MCN Energy 10-Q 1999 Q3 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 September 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 November 12, 1999:

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

TABLE OF CONTENTS

INDEX TO FORM 10-Q

For Quarter Ended September 30, 1999

	Page
	Number
COVER		i
INDEX		ii
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
PART II — OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K		42
SIGNATURE		43

ii

MCN ENERGY GROUP INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Results of Operations

      Results reflect reduced Diversified Energy and Gas Distribution contributions — MCN had a net loss for the 1999 third quarter of $31.2 million or $.37 per share compared with a net loss of $176.7 million or $2.24 per share in the same 1998 quarter. MCN experienced a net loss in the 1999 nine-and twelve-month periods of $31.9 million or $.39 per share and $7.9 million or $.10 per share, respectively, compared with a net loss of $310.5 million or $3.95 per share and $265.6 million or $3.38 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						9 Months						12 Months
		1999			1998			1999			1998			1999			1998
		(in Millions, Except Per Share Amounts)
Net Income (Loss)
Diversified Energy:
	Before unusual charges	$	(12.7	)	$	.2		$	(17.8	)	$	21.6		$	(24.6	)	$	33.9
	Unusual charges (Note 3)		(3.8	)		(152.4	)		(87.2	)		(372.9	)		(87.2	)		(372.9	)
			(16.5	)		(152.2	)		(105.0	)		(351.3	)		(111.8	)		(339.0	)
Gas Distribution:
	Before unusual charges		(14.7	)		(7.8	)		76.0			57.5			106.8			90.1
	Unusual charges (Note 3e)		—			(16.7	)		—			(16.7	)		—			(16.7	)
			(14.7	)		(24.5	)		76.0			40.8			106.8			73.4
Total Before Accounting Change:
	Before unusual charges		(27.4	)		(7.6	)		58.2			79.1			82.2			124.0
	Unusual charges (Note 3)		(3.8	)		(169.1	)		(87.2	)		(389.6	)		(87.2	)		(389.6	)
			(31.2	)		(176.7	)		(29.0	)		(310.5	)		(5.0	)		(265.6	)
Cumulative Effect of Accounting Change, Net of Taxes (Note 6)			—			—			(2.9	)		—			(2.9	)		—
		$	(31.2	)	$	(176.7	)	$	(31.9	)	$	(310.5	)	$	(7.9	)	$	(265.6	)
Earnings (Loss) Per Share — Basic and Diluted
Diversified Energy:
	Before unusual charges	$	(.15	)	$	—		$	(.22	)	$	.27		$	(.30	)	$	.43
	Unusual charges (Note 3)		(.05	)		(1.93	)		(1.05	)		(4.74	)		(1.07	)		(4.75	)
			(.20	)		(1.93	)		(1.27	)		(4.47	)		(1.37	)		(4.32	)
Gas Distribution:
	Before unusual charges		(.17	)		(.10	)		.92			.73			1.31			1.15
	Unusual charges (Note 3e)		—			(.21	)		—			(.21	)		—			(.21	)
			(.17	)		(.31	)		.92			.52			1.31			.94
Total Before Accounting Change:
	Before unusual charges		(.32	)		(.10	)		.70			1.00			1.01			1.58
	Unusual charges (Note 3)		(.05	)		(2.14	)		(1.05	)		(4.95	)		(1.07	)		(4.96	)
			(.37	)		(2.24	)		(.35	)		(3.95	)		(.06	)		(3.38	)
Cumulative Effect of Accounting Change (Note 6)			—			—			(.04	)		—			(.04	)		—
		$	(.37	)	$	(2.24	)	$	(.39	)	$	(3.95	)	$	(.10	)	$	(3.38	)

1

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

      Excluding the non-recurring items, MCN had a net loss of $27.4 million for the 1999 quarter and earnings of $58.2 million and $82.2 million for the 1999 nine-and twelve-month periods, respectively, resulting in decreases of $19.8 million, $20.9 million and $41.8 million from the corresponding 1998 periods. The comparisons reflect losses in the Diversified Energy group resulting from the decline in earnings in the Energy Marketing and Exploration & Production (E&P) segments as well as increased financing costs. The 1999 quarter also reflects higher seasonal losses in the Gas Distribution segment. The decline in Diversified Energy’s results in the 1999 nine- and twelve-month periods 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. Also affecting the comparability for the nine-and twelve-month periods were gains recorded by the Diversified Energy group in 1998 from the sale of certain assets.

      Restatement — As discussed in Note 5 to the Consolidated Financial Statements included herein and in MCN’s 1998 Annual Report included in the Form 8-K filed with the Securities and Exchange Commission (SEC) on October 15, 1999 (Note 1), 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 a decrease in net loss of $.4 million for the 1998 quarter and an increase in net loss of $3.7 million or $.05 per share and $9.1 million or $.11 per share for the 1998 nine- 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 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.

      Pending merger — MCN and DTE Energy Company (DTE) have signed a definitive merger agreement dated October 4, 1999 under which DTE will acquire all outstanding shares of MCN common stock. The boards of directors of both companies have unanimously approved the merger agreement. The transaction is subject to the approval of the shareholders of both companies, regulatory approvals and other customary merger conditions. The transaction is expected to close in six to nine months from the date of the merger agreement and will be accounted for as a purchase by DTE. The combined company, which will be named DTE Energy Company and headquartered in Detroit, will be the largest electric and gas utility in Michigan. In the 1999 fourth quarter and 2000 first quarter, MCN will record legal, accounting, employee benefit and other expenses associated with the merger. Further information regarding the merger agreement is included in Note 2 to the Consolidated Financial Statements included herein.

      Unusual charges — MCN recorded several unusual charges in the 1999 second and third quarters 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 3).

2

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

      A discussion of each unusual charge by segment follows:

		Quarter						9 Months						12 Months
		1999			1998			1999			1998			1999			1998
		(in Millions, Except Per Share Amounts)
Unusual Charges
Diversified Energy:
	Pipelines & Processing	$	—		$	(89.5	)	$	—		$	(89.5	)	$	—		$	(89.5	)
	Electric Power		—			(1.6	)		—			(1.6	)		—			(1.6	)
	Exploration & Production		(3.8	)		(54.5	)		(87.2	)		(275.0	)		(87.2	)		(275.0	)
	Corporate & Other		—			(6.8	)		—			(6.8	)		—			(6.8	)
			(3.8	)		(152.4	)		(87.2	)		(372.9	)		(87.2	)		(372.9	)
Gas Distribution			—			(16.7	)		—			(16.7	)		—			(16.7	)
		$	(3.8	)	$	(169.1	)	$	(87.2	)	$	(389.6	)	$	(87.2	)	$	(389.6	)
Loss Per Share		$	(.05	)	$	(2.14	)	$	(1.05	)	$	(4.95	)	$	(1.07	)	$	(4.96	)

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 significantly increased the possibility that the Internal Revenue Service (IRS) would 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 sought 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. In September 1999, MCN received favorable determination letters from the IRS ruling that four of the six plants were in service by June 30, 1998 (Note 4a).

      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 the decision 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 oil reserves as well as reduced expectations of sales proceeds on unproved acreage. Under the full cost method of accounting as prescribed by the SEC, MCN’s capitalized exploration and production costs at June 30, 1999 exceeded the

3

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

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 ($216.5 million net of taxes) and $83.9 million pre-tax ($54.5 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). In the third quarter of 1999, MCN recognized additional losses relating to the sale of these properties totaling $5.9 million pre-tax ($3.8 million net of taxes).

      Loss on Investment: In the second quarter of 1999, MCN recognized a $7.5 million pre-tax loss ($4.9 million net of taxes) from the write-down of an investment in the common stock of an E&P company. MCN had also recognized a $6.1 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 ($6.8 million net of taxes) restructuring charge related to the corporate realignment designed to improve operating efficiencies through a more streamlined organizational structure. The realignment 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 intends to sell in 2000. The write-down represents the amount by which the carrying value exceeded the estimated fair value of the investment.

     Diversified Energy

      Results reflect reduced Energy Marketing and E&P contributions — The Diversified Energy group had a net loss of $16.5 million for the 1999 third quarter compared to a net loss of $152.2 million for the same 1998 period. Diversified Energy had net losses of $105.0 million and $111.8 million in the 1999 nine- and twelve-month periods, respectively, compared to losses of $351.3 million and $339.0 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 $12.7 million, $17.8 million and $24.6 million for the 1999 quarter, nine-and twelve-month periods, respectively, compared to earnings of $.2 million, $21.6 million and $33.9 million for the same 1998 periods. The results for all 1999 periods reflect losses from the Energy Marketing segment due to higher gas costs. Additionally, 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 nine- 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 nine- and

4

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

twelve-month periods reflect the impact of lower methanol prices and methanol production on the Pipelines & Processing segment.

		Quarter						9 Months						12 Months
		1999			1998			1999			1998			1999			1998
		(in Millions)
Diversified Energy Operations
Operating Revenues*		$	335.5		$	228.9		$	927.0		$	734.0		$	1,185.8		$	1,039.3
Operating Expenses*
	Property write-downs and restructuring charges (Note 3)		—			234.5			52.0			567.5			52.0			567.5
	Other		347.9			227.5			929.6			721.4			1,198.0			1,018.2
			347.9			462.0			981.6			1,288.9			1,250.0			1,585.7
Operating Loss			(12.4	)		(233.1	)		(54.6	)		(554.9	)		(64.2	)		(546.4	)
Equity in Earnings of Joint Ventures			15.0			17.9			38.5			46.1			53.8			59.2
Other Income & (Deductions)*
	Interest income		1.1			.9			3.1			5.3			3.0			7.4
	Interest expense		(14.4	)		(16.4	)		(46.6	)		(38.1	)		(62.8	)		(43.5	)
	Dividends on preferred securities of subsidiaries		(10.3	)		(8.2	)		(31.0	)		(27.2	)		(40.2	)		(37.0	)
	Loss on sale of E&P properties (Note 3c)		(5.9	)		—			(74.7	)		—			(74.7	)		—
	Loss on E&P investment (Note 3c)		—			—			(7.5	)		(6.1	)		(7.5	)		(6.1	)
	Other		3.8			(.1	)		13.8			13.1			20.9			16.0
			(25.7	)		(23.8	)		(142.9	)		(53.0	)		(161.3	)		(63.2	)
Loss Before Income Taxes			(23.1	)		(239.0	)		(159.0	)		(561.8	)		(171.7	)		(550.4	)
Income Taxes
	Current and deferred benefit		(6.6	)		(84.3	)		(54.0	)		(199.5	)		(59.9	)		(195.8	)
	Federal tax credits		—			(2.5	)		—			(11.0	)		—			(15.6	)
			(6.6	)		(86.8	)		(54.0	)		(210.5	)		(59.9	)		(211.4	)
Net Income (Loss)
	Before unusual charges		(12.7	)		.2			(17.8	)		21.6			(24.6	)		33.9
	Unusual charges (Note 3)		(3.8	)		(152.4	)		(87.2	)		(372.9	)		(87.2	)		(372.9	)
		$	(16.5	)	$	(152.2	)	$	(105.0	)	$	(351.3	)	$	(111.8	)	$	(339.0	)

*  Includes intercompany transactions

Operating and Joint Venture Income

      Operating and joint venture results for the 1999 quarter, nine- and twelve-month periods (excluding the unusual charges) decreased from the comparable 1998 periods by $16.7 million, $22.8 million and $38.7 million, respectively. Results for all 1999 periods reflect reduced contributions from the Energy Marketing, E&P and Electric Power segments. Pipelines & Processing results improved in the 1999 quarter,

5

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

but declined in the 1999 nine- and twelve-month periods. Additionally, lower Corporate & Other expenses in the 1999 nine- and twelve-month periods favorably impacted operating and joint venture income.

		Quarter						9 Months						12 Months
		1999			1998			1999			1998			1999			1998
Operating and Joint Venture Income (Loss)
Before Unusual Charges:
	Pipelines & Processing	$	4.1		$	3.5		$	13.7		$	19.1		$	16.0		$	27.1
	Electric Power		6.6			8.6			18.0			21.0			23.0			25.8
	Energy Marketing		(8.8	)		.4			(6.0	)		.7			(10.2	)		(1.5	)
	Exploration & Production		1.8			6.5			10.0			23.4			15.6			34.5
	Corporate & Other		(1.1	)		.3			.2			(5.5	)		(2.8	)		(5.6	)
			2.6			19.3			35.9			58.7			41.6			80.3
Unusual Charges (Note 3)			—			(234.5	)		(52.0	)		(567.5	)		(52.0	)		(567.5	)
		$	2.6		$	(215.2	)	$	(16.1	)	$	(508.8	)	$	(10.4	)	$	(487.2	)

      Pipelines & Processing operating and joint venture results (excluding the write-offs) increased $.6 million for the 1999 quarter, and decreased $5.4 million and $11.1 million for the 1999 nine- and twelve-month periods, respectively. All 1999 periods reflect 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 nine- and twelve-month periods also reflect reduced earnings from MCN’s 25%-owned methanol production business resulting from lower methanol margins 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 and margins have since weakened. Pipelines & Processing’s average methanol sales prices declined 9% for the 1999 nine-month period and 23% for the 1999 twelve-month period. Methanol production declined 5.0 million gallons for the 1999 nine-month period and 5.2 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 1998 periods were impacted by operating losses related to the start-up of the coal fines plants (Note 3a).

      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, nine- and twelve-month periods by 7.1 billion cubic feet (Bcf), 24.1 Bcf and 35.0 Bcf, respectively. Pipelines & Processing results were also impacted in all 1999 periods by an increase in gas processed to remove natural gas liquids (NGLs). Gas processed to remove NGLs increased 11.0 Bcf, 20.0 Bcf and 23.2 Bcf in the 1999 quarter, nine- and twelve-month periods, respectively, reflecting volumes associated with the acquisition and development of additional processing facilities. Pipelines & Processing operations include variations in the level of gas processed to remove carbon dioxide (CO₂). The volume of CO₂ gas treated decreased .3 Bcf in the 1999 quarter, and increased 2.0 Bcf and 6.7 Bcf in the 1999 nine- and twelve-month periods, respectively. However, earnings were not significantly affected by these variations, since under the terms of Pipelines & Processing’s CO₂ processing contracts, revenues are not volume sensitive.

      In November 1999, MCN reached an agreement to sell four of its coal fines plants to DTE in an arms-length transaction that is independent of the pending merger (Note 4b). The sales price will depend on total production performance of the four plants. DTE will initially make a $45 million payment that will be adjusted up to $152 million or down to zero based on the results of a 36-month production test period. The sale is expected to be finalized in December 1999. Beginning in 2001, Pipelines & Processing results are expected to

6

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

be favorably affected by the recording of gains from the sale of the plants as increasing production levels are achieved.

			Quarter				9 Months				12 Months
			1999		1998		1999		1998		1999		1998
Pipelines & Processing Statistics*
	Methanol Produced (Million Gallons)			15.7		15.2		40.6		45.6		55.4		60.6
	Transportation (Bcf)			52.4		45.3		153.5		129.4		199.5		164.5
	Gas Processed (Bcf):
		Carbon Dioxide Treatment		12.4		12.7		38.2		36.2		50.9		44.2
		Natural Gas Liquids Removal		22.6		11.6		54.1		34.1		65.1		41.9
				35.0		24.3		92.3		70.3		116.0		86.1

*  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 September 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 up to 100,000 tons of high-quality asphalt annually. Currently, the plant is experiencing difficulties in producing economical quantities of asphalt, and MCN is aggressively working to resolve the issues.

      In 1998, MCN advanced approximately $18 million to a developer of a 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. The advance, which was due in September 1999, is being extended for an additional year. The project is being developed more slowly 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) decreased by $2.0 million, $3.0 million and $2.8 million in the 1999 quarter, nine- and twelve-month periods, respectively. Results for all 1999 periods were unfavorably affected by higher start-up expenditures associated with new ventures as well as reduced contributions from MCN’s international power investments, specifically the Torrent Power Limited (TPL) venture. In August 1999, MCN completed the sale of its 40% interest in TPL for approximately $130 million, resulting in a small gain. TPL holds minority interests in electric distribution companies and power generation facilities in the state of Gujarat, India. Earnings from TPL for 1999 were deferred due to the pending sale. Additionally, the nine- and twelve-month periods comparison was impacted by an uncollectible expense provision recorded in the second quarter of 1999 associated with a customer in bankruptcy as well as reduced contributions from the 30 megawatt (MW) Ada cogeneration facility, reflecting the sale of a 50% interest in the project in the first quarter of 1998.

      Electric Power’s earnings comparison for the nine- and twelve-month periods also was impacted by increased contributions from the 1,370 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 nine- and twelve-month periods include a favorable $2.1 million pre-tax adjustment for the resolution of a number of contract issues with the electricity purchaser. Also contributing favorably to

7

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

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 power purchase agreement.

		Quarter				9 Months				12 Months
		1999		1998		1999		1998		1999		1998
		(Thousands of MW hours)*
Electric Power
	Electricity Sales — Domestic		692.3		651.5		2,084.2		1,855.4		2,745.4		2,498.0
	Electricity Sales — International		—		336.5		—		874.2		414.2		874.4
			692.3		988.0		2,084.2		2,729.6		3,159.6		3,372.4

*  Includes MCN’s share of joint ventures

      Energy Marketing operating and joint venture results decreased $9.2 million, $6.7 million and $8.7 million for the 1999 quarter, nine- and twelve-month periods, respectively. The 1999 periods reflect the accounting effect of anticipated temporary high gas prices on gas in inventory and cost of gas sold. During the third quarter of each year, Energy Marketing normally increases gas in inventory and depletes such inventories in the colder fourth and first quarters of the year when gas demand and gas prices typically are at their highest. In anticipation that third quarter inventory injections will be withdrawn prior to year-end, Energy Marketing prices the gas inventory injections at the estimated average purchase rate for the calendar year. For the 1999 third quarter, the actual average purchase rate incurred exceeded the estimated average purchase rate for the year. This resulted in a higher cost of gas sold in the 1999 third quarter, the impact of which is expected to reverse in the 1999 fourth quarter.

      Results for all 1999 periods were also impacted by higher costs for natural gas transportation and storage capacity. 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.

		Quarter				9 Months				12 Months
		1999		1998		1999		1998		1999		1998
		(Bcf)*
Energy Marketing
	Gas Sales		140.5		114.5		423.1		333.0		544.7		435.8
	Exchange Gas Deliveries		—		—		5.6		6.8		9.9		11.9
			140.5		114.5		428.7		339.8		554.6		447.7

*  Includes MCN’s share of joint ventures

      The impact of the higher cost of gas sold as previously discussed, as well as the higher costs for gas transportation and storage capacity more than offset the improved margins resulting from an increase in total gas sales and exchange deliveries. Gas sales and exchange deliveries in total increased 26.0 Bcf, 88.9 Bcf and 106.9 Bcf during the 1999 quarter, nine- 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 the nine- and twelve-month periods were also affected by losses recorded in 1998 associated with trading activities (Note 5) as well as higher 1999 uncollectible expenses and costs associated with the June 1999 dissolution of the DTE-CoEnergy joint venture.

      Exploration & Production operating and joint venture results (excluding the unusual charges) decreased by $4.7 million, $13.4 million and $18.9 million for the 1999 quarter, nine- and twelve-month periods, respectively. These results reflect a decline in overall gas and oil production of 10.1 billion cubic feet

8

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

equivalent (Bcfe) in the 1999 quarter, 21.0 Bcfe in the 1999 nine-month period and 25.0 Bcfe in the 1999 twelve-month period. The decrease in gas and oil production is due primarily to the sale of MCN’s Western and Midcontinent/ Gulf Coast E&P properties recorded in the second quarter of 1999. Gas and oil production in future periods will also be lower due to the expected sale of other non-Michigan E&P properties by mid-2000.

      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, $.12 and $.09 for the 1999 quarter, nine- and twelve-month periods, respectively, reflecting the higher costs of operating the E&P properties retained. Gas prices increased by $.17 per Mcf in the 1999 third quarter, by $.16 per Mcf in the current nine-month period and by $.13 per Mcf in the 1999 twelve-month period. Oil prices increased by $1.44 per barrel (Bbl) in the 1999 quarter, but declined by $.61 per Bbl and $1.82 per Bbl in the current nine-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					9 Months					12 Months
	1999			1998		1999		1998			1999		1998
Exploration & Production Statistics
Gas Production (Bcf)		12.9			21.3		48.1		62.4			67.8		83.0
Oil Production (million Bbl)		.2			.5		1.0		2.1			1.5		3.1
Gas and Oil Production (Bcf equivalent)		14.2			24.3		54.2		75.2			76.9		101.9
Average Gas Selling Price (per Mcf)	$	2.59		$	2.03	$	2.15	$	2.07		$	2.13	$	2.23
Effect of Hedging (per Mcf)		(.37	)		.02		.05		(.03	)		.02		(.21	)
Overall Average Gas Sales Price (per Mcf)	$	2.22		$	2.05	$	2.20	$	2.04		$	2.15	$	2.02
Average Oil Sales Price (per Bbl)	$	13.20		$	10.64	$	11.77	$	11.55		$	11.27	$	12.99
Effect of Hedging (per Bbl)		—			1.12		.45		1.28			.72		.82
Overall Average Oil Sales Price (per Bbl)	$	13.20		$	11.76	$	12.22	$	12.83		$	11.99	$	13.81

      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 has been 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) declined $1.4 million in the 1999 quarter, and improved $5.7 million and $2.8 million for the 1999 nine- and twelve-month periods, respectively. The variations primarily reflect adjustments that reduced or eliminated accruals for employee incentive awards based on MCN’s operating or stock price performance.

Other Income and Deductions

      Other income and deductions for the 1999 quarter, nine- and twelve-month periods reflect unfavorable changes of $1.9 million, $89.9 and $98.1 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 the 1999 nine- and twelve-month periods reflect higher interest and preferred dividend expense due to an increase in debt and preferred securities required to finance capital investments in the Diversified Energy group. The 1999 nine- and

9

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

twelve-month periods 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 nine- and twelve-month 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 nine- 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.

      Additionally, other income in all 1999 periods include income from a third quarter 1998 tax credit sale transaction, whereby MCN records income from such sale as the credits are generated by the purchaser. MCN recorded pre-tax income of $3.3 million, $9.4 million and $13.6 million in the 1999 quarter, nine- and twelve-month periods, respectively, from such sale.

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. Gas production tax credits have not been recorded in the 1999 periods as a result of the 1998 tax credit sale transaction and MCN’s current net operating loss tax position.

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.

      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:

•  Midstream & Supply develops and manages MCN’s gas producing, gathering, processing, storage and transmission facilities within the Midwest-to-Northeast target region.

•  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.

•  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 seasonal loss and higher operating costs  — Gas Distribution had a net loss of $14.7 million for the 1999 third quarter compared to a net loss of $24.5 million from the same 1998 period. The Gas Distribution segment typically records third quarter losses due to seasonally lower demand for natural gas during the summer months. Gas Distribution had earnings of $76.0 million and $106.8 million for the 1999 nine- and twelve-month periods, respectively, resulting in increases of $35.2 million and $33.4 million from the comparable 1998 periods. Earnings in all three 1998 periods were unfavorably affected by $16.7 million of unusual charges as previously discussed. Excluding the unusual charges, Gas Distribution’s earnings declined by $6.9 million for the 1999 quarter, and improved by $18.5 million and $16.7 million in the 1999 nine- and twelve-month periods, respectively. The 1999 quarter reflects higher operating costs. The earnings improvements for the 1999 nine- and twelve-month periods reflect contributions from the new gas sales program as subsequently discussed. Additionally, all 1999 periods reflect the impact of more favorable weather.

		Quarter						9 Months						12 Months
		1999			1998			1999			1998			1999			1998
		(in Millions)
Gas Distribution Operations
Operating Revenues*
	Gas sales	$	74.9		$	80.2		$	653.5		$	579.1		$	913.3		$	929.7
	End user transportation		22.4			16.7			72.6			60.0			94.9			83.1
	Intermediate transportation		14.2			14.5			42.8			48.4			57.6			62.6
	Other		17.9			12.7			62.7			47.2			82.9			62.3
			129.4			124.1			831.6			734.7			1,148.7			1,137.7
Cost of Sales			33.2			32.1			354.6			311.6			505.1			533.0
Gross Margin			96.2			92.0			477.0			423.1			643.6			604.7
Other Operating Expenses*
	Operation and maintenance		65.3			58.3			203.5			184.2			275.9			260.3
	Depreciation, depletion and amortization		24.4			23.2			74.4			69.5			98.7			95.2
	Property and other taxes		12.3			12.2			43.8			43.7			56.0			58.1
	Property write-down (Note 3e)		—			24.8			—			24.8			—			24.8
			102.0			118.5			321.7			322.2			430.6			438.4
Operating Income (Loss)			(5.8	)		(26.5	)		155.3			100.9			213.0			166.3
Equity in Earnings of Joint Ventures			.4			.1			1.5			.5			1.9			.9
Other Income and (Deductions)*
	Interest income		.9			1.6			2.7			3.6			4.8			4.6
	Interest expense		(13.8	)		(13.1	)		(40.3	)		(41.1	)		(56.7	)		(55.6	)
	Investment loss (Note 3e)		—			(8.5	)		—			(8.5	)		—			(8.5	)
	Minority interest		(.3	)		7.1			(.8	)		5.9			(1.0	)		5.5
	Other		(.8	)		.5			(.7	)		1.1			(2.1	)		.9
			(14.0	)		(12.4	)		(39.1	)		(39.0	)		(55.0	)		(53.1	)
Income (Loss) Before Income Taxes			(19.4	)		(38.8	)		117.7			62.4			159.9			114.1
Income Taxes			(4.7	)		(14.3	)		41.7			21.6			53.1			40.7
Net Income (Loss)
	Before unusual charges		(14.7	)		(7.8	)		76.0			57.5			106.8			90.1
	Unusual charges (Note 3e)		—			(16.7	)		—			(16.7	)		—			(16.7	)
		$	(14.7	)	$	(24.5	)	$	76.0		$	40.8		$	106.8		$	73.4

*  Includes intercompany transactions

11

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

Gross Margin

      Gross margin (operating revenues less cost of sales) increased $4.2 million, $53.9 million and $38.9 million in the 1999 quarter, nine- and twelve-month periods, respectively. The increase is due primarily to margins generated under Michigan Consolidated Gas Company’s (MichCon) new three-year gas sales program, which is part of its Regulatory Reform Plan (Note 7a). 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 all three 1999 periods also reflect higher gas sales resulting from more normal weather, especially the 1999 nine-month period that was 13.1% colder than 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 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						9 Months						12 Months
			1999			1998			1999			1998			1999			1998
Effect of Weather on Gas Markets and Earnings
	Percent Warmer Than Normal			N/M			N/M			(8.5	)%		(21.6	)%		(10.7	)%		(14.5	)%
	Decrease From Normal in:
		Gas Markets (Bcf)		(.7	)		(1.5	)		(11.1	)		(26.7	)		(24.6	)		(27.4	)
		Net Income (Millions)	$	(.7	)	$	(1.1	)	$	(11.0	)	$	(23.1	)	$	(23.2	)	$	(23.7	)
		Diluted Earnings Per Share	$	(.01	)	$	(.01	)	$	(.13	)	$	(.29	)	$	(.28	)	$	(.30	)

N/M — not meaningful

      Gas sales and end user transportation revenues in total increased by $.4 million and $87.0 million for the 1999 quarter and nine-month period, respectively, and decreased by $4.6 million for the 1999 twelve-month period. Revenues were affected by fluctuations in gas sales and end user transportation deliveries that increased in total by 1.9 Bcf, 14.6 Bcf and 3.0 Bcf in the current quarter, nine- and twelve-month periods, respectively. The higher 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.

      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 rate increased

12

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

$.58 per Mcf (24%) and $.23 per Mcf (8%) for the 1999 quarter and nine-month period, respectively, and decreased $.08 per Mcf (3%) for the 1999 twelve-month period.

		Quarter				9 Months				12 Months
		1999		1998		1999		1998		1999		1998
		(Bcf)
Gas Distribution Markets
	Gas Sales		10.6		12.8		127.3		117.5		182.0		182.6
	End User Transportation		32.7		28.6		107.0		102.2		145.1		141.5
			43.3		41.4		234.3		219.7		327.1		324.1
	Intermediate Transportation*		128.3		133.9		390.8		430.8		497.5		570.2
			171.6		175.3		625.1		650.5		824.6		894.3

*  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 $.3 million, $5.6 million and $5.0 million in the 1999 quarter, nine- and twelve-month periods, respectively. Intermediate transportation revenues reflect lower off-system volumes of 5.6 Bcf, 40.0 Bcf and 72.7 Bcf in the 1999 quarter, nine- 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 for all 1999 periods is due to customers shifting volumes from a higher rate to a lower rate transportation route. The decrease in intermediate transportation revenues for the 1999 nine- and twelve-month periods is also 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.

      Other operating revenues increased $5.2 million, $15.5 million and $20.6 million in the 1999 quarter, nine- 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 7b), MichCon’s sales rates were set to recover all of its reasonably and prudently incurred gas costs. Therefore, fluctuations in cost of gas sold had little effect on gross margins. Under MichCon’s new gas sales program, the gas commodity component of its sales rates is fixed. Accordingly, beginning in January 1999, changes in cost of gas sold directly impact gross margins and earnings.

      Cost of sales increased $1.1 million and $43.0 million in the 1999 quarter and nine-month periods, respectively, and decreased $27.9 million in the 1999 twelve-month period. Cost of sales for all 1999 periods

13

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

was affected by a reduction in gas sales volumes as a result of customers who have chosen to purchase their gas from other suppliers under MichCon’s customer choice program. As previously discussed, MichCon maintains its previously existing sales margins on these services by continuing to transport and deliver the gas to the customers’ premises.

      The increase in the current nine-month period was due primarily to higher weather-driven sales volumes. Cost of sales was also impacted by average prices paid for gas, which increased $.42 per Mcf (18%) in the current quarter and decreased $.25 per Mcf (8%) in the current twelve-month period. Prices paid for gas sold in the 1999 nine-month period were flat compared to the same 1998 period. 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 $7.0 million, $19.3 million and $15.6 million in the 1999 quarter, nine- and twelve-month periods, respectively. The increase in the 1999 quarter and nine-month period is due to higher employee benefit costs. The increase in all 1999 periods also reflects 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. The 1998 nine- and twelve-month periods benefited from an interstate pipeline company refund.

      Depreciation and depletion increased $1.2 million, $4.9 million and $3.5 million in the 1999 quarter, nine- and twelve-month periods, respectively. Depreciation on higher plant balances impacted all 1999 periods. The increase in all 1999 periods was tempered by 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 $2.1 million in the 1999 twelve-month period. The improvement is attributable to lower Michigan Single Business Taxes resulting from an increase in capital acquisition deductions.

      Property write-down of $24.8 million in the 1998 periods represents the impairment of a Michigan gas gathering system (Note 3e).

Equity in Earnings of Joint Ventures

      Equity in earnings of joint ventures increased $.3 million in the 1999 quarter, and $1.0 million in the 1999 nine-and twelve-month periods. The comparability is affected by 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 intended sale of the investment in 2000.

Other Income and Deductions

      Other income and deductions changed unfavorably by $1.6 million, $.1 million and $1.9 million in the 1999 quarter, nine- and twelve-month periods, respectively. The 1998 nine- and twelve-month periods were impacted by gains from the sale of property. The 1999 quarter and twelve-month periods include slightly higher interest costs. Other income and deductions in all 1998 periods also reflect an unusual charge to write down the investment in a small natural gas distribution company located in Missouri (Note 3e). Also impacting other income and deductions in all 1998 periods was a change in minority interest reflecting the joint venture partners’ share of the write-down of the Michigan gas gathering properties (Note 3e).

Income Taxes

      Income taxes increased $9.6 million, $20.1 million and $12.4 million in the 1999 quarter, nine- and twelve-month periods, respectively, reflecting an increase in pre-tax earnings. The increase for all 1999 periods

14

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

is also due to the flow-through effect of certain book-to-tax temporary differences. Additionally, income tax comparisons for the 1999 nine- and twelve-month periods were affected by the favorable resolution of prior years’ tax issues.

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 designed to offer all sales customers added choices and greater price certainty. 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 of 10 Bcf in 1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon continues 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. As part of its gas acquisition strategy, MichCon has entered into fixed-price contracts at costs below $2.95 per Mcf for a substantial portion of its expected gas supply requirements through 2001. This strategy has produced favorable margins through September 1999 and is likely to continue producing favorable margins through 2001. The level of margins generated from selling gas will be affected by the number of customers choosing to purchase gas from suppliers other than MichCon under the three-year customer choice program.

      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 fourth quarter of 1999 will determine the actual amount of profit, 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 sales, installation and 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 nine- 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 assets or liabilities measured at their

15

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

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

		9 Months
		1999			1998
		(in Millions)
Cash and Cash Equivalents
Cash Flow Provided From (Used For):
	Operating activities	$	211.5		$	237.5
	Financing activities		(270.4	)		306.9
	Investing activities		72.2			(523.9	)
Net Increase in Cash and Cash Equivalents		$	13.3		$	20.5

     Operating Activities

      MCN’s cash flow from operating activities decreased $26.0 million during the 1999 nine-month period as compared to the same 1998 period. The decrease was due primarily to higher working capital requirements, substantially offset by increased earnings, after adjusting for non-cash items (depreciation, unusual charges and deferred taxes).

     Financing Activities

      MCN’s cash flow related to financing activities decreased $577.3 million during the 1999 nine-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 nine-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 nine-month period and $14.7 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 expired in October 1999. There was no balance outstanding under this credit agreement at September 30, 1999. MCN effectively replaced this agreement in October 1999 by entering into a $290 million revolving credit agreement that expires in July 2000. Borrowings under the credit agreement were used to refinance $100 million of Single Point Remarketed Reset Capital Securities that were redeemed in October 1999. The credit agreement will also be used to repay debt, fund capital investments and for general corporate purposes.

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 finance capital investments and working capital requirements. The 364-day facility was renewed in July 1999. During the first nine months

16

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

of 1999, Diversified Energy’s commercial paper and bank borrowings outstanding increased by $129.6 million, leaving borrowings of $355.3 million outstanding under this program at September 30, 1999.

      MCN received approximately $270 million through September 1999 from the sale of various non-Michigan E&P properties. MCN also received approximately $130 million in August 1999 from the sale of its interest in TPL. Proceeds from these 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 mid-2000 and will be used to repay outstanding borrowings and for general corporate purposes.

      MCN repaid $80 million 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 nine months of 1999, MichCon repaid $88.7 million of commercial paper, leaving borrowings of $129.6 million outstanding under this program at September 30, 1999.

      During 1999, MichCon issued approximately $110 million of debt (Note 10) and repaid $68 million of first mortgage bonds.

     Investing Activities

      MCN’s cash flow related to investing activities increased $596.1 million in the 1999 nine-month period as compared to the same 1998 period. The increase was due primarily to proceeds from the sale of property and investments and lower capital investments.

17

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

      Capital investments equaled $391.6 million in the 1999 nine-month period compared to $636.6 million for the same period in 1998. The 1999 amounts include significantly lower levels of investments in E&P properties and Pipelines & Processing ventures.

		9 Months
		1999		1998
		(in Millions)
Capital Investments
Consolidated Capital Expenditures:
	Diversified Energy	$	138.5	$	283.8
	Gas Distribution		94.9		106.3
			233.4		390.1
MCN’s Share of Joint Venture Capital Expenditures:(1)
	Pipelines & Processing		76.6		166.1
	Electric Power		52.0		19.7
	Energy Marketing		—		.6
	Other		.1		.8
			128.7		187.2
Acquisitions:(2)			29.5		59.3
Total Capital Investments		$	391.6	$	636.6

(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 $400 million in the 1999 nine-month period.

     Outlook

      1999 capital investments to approximate $500 million — MCN’s 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 approximates $300 million and is expected to be financed primarily with internally generated funds, including proceeds received from the sale of assets. 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 included in the Form 8-K filed with the SEC on October 15, 1999, 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 has completed the Year 2000 implementation plan for its mission critical

18

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

business systems and measurement and control systems (including embedded microprocessors), and therefore considers these systems Year 2000 ready. The completion status of these systems follows:

		Inventory			Assessment			Remediation			Testing
Business Systems:
	September 30, 1999		100	%		100	%		98	%		98	%
	October 31, 1999		100	%		100	%		100	%		100	%
Measurement and Control Systems:
	September 30, 1999		100	%		100	%		99	%		99	%
	October 31, 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 operations, liquidity and financial condition. The total costs are estimated to be between $5 million and $6 million, of which approximately $4.6 million was incurred through September 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. MCN has made a substantial investment in new systems that were installed over the past few years that are Year 2000 ready, particularly MichCon’s customer information system which was installed and functional in April 1999. The replacement of these systems and the customer information system, in particular, was 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 has completed the development of contingency plans for mission-critical processes in the event of a Year 2000 complication. Contingency plans for several essential gas transmission facilities were tested under a “power outage” scenario and have achieved excellent results. Completed contingency plans will continue to be enhanced throughout the remainder of 1999 as MCN works with partners, operators, suppliers and governmental agencies.

MARKET RISK INFORMATION

      As discussed in MCN’s 1998 Annual Report included in the Form 8-K filed with the SEC on October 15, 1999, MCN manages commodity price and interest rate risk through the use of various derivative instruments and generally 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 nine-month period follows.

Commodity Price Risk

     Hedging Activities

      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 and gas inventories. As a result of changes in commodity prices that occurred during the 1999 nine-month period, there have been significant changes in the outcome of the sensitivity analysis performed for commodity price risk at September 30, 1999 as compared to December 31, 1998.

19

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Continued)

      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.

      Changes in fair values resulting from sensitivity analysis calculations follow:

	September 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	$	79.6		$	(79.6	)	$	53.6		$	(53.6	)
Pay variable/receive fixed	$	(91.0	)	$	91.0		$	(54.0	)	$	54.0
Futures: Longs	$	5.3		$	(5.3	)	$	1.9		$	(1.9	)
Shorts	$	(3.5	)	$	3.5		$	(.1	)	$	.1

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

     Non-Hedging Activities

      During 1999, MCN sold its Western and Midcontinent/ Gulf Coast E&P properties, but has not yet fully exited the natural gas and oil swap agreements and futures contracts that served as hedges of the price risk associated with the gas and oil produced from these properties. As a result, these natural gas and oil swap agreements and futures contracts are no longer considered hedges under definitions prescribed by the SEC and generally accepted accounting principles. Accordingly, these swap agreements and futures contracts are accounted for using the mark-to-market method, with unrealized gains and losses recorded in earnings. At September 30, 1999, these swap agreements and futures contracts total 14.1 Bcf, have a notional value of $33.0 million and mature through 2000.

      Changes in fair values resulting from sensitivity analysis calculations previously discussed follow:

	September 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 variable/receive fixed	$	(2.3	)	$	2.3		N/A		N/A
Futures: Shorts	$	(1.3	)	$	1.3		N/A		N/A

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 nine-month period, there have not been any events or factors that have caused any significant changes to MCN’s interest rate risk.

20

MANAGEMENT’S DISCUSSION AND ANALYSIS — (Concluded)

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 the United Arab Emirates. During August 1999, MCN completed the sale of its interest in TPL that is located in India for approximately $130 million. This sale has reduced MCN’s foreign currency risk to an insignificant level.

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 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

      This 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 included herein in the Form 8-K filed with the SEC on October 15, 1999.

      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 1998 Annual Report included in the Form 8-K filed with the SEC on October 15, 1999; the Form 10-Q Quarterly Reports and the 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.

21

MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

		Three Months Ended						Nine Months Ended						Twelve Months Ended
		September 30,						September 30,						September 30,
					1998						1998						1998
					(Restated)						(Restated)						(Restated)
		1999			Note 5			1999			Note 5			1999			Note 5
		(in Thousands, except Per Share Amounts)
Operating Revenues		$	462,859		$	351,145		$	1,748,229		$	1,458,819		$	2,320,108		$	2,162,183
Operating Expenses
	Cost of sales		329,339			201,006			1,118,172			853,551			1,470,395			1,309,153
	Operation and maintenance		98,159			90,712			298,586			277,215			410,786			386,192
	Depreciation, depletion and amortization		38,611			44,231			125,948			135,478			169,960			182,245
	Property and other taxes		14,921			15,542			52,849			54,255			68,147			72,277
	Property write-downs and restructuring charges (Note 3 )		—			259,296			52,000			592,318			52,000			592,318
			481,030			610,787			1,647,555			1,912,817			2,171,288			2,542,185
Operating Income (Loss)			(18,171	)		(259,642	)		100,674			(453,998	)		148,820			(380,002	)
Equity in Earnings of Joint Ventures			15,396			17,963			40,020			46,561			55,684			60,040
Other Income and (Deductions)
	Interest income		1,909			2,496			5,774			8,659			8,008			13,136
	Interest on long-term debt		(22,540	)		(24,392	)		(66,046	)		(62,345	)		(91,047	)		(79,336	)
	Other interest expense		(5,541	)		(4,991	)		(20,858	)		(16,654	)		(28,608	)		(20,981	)
	Dividends on preferred securities of subsidiaries		(10,335	)		(8,178	)		(31,004	)		(27,162	)		(40,212	)		(36,916	)
	Loss on sale of E&P properties (Note 3c)		(5,877	)		—			(74,675	)		—			(74,675	)		—
	Investment losses (Notes 3c and 3e)		—			(8,500	)		(7,456	)		(14,635	)		(7,456	)		(14,635	)
	Minority interest (Note 3e)		(632	)		7,275			(1,371	)		6,030			(1,409	)		5,580
	Other		3,281			134			13,655			14,095			19,121			17,040
			(39,735	)		(36,156	)		(181,981	)		(92,012	)		(216,278	)		(116,112	)
Loss Before Income Taxes			(42,510	)		(277,835	)		(41,287	)		(499,449	)		(11,774	)		(436,074	)
Income Tax Benefit			(11,356	)		(101,111	)		(12,308	)		(188,984	)		(6,792	)		(170,496	)
Loss Before Cumulative Effect of Accounting Change			(31,154	)		(176,724	)		(28,979	)		(310,465	)		(4,982	)		(265,578	)
Cumulative Effect of Accounting Change, Net of Taxes (Note 6)			—			—			(2,872	)		—			(2,872	)		—
Net Loss		$	(31,154	)	$	(176,724	)	$	(31,851	)	$	(310,465	)	$	(7,854	)	$	(265,578	)
Loss Per Share — Basic and Diluted (Note 11)
	Before cumulative effect of accounting change	$	(0.37	)	$	(2.24	)	$	(.35	)	$	(3.95	)	$	(.06	)	$	(3.38	)
	Cumulative effect of accounting change (Note 6)		—			—			(.04	)		—			(.04	)		—
		$	(0.37	)	$	(2.24	)	$	(0.39	)	$	(3.95	)	$	(0.10	)	$	(3.38	)
Average Common Shares Outstanding — Basic and Diluted			85,282			78,938			82,724			78,689			81,840			78,531
Dividends Declared Per Share		$	.2550		$	.2550		$	.7650		$	.7650		$	1.0200		$	1.0200

CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT) (Unaudited)

	Three Months Ended						Nine Months Ended						Twelve Months Ended
	September 30,						September 30,						September 30,
				1998						1998						1998
				(Restated)						(Restated)						(Restated)
	1999			Note 5			1999			Note 5			1999			Note 5
	(in Thousands)
Balance — Beginning of period	$	(45,400	)	$	190,548		$	(2,977	)	$	365,730		$	(6,622	)	$	340,767
Add — Net loss		(31,154	)		(176,724	)		(31,851	)		(310,465	)		(7,854	)		(265,578	)
		(76,554	)		13,824			(34,828	)		55,265			(14,476	)		75,189
Deduct — Cash dividends declared		22,009			20,446			63,735			61,887			84,087			81,811
Balance — End of period	$	(98,563	)	$	(6,622	)	$	(98,563	)	$	(6,622	)	$	(98,563	)	$	(6,622	)

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

22

MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

		September 30,				December 31,
				1998
				(Restated)
		1999		Note 5		1998
		(in Thousands)
ASSETS
Current Assets
	Cash and cash equivalents, at cost (which approximates market value)	$	30,353	$	60,031	$	17,039
	Accounts receivable, less allowance for doubtful accounts of $16,216, $9,515 and $9,665, respectively		301,243		280,496		400,120
	Accrued unbilled revenues		21,499		17,359		87,888
	Gas in inventory		238,366		197,799		147,387
	Property taxes assessed applicable to future periods		39,505		33,115		72,551
	Other		56,799		56,120		42,472
			687,765		644,920		767,457
Deferred Charges and Other Assets
	Deferred income taxes		11,144		53,519		50,547
	Investments in debt and equity securities		72,494		42,986		69,705
	Deferred swap losses and receivables (Note 15)		96,539		45,033		63,147
	Deferred environmental costs		31,291		30,655		30,773
	Prepaid benefit costs		140,295		97,169		111,775
	Other		125,569		96,719		98,940
			477,332		366,081		424,887
Investments in and Advances to Joint Ventures
	Pipelines & Processing		581,515		488,536		521,711
	Electric Power		134,298		228,960		231,668
	Energy Marketing		25,496		24,944		29,435
	Gas Distribution		2,478		628		1,478
	Other		18,695		19,354		18,939
			762,482		762,422		803,231
Property, Plant and Equipment
	Pipelines & Processing		46,094		38,703		48,706
	Exploration & Production (Note 3c)		690,760		1,013,778		1,040,047
	Gas Distribution		3,001,638		2,869,897		2,916,540
	Other		77,937		34,747		36,124
			3,816,429		3,957,125		4,041,417
	Less — Accumulated depreciation and depletion		1,688,186		1,603,223		1,644,094
			2,128,243		2,353,902		2,397,323
		$	4,055,822	$	4,127,325	$	4,392,898

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

23

MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

		September 30,						December 31,
					1998
					(Restated)
		1999			Note 5			1998
		(in Thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable	$	291,176		$	318,129		$	304,349
	Notes payable		370,995			414,957			618,851
	Current portion of long-term debt, preferred securities and capital lease obligations		131,302			269,499			269,721
	Federal income, property and other taxes payable		5,249			48,130			69,465
	Deferred gas cost recovery revenues (Note 7b)		—			23,899			14,980
	Gas payable		36,073			50,302			42,669
	Customer deposits		15,766			16,829			18,791
	Interest payable		26,459			30,095			30,314
	Other		80,355			62,305			77,996
			957,375			1,234,145			1,447,136
Deferred Credits and Other Liabilities
	Unamortized investment tax credit		28,510			31,641			30,056
	Tax benefits amortizable to customers		136,906			132,676			130,120
	Deferred swap gains and payables (Note 15)		76,810			38,556			62,956
	Accrued environmental costs		30,373			35,000			35,000
	Minority interest		10,928			11,948			10,898
	Other		104,076			64,454			75,439
			387,603			314,275			344,469
Long-Term Debt, including capital lease obligations (Note 10)			1,460,941			1,402,526			1,307,168
MCN-Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries Holding Solely Debentures of MCN			402,900			405,481			502,203
Contingencies (Note 14)
Common Shareholders’ Equity
	Common stock (Note 10)		855			791			797
	Additional paid-in capital (Note 10)		967,356			813,809			832,966
	Retained earnings (deficit)		(98,563	)		(6,622	)		(2,977	)
	Accumulated other comprehensive loss (Note 13)		(357	)		(14,792	)		(16,576	)
	Yield enhancement, contract and issuance costs		(22,288	)		(22,288	)		(22,288	)
			847,003			770,898			791,922
		$	4,055,822		$	4,127,325		$	4,392,898

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

24

MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

				Nine Months Ended
				September 30,
							1998
							(Restated)
				1999			Note 5
				(in Thousands)
Cash Flow From Operating Activities
	Net loss			$	(31,851	)	$	(310,465	)
	Adjustments to reconcile net loss to net cash provided from operating activities Depreciation, depletion and amortization:
			Per statement of operations		125,948			135,478
			Charged to other accounts		6,676			5,990
		Unusual charges, net of taxes (Note 3)			87,185			389,598
		Cumulative effect of accounting change, net of taxes (Note 6)			2,872			—
		Deferred income taxes — current			(9,791	)		(11,994	)
		Deferred income taxes and investment tax credit, net			82,738			14,779
		Equity in earnings of joint ventures, net of distributions			(15,176	)		(30,344	)
		Other			(790	)		(9,331	)
		Changes in assets and liabilities, exclusive of changes shown separately			(36,312	)		53,787
			Net cash provided from operating activities		211,499			237,498
Cash Flow From Financing Activities
	Notes payable, net				(247,856	)		103,588
	Dividends paid				(63,735	)		(61,887	)
	Issuance of common stock (Note 10)				132,544			14,742
	Reacquisition of common stock				(780	)		—
	Issuance of long-term debt (Note 10)				106,535			458,761
	Long-term commercial paper and bank borrowings, net				92,344			109,643
	Retirement of long-term debt and preferred securities (Note 10)				(289,439	)		(326,194	)
	Other				—			8,243
			Net cash provided from (used for) financing activities		(270,387	)		306,896
Cash Flow From Investing Activities
	Capital expenditures				(233,410	)		(390,067	)
	Acquisitions				(33,071	)		(36,731	)
	Investment in debt and equity securities, net				(4,572	)		46,286
	Investment in joint ventures				(62,572	)		(166,977	)
	Sale of property and joint venture interests				409,616			44,034
	Other				(3,789	)		(20,403	)
			Net cash provided from (used for) investing activities		72,202			(523,858	)
Net Increase in Cash and Cash Equivalents					13,314			20,536
Cash and Cash Equivalents, January 1					17,039			39,495
Cash and Cash Equivalents, September 30				$	30,353		$	60,031
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
	Accounts receivable, net			$	98,192		$	113,476
	Accrued unbilled revenues				66,389			75,651
	Accrued/deferred gas cost recovery revenues, net				(15,153	)		36,761
	Gas in inventory				(90,979	)		(141,022	)
	Property taxes assessed applicable to future periods				33,046			34,764
	Accounts payable				(8,373	)		(22,576	)
	Federal income, property and other taxes payable				(64,216	)		(38,668	)
	Gas payable				(6,596	)		41,985
	Interest payable				(3,855	)		1,635
	Prepaid benefit costs, net				(28,487	)		(16,276	)
	Other current assets and liabilities, net				(2,193	)		(10,845	)
	Other deferred assets and liabilities, net				(14,087	)		(21,098	)
				$	(36,312	)	$	53,787
Supplemental Disclosures
	Cash paid during the year for:
		Interest, net of amounts capitalized		$	97,395		$	90,088
		Federal income taxes		$	3,550		$	11,700

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

25

MCN ENERGY GROUP INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.  General

      MCN Energy Group Inc. (MCN) is a diversified energy company that operates two major business groups, Diversified Energy and Gas Distribution. Diversified Energy, operating through MCN Energy Enterprises Inc. (MCNEE), was previously doing business as MCN Investment Corporation. Gas Distribution principally consists of Michigan Consolidated Gas Company (MichCon).

      In MCN’s 1998 Annual Report on Form 10-K/A, MCN accounted for its Exploration & Production (E&P) segment as a discontinued operation as the result of its decision to sell all of its oil and gas properties. In August 1999, the company made a strategic business decision to keep a portion of these properties (Note 8). Accordingly, financial results included in MCN’s 1998 Annual Report on Form 10-K/A have been reclassified to reflect the E&P segment as a continuing operation, and are included in MCN’s Form 8-K filed October 15, 1999 with the Securities and Exchange Commission (SEC). Therefore, the accompanying consolidated financial statements should be read in conjunction with MCN’s 1998 Annual Report included in the Form 8-K. Additionally, certain reclassifications have been made to the prior year’s financial statements to conform to 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.  Merger Agreement With DTE Energy Company

      MCN and DTE Energy Company (DTE) have signed a definitive merger agreement, dated October 4, 1999, under which DTE will acquire all outstanding shares of MCN common stock. Under the terms of the agreement, MCN shareholders will have the right to elect to receive either $28.50 in cash or 0.775 shares of DTE common stock in exchange for each share of MCN common stock that they hold. The acquisition of shares is subject to an allocation and proration that is intended to result in 45% of the MCN shares being converted into shares of DTE common stock and 55% being converted into cash.

      The boards of directors of both companies have unanimously approved the merger agreement. The transaction is subject to the approval of the shareholders of both companies, regulatory approvals and other customary merger conditions. The transaction is expected to close in six to nine months from the date of the merger agreement and will be accounted for as a purchase by DTE. The combined company, which will be named DTE Energy Company and headquartered in Detroit, will be the largest electric and gas utility in Michigan.

      DTE is a diversified energy provider. Its principal subsidiary is The Detroit Edison Company, Michigan’s largest electric utility serving 2.1 million customers in southeastern Michigan. DTE’s non-regulated subsidiaries and ventures sell methane gas from landfills, coal, metallurgical coke and other energy-related products and services.

      Additionally, as part of the merger agreement, MCN has agreed to use its best efforts to enter into agreements to dispose of some or all of its interests in certain assets or facilities. MCN may sell all or a portion of several “Qualifying Facilities” as defined by the Public Utility Regulatory Policies Act of 1978, as amended. MCN’s investments in these “Qualifying Facilities” include: a 23% interest in the Midland Cogeneration Venture, a 1,370 megawatt (MW) cogeneration facility located in Michigan; a 50% interest in the Michigan Power Project, a 123 MW cogeneration plant located in Michigan; a 33 1/3% interest in the Carson Cogeneration facility, a 42 MW cogeneration plant located in California; and a 50% interest in the Ada Cogeneration facility, a 30 MW cogeneration plant located in Michigan. Furthermore, under the terms of the merger agreement, MCN will dispose of all or a portion of its 95% interest in the Cobisa-Person facility, a 140

26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

MW power plant in New Mexico that is currently under construction.

3.  Unusual Charges

      As discussed in MCN’s 1998 Annual Report included in the Form 8-K filed with the SEC on October 15, 1999, MCN recorded several unusual charges in 1998, consisting of property write-downs, investment losses, and restructuring charges. In 1999, MCN recorded additional unusual charges. 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 significantly increased the possibility that the Internal Revenue Service (IRS) would 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 sought 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. In September 1999, MCN received favorable determination letters from the IRS ruling that four of the six plants were in service by June 30, 1998 (Note 4a).

      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 the decision to exit certain international power projects.

      c.  Exploration & 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 SEC, 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

27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of taxes). In the third quarter of 1999, MCN recognized additional losses relating to the sale of these properties totaling $5,877,000 pre-tax ($3,820,000 net of taxes).

      Loss on Investment: In the second quarter of 1999, MCN recognized a $7,456,000 pre-tax ($4,846,000 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 $6,135,000 pre-tax ($3,987,000 net of taxes) loss 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 September 30, 1999, payments of $3,087,000 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 distribution company that MCN intends to sell in 2000. The write-down represents the amount by which the carrying value exceeded the estimated fair value of the investment.

4.  Coal Fines Plants

      a.  IRS Determination

      During the third quarter of 1998, MCN recorded an impairment loss of $133,782,000, pre-tax, which equaled the carrying value of its coal fines plants and reflected the likely inability to recover such costs (Note 3a). In September 1999, MCN received “in-service” determination letters from the IRS with respect to its six coal fines plants, which were built to produce briquettes that qualify for synthetic fuel tax credits. In the determination letters, the IRS ruled that four of the plants were in service by the June 30, 1998 deadline in order to qualify for synthetic fuel tax credits. The IRS ruled that two other plants did not meet the in-service requirements. The company continues to believe these two plants also meet the requirements and intends to appeal the unfavorable rulings.

      b.  Disposition

      In November 1999, MCN reached an agreement to sell four of its coal fines plants to DTE in an arms-length transaction that is independent of the pending merger. The sales price will depend on total production performance of the four plants. DTE will initially make a $45,000,000 payment that will be adjusted up to $152,000,000 or down to zero based on the results of a 36-month production test period. The sale is expected to be finalized in December 1999.

28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.  Restatement

      As discussed in MCN’s 1998 Annual Report included in the Form 8-K filed with the SEC on October 15, 1999, subsequent to the issuance of MCN’s December 31, 1998 financial statements, certain matters came to management’s attention and resulted in a special investigation of prior years’ operations of CoEnergy Trading Company (CTC), MCN’s non-utility energy marketing subsidiary. As a result of the investigation, MCN identified that its internal controls had been overridden, and that certain transactions had not been properly accounted for. Specifically, the investigation concluded that CTC had entered into gas supply contracts and agreed to pay significantly less than market prices in one period in return for above-market prices to be paid in subsequent periods through March 2000. The effect of these transactions was to improperly delay the accrual of cost of gas expenses, resulting in the overstatement of net loss for the 1998 third quarter and nine-month periods by $3,044,000 and $1,680,000, respectively, and an understatement of net loss for the 1998 twelve-month period by $3,991,000.

      Additionally, the investigation identified that CTC had entered into certain unauthorized gas purchase and sale contracts for trading purposes. The unauthorized transactions violate MCN’s risk-management policy that requires all such activities to be reviewed and approved by a risk committee that reports regularly to the MCN Board of Directors. The gas purchase and sale contracts entered into in connection with trading activities 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 third quarter, nine- and twelve-month periods by $1,801,000, $4,545,000 and $4,208,000, respectively. However, net income of $403,000, $1,590,000 and $2,682,000 was realized and recorded in connection with these trading activities in the 1998 third quarter, nine- and twelve-month periods, respectively, resulting in a net loss from such activities for the 1998 third quarter, nine- and twelve-month periods of $1,398,000, $2,955,000 and $1,526,000, respectively. 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 by the end of June 1999.

      Other items identified during the investigation resulted in the understatement of net loss for the 1998 third quarter, nine- and twelve-month periods by $816,000, $859,000 and $880,000, respectively.

      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 September 30, 1998 financial statements is as follows:

		Three Months Ended						Nine Months Ended						Twelve Months Ended
		September 30, 1998						September 30, 1998						September 30, 1998
		Previously						Previously						Previously
		Reported			Restated			Reported			Restated			Reported			Restated
		(in Thousands, Except Per Share Amounts)
Consolidated Statement of
	Operations
Cost of Sales		$	201,663		$	201,006		$	847,823		$	853,551		$	1,295,187		$	1,309,153
Loss Before Income Taxes		$	(278,492	)	$	(277,835	)	$	(493,721	)	$	(499,449	)	$	(422,108	)	$	(436,074	)
Income Tax Benefit		$	(101,341	)	$	(101,111	)	$	(186,980	)	$	(188,984	)	$	(165,609	)	$	(170,496	)
Net Loss		$	(177,151	)	$	(176,724	)	$	(306,741	)	$	(310,465	)	$	(256,499	)	$	(265,578	)
Loss Per Share — Basic and Diluted		$	(2.24	)	$	(2.24	)	$	(3.90	)	$	(3.95	)	$	(3.27	)	$	(3.38	)

29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		September 30, 1998
		Previously
		Reported		Restated
Consolidated Statement of
	Financial Position
Accounts Receivable		$	277,229	$	280,496
Gas in Inventory		$	200,399	$	197,799
Accounts Payable		$	297,771	$	318,129
Federal Income, Property and Other Taxes Payable		$	55,020	$	48,130
Common Shareholders’ Equity		$	783,699	$	770,898

6.  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 nine- and twelve-month periods ended September 30, 1999.

7.  Regulatory Matters

      a.  Regulatory Reform Plan

      As discussed in MCN’s 1998 Annual Report included in the Form 8-K filed with the SEC on October 15, 1999, 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.

      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.

30

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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.

8.  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.

9.  Credit Facilities And Short-Term Borrowings

      In October 1999, MCN entered into a $290,000,000 revolving credit agreement that expires in July 2000. Borrowings under the credit agreement are at variable rates. This agreement replaced the March 1999 $150,000,000 revolving credit agreement.

      MCNEE 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 included in the Form 8-K filed with the SEC on October 15, 1999, MCN borrowed $260,000,000 under a one-year term loan facility, due December 2, 1999. Principal payments are required based on certain proceeds received from the sale of E&P assets. As of September 30, 1999, MCN had repaid $203,000,000 of borrowings under the facility.

10.  Enhanced Prides, Long-Term Debt and Preferred Securities

      As discussed in MCN’s 1998 Annual Report included in the Form 8-K filed with the SEC on October 15, 1999, 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.

      In October 1999, MCN borrowed from its $290,000,000 revolving credit agreement and redeemed, at par, $100,000,000 of Single Point Remarketed Reset Capital Securities which were due in 2037.

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

      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 at par on or after June 1, 2004.

31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.  Earnings Per Share Computation

      MCN reports both basic and diluted earnings per share (EPS). Basic EPS is computed by dividing income or loss 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. Potentially dilutive securities have been excluded from the diluted EPS calculation since their inclusion would have been antidilutive.

12.  Shareholders’ Rights Plan

      As discussed in MCN’s 1998 Annual Report included in the Form 8-K filed with the SEC on October 15, 1999, MCN has a Shareholders’ Rights Plan that is designed to maximize shareholders’ value in the event that MCN is acquired. The rights are attached to and trade with shares of MCN common stock until they are exercisable upon certain triggering events. The plan has been amended, in connection with the pending merger with DTE (Note 2), so that DTE’s acquisition of MCN will not represent a triggering event.

13.  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						Nine Months Ended						Twelve Months Ended
				September 30,						September 30,						September 30,
				1999			1998			1999			1998			1999			1998
				(in Thousands)
Comprehensive Income (Loss)
Net Loss				$	(31,154	)	$	(176,724	)	$	(31,851	)	$	(310,465	)	$	(7,854	)	$	(265,578	)
Other Comprehensive Income (Loss), Net of Taxes:
		Foreign currency translation adjustment:
			Foreign currency translation adjustment		16			(85	)		(600	)		(5,898	)		(1,256	)		(11,423	)
			Less: Reclassification for losses recognized in net income		13,132			—			13,132			—			13,132			—
					13,148			(85	)		12,532			(5,898	)		11,876			(11,423	)
		Unrealized loss on securities:
			Unrealized losses during period		—			(2,559	)		(1,159	)		(5,362	)		(2,287	)		(6,546	)
			Less: Reclassification for losses recognized in net income		—			—			4,846			3,987			4,846			3,987
					—			(2,559	)		3,687			(1,375	)		2,559			(2,559	)
	Total Other Comprehensive Income (Loss), Net of Taxes				13,148			(2,644	)		16,219			(7,273	)		14,435			(13,982	)
	Total Comprehensive Income (Loss)			$	(18,006	)	$	(179,368	)	$	(15,632	)	$	(317,738	)	$	6,581		$	(279,560	)

32

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14.  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.

15.  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:

		September 30,				December 31,
		1999		1998		1998
		(in Thousands)
Deferred Swap Losses and Receivables
	Unrealized losses	$	64,940	$	31,923	$	48,700
	Receivables		43,989		13,776		25,864
			108,929		45,699		74,564
	Less — Current portion		12,390		666		11,417
		$	96,539	$	45,033	$	63,147
Deferred Swap Gains and Payables
	Unrealized gains	$	34,884	$	13,024	$	24,126
	Payables		72,707		36,890		54,525
			107,591		49,914		78,651
	Less — Current portion		30,781		11,358		15,695
		$	76,810	$	38,556	$	62,956

33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16.  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						Nine Months Ended						Twelve Months Ended
		September 30,						September 30,						September 30,
		1999			1998			1999			1998			1999			1998
		(in Thousands)
Revenues From Unaffiliated Customers:
	Pipelines & Processing	$	6,416		$	6,238		$	17,747		$	14,677		$	23,927		$	15,948
	Electric Power		14,624			12,727			39,747			34,972			51,905			47,797
	Energy Marketing		305,405			184,926			813,594			592,491			1,029,471			858,348
	Exploration & Production		9,292			23,810			51,167			87,261			73,109			110,688
	Gas Distribution		127,122			123,444			825,974			729,418			1,141,696			1,129,402
			462,859			351,145			1,748,229			1,458,819			2,320,108			2,162,183
Revenues From Affiliated Customers:
	Pipelines & Processing		507			62			1,609			298			1,656			396
	Energy Marketing		17,940			15,356			49,466			47,432			66,276			64,696
	Exploration & Production		22,538			27,205			68,081			72,467			93,513			108,579
	Gas Distribution		2,318			618			5,652			5,328			6,959			8,326
			43,303			43,241			124,808			125,525			168,404			181,997
Eliminations			(43,303	)		(43,241	)		(124,808	)		(125,525	)		(168,404	)		(181,997	)
Consolidated Operating Revenues		$	462,859		$	351,145		$	1,748,229		$	1,458,819		$	2,320,108		$	2,162,183
Net Income (Loss):
	Pipelines & Processing	$	(99	)	$	(89,332	)	$	3,358		$	(82,089	)	$	3,207		$	(78,036	)
	Electric Power		4,311			2,627			11,682			15,290			15,663			18,660
	Energy Marketing		(7,158	)		(197	)		(7,545	)		2,646			(11,228	)		2,610
	Exploration & Production		(4,034	)		(51,017	)		(83,742	)		(258,408	)		(78,687	)		(249,752	)
	Gas Distribution		(14,671	)		(24,516	)		75,962			40,854			106,842			73,418
	Corporate & Other		(9,503	)		(14,289	)		(28,694	)		(28,758	)		(40,779	)		(32,478	)
			(31,154	)		(176,724	)		(28,979	)		(310,465	)		(4,982	)		(265,578	)
	Cumulative effect of accounting change		—			—			(2,872	)		—			(2,872	)		—
Consolidated Net Loss		$	(31,154	)	$	(176,724	)	$	(31,851	)	$	(310,465	)	$	(7,854	)	$	(265,578	)

17.  Consolidating Financial Statements

      Debt securities issued by MCNEE are subject to a support agreement between MCN and MCNEE, under which MCN has committed to make payments of interest and principal on MCNEE’s securities in the event of failure to pay by MCNEE. 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 MCNEE’s securities. The carrying value of MCN’s assets on an unconsolidated basis, which primarily consists of investments in subsidiaries other than MichCon, is $736,335,000 at September 30, 1999.

      The following MCN consolidating financial statements are presented and include separately MCNEE, MichCon and MCN and other subsidiaries. MCN has determined that separate financial statements and other disclosures concerning MCNEE 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.

34

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)

		MCN									Eliminations
		and Other									and			Consolidated
		Subsidiaries			MCNEE			MichCon			Reclasses			Total
		Three Months Ended September 30, 1999
		(in Thousands)
Operating Revenues		$	6,847		$	335,539		$	122,635		$	(2,162	)	$	462,859
Operating Expenses
	Cost of sales		5,047			298,054			28,187			(1,949	)		329,339
	Operation and maintenance		(752	)		36,612			62,486			(187	)		98,159
	Depreciation, depletion and amortization		1,044			13,375			24,192			—			38,611
	Property and other taxes		349			2,397			12,175			—			14,921
			5,688			350,438			127,040			(2,136	)		481,030
Operating Income (Loss)			1,159			(14,899	)		(4,405	)		(26	)		(18,171	)
Equity in Earnings of Joint Ventures and Subsidiaries			(30,454	)		14,952			444			30,454			15,396
Other Income and (Deductions)
	Interest income		10,841			1,100			916			(10,948	)		1,909
	Interest on long-term debt		245			(10,248	)		(12,537	)		—			(22,540	)
	Other interest expense		(2,304	)		(13,000	)		(1,184	)		10,947			(5,541	)
	Dividends on preferred securities of subsidiaries		—			—			—			(10,335	)		(10,335	)
	Loss on sale of E&P properties		—			(5,877	)		—			—			(5,877	)
	Minority interest		—			(350	)		(282	)		—			(632	)
	Other		(813	)		4,657			(590	)		27			3,281
			7,969			(23,718	)		(13,677	)		(10,309	)		(39,735	)
Loss Before Income Taxes			(21,326	)		(23,665	)		(17,638	)		20,119			(42,510	)
Income Tax Benefit			(507	)		(6,751	)		(4,098	)		—			(11,356	)
Net Loss			(20,819	)		(16,914	)		(13,540	)		20,119			(31,154	)
Dividends on Preferred Securities			10,335			—			—			(10,335	)		—
Net Income (Loss) Available for Common Stock		$	(31,154	)	$	(16,914	)	$	(13,540	)	$	30,454		$	(31,154	)
		Three Months Ended September 30, 1998
Operating Revenues		$	1,634		$	228,949		$	122,428		$	(1,866	)	$	351,145
Operating Expenses
	Cost of sales		931			170,039			31,143			(1,107	)		201,006
	Operation and maintenance		(8,742	)		42,791			57,422			(759	)		90,712
	Depreciation, depletion and amortization		696			20,562			22,973			—			44,231
	Property and other taxes		360			3,095			12,087			—			15,542
	Property write-downs and restructuring charges		8,669			225,827			24,800			—			259,296
			1,914			462,314			148,425			(1,866	)		610,787
Operating Loss			(280	)		(233,365	)		(25,997	)		—			(259,642	)
Equity in Earnings of Joint Ventures and Subsidiaries			(171,089	)		17,896			511			170,645			17,963
Other Income and (Deductions)
	Interest income		8,447			1,149			1,639			(8,739	)		2,496
	Interest on long-term debt		91			(13,508	)		(10,975	)		—			(24,392	)
	Other interest expense		(445	)		(11,244	)		(2,001	)		8,699			(4,991	)
	Dividends on preferred securities of subsidiaries		—			—			—			(8,178	)		(8,178	)
	Investment loss		(8,500	)		—			—			—			(8,500	)
	Minority interest		—			225			7,050			—			7,275
	Other		17			(412	)		529			—			134
			(390	)		(23,790	)		(3,758	)		(8,218	)		(36,156	)
Loss Before Income Taxes			(171,759	)		(239,259	)		(29,244	)		162,427			(277,835	)
Income Tax Benefit			(3,254	)		(86,951	)		(10,906	)		—			(101,111	)
Net Income			(168,505	)		(152,308	)		(18,338	)		162,427			(176,724	)
Dividends on Preferred Securities			8,178			—			—			(8,178	)		—
Net Loss Available for Common Stock		$	(176,683	)	$	(152,308	)	$	(18,338	)	$	170,605		$	(176,724	)

35

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)

		MCN									Eliminations
		and Other									and			Consolidated
		Subsidiaries			MCNEE			MichCon			Reclasses			Total
		Nine Months Ended September 30, 1999
		(in Thousands)
Operating Revenues		$	25,419		$	927,018		$	806,280		$	(10,488	)	$	1,748,229
Operating Expenses
	Cost of sales		17,685			771,091			336,948			(7,552	)		1,118,172
	Operation and maintenance		(1,586	)		109,108			193,974			(2,910	)		298,586
	Depreciation, depletion and amortization		2,851			49,539			73,558			—			125,948
	Property and other taxes		1,126			8,386			43,337			—			52,849
	Property write-downs and restructuring charges		—			52,000			—			—			52,000
			20,076			990,124			647,817			(10,462	)		1,647,555
Operating Income (Loss)			5,343			(63,106	)		158,463			(26	)		100,674
Equity in Earnings of Joint Ventures and Subsidiaries			(29,894	)		38,563			1,457			29,894			40,020
Other Income and (Deductions)
	Interest income		32,470			3,088			2,861			(32,645	)		5,774
	Interest on long-term debt		706			(31,724	)		(35,028	)		—			(66,046	)
	Other interest expense		(9,616	)		(38,867	)		(5,020	)		32,645			(20,858	)
	Dividends on preferred securities of subsidiaries		—			—			—			(31,004	)		(31,004	)
	Loss on sale of E&P properties		—			(74,675	)		—			—			(74,675	)
	Investment loss		—			(7,456	)		—			—			(7,456	)
	Minority interest		—			(566	)		(805	)		—			(1,371	)
	Other		(1,071	)		15,003			(303	)		26			13,655
			22,489			(135,197	)		(38,295	)		(30,978	)		(181,981	)
Income (Loss) Before Income Taxes			(2,062	)		(159,740	)		121,625			(1,110	)		(41,287	)
Income Tax Provision (Benefit)			(1,215	)		(54,120	)		43,027			—			(12,308	)
Income (Loss) Before Cumulative Effect of Accounting Change			(847	)		(105,620	)		78,598			(1,110	)		(28,979	)
Cumulative Effect of Accounting Change, Net of Taxes			—			(2,872	)		—			—			(2,872	)
Net Income (Loss)			(847	)		(108,492	)		78,598			(1,110	)		(31,851	)
Dividends on Preferred Securities			31,004			—			—			(31,004	)		—
Net (Loss) Available for Common Stock		$	(31,851	)	$	(108,492	)	$	78,598		$	29,894		$	(31,851	)
		Nine Months Ended September 30, 1998
Operating Revenues		$	10,303		$	734,031		$	724,442		$	(9,957	)	$	1,458,819
Operating Expenses
	Cost of sales		5,374			547,775			306,244			(5,842	)		853,551
	Operation and maintenance		(8,502	)		108,320			181,512			(4,115	)		277,215
	Depreciation, depletion and amortization		2,035			64,533			68,910			—			135,478
	Property and other taxes		1,531			9,382			43,342			—			54,255
	Write-down of E&P properties		8,669			558,849			24,800			—			592,318
			9,107			1,288,859			624,808			(9,957	)		1,912,817
Operating Income (Loss)			1,196			(554,828	)		99,634			—			(453,998	)
Equity in Earnings (Losses) of Joint Ventures and Subsidiaries			(305,927	)		46,062			1,461			304,965			46,561
Other Income and (Deductions)
	Interest income		28,019			5,314			3,573			(28,247	)		8,659
	Interest on long-term debt		494			(29,145	)		(33,694	)		—			(62,345	)
	Other interest expense		(1,104	)		(36,647	)		(7,149	)		28,246			(16,654	)
	Dividends on preferred securities of subsidiaries		—			—			—			(27,162	)		(27,162	)
	Loss on sale of E&P properties		—			—			—			—			—
	Investment loss		(8,500	)		(6,135	)		—			—			(14,635	)
	Minority interest		—			123			5,907			—			6,030
	Other		(490	)		13,350			1,235			—			14,095
			18,419			(53,140	)		(30,128	)		(27,163	)		(92,012	)
Income (Loss) Before Income Taxes			(286,312	)		(561,906	)		70,967			277,802			(499,449	)
Income Tax Provision (Benefit)			(3,010	)		(210,601	)		24,627			—			(188,984	)
Net Income (Loss)			(283,302	)		(351,305	)		46,340			277,802			(310,465	)
Dividends on Preferred Securities			27,162			—			—			(27,162	)		—
Net Loss Available for Common Stock		$	(310,464	)	$	(351,305	)	$	46,340		$	304,964		$	(310,465	)

36

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)

		MCN									Eliminations
		and Other									and			Consolidated
		Subsidiaries			MCNEE			MichCon			Reclasses			Total
		Twelve Months Ended September 30, 1999
		(in Thousands)
Operating Revenues		$	33,378		$	1,185,815		$	1,115,496		$	(14,581	)	$	2,320,108
Operating Expenses
	Cost of sales		23,017			975,523			482,233			(10,378	)		1,470,395
	Operation and maintenance		(3,291	)		153,395			264,859			(4,177	)		410,786
	Depreciation, depletion and amortization		4,022			68,407			97,531			—			169,960
	Property and other taxes		1,314			11,400			55,433			—			68,147
	Property write-downs and restructuring charges		—			52,000			—			—			52,000
			25,062			1,260,725			900,056			(14,555	)		2,171,288
Operating Income (Loss)			8,316			(74,910	)		215,440			(26	)		148,820
Equity in Earnings (Losses) of Joint Ventures and Subsidiaries			(6,251	)		53,743			1,942			6,250			55,684
Other Income and (Deductions)
	Interest income		41,859			4,383			4,976			(43,210	)		8,008
	Interest on long-term debt		(429	)		(44,400	)		(46,218	)		—			(91,047	)
	Other interest expense		(10,986	)		(50,850	)		(9,984	)		43,212			(28,608	)
	Dividends on preferred securities of subsidiaries		—			—			—			(40,212	)		(40,212	)
	Loss on sale of E&P properties		—			(74,675	)		—			—			(74,675	)
	Investment loss		—			(7,456	)		—			—			(7,456	)
	Minority interest		—			(424	)		(985	)		—			(1,409	)
	Other		(1,186	)		22,001			(1,720	)		26			19,121
			29,258			(151,421	)		(53,931	)		(40,184	)		(216,278	)
Income (Loss) Before Income Taxes			31,323			(172,588	)		163,451			(33,960	)		(11,774	)
Income Tax Provision (Benefit)			(1,034	)		(59,975	)		54,217			—			(6,792	)
Income (Loss) Before Cumulative Effect of Accounting Change			32,357			(112,613	)		109,234			(33,960	)		(4,982	)
Cumulative Effect of Accounting Change, Net of Taxes			—			(2,872	)		—			—			(2,872	)
Net Income (Loss)			32,357			(115,485	)		109,234			(33,960	)		(7,854	)
Dividends on Preferred Securities			40,212			—			—			(40,212	)		—
Net Income (Loss) Available for Common Stock		$	(7,855	)	$	(115,485	)	$	109,234		$	6,252		$	(7,854	)
		Twelve Months Ended September 30, 1998
Operating Revenues		$	15,967		$	1,039,310		$	1,121,762		$	(14,856	)	$	2,162,183
Operating Expenses
	Cost of sales		8,644			785,533			524,321			(9,345	)		1,309,153
	Operation and maintenance		(8,094	)		142,953			256,844			(5,511	)		386,192
	Depreciation, depletion and amortization		2,609			85,107			94,529			—			182,245
	Property and other taxes		1,860			12,933			57,484			—			72,277
	Property write-downs and restructuring charges		8,669			558,849			24,800			—			592,318
			13,688			1,585,375			957,978			(14,856	)		2,542,185
Operating Income (Loss)			2,279			(546,065	)		163,784			—			(380,002	)
Equity in Earnings (Losses) of Joint Ventures and Subsidiaries			(260,893	)		58,974			1,807			260,152			60,040
Other Income and (Deductions)
	Interest income		38,135			8,418			4,602			(38,019	)		13,136
	Interest on long-term debt		602			(34,691	)		(45,247	)		—			(79,336	)
	Other interest expense		(1,607	)		(47,616	)		(10,031	)		38,273			(20,981	)
	Dividends on preferred securities of subsidiaries		—			—			—			(36,916	)		(36,916	)
	Investment loss		(8,500	)		(6,135	)		—			—			(14,635	)
	Minority interest		—			99			5,481			—			5,580
	Other		(417	)		16,349			1,108			—			17,040
			28,213			(63,576	)		(44,087	)		(36,662	)		(116,112	)
Income (Loss) Before Income Taxes			(230,401	)		(550,667	)		121,504			223,490			(436,074	)
Income Tax Provision (Benefit)			(2,166	)		(211,562	)		43,232			—			(170,496	)
Net Income (Loss)			(228,235	)		(339,105	)		78,272			223,490			(265,578	)
Dividends on Preferred Securities			36,916			—			—			(36,916	)		—
Net Income (Loss) Available for Common Stock		$	(265,151	)	$	(339,105	)	$	78,272		$	260,406		$	(265,578	)

37

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)

			MCN								Eliminations
			and Other								and			Consolidated
			Subsidiaries			MCNEE			MichCon		Reclasses			Total
			September 30, 1999
			(in Thousands)
ASSETS
Current Assets
	Cash and cash equivalents, at cost		$	80		$	18,393		$	11,880	$	—		$	30,353
	Accounts receivable			5,450			239,004			111,434		(38,429	)		317,459
		Less — Allowance for doubtful accounts		168			1,652			14,396		—			16,216
	Accounts receivable, net			5,282			237,352			97,038		(38,429	)		301,243
	Accrued unbilled revenues			321			—			21,178		—			21,499
	Gas in inventory			—			128,196			110,170		—			238,366
	Property taxes assessed applicable to future periods			284			1,529			37,692		—			39,505
	Other			6,171			59,589			38,609		(47,570	)		56,799
				12,138			445,059			316,567		(85,999	)		687,765
Deferred Charges and Other Assets
	Deferred income taxes			9,248			106,934			—		(105,038	)		11,144
	Investments in debt and equity securities			—			5,217			66,653		624			72,494
	Deferred swap losses and receivables			—			96,539			—		—			96,539
	Deferred environmental costs			2,769			—			28,522		—			31,291
	Prepaid benefit costs			783			—			146,534		(7,022	)		140,295
	Other			16,273			41,802			64,528		2,966			125,569
				29,073			250,492			306,237		(108,470	)		477,332
Investments in and Advances to Joint Ventures and Subsidiaries				1,372,832			740,237			19,766		(1,370,353	)		762,482
Property, Plant and Equipment, at cost				48,697			793,985			2,973,747		—			3,816,429
	Less — Accumulated depreciation and depletion			19,537			203,718			1,464,931		—			1,688,186
				29,160			590,267			1,508,816		—			2,128,243
			$	1,443,203		$	2,026,055		$	2,151,386	$	(1,564,822	)	$	4,055,822
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable		$	5,845		$	213,448		$	112,090	$	(40,207	)	$	291,176
	Notes payable			57,751			181,748			132,465		(969	)		370,995
	Current portion of long-term debt and capital lease obligations			103,094			149			28,059		—			131,302
	Federal income, property and other taxes payable			(4,359	)		2,016			51,591		(43,999	)		5,249
	Gas payable			—			30,310			5,763		—			36,073
	Customer deposits			4			—			15,762		—			15,766
	Interest payable			2,270			12,259			11,930		—			26,459
	Other			12,548			21,078			47,834		(1,105	)		80,355
				177,153			461,008			405,494		(86,280	)		957,375
Deferred Credits and Other Liabilities
	Deferred income taxes			—			—			104,778		(104,778	)		—
	Unamortized investment tax credit			252			—			28,258		—			28,510
	Tax benefits amortizable to customers			—			—			136,906		—			136,906
	Deferred swap gains and payables			—			76,810			—		—			76,810
	Accrued environmental costs			3,000			—			27,373		—			30,373
	Minority interest			—			2,358			8,570		—			10,928
	Other			12,538			45,894			48,757		(3,113	)		104,076
				15,790			125,062			354,642		(107,891	)		387,603
Long-Term Debt, including capital lease obligations				—			777,455			683,486		—			1,460,941
Redeemable Preferred Securities of Subsidiaries				402,900			—			—		—			402,900
Common Shareholders’ Equity
	Common stock			855			5			10,300		(10,305	)		855
	Additional paid-in capital			967,356			956,767			230,399		(1,187,166	)		967,356
	Retained earnings (deficit)			(98,563	)		(293,885	)		467,065		(173,180	)		(98,563	)
	Accumulated other comprehensive loss			—			(357	)		—		—			(357	)
	Yield enhancement, contract and issuance costs			(22,288	)		—			—		—			(22,288	)
				847,360			662,530			707,764		(1,370,651	)		847,003
			$	1,443,203		$	2,026,055		$	2,151,386	$	(1,564,822	)	$	4,055,822

38

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)

			MCN								Eliminations
			and Other								and			Consolidated
			Subsidiaries			MCNEE			MichCon		Reclasses			Total
			September 30, 1998
			(in Thousands)
ASSETS
Current Assets
	Cash and cash equivalents, at cost		$	1,373		$	48,047		$	10,611	$	—		$	60,031
	Accounts receivable			5,185			185,364			108,135		(8,673	)		290,011
		Less — Allowance for doubtful accounts		70			533			8,912		—			9,515
	Accounts receivable, net			5,115			184,831			99,223		(8,673	)		280,496
	Accrued unbilled revenues			214			—			17,145		—			17,359
	Gas in inventory			—			101,334			96,465		—			197,799
	Property taxes assessed applicable to future periods			121			1,593			31,401		—			33,115
	Other			3,904			24,980			136,736		(109,500	)		56,120
				10,727			360,785			391,581		(118,173	)		644,920
Deferred Charges and Other Assets
	Deferred income taxes			3,387			131,597			—		(81,465	)		53,519
	Investments in debt and equity securities			—			5,464			37,171		351			42,986
	Deferred swap losses and receivables			—			45,033			—		—			45,033
	Deferred environmental costs			2,603			—			28,052		—			30,655
	Prepaid benefit costs			619			—			103,814		(7,264	)		97,169
	Other			4,891			33,671			58,429		(272	)		96,719
				11,500			215,765			227,466		(88,650	)		366,081
Investments in and Advances to Joint Ventures and Subsidiaries				1,282,571			741,335			20,458		(1,281,942	)		762,422
Property, Plant and Equipment, at cost				44,295			1,067,113			2,845,717		—			3,957,125
	Less — Accumulated depreciation and depletion			14,889			211,170			1,377,164		—			1,603,223
				29,406			855,943			1,468,553		—			2,353,902
			$	1,334,204		$	2,173,828		$	2,108,058	$	(1,488,765	)	$	4,127,325
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Accounts payable		$	2,894		$	259,081		$	67,591	$	(11,437	)	$	318,129
	Notes payable			107,440			211,348			204,313		(108,144	)		414,957
	Current portion of long-term debt and capital lease obligations			—			211,433			58,066		—			269,499
	Federal income, property and other taxes payable			703			6,204			41,223		—			48,130
	Deferred gas cost recovery revenues			—			—			23,899		—			23,899
	Gas payable			—			21,782			28,520		—			50,302
	Customer deposits			26			—			16,803		—			16,829
	Interest payable			2,873			13,697			13,525		—			30,095
	Other			16,680			9,534			38,112		(2,021	)		62,305
				130,616			733,079			492,052		(121,602	)		1,234,145
Deferred Credits and Other Liabilities
	Deferred income taxes			(6,574	)		—			84,652		(78,078	)		—
	Unamortized investment tax credit			279			—			31,362		—			31,641
	Tax benefits amortizable to customers			—			—			132,676		—			132,676
	Deferred swap gains and payables			—			38,556			—		—			38,556
	Accrued environmental costs			3,000			—			32,000		—			35,000
	Minority interest			—			2,599			9,349		—			11,948
	Other			15,712			14,148			41,858		(7,264	)		64,454
				12,417			55,303			331,897		(85,342	)		314,275
Long-Term Debt, including capital lease obligations				—			780,781			621,745		—			1,402,526
Redeemable Preferred Securities of Subsidiaries				405,481			—			—		—			405,481
Common Shareholders’ Equity
	Common stock			791			5			10,300		(10,305	)		791
	Additional paid-in capital			813,809			797,852			230,399		(1,028,251	)		813,809
	Retained earnings (deficit)			(6,622	)		(178,400	)		421,665		(243,265	)		(6,622	)
	Accumulated other comprehensive loss			—			(14,792	)		—		—			(14,792	)
	Yield enhancement, contract and issuance costs			(22,288	)		—			—		—			(22,288	)
				785,690			604,665			662,364		(1,281,821	)		770,898
			$	1,334,204		$	2,173,828		$	2,108,058	$	(1,488,765	)	$	4,127,325

39

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING STATEMENT OF FINANCIAL POSITION (Unaudited)

			MCN								Eliminations
			and Other								and			Consolidated
			Subsidiaries			MCNEE			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				1,534,180			782,471			19,343		(1,532,763	)		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
			$	1,598,794		$	2,255,772		$	2,172,525	$	(1,634,193	)	$	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)			(2,977	)		(185,393	)		406,144		(220,751	)		(2,977	)
	Accumulated other comprehensive loss			—			(16,576	)		—		—			(16,576	)
	Yield enhancement, contract and issuance costs			(22,288	)		—			—		—			(22,288	)
				808,498			869,426			646,843		(1,532,845	)		791,922
			$	1,598,794		$	2,255,772		$	2,172,525	$	(1,634,193	)	$	4,392,898

40

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Concluded)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Unaudited)

			MCN									Eliminations
			and Other									and			Consolidated
			Subsidiaries			MCNEE			MichCon			Reclasses			Total
			Nine Months Ended September 30, 1999
			(in Thousands)
Net Cash Flow From Operating Activities			$	51,563		$	30,059		$	177,343		$	(47,466	)	$	211,499
Cash Flow From Financing Activities
	Notes payable, net			(203,020	)		43,986			(88,704	)		(118	)		(247,856	)
	Capital contributions paid to affiliates, net			—			(114,623	)		—			114,623			—
	Dividends paid			(63,735	)		—			(17,500	)		17,500			(63,735	)
	Preferred securities dividends paid			(31,004	)		—			—			31,004			—
	Issuance of common stock			132,544			—			—			—			132,544
	Reacquisition of common stock			(780	)		—			—			—			(780	)
	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			—			(212,960	)		(76,479	)		—			(289,439	)
		Net cash provided from (used for) financing activities		(165,995	)		(191,253	)		(76,148	)		163,009			(270,387	)
Cash Flow From Investing Activities
	Capital expenditures			(882	)		(138,232	)		(94,296	)		—			(233,410	)
	Acquisitions			—			(33,071	)		—			—			(33,071	)
	Investment in debt and equity securities, net			—			(3,452	)		(1,097	)		(23	)		(4,572	)
	Investment in joint ventures and subsidiaries			113,623			(61,558	)		(14	)		(114,623	)		(62,572	)
	Sale of property and joint venture interests			—			411,867			—			(2,251	)		409,616
	Other			371			(5,003	)		(511	)		1,354			(3,789	)
		Net cash provided from (used for) investing activities		113,112			170,551			(95,918	)		(115,543	)		72,202
Net Increase (Decrease) in Cash and Cash Equivalents				(1,320	)		9,357			5,277			—			13,314
Cash and Cash Equivalents, January 1				1,400			9,036			6,603			—			17,039
Cash and Cash Equivalents, September 30			$	80		$	18,393		$	11,880		$	—		$	30,353

			Nine Months Ended September 30, 1998
Net Cash Flow From Operating Activities			$	37,775		$	11,228		$	218,035		$	(29,540	)	$	237,498
Cash Flow From Financing Activities
	Notes payable, net			107,440			138,592			(37,378	)		(105,066	)		103,588
	Capital contributions paid to affiliates, net			—			(38,554	)		—			38,554			—
	Dividends paid			(61,887	)		—			—			—			(61,887	)
	Preferred securities dividends paid			(27,162	)		—			—			27,162			—
	Issuance of common stock			14,742			—			—			—			14,742
	Issuance of long-term debt			—			305,709			153,052			—			458,761
	Long-term commercial paper, net			—			109,643			—			—			109,643
	Retirement of long-term debt			(100,365	)		(101,192	)		(124,637	)		—			(326,194	)
	Other			—			8,243			—			—			8,243
		Net cash provided from (used for) financing activities		(67,232	)		422,441			(8,963	)		(39,350	)		306,896
Cash Flow From Investing Activities
	Capital expenditures			(6,632	)		(278,256	)		(105,179	)		—			(390,067	)
	Acquisitions			—			(36,731	)		—			—			(36,731	)
	Investment in debt and equity securities, net			—			48,347			(2,061	)		—			46,286
	Investment in joint ventures and subsidiaries			(1,250	)		(165,776	)		49			—			(166,977	)
	Sale of property and investment in joint ventures			—			46,060			—			(2,026	)		44,034
	Other			38,689			(24,385	)		(105,623	)		70,916			(20,403	)
		Net cash provided from (used for) investing activities		30,807			(410,741	)		(212,814	)		68,890			(523,858	)
Net Increase (Decrease) in Cash and Cash Equivalents				1,350			22,928			(3,742	)		—			20,536
Cash and Cash Equivalents, January 1				23			25,119			14,353			—			39,495
Cash and Cash Equivalents, September 30			$	1,373		$	48,047		$	10,611		$	—		$	60,031

41

OTHER INFORMATION

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 Energy Enterprises Inc.
	27-1	1999 Financial Data Schedule
	27-2	1998 Financial Data Schedule

(b)  Reports on Form 8-K

MCN filed a report on Form 8-K dated September 22, 1999, under Item 5, with respect to the offering by MCN Energy Enterprises Inc. of up to $620,000,000 of its unsecured notes, designated as Medium-Term Notes, Series C (Offered Notes) pursuant to the registration statement of the registrant and MCN Energy Enterprises Inc. on Form S-3 (No. 333-47137) filed with the Securities and Exchange Commission under the Securities Act of 1933. The following documents were filed as Exhibits thereto:

•  Distribution Agreement dated September 22, 1999 with respect to the Offered Notes.

•  Form of Note with respect to the Offered Notes.

MCN filed a report on Form 8-K dated October 4, 1999, under Item 5, announcing that it had entered into an Agreement and Plan of Merger, dated as of October 4, 1999, among MCN, DTE Energy Company, and DTE Enterprises, Inc., pursuant to which MCN and DTE Enterprises, Inc. will merge, with DTE Enterprises, Inc. as the surviving corporation in the merger. The following documents were filed as Exhibits thereto:

•  Agreement and Plan of Merger, dated as of October 4, 1999, by and among MCN Energy Group Inc., DTE Energy Company, and DTE Enterprises, Inc.

•  Press Release, dated October 5, 1999

MCN filed a report on Form 8-K dated October 15, 1999, under Item 5, with respect to management’s decision, in August 1999, to retain its natural gas producing properties in Michigan. In the 1998 MCN Annual Report on Form 10-K/ A, MCN accounted for its Exploration & Production (E&P) segment, which included these properties, as a discontinued operation. 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. The following documents were filed as Exhibits thereto:

•  MCN Energy Group Inc. 1998 Annual Report reflecting the E&P segment reclassified as a continuing operation

•  March 31, 1999 and June 30, 1999 Quarterly Operating Results and Common Stock Prices

•  MCN 1998 Financial Data Schedule

•  MCN 1997 Financial Data Schedule

•  MCN 1996 Financial Data Schedule

42

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: November 12, 1999

By:  /s/ GERARD KABZINSKI

Gerard Kabzinski

Vice President and Controller

43

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 Energy Enterprises Inc.
	27-1	1999 Financial Data Schedule
	27-2	1998 Financial Data Schedule