferred swap gains and payables			—			50,014			—		—			50,014
	Accrued environmental costs			3,000			—			32,000		—			35,000
	Minority interest			—			2,565			16,600		1			19,166
	Other			17,063			61,438			43,926		(6,929	)		115,498
				15,800			72,193			337,342		(6,928	)		418,407
Long-Term Debt, including capital lease obligations				—			781,238			624,014		—			1,405,252
Redeemable Preferred Securities of Subsidiaries				405,428			—			—		—			405,428
Common Shareholders’ Equity
	Common stock			789			5			10,300		(10,305	)		789
	Additional paid-in capital			816,285			697,823			230,399		(928,221	)		816,286
	Retained earnings			203,777			(26,092	)		440,003		(427,140	)		190,548
	Accumulated other comprehensive loss			—			(12,148	)		—		—			(12,148	)
	Yield enhancement, contract and issuance costs			(22,288	)		—			—		—			(22,288	)
				998,563			659,588			680,702		(1,365,666	)		973,187
			$	1,434,656		$	2,146,113		$	1,998,345	$	(1,393,247	)	$	4,185,867

41

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)

			MCN								Eliminations
			and Other								and			Consolidated
			Subsidiaries			MCNIC			MichCon		Reclasses			Total
			December 31, 1998
(in Thousands)
ASSETS
Current Assets
	Cash and cash equivalents, at cost		$	1,400		$	9,036		$	6,603	$	—		$	17,039
	Accounts receivable			10,039			265,312			151,746		(17,312	)		409,785
		Less — Allowance for doubtful accounts		84			653			8,928		—			9,665
	Accounts receivable, net			9,955			264,659			142,818		(17,312	)		400,120
	Accrued unbilled revenues			1,121			—			86,767		—			87,888
	Gas in inventory			—			90,418			56,969		—			147,387
	Property taxes assessed applicable to future periods			214			1,172			71,165		—			72,551
	Other			5,143			11,872			30,169		(4,712	)		42,472
				17,833			377,157			394,491		(22,024	)		767,457
Deferred Charges and Other Assets
	Deferred income taxes			3,305			128,807			—		(81,565	)		50,547
	Investments in debt and equity securities			—			3,548			65,556		601			69,705
	Deferred swap losses and receivables			—			63,147			—		—			63,147
	Deferred environmental costs			2,604			—			28,169		—			30,773
	Prepaid benefit costs			—			—			113,879		(2,104	)		111,775
	Other			9,401			26,870			59,007		3,662			98,940
				15,310			222,372			266,611		(79,406	)		424,887
Investments in and Advances to Joint Ventures and Subsidiaries				1,550,770			782,471			19,343		(1,549,353	)		803,231
Property, Plant and Equipment, at cost				48,681			1,103,716			2,889,020		—			4,041,417
	Less — Accumulated depreciation and depletion			17,210			229,944			1,396,940		—			1,644,094
				31,471			873,772			1,492,080		—			2,397,323
			$	1,615,384		$	2,255,772		$	2,172,525	$	(1,650,783	)	$	4,392,898
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable		$	4,123		$	218,851		$	98,891	$	(17,516	)	$	304,349
	Notes payable			260,771			137,762			221,169		(851	)		618,851
	Current portion of long-term debt and capital lease obligations			—			211,433			58,288		—			269,721
	Federal income, property and other taxes payable			1,441			6,965			61,059		—			69,465
	Deferred gas cost recovery revenues			—			—			14,980		—			14,980
	Gas payable			—			17,332			25,337		—			42,669
	Customer deposits			22			—			18,769		—			18,791
	Interest payable			2,835			16,519			10,960		—			30,314
	Other			15,502			8,757			56,262		(2,525	)		77,996
				284,694			617,619			565,715		(20,892	)		1,447,136
Deferred Credits and Other Liabilities
	Deferred income taxes			(10,308	)		—			88,567		(78,259	)		—
	Unamortized investment tax credit			272			—			29,784		—			30,056
	Tax benefits amortizable to customers			—			—			130,120		—			130,120
	Deferred swap gains and payables			—			62,956			—		—			62,956
	Accrued environmental costs			3,000			—			32,000		—			35,000
	Minority interest			—			2,697			8,201		—			10,898
	Other			10,435			15,741			51,460		(2,197	)		75,439
				3,399			81,394			340,132		(80,456	)		344,469
Long-Term Debt, including capital lease obligations				—			687,333			619,835		—			1,307,168
Redeemable Preferred Securities of Subsidiaries				502,203			—			—		—			502,203
Common Shareholders’ Equity
	Common stock			797			5			10,300		(10,305	)		797
	Additional paid-in capital			832,966			1,071,390			230,399		(1,301,789	)		832,966
	Retained earnings (deficit)			13,613			(185,393	)		406,144		(237,341	)		(2,977	)
	Accumulated other comprehensive loss			—			(16,576	)		—		—			(16,576	)
	Yield enhancement, contract and issuance costs			(22,288	)		—			—		—			(22,288	)
				825,088			869,426			646,843		(1,549,435	)		791,922
			$	1,615,384		$	2,255,772		$	2,172,525	$	(1,650,783	)	$	4,392,898

42

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

			MCN									Eliminations
			and Other									and			Consolidated
			Subsidiaries			MCNIC			MichCon			Reclasses			Total
(in Thousands)
			Six Months Ended June 30, 1999
Net Cash Flow From Operating Activities			$	41,353		$	65,837		$	222,622		$	(38,844	)		290,968
Cash Flow From Financing Activities
	Notes payable, net			(104,331	)		25,124			(192,850	)		15			(272,042	)
	Capital paid to affiliates, net			—			8,993			—			(8,993	)		—
	Dividends paid			(41,726	)		—			(17,500	)		17,500			(41,726	)
	Preferred securities dividends paid			(20,669	)		—			—			20,669			—
	Issuance of common stock			135,120			—			—			—			135,120
	Reacquisition of common stock			(783	)		—			—			—			(783	)
	Issuance of long-term debt									106,535						106,535
	Long-term commercial paper and bank borrowings, net			—			92,344			—			—			92,344
	Retirement of long-term debt and preferred securities			—			(212,855	)		(55,918	)		—			(268,773	)
		Net cash provided from (used for) financing activities		(32,389	)		(86,394	)		(159,733	)		29,191			(249,325	)
Cash Flow From Investing Activities
	Capital expenditures			(637	)		(101,146	)		(58,097	)		—			(159,880	)
	Acquisitions			—			(31,153	)		—			—			(31,153	)
	Investment in debt and equity securities			—			(1,952	)		—			(645	)		(2,597	)
	Investment in joint ventures and subsidiaries			(9,493	)		(39,477	)		(14	)		8,993			(39,991	)
	Sale of property and joint venture interests			—			200,387			—			318			200,705
	Return of investment in joint ventures			—			1,193			—			—			1,193
	Other			200			(7,512	)		(558	)		987			(6,883	)
		Net cash provided from (used for) investing activities		(9,930	)		20,340			(58,669	)		9,653			(38,606	)
Net Increase (Decrease) in Cash and Cash Equivalents				(966	)		(217	)		4,220			—			3,037
Cash and Cash Equivalents, January 1				1,400			9,036			6,603			—			17,039
Cash and Cash Equivalents, June 30			$	434		$	8,819		$	10,823		$	—		$	20,076

			Six Months Ended June 30, 1998
Net Cash Flow From Operating Activities			$	19,014		$	(11,058	)	$	286,618		$	(19,354	)	$	275,220
Cash Flow From Financing Activities
	Notes payable, net			—			75,066			(237,624	)		886			(161,672	)
	Capital contributions paid to affiliates, net			—			(136,716	)		—			136,716			—
	Dividends paid			(41,441	)		—			—			—			(41,441	)
	Preferred securities dividends paid			(18,984	)		—			—			18,984			—
	Issuance of common stock			10,374			—			—			—			10,374
	Issuance of long-term debt			—			307,109			153,052			—			460,161
	Long-term commercial paper, net			—			109,643			—			—			109,643
	Retirement of long-term debt			(100,365	)		(100,826	)		(122,263	)		—			(323,454	)
	Other			263			8,243			—			—			8,506
		Net cash provided from (used for) financing activities		(150,153	)		262,519			(206,835	)		156,586			62,117
Cash Flow From Investing Activities
	Capital expenditures			(5,164	)		(197,988	)		(74,503	)		—			(277,655	)
	Acquisitions			—			(36,731	)		—			—			(36,731	)
	Investment in debt and equity securities			—			45,663			(1,422	)		—			44,241
	Investment in joint ventures and subsidiaries			136,216			(96,161	)		12			(136,714	)		(96,647	)
	Sale of property and joint venture interests			—			81,026			—			—			81,026
	Return of investment in joint ventures			—			4,801			—			—			4,801
	Other			117			(16,276	)		1,809			(518	)		(14,868	)
		Net cash provided from (used for) investing activities		131,169			(215,666	)		(74,104	)		(137,232	)		(295,833	)
Net Increase (Decrease) in Cash and Cash Equivalents				30			35,795			5,679			—			41,504
Cash and Cash Equivalents, January 1				23			25,119			14,353			—			39,495
Cash and Cash Equivalents, June 30			$	53		$	60,914		$	20,032		$	—		$	80,999

43

OTHER INFORMATION

Supplementary Information for Gas and Oil Producing Activities (Unaudited)

In December 1998, MCN accounted for its E&P segment as a discontinued operation as a result of its decision to sell all of its gas and oil properties. In August 1999, MCN announced a significantly revised strategic direction. Consistent with this revised strategy, as well as the result of the lowering of the bid for the Michigan E&P properties, MCN will now retain its natural gas producing properties in Michigan and continue selling its other E&P oil and gas properties. Accordingly, E&P’s operating results have been reclassified from discontinued operations to continuing operations. Refer to “Management’s Discussion and Analysis” and Note 6 to the Consolidated Financial Statements, included herein, for additional information regarding the E&P segment and management’s decision to retain the properties in Michigan. The following information is prepared in accordance with SFAS No. 69, “Disclosures About Oil and Gas Producing Activities” and related Securities and Exchange Commission (SEC) accounting rules. The information, as of or for the years ended December 31, would have been provided in MCN’s 1998 Annual Report on Form 10-K/ A if the E&P segment had not been classified as a discontinued operation.

MCNIC Oil & Gas Company (MOG), an indirect subsidiary of MCN, is engaged in natural gas and oil exploration, development and production. The full cost accounting method prescribed by the SEC is followed for investments in gas and oil properties. Under the full cost method, substantially all acquisition, exploration and development costs are capitalized.

The unit of production method is used for calculating depreciation, depletion and amortization (DD&A) on proved gas and oil properties. The average DD&A expense per thousand cubic feet equivalent was $.82, $.75 and $.70 in 1998, 1997 and 1996, respectively. Costs directly associated with the acquisition and evaluation of unproved gas and oil properties are excluded from the amortization base until the related properties are evaluated. Such unproved properties are assessed periodically, and a provision for impairment is made when appropriate.

Capitalized Costs

	1998		1997
(in Thousands)
Proved Properties	$	1,357,413	$	1,033,492
Unproved Properties		99,611		265,809
		1,457,024		1,299,301
SEC Ceiling Test Write-downs (Note 2c)		416,977		—
Accumulated Depreciation, Depletion and Amortization		224,795		150,015
Net Capitalized Costs	$	815,252	$	1,149,286

44

OTHER INFORMATION (Continued)

Capitalized Costs Excluded From Amortization

Unproved properties held by MCN are excluded from amortization until they have been evaluated. A summary of costs excluded from amortization at December 31, 1998, and the year in which they were incurred, follows:

			Year Costs Incurred
									1995 &
	Total		1998		1997		1996		Prior
(in Thousands)
Acquisition	$	43,131	$	14,254	$	17,119	$	9,321	$	2,439
Exploration		56,480		13,757		32,655		9,935		132
	$	99,611	$	28,011	$	49,774	$	19,256	$	2,571

The acquisition amount includes all costs incurred to purchase or lease property with unproved reserves.

Cost Incurred

		1998		1997		1996
(in Thousands)
Acquisition:
	Proved properties	$	53,377	$	35,695	$	60,340
	Unproved properties		7,498		66,721		136,142
			60,875		102,416		196,482
Exploration			52,948		143,580		65,160
Development			86,607		129,001		120,569
		$	200,430	$	374,997	$	382,211

Results of Operations

		1998			1997			1996
(in Thousands)
Operating Revenues:
	Unaffiliated customers	$	150,504		$	144,041		$	94,615
	Affiliated customers		56,598			71,787			43,326
			207,102			215,828			137,941
Production Costs			79,245			68,364			48,255
SEC Ceiling Test Write-downs			416,977			—			—
Depreciation, Depletion and Amortization			80,576			73,910			44,469
			576,798			142,274			92,724
Income (Loss) Before Income Taxes			(369,696	)		73,554			45,217
Income Taxes:
	Income tax provision (benefit)		(129,698	)		26,997			16,438
	Gas production tax credits		(10,485	)		(17,797	)		(15,878	)
			(140,183	)		9,200			560
Results of Operations, Excluding Corporate And Interest Costs		$	(229,513	)	$	64,354		$	44,657

Reserve Quantity Information

MCN’s proved reserves are located in the United States. Information on estimated gas and oil reserves that follows was obtained by MOG from the independent petroleum engineering

45

OTHER INFORMATION (Continued)

consultants Ryder Scott Company, Miller and Lents, Ltd., S.A. Holditch & Associates, Netherland, Sewell & Associates, Inc., and Williamson Petroleum Consultants, Inc.

			1998						1997
			Gas			Oil			Gas			Oil
			(MMcf)			(MBbl)			(MMcf)			(MBbl)
Proved Developed and Undeveloped Reserves:
	Beginning of year			1,166,174			25,843			1,137,729			17,214
		Revisions of previous estimates		(66,188	)		(2,865	)		(30,260	)		(430	)
		Extensions and discoveries		59,729			534			165,283			4,435
		Production		(82,040	)		(2,635	)		(78,218	)		(3,346	)
		Sales of minerals in place		(37,661	)		(8,389	)		(51,465	)		(1,019	)
		Purchases of minerals in place		52,959			499			23,105			8,989
	End of year			1,092,973			12,987			1,166,174			25,843
Proved Developed Reserves:
	Beginning of year			590,299			12,601			688,995			9,554
	End of year			630,130			6,367			590,299			12,601

Standardized Measure of Discounted Future Net Cash Flows

The following presentation of the standardized measure of discounted future net cash flows is intended to be neither a measure of the fair market value of MCN’s gas and oil properties, nor an estimate of the present value of actual future cash flows to be obtained as a result of their development and production. It is based upon subjective estimates of proved reserves only and attributes no value to categories of reserves other than proved reserves, such as probable or possible reserves, or to unproved acreage. Furthermore, as it is based on year-end prices and costs adjusted only for existing contractual arrangements and assumes an arbitrary annual discount rate of 10%, it does not reflect the impact of future price and cost changes. Future income tax expenses were computed by applying statutory tax rates, adjusted for permanent differences and tax credits, to estimated future pre-tax net cash flows.

The standardized measure is intended to provide a better means for comparing the value of MCN’s proved reserves at a given time with those of other gas and oil producing companies than is provided by a simple comparison of raw proved reserve quantities.

	1998		1997			1996
(in Thousands)
Future Revenues	$	2,795,786	$	3,121,124		$	3,867,785
Future Production Costs		984,042		1,155,734			1,322,108
Future Development Costs		264,631		328,739			340,190
Future Net Cash Flows Before Income Taxes		1,547,113		1,636,651			2,205,487
Discount to Present Value at 10%		806,746		812,605			1,139,507
Present Value of Future Net Cash Flows Before Income Taxes		740,367		824,046			1,065,980
Future Income Taxes Discounted at 10%		—		105,371			226,913
Future Tax Credits Discounted at 10%		—		(50,889	)		(62,207	)
Standardized Measure of Discounted Future Net Cash Flows	$	740,367	$	769,564		$	901,274

Future income taxes and tax credits have been excluded from the 1998 calculation since MOG is in a net operating loss position, and it is more likely than not that these tax benefits would not be realized by MOG on a stand-alone basis. However, MCN files a consolidated federal income tax return, which includes the taxable income or loss of MOG as well as MOG’s tax credits.

46

OTHER INFORMATION (Concluded)

Accordingly, it is management’s opinion that any tax benefits earned by MOG will be utilized by MCN in its consolidated tax returns.

The principal sources of change in the standardized measure of discounted future net cash flows were as follows:

		1998			1997			1996
(in Thousands)
Beginning of Year		$	769,564		$	901,274		$	521,907
	Net changes in sales prices and production costs		(67,085	)		(261,154	)		126,526
	Net change due to revisions in quantity estimates		(59,106	)		(26,015	)		5,061
	Extensions, discoveries, additions and improved recovery, net of related costs		46,739			153,291			200,026
	Development costs incurred, previously estimated		86,607			103,201			86,810
	Changes in estimated future development costs		(26,573	)		(120,219	)		(81,069	)
	Net change in future income taxes		105,371			116,366			(85,616	)
	Net change in federal tax credits		(41,997	)		(17,797	)		(15,878	)
	Sales of reserves in place		(56,924	)		(83,985	)		—
	Purchases of reserves in place		41,525			48,685			193,550
	Accretion of discount and other		70,103			103,381			39,643
End of Year		$	740,367		$	769,564		$	901,274

Additional data relating to E&P activities follows:

	1998		1997		1996
Production
Average Gas Sales Price (per Mcf)	$	2.04	$	1.95	$	1.96
Average Oil Sales Price (per Bbl)	$	12.58	$	16.87	$	20.18
Average Production Cost (per Mcf equivalent)	$	.81	$	.70	$	.76

			1998				1997				1996
			Gross		Net		Gross		Net		Gross		Net
Drilling Activity
Working Interest Well Completions:
Exploratory:
	Productive			58		26		63		30		63		28
	Dry			37		14		39		19		37		15
		Total Exploratory		95		40		102		49		100		43
Development:
	Productive			536		335		574		354		355		230
	Dry			15		6		20		9		12		6
		Total Development		551		341		594		363		367		236
Total Working Interest Well Completions				646		381		696		412		467		279
Wells in Process of Drilling at End of Year				77		30		150		92		167		108

	1998				1997				1996
	Gross		Net		Gross		Net		Gross		Net
Producing Wells and Acreage
Producing Wells
United States		3,143		1,782		2,917		1,677		2,890		1,481
Developed Lease Acreage
United States		623,076		352,315		663,767		344,818		519,107		287,964
Undeveloped Lease Acreage
United States		2,693,767		1,148,920		2,592,915		1,239,908		1,701,063		970,873

47

EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

Exhibit
Number		Description
	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
	23-1	Consent of Ryder Scott Company
	23-2	Consent of Miller and Lents, Ltd.
	23-3	Consent of S.A. Holditch & Associates
	23-4	Consent of Netherland, Sewell & Associates, Inc.
	23-5	Consent of Williamson Petroleum Consultants, Inc.
	27-1	Financial Data Schedule — 1999.
	27-2	Financial Data Schedule — 1998.

(b)  Reports on Form 8-K

Registrant filed a report on Form 8-K dated August 2, 1999, under Item 5. The contents of the Form 8-K were three press releases issued by MCN on August 2, 1999 outlining its revised strategic direction, the naming of the leadership team to implement the new strategy and the 1999 second quarter earnings release.

MCN announced a significantly revised strategic direction. Key aspects of the new corporate strategy include a regional rather than North American focus, and an emphasis on achieving operational efficiencies and growth through integration of existing businesses rather than building a portfolio of diverse, non-operated energy investments. Consistent with the new strategy, as well as the result of the lowering of the bid for the Michigan Exploration & Production (E&P) properties, MCN will retain its natural gas producing properties in Michigan. At year-end 1998, the E&P segment was classified as discontinued operations in preparation for the sale of the company’s entire E&P business.

Key aspects of the new strategy include reorganizing the MCN family of businesses to include four primary operating segments (Gas Distribution, Midstream & Supply, Energy Marketing and Power) and an investment arm (Energy Holdings). Changes to the leadership team include:

Stephen E. Ewing	President & Chief Operating Officer (COO), MCN Energy  Group Inc.
Anne Cooke	President & CEO, MCN Energy Marketing
Steve Kurmas	President & CEO, MCN Midstream & Supply
Joseph Roberts	President & CEO, MCN Power
	President & CEO, MCN Energy Holdings

48

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 16, 1999

By:  /s/ GERARD KABZINSKI

Gerard Kabzinski

Vice President and Controller

49

EXHIBIT INDEX

Exhibit
Number		Description
	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
	23-1	Consent of Ryder Scott Company
	23-2	Consent of Miller and Lents, Ltd.
	23-3	Consent of S.A. Holditch & Associates
	23-4	Consent of Netherland, Sewell & Associates, Inc.
	23-5	Consent of Williamson Petroleum Consultants, Inc.
	27-1	Financial Data Schedule. — 1999
	27-2	Financial Data Schedule. — 1998