Dte Energy Co – ‘S-4’ on 10/15/99

On:  Friday, 10/15/99   ·   Accession #:  950124-99-5478   ·   File #:  333-89175

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Registration of Securities Issued in a Business-Combination Transaction   —   Form S-4
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-4         Registration of Securities Issued in a               306   1.69M 
                          Business-Combination Transaction                       
 2: EX-3.3      Bylaws of Dte Energy                                  15     68K 
 3: EX-3.5      Articles of Incorporation of Dte                       4     26K 
 4: EX-3.6      Bylaws of Dte Enterprises, Inc.                        3     17K 
 5: EX-12.1     Computation of Ratio of Earnings                       2±    15K 
 6: EX-15.1     Awareness Letter of Deloitte & Touche LLP              1     10K 
 7: EX-23.1     Consent of Deloitte & Touche, LLP Addressed to Dte     1      8K 
13: EX-23.10    Consent of Holditch & Associates                       1      9K 
14: EX-23.11    Consent of Netherland, Sewell & Associates, Inc.       1     10K 
15: EX-23.12    Consent of Williamson Petroleum Consultants, Inc.      1     10K 
 8: EX-23.2     Consent of Deloitte & Touche LLP, Addressed to MCN     1      9K 
 9: EX-23.6     Consent of Warburg Dillon Read LLC                     1      8K 
10: EX-23.7     Consent of Merrill Lynch, Pierce, Fenner & Smith       1      9K 
11: EX-23.8     Consent of Ryder Scott Company                         1     10K 
12: EX-23.9     Consent of Miller and Lents, Ltd                       1      9K 
16: EX-24.1     Powers of Attorney                                     2±    15K 
17: EX-99.1     Form of Proxy Card of Dte Energy Company               2     15K 
18: EX-99.2     Form of Proxy Card of MCN Energy Group Inc.            2     15K 
19: EX-99.3     Consent of Person Named as About to Become Dir.        1      8K 

S-4   —   Registration of Securities Issued in a Business-Combination Transaction
Document Table of Contents

S-4
1st Page of 306
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1999
                                                        REGISTRATION NO. 333- --
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-4
REGISTRATION STATEMENT
UNDER 
THE SECURITIES ACT OF 1933
------------------------

DTE ENERGY COMPANY
(Exact Name of Registrant as Specified in its Charter)

                                                        [Enlarge/Download Table]
                                                                                     
            MICHIGAN                         4911                    38-3217752      
(State or Other Jurisdiction of  (Primary Standard Industrial     (I.R.S. Employer   
 Incorporation or Organization)  Classification Code Number)   Identification Number)

2000 2ND AVENUE 
DETROIT, MICHIGAN 48226-1279
(313) 235-4000
(Address, Including Zip Code, and Telephone Number, Including 
Area Code, of Registrant's Principal Executive Offices) 
------------------------
SUSAN M. BEALE
2000 2ND AVENUE 
DETROIT, MICHIGAN 48226-1279
(313) 235-4000
(Name, Address, Including Zip Code, and Telephone Number, 
Including Area Code, of Agent for Service)
------------------------
Copies to:

                                                        [Enlarge/Download Table]
                                                                                                          
    JOSEPH B. FRUMKIN          CHRISTOPHER C. NERN        DANIEL L. SCHIFFER          SETH A. KAPLAN      
   SULLIVAN & CROMWELL         DTE ENERGY COMPANY        MCN ENERGY GROUP INC.   WACHTELL, LIPTON, ROSEN &
    125 BROAD STREET             2000 2ND AVENUE          500 GRISWOLD STREET              KATZ           
NEW YORK, NEW YORK 10004  DETROIT, MICHIGAN 48226-1279  DETROIT, MICHIGAN 48226     51 WEST 52ND STREET   
     (212) 558-4000              (313) 235-4000             (313) 256-5500       NEW YORK, NEW YORK 10019 
                                                                                      (212) 403-1000      

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

   APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.            
------------------------

If the securities being registered on this Form are being offered in    
connection with the formation of a holding company and there is compliance with 
General Instruction G, check the following box. [ ]                             

If this form is filed to register additional securities for an offering 
pursuant to Rule 462(b) under the Securities Act, check the following box and   
list the Securities Act registration statement number of the earlier effective  
registration statement for the same offering. [ ]                               
------------------------                                                        

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act   
registration statement number of the earlier effective registration statement   
for the same offering. [ ]                                                      
------------------------                                                        
------------------------

CALCULATION OF REGISTRATION FEE 

                                                        [Enlarge/Download Table]

---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
                                                                PROPOSED MAXIMUM                                                 
                                                                 OFFERING PRICE            PROPOSED                              
       TITLE OF EACH CLASS OF              AMOUNT TO BE           PER SHARE OF        MAXIMUM AGGREGATE          AMOUNT OF       
     SECURITIES TO BE REGISTERED            REGISTERED            COMMON STOCK          OFFERING PRICE        REGISTRATION FEE   
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 
Common Stock, without par value......     32,126,112(1)              $24.25            $789,910,846.73          $219,696(2)      
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------

(1) Represents the maximum number of shares of common stock, without par value, 
   of DTE Energy Company ("DTE Common Stock"), including the associated rights
    to purchase Series A Junior Participating Preferred Stock issued pursuant to
 the Rights Agreement, dated as of September 23, 1997, between DTE and The
  Detroit Edison Company, as Rights Agent, estimated to be issuable upon the
   consummation of the merger (the "Merger") of MCN Energy Group Inc. ("MCN"),
a Michigan corporation, with and into DTE Enterprises, Inc., a Michigan 
 corporation and wholly-owned subsidiary of DTE Energy Company, based on a
    number of shares of MCN common stock, par value $0.01 per share ("MCN Common
Stock"), equal to 45% of the shares of MCN Common Stock outstanding     
immediately prior to the Merger (and assuming for this purpose that all 
  shares of MCN Common Stock issuable pursuant to the terms of the Preferred
 Redeemable Increased Dividend Equity Securities have been issued) and the
exchange of each such share of MCN common stock for 0.775 shares of DTE 
Common Stock.                                                           

(2) Pursuant to Rules 457(f)(1) and (3) and 457(c) under the Securities Act and 
solely for the purpose of calculating the registration fee, the proposed
    maximum aggregate offering price is equal to (x) the number of the shares of
  MCN Common Stock to be canceled in the Merger multiplied by (y) 24.25, the
    average of the high and low sale prices per share of MCN Common Stock on the
New York Stock Exchange Composite Tape on October 12, 1999, less        
$1,443,947,816.02, the aggregate amount of cash to be paid by DTE Energy
Company in the Merger.                                                  

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION       
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF  
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT    
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID  
SECTION 8(A), MAY DETERMINE.                                                    
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

S-4
2nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 2nd

SUBJECT TO COMPLETION, JOINT PROXY STATEMENT/PROSPECTUS 
DATED OCTOBER --, 1999

[DTE ENERGY LOGO]                                   [MCN ENERGY GROUP INC. LOGO]

MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT

Dear Fellow Shareholders:                                                       

On October 5, 1999, our companies announced the proposed merger of DTE
Energy Company and MCN Energy Group Inc. This merger will create the largest    
electric and gas utility in Michigan and a premier regional energy provider with
operations spanning the energy value chain.                                     

In order to complete our merger, the boards of directors of DTE Energy
Company and MCN Energy Group have each called special shareholders meetings for 
--, at which MCN shareholders will be asked to approve the merger agreement and 
DTE shareholders will be asked to approve the issuance of shares of DTE common  
stock to be issued in the merger.                                               

 In the merger, 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, subject to an allocation and proration
that ensures that 45% of the MCN shares are converted into shares of DTE common 
stock and 55% are converted into cash.                                          

------------------------------------------------------                          
Anthony F. Earley, Jr.
Chairman of the Board and 
Chief Executive Officer 
DTE Energy Company

  There is also a possibility that some MCN shares that otherwise would be
converted into $28.50 in cash will be converted into shares of DTE common stock 
in order to preserve tax-free treatment for MCN shareholders who exchange all   
their shares of MCN common stock solely for shares of DTE common stock in the   
merger.                                                                         

    An MCN shareholder who receives cash in the merger or who receives cash in
lieu of fractional shares may recognize gain for tax purposes.                  

YOUR VOTE IS VERY IMPORTANT. We cannot complete the merger unless we  
receive the necessary approvals from our shareholders at the shareholders       
meetings.                                                                       

  Whether or not you plan to attend your shareholders meeting, please take
the time to submit your proxy with voting instructions by mail, by telephone or 
through the Internet in accordance with the instructions contained in this      
document.                                                                       

 This document describes the shareholders meetings, the merger and other
related matters. Please read this entire document carefully.                    

------------------------------------------------------                          
Alfred R. Glancy III
Chairman of the Board and 
Chief Executive Officer 
MCN Energy Group Inc. 

PLEASE SEE PAGE -- FOR RISK FACTORS RELATING TO THE MERGER WHICH YOU SHOULD 
CONSIDER. 

Neither the Securities and Exchange Commission nor any state securities         
commission has approved or disapproved of the securities to be issued under this
document or determined if this document is truthful or complete. Any            
representation to the contrary is a criminal offense.                           

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE    
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE      
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE         
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.               

This Joint Proxy Statement/Prospectus is dated --, and is first being mailed to 
shareholders on or about --.                                                    

S-4
3rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 3rd

[DTE ENERGY LOGO] 

DTE ENERGY COMPANY
2000 2ND AVENUE 
DETROIT, MICHIGAN 48226-1279
------------------------

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS 
------------------------

To the Shareholders of DTE Energy Company:                                      

     NOTICE IS HEREBY GIVEN that a special meeting of shareholders of DTE Energy
Company, a Michigan corporation, will be held on --, at --, local time, at the  
-- at --, Michigan. The purpose of the DTE special meeting is to consider and to
vote upon the following matters:                                                

    1. A proposal to approve the issuance of shares of common stock,
     without par value, of DTE Energy Company pursuant to the Agreement and Plan
of Merger, dated as of October 4, 1999, among DTE Energy Company, MCN 
   Energy Group Inc. and DTE Enterprises, Inc., a wholly owned subsidiary of
     DTE, pursuant to which MCN will be merged with and into DTE Enterprises and
will become a wholly owned subsidiary of DTE Energy Company.          

      2. Such other business as may properly come before the DTE special
meeting or any adjournment or postponements thereof.                  

  The DTE board of directors has fixed the close of business on --, as the
record date for the DTE special meeting, and only DTE shareholders of record at 
such time will be entitled to notice of, and to vote at, the DTE special meeting
or any adjournment or postponements thereof. A complete list of DTE shareholders
entitled to vote at the DTE special meeting will be made available for          
inspection at the time and place of the DTE special meeting.                    

A form of proxy and a Joint Proxy Statement/Prospectus containing more
detailed information with respect to the matters to be considered at the DTE    
special meeting accompany and form a part of this notice.                       

 All shareholders entitled to notice of, and to vote at, the DTE special
meeting are cordially invited to attend the DTE special meeting in person.      
However, whether or not you plan to attend the DTE special meeting, please      
submit your proxy with voting instructions. You may submit your proxy with      
voting instructions by mail if you promptly complete, sign, date and return the 
accompanying proxy card in the enclosed self-addressed, stamped envelope. You   
may also submit your proxy with voting instructions by telephone or through the 
Internet in accordance with the instructions on the accompanying proxy card. Any
record holder who is present at the DTE special meeting may vote in person      
instead of by proxy, thereby canceling any previous proxy. In any event, a proxy
may be revoked in writing, by telephone or through the Internet at any time     
before the meeting.                                                             

ii

S-4
4th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 4th

  THE DTE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT.
THE DTE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ISSUANCE 
OF SHARES OF DTE ENERGY COMPANY COMMON STOCK IN THE MERGER.                     

                                       By Order of the Board of Directors,

                                          Vice President and Corporate Secretary

Detroit, Michigan                                                               
--                                                                              

THE INFORMATION AGENT FOR THE MERGER IS:
--
--
--, --
CALL -- 
------------------------

     Your vote is important. Please submit a proxy with your voting instructions
by telephone, through the Internet or by returning your signed and dated proxy  
by mail.                                                                        

 iii

S-4
5th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 5th

[MCN ENERGY GROUP INC. LOGO]

MCN ENERGY GROUP INC. 
500 GRISWOLD STREET 
DETROIT, MICHIGAN 48226 
------------------------

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS 
------------------------

To the Shareholders of MCN Energy Group Inc.:                                   

     NOTICE IS HEREBY GIVEN that a special meeting of shareholders of MCN Energy
Group Inc., a Michigan corporation, will be held on --, at --, local time, at   
the -- at --, Michigan. The purpose of the MCN special meeting is to consider   
and to vote upon the following matters:                                         

          1. A proposal to approve the Agreement and Plan of Merger, dated as of
  October 4, 1999, among DTE Energy Company, MCN Energy Group Inc. and DTE
   Enterprises, Inc., pursuant to which MCN will be merged with and into DTE
 Enterprises, a wholly owned subsidiary of DTE, and will become a wholly
 owned subsidiary of DTE Energy Company. In the merger, each outstanding
share of MCN common stock will, subject to allocation and proration   
 procedures, and tax adjustments necessary to preserve the status of the
  merger as a reorganization under the Internal Revenue Code, be converted
     into the right to receive either (i) $28.50 in cash or (ii) 0.775 shares of
DTE Energy Company common stock.                                      

   2. Such other business related to the foregoing proposal as may
properly come before the MCN special meeting or any adjournments or   
postponements thereof.                                                

 The MCN board of directors has fixed the close of business on -- as the
record date for the MCN special meeting, and only MCN shareholders of record at 
such time will be entitled to notice of, and to vote at, the MCN special meeting
or adjournments or postponements thereof. A complete list of MCN shareholders   
entitled to vote at the MCN special meeting will be made available for          
inspection by any MCN shareholder for any purpose germane to the special        
meeting, at the time and place of the MCN special meeting.                      

A form of proxy and a Joint Proxy Statement/Prospectus containing more
detailed information with respect to the matters to be considered at the MCN    
special meeting accompany and form a part of this notice.                       

   All shareholders entitled to notice of and to vote at the special meeting
are cordially invited to attend the MCN special meeting in person. However,     
whether or not you plan to attend the MCN special meeting, please submit your   
proxy with voting instructions. You may submit your proxy with voting           
instructions by mail if you promptly complete, sign, date and return the        
accompanying proxy card in the enclosed self-addressed, stamped envelope. You   
may also submit your proxy with voting instructions by telephone or through the 
Internet in accordance with the instructions on the accompanying proxy card. Any
record holder who is present at the MCN special meeting may vote in person      
instead of by proxy, thereby canceling any previous proxy. In any event, a proxy
may be revoked in writing, by telephone or through the Internet at any time     
before the meeting.                                                             

iv

S-4
6th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 6th

     THE MCN BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT AND
RECOMMENDS THAT MCN SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER          
AGREEMENT.                                                                      

                                       By Order of the Board of Directors,

                                          Senior Vice President, General Counsel
                 and Secretary

Detroit, Michigan                                                               
--                                                                              

THE INFORMATION AGENT FOR THE MERGER IS:
--
--
--, --
CALL -- 
------------------------

     Your vote is important. Please submit a proxy with your voting instructions
by telephone, through the Internet or by returning your signed and dated proxy  
by mail.                                                                        

 v

S-4
7th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 7th

REFERENCES TO ADDITIONAL INFORMATION

 This document incorporates important business and financial information
about DTE from other documents that are not included in or delivered with this  
document. This information is available to you without charge upon your written 
or oral request. You can obtain documents incorporated by reference in this     
document, other than exhibits to those documents, by requesting them in writing 
or by telephone from DTE at the following address:                              

DTE Energy Company                                                          
2000 2nd Avenue                                                             
Detroit, Michigan 48226-1279                                                
(313) 235---                                                                
Attention: Corporate Secretary                                              

 If you would like to request documents, please do so by --, in order to
receive them before the DTE shareholder meeting.                                

See "Where You Can Find More Information" on page --. 

vi

S-4
8th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 8th

TABLE OF CONTENTS 

                                                                [Download Table]

                                                                PAGE
                                                                ----
                                                                    
REFERENCES TO ADDITIONAL INFORMATION........................      vi
QUESTIONS AND ANSWERS ABOUT VOTING PROCEDURES FOR THE               
  MERGER....................................................       1
SUMMARY.....................................................       2
  The Companies.............................................       2
     DTE Energy Company.....................................       2
     MCN Energy Group Inc. .................................       2
     The Merger.............................................       2
     What You Will Receive..................................       2
     MCN Shareholders Will Be Asked to Elect the Form of            
      Merger Consideration..................................       3
     Recommendations to Shareholders........................       3
     Opinions of Financial Advisors.........................       3
     The DTE Special Meeting................................       3
       Time, Place and Matters to Be Voted Upon.............       3
       Record Date and Vote Required........................       3
     The MCN Special Meeting................................       4
       Time, Place and Matters to Be Voted Upon.............       4
       Record Date and Vote Required........................       4
     The Merger Agreement...................................       4
       Effective Time of the Merger.........................       4
       Conditions of the Merger.............................       4
       Termination..........................................       4
       Termination Fees and Expenses........................       5
     Other..................................................       5
       Interests of Management and Directors in the                 
        Merger..............................................       5
       Dissenters' Rights...................................       6
       Accounting Treatment.................................       6
       Material Federal Income Tax Consequences of the              
        Merger..............................................       6
       Comparison of Shareholders' Rights...................       6
       Listing of DTE Common Stock..........................       6
     Regulatory Filings, Approvals and Clearances...........       6
MARKET PRICE AND DIVIDEND INFORMATION.......................       7
  Dividend Information......................................       7
  Recent Closing Prices.....................................       8
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.............       9
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED        
  FINANCIAL DATA............................................      10
RISK FACTORS................................................      11
  MCN shareholders cannot be sure of the market value of DTE        
     common stock that will be issued in the merger.........      11
  The merger is subject to the receipt of consents and              
     approvals from government entities that may impose             
     conditions that could have a material adverse effect on        
     DTE or cause abandonment of the merger.................      11
  We may not be able to realize fully the cost savings and          
     other benefits we expect to be realized in connection          
     with the merger, which may adversely affect earnings           
     and financial condition................................      11
  Changes in regulatory environment and increased                   
     competition may result in decreased earnings...........      12
  For MCN shareholders, an investment in DTE is subject to          
     risks related to the electric utility industry.........      12
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS...      13

 vii

S-4
9th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 9th

                                                                [Download Table]

                                                                PAGE
                                                                ----
                                                                    
THE DTE SPECIAL MEETING.....................................      14
  General...................................................      14
  Voting....................................................      14
  Proxies...................................................      14
  Solicitation of Proxies...................................      16
THE MCN SPECIAL MEETING.....................................      17
  General...................................................      17
  Voting....................................................      17
  Proxies...................................................      17
  Solicitation of Proxies...................................      19
THE COMPANIES...............................................      20
  DTE Energy Company........................................      20
  MCN Energy Group Inc. ....................................      20
THE MERGER..................................................      22
  General...................................................      22
  Background to the Merger..................................      23
  DTE's and MCN's Reasons for the Merger....................      25
  Recommendation and Additional Considerations of the DTE           
     Board of Directors.....................................      26
  Recommendation and Additional Considerations of the MCN           
     Board of Directors.....................................      27
  Opinion of DTE's Financial Advisor........................      29
  Opinion of MCN's Financial Advisor........................      37
  Interests of Management and Directors in the Merger.......      44
  Public Trading Markets....................................      49
  Absence of Dissenters' Rights.............................      49
  Resale of DTE Common Stock................................      50
REGULATORY FILINGS, APPROVALS AND CLEARANCES................      51
  Hart-Scott-Rodino Act.....................................      51
  Public Utility Holding Company Act of 1935................      51
  Federal Power Act.........................................      51
  State Approvals...........................................      52
  Atomic Energy Act.........................................      52
THE MERGER AGREEMENT........................................      53
  Introduction..............................................      53
  Terms of the Merger.......................................      53
  Election Procedures and Distribution of Certificates of           
     DTE Common Stock.......................................      54
  Fractional Shares.........................................      55
  Closing and Effective Time of the Merger..................      55
  Corporate Governance......................................      56
  Conditions of the Merger..................................      56
  Representations and Warranties............................      57
  Covenants.................................................      58
  Additional Agreements.....................................      60
  Termination...............................................      64
  Modification, Amendment and Waiver........................      65
ACCOUNTING TREATMENT........................................      65
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER......      66
  Tax Consequences of the Merger Generally..................      66
  Exchange of MCN Common Stock Solely for Cash..............      66
  Exchange of MCN Common Stock Solely for DTE Common                
     Stock..................................................      67
  Exchange of MCN Common Stock for DTE Common Stock and             
     Cash...................................................      67
  Cash Received Instead of a Fractional Interest of DTE             
     Common Stock...........................................      68

viii

S-4
10th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 10th

                                                                [Download Table]

                                                                PAGE
                                                                ----
                                                                    
  Backup Withholding and Information Reporting..............      68
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED                 
  FINANCIAL STATEMENTS......................................      69
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED        
  FINANCIAL STATEMENTS......................................      73
DESCRIPTION OF DTE CAPITAL STOCK............................      74
  Authorized Capital Stock..................................      74
  DTE Common Stock..........................................      74
COMPARISON OF SHAREHOLDERS' RIGHTS..........................      74
  General...................................................      74
  Comparison of Shareholders' Rights........................      74
RIGHTS AGREEMENTS...........................................      80
  DTE.......................................................      80
  MCN.......................................................      80
DIRECTORS AND EXECUTIVE OFFICERS OF MCN ENERGY GROUP INC....      82
  Directors of MCN..........................................      82
  Executive Officers of MCN.................................      84
  Compensation of Directors of MCN..........................      84
  Compensation of Executives of MCN.........................      85
BENEFICIAL SECURITY OWNERSHIP OF MCN DIRECTORS AND EXECUTIVE        
  OFFICERS..................................................      93
COMMON STOCK AND TOTAL STOCK-BASED HOLDINGS.................      93
DESCRIPTION OF MCN ENERGY GROUP INC.........................      94
  DIVERSIFIED ENERGY........................................      95
  GAS DISTRIBUTION..........................................     104
  DISCONTINUED OPERATIONS...................................     112
  OTHER.....................................................     113
PROPERTIES..................................................     113
  MCN.......................................................     113
  Gas Distribution..........................................     113
  Diversified Energy........................................     114
  Exploration & Production Activities.......................     115
LEGAL PROCEEDINGS...........................................     116
  General...................................................     116
  Environmental.............................................     116
EXPERTS.....................................................     117
SHAREHOLDER PROPOSALS.......................................     117
  DTE.......................................................     117
  MCN.......................................................     117
WHERE YOU CAN FIND MORE INFORMATION.........................     118
VALIDITY OF SHARES..........................................     119
INDEX TO FINANCIAL STATEMENTS OF MCN ENERGY GROUP INC.......     F-1
APPENDIX A   Agreement and Plan of Merger, dated as of              
             October 4, 1999, among DTE Energy Company, MCN         
             Energy Group Inc. and DTE Enterprises, Inc.....     A-1
APPENDIX B   Opinion of Warburg Dillon Read LLC, dated              
             October 4, 1999................................     B-1
APPENDIX C   Opinion of Merrill Lynch, Pierce, Fenner &             
             Smith Incorporated, dated October 4, 1999......     C-1

ix

S-4
11th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 11th

QUESTIONS AND ANSWERS ABOUT VOTING
PROCEDURES FOR THE MERGER 

Q:  WHAT SHOULD I DO?                                                           

A:  After you have carefully read this document, either mail your signed proxy  
   card in the enclosed envelope or submit your proxy with voting instructions
   by telephone or through the Internet in accordance with the instructions on
  the accompanying proxy card so that your shares will be represented at the
DTE special meeting or the MCN special meeting.                         

Q:  IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY 
SHARES FOR ME?                                                          

A:  No. Your broker will not be able to vote your shares without instructions   
    from you. You should instruct your broker to vote your shares, following the
directions provided by your broker. If you are an MCN shareholder, your 
  failure to instruct your broker to vote your shares will be the equivalent
of voting against the approval of the merger agreement. If you are a DTE
  shareholder, your failure to instruct your broker to vote your shares will
    have the effect of reducing the aggregate number of shares voting at the DTE
special meeting and the number of shares of DTE common stock required to
approve the issuance of shares of DTE common stock in the merger.       

Q:  CAN I CHANGE MY VOTE AFTER I HAVE SUBMITTED MY PROXY WITH VOTING            
INSTRUCTIONS?                                                           

A:  Yes. There are three ways in which you may revoke your proxy and change your
vote. First, you may send a written notice to the party to whom you     
submitted your proxy stating that you would like to revoke your proxy.  
   Second, you may complete and submit a new proxy card by mail or submit your
    proxy with new voting instructions by telephone or through the Internet. The
   latest vote actually received by DTE or MCN, as the case may be, before the
   shareholders meeting will be counted and any earlier votes will be revoked.
    Third, you may attend the DTE special meeting or the MCN special meeting and
    vote in person. Simply attending the shareholders meeting, however, will not
   revoke your proxy. If you have instructed a broker to vote your shares, you
 must follow directions received from your broker to change or revoke your
proxy.                                                                  

Q:  IF I AM AN MCN SHAREHOLDER, HOW DO I ELECT TO RECEIVE CASH OR SHARES OF DTE 
COMMON STOCK IN THE MERGER?                                             

A:  We have enclosed with these materials written instructions for exchanging   
    your stock certificates and making your choice for the form of consideration
you wish to receive; that is, shares of DTE common stock, cash or both. 

Q:  IF I AM AN MCN SHAREHOLDER, WHEN SHOULD I SEND IN MY INSTRUCTIONS AND MY    
STOCK CERTIFICATES?                                                     

A:  We will publicly announce the date on which the merger will be completed    
five trading days prior to completion. Your stock certificates and your 
    instructions regarding whether you would like to receive cash, shares of DTE
   common stock, or both, must be received by the exchange agent no later than
9:00 a.m. on the date of the merger.                                    

MCN SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES BEFORE WE  
PUBLICLY ANNOUNCE THE DATE ON WHICH THE MERGER WILL BE COMPLETED.       

Q:  WHOM SHOULD SHAREHOLDERS CALL WITH QUESTIONS?                               

A:  If you are a DTE shareholder you should call -- at (800) -- with any        
questions about the merger and related transactions.                    

If you are an MCN shareholder you should call -- at (800) -- with any   
questions about the merger and related transactions.                    

 1

S-4
12th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 12th

SUMMARY 

This summary, together with the preceding Question and Answer section,
highlights selected information contained in this document and may not contain  
all of the information that is important to you. We urge you to read carefully  
this entire document and the other documents to which this document refers to   
understand fully the merger and other related transactions. See "Where You Can  
Find More Information" on page --. Each item in this summary includes a page    
reference directing you to a more complete description of that item.            

THE COMPANIES                                                                   

DTE ENERGY COMPANY (PAGE --)                                                    

     DTE Energy Company, a Michigan corporation organized in 1995, is the parent
holding company of The Detroit Edison Company and other subsidiaries engaged in 
energy-related businesses.                                                      

    DTE's principal operating subsidiary, Detroit Edison, is a Michigan public
utility engaged in the generation, purchase, transmission, distribution and sale
of electric energy in a 7,600 square mile area in Southeastern Michigan. Detroit
Edison's service area includes about 13% of Michigan's total land area and      
approximately five million people, which is about half of Michigan's population.
DTE also has affiliates engaged in non-regulated businesses, including          
energy-related services and products.                                           

MCN ENERGY GROUP INC. (PAGE --)                                                 

MCN Energy Group Inc., a Michigan corporation organized in 1988, is an
integrated energy company primarily involved in natural gas production,         
gathering, processing, transmission, storage and distribution, electric power   
generation and energy marketing.                                                

  MCN's largest subsidiary is Michigan Consolidated Gas Company, a natural
gas utility serving 1.2 million customers in more than 500 communities          
throughout Michigan. MCN Energy Enterprises Inc. is a wholly owned subsidiary of
MCN and serves as a holding company for MCN's nonutility businesses.            

THE MERGER (PAGE --)                                                            

 We are proposing a merger of MCN with and into DTE Enterprises, Inc., a
Michigan corporation and wholly owned subsidiary of DTE. After the merger, MCN  
will be a wholly-owned subsidiary of DTE.                                       

DTE and MCN believe that the merger offers both MCN shareholders who  
receive DTE common stock in the merger and DTE shareholders the opportunity to  
benefit from the growth opportunity expected to result from combining the two   
companies. For a more detailed discussion of the reasons for the merger, see    
pages -- through --.                                                            

WHAT YOU WILL RECEIVE (PAGE --)                                                 

  As a result of the merger, MCN shareholders will be entitled 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 they hold. This right to elect to receive    
either cash or DTE common stock or both is subject to allocation and proration  
procedures that ensure that the aggregate number of shares of MCN common stock  
that will be converted into cash and DTE common stock will be equal to 55% and  
45%, respectively, of the total number of shares of MCN common stock outstanding
immediately prior to the merger.                                                

EXAMPLE: IF YOU HOLD 1000 SHARES OF MCN COMMON STOCK, YOU MAY ELECT TO RECEIVE  
775 SHARES OF DTE COMMON STOCK, $28,500 IN CASH, OR SOME COMBINATION OF THE TWO.
THE AMOUNT OF EITHER STOCK OR CASH THAT YOU ACTUALLY RECEIVE WILL DEPEND UPON   
THE ELECTION OF OTHER MCN SHAREHOLDERS. FOR EXAMPLE, IF YOU ELECT TO RECEIVE    
ONLY STOCK AND ALL OTHER MCN SHAREHOLDERS MAKE THE SAME ELECTION, 45% OF YOUR   
SHARES WOULD BE CONVERTED INTO STOCK AND 55% OF YOUR SHARES WOULD BE CONVERTED  
INTO CASH, SO YOU WOULD RECEIVE A TOTAL OF 348 SHARES OF DTE COMMON STOCK AND   
$15,675 IN CASH PLUS ADDITIONAL CASH PAID INSTEAD OF FRACTIONAL SHARES.         
SIMILARLY, EVEN IF YOU ELECT TO RECEIVE CASH, YOU MAY RECEIVE A MIX OF CASH AND 
SHARES OF DTE COMMON STOCK IN THE MERGER.                                       

    Further, we have agreed to additional adjustments if necessary in order to
preserve the status of the merger as a "reorganization" under the Internal      
Revenue Code. These tax adjustments would decrease below 55% the number of      
shares of MCN common stock that will be converted into cash and increase above  
45% the number of shares of MCN common stock that will be converted into DTE    
common stock. If the tax adjustment is necessary, each share of MCN common stock
that would have been converted into cash in the absence of this tax adjustment  
will be converted into a number of                                              
 2

S-4
13th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 13th

shares of DTE common stock having a value of $28.50 instead of being converted  
at the 0.775 exchange ratio. Conversion of shares of MCN common stock at this   
conversion rate will continue to the extent that the conversion is necessary so 
that the value of the DTE common stock paid as consideration for shares of MCN  
common stock is not less than 41% of the value of the total consideration paid  
for shares of MCN common stock. Any additional shares of MCN common stock       
converted into DTE common stock instead of cash in connection with the tax      
adjustment will be converted at the 0.775 rate.                                 

MCN SHAREHOLDERS WILL BE ASKED TO ELECT THE FORM OF MERGER CONSIDERATION (PAGE  
--)                                                                             

     If you are an MCN shareholder, enclosed with these materials is an election
form, which you may use to indicate your preference to receive shares of DTE    
common stock, cash or both, in exchange for your shares of MCN common stock.    
Alternatively, you may decide to make no election, in which case the form of    
consideration you receive will be determined by the elections of other MCN      
shareholders. After the deadline for submitting election forms -- 9:00 a.m. on  
the date of the merger -- has passed, an exchange agent chosen by DTE will      
allocate the consideration to comply with the requirement that, subject to the  
adjustments necessary to preserve the status of the merger as a reorganization  
under the Internal Revenue Code, in the aggregate, 55% of the outstanding shares
of MCN common stock will be converted into cash and the other 45% will be       
converted into shares of DTE common stock.                                      

RECOMMENDATIONS TO SHAREHOLDERS (PAGE --)                                       

Both the DTE board of directors and the MCN board of directors have   
determined that the merger and the consideration to be received by MCN          
shareholders are fair to, and in the best interests of, its shareholders.       

DTE (PAGE --)                                                                   

   The DTE board of directors recommends that you vote "FOR" the issuance of
shares of DTE common stock in the merger.                                       

MCN (PAGE --)                                                                   

   The MCN board of directors recommends that you vote "FOR" the approval of
the merger agreement.                                                           
OPINIONS OF FINANCIAL ADVISORS (PAGES -- AND --)                                

In deciding whether to approve the merger agreement, the DTE board of 
directors considered the opinion of its financial advisor, Warburg Dillon Read  
LLC, and the MCN board of directors considered the opinion of its financial     
advisor, Merrill Lynch, Pierce, Fenner & Smith Incorporated. These opinions,    
dated October 4, 1999, are attached as Appendices B and C to this document. We  
encourage you to read these opinions carefully and in their entirety.           

THE DTE SPECIAL MEETING                                                         

TIME, PLACE AND MATTERS TO BE VOTED UPON (PAGE --)                              

  The DTE special meeting will be held on --, at --, local time, at --. At
the DTE special meeting, you will be asked:                                     

     1. To approve the issuance of shares of DTE common stock in the merger; and

   2. To act on other matters relating to the foregoing proposal that may be
brought properly before the DTE special meeting.                

RECORD DATE AND VOTE REQUIRED (PAGE --)                                         

You may cast one vote at the DTE special meeting for each share of DTE
common stock that you owned at the close of business on --.                     

    On --, there were approximately -- shareholders of record and -- shares of
DTE common stock outstanding and entitled to vote. To approve the issuance of   
shares of DTE common stock in the merger, a majority of the shares voting at the
DTE special meeting must vote in favor of doing so.                             

    As of --, directors and executive officers of DTE and its affiliates owned
an aggregate of approximately --% of the outstanding shares of DTE common stock.
The directors and executive officers have indicated their intention to vote the 
shares they hold in favor of the issuance of shares of DTE common stock in the  
merger.                                                                         
 3

S-4
14th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 14th

THE MCN SPECIAL MEETING                                                         

TIME, PLACE AND MATTERS TO BE VOTED UPON (PAGE --)                              

  The MCN special meeting will be held on --, at --, local time, at --. At
the MCN special meeting, you will be asked:                                     

1. To approve the merger agreement; and                               

   2. To act on other matters relating to the foregoing proposal that may be
brought properly before the MCN special meeting.                

RECORD DATE AND VOTE REQUIRED (PAGE --)                                         

You may cast one vote at the MCN special meeting for each share of MCN
common stock that you owned at the close of business on --.                     

    On --, there were approximately -- shareholders of record and -- shares of
MCN common stock outstanding and entitled to vote. To approve the merger        
agreement, the holders of a majority of the shares of MCN common stock issued   
and outstanding on -- must vote in favor of doing so.                           

As of --, directors and executive officers of MCN and their affiliates
owned an aggregate of approximately --% of the outstanding shares of MCN common 
stock, which they have indicated they intend to vote in favor of approval of the
merger agreement.                                                               

THE MERGER AGREEMENT                                                            

 The merger agreement is attached to this document as Appendix A. Please
read the merger agreement carefully and in its entirety. It is the legal        
document that governs the merger.                                               

EFFECTIVE TIME OF THE MERGER (PAGE --)                                          

     The merger will occur shortly after all the conditions to the completion of
the merger have been satisfied or waived. Although no assurances can be given,  
it is currently expected that the merger will be completed in six to nine months
from the date of the merger agreement.                                          

CONDITIONS OF THE MERGER (PAGE --)                                              

The completion of the merger depends on a number of conditions being  
satisfied or waived, including the following:                                   

    - Approval of the merger agreement by MCN shareholders and approval of the
       issuance of shares of DTE common stock in the merger by DTE shareholders;

     - The receipt of all governmental and other consents and approvals that are
necessary to complete the merger;                                 

   - The absence of any injunction or legal restraint blocking the merger or
    any threatened or pending litigation by certain governmental entities;

- MCN's sale of its interests in various electric facilities;         

- The representations and warranties of each of us being true in all  
material respects and each of us having performed in all material 
respects our obligations under the merger agreement;              

- The receipt by each of us of legal opinions that the merger will be 
    treated as a "reorganization" under the Internal Revenue Code and that
       DTE, MCN and DTE Enterprises will each be a party to that reorganization;
and                                                               

   - The absence of any materially adverse change in the condition of MCN or
DTE.                                                              

   If the law permits, either of us could choose to waive a condition to our
obligation to complete the merger even though that condition has not been       
satisfied. However, neither of us may waive the condition relating to the       
receipt of the tax opinions after either DTE shareholders or MCN shareholders   
have approved the merger unless further shareholder approval is obtained with   
appropriate disclosure. We cannot be certain when, or if, the conditions to the 
merger will be satisfied or waived, or that the merger will be completed.       

TERMINATION (PAGE --)                                                           

We may agree in writing to terminate the merger agreement at any time 
without completing the merger, even after the approval of our respective        
shareholders has been obtained.                                                 

 4

S-4
15th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 15th

    In addition, either of us may decide, without the consent of the other, to
terminate the merger agreement, even after the approval of our respective       
shareholders has been obtained, if:                                             

- The merger has not been completed by July 15, 2000, although we have
    agreed to extend that date for an additional nine months if the reason
the merger has not been completed is that we have not obtained all
governmental consents;                                            

     - MCN shareholders fail to approve the merger agreement or DTE shareholders
       fail to approve the issuance of shares of DTE common stock in the merger;

  - Any legal restriction permanently prohibiting completion of the merger
has become final and non-appealable;                              

- The other party materially breaches its representations, warranties,
     covenants or agreements contained in the merger agreement and does not,
or cannot, correct the breach within 30 days;                     

    - The board of directors of either of us withdraws, adversely modifies, or
fails to reconfirm its recommendation of the merger agreement; or 

    - Either of us decides to enter into a transaction with a third party that
is superior to the proposed merger.                               

We have also agreed that, if Federal Energy Regulatory Commission approval of   
the merger is not required, either one of us may terminate the merger agreement 
after one year from the date of the merger agreement by making a reasonable     
determination that it is more likely than not that the governmental consents    
needed to complete the merger on terms that satisfy the merger agreement will   
not be obtained prior to the date that is 18 months from the date of the merger 
agreement. If FERC approval of the merger is required, however, this right to   
terminate the merger agreement by making such a reasonable determination exists 
only after 15 months from the date of the merger agreement.                     

TERMINATION FEES AND EXPENSES (PAGE --)                                         

We have agreed that if MCN terminates the merger agreement in order to
accept a superior proposal from a third party, MCN will pay DTE a termination   
fee of $55 million, and reimburse DTE's expenses up to $15 million, and if DTE  
terminates the merger agreement under such circumstances, it will pay MCN a     
termination fee of $85 million, and reimburse MCN's costs and expenses up to $15
million. We have further agreed that if the merger agreement is terminated under
certain other circumstances involving either the failure to obtain the necessary
shareholder approval or the modification or withdrawal of a board of directors' 
recommendation of the merger agreement, then we will reimburse the other's costs
and expenses up to $15 million and, if we thereafter execute an agreement or    
complete a transaction with a third party within 12 months after termination, we
will pay the other party a termination fee which, in the case of DTE, will be   
$85 million, and, in the case of MCN, will be $55 million.                      

Except as provided in the termination fees and expenses provisions    
described above, whether or not the merger is completed, we will each pay our   
own fees and expenses, except that we will divide evenly the costs and expenses 
that we have incurred in printing and mailing this document and the fees that we
have paid to the Securities and Exchange Commission in connection with the      
merger.                                                                         

OTHER                                                                           

INTERESTS OF MANAGEMENT AND DIRECTORS IN THE MERGER (PAGE --)                   

  In considering the recommendations of the MCN board of directors and the
DTE board of directors with respect to the merger, you should be aware that     
certain officers and directors of MCN and DTE have interests in the merger that 
are in addition to, or different from, the interests of shareholders of MCN and 
DTE generally. These interests exist because of:                                

- The terms of change in control agreements that provide various MCN  
      officers with severance benefits if their employment is terminated under
certain conditions after the merger; and                          

- Rights the MCN officers have pursuant to the terms of benefit and   
  compensation plans maintained by MCN which will allow cash and stock
based awards to be available earlier.                             

   Further, DTE, MCN and DTE Enterprises have entered into a termination and
consulting                                                                      
 5

S-4
16th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 16th

agreement with Alfred R. Glancy III, MCN's Chairman and Chief Executive Officer,
which will go into effect if and when the merger is completed.                  

The members of both the DTE board of directors and the MCN board of   
directors knew about these additional interests, and considered them, when they 
adopted the merger agreement and the related transactions.                      

DISSENTERS' RIGHTS (PAGE --)                                                    

 Both companies are incorporated under Michigan law. Under Michigan law,
neither DTE shareholders nor MCN shareholders have any right to a court         
determination, in a proceeding known as an appraisal, of the fair value of their
shares in connection with the merger.                                           

ACCOUNTING TREATMENT (PAGE --)                                                  

DTE will account for the merger as a purchase for financial reporting 
purposes.                                                                       

MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (PAGE --)                

   We expect that for U.S. federal income tax purposes, MCN shareholders who
exchange all their shares of MCN common stock solely for shares of DTE common   
stock will not recognize any gain or loss. We also expect that MCN shareholders 
who receive cash, as well as shares of DTE common stock, in the merger may      
recognize gain, but not in excess of the amount of cash received.               

  We have conditioned the merger on our receipt of legal opinions that the
merger will be treated as a "reorganization" for federal income tax purposes.   

     This tax treatment may not apply to certain MCN shareholders and may depend
on your specific situation and on variables not within our control. We urge you 
to consult your own tax advisor for a full understanding of the tax consequences
of the merger.                                                                  

COMPARISON OF SHAREHOLDERS' RIGHTS (PAGE --)                                    

DTE and MCN are both incorporated in Michigan, so the rights of MCN   
shareholders who become DTE shareholders will continue to be governed by        
Michigan law. There are some differences in the rights of the shareholders under
the respective articles of incorporation and other documents relating to DTE and
MCN.                                                                            
LISTING OF DTE COMMON STOCK (PAGE --)                                           

   The shares of DTE common stock to be issued in connection with the merger
will be listed on the NYSE and the Chicago Stock Exchange under the symbol      
"DTE."                                                                          

REGULATORY FILINGS, APPROVALS AND CLEARANCES (PAGE --)                          

     The Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the rules and
regulations thereunder, provide that the merger may not be completed until      
premerger notification filings have been made, by which means information is    
submitted to the Antitrust Division of the U.S. Department of Justice and the   
Federal Trade Commission, and the specified HSR Act waiting period has expired. 
Even after the waiting period expires or is terminated, the Antitrust Division  
and the Federal Trade Commission will have the authority to challenge the merger
on antitrust grounds before or after the merger is completed.                   

DTE and MCN each intend to file a notification and report form for the
merger with the Antitrust Division and the Federal Trade Commission in          
mid-November, 1999.                                                             

 Although both DTE and MCN are exempt holding companies under the Public
Utility Holding Company Act of 1935, the Securities and Exchange Commission must
approve the merger pursuant to Section 9(a)(2) of the 1935 Act, which requires  
SEC approval of some acquisitions of public utility company securities.         

Under the merger agreement, MCN will use its best efforts promptly to 
dispose of various electric facilities. If MCN is successful in disposing of    
those assets and facilities, the merger should not require FERC approval under  
the Federal Power Act, although such dispositions may require FERC approval     
under the Power Act. If MCN is not successful in disposing of those facilities  
the merger itself is likely to require FERC approval under the Power Act.       

     We cannot predict whether we will obtain the required regulatory clearances
and approvals, the time frame within which such clearances and approvals may be 
received or whether any such clearances and approvals would contain conditions  
that would be detrimental to DTE.                                               

 6

S-4
17th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 17th

MARKET PRICE AND DIVIDEND INFORMATION 

  This table sets forth, for the calendar quarters indicated, the high and
low sales prices per share of DTE common stock and MCN common stock, as reported
on the NYSE Composite Tape, and the dividends per share declared on DTE common  
stock and MCN common stock.                                                     

                                                        [Enlarge/Download Table]

                                                    DTE                                             MCN                     
                                                COMMON STOCK                                   COMMON STOCK                 
                               ----------------------------------------------  ---------------------------------------------
       CALENDAR QUARTER             HIGH               LOW          DIVIDENDS       HIGH              LOW          DIVIDENDS
       ----------------             ----               ---          ---------  --------------         ---          ---------
                                                                                                                            
1996                                                                                                                        
  First Quarter............... $37 1/4            $33 1/8           $0.51500   $25 1/2           $21 5/8           $0.23250 
  Second Quarter..............  34 1/4             28                0.51500    25 5/8            22 3/4            0.23250 
  Third Quarter...............  31                 27 5/8            0.51500    27 5/8            22 3/4            0.23250 
  Fourth Quarter..............  33 1/8             27 7/8            0.51500    30 1/2            26 5/8            0.24250 
1997                                                                                                                        
  First Quarter...............  32 7/8             26 1/4            0.51500    32 5/8            28 1/8            0.24250 
  Second Quarter..............  28 3/8             26 1/8            0.51500    30 13/16          27 3/8            0.24250 
  Third Quarter...............  32 7/8             27 1/2            0.51500    33                30 3/8            0.24250 
  Fourth Quarter..............  34 3/4             28 1/16           0.51500    40 1/2            32                0.25500 
1998                                                                                                                        
  First Quarter...............  39 5/8             33 7/16           0.51500    39 7/8            36 1/4            0.25500 
  Second Quarter..............  42                 37 11/16          0.51500    39 7/8            24 3/4            0.25500 
  Third Quarter...............  45 5/16            39 3/16           0.51500    26 13/16          16 7/16           0.25500 
  Fourth Quarter..............  49 1/4             41 7/16           0.51500    20 13/16          16 13/16          0.25500 
1999                                                                                                                        
  First Quarter...............  43 3/4             37 15/16          0.51500    19 9/16           15 13/16          0.25500 
  Second Quarter..............  44 11/16           38 1/4            0.51500    22 5/8            15 15/16          0.25500 
  Third Quarter...............  41 7/8             35 3/16           0.51500    22 1/4            17                0.25500 
  Fourth Quarter (through --,                                                                                               
     1999)....................  --                 --                     --    --                --                     -- 

DIVIDEND INFORMATION                                                            

DTE intends to continue its dividend rate of $2.06 per share annually,
although the DTE board of directors may change this practice at any time.       

 7

S-4
18th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 18th

RECENT CLOSING PRICES                                                           

 Shares of DTE common stock are listed on the NYSE and the Chicago Stock
Exchange under the symbol "DTE." Shares of MCN common stock are listed on the   
NYSE under the symbol "MCN."                                                    

  The following table sets forth the closing sales prices per share of DTE
common stock and MCN common stock on the NYSE on October 4, 1999, the last      
trading day before public announcement of the merger, and on --, the last       
practicable trading day prior to the date of this document. The table also      
presents implied equivalent per share values for MCN common stock by multiplying
the price per share of DTE common stock on the dates indicated by the exchange  
ratio of 0.775.                                                                 

                                                        [Enlarge/Download Table]

                                                                          MCN    EQUIVALENT PER SHARE
                                                           DTE           COMMON         OF MCN       
                                                       COMMON STOCK      STOCK       COMMON STOCK    
                                                       ------------      ------  --------------------
                                                                                                     
October 4, 1999.......................................     $37       $17 11/16         $28.675       
--....................................................     $--       $--               $    --       

     The market price of both DTE common stock and MCN common stock is likely to
fluctuate prior to the merger and cannot be predicted. You should obtain current
market quotations for DTE common stock and MCN common stock. The future prices  
for DTE common stock after the merger cannot be predicted.                      

 8

S-4
19th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 19th

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA 

     DTE and MCN are providing the following financial information to aid you in
your analysis of the financial aspects of the merger. This information is only a
summary and you should read it in conjunction with the historical consolidated  
financial statements of DTE and MCN, and the related notes contained in DTE's   
Annual Report on Form 10-K and Quarterly Reports on Form 10-Q that DTE has      
previously filed with the Securities and Exchange Commission and MCN's 1998     
Annual Report and June 30, 1999 Quarterly Report that are included herein. See  
Where You Can Find More Information on page --.                                 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF DTE ENERGY COMPANY 

                                                        [Enlarge/Download Table]

                                                     YEAR ENDED DECEMBER 31,               SIX MONTHS ENDED 
                                          ----------------------------------------------   -----------------
                                           1994     1995     1996     1997         1998    6/30/98   6/30/99
                                           ----     ----     ----     ----         ----    -------   -------
                                                         (MILLIONS, EXCEPT PER SHARE AMOUNTS)               
                                                                                                            
Income Statement Data                                                                                       
  Operating Revenues..................... $3,519   $3,636   $3,645   $3,764       $4,221   $2,009    $2,174 
  Net Income............................. $  390   $  406   $  309   $  417       $  443   $  205    $  225 
  Earnings Per Common Share -- Basic and                                                                    
    Diluted.............................. $ 2.67   $ 2.80   $ 2.13   $ 2.88       $ 3.05   $ 1.41    $ 1.55 
  Dividends Declared Per Share of Common                                                                    
    Stock................................ $ 2.06   $ 2.06   $ 2.06   $ 2.06       $ 2.06   $ 1.03    $ 1.03 

                                                        [Enlarge/Download Table]

                                                            AT DECEMBER 31,                        AT JUNE 30,   
                                           --------------------------------------------------   -----------------
                                            1994      1995      1996      1997         1998      1998      1999  
                                            ----      ----      ----      ----         ----      ----      ----  
                                                            (MILLIONS, EXCEPT PER SHARE AMOUNTS)                 
                                                                                                                 
Balance Sheet Data                                                                                               
  Total Assets............................ $10,993   $11,131   $11,015   $11,223      $12,088   $11,595   $12,181
  Long-Term Debt Obligations (including                                                                          
    capital leases) and Redeemable                                                                               
    Preferred and Preference Stock                                                                               
    Outstanding........................... $ 3,980   $ 4,004   $ 4,038   $ 4,058      $ 4,323   $ 4,015   $ 4,082
  Book Value Per Share of Common Stock.... $ 22.89   $ 23.62   $ 23.69   $ 24.51      $ 25.49   $ 24.92   $ 26.00

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MCN ENERGY GROUP INC.

                                                        [Enlarge/Download Table]

                                                     YEAR ENDED DECEMBER 31,               SIX MONTHS ENDED 
                                          ----------------------------------------------   -----------------
                                           1994     1995     1996     1997         1998    6/30/98   6/30/99
                                           ----     ----     ----     ----         ----    -------   -------
                                                         (MILLIONS, EXCEPT PER SHARE AMOUNTS)               
                                                                                                            
Income Statement Data(a)                                                                                    
  Operating Revenues..................... $1,474   $1,495   $1,997   $2,208       $2,031   $1,108    $1,285 
  Net Income (Loss)...................... $   75   $   93   $  113   $  133       $ (286)  $ (134)   $    2 
  Earnings (Loss) Per Common Share --                                                                       
    Basic................................ $ 1.26   $ 1.44   $ 1.68   $ 1.82       $(3.63)  $(1.70)   $ 0.03 
  Earnings (Loss) Per Common Share --                                                                       
    Diluted.............................. $ 1.25   $ 1.43   $ 1.67   $ 1.79       $(3.63)  $(1.70)   $ 0.03 
  Dividends Declared Per Share of Common                                                                    
    Stock................................ $ 0.87   $ 0.90   $ 0.94   $ 0.98       $ 1.02   $ 0.51    $ 0.51 

                                                        [Enlarge/Download Table]

                                                         AT DECEMBER 31,                      AT JUNE 30,   
                                          ----------------------------------------------   -----------------
                                           1994     1995     1996     1997         1998     1998      1999  
                                           ----     ----     ----     ----         ----     ----      ----  
                                                         (MILLIONS, EXCEPT PER SHARE AMOUNTS)               
                                                                                                            
Balance Sheet Data                                                                                          
  Total Assets........................... $2,241   $2,899   $3,633   $4,331       $4,393   $4,186    $4,045 
  Long-Term Debt Obligations (including                                                                     
    capital leases) and Redeemable                                                                          
    Cumulative Preferred Securities...... $  784   $1,090   $1,426   $1,718       $1,809   $1,811    $1,966 
  Book Value Per Share of Common Stock... $ 8.56   $10.02   $11.66   $14.62       $ 9.93   $12.33    $10.35 

-------------------------                                                       
(a) Income statement data excludes the cumulative effect of the 1999 change in  
   accounting for start-up activities and the operations of MCN's discontinued
computer services segment which was sold in 1996.                       

See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements. 

 9

S-4
20th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 20th

SELECTED UNAUDITED PRO FORMA COMBINED 
CONDENSED CONSOLIDATED FINANCIAL DATA 

    The following selected unaudited pro forma combined condensed consolidated
financial data gives effect to the merger. The pro forma adjustments are based  
upon available information and certain assumptions that DTE and MCN believe are 
reasonable. The selected unaudited pro forma combined condensed consolidated    
financial data are presented for illustrative purposes only and are not         
necessarily indicative of the operating results or financial condition of the   
combined company that would have occurred had the merger occurred at the        
beginning of the periods presented, nor are the selected unaudited pro forma    
combined condensed consolidated financial data necessarily indicative of future 
operating results or financial position of the combined company. The selected   
unaudited pro forma combined condensed consolidated financial data have been    
derived from and should be read in conjunction with the "Unaudited Pro Forma    
Combined Condensed Consolidated Financial Statements" on page -- and the related
notes included herein and should be read in conjunction with the consolidated   
financial statements of DTE which are incorporated herein by reference, and of  
MCN, which are included herein on pages --.                                     

                                                        [Enlarge/Download Table]

                                                                YEAR ENDED          SIX MONTHS ENDED
                                                             DECEMBER 31, 1998       JUNE 30, 1999  
                                                             -----------------      ----------------
                                                              (MILLIONS, EXCEPT PER SHARE AMOUNTS)  
                                                                                                    
Income Statement Data(a)                                                                            
  Operating Revenues........................................      $6,252                 $3,459     
  Net Income................................................      $   80                 $  188     
  Earnings Per Common Share                                                                         
     Basic..................................................      $ 0.46                 $ 1.07     
     Diluted................................................      $ 0.44                 $ 1.05     

                                                                [Download Table]

                                                                JUNE 30, 1999
                                                                -------------
                                                                             
Balance Sheet Data                                                           
  Total Assets..............................................       $18,089   
  Long-Term Debt Obligations (including capital leases) and                  
     Redeemable Cumulative Preferred Securities.............       $ 6,048   
  Book Value Per Share of Common Stock......................       $ 27.25   

-------------------------                                                       
(a) Income statement data excludes the cumulative effect of the 1999 change in  
MCN's accounting for start-up activities.                               

See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements. 

10

S-4
21st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 21st

RISK FACTORS

MCN SHAREHOLDERS CANNOT BE SURE OF THE MARKET VALUE OF DTE COMMON STOCK THAT    
WILL BE ISSUED IN THE MERGER                                                    

     As a result of the merger, subject to adjustments necessary to preserve the
status of the merger as a reorganization under the Internal Revenue Code, 45% of
the total number of shares of MCN common stock outstanding immediately prior to 
the merger will be converted into shares of DTE common stock. Because the       
exchange ratio is fixed at 0.775, the market value of DTE common stock issued in
the merger will depend upon the market prices of DTE common stock prior to the  
merger. This market value of DTE common stock is likely to fluctuate prior to   
the completion of the merger and therefore may be different at the time the     
merger is completed than it was at the time the merger agreement was signed and 
at the time of the shareholders meetings. Accordingly, MCN shareholders cannot  
be sure of the market value of the DTE common stock that they will receive in   
the merger.                                                                     

THE MERGER IS SUBJECT TO THE RECEIPT OF CONSENTS AND APPROVALS FROM GOVERNMENT  
ENTITIES THAT MAY IMPOSE CONDITIONS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON
DTE OR CAUSE ABANDONMENT OF THE MERGER                                          

    Before we can complete the merger, we must obtain final approvals from the
Securities and Exchange Commission under the Public Utility Holding Company Act 
of 1935, as well as complying with premerger notification requirements under the
antitrust laws that apply to business combinations generally. Approvals from    
other governmental entities, including the Federal Energy Regulatory Commission,
may also be required. Obtaining these regulatory approvals is likely to delay   
the merger for a period of time after the necessary approvals of the DTE and MCN
shareholders have been obtained at the special meetings. Approval of the merger 
by the Michigan Public Service Commission (the "MPSC") is not required under    
Michigan law, although the MPSC may seek to examine aspects of the merger. We   
cannot assure you that we will obtain these and other regulatory approvals, or  
if we obtain them, whether the terms and conditions of the approvals will be    
satisfactory. The terms and conditions of such regulatory approvals may require 
the divestiture of divisions, operations, or assets of the combined company and 
such required divestitures may have a material adverse effect on the business,  
financial condition or results of operations of the combined company. We also   
cannot give any assurance on whether third parties will appeal any final orders 
approving the merger, which could further delay the merger.                     

     We will use commercially reasonable efforts to obtain any required consent,
registration, authorization, approval or permit of any governmental entity in   
connection with the merger and related transactions. However, DTE is not        
required to complete the merger if the regulators impose conditions which, in   
its reasonable judgment, are reasonably likely to have a materially adverse     
effect on DTE, MCN or DTE Enterprises. See "The Merger Agreement -- Conditions  
of the Merger" on page -- and "Regulatory Filings, Approvals and Clearances" on 
page --.                                                                        

 In addition, the merger agreement permits either of us to terminate the
merger agreement after specific dates if the required governmental approvals    
have not been obtained or if one of us reasonably determines that it is more    
likely than not that such approvals will not be obtained on terms that would    
allow us to complete the merger.                                                

WE MAY NOT BE ABLE TO REALIZE FULLY THE COST SAVINGS AND OTHER BENEFITS WE      
EXPECT TO BE REALIZED IN CONNECTION WITH THE MERGER, WHICH MAY ADVERSELY AFFECT 
EARNINGS AND FINANCIAL CONDITION                                                

    Significant benefits are expected to result from the merger. The merger is
expected to be accretive to DTE's earnings per share within the first full year 
of operation, based on anticipated results of future operations, and assuming   
timely realization of the estimated cost savings and avoidances expected to     
result from the merger and no adverse regulatory treatment. However, the merger 
involves the integration of two large companies that have previously operated   
independently of each other and the successful combination of                   

11

S-4
22nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 22nd

the two business enterprises may take an extended period of time. Further,      
coordinating the operations will involve a number of risks including:           

    - Difficulties in combining operations and systems, including combining or
coordinating utility operations;                                  

- Difficulties in retaining employees, customers and suppliers;       

- Potentially adverse short-term effects on operating results; and    

 - The possibility that we will not achieve anticipated cost savings, or
       that any savings are partially or fully offset by utility rate reductions
or other actions and so do not benefit the shareholders.          

Inability to realize the full extent of, or any of, the anticipated benefits of 
the merger, as well as delays encountered in the transition process, could have 
a material adverse effect upon the revenues, level of expenses, operating       
results and financial condition of DTE, which may affect the value of DTE common
stock. See "The Merger -- DTE's and MCN's Reasons for the Merger",              
" -- Recommendation and Additional Considerations of the DTE Board of Directors"
on page -- and "-- Recommendation and Additional Considerations of the MCN Board
of Directors" on page --.                                                       

CHANGES IN REGULATORY ENVIRONMENT AND INCREASED COMPETITION MAY RESULT IN       
DECREASED EARNINGS                                                              

     The merger will combine two companies that to a large extent share a common
regulatory environment and currently are affected by a number of similar        
factors, including deregulation and increased competition. There are initiatives
in Michigan addressing competition in the electric industry. The impact, if any,
of the adoption and implementation of one or more of these initiatives is       
currently unknown. In addition, the impact of the merger on deregulation issues,
if any, is currently unknown. The utility industry has been undergoing dramatic 
structural change for several years, resulting in increasing competitive        
pressures faced by electric and natural gas utility companies. Increased        
competition may create greater risks to the stability of utility earnings       
generally and may in the future reduce DTE's earnings from retail electric and  
natural gas sales. In a deregulated environment, formerly regulated utility     
companies that are not responsive to a competitive energy marketplace may suffer
erosion in market share, revenues and profits as competitors gain access to     
their customers.                                                                

FOR MCN SHAREHOLDERS, AN INVESTMENT IN DTE IS SUBJECT TO RISKS RELATED TO THE   
ELECTRIC UTILITY INDUSTRY                                                       

    DTE operates numerous electric generating facilities, including fossil and
nuclear fueled plants. Some of the risks associated with the operation and cost 
of operation of electric generating facilities differ from those relating to    
MCN's utility and non-utility businesses, including risks relating to           
unscheduled outages and changing environmental requirements. MCN shareholders,  
who after the merger hold DTE common stock, will be exposed to risks arising    
from the electric utility industry that did not significantly affect their      
investment in MCN.                                                              

12

S-4
23rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 23rd

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

   This document contains certain forward-looking statements with respect to
the financial condition, results of operations and business of each of DTE and  
MCN. These statements may be made directly in this document referring to DTE or 
MCN or, with respect to DTE only, may be made part of this document by reference
to other documents filed with the Securities and Exchange Commission, which is  
known as "incorporation by reference," and may include statements for the period
following the completion of the merger. You can find many of these statements by
looking for words such as "believes," "expects," "anticipates," "estimates" or  
similar expressions in this document or in documents incorporated herein.       

     These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors that may cause actual results to differ from those   
contemplated by the forward-looking statements include, among others, the       
following possibilities:                                                        

   - General economic or business conditions, both domestic and foreign, may
      be less favorable than expected, resulting in, among other things, lower
than expected revenues.                                           

     - Costs or difficulties related to the integration of the businesses of DTE
and MCN may be greater than expected.                             

    - Legislative or regulatory changes may adversely affect the businesses in
       which DTE and MCN are engaged. This includes any effect which the utility
 industry restructuring in Michigan may have on the combined entity.

- The capital intensive nature of MCN's and DTE's businesses.         

- The uncertainty of gas reserve estimates.                           

 - The timing and extent of changes in commodity prices for natural gas,
natural gas liquids, methanol, coal and electricity.              

  - The timely completion and functioning of modifications made to address
"Year 2000" issues.                                               

- The effects of weather and other natural phenomena.                 

- The effects of environmental regulations.                           

- The performance of non-regulated lines of business.                 

- Adverse changes may occur in the securities markets.                

- Changes in the interest rate environment may adversely affect profit
margins.                                                          

Because such forward-looking statements are subject to risks and      
uncertainties, actual results may differ materially from those expressed or     
implied by such forward-looking statements. DTE shareholders and MCN            
shareholders are cautioned not to place undue reliance on such statements, which
speak only as of the date of this document or the date of any document          
incorporated by reference.                                                      

    All subsequent written and oral forward-looking statements attributable to
DTE or MCN or any person acting on their behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section. 
Neither DTE nor MCN undertakes any obligation to release publicly any revisions 
to such forward-looking statements to reflect events or circumstances after the 
date of this document or to reflect the occurrence of unanticipated events.     

13

S-4
24th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 24th

THE DTE SPECIAL MEETING 

GENERAL                                                                         

     This document is being furnished to DTE shareholders in connection with the
solicitation of proxies by the DTE board of directors for use at the DTE special
meeting, to be held on --, at --, local time, at the --, --, Michigan. The proxy
card enclosed with this document is being mailed to shareholders on or about --.

The purpose of the DTE special meeting is:                            

         (1) To consider and to vote upon the issuance of shares of DTE common
stock in the merger; and                            

       (2) To transact such other business related to such proposal as may
properly come before the DTE special meeting.       

    THE DTE BOARD OF DIRECTORS HAS ADOPTED THE MERGER AGREEMENT. THE DTE BOARD
OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ISSUANCE OF SHARES OF  
DTE COMMON STOCK IN THE MERGER.                                                 

VOTING                                                                          

RECORD DATE                                                           

     The DTE board of directors has fixed the close of business on -- as the DTE
record date for the determination of the holders of DTE common stock entitled to
receive notice of and to vote at the DTE special meeting. You may vote at the   
DTE special meeting only if you owned DTE common stock at that time.            

    As of the DTE record date, there were -- shares of DTE common stock issued
and outstanding. Each share of DTE common stock outstanding on the DTE record   
date is entitled to one vote upon each matter properly submitted at the DTE     
special meeting.                                                                

VOTE REQUIRED                                                         

   The affirmative vote of the holders of a majority of the shares voting at
the DTE special meeting is required to approve the issuance of shares of DTE    
common stock in the merger.                                                     

Any failure to be present at the DTE special meeting, in person or by 
proxy, any abstention and any broker non-vote, as explained below, will have the
effect of reducing the aggregate number of shares voting at the DTE special     
meeting and, accordingly, the number of shares of DTE common stock required to  
approve the issuance of shares of DTE common stock in the merger. Under the     
rules of the NYSE, brokers who hold shares in street name for customers will not
have authority to vote on the issuance of shares of DTE common stock in the     
merger unless they receive specific instructions from the beneficial owners of  
such shares. Shares that are not voted because brokers did not receive any such 
instructions are referred to as "broker non-votes."                             

The presence, in person or represented by proxy, of a majority of the 
shares of DTE common stock entitled to vote at the DTE special meeting will     
constitute a quorum for the transaction of business. Abstentions and broker     
non-votes will be counted as present for purposes of determining a quorum.      

As of --, 1999, directors and executive officers of DTE and their     
affiliates owned beneficially an aggregate of -- shares of DTE common stock,    
including shares which may be acquired within 60 days upon exercise of employee 
stock options, or approximately --%, of the shares of DTE common stock          
outstanding on such date. The directors and executive officers of DTE have      
indicated their intention to vote their shares of DTE common stock in favor of  
the issuance of shares of DTE common stock in the merger.                       

     As of --, 1999, the directors and executive officers of DTE owned -- shares
of MCN common stock.                                                            

PROXIES                                                                         

   Each copy of this document mailed to DTE shareholders is accompanied by a
form of proxy with voting instructions for submission by mail. In addition, DTE 
shareholders entitled to vote at the DTE special meeting                        

14

S-4
25th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 25th

may submit their proxies by telephone or through the Internet, in accordance    
with the instructions set forth on the accompanying proxy card. However,        
submission of proxies with voting instructions by telephone or through the      
Internet may not be available to shareholders who hold their shares through a   
broker, nominee, fiduciary or other custodian. DTE shareholders should contact  
such person to determine whether they may submit their proxy by telephone or    
through the Internet. Shares of DTE common stock represented by a proxy properly
submitted as described below and received at or prior to the DTE special        
meeting, unless subsequently revoked, will be voted in accordance with the      
instructions thereon. DTE has been advised by counsel that submitting proxies by
telephone or through the Internet in the manner described in this document is   
consistent with the requirements of applicable law.                             

   Submitting Proxies by Mail. To submit a written proxy by mail, holders of
DTE common stock should complete, sign, date and mail the proxy card provided   
with this document in accordance with the instructions set forth on such card.  
If a proxy card is signed and returned without indicating any voting            
instructions, shares of DTE common stock represented by the proxy will be voted 
"FOR" the issuance of shares of DTE common stock in the merger.                 

   Submitting Proxies by Telephone or Internet. Shareholders may also submit
proxies with voting instructions by telephone by calling 1-800---, or through   
the Internet at http://www.--. In each case, shareholders should follow the     
instructions that are set forth on the reverse side of the accompanying proxy   
card. Each DTE shareholder has been assigned a unique control number which has  
been printed on each holder's proxy card. Shareholders who submit proxies by    
telephone or through the Internet will be required to provide their assigned    
control number before their proxy will be accepted. In addition to the          
instructions that appear on the proxy card, step-by-step instructions will be   
provided by a recorded telephone message for those shareholders submitting      
proxies by telephone, or at the designated website for those shareholders       
submitting proxies through the Internet. Shareholders submitting their proxies  
with voting instructions by telephone or through the Internet will receive      
confirmation on the telephone or through the Internet, as applicable, that their
proxies have been successfully submitted.                                       

Your vote is confidential, whether you submit your proxy by mail, by  
telephone or through the Internet. The tabulator and inspectors of election are 
not employees of DTE nor are they affiliated with DTE in any way. However, DTE  
may be advised of whether you have voted. Also, your vote may be disclosed to   
DTE if a contested proxy solicitation occurs or if a disclosure is required by  
law.                                                                            

REVOCATION                                                            

   Any person who submits a proxy may revoke it any time before it is voted:

- By giving written notice of revocation to DTE, addressed to --      

  - By submitting a later-dated proxy with voting instructions by mail, by
      telephone or through the Internet, if the proxy is received by DTE prior
to the DTE special meeting; or                                    

     - By VOTING in person at the DTE special meeting; a proxy is not revoked by
simply ATTENDING the DTE special meeting.                         

 DTE shareholders who have instructed a broker to vote their shares must
follow directions received from their broker to change or revoke their proxy.   

SPECIAL PROCEDURES FOR THE DETROIT EDISON SAVINGS & INVESTMENT PLAN   
PARTICIPANTS                                                                    

   Participants in the Detroit Edison Savings & Investment Plan may not vote
their shares using the procedures described above. Such shareholders must follow
the procedures described below.                                                 

   Participants in the Detroit Edison Savings & Investment Plan are entitled
to direct Fidelity Management Trust Company, as trustee, to vote on their behalf
at the DTE special meeting. Only Fidelity can vote shares of participants in the
Detroit Edison Savings & Investment Plan and Fidelity only votes shares for     
which it has received voting instructions. Participants cannot vote these shares
in person at the DTE special meeting and cannot vote these shares by telephone  
or through the Internet. How you vote these shares is confidential.             
15

S-4
26th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 26th

Fidelity will not disclose how you have instructed it to vote unless required by
law. DTE shareholders who are participants in this plan must follow the         
instructions from Fidelity in order to change or revoke their proxy.            

OTHER MATTERS                                                         

 The DTE board of directors is not currently aware of any business to be
acted upon at its special meeting, other than as described herein. If, however, 
other matters related to the proposal at the DTE special meeting are properly   
brought before the DTE special meeting, the persons appointed as proxies will   
have discretion to vote or to act thereon according to their best judgment,     
unless otherwise indicated on any particular proxy. The persons appointed as    
proxies also will have discretion to vote on adjournment of the DTE special     
meeting. Such adjournment may be for the purpose of soliciting additional       
proxies, although shares represented by proxies voting against the issuance of  
shares of DTE common stock in the merger will be voted against a proposal to    
adjourn the DTE special meeting for the purpose of soliciting additional        
proxies.                                                                        

SOLICITATION OF PROXIES                                                         

   In addition to solicitation by mail, directors, officers and employees of
DTE, none of whom will be specifically compensated for such services but may be 
reimbursed for reasonable out-of-pocket expenses in connection therewith, may   
solicit proxies from the shareholders of DTE personally or by telephone,        
telecopy or telegram or other forms of communication. Brokerage houses,         
nominees, fiduciaries and other custodians will be requested to forward         
soliciting materials to beneficial owners and will be reimbursed for their      
reasonable expenses incurred in sending such materials to beneficial owners.    

   In addition, DTE has retained -- to assist in the solicitation of proxies
from its shareholders. The fees to be paid by DTE to -- for such services will  
be equal to approximately --, plus reasonable out-of-pocket costs and expenses. 
DTE will bear its own expenses in connection with the solicitation of proxies   
for the DTE special meeting, except DTE and MCN will share equally all expenses 
incurred in connection with the filing of the registration statement filed by   
DTE with the Securities and Exchange Commission to register the shares of DTE   
common stock to be issued to MCN shareholders in the merger, and the printing   
and mailing of this document.                                                   

16

S-4
27th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 27th

THE MCN SPECIAL MEETING 

GENERAL                                                                         

     This document is being furnished to MCN shareholders in connection with the
solicitation of proxies by the MCN board of directors for use at the MCN special
meeting, to be held on -- at --, local time, at the --, Michigan. This document 
is also furnished to MCN shareholders as a prospectus in connection with the    
issuance by DTE of shares of DTE common stock pursuant to the merger agreement. 

The purpose of the MCN special meeting is:                            

          (1) To consider and to vote upon the approval of the merger agreement;
and                                                 

       (2) To transact such other business related to such proposal as may
properly come before the MCN special meeting.       

    THE MCN BOARD OF DIRECTORS HAS ADOPTED THE MERGER AGREEMENT AND RECOMMENDS
THAT THE MCN SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT.      

VOTING                                                                          

RECORD DATE                                                           

     The MCN board of directors has fixed the close of business on -- as the MCN
record date for the determination of the holders of MCN common stock entitled to
receive notice of and to vote at the MCN special meeting. You may vote at the   
MCN special meeting only if you owned MCN common stock at that time.            

    As of the MCN record date, there were -- shares of MCN common stock issued
and outstanding. Each share of MCN common stock outstanding on the MCN record   
date is entitled to one vote on each matter properly submitted at the MCN       
special meeting.                                                                

VOTE REQUIRED                                                         

The affirmative vote of the holders of a majority of the shares of MCN
common stock issued and outstanding on the MCN record date is required for      
approval of the merger agreement.                                               

Any failure to be present at the MCN special meeting, in person or by 
proxy, any abstention and any broker non-vote, as explained below, will have the
same effect as a vote against approval of the merger agreement. Under the rules 
of the NYSE, brokers who hold shares in street name for customers will not have 
authority to vote on the approval of the merger agreement unless they receive   
specific instructions from the beneficial owners of such shares. Shares that are
not voted because brokers did not receive any such instructions are referred to 
a "broker non-votes."                                                           

The presence, in person or represented by proxy, of a majority of the 
shares of MCN common stock entitled to vote at the MCN special meeting will     
constitute a quorum for the transaction of business. Abstentions and broker     
non-votes will be counted as present for purposes of determining a quorum.      

    As of --, directors and executive officers of MCN and its affiliates owned
beneficially an aggregate of -- shares of MCN common stock, including shares    
which may be acquired within 60 days upon exercise of employee stock options, or
approximately --% of the shares of MCN common stock outstanding on such date.   
The directors and executive officers of MCN have indicated their intention to   
vote their shares of MCN common stock in favor of the approval of the merger    
agreement.                                                                      

     As of -- the directors and executive officers of MCN owned -- shares of DTE
common stock.                                                                   

PROXIES                                                                         

   Each copy of this document mailed to MCN shareholders is accompanied by a
form of proxy with voting instructions for submission by mail. In addition, MCN 
shareholders entitled to vote at the MCN special                                

17

S-4
28th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 28th

meeting may submit their proxies by telephone or through the Internet in        
accordance with the instructions set forth on the accompanying proxy card.      
However, submission of proxies with voting instructions by telephone or through 
the Internet may not be available to shareholders who hold their shares through 
a broker, nominee, fiduciary or other custodian. MCN shareholders should contact
such person to determine whether they may submit their proxies by telephone or  
through the Internet. Shares of MCN common stock represented by a proxy properly
submitted as described below and received at or prior to the MCN special        
meeting, unless subsequently revoked, will be voted in accordance with the      
instructions thereon. MCN has been advised by counsel that submitting proxies by
telephone or through the Internet in the manner described in this document is   
consistent with the requirements of applicable law.                             

   Submitting Proxies by Mail. To submit a written proxy by mail, holders of
MCN common stock should complete, sign, date and mail the proxy card provided   
with this document in accordance with the instructions set forth on such card.  
If a proxy card is signed and returned without indicating any voting            
instructions, shares of MCN common stock represented by the proxy will be voted 
"FOR" the approval of the merger agreement.                                     

   Submitting Proxies by Telephone or Internet. Shareholders may also submit
proxies with voting instructions by telephone by calling 1-800---, or through   
the Internet at http://www.--. In each case, shareholders should follow the     
instructions that are set forth on the reverse side of the accompanying proxy   
card. Each shareholder has been assigned a unique control number which has been 
printed on each holder's proxy card. Shareholders who submit proxies by         
telephone or through the Internet will be required to provide their assigned    
control number before their proxy will be accepted. In addition to the          
instructions that appear on the proxy card, step-by-step instructions will be   
provided by a recorded telephone message for those shareholders submitting      
proxies by telephone, or at the designated website for those shareholders       
submitting proxies through the Internet. Shareholders submitting their proxies  
with voting instructions by telephone or through the Internet will receive      
confirmation on the telephone or through the Internet, as applicable, that their
proxies have been successfully submitted.                                       

REVOCATION                                                            

   Any person who submits a proxy may revoke it any time before it is voted:

 - By giving written notice of revocation to MCN, addressed to: Investor
      Relations, MCN Energy Group Inc., 500 Griswold Street, Detroit, Michigan
48226;                                                            

  - By submitting a later dated proxy with voting instructions by mail, by
      telephone or through the Internet, if the proxy is received by MCN prior
to the MCN special meeting; or                                    

     - By VOTING in person at the MCN special meeting; a proxy is not revoked by
simply ATTENDING the MCN special meeting.                         

MCN shareholders who have instructed a broker to vote their shares must follow  
directions received from their broker to change and revoke their proxy.         

SPECIAL PROCEDURES FOR THE MCN 401(K) PLANS                           

  Participants in the MCN 401(k) plans may not vote their shares using the
procedures described above. Putnam Fiduciary Trust Company, trustee under MCN's 
401(k) plans, will provide such participants with instructions as to voting     
procedures for such shares.                                                     

OTHER MATTERS                                                         

 The MCN board of directors is not currently aware of any business to be
acted upon at its special meeting, other than as described herein. If, however, 
other matters related to the proposal to approve the merger agreement are       
properly brought before the MCN special meeting, the persons appointed as       
proxies will have discretion to vote or to act thereon according to their best  
judgment, unless otherwise indicated on any particular proxy. The persons       
appointed as proxies also will have discretion to vote on adjournment of the MCN
special meeting. Such adjournment may be for the purpose of soliciting          
additional proxies, although                                                    

18

S-4
29th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 29th

shares represented by proxies voting against the approval of the merger         
agreement will be voted against a proposal to adjourn the MCN special meeting   
for the purpose of soliciting additional proxies.                               

SOLICITATION OF PROXIES                                                         

   In addition to solicitation by mail, directors, officers and employees of
MCN, none of whom will be specifically compensated for such services but may be 
reimbursed for reasonable out-of-pocket expenses in connection therewith, may   
solicit proxies from the shareholders of MCN personally or by telephone,        
telecopy or telegram or other forms of communication. Brokerage houses,         
nominees, fiduciaries and other custodians will be requested to forward         
soliciting materials to beneficial owners and will be reimbursed for their      
reasonable expenses incurred in sending such materials to beneficial owners.    

   In addition, MCN has retained -- to assist in the solicitation of proxies
from its shareholders. The fees to be paid by MCN to -- for such services will  
be equal to approximately --, plus reasonable out-of-pocket costs and expenses. 
MCN will bear its own expenses in connection with the solicitation of proxies   
for the MCN special meeting, except that MCN and DTE will share equally all     
expenses incurred in connection with the filing of the registration statement to
register the shares of DTE common stock to be issued to MCN shareholders in the 
merger and the printing and mailing of this document.                           

   MCN SHAREHOLDERS SHOULD NOT SEND MCN COMMON STOCK CERTIFICATES WITH THEIR
PROXY CARDS. Instructions for delivering stock certificates can be found under  
"The Merger Agreement -- Election Procedures and Distribution of Certificates of
DTE Common Stock," on page --.                                                  

19

S-4
30th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 30th

THE COMPANIES 

DTE ENERGY COMPANY                                                              

     DTE Energy Company, a Michigan corporation organized in 1995, is the parent
holding company of The Detroit Edison Company and other subsidiaries engaged in 
energy-related businesses.                                                      

   DTE's principal operating subsidiary, Detroit Edison, is a public utility
engaged in the generation, purchase, transmission, distribution and sale of     
electric energy in a 7,600 square mile area in Southeastern Michigan. Detroit   
Edison's service area includes about 13% of Michigan's total land area and      
approximately five million people, which is about half of Michigan's population.
Detroit Edison's residential customers reside in urban and rural areas,         
including an extensive shoreline along the Great Lakes and connecting waters.   

    DTE also has affiliates that engage in non-regulated businesses, including
the following energy-related services and products:                             

- The operation of a pulverized coal facility and coke oven batteries,

- Coal sourcing, blending and transportation,                         

- Landfill gas-to-energy facilities,                                  

- Providing expertise in the application of new energy technologies,  

- Real estate development,                                            

- Power marketing, and                                                

   - Specialty engineering services and retail marketing of energy and other
products.                                                         

DTE Capital Corporation, another affiliate of DTE, provides financial 
services to DTE's non-regulated affiliates.                                     

    The mailing address of DTE Energy Company's principal executive offices is
2000 2nd Avenue, Detroit, Michigan, 48226-1279, and its telephone number is     
(313) 235-4000.                                                                 

MCN ENERGY GROUP INC.                                                           

MCN, a Michigan corporation organized in 1988, is an integrated energy
company with more than $4.0 billion in assets at June 30, 1999 and revenues of  
over $2.2 billion for the twelve months ended June 30, 1999. MCN is primarily   
involved in natural gas production, gathering, processing, transmission, storage
and distribution, electric power generation and energy marketing. MCN's largest 
subsidiary is Michigan Consolidated Gas Company ("MichCon"), a natural gas      
utility serving 1.2 million customers in more than 500 communities throughout   
Michigan. MCN Energy Enterprises Inc. is a wholly owned subsidiary of MCN and   
serves as a holding company for MCN's nonutility businesses.                    

On August 2, 1999, MCN announced a significantly revised strategic    
direction. MCN's revised strategy includes:                                     

     - Focusing on the Midwest-to-Northeast region rather than on North America;
and                                                               

   - Emphasizing operational efficiencies and growth through the integration
 of existing businesses rather than building a portfolio of diverse,
non-operated energy investments.                                  

  Consistent with its new strategic direction, MCN will retain its natural
gas producing properties in Michigan and continue selling its other exploration 
and production oil and gas properties, and has reduced its capital investment   
expectations to approximately $500 million in 1999 and $300 million annually    
thereafter.                                                                     

     As a part of its revised strategic direction, MCN is reorganizing into four
primary business segments and an investment arm: Gas Distribution; Midstream &  
Supply; Energy Marketing; Power; and Energy Holdings.                           

     - Gas Distribution is responsible for MCN's regulated utilities operations.
      Gas Distribution consists principally of MichCon, a Michigan corporation
    organized in 1898 that, with its predecessors has been in business for
   over 150 years. MichCon is subject to the accounting requirements and
rate regulation                                                   
20

S-4
31st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 31st

of the Michigan Public Service Commission with respect to the distribution and  
transportation of natural gas.                                                  

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

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

- Power develops and manages independent electric power projects.     

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

   Until MCN's reorganization into the four business segments and investment
arm described above is complete, MCN will continue to operate through two major 
business groups: Diversified Energy and Gas Distribution.                       

     - Diversified Energy, operating through MCNEE, is involved in the following
segments: Pipelines & Processing with gathering, processing and   
 transmission facilities near areas of rapid reserve development and
   growing consumer markets; Electric Power with investments in electric
       generation facilities in operation and under construction with a combined
 2,986 MW of gross capacity and investments in electric distribution
    facilities at December 31, 1998; Energy Marketing with total gas sales
       and exchange gas delivery markets of 465.7 Bcf for 1998 with rights to 67
 Bcf of storage capacity. Diversified Energy also has investments in
      Exploration & Production properties with 1.2 Tcf/e of proved gas and oil
reserves at December 31, 1998. Consistent with its new strategic  
direction, MCN will retain its natural gas producing properties in
Michigan. MCN has sold its E&P properties in the Western and      
    Midcontinent/Gulf Coast regions and expects to sell other non-Michigan
E&P properties in 1999.                                           

   - Gas Distribution consists principally of MichCon. MichCon is subject to
      the accounting requirements and rate regulation of the MPSC with respect
to the distribution and intrastate transportation of natural gas. 
 Slightly less than half of MichCon's labor force is covered by five
  collective bargaining agreements. In June 1998, MichCon successfully
      negotiated and signed three 3-year collective bargaining agreements. The
remaining two agreements will expire December 2000.               

  MCN has its principal executive offices at 500 Griswold Street, Detroit,
Michigan 48226 (telephone number (313) 256-5500).                               

    For additional information about MCN, see "Description of MCN Energy Group
Inc." on page --.                                                               

21

S-4
32nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 32nd

THE MERGER

The discussion in this document of the merger of DTE and MCN and the  
principal terms of the Agreement and Plan of Merger, dated as of October 4,     
1999, among DTE, MCN and DTE Enterprises, Inc. does not purport to be complete  
and is subject to, and qualified in its entirety by reference to, the merger    
agreement which is incorporated into this document by reference. A copy of the  
merger agreement is attached as Appendix A to this document.                    

GENERAL                                                                         

     We are furnishing this document to DTE shareholders and MCN shareholders in
connection with the solicitation of proxies by the boards of directors of DTE   
and MCN for use at their respective special meetings of shareholders, and at any
adjournments or postponements thereof.                                          

    At the DTE special meeting, DTE shareholders will be asked to consider and
to vote on a proposal to issue shares of DTE common stock in the merger. At the 
MCN special meeting, MCN shareholders will be asked to consider and to vote upon
a proposal to approve the merger agreement. Approval of the merger agreement    
will also constitute approval of the transactions contemplated thereby,         
including, among others, the merger.                                            

 The merger agreement provides that MCN will be merged with and into DTE
Enterprises, with DTE Enterprises as the surviving corporation. In the merger,  
each share of MCN common stock issued and outstanding immediately prior to the  
merger, other than shares of MCN common stock owned by DTE or MCN (except for   
those owned on behalf of third parties), will be converted into the right to    
receive $28.50 in cash or 0.775 shares of DTE common stock. The merger agreement
also contains proration and allocation mechanisms that ensure that:             

     - The aggregate number of shares of MCN common stock that will be converted
 into cash will be equal to 55% of the total number of shares of MCN
common stock outstanding immediately prior to the merger; and     

     - The aggregate number of shares of MCN common stock that will be converted
      into shares of DTE common stock will be equal to 45% of the total number
of shares of MCN common stock outstanding immediately prior to the
merger.                                                           

In addition, as discussed in further detail under "The Merger         
Agreement -- Terms of the Merger" on page --, the percentage of shares of MCN   
common stock converted into cash and shares of DTE common stock also may be     
further adjusted in order to preserve the status of the merger as a             
reorganization under the Internal Revenue Code.                                 

 The merger will become effective when the certificate of merger is duly
endorsed by the Department of Consumer and Industry Services of the State of    
Michigan.                                                                       

DTE will account for the merger as a purchase for financial reporting 
purposes. The merger is intended to qualify as a "reorganization" within the    
meaning of Section 368(a) of the Internal Revenue Code of 1986, for federal     
income tax purposes.                                                            

     Based on the $37 closing price per share of DTE common stock on the NYSE on
October 4, 1999, the last trading day prior to public announcement of the       
merger, and the exchange ratio of 0.775, the implied per share value of each    
share of MCN common stock converted into shares of DTE common stock in the      
merger was $28.675 as of such date. The closing price per share of DTE common   
stock on the NYSE on --, the last practicable trading day prior to the date of  
this document, was $-- and the implied per share value of each share of MCN     
common stock converted into shares of DTE common stock in the merger was $-- as 
of such date.                                                                   

22

S-4
33rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 33rd

BACKGROUND TO THE MERGER                                                        

 In recent years, the management of each of DTE and MCN has periodically
reviewed its company's competitive position in the electric and gas utility     
industry, industry trends and strategic initiatives to seek to improve its      
competitive position.                                                           

     In this context, and after several meetings between Warburg Dillon Read LLC
and DTE's senior management team and after several presentations by Warburg     
Dillon Read to the DTE board of directors regarding possible strategic          
opportunities, DTE engaged Warburg Dillon Read in late 1998 as its financial    
advisor for a possible combination with MCN.                                    

 In the fall of 1998 and continuing into early 1999, Mr. Anthony Earley,
Jr., Chairman and Chief Executive Officer of DTE, and Mr. Alfred R. Glancy III, 
Chairman and Chief Executive Officer of MCN, had several discussions initiated  
by Mr. Earley with respect to a combination of DTE and MCN. In March 1999, Mr.  
Earley, on behalf of the DTE board of directors, sent a letter to Mr. Glancy    
expressing DTE's belief that a business combination of DTE and MCN could be     
beneficial to both of the companies and their respective shareholders, and to   
indicate that, based on a review of MCN's public documents and subject to a due 
diligence review of MCN, DTE believed that it could offer MCN's shareholders a  
substantial premium over MCN's then-current stock price. After considering the  
DTE proposal and determining that it was in the best interests of MCN's         
shareholders for MCN to pursue its business plan as an independent company, Mr. 
Glancy, on behalf of the MCN board of directors, declined Mr. Earley's offer to 
engage in further discussions.                                                  

     On June 22, 1999, the DTE board of directors met and received presentations
from Warburg Dillon Read, McKinsey and Company and Goldman, Sachs & Co. on      
recent developments and opportunities in the electric utility industry. Members 
of DTE's senior management also presented their views on various potential      
business acquisitions, including an acquisition of MCN.                         

On July 28, 1999, the MCN board of directors approved a significantly 
revised strategic direction for MCN, the key aspects of which included a        
regional rather than North American focus and an emphasis on achieving          
operational efficiencies and growth through integration of existing businesses. 
The MCN board of directors requested that Merrill Lynch assist it with a review 
and analysis of MCN's strategic alternatives.                                   

   On July 28, 1999, at a regular meeting of the DTE board of directors, the
DTE board of directors authorized management to pursue a negotiated acquisition 
of MCN.                                                                         

   In August 1999, at the request of Mr. Earley, Mr. Earley and Mr. Larry G.
Garberding, Chief Financial Officer of DTE, met with Mr. Glancy and Mr. Howard  
L. Dow III, Chief Financial Officer of MCN, to discuss a transaction between DTE
and MCN. At this meeting, Mr. Earley proposed that DTE and MCN pursue a         
transaction at a price of $27.00 per MCN share subject to adjustment based on   
further information from MCN. Mr. Glancy said he would discuss the proposal with
the MCN board of directors.                                                     

On August 24, 1999, the MCN board of directors met and Merrill Lynch  
reviewed with it recent developments in the gas utility industry. Merrill Lynch 
also reviewed with the MCN board of directors preliminary observations with     
regard to the range of values that MCN might reasonably expect to realize in an 
acquisition or business combination transaction. At that meeting, MCN authorized
management to work with Merrill Lynch in connection with a potential transaction
with DTE. At this meeting, the MCN board of directors also reviewed the DTE     
proposal.                                                                       

  Later in August 1999, Mr. Earley met with Mr. Glancy to consider further
the financial terms of a merger and shortly thereafter, Mr. Earley reported to  
the DTE board of directors on the progress of discussions with MCN. On August   
30, 1999, the parties entered into a customary form of confidentiality          
agreement. In early September 1999, after MCN provided preliminary information  
to DTE, Mr. Earley and Mr. Glancy had several conversations to discuss further  
the financial terms of the proposed transaction between the companies. These    
discussions focused on price, an exclusive negotiating arrangement and whether  
the consideration to be paid to MCN shareholders would be in cash or in shares  
of DTE common stock. On September 7, 1999, the MCN board of directors met and   
was briefed on the discussions between the parties and authorized further       
discussions.                                                                    

23

S-4
34th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 34th

    Thereafter, in September 1999, Mr. Earley and Mr. Glancy discussed a price
of $28.50 per share of MCN common stock, subject to DTE's due diligence review  
of MCN, and an informal understanding was reached that MCN would inform DTE     
prior to engaging in negotiations with a third party. The parties commenced     
their respective due diligence investigations of each other and the senior      
executives of DTE and MCN, along with outside financial advisors, began to meet 
to discuss the possible combination of the two companies. These discussions     
focused on the mutual due diligence, allocation of management responsibilities  
and regulatory issues. The parties' senior managements also discussed the       
immediate sale of MCN's coal fines properties and other assets to DTE and the   
potential financial impact of MCN severance agreements and the acceleration of  
certain MCN employee benefits. On September 16, 1999 and September 22, 1999, the
DTE board of directors and the MCN board of directors, respectively, were       
briefed on the discussions between the parties; at its meeting, the DTE board of
directors also reviewed relevant financial and legal considerations.            

   In late September, Mr. Earley and Mr. Glancy met to discuss allocation of
management responsibility and discussed the terms under which Mr. Glancy would  
be willing to enter into a consulting arrangement with DTE to ensure his        
availability after the completion of the proposed transaction. In addition, the 
companies' respective legal advisors engaged in extensive meetings and          
negotiations in New York to establish the terms of the transaction; among the   
principal issues discussed were matters relating to preserving the status of the
proposed transaction as a reorganization under the Internal Revenue Code,       
termination of the merger agreement and the fees that would be payable in the   
event of termination, and conditions to the parties' respective obligations to  
consummate the merger.                                                          

On September 29, 1999, Mr. Earley met with Mr. Glancy and agreed that,
subject to final resolution of certain unresolved matters, the consideration to 
be received by MCN shareholders would consist of cash and stock, and that the   
terms of the merger agreement would permit MCN shareholders to elect to receive 
$28.50 in cash or a fraction of a share of DTE common stock. On October 3, 1999,
Mr. Earley and Mr. Glancy met with their respective financial advisors and      
agreed that MCN shareholders would be able to elect to receive 0.775 shares of  
DTE common stock in lieu of $28.50 in cash, subject to allocation and proration 
mechanisms and tax adjustments necessary to preserve the status of the merger as
a reorganization under the Internal Revenue Code.                               

On October 4, 1999, the DTE board of directors met to consider and to 
approve the terms of the merger agreement. Members of DTE management and        
representatives of Warburg Dillon Read and Sullivan & Cromwell, special counsel 
to DTE, updated the DTE board of directors on developments since its September  
16, 1999, meeting. Sullivan & Cromwell reviewed the fiduciary obligations of the
DTE board of directors and described the definitive documentation and its       
effect. Warburg Dillon Read made a financial presentation and delivered its     
opinion to the effect that, based upon and subject to the considerations set    
forth in such opinion, as of October 4, 1999, the consideration to be paid to   
MCN shareholders in the merger was fair, from a financial point of view, to DTE.
After further discussion and deliberation, the DTE board of directors adopted   
the merger agreement, the merger and the transactions contemplated thereby, and 
resolved to recommend that DTE shareholders vote to approve the issuance of     
shares of DTE common stock in the merger.                                       

     On October 4, 1999, the MCN board of directors met to consider the proposed
merger. Members of MCN's senior management and representatives of Merrill Lynch 
and Wachtell, Lipton, Rosen & Katz, special counsel to MCN, made presentations  
to the MCN board of directors and discussed with the MCN board of directors     
their views and analyses of various business, financial, legal and regulatory   
aspects of the proposed transaction, including a review of the terms and        
conditions of the definitive agreements. In addition the MCN board of directors 
received a presentation from a nuclear consulting firm regarding DTE's nuclear  
plants. Wachtell, Lipton reviewed the fiduciary obligations of the MCN board of 
directors and described the definitive documentation and its effect. Merrill    
Lynch orally delivered its fairness opinion, which was subsequently confirmed in
writing, to the MCN board of directors to the effect that, as of such date, the 
merger consideration to be received by MCN shareholders in the merger was fair, 
from a financial point of view, to MCN shareholders. The nonmanagement directors
met in an executive session at which the directors were given an opportunity to 
ask questions and discuss their views of the transaction and discussed          
management's interests in the merger. After further discussion and deliberation,
the full MCN board of directors reconvened and discussed the presentations      
received from management, MCN's financial advisor                               
24

S-4
35th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 35th

and its legal counsel. The MCN board of directors also discussed the potential  
sale of MCN's coal fines properties to DTE. The MCN board of directors          
authorized management to negotiate definitive documentation containing          
arms-length terms, including those set forth in the merger agreement, relating  
to the sale of the coal fines properties independent of the merger transaction. 
The MCN board of directors then adopted by unanimous vote the merger agreement  
and authorized its execution and resolved to recommend that MCN shareholders    
vote to approve the merger agreement and the other related transactions.        

DTE'S AND MCN'S REASONS FOR THE MERGER                                          

The merger of DTE and MCN will create a fully integrated electric and 
natural gas company with a strong regional energy infrastructure and competitive
operations spanning the energy value chain. By combining DTE's experience in    
power plant operations, coal management and marketing with MCN's experience in  
natural gas purchasing, transportation, storage and marketing, the combined     
company will be positioned to market coal, gas, and electricity in the region   
and to compete more effectively in the development of new power plants and      
distributed generation. DTE and MCN believe this will generate significant      
opportunities to deliver greater value to shareholders. The DTE board of        
directors and the MCN board of directors each considered a number of factors in 
deciding to adopt the merger agreement and recommend it to their shareholders.  
The material factors considered are those set forth below:                      

     In reaching their decision, the DTE board of directors and the MCN board of
directors considered the complementary nature of the businesses of DTE and MCN  
in terms of their commercial strengths and the ability to combine these         
strengths to pursue more effectively growth and expansion opportunities         
available in the region spanning the corridor from the Great Lakes to the       
northeast area of the United States. The area from the Great Lakes to the       
northeast area of the United States generates a substantial portion of the      
nation's energy consumption, and has a high concentration of large industrial   
customers. This geographic area is playing an increasingly important role as a  
gas pricing and transportation hub, and is central to the growing west-to-east  
coal, gas and electric flows. The merger will combine in one enterprise DTE's   
position as a leading regional coal marketer and MCN's participation in         
pipelines and gas reserves in the regional gas corridor and will allow the      
combined company to offer attractive energy supply options to large customers,  
and develop as a major regional multi fuel and power marketer. The DTE board of 
directors and the MCN board of directors also believe that DTE's existing       
interconnections to the Canadian and Midwest electricity systems create an      
ability to sell electricity to eastern markets locations through Ontario and to 
mid-western locations, which have relatively low capacity, through Michigan's   
southern interconnections. These existing electricity interconnections make the 
combined company well-positioned to build a regional marketing business that    
complements DTE's and MCN's existing coal, electricity and gas marketing        
businesses.                                                                     

     Other positive factors considered by the DTE board of directors and the MCN
board of directors include: (1) the new enterprise's ability to provide expanded
product offerings to its customers, and the enhanced ability to develop onsite  
energy facilities and services for business customers; (2) the terms and        
conditions of the merger agreement, including the fixed exchange ratio and the  
lack of any conditions to the merger considered likely to impede or delay       
successful completion; (3) the expectation that the merger will generally be a  
tax-free exchange to shareholders of MCN who exchange all their shares of MCN   
common stock solely for shares of DTE common stock in the merger and that no    
gain or loss will be recognized by DTE or MCN for U.S. federal income tax       
purposes; (4) the combined companies' improved ability to compete against       
integrated gas and electric companies; and (5) the current environment in the   
electric and gas industries and the advantage to each company of proceeding with
a transaction now which offers an opportunity to generate value for             
shareholders.                                                                   

  Each company's board of directors also considered certain countervailing
factors in their respective deliberations concerning the merger including (1)   
the fact that the exchange ratio will not be adjusted even if the two companies'
share prices diverge in the period prior to completion of the merger and (2) the
possibility of encountering difficulties in integrating the operations of DTE   
and MCN and in achieving cost savings to the extent currently estimated or in   
the time currently contemplated.                                                

25

S-4
36th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 36th

RECOMMENDATION AND ADDITIONAL CONSIDERATIONS OF THE DTE BOARD OF DIRECTORS      

     At its meeting on October 4, 1999, the DTE board of directors, by unanimous
vote of the directors present (which did not include Messrs. Lobbia and Pryor,  
each of whom was unavailable on October 4, but who subsequently indicated their 
respective approval of the merger agreement and the merger after review of all  
material information regarding the transaction), determined that the merger     
agreement and the transactions contemplated thereby, including the merger, are  
fair to and in the best interests of DTE and the DTE shareholders. Accordingly, 
the DTE board of directors has approved the merger agreement, and the DTE board 
of directors recommends that the DTE shareholders vote "FOR" approval of the    
proposal to issue shares of DTE common stock in the merger.                     

     In the course of reaching its decision to approve the merger agreement, the
DTE board of directors consulted with DTE's management, as well as its outside  
legal counsel and its financial advisor, and considered the following factors,  
in addition to those set forth above under "-- DTE and MCN Reasons for the      
Merger":                                                                        

    - FAIRNESS OPINION. The DTE board of directors considered the analysis and
presentation prepared by Warburg Dillon Read and its oral opinion 
      (subsequently confirmed in writing) to the effect that, as of October 4,
      1999, and based upon and subject to the various considerations set forth
 in its opinion, that the consideration to be paid by DTE to the MCN
shareholders is fair to DTE from a financial point of view.       

- SYNERGIES. The DTE board of directors considered that the merged    
enterprise would be able to achieve an average of $60 million in  
       (after-tax) cost savings per year over the first ten years of the merger,
enhancing the earnings potential of the merged enterprise over the
    earnings potential of DTE and MCN as separate companies. The estimated
     cost savings are expected to come from operating cost synergies created
     by economies of scale, skill benefits and other operating efficiencies.

 - ACCRETIVE TRANSACTION. The DTE board of directors considered that the
     merger is expected to be accretive to DTE's earnings per share in 2001.
       In addition, DTE's board of directors considered management's belief that
   the merger with MCN will strongly support DTE's commitment to a long-
term earnings growth rate of 6%.                                  

     - MANAGEMENT OF DTE AFTER THE MERGER. The DTE board of directors considered
 the management arrangements agreed to between DTE and MCN that will
      provide for a strong management team drawn from both companies that will
work together to integrate the two companies, to realize growth   
 opportunities, to achieve synergistic benefits, and to successfully
implement strategies of DTE.                                      

  - TAX TREATMENT. The DTE board of directors considered that the intended
      treatment of the merger will be a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code.                      

- REGULATORY APPROVALS AND CLEARANCES. The DTE board of directors     
    considered its belief, after consultation with its legal counsel, that
      the regulatory approvals and clearances necessary to complete the merger
could be obtained.                                                

The DTE board of directors weighed these advantages and opportunities 
against the following risks associated with the merger:                         

- The DTE board of directors considered the challenges inherent in the
      combination of two business enterprises of the size and scope of DTE and
     MCN and the possible resulting diversion of management attention for an
extended period of time.                                          

  - The DTE board of directors considered the obligations of DTE under the
      circumstances set forth in the merger agreement to pay MCN a termination
     fee of $85 million and reimburse MCN's costs and expenses in connection
    with the merger up to a maximum amount of $15 million. On balance, the
   DTE board of directors determined that agreement to these provisions,
       which are often used in transactions of this nature, was a necessary part
of inducing MCN's commitment to enter into the merger agreement.  

In view of the wide variety of factors considered by the DTE board of 
directors in connection with its evaluation of the merger and the complexity of 
such matters, the DTE board of directors did not consider it                    

26

S-4
37th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 37th

practical to, nor did it attempt to, quantify, rank or otherwise assign relative
weights to the specific factors it considered in reaching its decision. The DTE 
board of directors conducted a discussion of the factors described above,       
including asking questions of DTE's management and DTE's legal and financial    
advisors, and reached a general consensus that the merger was fair to and in the
best interests of DTE and the DTE shareholders. In considering the factors      
described above, individual members of the DTE board of directors may have given
different weight to different factors. The DTE board of directors relied on the 
experience and expertise of its financial advisor for quantitative analysis of  
the financial terms of the merger. See "Opinion of DTE's Financial Advisor."    

  DTE's board of directors also considered that members of DTE's and MCN's
management and members of each party's board of directors have interests in the 
merger that are different from, or in addition to, the interests of DTE's       
shareholders generally. These interests are discussed in detail under "--       
Interests of Management and Directors in the Merger" on page --.                

  The foregoing discussion of the information and factors which were given
weight by the DTE board of directors is not exhaustive, but includes all        
material factors considered by the DTE board of directors. The DTE board of     
directors did not assign specific weights to the foregoing factors and          
individual directors may have given different weights to different factors. The 
DTE board of directors, however, approved and adopted the merger agreement and  
the merger.                                                                     

  THE DTE BOARD OF DIRECTORS, AT A MEETING DULY CALLED AND HELD, HAS, BY A
UNANIMOUS VOTE OF THE DIRECTORS PRESENT, ADOPTED THE MERGER AGREEMENT, AND HAS  
DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, 
INCLUDING THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF DTE AND THE DTE  
SHAREHOLDERS. ACCORDINGLY, THE DTE BOARD OF DIRECTORS RECOMMENDS THAT DTE       
SHAREHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO APPROVE THE ISSUANCE OF SHARES OF 
DTE COMMON STOCK IN THE MERGER.                                                 

RECOMMENDATION AND ADDITIONAL CONSIDERATIONS OF THE MCN BOARD OF DIRECTORS      

  At a special meeting held on October 4, 1999, having determined that the
merger is fair to and in the best interests of MCN and its shareholders, the MCN
board of directors unanimously adopted the merger agreement. In adopting the    
merger agreement and in reaching its recommendation, the MCN board of directors 
consulted with and relied upon information and reports prepared or presented by 
MCN's management and MCN's legal and financial advisors. The following are the  
material factors that the MCN board of directors considered, some of which      
contain both positive and negative elements:                                    

 - The MCN board of directors' consideration of the financial condition,
    recent results of operations, prospects and businesses of MCN, and the
recent stock price performance of MCN shares;                     

     - The MCN board of directors' consideration of the prospects and businesses
of MCN and DTE, the revenues of the companies, their complementary
  businesses, the recent stock price performance of DTE shares and the
percentage of the combined company to be owned by MCN shareholders
following the merger;                                             

- The other strategic options potentially available to MCN, including 
mergers with other parties, sales of additional assets, and share 
repurchases;                                                      

    - The MCN board of directors' understanding of the present and anticipated
 environment in the utility industry, and how possible consolidation
    within the utility industry could affect MCN's competitive position in
relation to integrated gas and electric companies;                

- Current industry, economic and market conditions;                   

    - The risks and rewards of the alternative of continuing as an independent
 entity. Such risks include, among others, the risks associated with
       remaining independent amidst industry-wide consolidation and with raising
 capital to fund growth on satisfactory terms. The potential rewards
include, among others, the ability of existing MCN shareholders to
    partake fully in the potential future growth and profitability of MCN;

27

S-4
38th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 38th

- The financial and business prospects for the combined company;      

    - The expectation that MCN shareholders who receive cash as well as shares
       of DTE common stock in the merger may recognize gain but not in excess of
 the amount of cash they receive. It is also expected that those MCN
   shareholders who exchange their MCN shares for cash will generally be
eligible for capital gains treatment;                             

     - Subject to tax adjustments necessary to preserve the status of the merger
       as a reorganization under the Internal Revenue Code, the consideration to
      be paid by DTE in the merger of $28.50 in cash to be received for 55% of
      the MCN shares in the merger, and 0.775 shares of DTE stock (which had a
    value of approximately $28.50 at the date of the merger agreement) for
      the other 45% of the MCN shares, representing a substantial premium over
the then-current market price of MCN stock;                       

- The fact that the merger agreement provides MCN shareholders an     
     opportunity to receive cash for their MCN shares (subject to allocation
      and proration and to tax adjustments necessary to preserve the status of
the merger as a reorganization under the Internal Revenue Code);  

 - The value of the merger consideration relative to then-current market
prices and historical trading prices of MCN and DTE stock;        

- The dividends payable in respect of 0.775 shares of DTE common stock
  being 56.5% higher than the dividend on a share of MCN common stock;

   - The corporate governance aspects of the merger, including the fact that
    Mr. Glancy and two other MCN directors selected by MCN in consultation
with DTE will be appointed to the DTE board of directors;         

- The role that MCN's current management is expected to play in the   
management of the combined company;                               

 - The interests of MCN management, including Mr. Glancy, in the merger;

    - The opinion of Merrill Lynch to the MCN board of directors to the effect
       that, as of October 4, 1999, and subject to the matters described in that
   opinion, the consideration to be received by the MCN shareholders was
fair from a financial point of view to MCN shareholders;          

- The other advice from MCN management and the MCN board of directors'
   financial and legal advisors, and the discussions of the MCN board of
directors concerning the proposed merger agreement;               

- The ability to obtain regulatory approvals for the merger;          

     - The fact that the merger agreement permits MCN to provide information and
     enter into negotiations if another party makes an unsolicited proposal,
   if the board of directors determines that failure to take such action
       would likely result in a breach of its fiduciary duties, and that MCN can
       terminate the merger agreement to accept a superior proposal if it pays a
       termination fee of $55 million and reimburses DTE's costs and expenses up
to $15 million; and                                               

    - In light of the board of directors' obligation under the MCN articles of
   incorporation to consider the impact of the offer on certain of MCN's
   constituencies, the fact that DTE made significant commitments in the
    merger agreement, including, among others, a statement of intention to
maintain MCN's and DTE's nominal aggregate level of charitable    
       contributions and community involvement, and a commitment to maintain for
    a period of one year MCN's current aggregate level of compensation and
benefits for its employees, as well as stating that it was DTE's  
     intention not to make any involuntary reductions in workforce, but that
    if such reductions become necessary, that they would be made on a fair
and equitable basis.                                              

   The MCN board of directors also considered (1) the risk that the benefits
sought in the merger would not be obtained, (2) the risk that the merger would  
not be completed, (3) the effect of the public announcement of the merger on    
MCN's sales, customer, supplier and creditor relationships, operating results   
and ability to                                                                  
28

S-4
39th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 39th

retain employees and the trading price of MCN shares, (4) the substantial       
management time and effort that will be required to complete the merger and     
integrate the operations of the two companies, (5) the possibility that various 
provisions of the merger agreement might have the effect of discouraging other  
persons potentially interested in a combination with MCN from pursuing such an  
opportunity, (6) the risk that the value of MCN shares will decline and (7)     
other matters described under "Risk Factors" and "Cautionary Statement Regarding
Forward-Looking Statements."                                                    

    This discussion of the information and factors considered by the MCN board
of directors is not intended to be exhaustive. In view of the wide variety of   
factors considered, the MCN board of directors did not assign relative weights  
to the factors discussed above or determine that any factor was of particular   
importance. Rather, the MCN board of directors based its recommendation upon the
totality of the information presented.                                          

 THE MCN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT MCN SHAREHOLDERS
VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT.                                

OPINION OF DTE'S FINANCIAL ADVISOR                                              

On October 4, 1999, the DTE Energy Company board of directors received
Warburg Dillon Read's oral opinion, which was subsequently followed by a written
opinion as of the same date, that, as of that date and subject to the various   
considerations, assumptions, limitations and qualifications described in the    
opinion, the consideration to be paid by DTE to shareholders of MCN and holders 
of options to purchase MCN common stock is fair, from a financial point of view,
to DTE.                                                                         

Each DTE shareholder is urged to read the actual Warburg Dillon Read  
opinion, dated October 4, 1999, which is attached as Appendix B to this proxy   
statement. The Warburg Dillon Read opinion does not constitute a recommendation 
as to how any DTE shareholder should vote at the special meeting.               

In arriving at its opinion, Warburg Dillon Read, among other things:  

 - Reviewed certain publicly available business and historical financial
information relating to DTE and MCN;                              

   - Reviewed certain internal financial information and other data relating
to the business and financial prospects of DTE and MCN, including 
     estimates and financial forecasts prepared by management of DTE and MCN
       that were provided to Warburg Dillon Read by DTE and MCN and not publicly
available;                                                        

  - Conducted discussions with members of the senior management of DTE and
MCN with respect to the business and prospects of DTE and MCN;    

- Reviewed publicly available financial and stock market data of      
    diversified natural gas companies which are, in the opinion of Warburg
Dillon Read, generally comparable to MCN;                         

  - Reviewed publicly available financial and stock market data of certain
     natural gas distribution companies which are, in the opinion of Warburg
Dillon Read, generally comparable to MichCon;                     

  - Compared the financial terms of the merger agreement with the publicly
 available financial terms of certain transactions which are, in the
opinion of Warburg Dillon Read, generally comparable;             

- Performed a segment analysis of MCN;                                

    - Performed a discounted cash flow analysis of certain business operations
       of MCN based on financial forecasts provided by the management of DTE and
MCN;                                                              

  - Reviewed publicly available financial and stock market data of certain
  electric utilities which are, in the opinion of Warburg Dillon Read,
generally comparable to DTE;                                      

- Considered certain pro forma effects of this transaction on DTE's   
       financial statements and reviewed certain estimates of synergies prepared
by DTE management;                                                

- Considered the strategic advantages of this transaction;            
29

S-4
40th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 40th

- Reviewed the merger agreement; and                                  

- Conducted other financial studies, analyses and investigations, and 
       considered such other information as Warburg Dillon Read deemed necessary
or appropriate.                                                   

Warburg Dillon Read did not independently verify any of the above     
information and relied, with DTE's consent, on the information being materially 
complete and accurate. Warburg Dillon Read has not made any independent         
evaluation or appraisal of any of the assets or liabilities of MCN or DTE, and  
no one has furnished Warburg Dillon Read with any such evaluation or appraisal. 
Warburg Dillon Read assumed that the financial forecasts referred to above were 
reasonably prepared on bases reflecting the best currently available estimates  
and judgments of DTE's and MCN's managements as to the future financial         
performance of DTE and MCN. Warburg Dillon Read also assumed that those         
estimates would be materially achieved in the amounts and at the times stated.  
DTE did not limit Warburg Dillon Read regarding the procedures to be followed or
factors to be considered in rendering its opinion.                              

  Warburg Dillon Read's opinion is based on economic, monetary, market and
other conditions existing on, and the information made available to Warburg     
Dillon Read as of, the date thereof.                                            

    The Warburg Dillon Read opinion does not address DTE's underlying business
decision to effect the transaction or constitute a recommendation to any        
shareholder of DTE or MCN as to how such shareholder should vote with respect to
the transaction. DTE did not ask Warburg Dillon Read to, and Warburg Dillon Read
did not, offer any opinion as to the material terms of the merger agreement or  
the transaction.                                                                

  No company, transaction or business used in the analysis described below
under "Comparable Company Trading Analysis" and "Comparable Natural Gas Company 
Acquisition Analysis" is identical to MCN or the proposed merger. Accordingly,  
the analysis of the results necessarily involves complex considerations and     
judgments concerning differences in financial and operating characteristics and 
other factors.                                                                  

    In connection with rendering its opinion, Warburg Dillon Read considered a
variety of valuation methods. Warburg Dillon Read considered the valuation of   
MCN both as a consolidated entity and as the summation of distinct segments. The
following discussion summarizes the material valuation methods considered by    
Warburg Dillon Read.                                                            

    The consolidated entity valuation consists of a comparable company trading
analysis and a comparable acquisition analysis for MCN.                         

    Comparable Company Trading Analysis. Using publicly available information,
Warburg Dillon Read compared multiples of certain financial criteria for MCN to 
multiples based upon market trading values at the time for certain other        
companies which, in Warburg Dillon Read's judgment, were generally comparable to
MCN for the purpose of this analysis. The factors Warburg Dillon Read considered
in selecting companies for comparison included size, geographic location,       
financial condition and scope of business operations. The companies used in the 
comparison were Columbia Energy Group, National Fuel Gas Company, CMS Energy    
Corporation, Consolidated Natural Gas Company and Questar Corporation.          

    In evaluating the current market value of MCN common stock, Warburg Dillon
Read determined ranges of multiples for selected measures of financial          
performance for the comparable companies, including the market value of         
outstanding common stock as a multiple of:                                      

    - Net income per share of common stock for the latest 12-month period, and
    estimated net income per share of common stock for the current and the
 following fiscal years as projected by I/B/E/S, a data service that
    monitors and publishes a compilation of earnings estimates produced by
   selected research analysts on companies of interest to investors; and

- Book value of common equity for the most recently available fiscal  
quarter.                                                          

In addition, Warburg Dillon Read determined ranges of multiples for   
selected measures of financial performance for the comparable companies,        
including the adjusted market value of MCN (defined as the                      

30

S-4
41st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 41st

market value of outstanding common stock plus total debt, preferred and minority
interests, less cash and equivalents) as a multiple of:                         

     - Operating income, or earnings before interest and taxes ("EBIT"), for the
latest 12-month period; and                                       

     - Operating cash flow, or earnings before interest, taxes, depreciation and
amortization ("EBITDA"), for the latest 12-month period.          

   Warburg Dillon Read then applied such multiples to the corresponding data
for MCN. This analysis produced a range of values per share for MCN. The results
are summarized in the following table, which shows the range of valuations      
produced for each of the measures of MCN's financial performance:               

                                                        [Enlarge/Download Table]

                                                              COMPARABLE      LOW END   HIGH END
             MEASURE OF FINANCIAL PERFORMANCE              COMPANY MULTIPLES  OF RANGE  OF RANGE
             --------------------------------              -----------------  --------  --------
                                                                                                
Latest Twelve Months Earnings Per Share...................   15.0x - 20.0x     $19.20    $25.60 
1999 Estimated Earnings Per Share.........................   14.0x - 16.0x     $16.80    $19.20 
2000 Estimated Earnings Per Share.........................   12.5x - 14.5x     $19.25    $22.33 
Book Value of Equity......................................   1.6x -  2.5x      $17.90    $27.97 
Latest Twelve Months EBIT.................................   12.5x - 15.0x     $16.41    $24.01 
Latest Twelve Months EBITDA...............................   7.0x -  9.0x      $13.17    $23.11 
Mean Value................................................                     $17.12    $23.70 
Median Value..............................................                     $17.35    $23.56 

     As shown above, this analysis produced values of $17.12 to $23.70 per share
for MCN. MCN's closing price of $17.69 on October 4, 1999, was near the low end 
of this range.                                                                  

 Warburg Dillon Read then added to the trading value of MCN the value of
certain cost synergies as estimated by the management of DTE using a discounted 
cash flow analysis. With respect to the estimates of cost synergies, Warburg    
Dillon Read assumed that such estimates were reasonably prepared upon bases     
reflecting the best available estimates and judgments of the management of DTE. 
Utilizing these estimates of cost synergies, Warburg Dillon Read discounted to  
present value, under assumed discount rates ranging from 6.65% to 7.65%, the    
after-tax cash flows to shareholders from cost synergies through the year 2010. 
Present values were derived both with and without a terminal value, which was   
determined based on the midpoint of the multiple range of EBITDA of 7.0x to     
9.0x, or 8.0x, based on the comparable company trading analysis. The implied    
value per share of cost synergies based upon this analysis was $3.59 to $7.29.  

     Combining the present value of cost synergies with the trading value of MCN
provided a value range of $20.71 to $30.99 per share of MCN common stock.       

  Comparable Natural Gas Company Acquisition Analysis. Warburg Dillon Read
reviewed comparable transactions involving acquisitions of regulated natural gas
companies or holding companies for regulated natural gas companies. Two sets of 
comparable transactions were selected. The first set, involving seven comparable
transactions, was selected based on size and included only those companies with 
equity valued in excess of $1 billion.                                          

  The first set of comparable transactions included the following proposed
transactions:                                                                   

- Wisconsin Energy Corporation and Wicor Inc.;                        

- NiSource Inc. and Columbia Energy Group;                            

- El Paso Energy Corporation and Sonat Inc.;                          

- Southern Union Company and Southwest Gas Corporation;               

- Dominion Resources, Inc. and Consolidated Natural Gas Company;      

- Duke Power Company and PanEnergy Corporation; and                   

- Houston Industries Inc. and NorAm Energy Corporation.               

31

S-4
42nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 42nd

    The second set of comparable transactions included an additional seventeen
transactions over the last four years. This set of comparables was reviewed     
because it includes the acquisition of regulated natural gas companies by much  
larger acquirors which is analogous to DTE's acquisition of MCN.                

   Warburg Dillon Read calculated the equity consideration to be received by
the second company's shareholders for each of the comparable transactions as a  
multiple of various measures of financial performance for that company          
including:                                                                      

     - Net income per share of common stock for the latest 12-month period as of
     the date of each respective transaction announcement, and projected net
     income per share of common stock for the then current and the following
fiscal years as projected by I/B/E/S; and                         

- Book value of common equity for the most recently available fiscal  
quarter prior to each respective transaction announcement.        

   In addition, Warburg Dillon Read calculated the adjusted market value for
each of the comparable transactions as a multiple of each acquired company's:   

    - Operating income, or EBIT, for the latest 12-month period as of the date
of each respective transaction announcement; and                  

    - Operating cash flow, or EBITDA, for the latest 12-month period as of the
date of each respective transaction announcement.                 

   Warburg Dillon Read then applied such multiples to the corresponding data
for MCN. This analysis produced a range of values per share for MCN. The results
are summarized in the following table, which shows the range of valuations      
produced for each of the measures of MCN financial performance:                 

                                                        [Enlarge/Download Table]

                                                              COMPARABLE        LOW END   HIGH END
            MEASURE OF FINANCIAL PERFORMANCE             TRANSACTION MULTIPLES  OF RANGE  OF RANGE
            --------------------------------             ---------------------  --------  --------
                                                                                                  
Latest Twelve Months Earnings Per Share.................     20.0x - 24.0x       $25.60    $30.72 
Current Year Estimated Earnings Per Share...............     18.0x - 22.0x       $21.60    $26.40 
Forward Year Estimated Earnings Per Share...............     16.0x - 21.0x       $24.64    $32.34 
Book Value of Equity....................................     2.3x -  2.9x        $25.74    $32.46 
Latest Twelve Months EBIT...............................     13.5x - 15.5x       $19.44    $25.52 
Latest Twelve Months EBITDA.............................     8.0x - 10.0x        $18.13    $28.07 
Mean Value..............................................                         $22.53    $29.25 
Median Value............................................                         $23.12    $29.40 

     As shown above, this analysis produced values of $22.53 to $29.40 per share
for MCN.                                                                        

 Warburg Dillon Read then averaged the values produced by the Comparable
Company Trading Analysis with the value produced by the Comparable Natural Gas  
Company Acquisition Analysis, producing values of $21.62 to $30.19 per MCN share
of common stock.                                                                

    To this range of values, Warburg Dillon Read added the value of MCN's coal
fines projects, estimated at $40 million per plant based upon recent            
transactions. The range of value for the coal fines projects of $1.76 to $2.63  
per MCN share of common stock is based upon four operating coal fines projects  
(at the low end of the range) to six operating coal fines projects (at the high 
end of the range). Combining this range of values with the range of values      
included above results in a total consolidated valuation range per MCN share of 
common stock of $23.37 to $32.82.                                               

Warburg Dillon Read also performed a segment analysis of MCN, which   
consisted of valuation analyses for MCN's two distinct segments: the natural gas
distribution company, MichCon, and the diversified energy business. For MichCon,
the valuation analysis was based upon a discounted cash flow analysis, a        
comparable company trading analysis and a comparable acquisition analysis.      

  Valuation of MCN's Natural Gas Distribution Company. Warburg Dillon Read
performed valuation analyses of MichCon based on a discounted cash flow         
analysis, a comparable company trading analysis, and a                          

32

S-4
43rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 43rd

comparable acquisition analysis. Warburg Dillon Read performed a discounted cash
flow analysis valuation of MichCon based upon projections furnished by DTE.     
Utilizing these projections, Warburg Dillon Read discounted to present value,   
under assumed discount rates ranging from 6.65% to 7.65%, the free unleveraged  
cash flows through the year 2004 for MichCon. Terminal values were determined   
utilizing multiples of EBITDA of 7.0x to 9.0x, based on the EBITDA multiples of 
public companies deemed comparable to MichCon. These were the same companies    
used by Warburg Dillon Read in its comparable company trading analysis of       
MichCon summarized below. The present value of the discounted cash flow of      
MichCon ranged from $14.99 to $21.14. Warburg Dillon Read added to the          
discounted cash flow valuation of MichCon the value of certain cost synergies as
discussed previously in "Comparable Company Trading Analysis." The implied value
per share of cost synergies of $3.59 to $7.29 was added to the results of the   
discounted cash flow analysis, producing a value range of $18.58 to $28.43 per  
share of MCN common stock.                                                      

    Using publicly available information, Warburg Dillon Read also performed a
comparable company trading analysis for MichCon. Warburg Dillon Read compared   
multiples of certain financial criteria for MichCon to multiples based upon     
market trading values at the time for certain other companies which, in Warburg 
Dillon Read's judgment, were generally comparable to MichCon for the purpose of 
this analysis. The factors Warburg Dillon Read considered in selecting companies
for this comparison included size, geographic location, financial condition and 
scope of business operations. The companies used in the comparison were Eastern 
Enterprises, Nicor Inc., Peoples Energy Corporation, Piedmont Natural Gas       
Company, Inc., Washington Gas Light Company and New Jersey Resources            
Corporation.                                                                    

In evaluating an implied market value of MichCon, were it a separate  
publicly traded company, Warburg Dillon Read determined ranges of multiples for 
selected measures of financial performance for the comparable companies,        
including the market value of outstanding common stock as a multiple of:        

    - Net income available to common stock for the latest 12-month period; and

- Book value of common equity for the most recently available fiscal  
quarter.                                                          

In addition, Warburg Dillon Read determined ranges of multiples for   
selected measures of financial performance for the comparable companies,        
including the adjusted market value as a multiple of:                           

- Operating income, or EBIT, for the latest 12-month period; and      

- Operating cash flow, or EBITDA, for the latest 12-month period.     

   Warburg Dillon Read then applied such multiples to the corresponding data
for MichCon. This analysis produced a range of values per share for MichCon. The
results are summarized in the following table, which shows the range of         
valuations produced for each of the measures of MichCon's financial performance:

                                                        [Enlarge/Download Table]

                                                              COMPARABLE      LOW END   HIGH END
             MEASURE OF FINANCIAL PERFORMANCE              COMPANY MULTIPLES  OF RANGE  OF RANGE
             --------------------------------              -----------------  --------  --------
                                                                                                
Latest Twelve Months Net Income Available to Common                                             
  Stock...................................................   16.0x - 21.0x     $20.03    $26.29 
Book Value of Common Equity...............................   1.8x -  2.2x      $14.25    $17.41 
Latest Twelve Months EBIT.................................   11.0x - 12.5x     $18.13    $21.74 
Latest Twelve Months EBITDA...............................   7.0x -  9.0x      $15.97    $22.91 
Mean Value................................................                     $17.10    $22.09 
Median Value..............................................                     $17.05    $22.32 

     As shown above, this analysis produced values of $17.05 to $22.32 per share
for MichCon. Warburg Dillon Read added to the comparable company trading        
analysis valuation of MichCon the value of certain cost synergies as discussed  
previously in "Comparable Company Trading Analysis." The implied value per share
of cost synergies of $3.59 to $7.29 was added to the results of the comparable  
company trading analysis, producing a value range of $20.64 to $29.61 per share 
of MCN common stock.                                                            

  Warburg Dillon Read reviewed comparable transactions involving regulated
natural gas companies or holding companies for regulated natural gas companies  
as previously discussed in "Comparable Natural Gas Company Acquisition          
Analysis." Warburg Dillon Read calculated the equity consideration to be        
received the                                                                    

33

S-4
44th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 44th

acquired company's shareholders for each of the comparable transactions as a    
multiple of various measures of financial performance for that company,         
including:                                                                      

     - Net income available to common stock for the latest 12-month period as of
the date of each respective transaction announcement; and         

- Book value of common equity for the most recently available fiscal  
quarter prior to each respective transaction announcement.        

   In addition, Warburg Dillon Read calculated the adjusted market value for
each of the comparable transactions as a multiple of each acquired company's:   

    - Operating income, or EBIT, for the latest 12-month period as of the date
of each respective transaction announcement; and                  

    - Operating cash flow, or EBITDA, for the latest 12-month period as of the
date of each respective transaction announcement.                 

   Warburg Dillon Read then applied such multiples to the corresponding data
for MichCon. This analysis produced a range of values per share for MCN. The    
results are summarized in the following table, which shows the range of         
valuations produced for each of the measures of MichCon financial performance:  

                                                        [Enlarge/Download Table]

                                                              COMPARABLE        LOW END   HIGH END
            MEASURE OF FINANCIAL PERFORMANCE             TRANSACTION MULTIPLES  OF RANGE  OF RANGE
            --------------------------------             ---------------------  --------  --------
                                                                                                  
Latest Twelve Months Net Income Available for Common                                              
  Stock.................................................     20.0x - 24.0x       $25.04    $30.05 
Book Value of Common Equity.............................     2.3x -  2.9x        $18.21    $22.96 
Latest Twelve Months EBIT...............................     13.5x - 15.5x       $24.14    $28.95 
Latest Twelve Months EBITDA.............................     8.0x - 10.0x        $19.44    $26.38 
Mean Value..............................................                         $21.71    $27.08 
Median Value............................................                         $21.79    $27.67 

 As shown above, this analysis produced a range of values for MichCon of
$21.71 to $27.67 per share of MCN common stock.                                 

The valuation analysis of MichCon can be summarized as shown in the   
following table:                                                                

                                                                [Download Table]

                                                             LOW END   HIGH END
                   VALUATION METHODOLOGY                     OF RANGE  OF RANGE
                   ---------------------                     --------  --------
                                                                               
Discounted Cash Flow Analysis...............................  $18.58    $28.43 
Comparable Company Trading Analysis.........................  $20.64    $29.61 
Comparable Acquisition Analysis.............................  $21.71    $27.67 
Mean Value..................................................  $20.31    $28.56 

As shown above, the valuation analysis produced a range of values for 
MichCon of $20.31 to $28.56 per share of MCN common stock.                      

Valuation of MCN's Diversified Energy Business. Warburg Dillon Read   
performed valuation analysis of MCN's diversified energy business based on      
various valuation methodologies, including discounted cash flow analysis,       
comparable acquisition analysis and expected proceeds from pending asset sales, 
where appropriate. Warburg Dillon Read performed discounted cash flow analyses  
of MCN's diversified energy businesses based upon forecasts provided by MCN     
management, with adjustments deemed appropriate by DTE management and Warburg   
Dillon Read. Warburg Dillon Read discounted to present value, under assumed     
discount rates ranging from 10.0% to 15.0%, the free unleveraged cash flows for 
varying periods for MCN's diversified energy businesses. Terminal values were   
determined, where appropriate, utilizing multiples of net income of 16.0x to    
24.0x. Where appropriate, Warburg Dillon Read also compared the discounted cash 
flow analysis results with the results of comparable acquisitions and the       
expected proceeds from pending asset sales. This analysis produced values       
ranging from $1,109 million to $1,372 million. After adjusting this value for   
the forecast debt level of $1,223 million (as of December 31, 1999) for MCN's   
diversified energy businesses, the implied equity                               

34

S-4
45th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 45th

value for MCN's diversified energy businesses ranges from negative $114 million 
to positive $149 million, or negative $1.25 to positive $1.64 per share of MCN  
common stock. To this range of values, Warburg Dillon Read added the range of   
value for MCN's coal fines projects of $1.76 to $2.63 per share of MCN common   
stock, producing a total valuation range for MCN's diversified businesses of    
$0.51 to $4.27 per share of MCN common stock.                                   

 The segment analysis of MCN can be summarized as shown in the following
table:                                                                          

                                                                [Download Table]

                                                             LOW END   HIGH END
                          SEGMENT                            OF RANGE  OF RANGE
                          -------                            --------  --------
                                                                               
MichCon.....................................................  $20.31    $28.56 
Diversified Energy Business.................................   (1.25)     1.64 
Coal Fines..................................................    1.76      2.63 
Total.......................................................  $20.82    $32.83 

  As shown above the segment valuation analysis produced a range of values
for MCN of $20.82 to $32.83 per share of MCN common stock.                      

DTE Comparable Company Trading Analysis. Using publicly available     
information, Warburg Dillon Read compared multiples of certain financial        
criteria for DTE to multiples based upon market trading values at the time for  
certain other electric utilities or holding companies for electric utilities    
which, in Warburg Dillon Read's judgment, were generally comparable to DTE for  
the purpose of this analysis. The factors Warburg Dillon Read considered in     
selecting companies for comparison included size, geographic location, financial
condition and scope of business operations. The companies used in the comparison
were Constellation Energy Group Inc., FirstEnergy Corporation, PECO Energy      
Company, PP&L Resources, Inc., Unicom Corporation and Wisconsin Energy          
Corporation.                                                                    

    In evaluating the current market value of DTE common stock, Warburg Dillon
Read determined ranges of multiples for selected measures of financial          
performance for the comparable companies including the market value of          
outstanding common stock as a multiple of:                                      

    - Net income per share of common stock for the latest 12-month period, and
    estimated net income per share of common stock for the current and the
following fiscal years as projected by I/B/E/S; and               

- Book value of common equity for the most recently available fiscal  
quarter.                                                          

In addition, Warburg Dillon Read determined ranges of multiples for   
selected measures of financial performance for the comparable companies,        
including the adjusted market value of DTE as a multiple of:                    

- Operating income, or EBIT, for the latest 12-month period; and      

- Operating cash flow, or EBITDA, for the latest 12-month period.     

   Warburg Dillon Read then applied such multiples to the corresponding data
for DTE. The results are summarized in the following table, which shows the     
range of valuations produced for each of the measures of DTE's financial        
performance:                                                                    

                                                        [Enlarge/Download Table]

                                                              COMPARABLE      LOW END   HIGH END
             MEASURE OF FINANCIAL PERFORMANCE              COMPANY MULTIPLES  OF RANGE  OF RANGE
             --------------------------------              -----------------  --------  --------
                                                                                                
Latest Twelve Months Earnings Per Share...................   12.3x - 14.5x     $39.88    $46.26 
1999 Estimated Earnings Per Share.........................   11.5x - 12.5x     $36.92    $40.13 
2000 Estimated Earnings Per Share.........................   10.5x - 12.0x     $35.28    $40.32 
Book Value of Equity......................................    1.4x -  1.6x     $36.40    $41.60 
Latest Twelve Months EBIT.................................    9.0x - 10.0x     $20.74    $26.82 
Latest Twelve Months EBITDA...............................    6.0x -  7.5x     $31.37    $47.71 
Mean Value................................................                     $33.43    $40.47 
Median Value..............................................                     $35.84    $40.96 

35

S-4
46th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 46th

     As shown above, this analysis produced values of $33.43 to $40.96 per share
for DTE. DTE's closing price on October 4, 1999, was $37.00. This analysis was  
performed by Warburg Dillon Read to determine if the DTE common stock comprising
45% of the total consideration of the merger was appropriately valued. Based on 
this analysis, Warburg Dillon Read determined that DTE common stock was         
appropriately valued.                                                           

     Accretion/Dilution Analysis. Warburg Dillon Read analyzed certain pro forma
effects of the transaction on the estimated earnings per share of DTE for 2001  
and 2002. This analysis was performed based upon both I/B/E/S estimates and     
forecasts provided by DTE management for DTE's estimated earnings and upon MCN  
forecasts provided by MCN management, with adjustments deemed appropriate by DTE
management and Warburg Dillon Read. The analysis also included the effect of    
potential cost synergies as estimated by DTE management. Utilizing I/B/E/S      
estimates for DTE and the MCN forecasts as adjusted by DTE and Warburg Dillon   
Read for 2001 and 2002 resulted in pro forma earnings per share accretion in    
these two years of $0.02 and $0.10, respectively. Utilizing the DTE forecasted  
earnings and the MCN forecasts as adjusted by DTE and Warburg Dillon Read for   
2001 and 2002 resulted in no change in pro forma earnings per share and $0.06   
accretion, respectively.                                                        

     The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the         
application of these methods to particular circumstances. Therefore, the opinion
and analysis are not readily susceptible to summary description. Accordingly,   
notwithstanding the separate factors and analyses summarized above, Warburg     
Dillon Read believes that its analysis must be considered as a whole and that   
selecting only portions of its analysis and the factors it considered, without  
considering all factors and analyses, could create a misleading view of the     
evaluation process underlying the opinions. Warburg Dillon Read did not assign  
any particular weight to any analyses or factors it considered. Rather, Warburg 
Dillon Read made qualitative judgments based on its experience in rendering     
these opinions and on economic, monetary and market conditions then present as  
to the significance and relevance of each analysis and factor. In its analyses, 
Warburg Dillon Read assumed relatively stable industry performance, regulatory  
environments and general business and economic conditions, all of which are     
beyond DTE's control. Any estimates contained in Warburg Dillon Read's analyses 
do not necessarily indicate actual value, which may be significantly more or    
less favorable than those suggested by such estimates. Estimates of the         
financial value of companies do not purport to be appraisals or to reflect      
necessarily the prices at which companies actually may be sold.                 

 Warburg Dillon Read is an internationally recognized investment banking
firm. As part of its investment banking business, Warburg Dillon Read is        
regularly engaged in evaluating businesses and their securities in connection   
with mergers and acquisitions, negotiated underwritings, competitive bids,      
secondary distributions of listed and unlisted securities, private placements   
and valuations for estate, corporate and other purposes. DTE's board of         
directors selected Warburg Dillon Read on the basis of the firm's expertise and 
reputation.                                                                     

    Pursuant to the engagement letter between DTE and Warburg Dillon Read, DTE
paid Warburg Dillon Read $2.5 million upon the rendering of Warburg Dillon      
Read's fairness opinion. In addition, Warburg Dillon Read received a $125,000   
payment on July 1, 1999, and has been and will continue to receive a $75,000    
quarterly retainer. At the completion of the merger, Warburg Dillon Read will   
receive a fee of $7.0 million. DTE has agreed to indemnify Warburg Dillon Read  
against certain liabilities, including liabilities under federal securities     
laws, relating to or arising out of its engagement.                             

     In the ordinary course of business, Warburg Dillon Read trades the debt and
equity securities of DTE and MCN for its own account and the accounts of its    
customers and, accordingly, may at any time hold a long or short position in    
such securities.                                                                

36

S-4
47th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 47th

OPINION OF MCN'S FINANCIAL ADVISOR                                              

On October 4, 1999, Merrill Lynch, Pierce, Fenner & Smith Incorporated
delivered its oral opinion, which opinion was substantially confirmed in a      
written opinion dated as of October 4, 1999, to the MCN board of directors to   
the effect that, as of such date, and based upon the assumptions made, matters  
considered and limits of review set forth in such opinion, the proposed         
consideration to be received by the holders of MCN common stock in the merger   
was fair from a financial point of view to the holders of MCN common stock. A   
copy of Merrill Lynch's opinion is attached to this document as Appendix C.     

THE MERRILL LYNCH OPINION SETS FORTH THE ASSUMPTIONS MADE, MATTERS    
CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY MERRILL 
LYNCH. EACH HOLDER OF MCN COMMON STOCK IS URGED TO READ THIS OPINION IN ITS     
ENTIRETY. THE MERRILL LYNCH OPINION WAS INTENDED FOR THE USE AND BENEFIT OF THE 
MCN BOARD OF DIRECTORS, WAS DIRECTED ONLY TO THE FAIRNESS OF THE MERGER         
CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF MCN COMMON STOCK,
DID NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY MCN TO ENGAGE IN THE   
MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW    
THAT SHAREHOLDER SHOULD VOTE ON THE PROPOSED MERGER OR ANY RELATED MATTER. THE  
MERGER CONSIDERATION WAS DETERMINED ON THE BASIS OF NEGOTIATIONS BETWEEN MCN AND
DTE AND WAS APPROVED BY THE MCN BOARD OF DIRECTORS. THIS SUMMARY OF THE MERRILL 
LYNCH OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE 
OPINION ATTACHED AS APPENDIX C.                                                 

In arriving at its opinion, Merrill Lynch, among other things:        

  - Reviewed certain publicly available business and financial information
relating to MCN and DTE that Merrill Lynch deemed to be relevant; 

    - Reviewed certain information, including financial forecasts, relating to
     the business, earnings, cash flow, assets, liabilities and prospects of
   MCN and DTE, as well as the amount and timing of the cost savings and
      related expenses expected to result from the merger furnished to Merrill
Lynch by MCN and DTE, respectively;                               

- Conducted discussions with members of senior management and         
    representatives of MCN and DTE concerning the matters described in the
previous two bullets, as well as their respective businesses and  
prospects before and after giving effect to the merger;           

   - Reviewed the market prices and valuation multiples for MCN common stock
   and DTE common stock and compared them with those of certain publicly
traded companies that Merrill Lynch deemed to be relevant;        

    - Reviewed the results of operations of MCN and DTE and compared them with
     those of certain publicly traded companies that Merrill Lynch deemed to
be relevant;                                                      

  - Compared the proposed financial terms of the merger with the financial
 terms of certain other transactions that Merrill Lynch deemed to be
relevant;                                                         

- Participated in certain discussions and negotiations among          
    representatives of MCN and DTE and their financial and legal advisors;

- Reviewed the potential pro forma impact of the merger;              

- Reviewed the merger agreement; and                                  

    - Reviewed such other financial studies and analyses and took into account
     such other matters as Merrill Lynch deemed necessary, including Merrill
     Lynch's assessment of general economic, market and monetary conditions.

    In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to     
Merrill Lynch, discussed with or reviewed by or for Merrill Lynch, or made      
publicly available, and Merrill Lynch did not assume any responsibility for     
independently verifying that information or for undertaking an independent      
evaluation or appraisal of any of the assets or liabilities of MCN or DTE and   
was not furnished with any such evaluation or appraisal. In                     

37

S-4
48th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 48th

addition, Merrill Lynch did not assume any obligation to conduct any physical   
inspection of the properties or facilities of MCN or DTE. With respect to the   
financial forecast information furnished to or discussed with Merrill Lynch by  
MCN or DTE, Merrill Lynch assumed that they were reasonably prepared and        
reflected the best currently available estimates and judgment of MCN's or DTE's 
management as to the expected future financial performance of MCN or DTE, as the
case may be. Merrill Lynch further assumed that the merger would qualify as     
tax-free reorganization for U.S. federal income tax purposes.                   

 Merrill Lynch's opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the          
information made available to Merrill Lynch as of the date of its opinion.      
Merrill Lynch assumed that in the course of obtaining the necessary regulatory  
or other consents or approvals, contractual or otherwise, for the merger, no    
restrictions, including any divestiture requirements or amendments or           
modifications, would be imposed that would have a material adverse effect on the
contemplated benefits of the merger.                                            

  In connection with the preparation of the Merrill Lynch opinion, Merrill
Lynch was not authorized by MCN or the MCN board of directors to solicit, nor   
did Merrill Lynch solicit, third-party indications of interest for the          
acquisition of or business combination involving all or any part of MCN.        

  The following is a summary of the material portions of the financial and
comparative analyses performed by Merrill Lynch which were presented to MCN's   
board of directors in connection with the opinion delivered to MCN's board of   
directors, dated October 4, 1999.                                               

MCN ANALYSIS:                                                                   

    Discounted Cash Flow Analysis. Merrill Lynch performed separate discounted
cash flow, or "DCF", analyses for MCN on a consolidated basis and on a          
segment-by-segment basis, using projections provided by MCN's management.       

  The DCF for MCN on a consolidated basis was calculated assuming discount
rates ranging from 7.5% to 8.5% and was comprised of the sum of the present     
values of:                                                                      

     (1) The projected cash flows for the years 2000 through 2004; and

         (2) The 2004 terminal value based upon a range of multiples from 7.5x
  to 8.5x estimated 2004 earnings before interest, taxes, depreciation and
amortization, which is referred to as "EBITDA."                       

   The segment-by-segment DCF valued MCN as the sum of the DCF values of its
gas distribution business segment and its diversified energy segment. The DCF   
for the diversified energy business segment was calculated assuming discount    
rates ranging from 8.5% to 9.5% and was comprised of the sum of the present     
values of:                                                                      

     (1) The projected cash flows for the years 2000 through 2004; and

         (2) The 2004 terminal value based upon a range of multiples from 8.0x
to 9.0x estimated 2004 EBITDA.                                        

   The DCF for the gas distribution business segment was calculated assuming
discount rates ranging from 7.0% to 8.0% and was comprised of the sum of the    
present values of:                                                              

     (1) The projected cash flows for the years 2000 through 2004; and

         (2) The 2004 terminal value based upon a range of multiples from 7.0x
to 8.0x estimated 2004 EBITDA.                                        

38

S-4
49th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 49th

     These analyses resulted in the following ranges of implied equity value per
share of MCN common stock, excluding any value attributable to synergies that   
may be realized from the merger:                                                

MCN IMPLIED EQUITY VALUE PER SHARE

                                                                [Download Table]

                        DCF METHOD                           LOW     HIGH 
                        ----------                           ---     ---- 
                                                                          
Segment-by-segment......................................... $17.75  $24.00
Consolidated............................................... $19.00  $25.25

Comparable Transactions Analysis. In order to value MCN, Merrill Lynch
reviewed certain publicly available information regarding 12 selected business  
combinations in the natural gas industry since October 19, 1998 (collectively,  
the "Natural Gas Comparable Merger Transactions") that Merrill Lynch deemed to  
be relevant in evaluating the merger. The Natural Gas Comparable Merger         
Transactions and the dates these transactions were announced are as follows:    

- Energy North, Inc./Eastern Enterprises (July 1999);                 

- CTG Resources, Inc./Energy East Corporation (June 1999);            

- WICOR, Inc./Wisconsin Energy Corporation (June 1999);               

- Yankee Energy System, Inc./Northeast Utilities (June 1999);         

- Columbia Energy Group/Nisource, Inc. (June 1999);                   

- Pennsylvania Enterprises, Inc./Southern Union Company (June 1999);  

- Southwest Gas Corporation/ONEOK, Inc. (April 1999);                 

- Connecticut Energy Corporation/Energy East Corporation (April 1999);

- Consolidated Natural Gas Company/Dominion Resources, Inc. (February 
1999);                                                            

     - Public Service Company of North Carolina, Incorporated /SCANA Corporation
(February 1999);                                                  

 - North Carolina Natural Gas Corporation/Carolina Power & Light Company
(November 1998); and                                              

- Colonial Gas Company/Eastern Enterprises (October 1998).            

 With respect to the Natural Gas Comparable Merger Transactions, Merrill
Lynch compared the "offer value" of each such transaction:                      

       (1) As a multiple of the next four quarters' estimated earnings per
  share of the target company at the date of announcement ("Forward EPS");
and                                                                   

(2) As a multiple of the book value of the target company.  

    Merrill Lynch also compared the "transaction value" of each of the Natural
Gas Comparable Merger Transactions as a multiple of the latest twelve months'   
EBITDA ("LTM EBITDA") of the target company.                                    

     The "offer value" is generally defined as the per share offer price for the
target company multiplied by the sum of the number of target company shares     
outstanding and the number of target company options outstanding, net of option 
proceeds. The "transaction value" is generally defined as the sum of the offer  
value, the preferred equity at liquidation value, the short term debt, the long 
term debt and any minority interests, less cash, marketable securities and      
exercisable options proceeds.                                                   

39

S-4
50th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 50th

The results of these analyses were as follows:                        

                                                        [Enlarge/Download Table]

                                                             LOW   HIGH   MEAN   MEDIAN
                                                             ---   ----   ----   ------
                                                                                       
Multiples of offer value to:                                                           
  Forward EPS.............................................. 17.9x  31.6x  22.8x  22.9x 
  Book value...............................................  1.9x   3.1x   2.6x   2.7x 
Multiples of transaction value to:                                                     
  LTM EBITDA...............................................  7.6x  13.0x  10.5x  10.8x 

Based on these analyses, Merrill Lynch derived the following ranges of
per-share value of MCN common stock, based on approximately 90.4 million shares 
of MCN common stock outstanding and net debt and preferred equity of $884.5     
million and $0 respectively, for the gas distribution segment and $932.1 million
and $270.6 million, respectively, for the diversified energy segment:           

                                                                [Download Table]

                                                              LOW      HIGH  
                                                              ---      ----  
                                                                             
Gas Distribution                                                             
  2000 EPS(1)............................................... $23.34   $28.46 
  1999 Book Value........................................... $21.27   $23.82 
  1999 EBITDA(2)............................................ $23.02   $30.41 
Diversified Energy                                                           
  2000 EPS.................................................. $ 2.52   $ 3.15 
  1999 Book Value........................................... $ 3.65   $ 4.87 
  1999 EBITDA............................................... $(4.17)  $(1.56)
Total                                                                        
  2000 EPS.................................................. $25.86   $31.61 
  1999 Book Value........................................... $24.92   $28.69 
  1999 EBITDA............................................... $18.85   $28.85 

-------------------------                                                       
(1) Includes amounts attributable to pension earnings.                          

(2) Includes amounts attributable to pension contributions.                     

   Comparable Public Company Analysis. Using publicly available information,
Merrill Lynch compared selected historical stock, financial and operating data  
and ratios for MCN with corresponding data and ratios of similar publicly traded
companies. These companies were selected by Merrill Lynch based upon Merrill    
Lynch's views as to the comparability of the financial and operating            
characteristics of these companies to MCN.                                      

 The companies selected for the comparable company analysis included the
following local distribution companies (LDC's):                                 

- Atlanta Gas Light Company;                                          

- Indiana Energy, Inc.;                                               

- New Jersey Resources Corporation;                                   

- Northwest Natural Gas Company;                                      

- Peoples Energy Corporation;                                         

- Washington Gas Light Company; and                                   

- WICOR, Inc.                                                         

40

S-4
51st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 51st

  The companies selected for the comparable company analysis also included
the following integrated energy companies:                                      

- Columbia Energy Group;                                              

- Consolidated Natural Gas Company;                                   

- Equitable Resources, Inc.;                                          

- KN Energy, Inc.;                                                    

- National Fuel Gas Company; and                                      

- Questar Corporation.                                                

In addition, the following companies selected by MCN management were  
included in the comparable company analysis:                                    

- CMS Energy Corporation;                                             

- DTE Energy Company;                                                 

- El Paso Energy Company;                                             

- Enbridge, Inc.;                                                     

- MDU Resources Group, Inc.;                                          

- National Fuel Gas Company;                                          

- ONEOK Inc.;                                                         

- Sempra Energy; and                                                  

- WestCoast Energy, Inc.                                              

     Merrill Lynch derived an estimated per-share valuation range for MCN common
stock by comparing market value as a multiple of estimated 2000 earnings per    
share and comparing "firm value" as a multiple of estimated 1999 earnings before
interest, taxes and depreciation. The earnings estimates were obtained from     
I/B/E/S, a data service that monitors and publishes a compilation of earnings   
estimates produced by selected research analysts on companies of interest to    
investors, as of October 1, 1999.                                               

COMPARABLE LOCAL DISTRIBUTION COMPANIES (LDC'S) 

                                                        [Enlarge/Download Table]

                                                           LOW   HIGH   MEAN   MEDIAN   MCN 
                                                           ---   ----   ----   ------   --- 
                                                                                            
Market value as a multiple of                                                               
  estimated 2000 EPS..................................... 12.1x  15.8x  14.0x  14.2x   11.1x
Firm value as a multiple of                                                                 
  estimated 1999 EBITDA..................................  6.7x   8.6x   7.4x   7.1x    9.3x

COMPARABLE INTEGRATED ENERGY COMPANIES

                                                        [Enlarge/Download Table]

                                                           LOW   HIGH   MEAN   MEDIAN   MCN 
                                                           ---   ----   ----   ------   --- 
                                                                                            
Market value as a multiple of                                                               
  estimated 2000 EPS..................................... 12.7x  23.4x  15.9x  15.1x   11.1x
Firm value as a multiple of                                                                 
  estimated 1999 EBITDA..................................  7.1x  10.2x   8.6x   8.5x    9.3x

41

S-4
52nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 52nd

COMPARABLE COMPANIES SELECTED BY MCN'S MANAGEMENT 

                                                        [Enlarge/Download Table]

                                                           LOW   HIGH   MEAN   MEDIAN   MCN 
                                                           ---   ----   ----   ------   --- 
                                                                                            
Market value as a multiple of                                                               
  estimated 2000 EPS..................................... 10.2x  16.5x  13.1x  13.1x   11.1x
Firm value as a multiple of                                                                 
  estimated 1999 EBITDA..................................  4.4x   9.8x   7.8x   7.6x    9.3x

  Based upon these analyses, Merrill Lynch derived the following ranges of
per share values of the MCN common stock, based on approximately 90.4 million   
shares of MCN common stock outstanding and assuming net debt of $1,816.6        
million, and preferred equity of $270.6 as of December 31, 1999:                

                                                                [Download Table]

                                             LOW       HIGH 
                                             ---       ---- 
                                                            
2000 EPS................................    $18.25    $21.75
1999 EBITDA.............................    $14.50    $19.50

DTE ANALYSIS:                                                                   

   Discounted Cash Flow Analysis. Merrill Lynch performed a DCF analysis for
DTE, using projections provided by the DTE management.                          

     The DCF for DTE was calculated assuming discount rates ranging from 7.5% to
8.5% and was comprised of the sum of the present values of:                     

     (1) The projected cash flows for the years 2000 through 2004; and

         (2) The 2004 terminal value based upon a range of multiples from 6.5x
to 7.5x estimated 2004 EBITDA, less $496 million of accelerated       
depreciation attributable to DTE's nuclear power plant.               

     This analysis resulted in a range of implied equity values per share of DTE
common stock from $40.23 to $51.36, as compared to the closing price per share  
of DTE common stock on October 1, 1999 of $36.63.                               

   Comparable Public Company Analysis. Using publicly available information,
Merrill Lynch compared selected historical stock, financial and operating data  
and ratios for DTE with corresponding data and ratios of similar publicly traded
companies. These companies were selected by Merrill Lynch based upon Merrill    
Lynch's views as to the comparability of the financial and operating            
characteristics of these companies to DTE.                                      

The companies included in the DTE comparable company analysis were:   

- Ameren Corporation;                                                 

- American Electric Power Company, Inc.;                              

- Cinergy Corp.;                                                      

- CMS Energy Corp.;                                                   

- DPL Inc.; and                                                       

- First Energy.                                                       

 Merrill Lynch derived an estimated valuation range for DTE by comparing
market value as a multiple of estimated 2000 earnings per share and estimated   
1999 book value. Merrill Lynch also compared firm value as                      

42

S-4
53rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 53rd

a multiple of estimated EBITDA. The earnings estimates were obtained from       
I/B/E/S as of October 1, 1999. The results of these analyses were as follows:   

COMPARABLE DTE COMPANIES

                                                        [Enlarge/Download Table]

                                                           LOW   HIGH   MEAN   MEDIAN   DTE 
                                                           ---   ----   ----   ------   --- 
                                                                                            
Market value as a multiple of                                                               
  estimated 2000 EPS..................................... 10.2x  14.4x  12.2x  12.5x   10.9x
  estimated 1999 book value.............................. 1.34x  2.08x  1.69x  1.76x   1.41x
Firm value as a multiple of                                                                 
  estimated 1999 EBITDA..................................  6.3x   7.7x   7.1x   7.4x    6.5x

     This analysis resulted in a range of implied equity values per share of DTE
common stock from $34.00 to $47.50. This compares to the closing per share price
of DTE common stock on October 1, 1999 of $36.63.                               

 Pro Forma Combination Analysis. Merrill Lynch also analyzed certain pro
forma effects resulting from the merger. Using the projected earnings for DTE   
for the years 2000 through 2005 provided by the management of DTE, and the      
projected earnings for MCN for the years 2000 through 2001 provided by          
management of MCN and for years 2002 through 2005 based upon guidance provided  
by the management of MCN, Merrill Lynch compared the projected earnings per     
share of DTE on a stand alone basis, assuming the merger did not occur, to the  
per-share earnings of a DTE shareholder, assuming the merger were to occur.     

     Using the assumptions detailed above, and further assuming no synergies and
aggregate merger consideration consisting of 55% cash and 45% DTE stock, the    
analysis indicated that the merger would be neutral to projected earnings per   
share of DTE if DTE realized pre-tax synergies as follows:                      

                                                                [Download Table]
                                                                  
2000.............................................    $69.4 million
2001.............................................    $63.5 million
2002.............................................    $55.7 million
2003.............................................    $24.6 million

     The summary of analyses performed by Merrill Lynch set forth above does not
purport to be a complete description of the analyses performed by Merrill Lynch 
in arriving at its opinion. The preparation of a fairness opinion is a complex  
process and is not necessarily susceptible to partial or summary description.   
Accordingly, Merrill Lynch believes that its analyses must be considered as a   
whole and that selecting portions of its analyses and the factors considered by 
Merrill Lynch, without considering all analyses and factors, could create an    
incomplete view of the processes underlying the Merrill Lynch opinions. Merrill 
Lynch did not assign relative weights to any of its analyses in preparing its   
opinions. The matters considered by Merrill Lynch in its analyses were based on 
numerous macroeconomic, operating and financial assumptions with respect to     
industry performance, general business and economic conditions and other        
matters, many of which are beyond MCN's and Merrill Lynch's control and involve 
the application of complex methodologies and educated judgment. Any estimates   
contained in the Merrill Lynch analyses are not necessarily indicative of actual
past or future results or values, which may be significantly more or less       
favorable than the estimates. Estimated values do not purport to be appraisals  
and do not necessarily reflect the prices at which businesses or companies may  
be sold in the future. The estimates are inherently subject to uncertainty.     

No company utilized as a comparison in the analyses described above is
identical to MCN or DTE and none of the comparable transactions utilized as a   
comparison is identical to the proposed merger. In addition, various analyses   
performed by Merrill Lynch incorporate projections prepared by research analysts
using only publicly available information. These estimates may or may not prove 
to be accurate. An analysis of publicly traded comparable companies and         
comparable business combinations is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating  
characteristics of the comparable companies and other factors that could affect 
the public trading value of the comparable companies to which they are being    
compared.                                                                       

43

S-4
54th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 54th

The MCN board selected Merrill Lynch to act as its financial advisor  
because of Merrill Lynch's reputation as an internationally recognized          
investment banking firm with substantial experience in transactions similar to  
the merger and because Merrill Lynch is familiar with MCN and its business. As  
part of Merrill Lynch's investment banking businesses, Merrill Lynch is         
continually engaged in the valuation of businesses and their securities in      
connection with mergers and acquisitions, leveraged buyouts, negotiated         
underwritings, secondary distributions of listed and unlisted securities and    
private placements.                                                             

   Pursuant to the terms of a letter agreement between MCN and Merrill Lynch
dated August 24, 1999, MCN agreed to pay Merrill Lynch a fee in the amount of   
approximately $10.3 million. This fee is payable in three installments as       
follows:                                                                        

(1) 1/4 of such fee was paid upon execution of the merger agreement;  

    (2) 1/4 of such fee is payable upon the vote of MCN shareholders approving
the merger; and                                               

  (3) The balance of the fee is payable upon the completion of the merger.

    MCN has agreed to reimburse Merrill Lynch for its reasonable out-of-pocket
expenses incurred in connection with its engagement (including the reasonable   
fees and disbursements of legal counsel) and to indemnify Merrill Lynch and     
related parties from and against specified liabilities, including liabilities   
under the federal securities laws, arising out of its engagement.               

   Merrill Lynch has, in the past, provided financial advisory and financing
services to MCN and/or its affiliates and may continue to do so and are         
currently providing financing services to an affiliate of DTE and has received, 
and may receive additional fees for the rendering of those services. In         
addition, in the ordinary course of Merrill Lynch's business, Merrill Lynch and 
its affiliates may actively trade MCN shares and other securities of MCN, as    
well as DTE shares and other securities of DTE, for their own accounts and for  
the accounts of customers. Accordingly, Merrill Lynch and its affiliates may at 
any time hold a long or short position in such securities.                      

INTERESTS OF MANAGEMENT AND DIRECTORS IN THE MERGER                             

     In considering the respective recommendations of the DTE board of directors
and the MCN board of directors with respect to the merger, it should be noted   
that members of DTE's management and MCN's management and of DTE's board of     
directors and MCN's board of directors have interests in the merger that are in 
addition to, or different from, the interests of shareholders of DTE and MCN    
generally. The DTE board of directors and the MCN board of directors were aware 
of these interests and considered them along with other matters when they       
adopted the merger agreement.                                                   

44

S-4
55th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 55th

CHANGE IN CONTROL AND SEVERANCE AGREEMENTS                            

MCN maintains change in control agreements with 22 of its officers,   
including executive officers. The purpose of the agreements is to assure the    
objective judgment and to retain the loyalty of these individuals in the event  
of a change in control of MCN. For purposes of the agreements, shareholder      
approval of the merger will constitute a change in control and the beginning of 
the three-year employment period covered by the agreements.                     

     The agreements entitle the officers to employment in commensurate positions
with responsibilities similar to those held within 90 days prior to the change  
in control, with compensation and benefits at least equal to the compensation   
and benefits they were receiving prior to the change in control. Under the      
agreements, the officers are entitled to receive severance benefits upon        
termination of an officer's employment within 3 years after the change in       
control if the termination is without cause, as defined in the agreements, or is
by the officers for "good reason." "Good reason" includes among other things,   
relocation without consent beyond a certain distance, a material diminution in  
duties or position or a reduction in compensation.                              

 Severance benefits provided under the agreements include the following:

  - A payment equal to three times the individual's annual base salary and
average annual bonus for the past three years;                    

   - Credit for up to three additional years of service under the MCN Energy
      Group Retirement Plan and the MCN Supplemental Retirement Plan ("SERP");
and                                                               

    - Continuation of medical and other welfare benefits for up to three years
following termination.                                            

     The following table sets forth the estimated cash severance amounts payable
to each of the Chief Executive Officer of MCN and the next four most highly     
compensated MCN officers and to the remaining 17 MCN officers as a group and the
value of the additional retirement benefits under each individual's agreement   
assuming MCN's obligations thereunder are triggered immediately after the       
completion of the merger. The estimates are based on current base salary and the
average annual bonus including projected annual bonus for 1999.                 

                                                        [Enlarge/Download Table]

                                                                                  VALUE OF     
                                                             ESTIMATED CASH      ADDITIONAL    
                                                               SEVERANCE        SUPPLEMENTAL   
                            NAME                             AMOUNT PAYABLE  RETIREMENT BENEFIT
                            ----                             --------------  ------------------
                                                                                               
Alfred R. Glancy III........................................  $ 3,600,000         $533,000     
Stephen E. Ewing............................................  $ 2,500,000         $337,000     
Howard L. Dow III...........................................  $ 1,500,000         $ 46,000     
Daniel L. Schiffer..........................................  $ 1,200,000         $182,000     
Steven E. Kurmas............................................  $ 1,200,000         $ 37,000     
17 other officers...........................................  $12,100,000         $933,000     

 In addition, six former officers of MCN have severance agreements which
provide for payments upon a change in control which, in the aggregate are       
approximately $2,000,000. The agreements also provide that executives and key   
officers who are subject to excise tax under the Internal Revenue Code section  
4999 as a result of the severance and certain other payments they receive are   
entitled to receive a tax reimbursement payment which would put the affected    
individuals in the same financial position after-tax that they would have been  
in if the excise tax did not apply to such amounts. Based upon the assumption   
set forth above and on a $28.50 share price, the estimated amount of this tax   
reimbursement payment for the above listed current and former officer would be: 
Alfred R. Glancy III -- $4,000,000; Stephen E. Ewing -- $2,000,000; Howard L.   
Dow III -- $1,000,000; Daniel L. Schiffer -- $800,000; Steven E.                
Kurmas -- $750,000 and the 17 other officers -- $7,600,000.                     

45

S-4
56th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 56th

STOCK INCENTIVE PLANS                                                 

   All of the executive officers and key employees of MCN participate in the
MCN Energy Group Long Term Incentive Plan. Under this plan, in the event of a   
change in control of MCN, 100%, or 150% or 200% depending on MCN's ranking      
within its designated peer group, of all performance shares granted under the   
plan and then outstanding would automatically be considered earned and would be 
payable in shares of unrestricted common stock. Approval of the merger agreement
by MCN shareholders will constitute a change in control for purposes of this    
plan. The following chart reflects the performance shares held as of the date of
the merger agreement, by the Chief Executive Officer of MCN and the next four   
most highly compensated MCN officers and all other officers holding performance 
share grants, and the value of the grants at 100%, 150% and 200% payouts based  
on a $28.50 share price. Depending on when MCN shareholder approval of the      
merger agreement is obtained, some of the grants may become vested in the       
ordinary course of business and additional grants may be made, although any     
grants made after the signing of the merger agreement will not vest as a result 
of MCN shareholder approval of the merger.                                      

                                                        [Enlarge/Download Table]

                                           NUMBER OF     VALUE OF       VALUE OF       VALUE OF   
                                          PERFORMANCE   OUTSTANDING    OUTSTANDING    OUTSTANDING 
                                            SHARES      PERFORMANCE    PERFORMANCE    PERFORMANCE 
                  NAME                    OUTSTANDING  SHARES @ 100%  SHARES @ 150%  SHARES @ 200%
                  ----                    -----------  -------------  -------------  -------------
                                                                                                  
Alfred R. Glancy III.....................   81,000      $2,308,500     $3,462,750     $4,617,000  
Stephen E. Ewing.........................   31,350      $  893,475     $1,340,213     $1,786,950  
Howard L. Dow III........................    8,375      $  238,688     $  358,031     $  477,375  
Daniel L. Schiffer.......................   11,000      $  313,500     $  470,250     $  627,000  
Steven E. Kurmas.........................    7,375      $  210,188     $  315,281     $  420,375  
16 other officers........................   73,590      $2,097,315     $3,145,973     $4,194,630  

 There is an additional 1999 special incentive plan under which one-year
performance units were granted to certain officers of MCN in lieu of an annual  
cash bonus for 1999. The following chart reflects the special performance shares
held as of the date of the merger agreement, by the Chief Executive Officer of  
MCN and the next four most highly compensated MCN officers and all other        
officers holding performance share grants, and the value of the grants at 100%, 
150% and 200% payouts based on a $28.50 share price. Under the terms of the     
special incentive plan, upon a change in control of not less than 100%, and up  
to 200% depending on MCN's performance relative to its peer group, of such      
performance units will vest and will be payable.                                

                                                        [Enlarge/Download Table]

                                           NUMBER OF      VALUE OF       VALUE OF       VALUE OF   
                                          1999 SPECIAL   OUTSTANDING    OUTSTANDING    OUTSTANDING 
                                          PERFORMANCE   1999 SPECIAL   1999 SPECIAL   1999 SPECIAL 
                                             SHARES      PERFORMANCE    PERFORMANCE    PERFORMANCE 
                  NAME                    OUTSTANDING   SHARES @ 100%  SHARES @ 150%  SHARES @ 200%
                  ----                    ------------  -------------  -------------  -------------
                                                                                                   
Alfred R. Glancy III.....................    20,250       $577,125      $  865,688     $1,154,250  
Stephen E. Ewing.........................        --             --              --             --  
Howard L. Dow III........................     5,870       $167,295      $  250,943     $  334,590  
Daniel L. Schiffer.......................     4,800       $136,800      $  205,200     $  273,600  
Steven E. Kurmas.........................        --             --              --             --  
9 Other Officers.........................    23,730       $676,305      $1,014,458     $1,352,610  

     Pursuant to the MCN Stock Incentive Plan, all outstanding MCN stock options
will also vest upon a change in control. Shareholder approval of the merger     
agreement will result in a change in control of MCN for these purposes. Of the  
591,330 options outstanding on the date of the signing of the merger agreement, 
the                                                                             

46

S-4
57th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 57th

officers held a total of 299,780 options on MCN stock with an exercise price of 
$17.25. The options currently held by the officers are reflected in the         
following chart:                                                                

                                                                [Download Table]

                                                    NUMBER OF       VALUE OF OPTIONS
                     NAME                      OUTSTANDING OPTIONS  $28.50 PER SHARE
                     ----                      -------------------  ----------------
                                                                                    
Alfred R. Glancy III..........................       100,000           $1,125,000   
Stephen E. Ewing..............................        48,300           $  543,375   
Howard L. Dow III.............................        14,000           $  157,500   
Daniel L. Schiffer............................        12,950           $  145,687   
Steven E. Kurmas..............................        11,725           $  131,906   
16 other officers.............................       112,805           $1,269,056   

     During the 60-day period beginning on the date MCN shareholders approve the
merger, the option holders will have the right to cash in a per-share amount    
equal to the excess of the higher of the price paid to MCN shareholders in the  
merger or the highest trading price of the MCN shares during the 60-day period  
ending on the date MCN shareholders approve the merger over $17.25.             

MCN EXECUTIVE ANNUAL PERFORMANCE PLAN                                 

 The MCN Executive Annual Performance Plan provides for the payment of a
pro-rated target bonus, based on the level of attainment of performance targets 
as of the end of the last measurement date prior to the change in control and   
assuming MCN's earnings were equal to its net income goal. Shareholder approval 
of the merger agreement also will result in a change in control of MCN for      
purposes of the annual performance plan. Assuming no change in the plan and     
approval of the merger agreement by MCN shareholders in January 2000, officers  
will be vested under the Annual Performance Plan for 2000 as follows:           

                                                                [Download Table]

                                                   ESTIMATED PORTION OF ANNUAL BONUS
                       NAME                          PAYABLE ON CHANGE IN CONTROL   
                       ----                        ---------------------------------
                                                                                    
Alfred R. Glancy III..............................             $ 34,000             
Stephen E. Ewing..................................             $ 19,000             
Howard L. Dow III.................................             $ 15,000             
Daniel L. Schiffer................................             $  9,000             
Steven E. Kurmas..................................             $  9,000             
17 other officers.................................             $102,000             

INDEMNIFICATION AND DIRECTORS' AND OFFICERS' INSURANCE                

    The merger agreement provides that after the completion of the merger, DTE
will indemnify and hold harmless each present and former director and officer of
MCN (when acting in such capacity) for any and all costs incurred in connection 
with any claims arising out of matters prior to the completion of the merger to 
the fullest extent that MCN would have been permitted to do so under Michigan   
law and its articles of incorporation and its bylaws in effect on the date of   
the merger agreement. The merger agreement also provides that DTE will advance  
expenses as incurred to the fullest extent permitted under applicable law as    
long as the person to whom expenses are advanced provides an undertaking to     
repay such advances if it is ultimately determined that such person is not      
entitled to such indemnification.                                               

The merger agreement further provides that, for a period of six years 
following the merger, DTE will maintain MCN's existing officers' and directors' 
liability insurance so long as the annual premium therefor is not in excess of  
200% of the last annual premium paid prior to the date of the merger agreement. 
However, the merger agreement permits DTE to substitute such policy with        
policies (which may be "tail" policies) containing terms with respect to such   
coverage and amount no less favorable to such directors and officers. In        
addition, if the existing directors' and officers' liability insurance expires, 
is terminated or is canceled during such six-year period, DTE will use its best 
efforts to obtain as much directors' and officers' insurance as can be obtained 
for the remainder of such period for a premium not in excess of 200% of the     
current premium.                                                                

47

S-4
58th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 58th

BOARD OF DIRECTORS AND SENIOR MANAGEMENT FOLLOWING THE MERGER         

     The merger agreement provides that at the effective time of the merger, DTE
will promptly increase the size of its board of directors or exercise its best  
efforts to secure the resignation of its present directors in order to cause Mr.
Alfred R. Glancy III and two additional persons selected by MCN after           
consultation with DTE from among MCN's directors as of the date of the merger   
agreement to be appointed to DTE's board of directors.                          

Set forth below is a table of the persons expected to serve as senior 
officers of DTE immediately following the merger.                               

                                                        [Enlarge/Download Table]

               NAME                                      POSITION IN DTE                       
               ----                                      ---------------                       
                                                                                               
Anthony F. Earley, Jr. ........... Chairman of the Board, President and Chief Executive Officer
Stephen E. Ewing.................. President and Chief Operating Officer of DTE Gas            
Robert J. Buckler................. President and Chief Operating Officer of DTE Energy         
                                   Distribution                                                
Gerard M. Anderson................ President and Chief Operating Officer of DTE Energy         
                                   Resources                                                   
Larry G. Garberding............... Executive Vice President and Chief Financial Officer        

     If any officer listed above ceases to be a full-time employee of either DTE
or MCN at or before the merger, or shall be unable or unwilling to serve as an  
officer of DTE, DTE will appoint another individual to serve in such            
individual's place.                                                             

DTE AND MCN STOCK-BASED RIGHTS                                        

In the merger agreement, MCN has agreed that before the merger is     
completed, it will take all action necessary to permit the assumption of all    
unexercised MCN options by DTE and DTE has agreed that it will take all         
corporate action necessary to reserve for issuance a sufficient number of shares
of DTE common stock for delivery upon exercise of MCN options assumed by DTE. As
a result of the merger, each MCN option will cease to represent a right to      
acquire shares of MCN common stock and will be converted automatically into     
options to acquire shares of DTE common stock, and DTE will assume each such    
stock option subject to the terms of the applicable MCN stock-based compensation
plan or agreement. The number of shares of DTE common stock purchasable upon    
exercise of each such MCN stock option will be equal to the number of MCN shares
that were purchasable under such MCN stock option immediately prior to the      
merger multiplied by the "conversion ratio", which fraction is set forth below, 
rounding to the nearest whole share, and the per share exercise price for such  
MCN stock option will be obtained by dividing the per share exercise price for  
such MCN stock option by the conversion ratio, rounding to the nearest whole    
cent. Any MCN option which is intended to be an "incentive stock option," as    
defined in Section 422 of the Internal Revenue Code, will be adjusted in        
accordance with the requirements of Section 424 of the Internal Revenue Code.   

The "conversion ratio" means a fraction, the numerator of which is the
average of the high and low sales price of one share of MCN common stock on the 
NYSE on the trading day immediately preceding the completion of the merger and  
the denominator of which is the average of the high and low sales price of one  
share of DTE common stock on the NYSE on the trading day immediately preceding  
the completion of the merger.                                                   

CONSULTING AGREEMENT                                                  

     DTE, MCN and DTE Enterprises have entered into a termination and consulting
agreement with Mr. Glancy, which will become effective at the completion of the 
merger and will terminate upon Mr. Glancy's 65th birthday. The consulting       
agreement provides that Mr. Glancy will resign from his employment immediately  
following the closing of the merger. At the time of such resignation, Mr. Glancy
will be entitled to the payments and benefits provided under his change in      
control agreement as described above. DTE has agreed that it will cause Mr.     
Glancy to be nominated to its board of directors for a term beginning at the    
completion of the merger, and renominated in accordance with normal board       
procedures until he reaches mandatory retirement age for members of the board of
directors. During the term of the consulting agreement,                         

48

S-4
59th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 59th

Mr. Glancy agrees to render 50 hours of services per month, upon request by the 
board of directors or the chief executive officer of DTE, on matters including, 
but not limited to, advice regarding natural gas industry matters,              
diversification strategy, public and civic relations, and merger transition     
issues. In return for rendering such services, Mr. Glancy will receive the      
following payments and benefits:                                                

   - A $25,000 monthly consulting fee, plus $500 for each hour of service he
renders exceeding fifty per month;                                

   - For as long as Mr. Glancy remains a member of the board of directors of
DTE, a home security system shall be provided to him, on terms and
      conditions no less favorable than those on which such system is provided
to the chief executive officer of DTE; and                        

- An office or offices of a size and with furnishings and other       
  appointments, and exclusive personal secretarial assistance at least
  equal to that provided to Mr. Glancy as of the effective date of the
      consulting agreement, or if more favorable, as provided generally at any
time thereafter to senior executives of DTE.                      

 DTE may terminate the consulting agreement for "cause," as such term is
defined in the agreement, in which case Mr. Glancy's services will no longer be 
required and no further fees shall be paid. During the term of the consulting   
agreement, Mr. Glancy may not compete with DTE or its subsidiaries; and, if Mr. 
Glancy violates this covenant or his duty not to divulge confidential           
information relating to DTE, MCN or any of their affiliated companies, DTE may  
withhold payments under the consulting agreement but not under Mr. Glancy's     
change in control agreement. In the event that the Internal Revenue Service     
determines or claims that any payments or benefits provided to Mr. Glancy       
constitute "excess parachute payments" within the meaning of Section 280G of the
Internal Revenue Code, Mr. Glancy will receive a tax reimbursement payment in   
accordance with the terms of his agreement. DTE and MCN will indemnify Mr.      
Glancy from any actions, suits or proceedings in connection with the agreement  
or his services thereunder, including reimbursement of reasonable attorney's    
fees, provided that any consulting services giving rise to such indemnification 
were performed by Mr. Glancy in good faith and, to Mr. Glancy's knowledge, in a 
lawful manner.                                                                  

PUBLIC TRADING MARKETS                                                          

DTE common stock is currently listed on the NYSE and the Chicago Stock
Exchange under the symbol "DTE." An application will be made for the listing on 
the NYSE and the Chicago Stock Exchange of the shares of DTE common stock to be 
issued in the merger. MCN common stock is currently listed on the NYSE under the
symbol "MCN." Upon completion of the merger, MCN common stock will be de-listed 
from the NYSE and de-registered under the Securities Exchange Act of 1934.      

ABSENCE OF DISSENTERS' RIGHTS                                                   

     Dissenters' rights are statutory rights that enable shareholders who object
to certain extraordinary transactions, such as mergers, to demand that the      
corporation pay the fair value for their shares as determined by a court in a   
judicial appraisal proceeding in lieu of receiving the consideration offered to 
shareholders in connection with the extraordinary transaction. Dissenters'      
rights are not available in all circumstances.                                  

    DTE shareholders are not entitled to dissenters' rights under Michigan law
in connection with the merger or the issuance of shares of DTE common stock     
pursuant to the merger because DTE is not a party to the merger and DTE         
shareholders are not voting to approve the merger agreement.                    

    MCN shareholders are not entitled to dissenters' rights under Michigan law
in connection with the merger because MCN common shares were listed on a        
national securities exchange, the NYSE, on the record date fixed for the MCN    
special meeting.                                                                

49

S-4
60th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 60th

RESALE OF DTE COMMON STOCK                                                      

   The shares of DTE common stock issuable to MCN shareholders in the merger
have been registered under the Securities Act of 1933. Such shares may be traded
freely and without restriction by those shareholders not deemed to be           
"affiliates" of MCN at the time of the MCN special meeting, as that term is     
defined in the rules under the Securities Act. "Affiliates" are generally       
defined as persons who control, are controlled by or are under common control   
with, MCN at the time of the MCN special meeting. Shares of DTE common stock    
received by those shareholders of MCN who are deemed to be "affiliates" of MCN  
may be resold without registration as provided for by Rule 145 under the        
Securities Act, or as otherwise permitted under the Securities Act.             

     The registration statement to register the shares of DTE common stock to be
issued in the merger, of which this document is a part, does not cover any      
resales of DTE common stock received by affiliates of MCN in the merger or by   
certain of their family members or related interests. In the merger agreement,  
MCN has agreed to use its best efforts to cause each of its affiliates as of the
date of its special meeting to deliver to DTE a written agreement in the form   
attached to the merger agreement acknowledging and agreeing to such resale      
restrictions under the Securities Act.                                          

50

S-4
61st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 61st

REGULATORY FILINGS, APPROVALS AND CLEARANCES

Under the merger agreement, DTE and MCN each have agreed to use its   
commercially reasonable efforts to take all actions and do all things necessary,
proper or advisable to complete the merger and the other transactions           
contemplated by the merger agreement as soon as practicable. This includes      
preparing and filing as promptly as practicable all required documentation and  
obtaining as promptly as practicable all consents, registrations, approvals,    
permits and authorizations necessary or advisable to be obtained from any third 
party and/or any governmental entity in order to complete the merger.           

The completion of the merger is conditioned upon the expiration of    
applicable federal and state waiting periods and the receipt of all governmental
consents except for those the failure of which to obtain is not reasonably      
likely to have a material adverse effect on DTE or MCN or provide a reasonable  
basis to conclude that the parties or any of their affiliates or advisors would 
be subject to criminal or material financial liability. In addition, completion 
of the merger is conditioned on receipt of all governmental approvals on terms  
that are, in the reasonable judgment of DTE, not reasonably likely to have a    
material adverse effect on DTE, MCN or DTE Enterprises.                         

If Federal Energy Regulatory Commission approval of the merger is not 
required, either DTE or MCN may terminate the merger agreement after one year   
from the date of the merger agreement, if either party reasonably determines    
that it is more likely than not that the governmental consents necessary to     
complete the merger on terms that satisfy the conditions to DTE's and MCN's     
obligation to complete the merger will not be obtained prior to the date that is
18 months from the date of the merger agreement. If FERC approval of the merger 
is required, however, then the right to terminate the merger agreement by making
such reasonable determination exists only after 15 months from the date of the  
merger agreement. In any event, either DTE or MCN may terminate the merger      
agreement if all necessary regulatory approvals necessary to complete the merger
have not been obtained or waived by April 15, 2001.                             

HART-SCOTT-RODINO ACT                                                           

 The Hart-Scott-Rodino Act provides that the merger may not be completed
until premerger notification filings have been made, by which means information 
is submitted to the Antitrust Division of the U.S. Department of Justice and the
Federal Trade Commission, and the specified HSR Act waiting period has expired  
or has terminated. Even after the waiting period expires or is terminated, the  
Antitrust Division and the Federal Trade Commission will have the authority to  
challenge the merger on antitrust grounds before or after the merger is         
completed.                                                                      

  DTE and MCN each intend to file a premerger notification and report form
for the merger with the Antitrust Division and the Federal Trade Commission in  
mid-November 1999.                                                              

PUBLIC UTILITY HOLDING COMPANY ACT OF 1935                                      

     DTE and MCN are both exempt holding companies under the 1935 Act. As exempt
holding companies, DTE and MCN are exempt from all provisions of the 1935 Act,  
except for Section 9(a)(2), which prohibits any "affiliate" of a "public utility
company" or a "holding company," as such terms are defined in the 1935 Act, from
acquiring the securities of any other public utility company of which it is an  
affiliate, or will become an affiliate after the acquisition, unless the        
acquisition is approved by the SEC. Under the 1935 Act, DTE is an affiliate of  
The Detroit Edison Company and, after completion of the merger, will be an      
affiliate of MichCon; accordingly, approval of the SEC under the 1935 Act is    
required. Nonetheless, after the merger, DTE will continue to be an exempt      
holding company under the 1935 Act by filing its annual exemption statement     
pursuant to Rule 2 under the 1935 Act.                                          

FEDERAL POWER ACT                                                               

     Under the merger agreement, MCN has agreed to use its best efforts promptly
to dispose of various electric facilities. If MCN is successful in disposing of 
those assets and other facilities, the merger should not be subject to FERC     
approval under the Federal Power Act, although such dispositions may be subject 
to                                                                              

51

S-4
62nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 62nd

FERC approval under the Power Act. If MCN is not successful in disposing of     
those generating assets and facilities, FERC approval of the merger itself is   
likely to be required under the Power Act.                                      

STATE APPROVALS                                                                 

    While there are no formal state approvals for the merger, DTE and MCN will
continue their practice of constructively working with state regulators that    
have ongoing jurisdiction over Detroit Edison and MichCon.                      

ATOMIC ENERGY ACT                                                               

    DTE holds a license issued by the Nuclear Regulatory Commission to own and
operate Fermi 2, a nuclear generating plant. Under the Atomic Energy Act and NRC
regulations, nuclear licensees must seek and obtain prior NRC consent for any   
changes that would constitute a transfer of an NRC license, directly or         
indirectly, through transfer of control of the license to any person.           
Additionally, the NRC has expressed concern over the potential of certain       
mergers to affect the basis for prior NRC decisions related to the financial    
qualifications as an NRC licensee. DTE does not believe that the merger would   
constitute a transfer of control of its NRC license or that the merger will     
affect the basis for prior NRC decisions relating to its financial              
qualifications as an NRC licensee. DTE has requested confirmation that the NRC  
concurs with its belief.                                                        

 While DTE and MCN believe that we will receive the requisite regulatory
approvals and clearances for the merger, DTE and MCN cannot give any assurance  
regarding the timing of the required approvals or clearances or the ability to  
obtain the required approvals and clearances on satisfactory terms or otherwise,
or that no action will be brought challenging the merger or the governmental or 
other actions.                                                                  

52

S-4
63rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 63rd

THE MERGER AGREEMENT

   The following describes certain aspects of the proposed merger, including
material provisions of the merger agreement. The following description of the   
merger agreement does not purport to be complete and is subject to, and         
qualified in its entirety by reference to, the merger agreement, which is       
attached as Appendix A to this document and is incorporated in this document by 
reference. All DTE shareholders and MCN shareholders are urged to read the      
merger agreement carefully and in its entirety.                                 

INTRODUCTION                                                                    

     The merger agreement provides, among other things, for a merger of MCN with
and into DTE Enterprises, with DTE Enterprises as the surviving corporation in  
the merger. The transaction is intended to qualify as a "reorganization" within 
the meaning of Section 368(a) of the Internal Revenue Code for federal income   
tax purposes.                                                                   

TERMS OF THE MERGER                                                             

GENERAL                                                               

Subject to the allocation and proration procedures and the adjustments
necessary to preserve the status of the merger as a reorganization under the    
Internal Revenue Code set forth in the merger agreement and more fully described
below, in the merger, each share of MCN common stock, par value $0.01 per share,
including the associated right to purchase Series A Junior Participating        
Preferred Stock issued pursuant to the Rights Agreement, dated as of December   
20, 1989, as amended by amendments dated as of September 19, 1994, July 23,     
1997, and October 4, 1999, by and between MCN and First Chicago Trust Company of
New York, as Rights Agent, issued and outstanding immediately prior to the      
merger, other than shares owned by DTE or MCN (except on behalf of third        
parties), will be converted into the right to receive either (1) $28.50 in cash 
or (2) 0.775 shares of DTE common stock.                                        

The merger agreement provides that each record holder of shares of MCN
common stock will be entitled to (1) elect to receive shares of DTE common stock
for all or some of its MCN shares ("Stock Election Shares"), (2) elect to       
receive cash for all or some of its MCN shares ("Cash Election Shares") or (3)  
make no election for all or some of its MCN shares ("Non-Election Shares"). Any 
shares of MCN common stock for which the record holder has not submitted a      
properly completed election form to the exchange agent by 9:00 a.m. on the date 
of the completion of the merger, will be treated as Non-Election Shares.        

ALLOCATION AND PRORATION                                              

 The merger agreement provides for an allocation and proration procedure
that ensures that, subject to adjustments necessary to preserve the status of   
the merger as a reorganization under the Internal Revenue Code, the aggregate   
number of shares of MCN common stock that will be converted into cash will be   
equal to 55% of the total number of shares of MCN common stock outstanding      
immediately prior to the merger and the aggregate number of shares of MCN common
stock that will be converted into shares of DTE common stock will be equal to   
45% of the total number of shares of MCN common stock outstanding immediately   
prior to the merger. The following explains these allocation and election       
procedures.                                                                     

  If the number of Cash Election Shares exceeds 55% of the total number of
shares of MCN common stock outstanding immediately prior to the merger,         
excluding those owned by DTE or MCN (except on behalf of third parties), (the   
"Cash Election Number"), then the following will occur:                         

   (1) All Non-Election Shares will be deemed to be Stock Election
Shares;                                                               

     (2) All Stock Election Shares, including those deemed to be Stock
   Election Shares, will be converted into the right to receive 0.775 shares
of DTE common stock; and                                              

53

S-4
64th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 64th

(3) Each Cash Election Share will be converted into:        

       - An amount in cash equal to $28.50 multiplied by a fraction, the
             numerator of which is the Cash Election Number, and the denominator
         of which is the total number of Cash Election Shares (the "Cash
Fraction"); and                                       

      - A number of shares of DTE common stock equal to the product of
    0.775 and a fraction equal to one minus the Cash Fraction.

  Alternatively, if the number of Stock Election Shares exceeds 45% of the
total number of shares of MCN common stock outstanding immediately prior to the 
merger, excluding those owned by DTE or MCN (except on behalf of third parties) 
(the "Stock Election Number"), then the following will occur:                   

          (1) All Non-Election Shares will be deemed to be Cash Election Shares;

   (2) All Cash Election Shares, including those deemed to be Cash
Election Shares, will be converted into the right to receive $28.50 in
cash; and                                                             

(3) Each Stock Election Share will be converted into:       

      - A number of shares of DTE common stock equal to the product of
            0.775 and a fraction, the numerator of which is the Stock Election
           Number, and the denominator of which is the total number of Stock
Election Shares (the "Stock Fraction"); and           

       - An amount in cash equal to the product of $28.50 and a fraction
equal to one minus the Stock Fraction.                

TAX OPINION ADJUSTMENT                                                

     It is a condition to the merger that DTE and MCN each receive an opinion of
their respective outside counsel that the merger will be treated as a           
"reorganization" for U.S. federal income tax purposes. It is possible, depending
upon the value of DTE common stock on the date the merger is completed, that    
such counsel will not be able to render their respective opinions unless the    
number of shares of MCN common stock that will be converted into cash is        
decreased below 55% of the total number of issued and outstanding shares of MCN 
common stock and the number of shares of MCN common stock that will be converted
into DTE common stock is increased above 45% of the total number of issued and  
outstanding shares of MCN common stock. In this case, the number of shares of   
MCN common stock that will be converted into DTE common stock in the merger will
be increased, and the number of shares of MCN common stock to be converted into 
cash will be correspondingly decreased, to the extent necessary to enable       
outside counsel to render their respective tax opinions. Each share of MCN      
common stock that would have been converted into cash but is instead converted  
into DTE common stock in order to enable such outside counsel to render their   
respective tax opinions will be converted into a number of shares of DTE common 
stock having a value of $28.50 to the extent that the conversion is necessary so
that the value of the DTE common stock, as determined for tax purposes, paid as 
consideration for shares of MCN common stock is not less than 41% of the value  
of the total consideration, as determined for tax purposes, for shares of MCN   
common stock. Any shares of MCN common stock that are otherwise converted into  
DTE common stock in order to enable outside counsel to render their respective  
tax opinions will be converted into DTE common stock at the exchange ratio of   
0.775. Shares of MCN common stock converted into shares of DTE common stock in  
order to enable outside counsel to render their respective tax opinions are     
nonetheless deemed to be converted into the right to receive cash, and the      
shares of DTE common stock issued are deemed to be cash, for purposes of the    
allocation and proration procedures of the merger agreement.                    

ELECTION PROCEDURES AND DISTRIBUTION OF CERTIFICATES OF DTE COMMON STOCK        

  For MCN shareholders only, enclosed with these materials are transmittal
materials for use in making the election to receive cash, shares of DTE common  
stock, or both with respect to shares of MCN common stock canceled in the merger
and for exchanging certificates representing shares of MCN common stock. The    
form on which this choice is to be made is referred to in this document as the  
"election form." MCN                                                            
54

S-4
65th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 65th

SHAREHOLDERS SHOULD NOT RETURN EITHER THE ELECTION FORM OR THEIR CERTIFICATES   
REPRESENTING SHARES OF MCN COMMON STOCK WITH THEIR PROXY MATERIALS. MCN         
SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES BEFORE WE PUBLICLY     
ANNOUNCE THE DATE ON WHICH THE MERGER WILL BE COMPLETED.                        

  Prior to the completion of the merger, DTE will select an exchange agent
with MCN's prior approval to administer the exchange of shares of MCN common    
stock for the cash, shares of DTE common stock, cash in lieu of fractional      
shares and dividends and other distributions, if any, to which MCN shareholders 
are entitled to receive in the merger. Five trading days prior to the completion
of the merger, DTE will publicly announce the intended completion date. Stock   
certificates representing shares of MCN common stock and a duly completed       
election form must be received by the exchange agent no later than 9:00 a.m. on 
the date of the merger, which time is referred to in this document as the       
"election deadline." A record holder who holds shares of MCN common stock in a  
representative capacity may submit multiple election forms, but such record     
holder must certify that each election form submitted to the exchange agent     
covers all the shares of MCN common stock held by such record holder on behalf  
of a particular beneficial owner.                                               

    In addition, as soon as practicable after the completion of the merger the
exchange agent will mail to each record holder who did not submit an election   
form or did not submit certificates with a duly completed election form, a      
letter of transmittal and instructions for surrendering certificates of MCN     
common stock. This mailing is solely to facilitate the exchange of shares of MCN
common stock for the cash, shares of DTE common stock into which such MCN shares
have been converted in the merger and cash instead of fractional shares; after  
the election deadline former MCN shareholders will not be able to elect the form
of consideration.                                                               

     Upon surrender of a certificate representing shares of MCN common stock and
a duly completed election form or letter of transmittal to the exchange agent,  
the holder will be entitled to receive:                                         

 - A certificate representing shares of DTE common stock into which such
   shares of MCN common stock have been converted or, if DTE establishes
       procedures for book-entry transfer of shares of DTE common stock prior to
     the completion of the merger, evidence of such certificates pursuant to
such book-entry system;                                           

- Cash to which such holder is entitled;                              

   - Cash in lieu of fractional shares, if any, to which such holder has the
right to receive; and                                             

     - Any dividends or other distribution to which such holder has the right to
receive.                                                          

   After completion of the merger, there will be no transfers on MCN's stock
transfer books of shares outstanding immediately prior to that time. No party   
will be liable to any MCN shareholder for any amount properly delivered to a    
public official pursuant to applicable abandoned property, escheat or similar   
laws.                                                                           

  All shares of DTE common stock to be issued in the merger will be deemed
issued and outstanding as of the completion of the merger. Accordingly, if DTE  
declares a dividend or other distribution after the completion of the merger,   
that declaration will include all shares of DTE common stock issued in the      
merger. Nonetheless, DTE will not pay any dividends or other distributions with 
respect to the shares of DTE common stock with a record date after the          
completion of the merger, to any former MCN shareholder who has not exchanged   
his or her certificates representing shares of MCN common stock.                

FRACTIONAL SHARES                                                               

     DTE will not issue any fractional shares of DTE common stock in the merger.
Instead, a MCN shareholder who would otherwise have received a fraction of a    
share of DTE common stock will receive cash (without interest). The amount of   
cash received will be equal to the holder's proportionate interest in the net   
proceeds from the sale on the NYSE by the exchange agent of the aggregate       
fractional shares of DTE common stock issued to the exchange agent on behalf of 
MCN shareholders.                                                               

CLOSING AND EFFECTIVE TIME OF THE MERGER                                        

     The merger agreement provides that unless DTE and MCN agree to another date
or time, the closing of the merger will take place on the fifth business day    
after fulfillment or waiver of the conditions set forth in the merger agreement,
other than those conditions that by their nature are to be satisfied at the     
closing, but                                                                    
55

S-4
66th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 66th

subject to the fulfillment or waiver of those conditions. As soon as practicable
on the closing date, MCN and DTE will cause a certificate of merger to be       
executed and filed with the Department of Consumer and Industry Services of the 
State of Michigan. The merger will become effective at the time when the        
certificate of merger is duly endorsed by the Department of Consumer and        
Industry Services of the State of Michigan.                                     

CORPORATE GOVERNANCE                                                            

In the merger agreement, DTE has agreed that at the completion of the 
merger, it will cause Mr. Glancy and two other persons who are currently members
of MCN's board of directors, and who will be chosen by MCN in consultation with 
DTE, to be elected to its board of directors.                                   

    The merger agreement provides that the directors of DTE Enterprises at the
effective time of the merger will be the directors of the surviving corporation 
and the officers of MCN at the time of the completion of the merger will be the 
officers of the surviving corporation.                                          

CONDITIONS OF THE MERGER                                                        

    The respective obligations of each of DTE and MCN to effect the merger are
subject to the satisfaction or waiver, at or prior to the merger, of each of the
following conditions:                                                           

 - The representations and warranties of the other party with respect to
   capitalization, corporate authority, brokers and, with respect to MCN
       only, the rights agreement and utility regulation, being true and correct
      in all material respects both as of the date of the merger agreement and
      as of the closing date, as though made on and as of such time (except to
   the extent any representation or warranty expressly speaks of another
date or time);                                                    

     - The representations and warranties of the other party with respect to all
    other matters being true and correct both as of the date of the merger
    agreement and as of the closing date, as though made on and as of such
 time (except to the extent any representation or warranty expressly
      speaks of another date or time), except for such failures to be true and
 correct which are not, individually or in the aggregate, reasonably
 likely to have a material adverse effect on the representing party;

     - The approval of the merger agreement by MCN shareholders and the approval
of the issuance of shares of DTE common stock by DTE shareholders;

   - The shares of DTE common stock issuable to MCN shareholders pursuant to
       the merger agreement having been authorized for listing on the NYSE, upon
official notice of issuance;                                      

  - The expiration of applicable federal and state waiting periods and the
receipt of all governmental consents in connection with the merger
agreement except for those the failure of which to obtain are not 
  reasonably likely to have a material adverse effect on DTE or MCN or
   provide reasonable basis to conclude that the parties or any of their
       affiliates or advisors would be subject to criminal or material financial
liability;                                                        

 - The absence of any legal restriction that prohibits completion of the
merger;                                                           

    - The registration statement registering the shares of DTE common stock to
be issued in the merger having become effective and no stop order 
     suspending the effectiveness or proceedings for that purpose shall have
been initiated or be threatened by the SEC;                       

   - DTE shall have received all state securities and "blue sky" permits and
    approvals necessary to consummate the transactions contemplated by the
merger agreement; and                                             

  - MCN shall have completed any required dispositions of its interests in
various electric facilities and all FERC-jurisdictional assets or 
facilities.                                                       

ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF DTE AND MCN               

Other than the condition relating to the receipt of tax opinions from 
counsel which may not be waived after DTE shareholders have approved the        
issuance of shares pursuant to the merger or MCN shareholders have approved the 
merger unless further shareholder approval is obtained with appropriate         
disclosure, the                                                                 

56

S-4
67th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 67th

obligations of each of DTE and MCN are subject to further satisfaction or waiver
by each party of the following conditions:                                      

     - The other party having performed in all material respects all obligations
      required to be performed by it under the merger agreement at or prior to
the closing date;                                                 

- The receipt of consents or approvals of each person whose consent or
       approval is required under any material contract to which the other party
or any of its subsidiaries is a party;                            

- DTE and MCN having received comfort letters from their respective   
independent public accounting firms;                              

  - Such party having received from its counsel opinions dated the closing
date, stating that:                                               

       (1) The merger will be treated for federal income tax purposes as a
      reorganization within the meaning of Section 368(a) of the
Internal Revenue Code; and                          

         (2) That each of DTE, MCN and DTE Enterprises will be a party to that
      reorganization within the meaning of Section 368(b) of the
Internal Revenue Code; and                          

- There shall not have occurred a material adverse effect on the other
party.                                                            

ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF DTE AND DTE ENTERPRISES             

The obligations of DTE and DTE Enterprises are subject to the further 
satisfaction or waiver by DTE of the following conditions:                      

- The receipt by DTE of affiliate letters from persons identified as  
affiliates of MCN; and                                            

  - That all governmental consents have been obtained without imposing any
terms or conditions that, individually or in the aggregate, in the
  reasonable judgment of DTE, are reasonably likely to have a material
adverse effect on any of the parties to the merger agreement.     

     For purposes of the merger agreement, "material adverse effect" means, with
respect to DTE or MCN a material adverse effect on the condition (financial or  
otherwise), properties, business, operations, results of operations or prospects
of the party and its subsidiaries taken as a whole, OTHER THAN ANY CHANGE OR    
EFFECT ARISING OUT OF:                                                          

(1) Any divestiture by MCN of various electric facilities or
           FERC-jurisdictional assets as required by the merger agreement;

       (2) MCN's recognition of a write-down of its gas and oil properties
          under the full cost method of accounting as prescribed by Rule
             4-10 of Regulation S-X under the Securities Act and Exchange Act;

(3) General economic conditions; or                         

  (4) Conditions generally affecting the electric or gas utility
industries.                                                           

REPRESENTATIONS AND WARRANTIES                                                  

   The merger agreement contains various representations and warranties made
by DTE, DTE Enterprises and MCN, some of which are qualified as to materiality, 
regarding the following matters, among others:                                  

- Corporate existence and capitalization;                             

  - Ownership of the shares of capital stock of its material subsidiaries;

- Corporate power and authority to execute, deliver and perform its   
 obligations under the merger agreement, and to complete the merger;

- Consents and regulatory approvals necessary to complete the merger; 

57

S-4
68th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 68th

   - The merger agreement and the transactions contemplated thereby will not
      result in a violation of DTE's, MCN's or DTE Enterprises' organizational
     documents or the organizational documents of any of their subsidiaries,
       contracts to which DTE, MCN or DTE Enterprises is a party, or violate any
law, rule or regulation;                                          

- Documents filed with the Securities and Exchange Commission and     
    applicable regulatory authorities, including financial statements, and
the accuracy of information contained therein;                    

- Absence of certain material adverse changes or events;              

     - Pending or threatened suits, actions or other proceedings, obligations or
liabilities;                                                      

- Employee benefits;                                                  

- Compliance with laws and required licenses and permits;             

- Environmental matters;                                              

- Tax matters;                                                        

- Intellectual property;                                              

- Insurance;                                                          

- Regulation as a utility;                                            

- Absence of beneficial ownership of each other's shares; and         

- Year 2000 compliance.                                               

  MCN has also made certain representations and warranties with respect to
regulatory proceedings and its FERC-jurisdictional assets.                      

COVENANTS                                                                       

INTERIM OPERATIONS                                                    

 DTE and MCN have each agreed as to itself and each of its subsidiaries,
from the date of the merger agreement and prior to the completion of the merger,
unless the other party otherwise approves, and except as otherwise expressly    
contemplated by the merger agreement, that, among other things:                 

       (1) It will conduct its businesses in the ordinary and usual course
       and will use best reasonable efforts to preserve intact its
              business organization and maintain existing relations and goodwill
          with various business relations and maintain and keep material
             properties and assets in as good repair and condition as such are
          in as of the date of the merger agreement, subject to ordinary
wear and tear;                                      

  (2) It will not amend its articles of incorporation or bylaws;

     (3) It will not make any distributions with respect to its common
             stock (other than quarterly cash dividends not in excess of $.255
              per share in the case of MCN and of $.515 per share in the case of
DTE) or change in capital structure;                

        (4) Other than in the ordinary and usual course of business, it will
              not make acquisitions or investments in any other person in excess
             of $100,000,000 in the aggregate or $30,000,000 in respect of any
              transaction or series of related transactions, in the case of MCN,
              or in excess of $250,000,000 in the aggregate, in the case of DTE;

          (5) It will not change any accounting principle, practice or method in
           a manner that is inconsistent with past practice, except to the
            extent required by U.S. generally accepted accounting principles
  as advised by its regular independent accountants; and

58

S-4
69th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 69th

      (6) It will not take or fail to take any action that is reasonably
             likely to make any representation or warranty of it inaccurate in
    any material respect at, or as of any time prior to, the
        completion of the merger, or that is, individually or in the
             aggregate, reasonably likely to have a material adverse effect on
it.                                                 

     In addition, MCN has agreed as to itself and each of its subsidiaries, from
the date of the merger agreement and prior to the completion of the merger,     
unless DTE otherwise approves, and except as otherwise expressly contemplated by
the merger agreement, that, among other things:                                 

(1) It will not make or authorize or commit for any capital 
            expenditures or operation and maintenance expenditures in excess
          of 110% of those contemplated to be spent pursuant to the year
       1999, 2000 or 2001 capital appropriations spending budgets;

          (2) It will not incur, assume or prepay any long-term debt or incur or
           assume any short-term debt other than in the ordinary and usual
          course of business in amounts and for purposes consistent with
            past practice under existing lines of credit, and except for the
       incurrence of long-term indebtedness in connection with the
              refinancing of existing indebtedness either at its stated maturity
or at a lower cost of funds;                        

         (3) It will not assume, guarantee, endorse or otherwise become liable
            or responsible for the obligations of any third-party, except in
the ordinary and usual course of business;          

       (4) It will not accelerate or delay collection of notes or accounts
             receivable in advance of or beyond their regular due dates or the
dates consistent with past practice;                

    (5) Except as required by law, an existing collective bargaining
              agreement or other contract identified to DTE, neither MCN nor any
of its subsidiaries will:                           

       - Terminate, establish, adopt, enter into, make any new grants or
       awards under, amend or otherwise modify, any compensation and
            benefit plans, or except as required by any existing contract with
           a non-officer employee, increase the salary, wage, bonus or other
          compensation of any employees, except increases occurring in the
ordinary and usual course of business; or             

    - Grant any severance or termination pay to, or enter into any
           employment or severance agreement with any director or officer of
        it or such subsidiaries, provided, that MCN is not required to
          violate any of its obligations existing prior to the date of the
merger agreement;                                     

          (6) It will not settle or compromise any material claims or litigation
         or amend or terminate any of its material contracts or waive,
release or assign any material rights or claims; and

     (7) It will not make any material tax election, other than in the
             ordinary and usual course or as is required by law, or permit any
             insurance policy naming it as a beneficiary or loss-payable payee
         to be canceled or terminated except in the ordinary and usual
course of business.                                 

     In addition, DTE has agreed as to itself and each of its subsidiaries, from
the date of the merger agreement and prior to the completion of the merger,     
unless MCN otherwise approves, and except as otherwise expressly contemplated by
the merger agreement, that, among other things:                                 

      (1) It will not enter into any agreement with respect to a merger,
    reorganization, share exchange, consolidation or similar
              transaction involving, or any purchase of all or substantially all
    of the equity securities of it or any of its significant
             subsidiaries (as defined in Rule 1-02 of Regulation S-X under the
Exchange Act); and                                  

  (2) Other than pursuant to the year 1999, 2000 or 2001 capital
           appropriations/ spending budgets and other than in the ordinary
            and usual course of business, it will not dispose of or encumber
     any property or assets, other than sales not in excess of
$250,000,000 in the aggregate.                      

59

S-4
70th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 70th

ACQUISITION PROPOSALS                                                 

   In the merger agreement, each of DTE and MCN has agreed that it will not,
directly or indirectly, initiate, solicit, encourage or otherwise facilitate any
inquiries or the making of any proposal or offer with respect to a merger,      
reorganization, share exchange, consolidation or similar transaction involving, 
or any purchase of all or any of the assets or any equity securities of, it or  
any of its subsidiaries. These limitations do not apply, however, to those      
transactions in the ordinary course of business or those transactions that are  
expressly contemplated by the merger agreement that could not interfere with the
merger. In addition, these limitations only apply to DTE to the extent such     
proposal or offer is conditioned on DTE's failure to obtain the approval of its 
shareholders of the issuance of shares of DTE common stock in the merger or     
could reasonably be expected to result in a failure to consummate the merger. In
this document, a proposal related to MCN is referred to as a "Company           
Acquisition Proposal," and a proposal related to DTE that satisfies the test set
forth above is referred to as a "Parent Adverse Proposal."                      

 Each of DTE and MCN has further agreed that it will not negotiate with,
provide confidential information or data to, or discuss with any person, a      
Company Acquisition Proposal or Parent Adverse Proposal, or otherwise facilitate
any effort or attempt to make or implement a Company Acquisition Proposal or    
Parent Adverse Proposal.                                                        

     Despite this agreement, nothing contained in the merger agreement prohibits
either party or its board of directors from:                                    

      (a) Complying with Rule 14e-2 under the Securities Exchange Act of
1934;                                               

    (b) Providing information in response to a request therefor by a
        person who has made an unsolicited bona fide written Company
          Acquisition Proposal or Parent Adverse Proposal so long as its
         board of directors receives from the person so requesting the
             information an executed confidentiality agreement with terms with
     respect to confidentiality substantially similar to those
              contained in the confidentiality agreement, dated August 30, 1999,
between DTE and MCN;                                

       (c) Engaging in any negotiations or discussions with any person who
         has made an unsolicited bona fide written Company Acquisition
Proposal or Parent Adverse Proposal; or             

       (d) Recommending the Company Acquisition Proposal or Parent Adverse
Proposal to its shareholders.                       

In order to engage in any of the activities described above in (b), (c) and (d) 
above, however, such activities must occur prior to the time of that party's    
shareholder vote and the board of directors must determine in good faith after  
consultation with outside legal counsel and its financial advisor and based upon
such other matters as it deems relevant that failure to take such action would  
likely result in a breach of its fiduciary duties under applicable law. In      
addition, the board of directors must determine that the Company Acquisition    
Proposal or Parent Adverse Proposal, if accepted, is reasonably likely to be    
completed, taking into account all legal, financial and regulatory aspects of   
the proposal and the person making the proposal and would, if completed be      
reasonably likely to result in a transaction more favorable to its shareholders 
from a financial point of view than the transaction contemplated by the merger  
agreement. With respect to MCN, any more favorable Company Acquisition Proposal 
described above is referred to as a "Superior Proposal" in this document.       

ADDITIONAL AGREEMENTS                                                           

STOCK OPTIONS                                                         

   In the merger agreement, DTE has agreed to assume each outstanding option
to purchase shares of MCN common stock in accordance with the terms of the MCN  
stock plans and the stock option agreement by which it is evidenced. See "The   
Merger -- Interests of Management and Directors in the Merger" on page --.      

60

S-4
71st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 71st

EMPLOYEE BENEFITS                                                     

     In the merger agreement, DTE has agreed that for one year after the closing
date, it will continue to provide the employees of MCN and its subsidiaries with
compensation and benefits under employee benefit plans that are no less         
favorable in the aggregate than those currently provided by MCN and its         
subsidiaries. This covenant does not apply to plans involving the issuance of   
shares of MCN common stock.                                                     

     In addition, DTE has agreed to cause DTE Enterprises and The Detroit Edison
Company, from and after the completion of the merger, to honor:                 

  (a) Each existing employment, change of control, severance and
             termination agreement between MCN or any of its subsidiaries, and
             any officer, director or employee of MCN or its subsidiaries; and

         (b) All compensation and benefit plans of MCN and its subsidiaries as
        in effect immediately before the closing date of the merger,
           although DTE can amend or terminate any such plan in accordance
with its terms.                                     

   The merger agreement provides that with respect to those employee benefit
plans of DTE and its affiliates that after the merger will provide benefits to  
any current MCN employees, which we refer to in this document as the "new       
plans," each MCN employee will be credited with his or her years of service with
MCN and its affiliates before the closing date of the merger, to the same extent
as the employee was entitled to credit for such purposes under any similar MCN  
plan. This right to credit does not apply if the credit would result in a       
duplication of benefits. In addition:                                           

      (a) Each MCN employee will be immediately eligible to participate,
            without any waiting time, in any and all new plans to the extent
             coverage under such new plan replaces coverage under a comparable
     MCN employee plan in which such MCN employee participated
             immediately before the closing date of the merger, which we refer
to in this document as the "old plans"; and         

(b) For purposes of each new plan providing medical, dental,
      pharmaceutical and/or vision benefits to any MCN employee:

       - DTE will cause all pre-existing condition exclusions of the new
   plan to be waived for the employee and his or her covered
             dependents to the extent that such exclusions and requirements were
waived under the corresponding MCN plan; and          

         - DTE will cause any eligible expenses incurred by the employee and
           his or her covered dependents during the portion of the plan year
 of the old plan ending on the date that such employee's
             participation in the corresponding new plan begins to be taken into
    account under such new plan for purposes of satisfying all
        deductible, coinsurance and maximum out-of-pocket requirements
           applicable to such employee and his or her covered dependents for
      the applicable plan-year as if such amounts had been paid in
accordance with such new plan.                        

EMPLOYEES                                                             

    The merger agreement provides that DTE and MCN presently intend that there
will be no involuntary reductions in workforce at the surviving corporation or  
its subsidiaries, and that DTE will continue DTE's and MCN's present strategy of
achieving workforce reductions through attrition or other voluntary means after 
the merger; however, if any reductions in workforce become necessary, DTE has   
agreed that such reductions will be made on a fair and equitable basis, in light
of the circumstances and the objectives to be achieved, giving consideration to 
previous work history, job experience, qualifications, and business needs       
without regard to whether employment prior to the completion of the merger was  
with MCN or its subsidiaries or DTE or its subsidiaries.                        

    Any employees whose employment is terminated or jobs are eliminated by DTE
or any of its subsidiaries will be entitled to participate on a fair and        
equitable basis in the job opportunity and employment placement programs offered
by DTE. Any workforce reductions carried out following the completion of the    
merger by                                                                       

61

S-4
72nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 72nd

DTE or its subsidiaries will be done in accordance with all applicable          
collective bargaining agreements, and all laws and regulations governing the    
employment relationship and termination thereof including, without limitation,  
the Worker Adjustment and Retraining Notification Act and regulations           
promulgated thereunder, and any comparable state or local law.                  

EXPENSES                                                              

DTE or DTE Enterprises will pay all charges and expenses of MCN, DTE  
Enterprises or DTE, including those of the exchange agent, in connection with   
the transactions contemplated by the provisions of the merger agreement related 
to MCN shareholders' exchange of their shares.                                  

  Except as otherwise provided in the termination provisions of the merger
agreement, whether or not the merger is consummated, all costs and expenses     
incurred in connection with the merger agreement and the merger and the other   
transactions contemplated by the merger agreement will be paid by the party     
incurring such expense, except that expenses incurred in connection with the    
filing fee for the registration statement, of which this document is a part, and
printing and mailing this document and the registration statement will be shared
equally by DTE and MCN.                                                         

INDEMNIFICATION AND DIRECTORS' AND OFFICERS' INSURANCE                

    In the merger agreement, DTE and MCN have agreed to provisions relating to
indemnification of officers and directors of MCN and the provision of directors 
and officers' liability insurance, which are described in "The Merger --        
Interests of Management and Directors in the Merger" on page --.                

DIVIDENDS                                                             

  MCN has agreed to coordinate with DTE the declaration, setting of record
dates and payment dates of dividends on shares of MCN common stock. This        
coordination is to ensure that MCN shareholders do not receive dividends on both
shares of MCN common stock and shares of DTE common stock received in the merger
in respect of any calendar quarter or fail to receive a dividend on either      
shares of MCN common stock or shares of DTE common stock received in the merger 
in respect of any calendar quarter.                                             

RATE MATTERS                                                          

   Other than currently pending rate filings, MCN has agreed, and has agreed
to cause its subsidiaries, to discuss with DTE any material changes in its or   
its subsidiaries regulated rates or charges (other than pass-through fuel rates 
or charges), standards of service or accounting, and MCN has agreed to consult  
with DTE prior to making any filing or effecting any agreement or consent with  
respect to such matters.                                                        

TRANSITION MATTERS                                                    

    In the merger agreement, DTE and MCN have agreed to establish a transition
committee consisting of three people from each company. The purpose of this     
committee is to facilitate a full exchange of information concerning the        
business, operations, capital spending and budgets and financial results of DTE 
and MCN and to identify ways in which the operations of DTE and MCN can be      
consolidated or coordinated.                                                    

 In the merger agreement, MCN and DTE have agreed to use reasonable best
efforts to enter into a definitive agreement within 14 days of the date of the  
merger agreement for the sale to DTE of all of MCN's membership interest in each
of several limited liability companies that own and operate synthetic fuel      
manufacturing facilities. MCN and DTE agreed that the economic terms for each   
such sale be designed to produce a payment stream to MCN with a net present     
value of $40 per ton of capacity, utilizing a 12% discount rate. As of the date 
hereof, DTE and MCN have reached an agreement in principle with respect to the  
material terms of the sale of these interests to DTE. This purchase and sale is 
independent of the completion of the merger.                                    

62

S-4
73rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 73rd

     In the merger agreement, MCN has agreed to use its best efforts promptly to
enter into, or to cause its subsidiaries promptly to enter into, agreements to  
dispose of:                                                                     

       (a) Such of its interests as are necessary so that the transactions
    contemplated by the merger agreement will not jeopardize the status of any
facilities in which MCN directly or indirectly owns any interest as   
     "Qualifying Facilities" under the Public Utility Regulatory Policies Act of
1978, as amended; and                                                 

        (b) All FERC-jurisdictional assets or facilities whether directly or
 indirectly owned or wholly or partially owned that would give rise to a
requirement for approval of the merger by the FERC.                   

  MCN has agreed to complete these dispositions prior to the date when all
governmental consents are obtained and to use commercially reasonable efforts to
maximize the after-tax proceeds from such sales or dispositions. However, the   
obligation to use best efforts to dispose of such assets does not require MCN to
take any action that would cause, alone or together with other events, any      
failure to satisfy any condition to closing. MCN has agreed to keep DTE informed
on a current basis regarding the status and terms of the dispositions and any   
other asset dispositions contemplated by MCN and its subsidiaries and to work   
cooperatively with DTE to maximize the mutual benefit to the parties of such    
dispositions.                                                                   

COMMUNITY INVOLVEMENT                                                 

     It is the present intention of DTE that after the merger, DTE will continue
to make aggregate annual charitable contributions to the communities served by  
DTE and otherwise maintain a substantial level of involvement in community      
activities in Michigan that is similar to, or greater than, the normal aggregate
annual level of charitable contributions, community development and related     
activities carried on by DTE and MCN prior to the date of the merger agreement. 

STOCK EXCHANGE LISTING AND DELISTING                                  

  DTE has agreed to use its best efforts to cause the shares of DTE common
stock to be issued in the merger to be approved for listing on the NYSE. The    
surviving corporation shall use its best efforts to cause the shares of MCN     
common stock to be de-listed from the NYSE and de-registered under the Exchange 
Act as soon as practicable following the completion of the merger.              

OTHER AGREEMENTS                                                      

     The merger agreement contains additional agreements relating to the conduct
of the parties prior to the merger, including the following:                    

  - To promptly make their respective filings with applicable governmental
  entities and to use commercially reasonable efforts in obtaining all
necessary regulatory approvals and consents;                      

 - To afford the other party reasonable access to its properties, books,
contracts and records; and                                        

    - To not take or cause to be taken any action, whether before or after the
completion of the merger, that would disqualify the merger as a   
   "reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code.                                                     

63

S-4
74th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 74th

TERMINATION                                                                     

    The merger agreement may be terminated at any time prior to the completion
of the merger, whether before or after the approval by DTE shareholders of the  
issuance of shares of DTE common stock in the merger or by MCN shareholders of  
the merger agreement:                                                           

(a) By the mutual written consent of DTE and MCN,           

(b) By either DTE or MCN:                                   

           (1) If the merger is not completed by July 15, 2000, although DTE
                and MCN have agreed to extend that date for an additional nine
                months if the reason the merger has not been completed is that
               the parties have not obtained all governmental consents; this
              termination right is not available to either party if it has
                materially breached its obligations under the merger agreement
            that is proximately related to the failure to complete the
merger;                                       

             (2) If MCN shareholders fail to approve the merger agreement or DTE
            shareholders fail to approve the issuance of shares of DTE
 common stock that will be issued in the merger;

            (3) If any legal restriction permanently prohibiting completion of
 the merger has become final and non-appealable;

         (4) If the other party materially breaches its representations,
             warranties, covenants or agreements contained in the merger
                agreement in a manner that cannot be cured, or, if curable, is
        not cured within 30 days after written notice from the
non-breaching party;                          

           (5) Pursuant to the terms of the merger agreement relating to the
                 receipt of a Superior Proposal or a Parent Adverse Proposal; or

            (6) If the other party's board of directors withdraws or adversely
       modifies its approval or recommendation of the merger
            agreement, or fails to reconfirm its recommendation of the
                 merger agreement within 5 business days after a written request
by the other party to do so.                  

     In addition, DTE and MCN have agreed that if FERC approval of the merger is
not required, either party may terminate the merger agreement after one year    
from the date of the merger agreement, if either party reasonably determines    
that it is more likely than not that the governmental consents necessary to     
complete the merger on terms that satisfy the conditions to DTE's and MCN's     
obligation to complete the merger will not be obtained prior to the date that is
18 months from the date of the merger agreement. If FERC approval of the merger 
is required, however, this right to terminate the merger agreement by making    
such a reasonable determination exists only after 15 months from the date of the
merger agreement.                                                               

TERMINATION FEE AND REIMBURSEMENT OF EXPENSES                         

In the merger agreement, DTE and MCN have agreed to the payment of    
termination fees and the reimbursement of expenses as follows:                  

          (1) If DTE terminates the merger agreement in order to accept a Parent
       Adverse Proposal, DTE will pay MCN a termination fee of $85
       million and will reimburse MCN for its charges and expenses
            incurred in connection with the merger agreement up to a maximum
amount of $15 million;                              

   (2) If MCN terminates the merger agreement in order to accept a
        Superior Proposal, MCN will pay DTE a termination fee of $55
       million and will reimburse DTE for its charges and expenses
            incurred in connection with the merger agreement up to a maximum
amount of $15 million;                              

     (3) If DTE or MCN terminates the merger agreement after the other
          party's board of directors withdraws or adversely modifies its
recommendation of the merger agreement, or fails to 

64

S-4
75th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 75th

reconfirm its recommendation of the merger agreement within 5 business days     
after a written request by the other party to do so, then the party whose board 
takes such action will:                                                         

       - Promptly reimburse the other party for its charges and expenses
          incurred in connection with the merger agreement up to a maximum
amount of $15 million; and                            

       - If such party enters into a definitive agreement or completes a
             Superior Proposal or Parent Adverse Proposal, as applicable, within
          12 months of such termination, pay the other party a termination
             fee which, in the case of DTE, will be $85 million and, in the case
of MCN, will be $55 million;                          

    (4) If DTE or MCN terminates the merger agreement after a Parent
            Adverse Proposal or a Superior Proposal, as the case may be, has
            been made and the vote of the shareholders of the party to which
              such proposal has been made has not been obtained, the party whose
shareholder vote was not obtained will:             

       - Promptly reimburse the other party for its charges and expenses
          incurred in connection with the merger agreement up to a maximum
amount of $15 million; and                            

       - If such party enters into a definitive agreement or completes a
             Superior Proposal or Parent Adverse Proposal, as applicable, within
          12 months of such termination, pay the other party a termination
            fee which, in the case of DTE will be $85 million and, in the case
of MCN will be $55 million.                           

MODIFICATION, AMENDMENT AND WAIVER                                              

   DTE and MCN may modify or amend the merger agreement at any time prior to
the completion of the merger, by written agreement executed and delivered by    
duly authorized officers of DTE or MCN. Each of DTE or MCN may waive the        
conditions to its obligations to complete the merger, in whole or in part.      

ACCOUNTING TREATMENT

The merger will be accounted for by the purchase method of accounting.
Under the purchase method of accounting, MCN's properties and investments which 
are not regulated will be recorded at their fair values. MCN's regulated        
operations will be recorded at historical amounts, except for gas inventory,    
which will be recorded at fair value with a corresponding credit recorded as a  
regulatory liability, and pension and other postretirement benefit assets and   
liabilities, which will be recorded at the current funded status of the related 
plans in accordance with the provisions of SFAS Nos. 87 and 106. The remaining  
difference between the purchase price of MCN, including direct costs of the     
acquisition, and the amounts assigned to identifiable assets and liabilities    
will be allocated between an acquisition adjustment in accordance with          
accounting for regulated public utilities and goodwill.                         

65

S-4
76th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 76th

MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

The following is a summary of the material U.S. federal income tax    
consequences of the merger to holders of MCN common stock who hold such stock as
a "capital asset" within the meaning of Section 1221 of the Internal Revenue    
Code. Special tax consequences may be applicable to particular classes of       
taxpayers, such as financial institutions, insurance companies, tax-exempt      
organizations, broker-dealers, traders in securities that elect to mark to      
market, persons that hold MCN common stock as part of a hedge, constructive     
sale, straddle or conversion transaction, persons who are not citizens or       
residents of the United States, other non-United States persons, and            
shareholders who acquired their shares of MCN common stock through the exercise 
of an employee stock option or otherwise as compensation. The following         
represents general information only and is based upon the Internal Revenue Code,
its legislative history, existing and proposed regulations thereunder, published
rulings and decisions, all as currently in effect as of the date hereof, and all
of which are subject to change, possibly with retroactive effect. Tax           
considerations under state, local and foreign laws, or under federal laws other 
than federal income tax laws, are not addressed in this proxy                   
statement/prospectus. ALL SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX        
ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE MERGER, INCLUDING THE     
APPLICABILITY AND EFFECT OF THE ALTERNATIVE MINIMUM TAX AND ANY STATE, LOCAL OR 
FOREIGN INCOME AND OTHER TAX LAWS AND OF CHANGES IN SUCH TAX LAWS.              

TAX CONSEQUENCES OF THE MERGER GENERALLY                                        

     It is a condition to the merger that DTE receive an opinion of its counsel,
Sullivan & Cromwell, and MCN receive an opinion of its counsel, Wachtell,       
Lipton, Rosen & Katz, each dated the closing date and each to the effect that   
the merger will be treated as a "reorganization" within the meaning of Section  
368(a) of the Internal Revenue Code and that each of DTE, DTE Enterprises and   
MCN will be a party to that reorganization within the meaning of Section 368(b) 
of the Internal Revenue Code. In rendering such opinions, counsel may require   
and rely upon customary representations contained in letters to be received from
MCN, DTE Enterprises, DTE and others. Neither of these tax opinions will be     
binding on the Internal Revenue Service, and neither DTE nor MCN intends to     
request any ruling from the Internal Revenue Service as to the U.S. federal     
income tax consequences of the merger.                                          

Assuming the merger is a reorganization within the meaning of Section 
368(a) of the Internal Revenue Code, for U.S. federal income tax purposes:      

          (1) No gain or loss will be recognized by DTE, DTE Enterprises, MCN or
shareholders of DTE pursuant to the merger;         

    (2) A shareholder of MCN who exchanges all of such shareholder's
         shares of MCN common stock solely for cash in the merger will
       recognize gain or loss in an amount equal to the difference
         between the cash received and such shareholder's adjusted tax
basis in the shares surrendered;                    

    (3) A shareholder of MCN who receives solely DTE common stock in
         exchange for such shareholder's shares in the merger will not
              recognize any gain or loss, except, as discussed below, in respect
of cash received instead of fractional shares; and  

       (4) A shareholder of MCN who receives a combination of cash and DTE
       common stock in the merger will not recognize loss but will
           recognize gain, if any, on the shares so exchanged in an amount
              that does not exceed the amount of any cash received, as described
in more detail below.                               

EXCHANGE OF MCN COMMON STOCK SOLELY FOR CASH                                    

  In general, a shareholder of MCN who exchanges all of such shareholder's
shares of MCN common stock for cash in the merger will recognize capital gain or
loss equal to the difference between the amount of cash received and such       
shareholder's adjusted tax basis in the shares of MCN common stock surrendered. 
The gain or loss will be long-term capital gain or loss if, as of the date of   
the merger, the holding period for such shares is greater than one year.        

66

S-4
77th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 77th

EXCHANGE OF MCN COMMON STOCK SOLELY FOR DTE COMMON STOCK                        

   A shareholder of MCN who receives solely DTE common stock in exchange for
its shares in the merger will not recognize any gain or loss upon such exchange.
Such shareholder may recognize gain or loss, however, in respect of cash        
received in lieu of a fractional share of MCN common stock, as discussed below. 
The aggregate adjusted tax basis of the shares of DTE common stock received in  
such exchange will be equal to the aggregate adjusted tax basis of the shares   
surrendered therefor, and the holding period of the DTE common stock will       
include the holding period of the shares of MCN common stock surrendered        
therefor.                                                                       

EXCHANGE OF MCN COMMON STOCK FOR DTE COMMON STOCK AND CASH                      

   A shareholder of MCN who receives a combination of cash and shares of DTE
common stock in the merger will not recognize loss but will recognize gain if   
the shareholder's adjusted basis in the MCN shares exchanged in the transaction 
is less than the fair market value on the date of the merger of the DTE common  
stock and the cash received. The gain, if any, that the holder will recognize   
will equal the lesser of:                                                       

 (1) The excess of the cash and the fair market value on the date of the
merger of the DTE common stock received by the shareholder over such            
shareholder's adjusted tax basis in the MCN common stock exchanged therefor and,

(2) The amount of cash received in the exchange.                      

Any such recognized gain will be treated as capital gain unless the receipt of  
the cash has the effect of the distribution of a dividend for U.S. federal      
income tax purposes, in which case such gain will be treated as ordinary        
dividend income to the extent of such shareholder's ratable share of accumulated
earnings and profits. Any capital gain will be long-term capital gain if, as of 
the date of the merger, the holding period for such shares is greater than one  
year. The following is a brief discussion of such potential tax treatment;      
however, MCN shareholders should consult their own tax advisors as to the       
possibility that all or a portion of any cash received in exchange for their MCN
common stock will be treated as a dividend.                                     

     The stock redemption provisions of Section 302 of the Internal Revenue Code
apply in determining whether cash received by a shareholder of MCN pursuant to  
the merger has the effect of a distribution of a dividend under Section         
356(a)(2) of the Internal Revenue Code. Under this analysis, called the         
"hypothetical redemption analysis," a shareholder of MCN will be treated as if  
the portion of the shares of MCN common stock exchanged for cash in the merger  
had been instead exchanged for shares of DTE common stock (the "hypothetical    
shares," followed immediately by a redemption of the hypothetical shares by DTE 
for cash. Under the principles of Section 302 of the Internal Revenue Code, a   
shareholder of MCN will recognize capital gain rather than dividend income with 
respect to the cash received if the hypothetical redemption is "not essentially 
equivalent to a dividend" or is "substantially disproportionate" with respect to
such shareholder. In applying the principles of Section 302, the constructive   
ownership rules of Section 318 of the Internal Revenue Code will apply in       
comparing the shareholder's ownership interest in DTE both immediately after the
merger, but before the hypothetical redemption, and after the hypothetical      
redemption.                                                                     

   Whether the hypothetical redemption by DTE of the hypothetical shares for
cash is "not essentially equivalent to a dividend" with respect to a shareholder
of MCN will depend upon such shareholder's particular circumstances. However,   
the hypothetical redemption must, in any event, result in a "meaningful         
reduction" in such shareholder's percentage ownership of DTE stock. In          
determining whether the hypothetical redemption by DTE results in a meaningful  
reduction in the shareholder's percentage ownership of DTE stock, and therefore,
does not have the effect of a distribution of a dividend, a shareholder of MCN  
should compare his or her share interest in DTE, including interests owned      
actually, hypothetically and constructively, immediately after the merger, but  
before the hypothetical redemption, to his or her interest after the            
hypothetical redemption. The IRS has indicated, in Revenue Ruling 76-385, that a
shareholder in a publicly-held corporation whose relative stock interest in the 
corporation is minimal and who exercises no "control" over corporate affairs is 
generally treated as having had a meaningful reduction in his or her stock after
a redemption transaction if his or her percentage stock ownership in the        
corporation has been reduced to any extent, taking into account the             
shareholder's actual and constructive ownership before and after the            

67

S-4
78th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 78th

hypothetical redemption. In Revenue Ruling 76-385, the IRS found a reduction    
from .0001118% to .0001081% to be a meaningful reduction.                       

The hypothetical redemption transaction would be "substantially       
disproportionate," and therefore, would not have the effect of a distribution of
a dividend with respect to a shareholder of MCN who owns less than 50% of the   
total combined voting power of all classes of outstanding DTE stock entitled to 
vote, if the percentage of DTE common stock actually and constructively owned by
such shareholder immediately after the hypothetical redemption is less than 80% 
of the percentage of DTE common stock actually, hypothetically and              
constructively owned by such shareholder immediately before the hypothetical    
redemption, and, if there are outstanding voting shares of DTE other than DTE   
common stock, the shareholder also meets the 80% test with respect to all shares
of outstanding DTE voting stock, including the DTE common stock.                

     The aggregate adjusted tax basis of the shares of DTE common stock received
in such exchange will be equal to the aggregate tax basis of the shares         
surrendered therefor, decreased by the cash received and increased by the amount
of gain recognized, if any. The holding period of DTE common stock will include 
the holding period of the shares of MCN common stock surrendered therefor.      

CASH RECEIVED INSTEAD OF A FRACTIONAL INTEREST OF DTE COMMON STOCK              

     A shareholder of MCN who receives cash instead of a fractional share of DTE
common stock will be treated as having received such fractional share pursuant  
to the merger and then as having exchanged such fractional share for cash in a  
redemption by DTE subject to Section 302 of the Internal Revenue Code. Such a   
deemed redemption will be treated as a sale of the fractional share, provided   
that it is "not essentially equivalent to a dividend" or is "substantially      
disproportionate" with respect to the MCN shareholder. (See the preceding       
section.) If the deemed redemption is treated as a sale of a fractional share,  
an MCN shareholder will recognize gain or loss equal to the difference between  
the amount of cash received and the portion of the basis of the shares of DTE   
common stock allocable to such fractional interest. Such gain or loss will be   
capital gain or loss if, as of the date of the merger, the holding period for   
such shares is greater than one year.                                           

BACKUP WITHHOLDING AND INFORMATION REPORTING                                    

   Payments of cash to a holder surrendering shares of MCN common stock will
be subject to information reporting and "backup" withholding (whether or not the
holder also receives DTE common stock) at a rate of 31% of the cash payable to  
the holder, unless the holder furnishes its taxpayer identification number in   
the manner prescribed in applicable Treasury Regulations, certifies that such   
number is correct, certifies as to no loss of exemption from backup withholding 
and meets certain other conditions. Any amounts withheld from payments to a     
holder under the backup withholding rules will be allowed as a refund or credit 
against the holder's U.S. federal income tax liability, provided the required   
information is furnished to the Internal Revenue Service.                       

68

S-4
79th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 79th

UNAUDITED PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

The following unaudited pro forma information reflects the historical 
combined condensed consolidated financial statements of DTE and MCN after       
accounting for the merger as a purchase business combination. Accordingly, the  
following information should be read together with the historical consolidated  
financial statements and the related notes thereto, of DTE, which are           
incorporated into this document by reference and of MCN, which are included     
herein. The unaudited pro forma combined condensed consolidated balance sheet   
assumes the merger became effective as of June 30, 1999. The unaudited pro forma
combined condensed consolidated statements of income from continuing operations 
assume the merger became effective on January 1, 1998.                          

The information presented below is not necessarily indicative of the  
results of operations that might have occurred had the merger actually closed on
January 1, 1998, or the actual financial position that might have resulted had  
the merger actually closed on June 30, 1999. The information is not necessarily 
indicative of the future results of operations or financial position of DTE     
after the merger. Due to the effect of seasonal fluctuations and other factors  
on the operation of DTE and MCN, financial results for the six months ended June
30, 1999 are not necessarily indicative of results for the year ending December 
31, 1999. The information does not reflect the disposition of MCN's investments 
in various electric facilities which is planned to occur prior to the merger.   

   The unaudited pro forma combined condensed consolidated financial data do
not reflect the non-recurring costs and expenses associated with integrating the
operations of the two companies, nor any of the anticipated recurring expense   
savings arising from the integration. Costs of integration will result in       
significant non-recurring charges to the combined results of operations after   
completion of the merger; however, the actual amount of such charges cannot be  
determined until the transition plan relating to the integration of operations  
is completed.                                                                   

   The pro forma combined condensed consolidated financial data assumes that
all MCN shares were exchanged for either consideration of $28.50 in cash or     
0.775 shares of DTE common stock, subject to allocation and proration procedures
that ensure that 45% of the MCN shares are converted into shares of DTE common  
stock and 55% are converted into cash. The total consideration for the          
transaction using this value is approximately $2.4 billion.                     

Allocations included in the pro forma statements are based on analyses
which are not yet completed. Accordingly, the final value of the purchase price 
and its allocation may differ, perhaps significantly, from the amounts shown in 
the unaudited pro forma combined condensed consolidated financial statements    
that follow.                                                                    

69

S-4
80th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 80th

DTE ENERGY COMPANY
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME 
FROM CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31, 1998

                                                        [Enlarge/Download Table]

                                                               (1)(2)            (4)                    
                                                 DTE             MCN          PRO FORMA        PRO FORMA
                                            (AS REPORTED)   (AS REPORTED)    ADJUSTMENT        COMBINED 
                                            -------------   -------------    ----------        ---------
                                                         (MILLIONS, EXCEPT PER SHARE AMOUNTS)           
                                                                                                        
Operating Revenues.........................    $4,221          $2,031           $  --           $6,252  
                                               ------          ------                           ------  
Operating Expenses                                                                                      
  Fuel, purchased power and gas............     1,063           1,206              --            2,269  
  Operation and maintenance................     1,288             389              --            1,677  
  Depreciation, depletion and                                                                           
     amortization..........................       661             180              29(c)(d)        870  
  Taxes other than income..................       272              70              --              342  
  Property write-downs and restructuring                                                                
     charges...............................        --             592              --              592  
                                               ------          ------           -----           ------  
          Total Operating Expenses.........     3,284           2,437              29            5,750  
Operating Income (Loss)....................       937            (406)            (29)             502  
Interest Expense and Other                                                                              
  Interest expense.........................       319             112              77(b)           508  
  Preferred stock dividends of                                                                          
     subsidiary............................         6              36              --               42  
  Equity in earnings of joint ventures.....        --             (62)             --              (62) 
  Other -- net.............................        15             (22)             --               (7) 
                                               ------          ------           -----           ------  
          Total Interest Expense and                                                                    
            Other..........................       340              64              77              481  
Income (Loss) Before Income Taxes..........       597            (470)           (106)              21  
Income Taxes (Benefit).....................       154            (184)            (29)(g)          (59) 
                                               ------          ------           -----           ------  
Net Income (Loss)..........................    $  443          $ (286)          $ (77)          $   80  
                                               ======          ======           =====           ======  
Average Common Shares Outstanding                                                                       
  Basic....................................       145              79                              173  
                                               ------          ------                           ------  
  Diluted..................................       145              79                              181  
                                               ------          ------                           ------  
Earnings (Loss) per Common Share                                                                        
  Basic....................................    $ 3.05          $(3.63)                          $ 0.46  
                                               ------          ------                           ------  
  Diluted..................................    $ 3.05          $(3.63)                          $ 0.44  
                                               ------          ------                           ------  

See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements. 

70

S-4
81st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 81st

DTE ENERGY COMPANY
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME 
FROM CONTINUING OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999

                                                        [Enlarge/Download Table]

                                                                  (1)(2)           (4)                   
                                                    DTE             MCN         PRO FORMA       PRO FORMA
                                               (AS REPORTED)   (AS REPORTED)   ADJUSTMENTS      COMBINED 
                                               -------------   -------------   -----------      ---------
                                                          (MILLIONS, EXCEPT PER SHARE AMOUNTS)           
                                                                                                         
Operating Revenues............................    $2,174          $1,285          $ --           $3,459  
                                                  ------          ------                         ------  
Operating Expenses                                                                                       
  Fuel, purchased power and gas...............       553             789            --            1,342  
  Operation and maintenance...................       689             200            --              889  
  Depreciation, depletion and amortization....       364              87            15(c)(d)        466  
  Taxes other than income.....................       142              38            --              180  
  Property write-downs and restructuring                                                                 
     charges..................................        --              52            --               52  
                                                  ------          ------          ----           ------  
          Total Operating Expenses............     1,748           1,166            15            2,929  
Operating Income (Loss).......................       426             119           (15)             530  
Interest Expense and Other                                                                               
  Interest expense............................       165              59            38(b)           262  
  Preferred stock dividends of subsidiary.....        --              21            --               21  
  Equity in earnings of joint ventures........        --             (25)           --              (25) 
  Loss on sale of exploration and production                                                             
     properties...............................        --              69            --               69  
  Other -- net................................         9              (6)           --                3  
                                                  ------          ------          ----           ------  
          Total Interest Expense and Other....       174             118            38              330  
Income Before Income Taxes....................       252               1           (53)             200  
Income Taxes (Benefit)........................        27              (1)          (14)(g)           12  
                                                  ------          ------          ----           ------  
Income Before Cumulative Effect of Accounting                                                            
  Change......................................    $  225          $    2          $(39)          $  188  
                                                  ======          ======          ====           ======  
Average Common Shares Outstanding                                                                        
  Basic.......................................       145              81                            175  
                                                  ------          ------                         ------  
  Diluted.....................................       145              83                            179  
                                                  ------          ------                         ------  
Earnings per Common Share Before Cumulative                                                              
  Effect of Accounting Change                                                                            
  Basic.......................................    $ 1.55          $ 0.03                         $ 1.07  
                                                  ------          ------                         ------  
  Diluted.....................................    $ 1.55          $ 0.03                         $ 1.05  
                                                  ------          ------                         ------  

See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements. 

71

S-4
82nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 82nd

DTE ENERGY COMPANY
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET 
JUNE 30, 1999 

                                                        [Enlarge/Download Table]

                                                                     (1)            (4)                
                                                      DTE            MCN         PRO FORMA    PRO FORMA
                                                 (AS REPORTED)  (AS REPORTED)   ADJUSTMENTS   COMBINED 
                                                 -------------  -------------   -----------   ---------
                                                                  (MILLIONS, EXCEPT SHARES)            
                                                                                                       
ASSETS                                                                                                 
Current Assets                                                                                         
  Cash and cash equivalents.....................    $    35        $   20         $   --       $    55 
  Restricted cash...............................        123            --             --           123 
  Accounts receivable, net......................        453           327             --           780 
  Accrued unbilled revenues.....................        203            21             --           224 
  Inventories                                                                                          
    Fuel........................................        165            --                          165 
    Gas.........................................         --           122            124(a)        246 
    Materials and supplies......................        156            13             --           169 
  Other.........................................        117            84             --           201 
                                                    -------        ------         ------       ------- 
                                                      1,252           587            124         1,963 
Investments                                                                                            
  Nuclear decommissioning trust funds...........        339            --             --           339 
  Other.........................................        242           936            (35)(c)     1,143 
                                                    -------        ------         ------       ------- 
                                                        581           936            (35)        1,482 
Property                                                                                               
  Property, plant and equipment.................     11,564         3,836            195(c)     15,595 
  Property under capital leases.................        234            --             --           234 
  Nuclear fuel under capital lease..............        662            --             --           662 
                                                    -------        ------         ------       ------- 
                                                     12,460         3,836            195        16,491 
  Less accumulated depreciation, depletion and                                                         
    amortization................................      5,411         1,685             --         7,096 
                                                    -------        ------         ------       ------- 
                                                      7,049         2,151            195         9,395 
Acquisition adjustment/goodwill.................         --            --          1,279(d)      1,279 
Regulatory Assets...............................      3,026            47                        3,073 
Other Assets....................................        273           324            300(e)        897 
                                                    -------        ------         ------       ------- 
         Total Assets...........................    $12,181        $4,045         $1,863       $18,089 
                                                    =======        ======         ======       ======= 
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                   
Current Liabilities                                                                                    
  Accounts payable..............................    $   233        $  253         $   --       $   486 
  Dividends payable.............................         75            --             --            75 
  Short-term borrowings.........................        407           347          1,373(b)      2,127 
  Current portion long-term debt................        378            46             --           424 
  Current portion capital leases................         98            --             --            98 
  Other.........................................        424           205             60(f)        689 
                                                    -------        ------         ------       ------- 
                                                      1,615           851          1,433         3,899 
Other Liabilities                                                                                      
  Deferred income taxes.........................      1,893            --            143(g)      2,036 
  Capital leases................................        119            --                          119 
  Regulatory liabilities........................        282           158            124(a)        564 
  Other.........................................        538           183             52(h)        773 
                                                    -------        ------         ------       ------- 
                                                      2,832           341            319         3,492 
Long-Term Debt..................................      3,963         1,464             --         5,427 
Preferred Stock of Subsidiaries.................         --           502             --           502 
Shareholders' Equity                                                                                   
  Common stock..................................      1,950             1            997(i)      2,948 
  Additional paid-in capital....................         --           945           (945)           -- 
  Accumulated other comprehensive loss..........         --           (14)            14            -- 
  Retained earnings (deficit)...................      1,821           (45)            45         1,821 
                                                    -------        ------         ------       ------- 
                                                      3,771           887            111         4,769 
                                                    -------        ------         ------       ------- 
         Total Liabilities and Shareholders'                                                           
           Equity...............................    $12,181        $4,045         $1,863       $18,089 
                                                    =======        ======         ======       ======= 

See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements. 

72

S-4
83rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 83rd

NOTES TO UNAUDITED PRO FORMA COMBINED 
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

1. Certain revenues, expenses, assets and liabilities of MCN have been
reclassified to conform with DTE's presentation.                                

  2. Sales and purchases between DTE and MCN are not material and have not
been eliminated in the Unaudited Pro Forma Combined Condensed Consolidated      
Financial Statements.                                                           

  3. DTE applies the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees for its incentive compensation     
plans. MCN applies the provisions of Financial Accounting Standards Board       
Statement No. 123, Accounting for Stock-Based Compensation for its incentive    
compensation plans. The impact of adjusting MCN's recorded compensation expense 
under FASB No. 123 to the provisions of APB No. 25 is not material, and not     
reflected in the pro forma adjustments.                                         

4. The Unaudited Pro Forma Combined Condensed Consolidated Financial  
Statements are based on the following assumptions:                              

a.   DTE utilizes the average cost method to account for its
               inventories. MCN prices its gas inventory on a last-in, first-out
               basis. The pro forma data reflects an adjustment to the estimated
            fair value of the gas inventory and a corresponding regulatory
liability at June 30, 1999.                       

          b.   Reflects the issuance of $1.373 billion in short-term debt of DTE
              upon completion of the merger. Interest expense is assumed to be
             at 6 percent. This amount represents the purchase of 55% of the
              outstanding shares of MCN at $28.50 per share and $30 million of
            estimated direct costs of DTE related to the merger, including
       fees of financial advisors, legal counsel and independent
              auditors. A 1/8 percent variance in the assumed interest rate is
            approximately $2 million. DTE anticipates replacing all of the
               short-term debt with proceeds from issuance of long-term debt and
divestiture of certain non-core assets.           

    c.   Other Investments and Property, Plant and Equipment include
      adjustments to reflect the estimated fair value of MCN's
             investment in various non-regulated joint ventures, exploration
               and production properties and other energy related properties and
            the related effect on depreciation, depletion and amortization
expense.                                          

d.   The purchase price in excess of the amounts assigned to
          identifiable assets and liabilities of MCN will be allocated
          between an "acquisition adjustment" related to the property,
           plant and equipment of MCN's regulated utility operations and
            goodwill. However, this allocation has not yet been determined
             and accordingly, is shown in the pro forma financial statements
               as acquisition adjustment/goodwill. Pro forma adjustments reflect
            the amortization of this amount using the straight-line method
over an estimated weighted-average 37 years.      

      e.   Other Assets reflects an adjustment of $300 million for MCN's
              pension assets to reflect the funded status of the plans at June
30, 1999.                                         

      f.   Pursuant to the terms of various change in control agreements
      with MCN's executives and other key employees, and other
             incentive compensation plans in place, certain payments will be
          required to be made upon a change in control. MCN will incur
              charges to compensation expense resulting from the completion of
    the merger. The amount of the charge is expected to be
        approximately $45 million. Also included is $15 million of
           estimated direct costs of MCN related to the merger. As these
         charges are pre-acquisition, they are reflected in retained
             earnings and are not included in the unaudited pro forma income
statements.                                       

          g.   The estimated provision for income taxes related to the pro forma
             adjustments is based on an assumed statutory federal income tax
              rate of 35%. Amortization of acquisition adjustment/goodwill has
not been tax affected.                            

 h.   Other Liabilities reflects an adjustment for MCN's other
  postretirement benefit obligations at June 30, 1999.

          i.   Reflects the issuance of 30 million shares of DTE common stock in
               exchange for 45% of the outstanding shares of MCN upon completion
of the merger.                                    
73

S-4
84th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 84th

DESCRIPTION OF DTE CAPITAL STOCK

 The following description of material terms of the capital stock of DTE
does not purport to be complete and is qualified in its entirety by reference to
the DTE Amended and Restated Articles of Incorporation, as amended, which       
document is incorporated herein by reference as an exhibit to the registration  
statement of which this document is a part.                                     

AUTHORIZED CAPITAL STOCK                                                        

The authorized capital stock of DTE currently consists of 400,000,000 
shares of DTE common stock, without par value, and 5,000,000 shares of preferred
stock, without par value. As of the record date for the DTE special meeting,    
there were issued and outstanding -- shares of DTE common stock, with -- shares 
reserved for issuance. As of such date there were no shares of preferred stock  
issued and outstanding and 1,500,000 million shares of Series A Junior          
Participating Preferred Stock were reserved for issuance pursuant to the Rights 
Agreement dated September 23, 1997 between DTE and The Detroit Edison Company.  

   Pursuant to the DTE articles of incorporation, the DTE board of directors
may cause the issuance of one or more new series of the authorized shares of the
preferred stock, to determine the number of shares constituting any such new    
series and to fix the voting, distribution, dividend, liquidation and all other 
rights and limitations of the preferred stock. These rights may be superior to  
those of the DTE common stock. To the extent any of DTE's preferred stock have  
voting rights, no share or preferred stock may be entitled to more than one vote
per share, except with respect to election of directors in which case cumulative
voting may be available.                                                        

DTE COMMON STOCK                                                                

Subject to any special voting rights which may vest in the holders of 
preferred stock, the holders of DTE common stock are entitled to vote as a class
and are entitled to one vote per share for each share held of record on all     
matters voted on by shareholders, except with respect to the election of        
directors, in which case cumulative voting is available, and are entitled to    
participate equally among holders of common stock in respect of dividends as and
when dividends are declared by the DTE board of directors out of funds legally  
available therefor. As a Michigan corporation, DTE is subject to statutory      
limitations on the declaration and payment of dividends. In the event of a      
liquidation, dissolution or winding-up of DTE, holders of DTE common stock have 
the right to DTE's assets remaining after satisfaction in full of the prior     
rights of creditors, and all liabilities and the aggregate liquidation          
preferences of any outstanding shares of DTE preferred stock. The holders of DTE
common stock have no conversion, redemption, or preemptive rights. All          
outstanding shares of DTE common stock are validly issued, fully paid and       
non-assessable.                                                                 

     The transfer agent and registrar for DTE common stock is The Detroit Edison
Company, 2000 2nd Avenue, Detroit, Michigan 48226-1279.                         

COMPARISON OF SHAREHOLDERS' RIGHTS

GENERAL                                                                         

   DTE and MCN are incorporated under the laws of the State of Michigan and,
accordingly, the rights of DTE and MCN shareholders are governed by the laws of 
the State of Michigan. As a result of the merger, MCN shareholders have the     
option to elect to become shareholders of DTE. Thus, following the merger, the  
rights of the DTE shareholders and of the MCN shareholders who elected to become
DTE shareholders in the merger will be governed by the DTE articles of          
incorporation, the DTE bylaws and the laws of the State of Michigan. The DTE    
articles of incorporation and the DTE bylaws will be unaltered by the merger.   

COMPARISON OF SHAREHOLDERS' RIGHTS                                              

Set forth on the following pages is a summary comparison of material  
differences between the rights of a DTE shareholder under the DTE articles of   
incorporation. DTE bylaws and Michigan law (left column) and                    

74

S-4
85th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 85th

the rights of a MCN shareholder under the MCN articles of incorporation. MCN    
bylaws and Michigan law (right column). The summary set forth below is not      
intended to provide a comprehensive summary of Michigan law or of each of such  
company's governing documents. This summary is qualified in its entirety by     
reference to the full text of each of such documents. Copies of the DTE articles
of incorporation and DTE bylaws, and the MCN articles of incorporation and MCN  
bylaws, will be sent to DTE and MCN shareholders upon request. See "Where You   
Can Find More Information" on page --.                                          

                                                        [Enlarge/Download Table]

------------------------------------------------------------------------------------------------
                        DTE                                          MCN                        
------------------------------------------------------------------------------------------------
                                                                                                
                                         CAPITAL STOCK                                          
                                       AUTHORIZED CAPITAL                                       
------------------------------------------------------------------------------------------------
    400 million shares of common stock, without  250 million shares of common stock, par        
    par value, 5 million shares of preferred     value $0.01 per share, 25 million shares of    
    stock, without par value. As of --, 1999,    preferred stock, no par value. As of --,       
    there were -- shares of DTE common stock     1999, there were -- shares of MCN common       
    issued and outstanding and -- shares         stock issued and outstanding and -- shares     
    reserved for issuance and no shares of       reserved for issuance and no shares of         
    preferred stock issued and outstanding.      preferred stock issued and outstanding.        
------------------------------------------------------------------------------------------------
                                       BOARD OF DIRECTORS                                       
                                         CLASSIFICATION                                         
------------------------------------------------------------------------------------------------
    Directors are divided into three classes. Each class serves a three-year term and the       
    classes are as nearly equal in size as possible.                                            
------------------------------------------------------------------------------------------------
                                      NUMBER OF DIRECTORS                                       
------------------------------------------------------------------------------------------------
    Such number as is fixed by the board of      Under Michigan law, the number of directors    
    directors from time to time but not less     is fixed by the bylaws, unless the articles    
    than ten nor more eighteen, subject to the   of incorporation fix the number. MCN's         
    board of director's authority to change the  articles of incorporation state that the       
    minimum and maximum number of directors.     board of directors shall have no fewer than    
    DTE currently has 12 directors.              nine and no more than twelve directors. MCN    
                                                 currently has 9 directors.                     
------------------------------------------------------------------------------------------------
                                            REMOVAL                                             
------------------------------------------------------------------------------------------------
    Under Michigan law, the shareholders are     Under Michigan law the shareholders are        
    permitted to remove a director with or       permitted to remove a director with or         
    without cause by a vote of the majority of   without cause by a vote of the majority of     
    shareholders entitled to vote at an          shareholders entitled to vote at an            
    election of directors, unless the articles   election of directors, unless the articles     
    of incorporation provide that directors may  of incorporation provide that directors may    
    be removed only for cause or that a higher   be removed only for cause or that a higher     
    vote is required for removal without cause.  vote is required for removal without cause.    
    The DTE articles of incorporation and        MCN's articles of incorporation provide        
    bylaws do not contain any specific           that directors may be removed at any time      
    provisions regarding removal of directors.   (1) by vote of the holders of two-third's      
                                                 of the shares entitled to vote at an           
                                                 election of directors, but only for cause;     
                                                 or (2) by vote of two-third's of the other     
                                                 directors, with or without cause.              
------------------------------------------------------------------------------------------------

75

S-4
86th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 86th

                                                        [Enlarge/Download Table]

------------------------------------------------------------------------------------------------
                        DTE                                          MCN                        
------------------------------------------------------------------------------------------------
                                                                                                
                           VACANCIES AND NEWLY CREATED DIRECTORSHIPS                            
------------------------------------------------------------------------------------------------
    Filled by a majority vote of the directors   Filled by a majority vote of the directors     
    then in office. The person who fills any     then in office, even if less than a quorum,    
    such vacancy holds office for the unexpired  or by the sole remaining director for a        
    term of the director to whom such person     term of office continuing until the next       
    succeeds.                                    election of directors by the shareholders.     
                                                 If the number of directors changes, any        
                                                 increase or decrease will be apportioned       
                                                 among the classes of directors so as to        
                                                 maintain the number of directors in each       
                                                 class as nearly equal as possible, but a       
                                                 decrease in the number of directors will       
                                                 not shorten the term of any incumbent          
                                                 director. When the number of directors is      
                                                 increased by the board of directors, there     
                                                 will be no classification of the additional    
                                                 directors until the next election of           
                                                 directors by shareholders.                     
------------------------------------------------------------------------------------------------
                                         QUALIFICATIONS                                         
------------------------------------------------------------------------------------------------
    Each director must be a holder of common     No specific provision in MCN's articles of     
    stock of DTE at the time of initial          incorporation and bylaws.                      
    election to the board of directors, or must                                                 
    become a holder within 30 days after such                                                   
    election. Any director who thereafter                                                       
    ceases to be such a holder shall thereupon                                                  
    cease to be a director. A person shall not                                                  
    be elected as a director after attaining                                                    
    the age of 70. Retired employees of DTE or                                                  
    its affiliates, except an employee who has                                                  
    retired from the position of Chief                                                          
    Executive Officer, may not be elected as                                                    
    directors.                                                                                  
------------------------------------------------------------------------------------------------
                                           COMMITTEES                                           
------------------------------------------------------------------------------------------------
    Under Michigan law, if the articles of       Under Michigan law, if the articles of         
    incorporation or bylaws do not provide       incorporation or bylaws do not provide         
    otherwise, the board may designate one or    otherwise, the board may designate one or      
    more committees, each committee consisting   more committees, each committee consisting     
    of one or more directors. The DTE bylaws     of one or more directors. The MCN bylaws       
    create an Executive Committee and permit     create an Audit Committee, a Compensation      
    the creation of other committees.            Committee, a Corporate Governance and          
                                                 Nominating Committee and a Finance             
                                                 Committee.                                     
------------------------------------------------------------------------------------------------
                                 SPECIAL MEETINGS OF THE BOARD                                  
------------------------------------------------------------------------------------------------
    Special meetings of the board of directors   Special meetings of the board of directors     
    may be called by the Chairman of the Board   may be held at such times and places as the    
    or the President, or in the event of their   board of directors may determine or upon       
    incapacity, by the Executive Committee.      call by the Chairman of the corporation.       
------------------------------------------------------------------------------------------------

76

S-4
87th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 87th

                                                        [Enlarge/Download Table]

------------------------------------------------------------------------------------------------
                        DTE                                          MCN                        
------------------------------------------------------------------------------------------------
                                                                                                
                                          SHAREHOLDERS                                          
                             SHAREHOLDER ACTION BY WRITTEN CONSENT                              
------------------------------------------------------------------------------------------------
    Under Michigan law, shareholders may act by unanimous written consent.                      
------------------------------------------------------------------------------------------------
                                SPECIAL MEETINGS OF SHAREHOLDERS                                
------------------------------------------------------------------------------------------------
    The DTE bylaws provide that special          The MCN bylaws provide that only the board     
    meetings of shareholders may be held upon    of directors, pursuant to a resolution         
    call of the board of directors or the        adopted by a majority of the board of          
    Chairman of the Board or the President or    directors, may call a special meeting of       
    the holders of record of three-quarters      the shareholders, unless otherwise provided    
    outstanding shares of the stock of the       by law. In addition, under Michigan law, a     
    company, at such time as may be fixed by     court may order a special meeting of           
    the board of directors or the Chairman of    shareholders upon a showing of good cause      
    the Board or the President or such           if at least 10% of all shares entitled to      
    shareholders and stated in the notice of     vote at a meeting apply to the court for       
    meeting. In addition, under Michigan law, a  such an order.                                 
    court may order a special meeting of                                                        
    shareholders upon a showing of good cause                                                   
    if at least 10% of all shares entitled to                                                   
    vote at a meeting apply to the court for                                                    
    such an order.                                                                              
------------------------------------------------------------------------------------------------
                                             VOTING                                             
------------------------------------------------------------------------------------------------
    All questions other than election of         Elections for the board of directors are       
    directors are decided by a majority of the   decided by a plurality of the votes cast.      
    votes cast, by the holders of shares         All other questions are decided by a           
    entitled to vote thereon except as           majority of the votes entitled to be cast      
    otherwise required by Michigan law, or as    by the holders of stock represented and        
    otherwise provided in the articles of        entitled to vote at a meeting, except as       
    incorporation or bylaws. On all matters      otherwise required by law.                     
    other than the election of directors, every                                                 
    holder of common stock and every holder of                                                  
    preferred stock is entitled to one vote per                                                 
    share. In the election of directors, every                                                  
    holder of common stock and every holder of                                                  
    preferred stock entitled to vote for the                                                    
    election of directors whose preferred stock                                                 
    has been granted the rights to cumulative                                                   
    votes in the election of directors has                                                      
    cumulative voting rights.                                                                   
------------------------------------------------------------------------------------------------

77

S-4
88th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 88th

                                                        [Enlarge/Download Table]

------------------------------------------------------------------------------------------------
                        DTE                                          MCN                        
------------------------------------------------------------------------------------------------
                                                                                                
                       SHAREHOLDER PROPOSALS AND NOMINATIONS OF DIRECTORS                       
------------------------------------------------------------------------------------------------
    Shareholders may nominate directors or       Shareholders may nominate directors or         
    submit proposals at any annual meeting. In   submit proposals at any annual meeting. In     
    order to do so, a shareholder must (1) be a  order to nominate directors, a shareholder     
    shareholder of the company of record at the  must provide written notice at least 90        
    time of the giving of the notice for such    days, but not more than 120 days, prior to     
    annual meeting; (2) be entitled to vote at   the anniversary date of the preceding          
    such meeting and (3) give notice of          annual meeting. Shareholder proposals must     
    director nominations or proposals to the     be received by the Corporate Secretary not     
    Corporate Secretary between 60 and 90 days   less than 60 days, and not more than 90        
    prior to the date of the annual meeting.     days, prior to the first anniversary of the    
    However, if the public announcement of the   preceding year's annual meeting; however,      
    date of the annual meeting is not made at    if the date of the annual meeting is           
    least 100 days prior to the date of the      advanced by more than 30 days from the         
    annual meeting, notice by the shareholder    anniversary date, notice must be received      
    must be received not later than the close    not earlier than the 90th day prior to such    
    of business on the 10th calender day         date, and not later than the close of          
    following the day on which public            business on the later of the 60th day prior    
    announcement is first made of the date of    to the meeting the 10th day following the      
    the annual meeting.                          date on which public announcement of the       
                                                 date of the meeting is first made.             
------------------------------------------------------------------------------------------------
                              AMENDMENT OF ARTICLES INCORPORATION                               
------------------------------------------------------------------------------------------------
    Under Michigan law, the articles of          The MCN articles of incorporation provide      
    incorporation may be amended by the          that amendment of those provisions relating    
    affirmative vote of a majority of the        to the classification of the board of          
    outstanding shares entitled to vote on the   directors, vacancy on the board of             
    proposed amendment, and, in addition, if     directors, changes in the number of            
    any class or series of shares is entitled    directors, removal of directors,               
    to vote on the proposed amendment as a       nominations to the board of directors,         
    class, the affirmative vote of a majority    shareholder action by written consent,         
    of the outstanding shares of each such       procedures for board approval of business      
    class. The DTE articles of incorporation do  combinations and amendment of the articles     
    not contain any specific provisions          of incorporation requires the affirmative      
    regarding amendment of the articles.         vote of at least two-thirds of the votes       
                                                 entitled to be cast by the holders of all      
                                                 the then outstanding shares of the             
                                                 corporation.                                   
------------------------------------------------------------------------------------------------
                                      AMENDMENT OF BYLAWS                                       
------------------------------------------------------------------------------------------------
    The provisions of the bylaws providing for   The bylaws provide that the board of           
    a classified board of directors may be       directors has the power to make, amend, and    
    amended or repealed only by the vote of the  repeal the bylaws at any regular or special    
    holders of a majority of shares of common    meeting of the board of directors by a         
    stock.                                       majority vote. This provision does not         
                                                 limit the power of the shareholders to         
    In all other cases, the bylaws may be        amend, alter or rescind any of the bylaws.     
    amended, repealed or adopted by (1) a vote                                                  
    of the holders of a majority of shares at                                                   
    the time entitled to vote in the election                                                   
    of any directors or (2) a vote of a                                                         
    majority of the directors then in office.                                                   
------------------------------------------------------------------------------------------------

78

S-4
89th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 89th

                                                        [Enlarge/Download Table]

------------------------------------------------------------------------------------------------
                        DTE                                          MCN                        
------------------------------------------------------------------------------------------------
                                                                                                
                                       DISSENTERS' RIGHTS                                       
------------------------------------------------------------------------------------------------
    Under Michigan Law, generally a shareholder is entitled to dissent from and obtain          
    payment for the fair value of his or her shares in the event of certain corporate           
    actions, including, among others:                                                           

    (a) Consummation of a plan of merger in which the corporation is a party, if shareholder    
    approval is required for the merger and the shareholders are entitled to vote on the        
    merger;                                                                                     

    (b) Consummation of a plan of share exchange to which the corporation is a party as the     
    corporation whose shares will be acquired, if the shareholders are entitled to vote on      
    the plan; and                                                                               

    (c) Consummation of a sale or exchange of all, or substantially all, of the property of     
    the corporation other than in the usual and regular course of business, if the              
    shareholder is entitled to vote on the sale or exchange, including a sale in                
    dissolution, but not including a sale pursuant to court order.                              

    However, the right to dissent is not available to holders of shares which, as of the        
    applicable record date, are listed on a national securities exchange.                       
------------------------------------------------------------------------------------------------
                                      OTHER CONSTITUENCIES                                      
------------------------------------------------------------------------------------------------
    No specific provisions in the articles of    The articles of incorporation provide that     
    incorporation or bylaws.                     the board of directors may not approve,        
                                                 adopt or recommend any proposal to enter       
                                                 into any merger unless the board of            
                                                 directors has evaluated the proposal,          
                                                 determined that it would be in compliance      
                                                 with all applicable laws and in the best       
                                                 interest of the company and its                
                                                 shareholders, and considered the effects of    
                                                 the transaction upon employees, customers,     
                                                 suppliers and the communities in which the     
                                                 company's offices are located.                 
------------------------------------------------------------------------------------------------

79

S-4
90th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 90th

RIGHTS AGREEMENTS 

   The following is a description of the rights issued under each of the DTE
rights agreement and the MCN rights agreement as amended. The following         
description of the DTE rights and the DTE rights agreement does not purport to  
be complete and is subject to, and is qualified in its entirety by reference to,
the text of the DTE rights agreement, which is incorporated herein by reference 
to the DTE rights agreement filed as an exhibit to this registration statement. 
The following description of the MCN rights and the MCN rights agreement as     
amended does not purport to be complete and is subject to, and is qualified in  
its entirety by reference to, the text of the MCN rights agreement as amended,  
which is incorporated herein by reference to the MCN rights agreement as amended
filed as an exhibit to this registration statement. See "Where You Can Find More
Information" on page --                                                         

DTE                                                                             

     The DTE rights agreement provides for the issuance of a right to the holder
of each share of DTE common stock. Shares of DTE common stock issued to MCN     
shareholders in the merger will have rights attached to such shares. Each right 
entitles the holder of the right to purchase from DTE one one-hundredth of a    
share of Series A Junior Participating Preferred Stock, without par value, of   
DTE at a price of $90.00 per one one-hundredth of a preferred share, subject to 
adjustment as provided for in the rights agreement. The rights, which are       
attached to and trade with the shares of DTE common stock until they are        
exercisable, may not be exercised until the close of business 10 calendar days, 
or such later time as the DTE board of directors may specify, after:            

  - The date of the first public announcement that a person, together with
     its affiliates and associates, has acquired beneficial ownership of 10%
or more of the outstanding shares of DTE common stock; or         

   - Any person commences a tender offer or exchange offer, the consummation
    of which would result in beneficial ownership by such person of 10% or
more of the outstanding shares of DTE common stock.               

DTE, its subsidiaries, employee benefit or stock ownership plans, and 
affiliates or associates of DTE are not persons whose ownership triggers the    
exercisability of the rights. The rights will expire on October 6, 2007, unless 
earlier redeemed, exchanged or amended by DTE.                                  

MCN                                                                             

     The MCN rights agreement provides for the issuance of a right to the holder
of each share of MCN common stock. Under MCN's rights agreement, each right     
entitles the holder to purchase from MCN one one-hundredth of a share of Junior 
Participating Preferred Stock, Series A, without par value, of MCN at a price of
$300 per one one-hundreth of a preferred share, subject to adjustment as        
provided for in the rights agreement. The rights, which are attached to and     
trade with the shares of MCN common stock until they are exercisable, may not be
exercised until the earlier to occur of:                                        

- 10 days after the public announcement that a person or group of     
       affiliated or associated persons has acquired beneficial ownership of 20%
or more of the outstanding shares of MCN common stock; or         

 - Unless the MCN board of directors specifies a later date, 10 business
       days after any person commences, or makes an announcement of an intention
  to make, a tender offer or exchange offer, the consummation of which
      would result in such person's beneficial ownership of 20% or more of the
outstanding shares of MCN common stock.                           

The MCN rights agreement further provides that if MCN is acquired in a
merger or other business combination transaction, or 50% or more of its         
consolidated assets or earning power are sold, then each holder of a right is   
entitled to receive, upon exercise, that number of shares of common stock of the
acquiring company which at the time of such transaction has a market value of   
two times the purchase price of one one-hundredth of a preferred share.         

80

S-4
91st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 91st

On October 4, 1999, MCN amended the rights agreement to provide that: 

   (1) DTE will not be treated as an Acquiring Person (as defined in the MCN
rights agreement);                                                              

   (2) As a result of entering into the merger agreement or consummating the
       merger or other transactions contemplated by the merger agreement (a)
    no Distribution Date (as defined in the MCN rights agreement) will
   occur and (b) the rights will not separate from the shares of MCN
common stock; and                                             

    (3) The rights will expire at or prior to the earliest of (a) the close of
        business on July 23, 2007 or (b) immediately prior to the consummation
of the merger in accordance with the merger agreement.        

81

S-4
92nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 92nd

DIRECTORS AND EXECUTIVE OFFICERS OF MCN ENERGY GROUP INC. 

DIRECTORS OF MCN                                                                

Alfred R. Glancy III and two additional persons who are currently MCN 
directors will be appointed to the DTE board of directors at the time of the    
merger. The current MCN directors are listed below.                             

Alfred R. Glancy III, 61, MCN director since 1988                               

Mr. Glancy has been Chairman and Chief Executive Officer of MCN since 
August 1988 and served as its President from September 1992 until July 1999. He 
has been Chairman of MCN Energy Enterprises Inc. since 1988. Mr. Glancy has been
Chairman of MichCon since 1984 and served as its Chief Executive Officer from   
1984 until September 1992. He has been a Director of MichCon since 1981.        

  Mr. Glancy is Chairman Emeritus of Detroit Symphony Orchestra, Inc., and
past Chairman of The Detroit Medical Center, Detroit Renaissance, Detroit       
Economic Growth Corporation and New Detroit, Inc. He is also a Director of the  
Detroit Institute of Arts, United Way Community Services, Community Foundation  
for Southeastern Michigan, Morton Industrial Group, Greater Downtown            
Partnership, Interstate Natural Gas Association, National Petroleum Council and 
the Hudson-Webber Foundation. He is Vice Chairman of UNICO Investment in        
Seattle, Washington.                                                            

Frank M. Hennessey, 61, MCN director since 1988                                 

Mr. Hennessey has been Vice Chairman of the MCN board of directors and
Chief Executive Officer of MascoTech, Inc. since January 1998. He was formerly  
Executive Vice President of Masco Corporation. Mr. Hennessey is Chairman of Emco
Limited, a leading Canadian manufacturer and distributor of plumbing-related    
products, roofing and other building products. He was previously Vice President 
for Strategic Planning at Masco Corporation, and President, Chief Executive     
Officer and Director of Emco Limited from December 1990 through August 1995.    

   Mr. Hennessey is a Trustee of the Hudson-Webber Foundation and a Director
of New Detroit, Inc. He is a Director and Treasurer of United Way Community     
Services, and Trustee of the Citizens Research Council of Michigan, as well as, 
past Chairman of the Greater Detroit and Windsor Japan America Society.         

Howard F. Sims, 66, MCN director since 1988                                     

Mr. Sims is Chairman and Chief Executive Officer of Sims-Varner &     
Associates, PLLC, an architecture, engineering and planning firm, and has been a
practicing architect since 1963. He also serves as Chairman of The SVA Group and
SV Associates, LLC, both engaged in architecture and planning.                  

Mr. Sims is a Director of Comerica Incorporated. He is a Trustee of   
Citizens Research Council of Michigan, the W.K. Kellogg Foundation, The         
Community Foundation of Southeastern Michigan and the Karmanos Cancer Institute.
Mr. Sims is a member of the Executive Board of the Detroit Area Council, Boy    
Scouts of America, United Way Community Services of Southeast Michigan and the  
NAACP.                                                                          

James G. Berges, 52, MCN director since 1998                                    

  Mr. Berges has been President of Emerson Electric Co., a manufacturer of
electrical, electromechanical, and electronic products and systems, since May,  
1999 and Vice Chairman since April 1997. He was previously Executive Vice       
President from 1990 through March 1997. Mr. Berges is Chairman of Astec (BSR)   
Plc, a manufacturer of power conversion products and electronic components, and 
EGS Electrical Group, a joint venture with SPX, a manufacturer of specialty     
service tools and engineered components for the global motor vehicle industry.  
He is a Director of Emerson Electric.                                           

     Mr. Berges is a Board Member of the St. Louis Regional Housing Alliance and
has been active in various roles with the United Way of Greater St. Louis.      

82

S-4
93rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 93rd

Thomas H. Jeffs II, 61, MCN director since 1991                                 

 Mr. Jeffs retired as Vice Chairman of First Chicago NBD Corporation and
First National Bank of Chicago in October 1998. Mr. Jeffs was President and     
Chief Operating Officer of its subsidiary, NBD Bank Michigan, from January 1994 
to October 1998.                                                                

   Mr. Jeffs is Chairman of New Detroit, Inc. and a Director of The Economic
Club of Detroit, Detroit Renaissance, Inc. and Local Initiatives Support        
Corporation of New York, New York. He is also a Director of Intermet            
Corporation. Mr. Jeffs serves as Vice Chairman and a member of the Executive    
Committee of the Detroit Symphony Orchestra, Inc. He is a Director of the       
Detroit Institute of Arts. Mr. Jeffs is a member of the Visiting Committee of   
the University of Michigan, School of Business Administration.                  

Bill M. Thompson, 67, MCN director since 1996                                   

     Mr. Thompson retired from Phillips Petroleum Company in December 1992 after
38 years of service. He was Chairman of the Board, President and Chief Executive
Officer of GPM Gas Corporation, a wholly owned subsidiary of Phillips Petroleum 
Company, from February 1992 until December 1992. He had been Vice Chairman of   
Phillips Petroleum Company from his election in December 1991 until February    
1992. Prior to that, he was Executive Vice President of Phillips' downstream    
operations from September 1988 until December 1991. He was elected a member of  
the board of directors of Phillips Petroleum Company in 1988.                   

  Mr. Thompson serves on the board of directors of The University of Texas
College of Engineering Foundation Advisory Council. He is a past member of the  
board of directors of the American Petroleum Institute, The National Association
of Manufacturers, and The Chemical Manufacturers Association.                   

Stephen E. Ewing, 55, MCN director since 1988                                   

    Mr. Ewing has been President and Chief Operating Officer of MCN since July
1999 and also served in these offices from August 1988 until September 1992. Mr.
Ewing has been President of MichCon since 1985, Chief Executive Officer since   
September 1992 and Chief Operating Officer from 1985 to September 1992. Mr.     
Ewing has been a Director of MichCon since 1984.                                

Mr. Ewing is Chairman of the Detroit Economic Growth Corporation, the 
Natural Gas Vehicle Coalition and Oakwood Healthcare, Inc. and Vice Chairman of 
United Way Community Services. He is past Chairman of the 1997 United Way       
Community Services Torch Drive, Greater Detroit Area Health Council,            
Metropolitan Affairs Corporation and the Midwest Gas Association. He is a board 
member of the Michigan Jobs Commission, Detroit Renaissance, Michigan Opera     
Theater, Institute of Gas Technology, the American Gas Association, the Skillman
Foundation and AAA Michigan. Mr. Ewing is also a member of Leadership Detroit,  
the NAACP and Boy Scouts of America's Detroit Area Council Executive Board.     

Roger Fridholm, 58, MCN director since 1988                                     

Mr. Fridholm has been President of the St. Clair Group, a private     
investment company, since 1991. He has been Chairman of Ad Hoc Legal Resources, 
LLC since 1995 and President of IPG Services Corporation since 1996, both of    
which are staffing service companies. In 1998, Mr. Fridholm became President of 
the Business, Technology, and Staffing Services Group of MSX International. He  
previously served as President and Chief Executive Officer of Counsel,          
Enterprises, Inc. from February through July 1994 and as Senior Vice President  
of Corporate Development of Kelly Services, Inc. from March 1992 through January
1994.                                                                           

  Mr. Fridholm serves as a Director of The Stroh Brewery Company, Comerica
Bank-Michigan, and MascoTech, Inc.                                              

Helen O. Petrauskas, 55, MCN director since 1990                                

Ms. Petrauskas has been Vice President for Environmental and Safety   
Engineering with Ford Motor Company since 1983.                                 

83

S-4
94th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 94th

   Ms. Petrauskas is a Director of The Sherwin-Williams Company, a member of
the Board of Governors of Argonne National Laboratory and a member of the       
Society of Automotive Engineers. Ms. Petrauskas is also on the Advisory Boards  
of the Center for Risk Analysis, Harvard School of Public Health, and Resources 
for the Future in Washington, D.C.                                              

EXECUTIVE OFFICERS OF MCN                                                       

Alfred R. Glancy III, 61, Chairman and Chief Executive Officer                  

    Mr. Glancy's biographical information appears in the section "-- Directors
of MCN."                                                                        

Stephen E. Ewing, 55, President and Chief Operating Officer                     

   Mr. Ewing's biographical information appears in the section "-- Directors
of MCN."                                                                        

Howard L. Dow III, 44, Executive Vice President, Chief Financial Officer and    
Treasurer                                                                       

 Mr. Dow has been Executive Vice President of MCN since July 1999, Chief
Financial Officer of MCN since April 1999, Treasurer of MCN since September 1998
and Senior Vice President of MCN from September 1998 until July 1999. Mr. Dow   
has been Senior Vice President and Treasurer of MichCon since April 1998, Chief 
Financial Officer of MichCon since October 1996, Vice President of MichCon from 
March 1990 until April 1998 and a director of MichCon since 1995.               

Daniel L. Schiffer, 55, Senior Vice President, General Counsel and Secretary    

  Mr. Schiffer has been Senior Vice President of MCN since September 1995,
General Counsel and Secretary of MCN since August 1988 and served as its Vice   
President from August 1988 until September 1995. Mr. Schiffer has been Vice     
President and General Counsel of MichCon from July 1991 to September 1992 and   
Director of MichCon from January 1989 to September 1998.                        

COMPENSATION OF DIRECTORS OF MCN                                                

As of April 1, 1997, non-officer directors receive an annual fee of   
$30,000. Additionally, each year non-officer directors receive performance      
shares worth approximately $30,000, calculated at the beginning of the fiscal   
year and rounded to the nearest 100 shares. Each performance share is equivalent
to one share of MCN common stock. Non-officer directors are permitted to defer  
all or a portion of their cash retainer fee in performance shares. The          
performance shares will be credited to deferral accounts established for each   
non-officer director. The value of the performance shares held in each          
non-officer director's account will increase/decrease as the value of the       
underlying MCN common stock increases/decreases and the account will be credited
with dividend equivalents equal to one-half of the common stock dividend rate.  
Upon the non-officer director's death or retirement, the value of the           
performance shares will be paid out in shares of MCN common stock over a period 
of one to fifteen years as elected by the non-officer director. Based on the    
elections of the non-officer directors, 100% of their compensation will be in   
the form of performance shares, further aligning the interests of each          
non-officer director and shareholders by tying compensation to the value of MCN 
common stock. Directors who are employees of MCN do not receive additional      
compensation for service as directors of MCN.                                   

84

S-4
95th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 95th

COMPENSATION OF EXECUTIVES OF MCN                                               

   The following table sets forth the aggregate compensation paid or awarded
for performance from 1996 through 1998 to the Named Executive Officers of MCN   
who are currently executive officers of MCN.                                    

SUMMARY COMPENSATION TABLE

                                                        [Enlarge/Download Table]

                                               ANNUAL                                                   
                                          COMPENSATION(1)               LONG-TERM COMPENSATION          
                                        --------------------  ------------------------------------------
                                                              SECURITIES                                
                                                              UNDERLYING                     ALL OTHER  
                                                      BONUS    OPTIONS      LTIP PAY-OUT    COMPENSATION
   NAME AND PRINCIPAL POSITION    YEAR  SALARY($)    ($)(2)     (#)(3)       ($)(1)(4)         ($)(5)   
   ---------------------------    ----  ---------    -------  ----------    ------------    ------------
                                                                                                        
Alfred R. Glancy III............. 1998   667,800           0   100,000               0         66,326   
  Chairman and                    1997   620,833     500,000        --       2,382,016         61,110   
  Chief Executive Officer         1996   575,000     520,000        --       1,984,000         42,069   
Stephen E. Ewing................. 1998   412,500     450,000    48,300               0         37,356   
  President and Chief             1997   356,667     240,000        --       1,339,884         33,818   
  Operating Officer               1996   335,625     136,000        --       1,240,000         23,404   
Howard L. Dow III................ 1998   211,539     180,000    14,000               0         13,312   
  Executive Vice President,       1997   205,000      98,200        --         558,285         11,675   
  Chief Financial Officer and     1996   168,750      47,200        --         446,400          9,228   
  Treasurer                                                                                             

-------------------------                                                       
(1) Includes amounts received or deferred.                                      

(2) Amounts under the MCN Energy Group Inc. Annual Performance Plan are shown   
  for the year upon which performance is measured. They are paid in February
   or March of the subsequent year. Messrs. Ewing and Dow earned bonuses based
upon MichCon's performance.                                             

(3) Stock options are granted in the February subsequent to the fiscal year     
indicated in the table.                                                 

(4) Amounts shown in this column represent the dollar value of final payouts of 
previous awards pursuant to the Performance Share Plan for the 6 year   
periods 1991 through 1996, 1992 through 1997, and 1993 through 1998,    
respectively. See "Report of the Compensation Committee of the Board of 
    Directors of Executive Compensation" for a detailed description of the plan.
 The current value of awards for the years 1996 and 1997 that were paid in
stock or deferred under the Mandatory Deferred Compensation Plan are    
   significantly less than shown due to the decline in the price of MCN common
stock.                                                                  

(5) Amounts shown in this column represent MCN's contributions to defined       
contribution plans and its payment of life insurance premiums.          

LONG-TERM COMPENSATION                                                      

  Beginning with the 1998 performance year, MCN determined that 50% of its
long-term incentive awards should be in the form of stock options (See          
"-- Report of the Compensation Committee of the Board of Directors on Executive 
Compensation"). The stock options granted on February 24, 1999 to the Named     
Executive Officers who are currently executive officers of MCN are indicated in 
the table below.                                                                

OPTIONS GRANTED 

                                                        [Enlarge/Download Table]

                                                                                        POTENTIAL REALIZABLE  
                                                                                      VALUE AT ASSUMED ANNUAL 
                                                                                        RATES OF STOCK PRICE  
                                               PERCENT OF                                 APPRECIATION FOR    
                             NUMBER OF        TOTAL OPTIONS  EXERCISE OF                    OPTION TERM       
                       SECURITIES UNDERLYING   GRANTED TO    BASE PRICE   EXPIRATION  ------------------------
         NAME           OPTIONS GRANTED(#)      EMPLOYEES     ($/SHARE)      DATE       5%($)         10%($)  
         ----          ---------------------  -------------  -----------  ----------    -----         ------  
                                                                                                              
Alfred R. Glancy                                                                                              
  III.................        100,000             15.4          17.25      2/24/09    1,084,840     2,749,210 
Stephen E. Ewing......         48,300              7.4          17.25      2/24/09      523,978     1,327,868 
Howard L. Dow III.....         14,000              2.2          17.25      2/24/09      151,878       384,889 

85

S-4
96th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 96th

  The options have a strike price of $17.25, which was the market price of
MCN common stock on February 24, 1999 (the grant date). The options vest ratably
over three years following the date of grant and are exercisable from the time  
of vesting until the tenth anniversary of the grant.                            

   Beginning with the 1992 performance year, MCN adopted a performance share
plan pursuant to the Stock Incentive Plan approved by its shareholders. In 1998,
MCN determined that 50%, rather than 100%, of the long-term incentive awards    
should be in the form of performance shares. Performance shares are granted in  
February subsequent to the three-year period upon which performance is measured.
Performance shares granted February 24, 1999 for the 1996 to 1998 performance   
period to the Named Executive Officers who are currently executive officers of  
MCN are indicated in the table below.                                           

PERFORMANCE UNITS 

                                                        [Enlarge/Download Table]

                                              PERFORMANCE OR       ESTIMATED FUTURE PAYOUTS UNDER     
                                               OTHER PERIOD          NON-STOCK PRICE-BASED PLANS      
                                  NUMBER OF  UNTIL MATURATION  ---------------------------------------
              NAME                SHARES(#)     OR PAYOUT      THRESHOLD(#)    TARGET(#)    MAXIMUM(#)
              ----                ---------  ----------------  ------------    ---------    ----------
                                                                                                      
Alfred R. Glancy III.............  14,250        3 years            0           14,250        28,500  
Stephen E. Ewing.................   6,900        3 years            0            6,900        13,800  
Howard L. Dow III................   2,000        3 years            0            2,000         4,000  

  Each performance share is equivalent to a share of MCN common stock. The
number of performance shares initially granted is based on MCN's total          
shareholder return for the previous three years compared to the total           
shareholder return for a group of peer companies (identified under "-- Report of
the Compensation Committee of the Board of Directors on Executive Compensation")
over the same period. Once initially granted, dividend equivalents are paid on  
performance shares. The initial grants are adjusted upward or downward after a  
three-year period based on MCN's total shareholder return for this subsequent   
period compared to the total shareholder return for a group of peer companies   
over the same period. (See the discussion of peer groups and award periods under
"-- Report of the Compensation Committee of the Board of Directors on Executive 
Compensation") The final award, which will be payable in MCN common stock, will 
range from 0% to 200% of the initial grant.                                     

Alternatively, participants are provided the option of deferring their
awards until their employment terminates. The deferrals are in the form of      
common stock equivalents that earn dividend equivalents equal to one-half of the
common stock dividend. Final awards are included as Long-Term Incentive Payouts 
in the Summary Compensation Table above in the year they are paid out.          

INDEBTEDNESS OF MANAGEMENT                                            

In order to encourage executives to maintain their holdings in shares 
purchased under a stock option plan, which was replaced by the MCN Stock        
Incentive Plan in May 1989, MCN provided loans at an interest rate in accordance
with IRS guidelines based on the market yield of U.S. short-term marketable     
securities. Pursuant to this provision, Mr. Glancy initiated a loan in 1992 at  
an interest rate of 4.43%, which was renewed in 1995 and again in 1998 at the   
then current interest rates of 5.65% and 5.41%, respectively. The loan covered a
maximum outstanding amount of $725,014, including interest, during 1998. A      
balance of $581,981, including interest, was outstanding as of December 31,     
1998. The loan is secured by 169,628 shares of MCN common stock with a year-end 
market value of $3,233,534.                                                     

86

S-4
97th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 97th

RETIREMENT PLANS                                                      

PENSION PLAN TABLE

                                                        [Enlarge/Download Table]

                                       ANNUAL RETIREMENT BENEFIT AT AGE 65 FOR YEARS OF SERVICE      
                                 --------------------------------------------------------------------
         FINAL AVERAGE              20          25          30          35          40          45   
        ANNUAL EARNINGS           YEARS       YEARS       YEARS       YEARS       YEARS       YEARS  
        ---------------           -----       -----       -----       -----       -----       -----  
                                                                                                     
$150,000........................ $ 54,700    $ 68,400    $ 82,100    $ 95,700    $105,700    $115,600
 200,000........................   73,000      91,300     109,500     127,800     141,000     154,300
 250,000........................   91,300     114,100     137,000     159,800     176,400     193,000
 300,000........................  109,600     137,000     164,400     191,800     211,700     231,600
 350,000........................  127,900     159,900     191,900     223,800     247,100     270,300
 400,000........................  146,200     182,800     219,300     255,900     282,400     309,000
 450,000........................  164,500     205,600     246,800     287,900     317,800     347,700
 500,000........................  182,800     228,500     274,200     319,900     353,100     386,300
 550,000........................  241,800     276,100     301,600     351,900     388,500     425,000
 600,000........................  263,800     301,300     329,100     383,900     423,800     463,700
 650,000........................  285,800     326,400     356,500     415,900     459,100     502,400
 700,000........................  307,800     351,500     384,000     447,900     494,500     541,000

All salaried employees of MCN and certain of its subsidiaries (the    
"Participating Companies") participate in a noncontributory, defined benefit    
retirement plan (the "Retirement Plan"), under which benefits have been based   
upon the final average salary. Specifically, the monthly pension at normal      
retirement (age 65) is calculated using a formula providing a single life       
monthly benefit equal to (1) 1.33% of final average monthly earnings multiplied 
by the number of total years of credited service with the Participating         
Companies; plus (2) 0.5% of final average monthly earnings that exceed a 35-year
average Social Security wage base multiplied by the number of years of credited 
service up to 35 years. Early retirement benefits (at a reduced benefit if such 
retirement is before the participant attains age 62) are permitted under the    
plan, (1) on or after the date a participant attains age 55, if the             
participant's age plus years of credited service (as defined in the plan) equals
or exceeds 70, or (2) when the participant has attained 30 years of credited    
service. An employee's final average monthly earnings is defined as his or her  
highest average monthly earnings for a consecutive 60-month period during the   
participant's last 15 years of employment. Average monthly earnings are         
calculated based on an individual's base salary only. An employee is not vested 
under the Retirement Plan until he or she has completed five years of credited  
service or has attained age 65.                                                 

  The table above illustrates the total estimated annual normal retirement
pension benefits including the Supplemental Retirement Plan amounts (discussed  
below), if applicable, that will be payable upon normal retirement at age 65 to 
participants for the specified remuneration and years of credited service       
classifications. Retirement benefits are not subject to any deduction for social
security or other offset amounts. The table does not reflect any reductions in  
retirement benefits that would result from the selection of one of various      
available survivorship options or the election to retire prior to age 62.       
Benefit amounts are computed on a straight life annuity basis.                  

As of December 31, 1998, the credited years of service (rounded to the
nearest whole year) for the Named Executive Officers participating in the final 
average salary plan are as follows: Mr. Ewing, 27 years and Mr. Dow, 20 years.  

     In 1998, MCN adopted a cash balance plan feature within its defined benefit
plan to better attract and retain employees. The cash balance plan will be the  
defined benefit plan for all new hires at MCN and MCNEE and was offered as a    
one-time option to all current employees of MCN and MCNEE. For employees        
electing to switch from the final average salary to the cash balance plan, a    
retirement annuity as of January 1, 1998 was calculated under the "traditional" 
defined benefit plan formula described above and present-valued using a 6.11%   
interest rate, the average interest rate on 30-year Treasury Bills for November 
1997. This amount represented the opening account balance under the cash balance
feature. Under the cash balance plan, at the beginning of each year, each       
participant's account is credited with 8% of the                                

87

S-4
98th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 98th

individual's salary and bonus plus an additional 5% of such compensation over   
the Social Security wage base. In addition, each participant's account is       
credited with interest based on the 30-year Treasury Bill rate as of November of
the prior year. All vested participants in the cash balance plan are entitled to
receive a lump sum payment in lieu of monthly pension annuities. Mr. Glancy and 
248 other incumbent employees out of an eligible group of 330 opted to          
participate in the cash balance plan. Had Mr. Glancy retired effective January  
1, 1999, he could have elected to receive an immediate annual annuity under the 
cash balance plan of $379,000.                                                  

     MCN also maintains the Supplemental Retirement Plan, which provides for the
payment of benefits that would otherwise be payable under the Retirement Plan   
but for limitations imposed by Federal tax law on benefits paid by qualified    
plans.                                                                          

SUPPLEMENTAL DEATH BENEFIT AND RETIREMENT INCOME PLAN                 

MCN's Named Executive Officers and certain other officers of the      
Participating Companies currently participate in a Supplemental Death Benefit   
and Retirement Income Plan. Under this plan, the pre-retirement death benefits  
payable to an employee's surviving spouse are 50% of the employee's final salary
until such time as the employee would have reached age 65. Thereafter, payments 
are 20% of salary until the employee would have reached age 75. At retirement an
employee may elect to receive (1) annual supplemental retirement income equal to
20% of the employee's final annual salary payable for a period of 10 years after
age 62; or (2) other available post retirement benefits that are actuarially    
equivalent to the 10-year payment option.                                       

     REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION                                                                    

  The Compensation Committee (the "Committee") establishes MCN's strategic
compensation objectives. The Committee then monitors and evaluates the design   
and effectiveness of MCN's executive pay programs against those objectives.     
Under Committee review, MCN's executive compensation programs are administered  
to link executive pay with MCN's strategic direction and business objectives. In
light of 1998's disappointing financial results, the Committee reviewed each    
element of executive compensation to assure itself that MCN's programs taken as 
a whole continue to support its business strategy.                              

OBJECTIVE:                                                                      

     The Committee's primary and overriding objective continues to be to provide
a total compensation package that allows MCN to attract, retain, and motivate   
executive employees. In doing so, MCN establishes total compensation opportunity
(base salary, annual incentive, and long-term incentive) at competitive levels. 

- Base salary levels are generally set between the 40th and 65th      
percentile.                                                       

  - Total cash compensation (base salary and annual incentive) is targeted
     for the 65th percentile with the opportunity to exceed or fall short of
that level when warranted by company and individual performance.  

   - Long-term incentives are also targeted for the 65th percentile with the
    opportunity to exceed or fall short of that level when MCN performance
warrants.                                                         

METHODOLOGY:                                                                    

The methodology used to determine market competitiveness is an annual 
survey of comparable companies as well as analysis of national and industry     
executive compensation data. Three separate sets of comparable companies have   
been identified to best match the three distinct business environments of MCN,  
MichCon, and MCNEE.                                                             

  - Performance, both MCN and individual, drive total compensation levels.

  The relationship of an executive's current salary in relation to the
     specific marketplace data, along with an assessment of the individual's
     performance against a set of objectives, determines base pay increases.

88

S-4
99th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 99th

Annual incentives relate to attaining financial and individual    
objectives.                                                       

Long-term incentives relate to creating shareholder value.        

  - Variable ("incentive") compensation opportunities are set at levels to
     put a significant percentage of executive compensation at risk relative
      to MCN performance, thus linking executive and shareholder interests. At
target payout projections, the short-term and long-term incentive 
programs put more than 60% of the Chairman & CEO's total direct   
compensation at-risk.                                             

    - Program design encourages and increases stock ownership by executives to
     better align their interests with those of shareholders. Currently, any
final awards under the performance share aspect of the long-term  
  incentive plan are paid out 100% in MCN common stock or common stock
equivalents.                                                      

 - All components of executive compensation programs are communicated to
participating employees annually to ensure they understand the    
opportunity (and the risks) available based on performance, thus  
   increasing the motivational impact of the plans. The status of actual
     performance relative to the targets is communicated throughout the year
to maintain focus on the targets.                                 

ROLE OF THE COMMITTEE:                                                          

  The Committee makes recommendations to the MCN board of directors on the
compensation levels of all officers of MCN, MCNEE, and MichCon and reviews the  
aggregate recommendations for base pay, annual incentive awards, and long-term  
incentive awards for the other senior executives of MCN. In addition, the       
Committee has oversight responsibility for all MCN's compensation programs to   
ensure that they are aligned with the strategic direction and objectives of MCN.

     In fulfilling these responsibilities, the Committee utilizes MCN's internal
compensation function and outside consultants to research and summarize pay and 
incentive practices of comparable companies, industry averages, and other       
benchmarks. This year the Committee, in addition to MCN's executive compensation
staff, utilized Hewitt Associates LLC to assist in this process.                

SPECIFIC DISCUSSION ON THE COMPONENTS OF EXECUTIVE COMPENSATION:                

    Short-Term Incentives -- The MCN Energy Group Inc. Annual Performance Plan
provides for annual incentive payments to executives based on the accomplishment
of corporate goals established by the Committee prior to the start of the fiscal
year. The target award opportunity for the Chairman and Chief Executive Officer 
is 60% of base salary. Target awards for all other executives range from 15% to 
55%. The adjusted award can be more or less than the target award depending on  
the achievement of the corporate goals. An executive's individual final award   
may vary from 0% to 125% of the adjusted award amount based on individual       
performance measured using a combination of criteria including:                 

- the performance assessment measured by specific accomplishments;    

- leadership abilities; and                                           

- the executive's fiscal responsibility.                              

1998 Results -- For 1998 the goals were defined as Return on Equity   
("ROE"), calculated separately for MCN, MCNEE, and MichCon, and also included a 
factor for growth in earnings per share.                                        

    MichCon's performance in 1998 resulted in a calculated award fund equal to
190% of the target payout. Based on 1998 results, there was no award fund for   
MCN or MCNEE. Neither Mr. Glancy, nor any other employee at MCN or MCNEE,       
received any bonus award. Mr. Dow, who moved to MCN from MichCon in late 1998,  
received a bonus based on MichCon results.                                      

   1999 Plan Design -- As a result of the overall compensation review of the
market, the Committee, determined that the target awards for all executives,    
including the Chairman and Chief Executive Officer of MCN at 60% of base salary,
remain unchanged.                                                               

89

S-4
100th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 100th

     In order to better focus employees on the need to rebuild shareholder value
and to address retention concerns, the plan for 1999 for MCN and MCNEE was      
completely revised. Employees at MCN and MCNEE were granted special performance 
units ("Units") that will be adjusted after one year based on total shareholder 
return during 1999 versus the new peer group, as described in the long-term     
incentive section of this report. Final payouts, which will occur in early 2000,
will be in the form of MCN common stock, with the final number of shares being  
anywhere from 0% to 200% of the initial Units granted based on peer group       
ranking. For executives, one-half of the final payout will occur in early 2000  
with the second half paid in early 2001. The number of Units granted was        
calculated using the existing base salary targets divided by an assumed share   
price of $20. For Mr. Glancy this resulted in an initial grant of 20,250 Units. 

For MichCon, the goal for 1999 continues to be based on ROE with an   
additional 25% funding available if MCN finishes in the top half of the peer    
group as measured by total shareholder return during 1999.                      

   Long-Term Incentives -- The MCN Energy Group Inc. Stock Incentive Plan is
designed to provide a significant level of executives' total compensation in a  
format that encourages them to remain in the employment of the corporation and  
matches their interests with those of shareholders. The plan is an omnibus plan 
that allows the corporation to issue a variety of long-term incentives. The     
total economic value delivered to executives is designed to provide competitive 
compensation, regardless of the long-term incentive methodology. The Committee  
determined that the range of target awards as a percent of base salary should   
remain basically unchanged from 1998 to 1999.                                   

     Stock Options -- In 1999 the Committee determined that 50% of the long-term
economic value should be delivered using standard stock options. Specifically,  
the number of options granted was determined based on a value of $3.83 per      
option utilizing the Black-Scholes model. The options have a strike price of    
$17.25, which was the market price of MCN common stock on February 24, 1999 (the
grant date). The options will vest ratably over three years following the date  
of grant and are exercisable from the time of vesting until the 10th anniversary
of the grant. The remaining 50% of the long-term award was granted in the form  
of performance shares subject to the same vesting and adjustment procedures used
in the past as described below.                                                 

  The Committee's decision to utilize stock options was primarily based on
three reasons. First, stock options directly support MCN's goal of rebuilding   
shareholder value since they have value only if MCN's stock price increases. In 
contrast, performance shares focus on growing and preserving shareholder value. 
Second, stock options are purely future-oriented, while the performance share   
plan looks both back and forward three years. Third, most of MCN's peer         
companies use two or more long-term incentive vehicles; including stock options.
The Committee is persuaded that substituting stock options for a portion of the 
performance shares more closely aligns shareholder and executive interest while 
furthering MCN's ability to retain and attract needed talent.                   

    Mr. Glancy received a grant of 100,000 stock options on February 24, 1999.

     Performance Shares -- Performance shares are awarded to executives based on
total shareholder return covering a six-year period, as compared to a peer group
of companies. This period is divided into two parts. The first three years      
determine the initial grant of performance shares. Participants receive dividend
equivalents on the performance shares during the subsequent three-year period.  
The initial grant is adjusted upward or downward based upon performance over the
subsequent three-year period. The final award, if any, is paid 100% in MCN      
common stock or may be deferred in common stock equivalents. One half of any    
shares not deferred may be sold to satisfy tax-withholding obligations. The     
remaining shares must be retained until the recipient meets or exceeds specified
stock ownership guidelines, retires, or terminates employment with              

90

S-4
101st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 101st

MCN. Both the initial grant and the final award are based on MCN's performance  
ranking within its peer group using the following parameters:                   

                                                                [Download Table]

                        PERFORMANCE                                           
                          RANKING                                             
                         (QUARTILE)                           PERCENT OF AWARD
                        -----------                           ----------------
                                                                              
First.......................................................    125% - 200%   
Second......................................................     75% - 150%   
Third.......................................................     25% - 100%   
Fourth......................................................      0% - 50%    

Individual standard awards are based on the impact of the executive's 
position to corporate success and to the size of the standard grant (at current 
market value) compared to base salary to achieve an appropriate market-based    
relationship between base pay and incentive opportunity. The target award       
levels, which are expressed as a percentage of base salary, are reviewed        
annually as part of the overall compensation survey analysis and were adjusted  
in 1999 to reflect the issuance of stock options. As a result, the standard     
award for the Chairman & CEO for 1999 was approximately 55% of base salary. In  
1999 this equated to 28,500 performance shares (based on a value of $13.44 per  
performance unit as determined through the use of Hewitt's proprietary model)   
for Mr. Glancy. Standard awards for other executives were consistently          
calculated.                                                                     

In 1999 the Committee adopted a new peer group to recognize MCN's new 
portfolio of businesses without the E&P business. The new peer group will be    
used as the basis for final awards of performance shares granted in 1999 and    
subsequent years. The old peer group was used as the basis for issuing final    
awards of performance shares initially granted in 1996 and will also be used for
the 1997 and 1998 grants. Total shareholder return for the new peer group was   
75.1% for 1996 through 1998 versus 73.8% for the old peer group. The companies  
currently included in the respective peer groups are identified below:          

                                                                [Download Table]

               NEW PEER GROUP                          OLD PEER GROUP         
               --------------                          --------------         
                                                                              
CMS Energy Corporation                        Brooklyn Union (Keyspan Energy) 
Columbia Energy Group                         CMS Energy Corporation          
Consolidated Natural Gas Company              Columbia Energy Group           
DTE Energy Company                            Consolidated Natural Gas Company
El Paso Energy Corporation                    Enron Corporation               
Enbridge Inc.                                 Equitable Resources, Inc.       
Equitable Resources, Inc.                     KN Energy, Inc.                 
KN Energy, Inc.                               National Fuel Gas Company       
MDU Resources Group, Inc.                     ONEOK, Inc.                     
National Fuel Gas Company                     Questar Corporation             
ONEOK, Inc.                                   Sonat, Inc.                     
Peoples Energy Corporation                    Southwestern Energy Company     
Questar Corporation                           The Coastal Corporation         
Sempra Energy                                 The Williams Companies, Inc.    
WestCoast Energy, Inc.                        WICOR, Inc.                     

     For the three-year period 1996-1998, MCN's total return to shareholders was
(7.9)%, which placed MCN 16th in the new peer group. Using the program          
guidelines above, and considering MCN's ranking, the need to motivate and retain
employees, and the significant discretion reserved for the MCN board of         
directors when making a final adjustment in 2002; the Committee granted 1999    
performance shares at 50% of the standard award level. For Mr. Glancy the       
Committee granted 14,250 performance shares. These units may as much as double  
or be forfeited completely based on how MCN's total shareholder return compares 
to peer companies using the above scale for the 1999-2001 period.               

The performance shares initially granted in February 1996 vested in   
February 1999. MCN finished 14th in the old peer group for the 1996-1998 period.
Based on MCN's disappointing performance, the Committee determined that the     
performance shares granted in 1996 should be completely forfeited.              

91

S-4
102nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 102nd

     Base Salary -- The base salary of an executive is established when entering
the position based on the individual's experience in relation to external market
comparisons for that position. Annually, each executive's salary is reviewed    
relative to the specific marketplace data and adjustments are made with         
consideration of the individual's level of performance, scope and role within   
the organization, and recent salary history.                                    

  For 1999, the Committee found that Mr. Glancy's base salary was slightly
below the 50th percentile of the diversified energy company market. The         
Committee determined to leave Mr. Glancy's current base salary of $675,000      
unchanged. Mr. Glancy's base salary was last increased on March 1, 1998. Using  
similar methodology, the committee determined that 20 other officers of MCN,    
MichCon, and MCNEE should receive base salary increases averaging 7.8%. Five    
other officers did not receive any increase in base salary. Overall, base       
salaries were increased by a total of 5.7% for the 25 officers other than Mr.   
Glancy.                                                                         

TREATMENT OF INDIVIDUAL EXECUTIVE WITH COMPENSATION EXCEEDING $1 MILLION        
ANNUALLY:                                                                       

In 1994, MCN adopted a plan requiring covered executives whose total  
compensation in any calendar year exceeded the $1 million limitation on         
deductibility set forth on Section 162(m) of the Internal Revenue Code of 1986  
to defer the excess until he or she leaves MCN. This excess amount is placed in 
an account in which the value is adjusted in terms of MCN common stock at       
prevailing market prices. Executives receive dividend equivalents on 50% of the 
common stock units deferred.                                                    

CONCLUSION:                                                                     

The Committee reviewed all executive compensation programs in light of
1998's disappointing results along with MCN's need to attract and retain the    
management talent to rebuild shareholder value. The tie between MCN performance 
and executive compensation, coupled with the stock ownership guidelines, clearly
balanced these competing interests. The Committee believes that MCN's executive 
compensation programs clearly align each executive's total compensation         
potential with individual and MCN performance as well as shareholder returns,   
while providing a balanced compensation mix between base pay and incentives that
is based on market and performance factors. It is the Committee's intent to     
ensure that this alignment continues into the future and to review and refine   
MCN's pay and incentive programs to reflect this objective.                     

THE COMPENSATION COMMITTEE                                                      
Thomas H. Jeffs II, Chairman                                                    
Roger Fridholm                                                                  
Howard F. Sims                                                                  
Bill M. Thompson                                                                

PERFORMANCE TABLE                                                     

COMPARISON OF $100 INVESTED IN MCN STOCK SINCE
DECEMBER 1993 WITH DIVIDENDS REINVESTED 

                                                        [Enlarge/Download Table]

                     DATE                         MCN    S&P 500  OLD PEER GROUP  NEW PEER GROUP
                     ----                         ---    -------  --------------  --------------
                                                                                                
12/93.......................................... $100.00  $100.00     $100.00         $100.00    
12/94.......................................... $108.38  $101.32     $ 98.30         $ 91.28    
12/95.......................................... $146.64  $139.34     $137.86         $122.02    
12/96.......................................... $188.80  $171.32     $176.36         $149.88    
12/97.......................................... $272.23  $228.46     $215.52         $197.75    
12/98.......................................... $133.99  $293.74     $239.59         $213.65    

-------------------------                                                       
(1) The above table compares the performance of MCN with that of a broad equity 
    market index, the S&P 500 Composite. Also included is the performance of the
    old peer group of companies, which is used in connection with the payout for
   the vesting of Performance units initially granted in 1996 through 1998. In
1999, MCN changed to the new peer group of companies to be used in      
connection with its Performance Share Plan to better reflect its current
  business mix. (See the discussion of peer groups and award periods above.)

(2) The returns for each company included in the peer group are weighted        
according to MCN's stock market capitalization at the beginning of each 
month.                                                                  

92

S-4
103rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 103rd

BENEFICIAL SECURITY OWNERSHIP OF
MCN DIRECTORS AND EXECUTIVE OFFICERS

   The following table includes MCN common stock and stock-based holdings of
MCN's chief executive officer and its four most highly-compensated executive    
officers in 1998 (collectively, the "Named Executive Officers") and its         
directors as of October 1, 1999 and the percent of DTE common stock that such   
persons will hold at the time of the merger assuming that 45% of such person's  
MCN common stock is exchanged for DTE common stock in the merger, consistent    
with the overall ratio of MCN common stock that, subject to adjustments         
necessary to preserve the status of the merger as a reorganization under the    
Internal Revenue Code, will be converted into DTE common stock in the merger. As
of October 1, 1999, no person is known to MCN to be the beneficial owner of more
than five percent of any class of MCN's voting securities.                      

COMMON STOCK AND TOTAL STOCK-BASED HOLDINGS 

                                                        [Enlarge/Download Table]

                                                                                       PERCENT OF DTE 
                                                                                      GIVING EFFECT TO
               NAME                 SHARES(1)    EQUIVALENTS(2)  TOTAL    PERCENT(3)   THE MERGER(4)  
               ----                 ---------    --------------  -----    ----------  ----------------
                                                                                                      
Alfred R. Glancy III...............  307,206(5)     101,250      408,456     0.5%            0.1%     
Stephen E. Ewing...................   35,715(5)      31,350       67,065     0.1               *      
Joseph T. Williams.................   51,495(5)      10,025       61,520     0.1               *      
William K. McCrackin...............      140(5)      26,250       26,390       *               *      
Howard L. Dow III..................   28,727(5)      14,245       42,972     0.1               *      
James G. Berges....................      100         --              100       *               *      
Roger Fridholm.....................   10,300(6)      --           10,300       *               *      
Frank M. Hennessey.................   11,140         --           11,140       *               *      
Thomas H. Jeffs II.................    5,000         --            5,000       *               *      
Helen O. Petrauskas................    3,166         --            3,166       *               *      
Howard F. Sims.....................    3,145         --            3,145       *               *      
Bill M. Thompson...................    3,429         --            3,429       *               *      
Directors, nominees and executive                                                                     
  officers as a group..............  497,434        198,920      696,354     0.8%            0.1%     

-------------------------                                                       
*  Less than 0.1%                                                             

(1) This column lists voting securities, including shares of restricted stock in
which the beneficial owners have voting power but do not have investment
   power until the shares vest. In many instances, voting power and investment
power are shared with another as joint tenants.                         

(2) This column includes certain non-voting common stock equivalents, such as   
performance shares granted under the Stock Incentive Plan and special   
performance shares granted under the 1999 special provisions of the     
   Long-Term Incentive Performance Share Plan which will vest upon a change in
control of MCN under the plans.                                         

(3) Includes the total of shares and equivalents as listed in the third column  
of this table.                                                          

(4) This calculation assumes (a) that the equivalents listed in the second      
   column of this table are paid out in MCN shares at a value of 100% upon MCN
shareholder approval of the merger agreement as described under "The    
   Merger -- Interests of Management and Directors in the Merger" and (b) that
  45% of the MCN shares paid out as described in clause (a) above and 45% of
 the MCN shares listed in the first column of this table are exchanged for
DTE common stock in the merger.                                         

(5) Includes shares held in the MCN Energy Group Savings and Stock Ownership    
Plan (the "Savings Plan"). The beneficial owners of the shares have sole
  voting power on all shares. Beneficial owners have investment power on all
    shares except those purchased by MCN and held as restricted under provisions
of the Savings Plan.                                                    

93

S-4
104th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 104th

(6) Includes 2,100 shares held in the St. Clair Charitable Trust, of which Roger
  Fridholm is a Trustee. Mr. Fridholm has shared voting and investment power
on these shares.                                                        

DESCRIPTION OF MCN ENERGY GROUP INC.

MCN Energy Group Inc., a Michigan corporation organized in 1988, is an
integrated energy company with more than $4.0 billion in assets at June 30, 1999
and revenues of over $2.2 billion for the twelve months ended June 30, 1999. MCN
is primarily involved in natural gas production, gathering, processing,         
transmission, storage and distribution, electric power generation and energy    
marketing. MCN's largest subsidiary is Michigan Consolidated Gas Company        
("MichCon"), a natural gas utility serving 1.2 million customers in more than   
500 communities throughout Michigan. MCN Energy Enterprises Inc. ("MCNEE") is a 
wholly owned subsidiary of MCN and serves as a holding company for MCN's        
non-utility businesses.                                                         

On August 2, 1999, MCN announced a significantly revised strategic    
direction. MCN's revised strategy includes:                                     

     - Focusing on the Midwest-to-Northeast region rather than on North America;
and                                                               

   - Emphasizing operational efficiencies and growth through the integration
 of existing businesses rather than building a portfolio of diverse,
non-operated energy investments.                                  

  Consistent with its new strategic direction, MCN will retain its natural
gas producing properties in Michigan and continue selling its other exploration 
and production oil and gas properties, and has reduced its capital investment   
expectations to approximately $500 million in 1999 and $300 million annually    
thereafter.                                                                     

     As a part of its revised strategic direction, MCN is reorganizing into four
primary business segments and an investment arm: Gas Distribution; Midstream &  
Supply; Energy Marketing; Power; and Energy Holdings.                           

     - Gas Distribution is responsible for MCN's regulated utilities operations.
      Gas Distribution consists principally of MichCon, a Michigan corporation
     organized in 1898 that, with its predecessors, has been in business for
   over 150 years. MichCon is subject to the accounting requirements and
rate regulation of the MPSC with respect to the distribution and  
transportation of natural gas.                                    

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

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

- Power develops and manages independent electric power projects.     

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

   Until MCN's reorganization into the four business segments and investment
arm described above is complete, MCN will continue to operate through two major 
business groups: Diversified Energy and Gas Distribution.                       

     - Diversified Energy, operating through MCNEE, is involved in the following
segments: Pipelines & Processing with gathering, processing and   
 transmission facilities near areas of rapid reserve development and
   growing consumer markets; Electric Power with investments in electric
       generation facilities in operation and under construction with a combined
 2,986 MW of gross capacity and investments in electric distribution
    facilities at December 31, 1998; Energy Marketing with total gas sales
       and exchange gas delivery markets of 465.7 Bcf for 1998 with rights to 67
Bcf of storage capacity.                                          
94

S-4
105th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 105th

 Diversified Energy also has investments in Exploration & Production
 ("E&P") properties with 1.2 Tcf/e of proved gas and oil reserves at
      December 31, 1998. Consistent with its new strategic direction, MCN will
       retain its natural gas producing properties in Michigan. MCN has sold its
   E&P properties in the Western and Midcontinent/Gulf Coast regions and
expects to sell other non-Michigan E&P properties.                

   - Gas Distribution consists principally of MichCon. MichCon is subject to
      the accounting requirements and rate regulation of the MPSC with respect
to the distribution and intrastate transportation of natural gas. 
 Slightly less than half of MichCon's labor force is covered by five
  collective bargaining agreements. In June 1998, MichCon successfully
      negotiated and signed three 3-year collective bargaining agreements. The
remaining two agreements will expire December 2000.               

    The operating revenues, operating income, and identifiable assets of these
business segments are included in "Financial Statements of MCN Energy Group     
Inc.,". On December 31, 1998, MCN and its subsidiaries had 2,986 employees.     

  MCN has its principal executive offices at 500 Griswold Street, Detroit,
Michigan 48226 (telephone number (313) 256-5500).                               

RESULTS OF OPERATIONS                                                           

   MCN had a net loss for the six months ended June 30, 1999 of $.7 million,
compared with a net loss of $133.7 million for the same 1998 period. For the    
year ended December 31, 1998, MCN experienced a net loss of $286.5 million      
compared to net income of $133.2 million in 1997. As subsequently discussed, the
results reflect several unusual charges which totaled $83.4 million for the six 
months ended June 30, 1999, $220.4 million for the six months ended June 30,    
1998, and $389.6 million for the year ended December 31, 1998. The unusual      
charges include losses on the sale of properties, property write-downs,         
investment losses and restructuring charges. In addition, the 1999 period was   
affected by an accounting change that reduced net income by $2.9 million.       
Excluding these non-recurring items, MCN had earnings of $85.6 million for the  
six months ended June 30, 1999, a decrease of $1.1 million from the             
corresponding 1998 period, and earnings of $103.1 million for the year ended    
December 31, 1998, a decrease of $30.1 million from 1997. The charges for each  
business segment will be discussed further within the related business segment  
information to follow and in "Financial Statements of MCN Energy Group Inc."    

DIVERSIFIED ENERGY

The Diversified Energy group had a net loss of $88.5 million in the   
six-month period ended June 30, 1999, compared to a loss of $199.1 million in   
the corresponding 1998 period. Excluding unusual charges, Diversified Energy had
a loss of $5.1 million for the 1999 six-month period compared to earnings of    
$21.3 million for the 1998 six-month period. These results reflect the impact of
lower E&P gas and oil production on operating and joint venture income, higher  
financing costs and the impact of lower methanol prices and production at the   
Pipelines & Processing segment for 1999. The earnings comparison was also       
affected by gains recorded in 1998 from the sale of certain assets.             

    The Diversified Energy group reported a loss of $358.2 million in 1998 due
to certain property write-downs and restructuring charges, which reduced 1998   
earnings by $372.9 million. Excluding these unusual items, Diversified Energy's 
earnings for 1998 declined by $37.4 million from 1997. These results reflect    
reduced contributions from the Pipelines & Processing and E&P segments due to   
low energy prices as well as higher losses from the Energy Marketing segment.   
Additionally, the 1998 decrease is due to higher financing costs as a result of 
additional capital needed to fund investments. Partially offsetting the         
decreases for 1998 was increased operating and joint venture income posted by   
the Electric Power segment. Earnings for 1997 increased by $20.9 million from   
1996, reflecting increased operating and joint venture income from the Pipelines
& Processing, Electric Power and E&P segments. Reduced Energy Marketing         
contributions and higher financing costs in 1997 partially offset this growth.  

95

S-4
106th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 106th

DIVERSIFIED ENERGY -- OPERATING STATISTICS

                                                        [Enlarge/Download Table]

                                             SIX MONTHS ENDED                YEAR ENDED            
                                                 JUNE 30,                   DECEMBER 31,           
                                          ----------------------  ---------------------------------
                                            1999         1998       1998         1997        1996  
                                            ----         ----       ----         ----        ----  
                                                                                                   
Pipelines & Processing*                                                                            
  Methanol Produced (thousand gallons)...    24,879       30,315     60,446       60,810     10,545
  Transportation (MMcf)..................   101,081       84,153    175,466      115,975     86,391
  Gas Processed (MMcf):                                                                            
     CO(2) Treatment.....................    25,748       23,512     48,868       42,761     44,223
     NGL Removal.........................    31,518       22,473     45,082       21,764      7,446
Electric Power*                                                                                    
  Electricity sales (MW hours)........... 1,391,933    1,741,590  3,804,957    1,843,302    708,867
                                          ---------    ---------  ---------    ---------    -------
Energy Marketing* (MMcf)                                                                           
  Gas Sales..............................   282,633      218,529    454,681      343,719    218,952
  Exchange Gas Deliveries................     5,566        6,755     11,061       15,109     22,586
                                          ---------    ---------  ---------    ---------    -------
                                            288,199      225,284    465,742      358,828    241,538
                                          =========    =========  =========    =========    =======
Exploration & Production                                                                           
  Gas Production (MMcf)..................    35,287       41,092     82,040       78,218     57,202
  Oil Production (Mbbl)..................       794        1,629      2,635        3,346      1,086
  Gas and Oil Production (MMcf                                                                     
     equivalent).........................    40,051       50,866     97,850       98,294     63,718

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

* Includes MCN's share of joint ventures                                        

PIPELINES & PROCESSING                                                          

   Operating and joint venture results decreased by $6.0 million for the six
months ended June 30, 1999, reflecting 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 ("PNGTS"), as it was placed in service in the first quarter of 1999. The 
results also reflect the impact of a 22% decline in average methanol sales      
prices and a 5.4 million gallon decline in methanol production primarily due to 
the shutdown of the methanol plant for scheduled maintenance in March 1999.     
Including Pipelines & Processing's share of joint venture operations, gas       
transportation volumes increased 20% during the six months ended June 1999, to  
101.1 Bcf. Gas processed to remove carbon dioxide ("CO(2)") increased 10% to    
25.8 Bcf, while gas processed to remove natural gas liquids ("NGL") increased   
40% to 31.5 Bcf.                                                                

 Results for this business segment in 1998 were negatively affected by a
$133.8 million pre-tax ($87.0 million net of taxes) write-off of the coal fines 
briquetting project and a $3.9 million pre-tax ($2.5 million net of taxes)      
impairment related to a small Michigan pipeline. Excluding these charges,       
operating and joint venture income was $21.4 million compared with $29.1 million
in 1997. The decrease in income reflects a $13 million reduction in revenues    
resulting from an approximate 40% drop in methanol prices compared with 1997, as
well as $9.1 million of operating losses incurred by the coal fines project.    
Including Pipelines & Processing's share of joint venture operations, gas       
transportation volumes increased 51% to 175.5 Bcf in 1998 from 116.0 Bcf in     
1997. Gas processed to remove CO(2) increased 6.1 Bcf or 14% in 1998 and        
decreased slightly in 1997. Gas processed to remove NGL more than doubled,      
increasing 23.3 Bcf and 14.4 Bcf in 1998 and 1997, respectively, due to the     
acquisition of processing facilities since 1996.                                

In June 1998, MCN placed into operation six plants designed to recover
particles of coal that are a waste by-product of coal mining and then process   
those particles to create coal briquettes for sale. The economic viability of   
the venture was dependent on the briquettes qualifying for synthetic fuel tax   
credits and MCN's ability to utilize or sell such credits. Although the plants  
were placed in service by June 30, 1998, the date specified to qualify for the  
tax credits, operating delays at the plants significantly increased the         
possibility that the Internal Revenue Service ("IRS") would challenge the       
project's eligibility for tax credits. In addition,                             

96

S-4
107th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 107th

there was uncertainty as to whether MCN could utilize or sell the credits. These
factors led to MCN's decision in the third quarter of 1998 to record an         
impairment loss of $133.8 million pre-tax ($87.0 million net of taxes), equal to
the carrying value of the plants.                                               

In May 1999, MCN 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 "in-service" determination letters from the IRS    
with respect to the coal plants. The IRS has ruled that four of the plants were 
in-service prior to the July 1, 1998 deadline and, therefore, qualify for       
Section 29 tax credits. In October 1999, MCN reached an agreement in principle  
to sell the four plants to DTE in an arms-length transaction that is independent
of the merger. The IRS has also ruled that, in its judgment, two other plants   
did not meet the in-service requirements. MCN continues to believe these two    
plants also meet the requirements and is considering appealing the unfavorable  
rulings.                                                                        

In the third quarter of 1998, MCN recorded an impairment loss of $3.9 
million pre-tax ($2.5 million net of taxes) relating to an out-of-service       
pipeline in Michigan that was acquired for future development, along with       
related easements and rights-of-way. MCN reviewed the business alternatives for 
these assets, and determined that their development is unlikely. Accordingly,   
MCN recorded an impairment loss equal to the carrying value of these assets.    

Pipelines & Processing intends to focus on opportunities in the       
Midwest-to-Northeast region that supply natural gas to meet growing demand. Much
of the growth in the demand for natural gas is expected within the Mid-Atlantic 
and New England regions. These regions lack the pipeline capacity and low-cost  
storage necessary to deliver gas volumes to compete effectively with other fuels
(primarily fuel oil) that dominate these markets. PNGTS, Millennium Pipeline    
("Millennium") and Vector Pipeline ("Vector") interstate pipeline projects are  
intended to fill a large portion of that need, and are complemented by MCN's    
rights to significant storage capacity.                                         

Under MCN's refocused strategic direction, Pipelines & Processing     
anticipates capital investments of approximately $300 million through 2001. Of  
this amount, approximately $130 million of capital investments are planned for  
1999, which compares with $320 million invested in 1998. Under MCN's new        
Midstream & Supply segment, Pipelines & Processing's assets and operations will 
be integrated with MCN's other gas supply functions required to deliver the gas 
to the Gas Distribution, Energy Marketing and Power segments, and to other      
non-affiliated wholesale customers.                                             

During 1998, the Dauphin Island Gathering Partners ("DIGP") venture   
proceeded with the second phase of its expansion, which was completed in the    
1999 first quarter. The project raised this natural gas system's throughput     
capacity to 1.1 Bcf/d, up from pre-expansion capacity of 680 MMcf/d. DIGP also  
signed definitive agreements with producers in the Gulf of Mexico to commit     
significant new deep-water natural gas supplies to the system. MCN owns 35% of  
DIGP.                                                                           

 Pipelines & Processing's other offshore gathering system, the one-third
owned 48-mile Blue Dolphin Pipeline, had an average throughput of 75 MMcfe/d    
during 1998, compared with 92 MMcfe/d in 1997. During the first quarter of 1999,
this venture acquired the 75-mile offshore Black Marlin Pipeline located near   
Galveston, Texas that is capable of transporting up to 160 MMcf/d of gas and    
2,000 barrels per day ("BPd") of liquids.                                       

     Elsewhere in the Midcontinent/Gulf Coast region, Pipelines & Processing has
two natural gas gathering ventures with American Central Gas Companies, Inc.    
Pipelines & Processing holds a 40% interest in each. In July 1997 the Foss Lake 
Gathering System venture was created to own and operate a 150-mile low-pressure 
system in the Anadarko Basin of western Oklahoma. This system currently gathers 
approximately 47 MMcf/d and has a design capacity of 70 MMcf/d. In December 1997
the second venture was formed to own and operate the East Texas Gathering       
system. This system primarily consists of 130 miles of gas gathering lines with 
throughput capacity of about 225 MMcf/d. This system currently is gathering 165 
MMcf/d with additional commitments of 30 MMcf/d to be added during 1999. It is  
located in an area of significant drilling activity, providing opportunity for  
rapid expansion.                                                                

    The Cardinal States Pipeline, which gathers and transports coalbed methane
in Appalachia, constructed a second 30-mile pipeline in 1998, doubling          
throughput capacity to 225 MMcf/d to handle increasing production in the region.
MCN owns 50% of this system.                                                    
97

S-4
108th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 108th

  Pipelines & Processing is a 50% partner in Copano Field Services L.P. In
mid-1998, Copano built a 15-mile lateral on its Upper Gulf Coast system to      
connect new gas production. Throughput capacity is 415 MMcf/d, while gas        
processing capacity is 25 MMcf/d. The system now has 867 miles of pipe. Efforts 
are underway to acquire or build new pipeline sections to link the various      
non-contiguous Copano systems.                                                  

     Pipelines & Processing has a 35% interest in the Jonah Gas Gathering System
in Wyoming. This system has a capacity of 250 MMcf/d and had throughput of 18.2 
Bcf during 1998, up from 12.6 Bcf in 1997.                                      

    In September 1997, Pipelines & Processing created a partnership with Petro
Source Corporation to develop CO(2) pipelines and marketing projects in support 
of enhanced oil recovery projects. As its first initiative, in 1998 the         
partnership constructed an 82-mile, 100 MMcf/d CO(2) pipeline that connects four
gas treating plants to a distribution system servicing enhanced oil recovery    
projects in the Permian Basin of west Texas. Pipelines & Processing has a 33%   
interest in this Val Verde CO(2) pipeline, which was placed in service during   
the fourth quarter of 1998. This pipeline currently is transporting 60 MMcf/d.  

     At the DIGP system's onshore terminus in Alabama, the Mobile Bay Processing
Partnership ("MBPP") joint venture has constructed a 600 MMcf/d gas processing  
plant, which was placed in service in the first quarter of 1999. Effective      
October 1999, Pipelines & Processing sold a 14% interest in the venture,        
bringing its ownership to 29%. Related to but separate from this processing     
plant, Pipelines & Processing holds a 7% interest in a newly constructed,       
210-mile, 80,000 barrel per day liquids pipeline that will deliver natural gas  
liquids extracted by MBPP joint venture and other plants to southern Louisiana  
markets.                                                                        

In 1996, Pipelines & Processing acquired a 25% interest in Lyondell   
Methanol Company, L.P., a limited partnership that owns a 248 million           
gallon-per-year methanol production plant in Texas. Pipelines & Processing      
supplies a portion of the natural gas for the methanol plant. Pipelines &       
Processing's share of methanol production in 1998 and 1997 was 60.4 and 60.8    
million gallons, respectively, compared with initial production of 10.5 million 
gallons in 1996. Depressed methanol prices in 1998 resulted in a $13 million    
decrease in revenues.                                                           

  In Michigan, gas processing capacity was expanded to 195 MMcf/d in 1998.
Pipelines & Processing now has an average interest of 89% in seven such plants  
that extract CO(2) from Antrim gas production.                                  

     The 292-mile PNGTS project started construction in June 1998 and was placed
in service during the first quarter of 1999. MCN owns a 16.4% interest in this  
$425 million venture, which has the capability to transport up to 360 MMcf/d    
from the Canadian border to the northeastern United States.                     

   Vector has become a front-runner among competing efforts to provide a new
strategic transportation link for 1 Bcf/d of new supply coming into the Chicago 
area to growing markets in eastern Canada and in the Midwest and Northeast      
regions of the U.S. This $500 million project is expected to be in service by   
October 2000. Pipelines & Processing holds a 25% interest in this project.      
MichCon will lease a portion of its transmission system to the project, thereby 
providing additional earnings to MCN while reducing Vector's cost and           
environmental impact.                                                           

   Pipelines & Processing has a 10.5% interest in Millennium which will link
up with Vector through the Dawn, Ontario hub and run to the New York City area. 
This 442-mile, $685 million pipeline will carry 700 MMcf/d to serve markets on  
the Atlantic Seaboard.                                                          

During the first quarter of 1999, the Volunteer Pipeline project was  
announced. This 160-mile pipeline will facilitate the movement of natural gas   
entering Chicago from Western Canada. Located in Tennessee, the pipeline will   
have a capacity of 250 MMcf/d and has an expected in-service date of November   
2001. Pipelines & Processing owns a 33% interest in this project.               

Pipelines & Processing formed the Crown Asphalt Distribution LLC joint
venture with Crown Energy Corp. in 1998. Pipelines & Processing has a 50%       
interest in these asphalt distribution operations, which further enhances the   
value of the MCN/Crown Energy Asphalt Ridge Joint Venture. The Asphalt Ridge    
project, in which Pipelines & Processing holds a 75% interest, recently         
completed construction of a 100,000 ton-per-year high-grade asphalt             
manufacturing plant, at a total cost of $18 million. The plant is experiencing  
some                                                                            

98

S-4
109th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 109th

technical difficulties in producing economical quantities of asphalt. MCN is    
aggressively working to resolve the technical issues.                           

During the first quarter of 1999, the KCI Compression Company L.P. was
formed to provide a full range of natural gas compression services. MCN owns a  
43% interest in the partnership, which complements its diverse energy-related   
businesses.                                                                     

     In 1998, MCN advanced approximately $18 million to a developer of a natural
gas-based fertilizer project in the United Arab Emirates. The advance was       
structured as an interest bearing loan with the possibility of being converted  
into an equity investment in the project. Under MCN's new strategic direction,  
it is no longer likely that it will make any significant equity investment in   
the project. Negotiations are underway to extend the maturity of the loan to    
September 30, 2000. The loan is secured by the assets of the project.           

ELECTRIC POWER                                                                  

    The Electric Power unit operates through several wholly owned subsidiaries
of MCNEE, to pursue power generation-related opportunities in the               
Midwest-to-Northeast region. Power generation projects offer the potential for  
multiple sources of income, such as long-term gas sales and transportation      
services, as well as return on the investment in the facility itself.           

 Operating and joint venture income decreased by $1.0 million in the six
months ended June 30, 1999, reflecting an uncollectible expense provision       
associated with a customer in bankruptcy and higher start-up expenditures       
associated with new ventures. The results also reflect lower contributions from 
its investments in the Torrent Power Limited venture in India; MCN sold this    
investment in August 1999. Earnings for the six months ended June 30, 1999      
include increased contributions from the Midland Cogeneration Venture ("MCV")   
reflecting an increase in MCN's interest in the MCV partnership from 18% to 23% 
in June 1998, as well as increased contributions from MCN's 50%-owned Michigan  
Power cogeneration facility.                                                    

    Excluding a $2.5 million pre-tax ($1.6 million net of taxes) restructuring
charge related to exiting several early-stage international projects, this      
segment's operating and joint venture income totaled $26.0 million in 1998,     
compared with $18.1 million in 1997. The 1997 earnings included a favorable $2.8
million property tax adjustment related to MCV. Increased contributions from    
Torrent Power in India and the purchase in June 1998 of an additional 5%        
interest in MCV accounted for the improved results. Also, partial operation of  
Torrent Power's new 655 MW plant in 1998 helped the Electric Power segment to   
more than double its net electricity production to 3.8 million MWh from 1.8     
million MWh in 1997. Net generating capacity climbed to 732 MW in 1998 from 546 
MW in 1997.                                                                     

 Electric Power is pursuing projects intended to meet growing demand for
electricity. The majority of new power generation facilities throughout North   
America are expected to be gas-fired because of competitive and environmental   
considerations, as well as the speed with which such facilities can be brought  
on-line. Demand for new gas-fired generation facilities in the Midwest and along
the East Coast is being significantly increased by the shut-down of nuclear     
plants in the United States and Canada that supply those areas. In addition,    
U.S. electricity consumption has been growing at a 2.2% annual rate and is      
estimated by government and industry sources to grow more than 30% by 2015. MCN 
anticipates investing approximately $50 million annually in Electric Power      
during 2000 and 2001. Approximately $140 million of capital investments by MCN  
are planned in Electric Power for 1999, while $88 million was spent in 1998. The
Electric Power segment is not pursuing new international power projects.        

    In October 1998, Electric Power acquired an interest in an operating 42 MW
gas-fired cogeneration plant in Carson, California. Electric Power currently    
owns a 33 1/3% interest in the Carson plant. The eight-year-old plant has a     
long-term contract to sell electricity to the local utility and steam to a      
nearby industrial customer.                                                     

  During 1998, Electric Power acquired a 95% interest in the Cobisa-Person
Power project, a venture created to build, own and operate a 140 MW power plant 
in Albuquerque, New Mexico. This gas-fired peaking plant is expected to be in   
service in 2000 and is backed by a long-term power purchase agreement with      
Public Service Company of New Mexico. The project is being constructed at the   
site of a decommissioned                                                        

99

S-4
110th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 110th

power plant, keeping costs low and accelerating its development. This project or
a portion thereof is subject to divestiture pursuant to the Merger Agreement.   

    Electric Power acquired an initial 18% general partnership interest in MCV
in 1997 and an additional 5% general partnership interest in June 1998. MCV is a
partnership that leases and operates a cogeneration facility in Midland,        
Michigan. The MCV facility, the nation's largest cogeneration facility, can     
produce up to 1,370 MW of electricity and 1.35 million pounds per hour of       
process steam for industrial use. Electric Power's initial investment totals    
$73.0 million. MCV sells electricity to Consumers Energy Co. and Dow Chemical   
Co. under long-term contracts. Dow Chemical and Dow Corning Corp. also purchase 
process steam from the facility under long-term contracts.                      

     In 1997, Electric Power acquired an approximate 65% interest in Bhote Koshi
Power Company, a partnership that is constructing a 36 MW hydroelectric power   
plant in Nepal. Construction of the plant began in early 1997 and is scheduled  
to be completed by mid-2000.                                                    

 In 1997, Electric Power acquired a 40% interest in the common equity of
Torrent Power Limited ("TPL"), a joint venture that holds minority interests in 
electric distribution companies and power generation facilities located in the  
state of Gujarat, India. In 1997 and 1998, Electric Power acquired preference   
shares in TPL, bringing the total cost of Electric Power's TPL holdings to      
$121.2 million. The joint venture has a 36% interest in Ahmedabad Electricity   
Company Limited ("AEC") and a 42% interest in Surat Electricity Company Limited 
("SECL"). TPL recently sold its 42% interest in Gujarat Torrent Energy          
Corporation ("GTEC"). AEC serves the city of Ahmedabad and has 550 MW of        
electric generating capacity. SECL provides electricity to the city of Surat.   
GTEC owns and operates a 655 MW power project in Gujarat, India, that reached   
full commissioning during the fourth quarter of 1998.                           

  In August 1999, MCN completed the sale of its entire interest in TPL for
approximately $130 million, essentially equal to its book value.                

    The Mobile Bay cogeneration project was placed into service along with the
Mobile Bay Processing venture during the first quarter of 1999. Electric Power  
owns 29% of this 40 MW, natural gas-fired plant, which will provide electricity 
and thermal energy to the processing facility.                                  

   Electric Power has a 50% interest in the Michigan Power Project, a 123 MW
cogeneration plant in Ludington, Michigan. The facility provides electricity to 
Consumers Energy Corporation and steam to Dow Chemical under long-term          
contracts. Electric Power also owns 50% of Ada Cogeneration, which owns and     
operates a natural gas-fueled cogeneration facility in western Michigan. The Ada
facility generates up to 30 MW of electricity, which is sold to Consumers       
Energy, and produces up to 50,000 pounds of steam per hour, which is sold to a  
nearby commercial operation. Electric Power's business also includes a number of
small cogeneration units located at the operating facilities of large commercial
and industrial customers. Electric Power has long-term agreements for the sale  
and transportation of natural gas to these units.                               

  Electric Power may have to sell some or all of its interests in MCV, the
Michigan Power Project, the Ada facility and the Carson plant for the reasons   
set forth under "The Merger Agreement -- Additional Agreements -- Transition    
Matters."                                                                       

Electric Power is a 50% general partner in Metro Energy, L.L.C. This  
venture, formed in 1999, will design, construct and operate an energy facility  
to provide all of the heating, chilling and energy requirements for the new     
Midfield Terminal at Detroit Metropolitan Wayne County Airport under a 30-year  
contract. The 17 MW facility is expected to be in full service by the end of    
2001.                                                                           

    In addition to these power generation facilities, Electric Power continues
to pursue a number of other opportunities, including a 220 MW peaking plant in  
Columbus, Ohio. New projects continue to come to our attention, some of which   
will ultimately materialize.                                                    

ENERGY MARKETING                                                                

    Operating and joint venture results for the six months ended June 30, 1999
improved $2.6 million over the comparable 1998 period. These results were       
impacted by improved margins due to an increase in total gas                    
 100

S-4
111th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 111th

sales and exchange deliveries of 62.9 Bcf during the six months ended June 30,  
1999. The results also reflect higher costs for natural gas transportation and  
storage capacity, higher uncollectible expenses and costs associated with the   
June 1999 dissolution of the DTE-CoEnergy joint venture. 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. Earnings were also    
affected by losses associated with trading activities.                          

    Energy Marketing's operating and joint venture loss increased $1.3 million
to $3.6 million in 1998. The increased loss in 1998 primarily reflects          
unrealized losses associated with trading activities and higher gas storage     
costs, partially offset by higher earnings from a significant increase in gas   
sales volumes. Additionally, the earnings comparison was affected as a result of
1997 including $2.2 million of contributions from Energy Marketing's 25%        
interest in a gas storage project that was sold in December 1997.               

The Energy Marketing segment plans to grow primarily as a provider of 
higher-valued energy supply and management services to markets in the Midwest   
and Eastern regions of the United States and Canada. These services generally   
entail the bundling of energy supplies, transportation and often storage        
capacity to provide energy to customers when and where needed in an efficient,  
one-stop-shopping manner. Capital investments are anticipated to be immaterial  
in 1999 as this segment is not capital intensive.                               

     New independent power plants represent a significant growth opportunity for
Energy Marketing. More than 50,000 MW of new gas-fired generating capacity has  
been proposed nationwide. While not all of the new proposals will be successful,
each 1,000 MW of baseload capacity represents about 60 Bcf of potential annual  
gas consumption, so power generation will be a key area of growth. This is      
particularly the case in the Northeast, where significant new generating        
capacity is needed.                                                             

  MCN's non-regulated energy marketing activities are directed by CoEnergy
Trading Company ("CTC"). CTC, a wholly owned subsidiary of MCNEE, is engaged in 
the purchase and sale of natural gas to commercial and industrial users, as well
as gas and electric utilities and other large-volume customers throughout the   
Midwest, Gulf Coast and Northeast regions of the United States and Canada. CTC  
offers buyers a bundled service by making arrangements for the acquisition of   
the required gas volumes and delivery to customers' facilities, and for all the 
necessary services in between. This bundled service is more in demand during the
winter months, when interstate pipeline capacity in certain areas of the        
Northeast and Midwest is either constrained or uneconomical. CTC is able to     
better meet this demand through access to storage fields and other physical     
assets owned by affiliates.                                                     

CTC and its joint venture/marketing alliances compete against numerous
marketing companies. A diverse portfolio of short-, medium- and long-term sales 
and supply contracts combined with access to reliable gas suppliers, storage    
facilities and multiple pipeline connections enhances its competitive position. 
Approximately one-third of CTC's 1998 sales were to its joint venture/marketing 
alliances and other MCNEE affiliated companies, with another one-third to       
Midwest markets, and the final one-third to Northeast and Canadian markets.     
Approximately 25% of CTC's natural gas supply in 1998 originated in the         
Midcontinent with another 25% purchased within Michigan.                        

    CTC is involved in a joint venture that expands its market region and adds
other energy sources to its market portfolio. The joint venture, U.S. CoEnergy  
Services, is a partnership with U.S. Oil Company, Inc. formed for the sale of   
natural gas, fuel oil and propane to target markets within the State of         
Wisconsin.                                                                      

Assisting CTC's marketing efforts is strategically selected pipeline  
capacity that is used to deliver gas to its markets. CTC has firm transportation
service contracts on various pipeline systems totaling over 500 MMcf/d, which is
supplemented by interruptible service as needed. CTC expects to enhance its     
reserved pipeline capacity by purchasing firm transportation services on future 
Pipelines & Processing projects. CTC expects to capture significant marketing   
opportunities utilizing these new pipelines, to further enhance and complement  
business opportunities for other MCN/MCNEE entities. For example, the Northeast 
is the primary target market of three interstate pipeline projects in which     
Pipelines & Processing is participating. CTC holds significant capacity in PNGTS
and the proposed Vector Pipeline and Millennium Pipeline that will be used to   
market bundled gas services to power plants and other large customers.          

 101

S-4
112th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 112th

   Storage provides a critical competitive ingredient to our bundled package
of gas marketing services, as it allows Energy Marketing to provide very        
reliable service while keeping operating costs low. In southeast Michigan, the  
development of Washington 10 Storage, which is strategically located in the     
gateway to eastern Canada and the northeastern United States, has significantly 
increased the amount of gas storage capacity available to CTC to serve its      
markets. The project has converted a depleted gas reservoir to a 42 Bcf storage 
facility. Initial gas injection occurred in the spring of 1999, and the facility
reached completion in July 1999, in time for the 1999-2000 winter heating       
season.                                                                         

 Energy Marketing has a 50% interest in the 10 Bcf Washington 28 storage
field, located northeast of Detroit in Macomb County. In December 1997, Energy  
Marketing sold its 25% share of the 46 Bcf Blue Lake gas storage project located
in northern Michigan. MichCon expects to maintain its 25% interest in the Blue  
Lake venture.                                                                   

   In total, with the addition of Washington 10, CTC has rights to 67 Bcf of
market-area storage capacity in 1999. CTC will use this storage in conjunction  
with its over 500 MMcf/d of firm and interruptible transportation capacity on   
various pipelines to continue increasing its marketing presence in the U.S.     
Midwest and Northeast, as well as in eastern Canada.                            

EXPLORATION & PRODUCTION                                                        

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. As previously discussed, MCN significantly revised its strategic
direction in the third quarter of 1999. 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, a bid which 
had previously been received for the Michigan properties was lowered            
significantly. The lower price was unacceptable, especially in light of MCN's   
new strategic direction.                                                        

During the second quarter of 1999, MCN completed the sale of its E&P  
properties located in the Western and Midcontinent/Gulf Coast regions and       
expects to sell other non-Michigan E&P properties. At December 31, 1998 Western 
and Midcontinent/Gulf Coast had 360 Bcfe of proven reserves.                    

Results for this segment for the six months ended June 30, 1999 were  
negatively impacted by a $52.0 million pre-tax ($33.8 million net of tax)       
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 Securities and Exchange Commission, MCN's capitalized exploration and       
production costs at June 30, 1999 exceeded the full cost "ceiling," resulting in
the excess being written-off to income. The ceiling is the sum of discounted    
future net cash flows from the production of proved gas and oil reserves, and   
the lower of cost or estimated fair value of unproved properties, net of related
income tax effects.                                                             

The operating results for the six months ended June 30, 1999 were also
impacted by losses on the sale of its Western and Midcontinent/Gulf Coast E&P   
properties totaling $68.8 million pre-tax ($44.7 million net of taxes) and by a 
$7.5 million pre-tax write-down ($4.9 million net of taxes) of an investment in 
the common stock of an E&P company. MCN had previously 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.                                              

     In the second and third quarters of 1998, MCN recognized write-downs of its
gas and oil properties totaling $333.0 million pre-tax ($216.4 million net of   
taxes) and $83.9 million pre-tax ($54.6 million net of taxes), respectively. The
write-downs were also the result of MCN's capitalized exploration and production
costs exceeding the full cost ceiling due primarily to lower oil and gas prices 
and lower-than-expected exploratory drilling results.                           

 102

S-4
113th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 113th

    Excluding the unusual charges discussed above, operating and joint venture
income decreased by $8.7 million for the six months ended June 30, 1999. This   
result reflects a decline in overall gas and oil production of 10.9 Bcf         
equivalent due primarily to the sale of MCN's Western properties in April 1999. 
Gas and oil production in future 1999 periods will also be lower than the       
comparable 1998 periods due to the sale of other non-Michigan E&P properties    
during the second half of 1999. The results for the six months ended June 30,   
1999 were also impacted by an increase in production-related expenses of $0.09  
per Mcf equivalent, by an increase in gas sales prices of $0.16 per Mcf, and by 
a decline in oil sales prices of $1.21 per Bbl. The impact of fluctuations in   
natural gas and oil sales prices was mitigated by hedging with swaps and futures
agreements.                                                                     

    Excluding the unusual charges discussed above, operating and joint venture
income decreased by $29.1 million, to $29.0 million, in 1998 compared to 1997.  
The decrease was due primarily to a sharp decline in oil sales prices of $4.29  
per Bbl, an increase in production-related expenses of $0.11 per Mcf equivalent 
and a slight decline in the level of oil and gas produced. These factors were   
partially offset by an increase in average gas sales prices. Operating and joint
venture income increased in 1997 by $24.9 million over 1996 to $58.1 million,   
reflecting a significant increase in gas and oil production and $6.6 million of 
pretax gains from the sale of undeveloped properties by an unconsolidated joint 
venture during 1997. Production-related expenses in 1997 decreased by $0.06 per 
Mcf equivalent from the 1996 level. The average oil sales rate in 1997 was      
$16.87 per Bbl, down $3.31 per Bbl from 1996. At December 31, 1998, proved gas  
reserves totaled 1,093.0 Bcf and proved oil reserves were 77.9 Bcf equivalent,  
down a combined 150.3 Bcf equivalent from December 1997 levels.                 

    MCN's strategy for the E&P business is to aggressively manage the Michigan
E&P assets and optimize returns by efficiently integrating production with the  
Pipeline & Processing and Energy Marketing segments. Approximately 23% of the   
segment's 1998 production and 40% of proved reserves were related to the        
Michigan Antrim properties. MCN has accumulated the industry's largest Antrim   
gas reserve base, accounting for approximately 20% of the total Michigan Antrim 
gas production. During 1998, MCN participated in the drilling of 167 wells (103 
net) in the Antrim formation, bringing the total drilled to 1,305 wells (859    
net). Even though the potential natural gas recovery from the average Antrim    
well is less than the recovery from wells drilled in other formations, wells    
drilled in the Antrim shale formations have a high success rate and low drilling
costs, and are therefore considered relatively low risk. Additional information 
regarding E&P's exploration and production activities is reported under         
Properties, located on pages -- through -- under this section.                  

 It is anticipated that MCN will invest approximately $90 million in E&P
during 1999, and approximately $30 million in each of 2000 and 2001.            

RISK MANAGEMENT STRATEGY                                                        

  MCN primarily manages commodity price risk by utilizing futures, options
and swap contracts to more fully balance its portfolio of gas and oil supply and
sales agreements. Energy Marketing coordinates all of MCN's hedging activities  
to ensure compliance with risk management policies that are periodically        
reviewed by MCN's board of directors. In late 1998, MCN began entering into     
offsetting positions for existing hedges of gas and oil production from         
properties that have been or are expected to be sold in 1999. MCN's risk        
management strategy is being revised to reflect the change in its business that 
will result from its new strategic direction. Additionally, as a result of the  
special investigation (see discussion in Management's Discussion and Analysis,  
page --), MCN is taking additional steps to ensure compliance with risk         
management policies.                                                            

 103

S-4
114th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 114th

GAS DISTRIBUTION

GAS SALES AND TRANSPORTATION                                                    

    Gas Distribution serves customers in the Detroit, Grand Rapids, Ann Arbor,
Traverse City, Muskegon and Adrian metropolitan areas and in various other      
communities throughout the State of Michigan. The following services are        
provided by Gas Distribution:                                                   

-- Gas Sales -- Includes the sale and delivery of natural gas to
residential and small-volume commercial customers.        

-- End User Transportation -- Through this service, primarily   
           large-volume commercial and industrial customers who purchase natural
      gas directly from producers or brokerage companies utilize MCN's
network to transport the gas to their facilities.         

 -- Intermediate Transportation -- Provides transportation service
      through MCN's gathering and high pressure transmission system to
        producers, brokers and other local distribution companies that own
the natural gas, but are not the ultimate consumers.      

RESULTS OF OPERATIONS                                                           

 Gas Distribution's earnings were $90.7 million for the six months ended
June 30, 1999, resulting in an increase of $25.3 million from the comparable    
1998 period. This improvement reflects contributions from the new gas sales     
program and the impact of more favorable weather.                               

   Gas Distribution's earnings for 1998 totaled $71.7 million, a decrease of
$9.4 million from 1997. Results for 1998 were affected by unusual charges       
consisting of a property write-down and an investment loss as subsequently      
discussed. Excluding the unusual charges, the Gas Distribution group reported   
1998 earnings of $88.4 million, an improvement of $7.3 million over 1997.       
Earnings comparisons were impacted by variations in weather and cost-saving     
initiatives resulting in significantly lower operating costs. These cost-saving 
initiatives allowed the Gas Distribution group to continue its record of solid  
financial performance, producing returns on equity of 11.0% in 1998 and 13.2% in
1997.                                                                           

     Gas Distribution's earnings for 1998 were negatively affected by a property
write-down and an investment loss. Gas Distribution recorded a $24.8 million    
pre-tax ($11.2 million, net of taxes and minority interest), write-down of      
certain gas gathering properties. A new gas reserve analysis was performed to   
determine the impact of the diversion of certain untreated gas away from the    
gathering system. This analysis revealed that projected cash flows from the     
gathering system were not sufficient to cover the system's carrying value.      
Therefore, an impairment loss was recorded representing the amount by which the 
carrying value of the system exceeded its estimated fair value. Also recorded   
was an $8.5 million pre-tax ($5.5 million net of taxes) loss from the write-down
of an investment in a Missouri gas distribution company. As a result of MCN's   

 104

S-4
115th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 115th

refocused strategic direction, Gas Distribution has decided to sell this        
investment. The write-down represents the amount by which the carrying value    
exceeded the estimated fair value of the investment.                            

                                                        [Enlarge/Download Table]

                                                 SIX MONTHS ENDED             YEAR ENDED           
                                                     JUNE 30,                DECEMBER 31,          
                                                 ----------------  --------------------------------
                                                  1999      1998     1998        1997        1996  
                                                  ----      ----     ----        ----        ----  
                                                                                                   
REVENUES (in millions of dollars)                                                                  
Gas Sales....................................... $578.6    $499.0  $  838.9    $1,080.1    $1,102.9
End User Transportation.........................   50.2      43.3      82.3        84.7        82.5
Intermediate Transportation.....................   28.6      33.8      63.2        55.2        48.6
                                                 ------    ------  --------    --------    --------
  Total Sales and Transportation................  657.4     576.1     984.4     1,220.0     1,234.0
Other...........................................   44.8      34.6      67.4        51.3        42.3
                                                 ------    ------  --------    --------    --------
  Total Operating Revenues...................... $702.2    $610.7  $1,051.8    $1,271.3    $1,276.3
                                                 ======    ======  ========    ========    ========
MARKETS (BCF)                                                                                      
Gas Sales.......................................  116.6     104.7     172.2       209.1       221.0
End User Transportation.........................   74.4      73.6     140.3       145.1       146.9
Intermediate Transportation.....................  262.4     296.8     537.5       586.5       527.5
                                                 ------    ------  --------    --------    --------
  Total Sales and Transportation................  453.4     475.1     850.0       940.7       895.4
                                                 ======    ======  ========    ========    ========

NOTE: Intermediate Transportation includes intercompany transactions. 

     Gas Distribution expects to continue growing revenues by offering a variety
of energy-related services, which include appliance maintenance and home safety.
Additionally, Gas Distribution began participating in Michigan's $1.2 billion   
per year heating, ventilation and air conditioning market with the October 1998 
acquisition of three companies specializing in the sale, installation and       
servicing of residential and commercial heating and cooling systems. The        
acquired companies have total revenues of approximately $20 million per year.   

EFFECT OF WEATHER                                                     

    Gas Distribution's gas sales and end user transportation volumes, revenues
and net income are impacted by weather. Given the seasonal nature of the        
business, revenues and net income are concentrated in the first and fourth      
quarters of the calendar year. By the end of the first quarter, the heating     
season is largely over, and Gas Distribution typically incurs substantially     
reduced revenues 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.                 

EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS 

                                                        [Enlarge/Download Table]

                                                SIX MONTHS                  YEAR ENDED          
                                              ENDED JUNE 30,               DECEMBER 31,         
                                            -------------------    -----------------------------
                                             1999         1998      1998        1997       1996 
                                             ----         ----      ----        ----       ---- 
                                                                                                
Percentage Colder (Warmer) Than Normal.....   (7.8)%      (20.1)%   (19.3)%     0.8%        5.4%
Increase (Decrease) From Normal in:                                                             
  Gas Markets (in Bcf).....................  (10.4)       (25.3)    (40.3)       0.6        10.9
  Net Income (in millions)................. $(10.3)      $(22.0)   $(35.3)      $0.5       $ 9.9

GAS SALES                                                             

 Revenue increased $79.6 million for the six months ended June 30, 1999,
primarily due to weather which was approximately 12% colder than in the         
comparable 1998 period. Revenues were also impacted by an $0.18 per Mcf (6%)    
increase in the gas commodity component of gas sales rates. As subsequently     
discussed, the gas commodity component was fixed under MichCon's new gas sales  
program at $2.95 per Mcf beginning in                                           

 105

S-4
116th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 116th

January 1999. MichCon's three-year customer choice program, which is a part of  
its Regulatory Reform Plan subsequently discussed, had the effect of decreasing 
gas sales revenues for the six months ended June 30, 1999, partially offset by  
an increase in end user transportation revenues. This resulted in a net decrease
in total operating revenues due to the gas commodity component included in gas  
sales rates. Revenues decreased $241.2 million in 1998 due primarily to weather 
which was 20.1% warmer in 1998, and a reduction in gas sales rates resulting    
from lower gas costs. This market represented approximately 20% of total        
deliveries in 1998 and produced 64% of Gas Distribution's gross profit margin.  
The average margin per Mcf from gas sales was improved significantly to $2.16 in
1998 from $2.07 in 1997.                                                        

    Competition in the gas sales market comes primarily from alternative fuels
such as electricity, propane and, to a lesser degree, oil and wood, and other   
natural gas providers in a few areas. Natural gas continues to be the preferred 
fuel for Michigan residences and businesses. Nearly every residential and       
commercial developer in MichCon's service territories selects natural gas in new
construction because of the convenience, cleanliness and price advantage of     
natural gas compared to propane, fuel oil and other alternative fuels. Service  
and price are the primary factors affecting this market.                        

   Gas Distribution continues to take steps to become the preferred provider
of natural gas and high-value energy services within Michigan and to achieve    
competitive financial results. To accomplish this, MichCon will increase        
penetration of existing markets by focusing on meeting the needs of customers   
and the marketplace, will continue efforts to reduce cost of gas and operating  
costs, and will take advantage of profitable opportunities to expand to new     
geographic areas.                                                               

  The challenges and opportunities resulting from increased competition in
the natural gas industry have been a catalyst for MPSC action in the development
of major reforms in utility regulation aimed at giving all customers added      
choices and greater price certainty. The overall package of regulatory changes  
associated with the gas industry restructuring is expected to generate          
additional revenue and cost savings opportunities. Gas Distribution is          
positioning itself to respond to changes in regulation and increased competition
by reducing its cost of operations while maintaining a safe and reliable system 
for customers. See "--Regulation and Rates" on page -- for a discussion         
regarding regulatory reform.                                                    

    Gas Distribution's Market Expansion Program is intended to spur demand for
natural gas in areas currently not served. The program primarily targets        
residential and small-volume commercial markets. By financing the cost of main  
extensions, this program makes it easier for users of higher-cost fuels, such as
propane and fuel oil, to switch to natural gas for space heat and other         
applications. This program accounted for over 12,000 of the nearly 95,000 new   
customers added during 1995 - 1998. In 1998, three new areas of Michigan were   
served by MichCon, bringing the total number of new areas added since the       
program's inception in 1984 to 140.                                             

   Cost of gas sold per Mcf for the six months ended June 30, 1999 decreased
$.05 (2%), to $2.72 per Mcf, from the comparable 1998 period. Cost of gas sold  
per Mcf for 1998 was $2.71, a decrease of $.40 (13%) from 1997. Cost of gas sold
per Mcf for 1997 increased from 1996 by $.19 (7%).                              

  Gas Distribution owns a 47.5% interest in Southern Missouri Gas Company,
L.P. which was formed in November 1996. The initial phase of system construction
was completed in 1997 at a cost of approximately $40 million. As of December 31,
1998 the system was comprised of a 441-mile pipeline system and served          
approximately 7,000 customers. As a result of MCN's refocused strategic         
direction, Gas Distribution has decided to sell this investment. Gas            
Distribution recorded a $5.5 million, net of taxes, loss from the write-down of 
this investment to reflect its estimated fair value. The write-down represents  
the amount by which the carrying value exceeded the estimated fair value of the 
investment.                                                                     

END USER TRANSPORTATION                                               

   Deliveries for the six months ended June 30, 1999 increased slightly from
the comparable 1998 period due to colder weather and the migration of volumes   
from gas sales under MichCon's customer choice program. Deliveries decreased    
slightly to 140.3 Bcf in 1998 due to warmer weather. In 1998, this market       

 106

S-4
117th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 117th

accounted for approximately 17% of total gas deliveries and produced            
approximately 14% of Gas Distribution's gross profit margin.                    

As of September 1999, MichCon had end user transportation agreements  
representing annual volumes of 162 Bcf. Approximately 77% of these volumes are  
under contracts that extend to 2000 or beyond and include the majority of the   
large, and most price-sensitive, customers. Contracts for the remaining volumes 
are typically one-year contracts that expire at various times during 1999 and   
2000 and relate to a large number of low-volume users with relatively low price 
sensitivity.                                                                    

Gas Distribution continues to be successful in converting customers'  
facilities to natural gas from alternative fuels and in retaining those         
customers after conversion. Also, it has not experienced any significant fuel   
switching by its customers in recent years. In 1998, approximately 23 Bcf of    
MichCon's transportation deliveries were to customers who substituted natural   
gas for coal.                                                                   

The primary focus of competition in this market is cost. Some large   
commercial and industrial customers have the capacity to switch to alternative  
fuel sources such as coal, electricity, oil and steam. In addition, some of     
these customers could bypass Gas Distribution's distribution system and obtain  
gas directly from an interstate pipeline company. However, cost differentials   
must be sufficient to offset the costs, risks and loss of service flexibility   
associated with fuel switching or bypass. During 1998, none of Gas              
Distribution's industrial customers bypassed its distribution system. Gas       
Distribution competes against alternative fuel sources by providing competitive 
pricing and reliable supply through the use of MCN's extensive storage capacity 
and multiple supply sources. Almost all significant customers who could bypass  
MichCon are under long-term transportation contracts.                           

   The MPSC has approved a direct access program for the state's two largest
electric utilities, which began in mid-1998, and allows large electric users to 
directly purchase lower priced electricity. The program is not expected to      
impact materially the competitiveness of natural gas.                           

INTERMEDIATE TRANSPORTATION                                           

Intermediate transportation deliveries were 34.4 Bcf lower in the six 
months ended June 30, 1999 compared to the same period in 1998. A significant   
portion of the decrease was for customers who pay a fixed fee for intermediate  
transportation capacity regardless of actual usage.                             

 This service accounted for approximately 63% of total gas deliveries in
1998, however, due to the lower costs and therefore rates applicable to this    
service, it represents only 11% of gross profit margin. The decrease in         
intermediate transportation deliveries in 1998 reflects lower off-system demand 
caused by the warmer weather and lower volumes transported for fixed-fee        
customers. Although transported volumes for fixed-fee customers may fluctuate,  
revenues from such customers are not affected.                                  

   In 1998, through efficient use of transmission and storage assets as well
as upstream supply, Gas Distribution sold significant short-term services       
resulting in increased revenues from 1997. Gas Distribution's extensive         
transmission pipeline system has enabled it to increase the volumes transported 
for Michigan gas producers, marketers, distribution companies and other         
pipelines. Gas Distribution operates in a pivotal geographic location with links
to major interstate pipelines that reach markets elsewhere in the Midwest, the  
eastern United States and eastern Canada. Michigan Antrim gas production has    
increased significantly over the past several years, resulting in a growing     
demand by gas producers and brokers for intermediate transportation services.   

   In 1997, in order to meet the increased demand, Gas Distribution expanded
the transportation capacity of its northern Michigan gathering system. In       
December 1997, MichCon Pipeline purchased Thunder Bay Pipeline for approximately
$13 million. During 1998, 175 Bcf was transported on this system, of which      
Thunder Bay contributed 31.7 Bcf.                                               

In January 1997, Gas Distribution placed into service a $91 million,  
59-mile loop of its existing Milford-to-Belle River Pipeline. This new loop has 
improved the overall reliability and efficiency of Gas Distribution's gas       
storage and transmission system by mitigating the risk associated with the      
disruption of the existing                                                      

 107

S-4
118th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 118th

pipeline or other facilities used to supply gas to Gas Distribution's customers.
In addition, the pipeline provides significant off-system transportation        
opportunities as discussed below.                                               

Gas Distribution is in an excellent position to increase revenues by  
providing transportation of new supplies of western Canadian gas, coming into   
the Chicago area which began in December 1998, to third-party pipelines serving 
growing markets in eastern Canada and the northeast United States. In December  
1997, MichCon entered into a long-term facility lease of its Milford-to-Belle   
River Pipeline to Vector to effectuate transportation of Chicago supplies to    
Dawn, Ontario, a significant Canadian natural gas market hub. Vector is         
scheduled to be completed in October 2000. Additional opportunities for         
transportation services are being pursued which will further maximize the use of
Gas Distribution's transmission infrastructure.                                 

ENERGY ASSISTANCE PROGRAMS                                                      

   Energy assistance programs funded by the federal government and the State
of Michigan, including the Home Heating Credit for low-income customers and the 
Family Independence Agency's State Emergency Relief Program, remain critical to 
MichCon's ability to control its uncollectible gas account expenses. MichCon has
historically obtained favorable regulatory treatment of its uncollectible gas   
account costs, including those related to these energy assistance programs.     

 MichCon receives a significant amount of its heating assistance funding
through the Federal Low-Income Home Energy Assistance Program ("LIHEAP"), which 
funds the State of Michigan's Home Heating Credit program. In 1998, Congress    
provided $1.1 billion for LIHEAP funding for the 1998 fiscal year and           
supplemented it with a $300 million emergency fund that could be tapped only    
upon order of the President. Michigan received $54 million of the total $1.1    
billion that was released in 1998. MichCon received $13.4 million through this  
program in 1998. Home Heating Credits assisted 73,000 MichCon customers in 1998.
Congress voted to continue LIHEAP for federal fiscal years 1999 and 2000. For   
federal fiscal year 1999, which began October 1, 1998, Congress maintained      
LIHEAP funding at $1.1 billion and again authorized a $300 million emergency    
fund. In addition, Congress appropriated $1.1 billion for federal Fiscal Year   
2000 which is subject to revision during budget deliberations.                  

GAS SUPPLY                                                                      

 Gas Distribution obtains its natural gas supply from various sources in
different geographic areas (the Gulf Coast, the Midcontinent, Canada, and       
Michigan) under agreements that vary in both pricing and terms. Looking forward 
to MichCon's Regulatory Reform Plan, in 1998 MichCon issued and signed new base 
supply contracts with its suppliers, ensuring price stability and supply        
reliability (see "-- Regulation and Rates" for a discussion regarding MichCon's 
plan). Gas Distribution's geographic diversity of supply ensures that MichCon   
will be able to meet the requirements of its existing and future customers with 
reliable supplies of natural gas at a known cost, free from the potentially     
severe swings of a volatile gas market. Whereas prior to 1999, under Gas Cost   
Recovery ("GCR") regulation, gas supply costs were a non-profit passthrough of  
prudently incurred costs, beginning January 1, 1999, MichCon has had the ability
to take full advantage of its assets and expertise to generate profits from gas 
supply operations. By fixing the gas cost component of MichCon's sales rates at 
$2.95/Mcf for three years, customers benefit from greater price certainty while 
MichCon can take advantage of opportunities to secure lower priced gas supplies.
MichCon secured 100% of its 1999 warmer than normal weather requirements and has
secured approximately 90% of its 2000 and 2001 similar requirements at prices   
that help ensure profit contributions from gas supply operations.               

Citizens Gas Fuel Company ("Citizens") serves approximately 15,000    
customers and is served by two interstate pipelines, Panhandle Eastern Pipe Line
Company ("Panhandle") and ANR Pipeline Company ("ANR"). MCNIC Michigan Holdings,
Inc., an affiliate intrastate pipeline company, connects ANR to Citizens'       
distribution system. During 1998, nearly all of Citizens' purchases were from   
CTC, an affiliated company.                                                     

 108

S-4
119th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 119th

GAS DISTRIBUTION -- SOURCES OF GAS SUPPLY (BCF) 

                                                                [Download Table]

                                              SIX MONTHS                           
                                                 ENDED            YEAR ENDED       
                                               JUNE 30,          DECEMBER 31,      
                                             -------------  -----------------------
                                             1999     1998  1998     1997     1996 
                                             ----     ----  ----     ----     ---- 
                                                                                   
Michigan Producers..........................  11.9    17.7   41.9     66.0     86.3
Interstate Suppliers........................  35.1    24.6   29.0     13.8     14.5
Canadian Suppliers..........................  15.1    15.9   31.7     31.3     37.3
Spot Market.................................  40.3    39.2   76.3     89.1     94.0
                                             -----    ----  -----    -----    -----
                                             102.4    97.4  178.9    200.2    232.1
                                             =====    ====  =====    =====    =====

   For the six months ended June 30, 1999, Gas Distribution purchased 12% of
its supply from Michigan producers, 73% from producers in the Southern and      
Midcontinent regions of the United States and 15% from Canadian producers. Gas  
Distribution purchased 23% of its 1998 supply from Michigan producers, 59% from 
producers in the Southern and Midcontinent regions of the United States and 18% 
from Canadian producers. These supplies are complemented by 124 Bcf of working  
storage capacity from storage fields owned and operated by MichCon in Michigan, 
of which 36 Bcf is leased to others, including 17 Bcf with an affiliate.        

   MichCon has long-term firm transportation agreements, expiring on various
dates through 2011, with ANR, Panhandle, Viking Gas Transmission Company        
("Viking") and Great Lakes Gas Transmission Limited Partnership ("Great Lakes").
ANR is obligated to transport for MichCon 375 MMcf/d of supply through October  
1999. Effective November 1, 1999, MichCon's ANR capacity reduces to 285 MMcf/d. 
The capacity reduction results in roughly $13 million in annual cost savings.   
ANR capacity delivers 117.5 MMcf/d of supply sourced in the Gulf, 117.5 MMcf/d  
sourced in the Midcontinent and 50 MMcf/d from Canada. Viking transports 50     
MMcf/d of Canadian supply to the ANR system for delivery to MichCon and         
Panhandle transports 2 MMcf/d of Gulf Coast supply from the ANR system for      
delivery to MichCon. Additional Canadian supplies of 30 MMcf/d are delivered    
through firm transport agreements with Great Lakes.                             

    MichCon has supply contracts, expiring on various dates through 2007, with
independent Michigan producers. Many of these contracts originally tied prices  
to spot market indices coupled with transport rates. MichCon, as a result of a  
recent MPSC Order and individually negotiated settlements, has successfully     
amended a number of these contracts that were previously at above-market prices 
to a more competitive level.                                                    

   At December 31, 1998, MichCon owned and operated four natural gas storage
fields in Michigan with a working storage capacity of approximately 124 Bcf.    
These facilities play an important role in providing reliable and cost-effective
service. MichCon uses its storage capacity to supplement its supply during the  
winter months, replacing the gas in April through October when demand and prices
are generally at the lowest levels. The use of storage capacity also allows     
MichCon to lower its peak-day entitlement, thereby reducing interstate pipeline 
charges. During 1998, MichCon's maximum one-day sendout exceeded 2.1 Bcf, of    
which approximately 68% came from its underground storage fields. Year to date  
1999, MichCon's maximum one-day sendout exceeded 2.3 Bcf, of which approximately
73% came from storage. MichCon's gas distribution system has a maximum daily    
sendout capability of 2.8 Bcf, with the capacity to supply nearly 70% from      
underground storage.                                                            

REGULATION AND RATES                                                            

    MichCon is subject to the jurisdiction of the MPSC as to various phases of
its operations, including gas sales and transportation rates, service and       
accounting. Citizens' rates are set by the Adrian Gas Rate Commission, a        
municipal commission. Other various phases of its operations are subject to the 
jurisdiction of the MPSC. Both MichCon and Citizens are subject to the          
requirements of other regulatory agencies with respect to safety, the           
environment and health.                                                         

 109

S-4
120th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 120th

REGULATORY REFORM PLAN                                                

     In April 1998, the MPSC approved MichCon's Regulatory Reform Plan. The plan
includes a comprehensive experimental three-year customer choice program open to
all of MichCon's 1.2 million residential and commercial customers, subject to   
annual caps on the level of participation. The customer choice program began    
April 1, 1999, when approximately 70,000 customers chose 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. MCN's gas marketing affiliates also  
participate as alternative suppliers under the program. In each of the three    
plan years, there is also a volume limitation on commercial and industrial      
participants. The volume limitation for these participants is 10 Bcf in 1999, 20
Bcf in 2000 and 30 Bcf in 2001. MichCon will continue to transport and deliver  
the gas to the customers' premises at prices that maintain its existing sales   
margins.                                                                        

The plan also suspends the GCR mechanism for customers who continue to
purchase gas from MichCon and fixes the gas price component of MichCon's sales  
rates at $2.95 per Mcf for the three-year period beginning on January 1, 1999.  
Prior to January 1999, MichCon did not generate any earnings nor generally incur
any unrecovered costs on the gas supply portion of its operations. However,     
under this plan, changes in cost of gas will directly impact earnings. As part  
of its gas acquisition strategy, MichCon has entered into firm-price contracts  
for a substantial portion of its expected gas supply requirements through 2001. 
These contracts, coupled with the use of MichCon's storage facilities, will     
substantially mitigate risks from winter price and volume fluctuations.         

  Also beginning in 1999, the plan established an income sharing mechanism
that allows customers to share in profits if actual utility return on equity    
exceeds predetermined thresholds. In October 1998, the MPSC denied a rehearing  
and affirmed its approval of the plan. Various parties have appealed the MPSC's 
decision to the Michigan Court of Appeals. While management believes that the   
order will be upheld based upon applicable Michigan law, there can be no        
assurance as to the outcome.                                                    

GENERAL RATE PROCEEDINGS                                              

MichCon received authorization to defer manufactured gas plant ("MGP")
investigation and remediation costs in excess of the $11.7 million previously   
reserved by MichCon. The remaining balance of this initial reserve at December  
31, 1998 was approximately $0.1 million. In February 1999, MichCon depleted this
initial reserve. The excess costs are being deferred and amortized over a       
10-year period beginning in the year subsequent to the year environmental       
investigation and remediation costs are paid. The recovery of any remediation   
costs incurred will be reviewed in a future rate case.                          

MichCon filed an application with the MPSC in October 1996 requesting 
authority to decrease depreciation rates from an average rate of 4.1% to 3.5%.  
In December 1997, the MPSC issued an order approving a reduction in annual      
depreciation costs by more than $16 million. The Michigan Attorney General      
appealed the depreciation order. In June 1999, MichCon received a favorable     
ruling to this appeal by the Michigan Court of Appeals which affirmed the MPSC  
order approving the lower depreciation rates without a corresponding gas rate   
reduction.                                                                      

In 1994, Citizens entered into a rate agreement with the municipal    
commission that sets Citizens' rates. Under the terms of this agreement, which  
went into effect in January 1995, Citizens received a 3% rate increase and its  
rates were frozen for five years. The rate agreement, which expires in January  
2000, provides Citizens' customers with known prices and MCN with an opportunity
to control costs and continue to earn a reasonable rate of return.              

GAS COST RECOVERY                                                     

  Prior to January 1, 1999, the GCR process allowed MichCon to recover its
cost of gas sold if the MPSC determined that such costs were reasonable and     
prudent. As previously discussed, beginning January 1, 1999, the MichCon plan   
suspends the GCR mechanism and fixes the gas commodity component of MichCon's   
sales rate at $2.95 per Mcf for three years.                                    

 110

S-4
121st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 121st

     The GCR process included an annual Gas Supply and Cost Review, in which the
MPSC approved maximum monthly GCR factors. A subsequent annual GCR              
reconciliation proceeding provided a review of gas costs incurred during the    
year, determined whether approved gas costs had been overcollected or           
undercollected and, as a result, whether a refund or surcharge, including       
interest, was required to be returned to or collected from GCR customers. In    
February 1999, MichCon filed its final GCR reconciliation case covering gas     
costs incurred during 1998, which indicated an overrecovery of $18 million,     
including interest. Management believes that the 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.                                                             

     In September 1998, a settlement regarding MichCon's 1997 GCR Reconciliation
Case was approved by the MPSC indicating a net underrecovery of approximately   
$13 million, including interest. In April 1998, the MPSC issued an order in     
MichCon's 1998 GCR Plan Case approving a $3.20 per Mcf maximum GCR factor       
including the net underrecovery for 1997 referred to above. MichCon's 1998 GCR  
overrecovery is approximately $15 million, excluding interest. Pursuant to the  
terms of the plan that approved suspension of the GCR clause, MichCon refunded  
the overrecovery through surcharge credits during January through March 1999. In
February 1997, MichCon filed its 1996 GCR reconciliation case indicating a net  
underrecovery of approximately $28 million, including interest. The total 1996  
underrecovery was rolled into MichCon's 1997 GCR cost recovery. In September    
1997, the MPSC issued an order finding that all of MichCon's 1996 gas costs were
reasonable and prudent.                                                         

FERC RATE MATTERS                                                     

   In February 1998, the FERC approved a settlement agreement in an ANR rate
case entitling MichCon to refunds totaling $9.4 million. In April 1998, MichCon 
received $5.5 million relating to transportation services provided by ANR to    
MichCon. In June 1998, MichCon received the remaining refund, which was         
reflected as a reduction to MichCon's cost of gas.                              

ENVIRONMENTAL MATTERS                                                           

   Prior to the construction of major natural gas pipelines, gas for heating
and other uses was manufactured from processes involving coal, coke or oil. MCN 
owns, or previously owned, 17 such former MGP sites.                            

During the mid-1980s, preliminary environmental investigations were   
conducted at these former MGP sites, and some contamination related to the      
by-products of gas manufacturing was discovered at each site. The existence of  
these sites and the results of the environmental investigations have been       
reported to the Michigan Department of Environmental Quality ("MDEQ"). None of  
these former MGP sites is on the National Priorities List prepared by the U.S.  
Environmental Protection Agency.                                                

  MCN is involved in an administrative proceeding before the EPA regarding
one of the former MGP sites. MCN has executed an order with the EPA, pursuant to
which MCN is legally obligated to investigate and remediate the MGP site. MCN is
remediating five of the former MGP sites and conducting more extensive          
investigations at four other former MGP sites. In 1998, MichCon completed the   
remediation of one of the former MGP sites, which was confirmed by the MDEQ.    
Additionally, the MDEQ has determined with respect to one other former MGP site 
that MichCon is not a responsible party for the purpose of assessing remediation
expenditures.                                                                   

In 1984, MCN established an $11.7 million reserve for environmental   
investigation and remediation. During 1993, MichCon received MPSC approval of a 
cost deferral and rate recovery mechanism for investigation and remediation     
costs incurred at former MGP sites in excess of this reserve.                   

   MCN employed outside consultants to evaluate remediation alternatives for
these sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. The findings of these investigations indicate that 
the estimated total expenditures for investigation and remediation activities   
for these sites could range from $30 million to $170 million based on           
undiscounted 1995 costs. As a result of these studies, MCN accrued an additional
liability and a corresponding regulatory asset of $35 million during 1995.      

 111

S-4
122nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 122nd

MCN notified more than 50 current and former insurance carriers of the
environmental conditions at these former MGP sites. MCN concluded settlement    
negotiations with certain carriers in 1996 and 1997 and has received payments   
from several carriers. In October 1997, MichCon filed suit against major        
nonsettling carriers seeking recovery of incurred costs and a declaratory       
judgment of the carriers' liability for future costs of environmental           
investigation and remediation at former MGP sites. Discovery is ongoing in the  
case, and a tentative trial date has been scheduled for February 2000.          

During the six months ended June 30, 1999 and the years 1998, 1997 and
1996, MCN spent $0.4 million, $1.6 million, $0.8 million and $0.9 million,      
respectively, investigating and remediating these former MGP sites. At December 
31, 1998, the reserve balance was $35.1 million, of which $0.1 million was      
classified as current. At June 30, 1999, the reserve balance was $34.7 million, 
none of which was classified as current. Any significant change in assumptions, 
such as remediation techniques, nature and extent of contamination and          
regulatory requirements, could impact the estimate of remedial action costs for 
the sites and, therefore, have an effect on MichCon's financial position and    
cash flows. However, management believes that insurance coverage and the cost   
deferral and rate recovery mechanism approved by the MPSC will prevent          
environmental costs from having a material adverse impact on MichCon's results  
of operations.                                                                  

In 1998, MichCon received written notification from ANR, alleging that
MichCon has responsibility for a portion of the costs associated with responding
to environmental conditions present at a natural gas storage field in Michigan  
currently owned and operated by an affiliate of ANR. At least some portion of   
the natural gas storage field was formerly owned by MichCon. MichCon is         
evaluating ANR's allegations to determine whether and to what extent, if any, it
may have legal responsibility for these costs. Management does not believe that 
this matter will have a material impact on MCN's financial statements.          

FRANCHISES                                                                      

MichCon operates in more than 530 cities, villages and townships under
franchises or permits that typically are revocable at will and have a 30-year   
maximum duration. In 1993, MichCon began a structured process to renew or       
re-establish formal franchises in 233 municipalities. During the period between 
January 1994 and October 1999, an additional 193 franchises expired. To date,   
399 franchises have been renewed, including nine renewed in 1998, accounting for
gas sales volumes of approximately 115 MMcf annually, and 8 renewed to date in  
1999 (161 MMcf annually). Additionally, one new franchise was acquired in 1998. 
There were no franchises lost during 1998 or 1999.                              

As for the 26 franchises that are currently expired, MichCon's gas    
distribution systems are rightfully occupying the streets with the consent or   
acquiescence of the municipalities. While MichCon could be ordered by any       
municipality in which its franchise has expired to remove its property, it could
lose ownership only by its consent and the payment of an agreed-upon price, or  
by condemnation and the payment of the fair value of such property. Should any  
of these municipalities seek to terminate MichCon's operations therein and      
substitute another gas utility operation, publicly or privately owned, the      
municipality must either (1) acquire and operate MichCon's system, (2) construct
a new system or (3) grant a franchise to another privately owned utility to     
construct or acquire its own distribution system.                               

  Citizens operates in cities and townships in and around Adrian, Michigan
under franchises or permits that are revocable, have a 30-year maximum duration,
and provide for municipal rate setting. In November 1995, the residents of      
Adrian voted favorably on granting a 30-year renewal franchise to Citizens.     
There were three franchise renewals during 1998.                                

DISCONTINUED OPERATIONS 

    In 1996, MCN completed the sale of its computer operations subsidiary, The
Genix Group, Inc. ("Genix"), to Affiliated Computer Services, Inc. for an       
adjusted sales price of $132.9 million, resulting in an after-tax gain of $36.2 
million. Genix's 1996 income from operations totaled $1.6 million and has been  
accounted for as a discontinued operation.                                      

 112

S-4
123rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 123rd

OTHER 

     MCN is involved in several residential and commercial community development
partnerships.                                                                   

  MCNIC Gas Storage Company, a 100%-owned subsidiary of MCNEE, holds a 50%
limited partnership interest in The Orchards Golf Limited Partnership. The      
Orchards golf course is above the Washington 28 storage field, located north of 
Detroit. The partnership was formed in 1991 and developed approximately 450     
acres of land in Washington Township, Michigan. The acreage consists of an      
18-hole championship golf course of approximately 200 acres and residential     
development of the remaining 250 acres.                                         

MichCon Development Company, a 100%-owned subsidiary of MichCon, holds
between a 33% and a 50% interest in various partnerships related to the         
Harbortown development. The Harbortown development is a mixed use development   
consisting of a 60,000 square foot retail shopping center, a 63 slip marina, 273
rental units and 80 low-rise condominiums located in Detroit along the Detroit  
River. The development consists of 35 acres of land, of which 12 are currently  
undeveloped.                                                                    

PROPERTIES

MCN                                                                             

  MCN, through its principal subsidiaries, owns or leases, under long-term
leases, office space in Detroit and Grand Rapids, Michigan, Houston, Texas,     
Denver, Colorado, and Hartford, Connecticut. MCN's facilities are suitable and  
adequate for their intended use. MCN's capital investments for 1998 totaled $791
million and for 1999 are anticipated to be approximately $500 million.          

GAS DISTRIBUTION                                                                

MichCon operates natural gas distribution, transmission and storage   
facilities in Michigan. At December 31, 1998, MichCon's distribution system     
included 16,722 miles of distribution mains, 1,083,607 service lines and        
1,202,722 active meters. MichCon owns 2,604 miles of transmission and production
lines that deliver natural gas to the distribution districts and interconnect   
its storage fields with the sources of supply and the market areas. MichCon also
owns properties relating to four underground storage fields with an aggregate   
storage capacity of approximately 124 Bcf. Additionally, MichCon owns district  
office buildings, service buildings and gas receiving and metering stations. In 
January 1998, MichCon purchased its principal office building in Detroit, the   
Guardian Building, ending its long-term capital lease obligation. MichCon       
occupies its principal office building in Grand Rapids under a long-term lease. 
Portions of these buildings are subleased to affiliates and others.             

   Most of MichCon's properties are held in fee, by easement, or under lease
agreements expiring at various dates to 2006, with renewal options extending    
beyond that date. The principal plants and properties of MichCon are held       
subject to the lien of MichCon's Indenture of Mortgage and Deed of Trust under  
which MichCon's First Mortgage Bonds are issued. Some existing properties are   
being fully utilized and new properties are being added to meet the requirements
of expansion into new areas. Gas Distribution's capital expenditures for 1998   
totaled $159 million and for 1999 are anticipated to be approximately $140      
million.                                                                        

The Saginaw Bay Pipeline Company, a wholly owned subsidiary of MichCon
Pipeline, owns a 66 2/3% interest in the Saginaw Bay Area Limited Partnership,  
which owns substantially all of the properties used in the conduct of its       
business, primarily a 126-mile major gathering line. The Saginaw Bay Lateral    
Company, a wholly owned subsidiary of MichCon Pipeline, owns a 46% interest in  
the Saginaw Bay Lateral Limited Partnership, which owns substantially all of the
properties used in the conduct of its business, primarily lateral lines related 
to the Saginaw Bay major gathering line. Westside Pipeline Company, a wholly    
owned subsidiary of MichCon Pipeline, owns an 82.62% interest in Jordan Valley  
Pipeline, a 14-mile major gathering line, and the Terra-Hayes Pipeline, an      
18-mile major gathering line. MichCon Gathering Company, a wholly owned         
subsidiary of MichCon Pipeline, owns substantially all of the properties used in
the conduct of its business, including 44.7-mile, 8.6-mile, 11-mile and         
25.2-mile major gathering lines and a 2,400 horsepower compressor station.      
 113

S-4
124th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 124th

Thunder Bay Gathering Company, a wholly owned subsidiary of MichCon   
Pipeline, owns substantially all of the properties used in the conduct of its   
business, including 44 miles of gathering lines.                                

Citizens owns all of the properties used in the conduct of its utility
business. Included in these properties is a gas distribution system, a two-story
office building in downtown Adrian and a one-story service center.              

DIVERSIFIED ENERGY                                                              

     In addition to Gas Distribution, MCN is involved in joint ventures that own
property primarily associated with gas gathering, processing, transmission and  
storage, electric power generation and distribution and real estate. The        
majority of these investments are in unconsolidated joint ventures and          
partnerships in which Diversified Energy has an ownership interest of less than,
or equal to, 50%.                                                               

  During 1998, Electric Power acquired a 95% interest in the Cobisa-Person
Power project, a joint venture created to build, own and operate a 140 MW power 
plant in Albuquerque, New Mexico. This $60 million gas-fired peaking plant is   
expected to be in service in 2000 and is backed by a long-term power purchase   
agreement with Public Service Company of New Mexico. The project is being       
constructed at the site of a decommissioned power plant, keeping costs low and  
accelerating its development.                                                   

 114

S-4
125th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 125th

EXPLORATION & PRODUCTION ACTIVITIES                                             

MCNIC Oil & Gas Company (MOG), an indirect subsidiary of MCN, is engaged in     
natural gas and oil exploration, development and production. The following data,
together with the financial information detailed in Note -- of the MCN          
Consolidated Financial Statements located on page --, and the general           
information provided under Description of MCN Energy Group Inc. -- Diversified  
Energy -- Exploration and Production, provide additional information regarding  
the activity. Information on estimated gas and oil reserves that follows was    
obtained by MOG from the independent petroleum engineering consultants Ryder    
Scott Company, Miller and Lents, Ltd., Holditch-Reservoir Technologies,         
Netherland, Sewell & Associates, Inc., and Williamson Petroleum Consultants,    
Inc.                                                                            

                                                                [Download Table]

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

                                                        [Enlarge/Download Table]

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

                                                        [Enlarge/Download Table]

                                     PRODUCING WELLS AND ACREAGE                                      
                                         1998                      1997                   1996        
                                ----------------------    ----------------------  --------------------
                                  GROSS         Net         Gross         Net       Gross        Net  
                                  -----         ---         -----         ---       -----        ---  
                                                                                                      
PRODUCING WELLS                                                                                       
United States..................     3,143        1,782        2,917        1,677      2,890      1,481
                                =========    =========    =========    =========  =========    =======
DEVELOPED LEASE ACREAGE                                                                               
United States..................   623,076      352,315      663,767      344,818    519,107    287,964
                                =========    =========    =========    =========  =========    =======
UNDEVELOPED LEASE ACREAGE                                                                             
United States.................. 2,693,767    1,148,920    2,592,915    1,239,908  1,701,063    970,873

 115

S-4
126th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 126th

LEGAL PROCEEDINGS 

GENERAL                                                                         

    In addition to Gas Distribution's regulatory proceedings and other matters
described above, MCN also is involved in a number of lawsuits and administrative
proceedings in the ordinary course of business with respect to taxes,           
environmental matters, contracts, personal injury, property damage claims and   
other matters. 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 condition or results of operations.           

ENVIRONMENTAL                                                                   

     In 1994, MichCon received a general notice of liability letter from the EPA
stating that it was one of two potentially responsible parties at the Lower     
Ecorse Creek Superfund site in Wyandotte, Michigan. The EPA requested that      
MichCon conduct a remedial investigation and feasibility study at that site.    
MichCon investigated its prior activities in the area and the EPA's bases for   
its conclusion, and concluded that it was not responsible for contamination     
discovered at that site. MichCon informed the EPA of this belief and did not    
undertake the requested activities.                                             

In September 1996, the EPA sent MichCon a second general notice of    
liability letter for the site and demanded reimbursement of approximately $2.3  
million in past costs, plus interest. The EPA then issued MichCon and the other 
potentially responsible party a unilateral administrative order under section   
106 of the Comprehensive Environmental Response Compensation and Liability Act  
to implement the remedy. The EPA estimates the cost of the remedy to be         
approximately $650,000. MichCon again reviewed the EPA's bases for determining  
that it is a potentially responsible party and concluded again that it was not  
responsible for contamination discovered at that site and informed the EPA of   
its decision. The EPA has not taken any subsequent action against MichCon. The  
EPA may sue MichCon to force compliance with the order or may implement the     
remedy and then sue MichCon for recovery of all incurred costs. If the EPA      
institutes and prevails in such a suit and if the court determines that MichCon 
did not have sufficient cause not to comply with the order, the court may impose
civil penalties and punitive damages. Management believes that MichCon was not  
responsible for contamination at the site and has sufficient cause not to comply
with this order and that the resolution of this matter will not have a material 
adverse effect on MichCon's financial statements.                               

 116

S-4
127th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 127th

EXPERTS 

   The financial statements of MCN Energy Group Inc. as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998  
included in this prospectus have been audited by Deloitte & Touche LLP,         
independent auditors, as stated in their report appearing herein, and have been 
so included in reliance upon the report of such firm given upon their authority 
as experts in accounting and auditing.                                          

  The financial statements and the related financial statement schedule of
DTE Energy Company incorporated in this prospectus by reference from the DTE    
Energy Company's Annual Report on Form 10-K for the year ended December 31, 1998
have been audited by Deloitte & Touche LLP, independent auditors, as stated in  
their report, which is incorporated herein by reference, and have been so       
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.                                          

   With respect to the unaudited interim financial information of DTE Energy
Company for the periods ended March 31, 1999 and 1998 and June 30, 1999 and 1998
which is incorporated herein by reference, Deloitte & Touche LLP have applied   
limited procedures in accordance with professional standards for a review of    
such information. However, as stated in their reports included in DTE Energy    
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999  
and June 30, 1999 and incorporated by reference herein, they did not audit and  
they do not express an opinion on that interim financial information.           
Accordingly, the degree of reliance on their reports on such information should 
be restricted in light of the limited nature of the review procedures applied.  
Deloitte & Touche LLP are not subject to the liability provisions of Section 11 
of the Securities Act of 1933 for their reports on the unaudited interim        
financial information because those reports are not "reports" or a "part" of the
registration statement prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.                                                

     This prospectus includes various oil and gas reserve information summarized
from reports prepared by the independent petroleum consultants Ryder Scott      
Company; Miller and Lents, Ltd.; Holditch-Reservoir Technologies; Netherland,   
Sewell & Associates, Inc.; and Williamson Petroleum Consultants, Inc. This      
reserve information and related schedules have been included in this prospectus 
in reliance upon such reports given upon the authority of said firms as experts 
in oil and gas reserve estimation.                                              

SHAREHOLDER PROPOSALS 

DTE                                                                             

 DTE will hold its annual meeting of DTE shareholders on April 14, 2000.
Shareholder proposals intended to be presented at the 2000 annual meeting of DTE
shareholders pursuant to Rule 14a-8 promulgated under the Exchange Act must be  
received by the Corporate Secretary of DTE not later than November 29, 1999, in 
order to be included in the proxy materials sent by management of DTE for such  
meeting. Shareholder proposals intended to be presented at the 2000 annual      
meeting of DTE shareholders that are not intended to be included in management's
proxy materials pursuant to Rule 14a-8 must be received by the Corporate        
Secretary of DTE, not earlier than January 14, 2000, and not later than February
14, 2000, in order to be considered at the 2000 annual meeting.                 

MCN                                                                             

    If the merger is not completed, MCN will hold a 2000 annual meeting of its
shareholders. If such a meeting is held, shareholder proposals intended to be   
presented at that meeting pursuant to Rule 14a-8 must be received by the        
Secretary of MCN a reasonable time prior to the time MCN begins to print and    
mail proxy materials for such meeting in order to be included in the proxy      
materials sent by management of MCN for the 2000 annual meeting. Shareholder    
proposals intended to be presented at the 2000 annual meeting of MCN            
shareholders that are not intended to be included in management's proxy         
materials pursuant to Rule 14a-8 must be received by the Secretary of MCN not   
less than 60 days and not more than 90 days prior to such meeting in order to be
considered at the 2000 annual meeting.                                          

 117

S-4
128th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 128th

WHERE YOU CAN FIND MORE INFORMATION 

  DTE has filed with the Securities and Exchange Commission a Registration
Statement under the Securities Act of 1933 that registers the distribution to   
the MCN shareholders of the DTE common stock to be issued in the merger. The    
Registration Statement, including the attached exhibits and schedules, contains 
additional relevant information about DTE and its common stock. The rules and   
regulations of the Securities and Exchange Commission allow us to omit certain  
information included in the Registration Statement from this document.          

In addition, DTE and MCN file reports, proxy statements and other     
information with the Securities and Exchange Commission under the Securities    
Exchange Act of 1934. You may read and copy this information at the following   
locations of the Securities and Exchange Commission:                            

                                                                [Download Table]
                                                                              
 Public Reference Room  New York Regional Office     Chicago Regional Office  
450 Fifth Street, N.W.    7 World Trade Center           Citicorp Center      
       Room 1024               Suite 1300            500 West Madison Street  
Washington, D.C. 20549  New York, New York 10048           Suite 1400         
                                                  Chicago, Illinois 60661-2511

You may also obtain copies of this information by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,  
N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. Further           
information on the operation of the Securities and Exchange Commission's Public 
Reference Room in Washington, D.C. can be obtained by calling the Securities and
Exchange Commission at 1-800-SEC-0330.                                          

 The Securities and Exchange Commission also maintains an Internet world
wide web site that contains reports, proxy statements and other information     
about issuers, such as DTE and MCN, who file electronically with the Securities 
and Exchange Commission. The address of that site is http://www.sec.gov.        

    You can also inspect reports, proxy statements and other information about
DTE and MCN at the offices of the NYSE, 20 Broad Street, New York, New York     
10005 and, in the case of DTE, the offices of the Chicago Stock Exchange, 440   
South LaSalle Street, Chicago, Illinois 60605.                                  

The Securities and Exchange Commission allows DTE to "incorporate by  
reference" information into this document, which means that DTE can disclose    
important information to you by referring you to another document filed         
separately with the Securities and Exchange Commission. The information         
incorporated by reference is deemed to be part of this document, except for any 
information superseded by information in this document. This document           
incorporates by reference the documents set forth below that DTE has previously 
filed with the Securities and Exchange Commission. These documents contain      
important information about DTE and its finances.                               

                                                        [Enlarge/Download Table]

  DTE COMMISSION FILINGS (FILE NO. 1-11607)                PERIOD OR DATE FILED          
  -----------------------------------------                --------------------          
                                                                                         
Annual Report on Form 10-K                     Year ended December 31, 1998.             
Quarterly Reports on Form 10-Q                 Quarters ended March 31, 1999 and June 30,
                                               1999.                                     
Current Report on Form 8-K                     Filed October 5, 1999.                    
The description of the DTE common stock set    Filed January 2, 1996.                    
  forth in the Registration Statement on Form                                            
  8-B                                                                                    
Description of the DTE Rights Agreement set    Filed September 23, 1997.                 
  forth in the registration statement on Form                                            
  8-A                                                                                    

 DTE is also incorporating by reference additional documents that it may
file with the Securities and Exchange Commission pursuant to Section 13(a),     
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between the date of   
this document and the date of the DTE special meeting. These documents include  
periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, as well as proxy statements.              

 118

S-4
129th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 129th

    DTE has supplied all information contained or incorporated by reference in
this document relating to DTE, and MCN has supplied all such information        
relating to MCN.                                                                

VALIDITY OF SHARES

The validity of the DTE common stock to be issued to MCN shareholders 
pursuant to the merger will be passed upon for DTE by Christopher C. Nern. As of
the date of this document, -- owned -- % of the shares (including options       
representing certain rights to purchase shares) of DTE common stock.            

 119

S-4
130th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 130th

INDEX TO FINANCIAL STATEMENTS OF MCN ENERGY GROUP INC.

MCN ENERGY GROUP INC. 1998 ANNUAL REPORT                                        

                                                                [Download Table]
                                                                 
Management's Discussion and Analysis of Financial                
   Condition and Results of Operations....................    F-2
Consolidated Statement of Operations......................   F-29
Consolidated Statement of Financial Position..............   F-30
Consolidated Statement of Cash Flows......................   F-32
Consolidated Statement of Shareholders' Equity............   F-33
Notes to Consolidated Financial Statements................   F-34
Independent Auditors Report...............................   F-80

MCN ENERGY GROUP INC. JUNE 30, 1999 QUARTERLY REPORT                            

                                                                [Download Table]
                                                                 
Management's Discussion and Analysis of Financial                
   Condition and Results of Operations....................   F-81
Consolidated Statement of Financial Position..............  F-101
Consolidated Statement of Operations......................  F-103
Consolidated Statement of Cash Flows......................  F-104
Notes to Consolidated Financial Statements................  F-105

 F-1

S-4
131st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 131st

MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
DECEMBER 31, 1998 

RESULTS OF OPERATIONS                                                           

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

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

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

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

 Discontinued operations subsequently retained -- In the 1998 MCN Annual
Report on Form 10-K/A, MCN accounted for its Exploration & Production (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 all periods included herein 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.                           

   Results for 1998 reflect unusual charges -- MCN experienced a net loss of
$286.5 million or $3.63 per share in 1998. As subsequently discussed, 1998      
results reflect several unusual charges that totaled $389.6 million or $4.94 per
share. Excluding these charges, MCN had 1998 earnings of $103.1 million or $1.31
per share compared to 1997 earnings of $133.2 million or $1.79 per diluted      
share. The earnings                                                             
 F-2

S-4
132nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 132nd
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

comparisons reflect the effects of low energy prices, abnormally warm weather   
and higher financing costs, partially offset by reduced operating costs in the  
Gas Distribution segment. MCN's earnings from continuing operations for 1997    
increased $20.6 million or $.12 per diluted share from 1996, reflecting improved
contributions from the Diversified Energy group. Per share comparisons were     
affected by an increase in the average number of shares outstanding due to the  
June 1997 issuance of 9,775,000 shares of new common stock.                     

                                                        [Enlarge/Download Table]

                                                              1998      1997    1996 
                                                              ----      ----    ---- 
                                                                                     
NET INCOME (LOSS) (in Millions)                                                      
Continuing Operations:                                                               
  Diversified Energy:                                                                
     Before unusual charges................................. $  14.7   $ 52.1  $ 31.2
     Unusual charges (Notes 2a, 2b & 3).....................  (372.9)      --      --
                                                             -------   ------  ------
                                                              (358.2)    52.1    31.2
                                                             -------   ------  ------
  Gas Distribution:                                                                  
     Before unusual charges.................................    88.4     81.1    81.4
     Unusual charges (Note 2c)..............................   (16.7)      --      --
                                                             -------   ------  ------
                                                                71.7     81.1    81.4
                                                             -------   ------  ------
Total from Continuing Operations:                                                    
  Before unusual charges....................................   103.1    133.2   112.6
  Unusual charges (Notes 2 & 3).............................  (389.6)      --      --
                                                             -------   ------  ------
                                                              (286.5)   133.2   112.6
                                                             -------   ------  ------
Discontinued Operations (Note 4):                                                    
  Income from operations....................................      --       --     1.6
  Gain on sale..............................................      --       --    36.2
                                                             -------   ------  ------
                                                                  --       --    37.8
                                                             -------   ------  ------
                                                             $(286.5)  $133.2  $150.4
                                                             =======   ======  ======
DILUTED EARNINGS (LOSS) PER SHARE                                                    
Continuing Operations:                                                               
  Diversified Energy:                                                                
     Before unusual charges................................. $   .19   $  .72  $  .47
     Unusual charges (Notes 2a, 2b & 3).....................   (4.73)      --      --
                                                             -------   ------  ------
                                                               (4.54)     .72     .47
                                                             -------   ------  ------
  Gas Distribution:                                                                  
     Before unusual charges.................................    1.12     1.07    1.20
     Unusual charges (Note 2c)..............................    (.21)      --      --
                                                             -------   ------  ------
                                                                 .91     1.07    1.20
                                                             -------   ------  ------
Total from Continuing Operations:                                                    
  Before unusual charges....................................    1.31     1.79    1.67
  Unusual charges (Notes 2 & 3).............................   (4.94)      --      --
                                                             -------   ------  ------
                                                               (3.63)    1.79    1.67
                                                             -------   ------  ------
Discontinued Operations (Note 4):                                                    
  Income from operations....................................      --       --     .03
  Gain on sale..............................................      --       --     .53
                                                             -------   ------  ------
                                                                  --       --     .56
                                                             -------   ------  ------
                                                             $ (3.63)  $ 1.79  $ 2.23
                                                             =======   ======  ======

 F-3

S-4
133rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 133rd
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

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

  UNUSUAL CHARGES -- As previously discussed, MCN recorded several unusual
charges in 1998, consisting of property write-downs, investment losses and      
restructuring charges, which reduced 1998 earnings by $389.6 million or $4.94   
per share. A detailed discussion of each unusual charge by segment follows:     

                                                                [Download Table]

                                                                     1998        
                                                             --------------------
                                                               NET        DILUTED
                                                             INCOME         EPS  
                                                             ------       -------
                                                                                 
UNUSUAL CHARGES (in Millions, Except Per Share Amounts)                          
Diversified Energy:                                                              
  Pipelines & Processing (Note 2a).......................... $ (89.5)     $(1.13)
  Electric Power (Note 3)...................................    (1.6)       (.02)
  Exploration & Production (Note 2b)........................  (275.0)      (3.49)
  Corporate & Other (Note 3)................................    (6.8)       (.09)
                                                             -------      ------ 
                                                              (372.9)      (4.73)
Gas Distribution (Note 2c)..................................   (16.7)       (.21)
                                                             -------      ------ 
                                                             $(389.6)     $(4.94)
                                                             =======      ====== 

     Pipelines & Processing recorded a $133.8 million pre-tax ($87.0 million net
of taxes) write-off of its coal fines project. In June 1998, MCN placed into    
operation six plants designed to recover particles of coal that are a waste     
by-product of coal mining and then process the particles to create coal         
briquettes for sale. The economic viability of the venture is dependent on the  
briquettes qualifying for synthetic fuel tax credits and MCN's ability to       
utilize or sell such credits. Although the plants were placed in service by June
30, 1998, the date specified to qualify for the tax credits, operating delays at
the plants have significantly increased the possibility that the Internal       
Revenue Service will challenge the project's eligibility for tax credits. In    
addition, there is uncertainty as to whether MCN can utilize or sell the        
credits. Without the credits, the project generates negative cash flows. These  
factors led to MCN's decision to record an impairment loss equal to the carrying
value of the plants, reflecting the likely inability to recover such costs. MCN 
is currently negotiating the sale of its interest in the coal fines project.    
Management does not expect proceeds from the sale to be in excess of selling    
expenses and remediation obligations.                                           

    MCN also recorded an impairment loss of $3.9 million pre-tax ($2.5 million
net of taxes) relating to an acquired out-of-service pipeline in Michigan. This 
pipeline was acquired for future development, along with related easements and  
rights-of-way. In connection with certain lease renewal options, MCN reviewed   
the business alternatives for these assets and determined that their development
is unlikely. Accordingly, MCN has recorded an impairment loss equal to the      
carrying value of these assets.                                                 

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

 F-4

S-4
134th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 134th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

Exploration & Production recorded write-downs in the second and third 
quarter of 1998 totaling $416.9 million pre-tax ($271.0 million net of taxes) to
reflect the impact of low oil and gas prices as well as the under-performance of
certain oil and gas properties. The E&P business recognized the write-downs     
under the full cost method of accounting as prescribed by the Securities and    
Exchange Commission (SEC). Under the full cost method of accounting, E&P's      
capitalized exploration and development costs at September 30, 1998 and June 30,
1998 exceeded the full cost "ceiling," resulting in the excess being written off
to income. The ceiling is the sum of discounted future net cash flows from the  
production of proved gas and oil reserves and the lower of cost or estimated    
fair value of unproved properties, net of related income tax effects. Future net
cash flows are required to be estimated based on end-of-quarter prices and      
costs, unless contractual arrangements exist, even if any price decline is      
temporary. A significant portion of the write-down was due to                   
lower-than-expected exploratory drilling results.                               

    In 1998, MCN also recognized a $6.1 million pre-tax loss ($4.0 million net
of taxes) from the write-down of an investment in the common stock of an E&P    
company. The loss was due to a decline in the fair value of the securities that 
is not considered temporary.                                                    

  Subsequent to the issuance of the 1998 Annual Report on Form 10-K/A, the
E&P segment recorded several unusual charges in 1999 (Note 4a). Included in     
these unusual charges for 1999 was the $68.8 million pre-tax ($44.7 million net 
of taxes) loss on the sale of the Western and Midcontinent/Gulf Coast           
properties. Proceeds from the sale of these properties totaled approximately    
$265 million. At December 31, 1998, the Western and Midcontinent/Gulf Coast     
properties had 360 billion cubic feet equivalent of proven reserves. MCN will   
continue selling other non-Michigan E&P oil and gas properties. Additionally, 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. Also, MCN recognized an     
additional 7.5 million pre-tax ($4.9 million net of taxes) write-down of its    
investment in the common stock of an E&P company during the second quarter of   
1999. MCN has no carrying value in this investment after this write-down.       

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

 Gas Distribution recorded a $24.8 million pre-tax ($11.2 million net of
taxes and minority interest) write-down of certain gas gathering properties. A  
new gas reserve analysis was performed to determine the impact of the diversion 
of certain untreated gas away from the gathering system. This analysis revealed 
that projected cash flows from the gathering system were not sufficient to cover
the system's carrying value. Therefore, an impairment loss was recorded         
representing the amount by which the carrying value of the system exceeded its  
estimated fair value.                                                           

    MCN also recorded an $8.5 million pre-tax ($5.5 million net of taxes) loss
from the write-down of an investment in a Missouri gas distribution company. As 
a result of MCN's refocused strategic direction, MCN expects to sell this       
investment in 1999. The write-down represents the amount by which the carrying  
value exceeded the estimated fair value of the investment.                      

 F-5

S-4
135th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 135th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

DIVERSIFIED ENERGY                                                    

Results impacted by unusual charges, financing costs and low energy   
prices -- The Diversified Energy group reported a loss in 1998 due to the       
property write-downs and restructuring charges, as previously discussed.        
Excluding these unusual items, Diversified Energy's earnings for 1998 declined  
by $37.4 million from 1997. These results reflect higher financing costs,       
reduced contributions from the Pipelines & Processing and E&P segments due to   
low energy prices as well as increased losses from the Energy Marketing segment.
Partially offsetting the decreases for 1998 was increased operating and joint   
venture income posted by the Electric Power segment.                            

Earnings for 1997 increased by $20.9 million from 1996, reflecting    
increased operating and joint venture income from the Pipelines & Processing,   
Electric Power and E&P segments. Reduced Energy Marketing contributions and     
higher financing costs partially offset this growth.                            

                                                        [Enlarge/Download Table]

                                                               1998      1997     1996  
                                                               ----      ----     ----  
                                                                                        
DIVERSIFIED ENERGY OPERATIONS (in Millions)                                             
Operating Revenues*......................................... $  992.8   $951.3   $734.4 
                                                             --------   ------   ------ 
Operating Expenses*                                                                     
  Property write-downs (Notes 2a & 2b)......................    554.6       --       -- 
  Restructuring charges (Note 3)............................     12.9       --       -- 
  Other.....................................................    989.6    905.7    693.6 
                                                             --------   ------   ------ 
                                                              1,557.1    905.7    693.6 
                                                             --------   ------   ------ 
Operating Income (Loss).....................................   (564.3)    45.6     40.8 
                                                             --------   ------   ------ 
Equity in Earnings of Joint Ventures........................     61.2     53.1     16.6 
                                                             --------   ------   ------ 
Other Income & (Deductions)*                                                            
  Interest income...........................................      5.2      6.7      3.0 
  Interest expense..........................................    (54.3)   (32.2)   (28.7)
  Dividends on preferred securities.........................    (36.4)   (31.1)   (12.4)
  Investment loss (Note 2b).................................     (6.1)      --       -- 
  Other.....................................................     20.2     10.1      5.5 
                                                             --------   ------   ------ 
                                                                (71.4)   (46.5)   (32.6)
                                                             --------   ------   ------ 
Income (Loss) Before Income Taxes...........................   (574.5)    52.2     24.8 
Income Tax Provision (Benefit)..............................   (216.3)      .1     (6.4)
                                                             --------   ------   ------ 
Net Income (Loss)                                                                       
  Before unusual charges....................................     14.7     52.1     31.2 
  Unusual charges (Notes 2a, 2b & 3)........................   (372.9)      --       -- 
                                                             --------   ------   ------ 
                                                             $ (358.2)  $ 52.1   $ 31.2 
                                                             ========   ======   ====== 

-------------------------                                                       
* Includes intercompany transactions                                            

 F-6

S-4
136th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 136th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

OPERATING AND JOINT VENTURE INCOME                                              

Operating and joint venture results, excluding the unusual charges,   
declined $34.5 million in 1998 and increased $41.3 million in 1997. A discussion
of each business segment, its contributions and its outlook follows:            

                                                        [Enlarge/Download Table]

                                                               1998      1997     1996  
                                                               ----      ----     ----  
                                                                                        
OPERATING AND JOINT VENTURE INCOME (LOSS) (in Millions)                                 
Before Unusual Charges:                                                                 
  Pipelines & Processing.................................... $   21.4   $ 29.1   $ 10.7 
  Electric Power............................................     26.0     18.1      4.6 
  Energy Marketing..........................................     (3.6)    (2.3)     9.4 
  Exploration & Production..................................     29.0     58.1     33.2 
  Corporate & Other.........................................     (8.6)    (4.3)     (.5)
                                                             --------   ------   ------ 
                                                                 64.2     98.7     57.4 
Unusual Charges (Notes 2a, 2b & 3)..........................   (567.3)      --       -- 
                                                             --------   ------   ------ 
                                                             $ (503.1)  $ 98.7   $ 57.4 
                                                             ========   ======   ====== 

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

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

  Transportation volumes increased 59.5 Bcf or over 50% as a result of the
acquisition and expansion of pipeline facilities during 1997 and 1998. Gas      
processed to remove carbon dioxide (CO(2)) increased 6.1 Bcf or 14% in 1998 and 
decreased slightly in 1997. Gas processed to remove natural gas liquids (NGL)   
more than doubled, increasing 23.3 Bcf and 14.4 Bcf in 1998 and 1997,           
respectively, due to the acquisition of processing facilities since 1996.       

                                                                [Download Table]

                                                             1998   1997   1996
                                                             ----   ----   ----
                                                                               
PIPELINES & PROCESSING STATISTICS*                                             
Methanol Produced (million gallons).........................  60.4   60.8  10.5
Transportation (Bcf)........................................ 175.5  116.0  86.4
Gas Processed (Bcf)                                                            
  CO(2) treatment...........................................  48.9   42.8  44.2
  NGL removal...............................................  45.1   21.8   7.4

-------------------------                                                       
* Includes MCN's share of joint ventures                                        

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

 F-7

S-4
137th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 137th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

METHANOL PRICES*                                                                
per Gallon                                                                      
[METHANOL PRICE CHART]                                                          

                                                                [Download Table]

YEAR  METHANOL PRICES
----  ---------------
                     
96         0.44      
97         0.58      
98         0.36      

* Estimated U.S. Gulf average                                           

 Outlook -- Pipelines & Processing's expansion strategy will continue to
focus on investing in natural gas and gas liquid gathering, processing and      
transmission facilities near areas of rapid reserve development or growing      
consumer markets. This business segment acquired or advanced several pipeline   
and processing ventures in 1998 that are expected to contribute to future       
operating results. MCN has a 35% joint venture interest in Dauphin Island       
Gathering Partners (DIGP), which is proceeding with the second phase of its     
expansion. The expansion is expected to be completed during the first quarter of
1999 and will increase the throughput capacity of the system to 1.1 billion     
cubic feet per day (Bcf/d). Also, the Mobile Bay Processing Partners joint      
venture has constructed a 600 million cubic feet per day (MMcf/d) gas processing
plant at the Dauphin Island system's onshore terminus in Alabama. MCN owns 43%  
of this venture, which is expected to be in service in the first quarter of     
1999. In addition, MCN has partnership interests in three interstate pipeline   
projects. Portland Natural Gas Transmission System (Portland), Millennium       
Pipeline and Vector Pipeline will transport Canadian and U.S. natural gas       
volumes into the Northeast and Southeast U.S. markets. MCN has a 21.4% interest 
in the Portland system, a 292-mile pipeline that will transport up to 360 MMcf/d
and is expected to be in-service in early 1999. MCN has a 10.5% interest in the 
442-mile Millennium Pipeline that will have the capacity to transport 700       
MMcf/d. MCN also has a 25% interest in the 343-mile Vector Pipeline that is     
expected to transport up to 1 Bcf/d. Both the Millennium and Vector Pipelines   
are subject to regulatory approval and sufficient market development.           

    MCN's Pipelines & Processing segment also has a 75% interest in an asphalt
manufacturing partnership that has completed construction of a plant designed to
produce annually up to 100,000 tons of high-quality asphalt. Additional         
manufacturing plants may be built if market conditions warrant. During 1998, MCN
acquired a 49.9% interest in an asphalt distribution operation.                 

Pipelines & Processing's future operating results are expected to be  
favorably affected by an increase in gas volumes transported and processed as   
well as an increase in asphalt manufactured and sold. Future results will also  
be impacted by changes in gas processing margins, methanol and asphalt prices,  
and transportation and gathering rates. Gas processing margins and methanol     
prices were significantly lower in 1998 than in the past few years.             

 F-8

S-4
138th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 138th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

   ELECTRIC POWER holds joint venture interests in electric power generation
and distribution facilities in the United States, India and Nepal. Electric     
Power also provides fuel management services and supplies gas to power          
generation facilities under long-term sales contracts.                          

     Electric Power operating and joint venture results, excluding restructuring
charges, increased $7.9 million in 1998 and $13.5 million in 1997. The increased
earnings for 1998 and 1997 reflect contributions from Midland Cogeneration      
Venture L.P. (MCV), a limited partnership that owns a gas-fired cogeneration    
facility capable of producing up to 1,370 megawatts (MW) of electricity and 1.35
million pounds per hour of process steam. MCN acquired an initial 18% interest  
in MCV in the 1997 second quarter and an additional 5% interest in MCV in June  
1998. In addition, earnings from MCV for 1997 include a favorable $2.8 million  
pre-tax adjustment resulting from a change in accounting for property taxes.    

ELECTRICITY SALES*                                                              
[ELECTRICITY SALES GRAPH]                                                       

                                                                [Download Table]

    DOMESTIC AND INTERNATIONAL
    --------------------------
                              
96             708.9          
97            1843.3          
98              3805          

* Includes MCN's share of joint ventures                                        

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

    Outlook -- MCN intends to expand its Electric Power business, primarily in
projects in North America. Under its refocused strategic plan, MCN has exited   
certain international power projects and plans to limit future capital          
investments in developing countries to projects where it has existing           
commitments. In February 1999, MCN reached an agreement to sell its interest in 
TPL for approximately $130 million (Note 5b). The sale is subject to certain    
regulatory approvals and is expected to be completed by the third quarter of    
1999. MCN will continue to pursue opportunities to acquire and sell properties  
in order to optimize its portfolio.                                             

  The Michigan Public Service Commission (MPSC) has issued its final order
regarding electric restructuring, which is being appealed. MCN has investments  
in three Michigan electric power generation facilities that could be impacted by
electric restructuring.                                                         

 F-9

S-4
139th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 139th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

    A number of projects were advanced or acquired in 1998 and are expected to
contribute to future results. In October 1998, MCN acquired a 48% interest in   
the Carson cogeneration project, a 42 MW gas-fired cogeneration plant in        
California. The plant sells electricity and steam under separate long-term      
contracts. In addition, MCN has a 43% interest in the Mobile Bay cogeneration   
project, a 40 MW natural gas-fired plant, which is expected to be placed into   
service in the first quarter of 1999. In December 1997, MCN acquired a 65%      
interest in a 36 MW hydroelectric power plant in Nepal. Construction on the $98 
million project began in early 1997 and is scheduled to be completed in early   
2000. MCN also has a 95% interest in the Cobisa-Person Power project, a joint   
venture that will build, own and operate a 140 MW power plant in Albuquerque,   
New Mexico. This gas-fired peaking plant is expected to be in service by        
mid-2000.                                                                       

  Foreign currency translation adjustments relating to MCN's international
equity investments are included in Accumulated Other Comprehensive Loss, a      
component of Common Shareholders' Equity. The foreign currency translation      
adjustment through December 1998 primarily relates to the U.S. dollar and Indian
rupee exchange rate fluctuations from the TPL investment. MCN's financial       
statements will continue to be affected by currency exchange rate fluctuations. 
However, the expected sale of MCN's interest in TPL will significantly reduce   
its foreign currency risk.                                                      

     ENERGY MARKETING sells premium, reliable, primarily bundled energy services
to large-volume customers in the Midwest, Gulf Coast and Northeast United States
and eastern Canada. In addition, the segment holds market-area storage capacity 
that adds value to its energy marketing activities.                             

     Energy Marketing operating and joint venture loss increased $1.3 million in
1998. The increased loss in 1998 primarily reflects unrealized losses associated
with trading activities (Note 1b) and higher gas storage costs, partially offset
by higher earnings from a significant increase in gas sales volumes.            
Additionally, the earnings comparison was affected as a result of 1997 including
$2.2 million of contributions from Energy Marketing's 25% interest in a gas     
storage project that was sold in December 1997. Operating and joint venture     
income for 1997 decreased $11.7 million due to lower gas sales margins as well  
as higher costs for storage capacity, which enhances Energy Marketing's ability 
to offer reliable gas supply during peak winter months.                         

GAS SALES & EXCHANGE GAS DELIVERIES*                                            
in Bcf                                                                          
[GAS SALES & EXCHANGE GAS DELIVERIES GRAPH]                                     

                                                                [Download Table]

YEAR  GAS SALES & EXCHANGE GAS DELIVERIES*
----  ------------------------------------
                                          
96                    241.5               
97                    358.8               
98                    465.7               

* Includes MCN's share of joint ventures                                        

    Energy Marketing's total gas sales and exchange deliveries increased 106.9
Bcf or 30% during 1998 and 117.3 Bcf or 49% for 1997. The increase in Energy    
Marketing's gas sales volumes was driven by additional                          

F-10

S-4
140th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 140th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

sales in each of the company's market regions. Under exchange gas contracts,    
Energy Marketing accepts gas from customers or delivers gas to customers, and   
gas is returned during a subsequent period.                                     

  MCN has a 50% interest in a joint venture storage project that owns a 10
Bcf storage facility. This storage facility is utilized by MCN's Energy         
Marketing unit, in conjunction with third-party storage and pipeline capacity,  
to enhance its ability to provide reliable gas sales and exchange gas services. 

   Outlook -- MCN will focus on growing its Energy Marketing segment through
expansion of its coverage within existing markets as well as by entering new    
markets through strategic alliances with other energy providers. Enhanced by its
ability to provide reliable and custom-tailored bundled services to large-volume
end users and utilities, MCN is positioned to capitalize on opportunities to    
further expand its market base into the Northeast and Midwest United States and 
eastern Canada.                                                                 

     MCN is in the process of converting a depleted natural gas reservoir into a
42 Bcf storage facility. The storage field is expected to be completed by       
mid-1999 and, therefore to be available for the 1999-2000 winter heating season.
The storage field will support Energy Marketing's operations by enhancing its   
ability to offer a reliable gas supply during peak winter months.               

 EXPLORATION & PRODUCTION is engaged in natural gas and oil exploration,
development and production.                                                     

E&P operating and joint venture income, excluding the write-downs,    
decreased by $29.1 million in 1998 and increased $24.9 million in 1997. Earnings
for the 1998 period reflects a sharp decline in average oil sales prices,       
partially offset by an increase in average gas sales prices, and a slight       
decline in the level of gas and oil produced. The 1997 period reflects a        
significant increase in gas and oil produced due to the development and         
acquisition of properties, partially offset by a decline in oil sales prices.   
Results for 1997 also include income from MCN's unconsolidated joint venture    
which contributed $6.6 million of pre-tax gains from the sale of undeveloped    
properties.                                                                     

GAS & OIL PRODUCTION                                                            
(in Bcf equivalent)                                                             
[GAS & OIL PRODUCTION GRAPH]                                                    

GAS & OIL PRODUCTION                                                            
(in Bcf equivalent)                                                             
[GAS & OIL PRODUCTION GRAPH]                                                    

                                                                [Download Table]

YEAR   GAS AND OIL
----   -----------
                  
96    63.7        
97    98.3        
98    97.9        

    Gas and oil production declined .4 billion cubic feet equivalent (Bcfe) in
1998 and increased 34.6 Bcfe or 54% in 1997. E&P operating results reflect      
average oil sales rates per barrel of $12.58 in 1998, $16.87 in 1997 and $20.18 
in 1996. E&P experienced average gas sale rates per thousand cubic feet (Mcf) of
$2.04 in 1998, $1.95 in 1997 and $1.96 in 1996. The average gas and oil sales   
rates include the effect of hedging with                                        

F-11

S-4
141st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 141st
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

commodity swap and futures agreements, which are used to manage Diversified     
Energy's exposure to the risk of market price fluctuations as discussed in the  
"Risk Management Strategy" section that follows.                                

E&P operating and joint venture income for 1998 also reflects higher  
production-related expenses and depletion costs which increased per Mcf         
equivalent by $.11 and $.07, respectively.                                      

    E&P operations have supplemented Diversified Energy's earnings through the
generation of gas production tax credits, primarily from production of coalbed  
methane and Antrim shale gas properties. Tax credits decreased 41% to $10.5     
million in 1998, compared to $17.8 million in 1997 and $15.9 million in 1996.   
The decline in 1998 reflects the sale of Antrim tax credits in mid-1998, whereby
the income from such sale is recorded as other income as the credits are        
generated.                                                                      

    Outlook -- In August 1999, MCN announced a significantly revised strategic
direction. Consistent with this revised strategy, as well as the result of the  
lowering of the bid for the Michigan E&P properties, MCN will retain its natural
gas producing properties in Michigan and continue selling other E&P oil and gas 
properties. The timing of any sales is dependent upon receiving bids that       
reflect the long-term value of such properties.                                 

   RISK MANAGEMENT STRATEGY -- MCN primarily manages commodity price risk by
utilizing futures, options and swap contracts to more fully balance its         
portfolio of gas and oil supply and sales agreements. MCN's Energy Marketing    
business coordinates all of MCN's hedging activities to ensure compliance with  
risk management policies that are periodically reviewed by MCN's Board of       
Directors. Certain hedging gains or losses related to gas and oil production are
recorded by MCN's E&P operations. Gains and losses on gas and oil               
production-related hedging transactions that are not recorded by MCN's E&P unit 
are recorded by Energy Marketing. In late 1998, MCN began entering into         
offsetting positions for existing hedges of gas and oil production from         
properties that are expected to be sold in 1999. MCN's risk management strategy 
is being revised to reflect the change in its business that will result from    
selling a significant portion of its E&P properties.                            

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

OTHER INCOME AND DEDUCTIONS                                                     

Other income and deductions increased $24.9 million in 1998 and $13.9 
million in 1997. The increases reflect higher dividends resulting from the      
issuance of $332 million of preferred securities in 1997 and $80 million of     
preferred securities in 1996. All periods also reflect higher interest costs on 
increased borrowings required to finance capital investments in the Diversified 
Energy group. In addition, 1998 reflects an unusual charge of $6.1 million      
representing the write-down of an investment in the common stock of an E&P      
company, as previously discussed.                                               

     Other income and deductions comparisons also were affected by several gains
from the sale of properties. In 1998, a $6.0 million pre-tax gain was recorded  
from the sale of certain gas sales contracts and a $3.9 million pre-tax gain was
recorded from the sale of a 50% interest in the 30 MW Ada cogeneration facility.
Other income and deductions for 1997 included a $3.2 million pre-tax gain from  
the December 1997 sale of Diversified Energy's 25% interest in a gas storage    
project, a $2.5 million pre-tax gain from the sale of pipeline assets as well as
gains related to DIGP. In a series of transactions during 1996, MCN sold 64% of 
its 99%                                                                         

F-12

S-4
142nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 142nd
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

interest in the DIGP partnership, resulting in pre-tax gains totaling $8.8      
million, of which $2.4 million was deferred until 1997 when a related option    
agreement expired unexercised.                                                  

   Additionally, other income and deductions in 1998 include $7.4 million of
income from a tax credit sale transaction, whereby MCN records income from such 
sale as the credits are generated by the purchaser.                             

INCOME TAXES                                                                    

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

GAS DISTRIBUTION                                                      

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

F-13

S-4
143rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 143rd
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

significantly lower operating costs. These cost-saving initiatives allowed the  
Gas Distribution group to continue its record of solid financial performance,   
producing returns on equity of 11.0% in 1998 and 13.2% in 1997.                 

                                                        [Enlarge/Download Table]

                                                               1998       1997       1996   
                                                               ----       ----       ----   
                                                                                            
GAS DISTRIBUTION OPERATIONS (in Millions)                                                   
Operating Revenues*                                                                         
  Gas sales................................................. $  838.9   $1,080.1   $1,102.9 
  End user transportation...................................     82.3       84.7       82.5 
  Intermediate transportation...............................     63.2       55.2       48.6 
  Other.....................................................     67.4       51.3       42.3 
                                                             --------   --------   -------- 
                                                              1,051.8    1,271.3    1,276.3 
Cost of Gas.................................................    462.1      642.0      646.3 
                                                             --------   --------   -------- 
Gross Margin................................................    589.7      629.3      630.0 
                                                             --------   --------   -------- 
Other Operating Expenses*                                                                   
  Operation and maintenance.................................    256.6      286.7      298.4 
  Depreciation and depletion................................     93.8      104.4       98.8 
  Property and other taxes..................................     56.0       61.3       62.3 
  Property write-down (Note 2c).............................     24.8         --         -- 
                                                             --------   --------   -------- 
                                                                431.2      452.4      459.5 
                                                             --------   --------   -------- 
Operating Income............................................    158.5      176.9      170.5 
                                                             --------   --------   -------- 
Equity in Earnings of Joint Ventures........................      1.0        2.5        1.3 
                                                             --------   --------   -------- 
Other Income and (Deductions)*                                                              
  Interest income...........................................      5.7        4.7        4.0 
  Interest expense..........................................    (57.5)     (54.5)     (48.9)
  Investment loss (Note 2c).................................     (8.5)        --         -- 
  Minority interest.........................................      5.7       (1.9)      (1.0)
  Other.....................................................      (.2)        .5       (1.8)
                                                             --------   --------   -------- 
                                                                (54.8)     (51.2)     (47.7)
                                                             --------   --------   -------- 
Income Before Income Taxes..................................    104.7      128.2      124.1 
Income Tax Provision........................................     33.0       47.1       42.7 
                                                             --------   --------   -------- 
Net Income                                                                                  
  Before unusual charges....................................     88.4       81.1       81.4 
  Unusual charges (Note 2c).................................    (16.7)        --         -- 
                                                             --------   --------   -------- 
                                                             $   71.7   $   81.1   $   81.4 
                                                             ========   ========   ======== 

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

* Includes intercompany transactions                                            

GROSS MARGIN                                                                    

 Gross margins reflect abnormally warm weather -- Gas Distribution gross
margin (operating revenues less cost of gas) decreased $39.6 million and $.7    
million in 1998 and 1997, respectively, reflecting changes in gas sales and end 
user transportation deliveries due primarily to abnormally warm weather in 1998 
and significantly colder weather in 1996. Additionally, gross margins in 1998   
and 1997 were favorably affected by                                             

F-14

S-4
144th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 144th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

the continued growth in intermediate transportation services as well as         
increased other operating revenues resulting from providing gas-related         
services.                                                                       

                                                                [Download Table]

                                                              1998     1997   1996  
                                                              ----     ----   ----  
                                                                                    
EFFECT OF WEATHER ON GAS MARKETS AND EARNINGS                                       
Percentage Colder (Warmer) Than Normal......................  (19.3)%    .8%    5.4%
Increase (Decrease) From Normal in:                                                 
  Gas markets (in Bcf)......................................  (40.3)     .6    10.9 
  Net income (in Millions).................................. $(35.3)   $ .5   $ 9.9 
  Diluted earnings per share................................ $ (.45)   $.01   $ .15 

  GAS SALES AND END USER TRANSPORTATION revenues in total decreased $243.6
million in 1998 and $20.6 million in 1997. Revenues were affected by            
fluctuations in gas sales and end user transportation deliveries that decreased 
by 41.7 Bcf to 312.5 Bcf in 1998 and decreased by 13.7 Bcf to 354.2 Bcf in 1997.
The decreases in gas sales and end user transportation deliveries for both      
periods were due primarily to weather, which was 20.1% warmer in 1998 and 4.6%  
warmer in 1997 compared to the previous years. The decrease in revenues in 1998 
also reflects a reduction in gas sales rates resulting from lower gas costs. The
impact of reduced gas sales and transportation deliveries in 1997 was partially 
offset by an increase in gas sales rates due to higher gas costs. As discussed  
in the "Cost of Gas" section that follows, Gas Distribution's sales rates       
through the end of 1998 were set to recover all of its reasonably and prudently 
incurred gas costs. Therefore, the effect of any fluctuations in cost of gas    
sold was substantially offset by a change in gas sales revenues.                

  End user transportation services are provided to large-volume commercial
and industrial customers who purchase gas directly from producers and brokers,  
including MCN's Energy Marketing business, and contract with MichCon to         
transport the gas to their facilities. Gas Distribution continues to enter into 
multi-year, competitively priced transportation agreements with large-volume    
users to maintain these gas markets over the long term.                         

GAS DISTRIBUTION VOLUMES/GROSS MARGIN COMPARISON                                
[GAS DISTRIBUTION VOLUMES/GROSS MARGIN COMPARISON GRAPH]                        

[BAR GRAPH] 

                                                                [Download Table]

                  Volumes           Gross Margins
Year              In Bcf            In Millions  
----              -------           -------------
                                                 
96                895.4             $  630.0     
                                    $  614.8*    
97                940.7             $  629.3     
                                    $  628.6*    
98                850.0             $  589.7     
                                    $  644.0*    


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

* Total Margins Weather Normalized                                              

F-15

S-4
145th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 145th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

 INTERMEDIATE TRANSPORTATION revenues increased by $8.0 million and $6.6
million in 1998 and 1997, respectively, due in part to increased fees generated 
from the transfer of gas title among and between intermediate transportation    
service users and various gas owners. Intermediate transportation is a gas      
delivery service provided to gas producers, gas brokers and other gas companies 
that own the natural gas but are not the ultimate consumers.                    

  Although intermediate transportation revenues increased in 1998, volumes
delivered decreased 49.0 Bcf to 537.5 Bcf. Intermediate transportation          
deliveries increased in 1997 by 59.0 Bcf to 586.5 Bcf. The decrease in          
intermediate transportation deliveries in 1998 reflects lower off-system demand 
caused by the warmer weather and lower volumes transported for fixed-fee        
customers. Although transported volumes for fixed-fee customers may fluctuate,  
revenues from such customers are not affected. Intermediate transportation      
revenues and volumes delivered for both 1998 and 1997 reflect additional Antrim 
gas volumes transported for Michigan gas producers and brokers. There has been a
significant increase in Michigan Antrim gas production over the past several    
years, resulting in a growing demand by gas producers and brokers for           
intermediate transportation services. In order to meet the increased demand, Gas
Distribution expanded the transportation capacity of its northern Michigan      
gathering system in 1996. In December 1997, MichCon purchased an existing       
pipeline system and further expanded the capacity of this system. Although      
intermediate transportation volumes are a significant part of Gas Distribution's
total markets, profit margins on this service are considerably less than margins
on gas sales or for end user transportation services.                           

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

COST OF GAS                                                                     

 Cost of gas is affected by variations in sales volumes and the costs of
purchased gas as well as related transportation costs. Under the Gas Cost       
Recovery (GCR) mechanism in effect through 1998 (Note 7b), MichCon adjusted its 
sales rates to recover all of its reasonably and prudently incurred gas costs.  
Therefore, fluctuations in cost of gas sold had little effect on gross margins. 

     Cost of gas sold decreased by $179.9 million in 1998 and by $4.3 million in
1997 as a result of lower sales volumes, primarily due to warmer weather. The   
decrease in 1998 also reflects lower prices paid for gas purchased of $.40 (13%)
per thousand cubic feet (Mcf). Additionally, the decrease in 1997 was impacted  
by supplier refunds, partially offset by higher prices paid for gas purchased of
$.19 per Mcf (7%).                                                              

OTHER OPERATING EXPENSES                                                        

     OPERATION AND MAINTENANCE expenses declined by $30.1 million or 10% in 1998
and $11.7 million or 4% in 1997. These reductions reflect management's          
continuing efforts to control operating costs. More specifically, the reductions
for both 1998 and 1997 reflect lower benefit costs, primarily pension and       
retiree healthcare costs, as well as lower uncollectible gas accounts expense.  

     Gas Distribution has streamlined its organizational structure over the past
several years while increasing its customer base and expanding energy services  
to customers. MichCon implemented an early retirement program in early 1998 that
reduced its net workforce by approximately 175 employees or 6%. The cost of the 
program and the related savings were largely offsetting in 1998 but will        
contribute to lower operating costs in future years. Since 1995, the number of  
Gas Distribution employees has declined by 410 or 13%, while the number of      
customers has increased over 30,000 or 3%.                                      

F-16

S-4
146th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 146th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

GAS DISTRIBUTION -- NUMBER OF CUSTOMERS SERVED PER EMPLOYEE                     
[GAS DISTRIBUTION/NUMBER OF CUSTOMERS SERVED PER EMPLOYEE GRAPH]                

                                                                [Download Table]

      GAS DISTRIBUTION - NUMBER OF CUSTOMERS SERVED
YEAR                   PER EMPLOYEE                
----  ---------------------------------------------
                                                   
96                         380                     
97                         409                     
98                         435                     

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

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

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

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

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

F-17

S-4
147th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 147th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

EQUITY IN EARNINGS OF JOINT VENTURES                                            

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

OTHER INCOME AND DEDUCTIONS                                                     

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

INCOME TAXES                                                                    

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

ENVIRONMENTAL MATTERS                                                           

   Prior to the construction of major natural gas pipelines, gas for heating
and other uses was manufactured from processes involving coal, coke or oil. MCN 
owns, or previously owned, 17 such former manufactured gas plant (MGP) sites.   

During the mid-1980s, preliminary environmental investigations were   
conducted at these former MGP sites, and some contamination related to the      
by-products of gas manufacturing was discovered at each site. The existence of  
these sites and the results of the environmental investigations have been       
reported to the Michigan Department of Environmental Quality (MDEQ). None of    
these former MGP sites is on the National Priorities List prepared by the U.S.  
Environmental Protection Agency (EPA).                                          

  MCN is involved in an administrative proceeding before the EPA regarding
one of the former MGP sites. MCN has executed an order with the EPA, pursuant to
which MCN is legally obligated to investigate and remediate the MGP site. MCN is
remediating five of the former MGP sites and conducting more extensive          
investigations at four other former MGP sites. In 1998, MichCon completed the   
remediation of one of the former MGP sites, which was confirmed by the MDEQ.    
Additionally, the MDEQ has determined with respect to one other former MGP site 
that MichCon is not a responsible party for the purpose of assessing remediation
expenditures.                                                                   

In 1984, MCN established an $11.7 million reserve for environmental   
investigation and remediation. During 1993, MichCon received MPSC approval of a 
cost deferral and rate recovery mechanism for investigation and remediation     
costs incurred at former MGP sites in excess of this reserve.                   

   MCN employed outside consultants to evaluate remediation alternatives for
these sites, to assist in estimating its potential liabilities and to review its
archived insurance policies. The findings of these investigations indicate that 
the estimated total expenditures for investigation and remediation activities   
for                                                                             
F-18

S-4
148th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 148th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

these sites could range from $30 million to $170 million based on undiscounted  
1995 costs. As a result of these studies, MCN accrued an additional liability   
and a corresponding regulatory asset of $35 million during 1995.                

MCN notified more than 50 current and former insurance carriers of the
environmental conditions at these former MGP sites. MCN concluded settlement    
negotiations with certain carriers in 1996 and 1997 and has received payments   
from several carriers. In October 1997, MCN filed suit against major nonsettling
carriers seeking recovery of incurred costs and a declaratory judgment of the   
carriers' liability for future costs of environmental investigation and         
remediation costs at former MGP sites. Discovery is ongoing in the case, and a  
preliminary trial date has been scheduled for August 1999.                      

  During 1998, 1997, and 1996, MCN spent $1.6 million, $.8 million and $.9
million, respectively, investigating and remediating these former MGP sites. At 
December 31, 1998, the reserve balance is $35.1 million, of which $.1 million is
classified as current. Any significant change in assumptions, such as           
remediation techniques, nature and extent of contamination and regulatory       
requirements, could impact the estimate of remedial action costs for the sites  
and, therefore, have an effect on MCN's financial position and cash flows.      
However, management believes that insurance coverage and the cost deferral and  
rate recovery mechanism approved by the MPSC will prevent environmental costs   
from having a material adverse impact on MCN's results of operations.           

  In 1998, MichCon received written notification from ANR Pipeline Company
(ANR) alleging that MichCon has responsibility for a portion of the costs       
associated with responding to environmental conditions present at a natural gas 
storage field in Michigan currently owned and operated by an affiliate of ANR.  
At least some portion of the natural gas storage field was formerly owned by    
MichCon. MichCon is evaluating ANR's allegations to determine whether and to    
what extent, if any, it may have legal responsibility for these costs.          
Management does not believe this matter will have a material impact on MCN's    
financial statements.                                                           

OUTLOOK                                                                         

     Gas Distribution's strategy is to expand its role as the preferred provider
of natural gas and high-value energy services within Michigan. Accordingly, Gas 
Distribution's objectives are to grow its revenues and control its costs in     
order to deliver strong shareholder returns and provide customers high-quality  
service at competitive prices. Revenue growth will be achieved through          
initiatives to expand Gas Distribution's 900 Bcf of gas markets, its 1.2 million
residential, commercial and industrial customer base, as well as by providing   
new energy-related services that capitalize on its expertise, capabilities and  
efficient systems.                                                              

     Gas Distribution expects to provide natural gas to approximately 13,000 new
customers in 1999. Gas Distribution's market share for residential heating      
customers in the communities it serves is approximately 80%. While this         
saturation rate is high, growth opportunities exist through conversion of       
existing homes from other fuels as well as from new construction. Gas           
Distribution continues to expand industrial and commercial markets by           
aggressively facilitating the use of existing gas technologies and equipment.   

   Management is continually assessing ways to improve cost competitiveness.
Among other cost saving initiatives, MichCon implemented an early retirement    
incentive program in 1998 that reduced its net workforce by approximately 6%.   
Although this program did not have a material impact on 1998 net income, the    
early retirement of employees is expected to contribute toward reducing         
operating costs in future years.                                                

  The challenges and opportunities resulting from increased competition in
the natural gas industry have been a catalyst for MPSC action in the development
of major reforms in utility regulation aimed at giving all customers added      
choices and more price certainty. The overall package of regulatory changes     
connected with the gas industry restructuring is expected to generate additional
revenue and cost savings opportunities. Gas Distribution is positioning itself  
to respond to changes in regulation and increased competition by reducing its   
cost of operations while maintaining a safe and reliable system for customers.  

F-19

S-4
149th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 149th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

  Gas Distribution plans to capitalize on opportunities resulting from the
gas industry restructuring by implementing MichCon's Regulatory Reform Plan,    
which was approved by the MPSC in April 1998. The plan includes a comprehensive 
experimental three-year customer choice program that offers all sales customers 
added choices and greater price certainty. Beginning April 1, 1999, a limited   
number of customers will have the option of purchasing natural gas from         
suppliers other than MichCon. However, MichCon will continue to transport and   
deliver the gas to the customers' premises at prices that maintain its existing 
sales margins.                                                                  

The plan also suspends the GCR mechanism for customers who continue to
purchase gas from MichCon and fixes the gas commodity component of MichCon's    
sales rates at $2.95 per Mcf for the three-year period beginning on January 1,  
1999. Prior to 1999, MichCon did not generate earnings on the gas commodity     
portion of its operations. However, under this plan, changes in the cost of gas 
will directly impact gross margins and earnings. As part of its gas acquisition 
strategy, MichCon has entered into firm-price contracts for a substantial       
portion of its expected gas supply requirements for the next three years. These 
contracts, coupled with the use of MichCon's storage facilities, will           
substantially mitigate risks from winter price and volume fluctuations.         

 Also beginning in 1999 under the plan, an income sharing mechanism will
allow customers to share in profits when actual utility return on equity exceeds
predetermined thresholds. Although the plan increases MichCon's risk associated 
with generating margins that cover its gas costs, management believes this      
program will have a favorable impact on future earnings. In October 1998, the   
MPSC denied a request for rehearing and affirmed its approval of the plan.      
Various parties have appealed the MPSC's decision to the Michigan Court of      
Appeals.                                                                        

     Gas Distribution expects to continue growing revenues by offering a variety
of energy-related services, which includes appliance maintenance and home       
safety. Additionally, Gas Distribution began participating in Michigan's $1.2   
billion per year heating, ventilation and air conditioning market with the      
October 1998 acquisition of three companies specializing in the sale,           
installation and servicing of residential and commercial heating and cooling    
systems. The acquired companies have total revenues of approximately $20 million
per year.                                                                       

     As described in Note 7a to the consolidated financial statements, MCN's Gas
Distribution segment complies with the provisions of Statement of Financial     
Accounting Standards (SFAS), No. 71, "Accounting for the Effects of Certain     
Types of Regulation." Future regulatory changes or changes in the competitive   
environment could result in Gas Distribution discontinuing the application of   
SFAS No. 71 for all or part of its business and require the write-off of the    
portion of any regulatory asset or liability that was no longer probable of     
recovery or refund. If Gas Distribution were to discontinue application of SFAS 
No. 71 for all of its operations as of December 31, 1998, it would have an      
extraordinary, noncash increase to net income of approximately $63.7 million.   
Factors that could give rise to the discontinuance of SFAS No. 71 include (1)   
increasing competition that restricts Gas Distribution's ability to establish   
prices to recover specific costs, and (2) a significant change in the manner in 
which rates are set by regulators from cost-based regulation to another form of 
regulation. Based on a current evaluation of the various factors and conditions 
that are expected to impact future regulation, management believes currently    
available facts support the continued application of SFAS No. 71.               

DISCONTINUED OPERATIONS                                               

    In June 1996, MCN completed the sale of its computer operations subsidiary
for an adjusted sales price of $132.9 million, resulting in an after-tax gain of
$36.2 million (Note 4b).                                                        

F-20

S-4
150th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 150th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

CAPITAL RESOURCES AND LIQUIDITY 

                                                        [Enlarge/Download Table]

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

OPERATING ACTIVITIES                                                  

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

FINANCING ACTIVITIES                                                  

  MCN's cash flow from financing activities decreased $25.1 million during
1998. The decrease reflects lower debt and equity issuances, net of debt        
repayments, in 1998 compared to 1997 as a result of lower capital expenditures  
and acquisitions. Cash flow from financing activities increased $82.5 million in
1997 as a result of higher issuances of common stock and preferred securities,  
offset slightly by lower borrowings of long-term debt. The proceeds from the    
issuances were used to finance higher capital investments during 1997.          

 MCN typically relies on commercial paper and bank borrowings to finance
capital expenditures on a temporary basis until paid down with the proceeds from
the issuance of more permanent capital, such as long-term debt, preferred       
securities and common stock. However, MCN will rely more on short-term financing
and less on permanent capital issuances during 1999. Proceeds from the expected 
sale of a significant portion of MCN's E&P properties in 1999 will be used to   
repay commercial paper and bank borrowings. A summary of MCN's significant      
financing activities for 1998 and financing plans for 1999 follows.             

    In late 1998, MCN issued $100 million of preferred securities and borrowed
$260 million under a one-year term loan (Note 9). Proceeds were used to reduce  
commercial paper, to fund capital investments by Diversified Energy and for     
general corporate purposes. MCN intends to repay the term loan with proceeds    
from the sale of E&P properties.                                                

  In 1997, MCN sold 9,775,000 shares of common stock in a public offering,
generating net proceeds of $276.6 million (Note 11a). In 1997, MCN issued $100  
million of Private Institutional Trust Securities (PRINTS) and $100 million of  
Single Point Remarketed Reset Capital Securities (SPRRCS) (Note 10a). In 1997,  
MCN also issued 2,645,000 FELINE PRIDES, generating proceeds of $132.3 million  
(Note 10a). The proceeds from these issuances were invested by MCN in its       
Diversified Energy group and were used to reduce short-term debt incurred to    
fund capital investments.                                                       

     During 1998, MCN retired the PRINTS early because it determined other forms
of financing provide greater flexibility.                                       

  In 1996, MCN issued $80 million of Trust Originated Preferred Securities
(TOPrS). Proceeds from the issuance were invested by MCN in its Diversified     
Energy group and were used to reduce short-term debt incurred to fund capital   
expenditures, for working capital requirements and for general corporate        
purposes.                                                                       

F-21

S-4
151st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 151st
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

     In April 1996, MCN issued 5,865,000 Preferred Redeemable Increased Dividend
Equity Securities (Enhanced PRIDES) (Note 10c). The Enhanced PRIDES are         
convertible securities that consist of a forward contract under which MCN is    
obligated to sell, and the Enhanced PRIDES holders are obligated to purchase,   
$135 million of MCN common stock in April 1999. It is anticipated that proceeds 
from the conversion of the Enhanced PRIDES will be used to repay Diversified    
Energy's medium-term notes that mature in May 1999.                             

 MCN traditionally has issued new shares of common stock pursuant to its
Direct Stock Purchase and Dividend Reinvestment Plan and various employee       
benefit plans. During the 1996-1998 period, MCN issued 3,281,000 shares and     
generated $55.3 million. Beginning in 1999, shares issued under these plans will
be acquired by MCN through open market purchases.                               

As of December 1998, MCN had an outstanding shelf registration with   
approximately $835.9 million remaining to be issued in the form of debt or      
equity securities.                                                              

     The following table sets forth the ratings for securities issued by MCN and
its subsidiaries as of June 1999:                                               

                                                        [Enlarge/Download Table]

                                                           STANDARD           DUFF &       
                                                           & POOR'S  MOODY'S  PHELPS  FITCH
                                                           --------  -------  ------  -----
                                                                                           
MCN:                                                                                       
  FELINE PRIDES...........................................   BBB-       Ba1    BBB     BBB 
  Enhanced PRIDES.........................................   BBB-      Baa3    BBB     BBB 
  Preferred securities....................................   BBB-       Ba1    BBB     BBB 
  SPRRCS..................................................   BBB+      Baa3    BBB+    BBB+
MCNIC:                                                                                     
  Commercial paper*.......................................     A2        P3      D2      F2
  Medium-term notes*......................................   BBB       Baa3    BBB+    BBB 
MichCon:                                                                                   
  Commercial paper........................................     A2        P1      D1      F1
  First mortgage bonds....................................     A-        A2      A+      A 

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

* Ratings based on MCN support agreement                                        

DIVERSIFIED ENERGY                                                              

  In 1998, Diversified Energy issued remarketable debt securities totaling
$300 million (Note 9). Proceeds from these issuances were used to reduce        
short-term debt incurred by the Diversified Energy group to fund capital        
investments and for general corporate purposes.                                 

    During 1998, a subsidiary of MCN Investment Corporation (MCNIC), currently
operating as MCN Energy Enterprises, retired early a $100 million five-year term
loan because it determined that other forms of debt financing provide greater   
flexibility and lower costs.                                                    

    In 1998, MCNIC renewed its credit lines, which now allow for borrowings of
up to $200 million under a 364-day revolving credit facility and up to $200     
million under a three-year revolving credit facility. These facilities support  
MCNIC's $400 million commercial paper program, which is used to finance capital 
investments of the Diversified Energy group and working capital requirements of 
its Energy Marketing operations. At December 31, 1998, commercial paper and bank
borrowings of $225.7 million were outstanding under this program.               

 In 1997, MCNIC repaid $30 million of senior debt on its stated maturity
date and issued $150 million of medium-term notes, using the proceeds to repay  
short-term debt and for general corporate purposes.                             

F-22

S-4
152nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 152nd
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

     In 1996, MCNIC issued $330 million of medium-term notes, using the proceeds
to repay commercial paper balances and for general corporate purposes.          

    As of December 1998, MCNIC had an outstanding shelf registration with $620
million remaining to be issued in the form of debt securities.                  

GAS DISTRIBUTION                                                                

    Gas Distribution maintains a relatively consistent amount of cash and cash
equivalents through the use of short-term borrowings. Short-term borrowings are 
normally reduced in the first part of each year as gas inventories are depleted 
and funds are received from winter heating sales. During the latter part of each
year, Gas Distribution's short-term borrowings normally increase as funds are   
used to finance increases in gas inventories and customer accounts receivable.  
To meet its seasonal short-term borrowing needs, Gas Distribution normally      
issues commercial paper that is backed by credit lines with several banks.      
MichCon has established credit lines to allow for borrowings of up to $150      
million under a 364-day revolving credit facility and up to $150 million under a
three-year revolving credit facility, both of which were renewed in July 1998.  
At December 31, 1998, commercial paper of $218.4 million was outstanding under  
this program.                                                                   

  During 1998, MichCon issued $150 million of remarketable debt securities
(Note 9). Proceeds from these issuances were used to retire first mortgage      
bonds, fund capital expenditures and for general corporate purposes. Also during
1998, MichCon redeemed through a tender offer $89.7 million and repaid $20      
million of first mortgage bonds.                                                

    During 1997, MichCon issued $85 million of first mortgage bonds. The funds
from this issuance were used to retire first mortgage bonds, fund capital       
expenditures and for general corporate purposes. During 1997, nonutility        
subsidiaries of MichCon borrowed $40 million under a nonrecourse credit         
agreement that matures in 2005. Proceeds were used to finance the expansion of  
the northern Michigan gathering system.                                         

     During 1997, MichCon redeemed $17 million of long-term debt and also repaid
$50 million of first mortgage bonds.                                            

    During 1996, MichCon issued first mortgage bonds totaling $70 million. The
proceeds were used to repay short-term obligations, finance capital expenditures
and for general corporate purposes. Also during 1996, MichCon repaid all amounts
owing under its Trust Demand Note program and did not renew this program which  
allowed for borrowings of up to $25 million.                                    

 As of December 1998, MichCon had an outstanding shelf registration with
$250 million remaining to be issued in the form of debt securities.             

INVESTING ACTIVITIES                                                  

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

Capital investments equaled $790.9 million in 1998 compared to $959.6 
million in 1997. The 1998 decrease reflects lower acquisitions as well as lower 
capital expenditures for the E&P properties. Partially offsetting this decrease 
were significantly higher investments in Pipelines & Processing properties, as  
well as increased investments in domestic and international power generation    
projects.                                                                       

F-23

S-4
153rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 153rd
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

                                                                [Download Table]

                                                              1998    1997    1996 
                                                              ----    ----    ---- 
                                                                                   
CAPITAL INVESTMENTS (in Millions)                                                  
Consolidated Capital Expenditures:                                                 
  Diversified Energy........................................ $324.8  $405.0  $395.3
  Gas Distribution..........................................  158.0   157.7   215.3
  Discontinued Operations...................................     --      --     6.5
                                                             ------  ------  ------
                                                              482.8   562.7   617.1
                                                             ------  ------  ------
MCN's Share of Joint Venture Capital Expenditures:*                                
  Pipelines & Processing....................................  219.9   152.2     5.2
  Electric Power............................................   12.0     7.4     5.5
  Energy Marketing..........................................     .8     3.2      .2
  Gas Distribution..........................................     .8     2.6     4.8
  Other.....................................................     .1      .5      .3
                                                             ------  ------  ------
                                                              233.6   165.9    16.0
                                                             ------  ------  ------
Acquisitions:                                                                      
  Significant...............................................   66.8   231.0   133.2
  Other.....................................................    7.7      --    24.4
                                                             ------  ------  ------
                                                               74.5   231.0   157.6
                                                             ------  ------  ------
Total Capital Investments................................... $790.9  $959.6  $790.7
                                                             ======  ======  ======

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

* A portion of joint venture capital expenditures is financed with joint venture
project debt.                                                               

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

OUTLOOK                                                               

1999 capital investments estimated at $750 million -- MCN's refocused 
strategic direction will result in capital investments in future years of       
approximately $600 million to $750 million annually, allocated approximately 35%
within Pipelines & Processing, 40% in Electric Power and 25% within Gas         
Distribution. MCN intends to grow by investing in a diverse portfolio of        
energy-related projects, primarily in North America.                            

  The proposed level of investments for future years will increase capital
requirements materially in excess of internally generated funds and require the 
issuance of additional debt and equity securities. MCN's actual capital         
requirements will depend on proceeds received from the sale of assets. General  
market conditions will dictate the timing and amount of future issuances. As it 
expands its business, MCN's capitalization objective is to maintain its credit  
ratings through a strong balance sheet. Its capitalization objective is a ratio 
of 50% equity and 50% debt. It is management's opinion that MCN and its         
subsidiaries will have sufficient capital resources, both internal and external,
to meet anticipated capital requirements.                                       

YEAR 2000 

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

F-24

S-4
154th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 154th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

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

                                                        [Enlarge/Download Table]

                                                   INVENTORY  ASSESSMENT  REMEDIATION  TESTING
                                                   ---------  ----------  -----------  -------
                                                                                              
Business Systems                                                                              
  December 31, 1998...............................   100%         95%         15%        15%  
  March 31, 1999..................................   100%        100%         80%        70%  
  June 30, 1999...................................   100%        100%        100%       100%  
Measurement and Control Systems                                                               
  December 31, 1998...............................    98%         90%         70%        60%  
  March 31, 1999..................................   100%        100%         95%        90%  
  June 30, 1999...................................   100%        100%        100%       100%  

    MCN also has visited key partners, operators and suppliers to review their
Year 2000 issues and share information. To the extent that any of these parties 
experience Year 2000 problems in their systems, MCN's operations may be         
adversely affected. The majority of MCN's key partners, operators and suppliers 
have represented to MCN that they have completed their Year 2000 inventory and  
assessment phases. MCN is continuing to monitor the progress of these key       
partners, operators and suppliers toward their completion of the remediation and
testing phases.                                                                 

  Cost of Remediation -- Costs associated with the Year 2000 issue are not
expected to have a material adverse effect on MCN's results of operation,       
liquidity or financial condition. The total costs are estimated to be between $5
million and $6 million, of which approximately $3.7 million was incurred through
December 1998. This estimate does not include MCN's share of Year 2000 costs    
that may be incurred by partnerships and joint ventures.                        

     The anticipated costs are not higher due in part to the ongoing replacement
of significant older systems, particularly MichCon's customer information       
system. MCN has made a substantial investment in new systems that are in process
of being installed, as well as those installed over the past few years. The     
replacement of these systems and the customer information system, in particular,
was necessary to maintain a high level of customer satisfaction and to respond  
to changes in regulation and increased competition within the energy industry.  
While the system replacements were not accelerated due to Year 2000 issues, MCN 
expects the new systems to be Year 2000 ready.                                  

     Risk and Contingency Planning -- MCN anticipates a smooth transition to the
Year 2000. However, the failure to correct a material Year 2000 problem could   
result in an interruption in or a failure of certain business activities and    
operations such as: i) delivery of gas to customers; ii) control and operation  
of the distribution system by electronic devices; iii) communication with       
customers for purposes of service calls or                                      

F-25

S-4
155th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 155th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

inquiries; and iv) timely billing and collection. The risk and impact of such   
failures is largely dependent on critical vendors and the external              
infrastructure that includes telecommunications providers, gas suppliers and    
project partners. The most reasonably likely worst case scenarios would be the  
extended inability to deliver gas due to the failure of embedded systems in the 
distribution process or the extended inability to communicate with and respond  
to customers due to the loss of telecommunications. Such failures could have a  
material adverse effect on MCN's results of operations, liquidity and financial 
condition. Due to the uncertainty inherent in the Year 2000 issue, resulting in 
part from the uncertainty of the Year 2000 readiness of key partners, operators,
suppliers and government agencies, MCN cannot certify that it will be unaffected
by Year 2000 complications. MCN has addressed the Year 2000 risks of its        
business by prioritizing such risks based on the worst case scenarios and their 
impact on the business. Focusing first on the safety and welfare of MCN's       
customers and employees, the following two mission-critical processes were      
identified: gas supply and distribution, and leak management emergency response.

While MCN believes it will be able to remediate and test all internal 
systems that support these processes, it fully recognizes its dependence on     
partners, operators, suppliers and government agencies. In order to reduce its  
Year 2000 risk, MCN is developing contingency plans for mission-critical        
processes in the event of a Year 2000 complication. Through failure scenario    
identification, MCN's approach is to develop reasonable and practical           
contingency plans to maintain operations in case of non-performance. Ten        
contingency planning teams have been established to address specific scenarios  
and mission critical functions identified in support of the safety and welfare  
of customers and employees. External suppliers have been contacted for their    
participation in the contingency planning efforts for gas supply and            
transportation, and materials management. Contingency plans for several         
essential gas transmission facilities were tested during December 1998 under a  
"power outage" scenario and achieved excellent results. Contingency plans will  
continue to be refined throughout 1999 as MCN works with partners, operators,   
suppliers and governmental agencies.                                            

MARKET RISK INFORMATION 

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

COMMODITY PRICE RISK                                                  

    MCN's exposure to commodity price risk arises from changes in natural gas,
natural gas liquids, oil and methanol prices throughout the United States and in
eastern Canada where MCN conducts sales and purchase transactions. MCN closely  
monitors and manages its exposure to commodity price risk through a variety of  
risk management techniques. Natural gas and oil futures and swap agreements are 
used to manage MCN's exposure to the risk of market price fluctuations on gas   
sale and purchase contracts, natural gas and oil production and gas inventories.

     A sensitivity analysis model was used to calculate the fair values of MCN's
natural gas and oil futures and swap agreements utilizing applicable forward    
commodity rates in effect at December 31, 1998. The sensitivity analysis        
involved increasing or decreasing the forward rates by a hypothetical 10% and   
calculating the resulting unfavorable change in the fair values of the gas and  
oil futures and swap agreements.                                                

INTEREST RATE RISK                                                    

 MCN is subject to interest rate risk in connection with the issuance of
variable- and fixed-rate debt and preferred securities. In order to manage      
interest costs, MCN uses interest rate swap agreements to exchange              
F-26

S-4
156th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 156th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

fixed- and variable-rate interest payment obligations over the life of the      
agreements without exchange of the underlying principal amounts. MCN's exposure 
to interest rate risk arises primarily from changes in U.S. Treasury rates and  
London Inter-Bank Offered Rates (LIBOR).                                        

    A sensitivity analysis model was used to calculate the fair values or cash
flows of MCN's debt and preferred securities, as well as its interest rate      
swaps, utilizing applicable forward interest rates in effect at December 31,    
1998. The sensitivity analysis involved increasing or decreasing the forward    
rates by a hypothetical 10% and calculating the resulting unfavorable change in 
the fair values or cash flows of the interest rate sensitive instruments.       

The results of the sensitivity model calculations follow:             

                                                                [Download Table]

                                                                     UNFAVORABLE
                                                             AMOUNT   CHANGE IN 
                                                             ------  -----------
                                                                                
MARKET RISK (in millions)                                                       
Commodity Price Sensitive:*                                                     
  Swaps -- pay fixed/receive variable....................... $ 53.6  Fair Value 
         -- pay variable/receive fixed...................... $ 54.0  Fair Value 
         -- basis........................................... $  5.2  Fair Value 
  Futures -- Longs.......................................... $  1.9  Fair Value 
          -- Shorts......................................... $   .1  Fair Value 
Interest Rate Sensitive:                                                        
  Debt -- fixed rate........................................ $121.4  Fair Value 
        -- variable rate.................................... $   .6   Cash Flow 
  Swaps -- pay fixed/receive variable....................... $   .2  Fair Value 
         -- pay variable/receive fixed...................... $  2.8  Fair Value 

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

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

FOREIGN CURRENCY RISK                                                 

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

NEW ACCOUNTING PRONOUNCEMENTS 

Computer Software -- In March 1998, the Accounting Standards Executive
Committee (AcSEC) of the American Institute of Certified Public Accountants     
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer  
Software Developed or Obtained for Internal Use." SOP 98-1 requires the         
capitalization of internal-use software and specifically identifies which costs 
should be capitalized and which                                                 

F-27

S-4
157th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 157th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONCLUDED)

costs should be expensed. The statement is effective for fiscal years beginning 
after December 15, 1998. Management does not expect the SOP to have a material  
impact on MCN's financial statements.                                           

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

     Derivative and Hedging Activities -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and 
Hedging Activities," effective for fiscal years beginning after June 15, 1999.  
SFAS No. 133 expands the definition of the types of contracts considered        
derivatives, requires all derivatives to be recognized in the balance sheet as  
either assets or liabilities measured at their fair value and sets forth        
conditions in which a derivative instrument may be designated as a hedge. The   
statement requires that changes in the fair value of derivatives be recognized  
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to be   
recorded to other comprehensive income or to offset related results on the      
hedged item in earnings.                                                        

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

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

FORWARD-LOOKING STATEMENTS

   This Annual Report includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking        
statements involve certain risks and uncertainties that may cause actual future 
results to differ materially from those contemplated, projected, estimated or   
budgeted in such forward-looking statements. Factors that may impact            
forward-looking statements include, but are not limited to, the following: (i)  
the effects of weather and other natural phenomena; (ii) increased competition  
from other energy suppliers as well as alternative forms of energy; (iii) the   
capital intensive nature of MCN's business; (iv) economic climate and growth in 
the geographic areas in which MCN does business; (v) the uncertainty of gas and 
oil reserve estimates; (vi) the timing and extent of changes in commodity prices
for natural gas, natural gas liquids, methanol, electricity and crude oil; (vii)
the nature, availability and projected profitability of potential projects and  
other investments available to MCN; (viii) conditions of capital markets and    
equity markets; (ix) changes in the economic and political climate and          
currencies of foreign countries where MCN has invested or may invest in the     
future; (x) the timing and results of major transactions, such as the sale of   
E&P properties; (xi) the timing, nature and impact of Year 2000 activities; and 
(xii) the effects of changes in governmental policies and regulatory actions,   
including income taxes, environmental compliance and authorized rates.          

F-28

S-4
158th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 158th

CONSOLIDATED STATEMENT OF OPERATIONS

                                                        [Enlarge/Download Table]

                                                                    YEAR ENDED DECEMBER 31          
                                                           -----------------------------------------
                                                              1998           1997                   
                                                           (RESTATED)     (RESTATED)                
                                                             NOTE 1B        NOTE 1B         1996    
                                                           ----------     ----------        ----    
                                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 
                                                                                                    
OPERATING REVENUES                                                                                  
  Gas and oil sales......................................  $1,813,343     $2,014,418     $1,827,198 
  Transportation.........................................     139,609        129,953        120,019 
  Other..................................................      77,746         63,496         50,051 
                                                           ----------     ----------     ---------- 
                                                            2,030,698      2,207,867      1,997,268 
                                                           ----------     ----------     ---------- 
OPERATING EXPENSES                                                                                  
  Cost of gas............................................   1,205,774      1,335,033      1,193,578 
  Operation and maintenance..............................     389,415        393,341        371,980 
  Depreciation, depletion and amortization...............     179,490        181,612        145,990 
  Property and other taxes...............................      69,553         75,491         74,427 
  Property write-downs and restructuring charges (Notes 2                                           
     and 3)..............................................     592,318             --             -- 
                                                           ----------     ----------     ---------- 
                                                            2,436,550      1,985,477      1,785,975 
                                                           ----------     ----------     ---------- 
OPERATING INCOME (LOSS)..................................    (405,852)       222,390        211,293 
                                                           ----------     ----------     ---------- 
EQUITY IN EARNINGS OF JOINT VENTURES (Note 6)............      62,225         55,659         17,867 
                                                           ----------     ----------     ---------- 
OTHER INCOME AND (DEDUCTIONS)                                                                       
  Interest income........................................      10,893         11,166          7,234 
  Interest on long-term debt.............................     (87,346)       (75,170)       (66,517)
  Other interest expense.................................     (24,404)       (11,283)       (11,264)
  Dividends on preferred securities of subsidiaries......     (36,370)       (31,090)       (12,374)
  Investment losses (Notes 2b and 2c)....................     (14,635)            --             -- 
  Minority interest......................................       5,992         (1,964)        (1,059)
  Other (Note 5e)........................................      19,561         10,759          3,764 
                                                           ----------     ----------     ---------- 
                                                             (126,309)       (97,582)       (80,216)
                                                           ----------     ----------     ---------- 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME                                              
  TAXES..................................................    (469,936)       180,467        148,944 
INCOME TAX PROVISION (BENEFIT)...........................    (183,468)        47,238         36,375 
                                                           ----------     ----------     ---------- 
INCOME (LOSS) FROM CONTINUING OPERATIONS.................    (286,468)       133,229        112,569 
DISCONTINUED OPERATIONS, NET OF TAXES (Note 4)...........          --             --         37,771 
                                                           ----------     ----------     ---------- 
NET INCOME (LOSS)........................................  $ (286,468)    $  133,229     $  150,340 
                                                           ==========     ==========     ========== 
BASIC EARNINGS (LOSS) PER SHARE (Note 11d)                                                          
  Continuing operations..................................  $    (3.63)    $     1.82     $     1.68 
  Discontinued operations (Note 4).......................          --             --            .57 
                                                           ----------     ----------     ---------- 
                                                           $    (3.63)    $     1.82     $     2.25 
                                                           ==========     ==========     ========== 
DILUTED EARNINGS (LOSS) PER SHARE (Note 11d)                                                        
  Continuing operations..................................  $    (3.63)    $     1.79     $     1.67 
  Discontinued operations (Note 4).......................          --             --            .56 
                                                           ----------     ----------     ---------- 
                                                           $    (3.63)    $     1.79     $     2.23 
                                                           ==========     ==========     ========== 
AVERAGE COMMON SHARES OUTSTANDING                                                                   
  Basic..................................................  $   78,823     $   72,887     $   66,944 
                                                           ----------     ----------     ---------- 
  Diluted................................................      78,823         75,435         67,521 
                                                           ----------     ----------     ---------- 
DIVIDENDS DECLARED PER SHARE.............................  $   1.0200     $    .9825     $    .9400 
                                                           ==========     ==========     ========== 

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

F-29

S-4
159th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 159th

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

                                                        [Enlarge/Download Table]

                                                                    DECEMBER 31        
                                                             --------------------------
                                                                1998            1997   
                                                             (RESTATED)      (RESTATED)
                                                              NOTE 1B         NOTE 1B  
                                                             ----------      ----------
                                                                   (IN THOUSANDS)      
                                                                                       
ASSETS                                                                                 
CURRENT ASSETS                                                                         
  Cash and cash equivalents, at cost (which approximates                               
     market value).......................................... $   17,039      $   39,495
  Accounts receivable, less allowance for doubtful accounts                            
     of $9,665 and $15,711, respectively....................    400,120         405,924
  Accrued unbilled revenues.................................     87,888          93,010
  Gas in inventory..........................................    147,387          56,777
  Property taxes assessed applicable to future periods......     72,551          67,879
  Accrued gas cost recovery revenues........................         --          12,862
  Other.....................................................     42,472          54,089
                                                             ----------      ----------
                                                                767,457         730,036
                                                             ----------      ----------
DEFERRED CHARGES AND OTHER ASSETS                                                      
  Deferred income taxes (Note 17)...........................     50,547              --
  Investments in debt and equity securities.................     69,705          97,521
  Deferred swap losses and receivables (Note 14a)...........     63,147          51,023
  Deferred environmental costs..............................     30,773          30,234
  Prepaid benefit costs (Note 16)...........................    111,775          80,242
  Other.....................................................     98,940          86,181
                                                             ----------      ----------
                                                                424,887         345,201
                                                             ----------      ----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (NOTE 6)                                 
  Pipelines & Processing....................................    521,711         323,597
  Electric Power............................................    231,668         180,127
  Energy Marketing..........................................     29,435          25,159
  Gas Distribution (Note 2c)................................      1,478           8,841
  Other.....................................................     18,939          19,252
                                                             ----------      ----------
                                                                803,231         556,976
                                                             ----------      ----------
PROPERTY, PLANT AND EQUIPMENT                                                          
  Pipelines & Processing (Note 2a)..........................     48,706          47,037
  Gas Distribution (Note 2c)................................  2,916,540       2,813,434
  Exploration & Production (Note 2b)........................  1,040,047       1,299,301
  Other.....................................................     36,124          27,002
                                                             ----------      ----------
                                                              4,041,417       4,186,774
  Less -- Accumulated depreciation and depletion............  1,644,094       1,488,050
                                                             ----------      ----------
                                                              2,397,323       2,698,724
                                                             ----------      ----------
                                                             $4,392,898      $4,330,937
                                                             ==========      ==========

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

F-30

S-4
160th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 160th

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

                                                        [Enlarge/Download Table]

                                                                    DECEMBER 31        
                                                             --------------------------
                                                                1998            1997   
                                                             (RESTATED)      (RESTATED)
                                                              NOTE 1B         NOTE 1B  
                                                             ----------      ----------
                                                                   (IN THOUSANDS)      
                                                                                       
LIABILITIES AND CAPITALIZATION                                                         
CURRENT LIABILITIES                                                                    
  Accounts payable.......................................... $  304,349      $  342,195
  Notes payable.............................................    618,851         401,726
  Current portion of long-term debt and capital lease                                  
     obligations............................................    269,721          36,878
  Federal income, property and other taxes payable..........     69,465          86,826
  Deferred gas cost recovery revenues.......................     14,980              --
  Gas payable...............................................     42,669           8,317
  Customer deposits.........................................     18,791          16,382
  Other.....................................................    108,310         101,630
                                                             ----------      ----------
                                                              1,447,136         993,954
                                                             ----------      ----------

DEFERRED CREDITS AND OTHER LIABILITIES                                                 
  Deferred income taxes (Note 17)...........................         --         153,159
  Unamortized investment tax credit.........................     30,056          33,046
  Tax benefits amortizable to customers.....................    130,120         123,365
  Deferred swap gains and payables (Note 14a)...............     62,956          41,717
  Accrued environmental costs...............................     35,000          35,000
  Minority interest.........................................     10,898          19,188
  Other.....................................................     75,439          69,889
                                                             ----------      ----------
                                                                344,469         475,364
                                                             ----------      ----------

COMMITMENTS AND CONTINGENCIES (NOTE 13)                                                
CAPITALIZATION                                                                         
  Long-term debt, including capital lease obligations (Note                            
     9).....................................................  1,307,168       1,212,564
  MCN-obligated mandatorily redeemable preferred securities                            
     of subsidiaries holding solely debentures of MCN (Note                            
     10a)...................................................    502,203         505,104
  Common shareholders' equity (see accompanying                                        
     statement).............................................    791,922       1,143,951
                                                             ----------      ----------
                                                              2,601,293       2,861,619
                                                             ----------      ----------
                                                             $4,392,898      $4,330,937
                                                             ==========      ==========

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

F-31

S-4
161st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 161st

CONSOLIDATED STATEMENT OF CASH FLOWS

                                                        [Enlarge/Download Table]

                                                                      YEAR ENDED DECEMBER 31           
                                                             ----------------------------------------- 
                                                                1998            1997                   
                                                             (RESTATED)      (RESTATED)                
                                                              NOTE 1B         NOTE 1B          1996    
                                                             ----------      ----------        ----    
                                                                           (IN THOUSANDS)              
                                                                                                       
CASH FLOW FROM OPERATING ACTIVITIES                                                                    
  Net income (loss)......................................... $(286,468)       $ 133,229      $ 150,340 
  Adjustments to reconcile net income (loss) to net cash                                               
    provided from operating activities                                                                 
    Depreciation, depletion and amortization                                                           
      Per statement of operations...........................   179,490          181,612        145,990 
      Charged to other accounts.............................     8,000            7,728         11,026 
    Unusual charges (Notes 2 and 3).........................   389,598               --             -- 
    Deferred income taxes -- current........................    (2,587)          (2,701)         8,061 
    Deferred income taxes and investment tax credit, net....    14,565           11,660         23,892 
    Gain on sale of Genix, net of taxes (Note 4b)...........        --               --        (36,176)
    Equity in earnings of joint ventures, net of                                                       
      distributions.........................................   (40,360)         (16,511)        (2,506)
    Other...................................................   (11,550)          (5,456)        (7,541)
    Changes in assets and liabilities, exclusive of changes                                            
      shown separately......................................   (97,966)          33,823        (94,754)
                                                             ---------        ---------      --------- 
      Net cash provided from operating activities...........   152,722          343,384        198,332 
                                                             ---------        ---------      --------- 
CASH FLOW FROM FINANCING ACTIVITIES                                                                    
  Notes payable, net........................................   307,482           68,000         87,491 
  Dividends paid............................................   (82,239)         (72,851)       (62,875)
  Issuance of common stock (Note 11a).......................    20,192          294,402         17,264 
  Issuance of preferred securities (Note 10a)...............    96,850          326,521         77,218 
  Issuance of long-term debt (Note 9).......................   458,761          273,241        398,540 
  Long-term commercial paper and bank borrowings (Note 9)...    17,299         (261,822)       (62,835)
  Retirement of long-term debt and preferred securities                                                
    (Notes 9 and 10a).......................................  (328,810)        (109,224)        (8,139)
  Other.....................................................     8,243            4,612         (6,249)
                                                             ---------        ---------      --------- 
    Net cash provided from financing activities.............   497,778          522,879        440,415 
                                                             ---------        ---------      --------- 
CASH FLOW FROM INVESTING ACTIVITIES                                                                    
  Capital expenditures......................................  (482,775)        (561,354)      (610,323)
  Acquisitions (Note 5).....................................   (42,429)        (166,553)      (133,201)
  Investment in debt and equity securities, net.............    17,831          (63,123)       (26,903)
  Investment in joint ventures..............................  (189,309)        (152,642)       (36,217)
  Sale of property and joint venture interests..............    47,185           67,365         36,621 
  Sale of Genix (Note 4b)...................................        --               --        132,889 
  Other.....................................................   (23,459)          19,077          9,590 
                                                             ---------        ---------      --------- 
    Net cash used for investing activities..................  (672,956)        (857,230)      (627,544)
                                                             ---------        ---------      --------- 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........   (22,456)           9,033         11,203 
CASH AND CASH EQUIVALENTS, JANUARY 1........................    39,495           30,462         19,259 
                                                             ---------        ---------      --------- 
CASH AND CASH EQUIVALENTS, DECEMBER 31...................... $  17,039        $  39,495      $  30,462 
                                                             =========        =========      ========= 
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES                                                
  SHOWN SEPARATELY                                                                                     
  Accounts receivable, net.................................. $  (6,653)       $ (49,017)     $ (66,183)
  Accrued unbilled revenues.................................     5,122           15,499        (16,099)
  Gas in inventory..........................................   (90,610)          22,384         (7,398)
  Accrued/deferred gas cost recovery revenues, net..........    27,842           14,810        (28,250)
  Prepaid/accrued benefit costs, net........................   (31,490)         (16,086)       (50,972)
  Accounts payable..........................................   (35,597)          24,273        102,711 
  Federal income, property and other taxes payable..........   (17,333)         (10,820)       (19,587)
  Gas payable...............................................    34,352            5,524         (9,339)
  Other current assets and liabilities, net.................     8,152            5,998         (5,146)
  Other deferred assets and liabilities, net................     8,249           21,258          5,509 
                                                             ---------        ---------      --------- 
                                                             $ (97,966)       $  33,823      $ (94,754)
                                                             =========        =========      ========= 

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

F-32

S-4
162nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 162nd

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

                                                        [Enlarge/Download Table]

                                                                   YEAR ENDED DECEMBER 31        
                                                            ------------------------------------ 
                                                               1998          1997                
                                                            (RESTATED)    (RESTATED)             
                                                             NOTE 1B       NOTE 1B        1996   
                                                            ----------    ----------      ----   
                                                                       (IN THOUSANDS)            
                                                                                                 
COMMON SHAREHOLDERS' EQUITY (Note 11)                                                            
COMMON STOCK,                                                                                    
  par value $.01 per share -- 100,000,000 shares                                                 
  authorized, 79,724,542, 78,231,889 and 67,303,908 shares                                       
  outstanding, respectively................................ $     797     $      782    $    673 
                                                            ---------     ----------    -------- 
ADDITIONAL PAID-IN CAPITAL                                                                       
  Balance -- beginning of period...........................   806,997        493,078     445,828 
  Common stock and performance units.......................    25,969        313,485      47,326 
  Other....................................................        --            434         (76)
                                                            ---------     ----------    -------- 
  Balance -- end of period.................................   832,966        806,997     493,078 
                                                            ---------     ----------    -------- 
ACCUMULATED OTHER COMPREHENSIVE LOSS                                                             
  Foreign Currency Translation Adjustment:                                                       
     Balance -- beginning of period........................    (6,335)           (43)       (141)
     Net change in foreign currency translation adjustment                                       
       (a).................................................    (6,554)        (6,292)         98 
                                                            ---------     ----------    -------- 
     Balance -- end of period..............................   (12,889)        (6,335)        (43)
                                                            ---------     ----------    -------- 
  Unrealized Losses on Securities:                                                               
     Balance -- beginning of period........................    (1,184)            --          -- 
     Net change in unrealized losses on securities(a)......    (2,503)        (1,184)         -- 
                                                            ---------     ----------    -------- 
     Balance -- end of period..............................    (3,687)        (1,184)         -- 
                                                            ---------     ----------    -------- 
                                                              (16,576)        (7,519)        (43)
                                                            ---------     ----------    -------- 
RETAINED EARNINGS                                                                                
  Balance -- beginning of period...........................   365,730        305,352     218,425 
  Net income (loss)(a).....................................  (286,468)       133,229     150,340 
  Cash dividends declared..................................   (82,239)       (72,851)    (62,875)
  Other....................................................        --             --        (538)
                                                            ---------     ----------    -------- 
  Balance -- end of period.................................    (2,977)       365,730     305,352 
                                                            ---------     ----------    -------- 
YIELD ENHANCEMENT, CONTRACT AND ISSUANCE COSTS.............   (22,288)       (22,039)    (14,492)
                                                            ---------     ----------    -------- 
                                                            $ 791,922     $1,143,951    $784,568 
                                                            =========     ==========    ======== 
(A) DISCLOSURE OF COMPREHENSIVE INCOME (LOSS)(Note 1a):                                          
  Net income (loss)........................................ $(286,468)    $  133,229    $150,340 
  Other comprehensive income, net of taxes:                                                      
  Foreign Currency Translation Adjustment:                                                       
     Foreign currency translation gains (losses), net of                                         
       taxes of $3,529, $3,388 and $53.....................    (6,554)        (6,292)         98 
  Unrealized Losses on Securities:                                                               
     Unrealized losses on securities, net of taxes of                                            
       $3,495, $637 and $--................................    (6,490)        (1,184)         -- 
     Reclassification of losses recognized in net income,                                        
       net of taxes of $2,147, $-- and $--.................     3,987             --          -- 
                                                            ---------     ----------    -------- 
                                                            $(295,525)    $  125,753    $150,438 
                                                            =========     ==========    ======== 

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

F-33

S-4
163rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 163rd

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1a. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                  

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

     - Diversified Energy, operating through MCN Investment Corporation (MCNIC),
currently operating as MCN Energy Enterprises, is involved in the 
       following segments: Pipelines & Processing with gathering, processing and
 transmission facilities near areas of rapid reserve development and
   growing consumer markets; Electric Power with investments in electric
       generation facilities in operation and under construction with a combined
2,986 megawatts (MW) of gross capacity and investments in electric
distribution facilities; Energy Marketing with total gas sales and
      exchange gas delivery markets of 465.7 billion cubic feet (Bcf) for 1998
    and rights to 67 Bcf of storage capacity, of which 42 Bcf is currently
   under development; Exploration & Production (E&P) properties with 1.2
       trillion cubic feet equivalent of proved gas and oil reserves at December
31, 1998.                                                         

- Gas Distribution consists principally of Michigan Consolidated Gas  
    Company (MichCon), a natural gas distribution and transmission company
   serving 1.2 million customers in more than 500 communities throughout
  Michigan. MichCon is subject to the accounting requirements and rate
      regulation of the Michigan Public Service Commission (MPSC) with respect
to the distribution and intrastate transportation of natural gas. 

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

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

REVENUES AND COST OF GAS -- Gas Distribution accrues revenues for gas 
service provided but unbilled at month end. Through December 31, 1998, MichCon's
accrued revenues included a component for cost of gas sold that was recoverable 
through the gas cost recovery (GCR) mechanism. Prior to 1999, GCR proceedings   
before the MPSC permitted MichCon to recover the prudent and reasonable cost of 
gas sold. The overcollection of gas costs totaling $14,980,000 at December 31,  
1998, including interest, will be refunded to customers through reduced future  
rates.                                                                          

     Beginning in 1999, MichCon implemented a Regulatory Reform Plan approved by
the MPSC. The plan suspends the GCR mechanism and fixes the gas commodity       
component of MichCon's sales rates for the three-year period beginning January  
1, 1999.                                                                        

    NATURAL GAS AND OIL EXPLORATION AND PRODUCTION -- The full-cost accounting
method prescribed by the Securities and Exchange Commission (SEC) is followed   
for investments in gas and oil properties. Under the full cost method           
substantially all acquisition, exploration and development costs are            
capitalized. To the extent such capitalized costs exceed the "ceiling," the     
excess is written off to income. The ceiling is the sum of discounted future net
cash flows from proved gas and oil reserves (using unescalated prices and costs 
unless contractual arrangements exist), and the costs of unproved properties    
after income tax effects. The ceiling test is applied at the end of each quarter
and requires a write-down of gas and oil properties if the ceiling is exceeded, 
even if any price decline is temporary. Management's investment and operating   
decisions are based upon prices, costs and production assumptions that are      
different from those used to compute the ceiling. As a                          

F-34

S-4
164th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 164th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

result, it is possible that future fluctuations in key forecast assumptions     
could result in impairments being recorded for accounting purposes, when the    
long-term economics of such properties have not changed.                        

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

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

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

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

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

   PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment, excluding
E&P property, is stated at cost and includes amounts for labor, materials,      
overhead and an allowance for funds used during construction. Unit of production
depreciation and depletion is used for certain Gas Distribution production and  
transmission property. All other property, plant and equipment of MCN, excluding
E&P property, is depreciated over its useful life using the straight-line       
method. Depreciation rates vary by class of property.                           

  The ratio of the provision for depreciation and depletion to the average
cost of depreciable property is as follows:                                     

                                                                [Download Table]

                                                     1998       1997       1996 
                                                     ----       ----       ---- 
                                                                                
Pipelines & Processing...........................     3.4%       3.5%       3.8%
Gas Distribution.................................     3.5%       4.1%       4.4%
Other............................................    12.2%      12.3%      10.1%

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

F-35

S-4
165th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 165th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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

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

  Investment tax credits relating to Gas Distribution property placed into
service were deferred and are being credited to income over the life of the     
related property. Investment tax credits relating to Diversified Energy         
operations were recorded to income in the year the related property was placed  
into service.                                                                   

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

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

                                                                [Download Table]

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

1b. RESTATEMENT                                                                 

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

F-36

S-4
166th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 166th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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

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

    The accompanying consolidated financial statements have been restated from
amounts originally reported to properly account for the transactions identified.
Additionally, amounts have been reclassified to reflect E&P as a continuing     
operation. A summary of the significant effects of the restatement and          
reclassification on MCN's 1998 and 1997 financial statements is as follows:     

                                                        [Enlarge/Download Table]

                                                       1998                                     1997                 
                                      --------------------------------------   --------------------------------------
                                                                RECLASSIFIED                             RECLASSIFIED
                                                                    AND                                      AND     
                                      PREVIOUSLY                  RESTATED     PREVIOUSLY                  RESTATED  
                                       REPORTED     RESTATED     (NOTE 4A)      REPORTED     RESTATED     (NOTE 4A)  
                                      ----------    --------    ------------   ----------    --------    ------------
                                                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                    
                                                                                                                     
CONSOLIDATED STATEMENT OF OPERATIONS                                                                                 
  Cost of Gas.......................  $1,250,815   $1,262,372    $1,205,774    $1,392,856   $1,406,819    $1,335,033 
  Income (Loss)From Continuing                                                                                       
    Operations Before Income                                                                                         
    Taxes...........................  $  (21,620)  $  (33,177)   $ (469,936)   $  174,413   $  160,450    $  180,467 
  Income Tax Provision (Benefit)....  $  (15,456)  $  (19,500)   $ (183,468)   $   62,266   $   57,380    $   47,238 
  Income (Loss) From Continuing                                                                                      
    Operations......................  $   (6,164)  $  (13,677)   $ (286,468)   $  112,147   $  103,070    $  133,229 
  Net Income (Loss).................  $ (278,955)  $ (286,468)   $ (286,468)   $  142,306   $  133,229    $  133,229 
  Basic Earnings (Loss) Per Share                                                                                    
    Continuing Operations...........  $     (.08)  $     (.17)   $    (3.63)   $     1.54   $     1.41    $     1.82 
    Continuing and Discontinued                                                                                      
      Operations....................  $    (3.54)  $    (3.63)   $    (3.63)   $     1.95   $     1.82    $     1.82 
  Diluted Earnings (Loss) Per Share                                                                                  
    Continuing Operations...........  $     (.08)  $     (.17)   $    (3.63)   $     1.51   $     1.39    $     1.79 
    Continuing and Discontinued                                                                                      
      Operations....................  $    (3.54)  $    (3.63)   $    (3.63)   $     1.91   $     1.79    $     1.79 
CONSOLIDATED STATEMENT OF FINANCIAL                                                                                  
  POSITION                                                                                                           
  Accounts Receivable...............  $  397,298   $  400,120    $  400,120    $  404,448   $  405,924    $  405,924 
  Gas in Inventory..................  $  149,797   $  147,387    $  147,387    $   56,777   $   56,777    $   56,777 
  Accounts Payable..................  $  278,417   $  304,349    $  304,349    $  326,756   $  342,195    $  342,195 
  Federal Income, Property and Other                                                                                 
    Taxes Payable...................  $   78,395   $   69,465    $   69,465    $   91,712   $   86,826    $   86,826 
  Common Shareholders' Equity.......  $  808,512   $  791,922    $  791,922    $1,153,028   $1,143,951    $1,143,951 

F-37

S-4
167th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 167th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

2. PROPERTY WRITE-DOWNS AND INVESTMENT LOSS                                     

A. PIPELINES & PROCESSING                                             

        PROPERTY -- During 1998, MCN recorded an impairment loss relating to
  its coal fines project totaling $133,782,000 pre-tax ($86,959,000 net of
taxes). In June 1998, MCN placed into operation six coal fines plants 
   designed to recover particles of coal that are a waste by-product of coal
   mining and then process the particles to create coal briquettes for sale.
The economic viability of the venture is dependent on the briquettes  
   qualifying for synthetic fuel tax credits and MCN's ability to utilize or
  sell such credits. Although the plants were in service by June 30, 1998,
    the date specified to qualify for the tax credits, operating delays at the
  plants in the third quarter have significantly increased the possibility
    that the Internal Revenue Service will challenge the project's eligibility
  for tax credits. In addition, there is uncertainty as to whether MCN can
 utilize or sell the credits. Without the credits, the project generates
negative cash flows. These factors led to MCN's decision to record an 
   impairment loss equal to the carrying value of the plants, reflecting the
  likely inability to recover such costs. MCN is currently negotiating the
    sale of its interest in the coal fines project. Management does not expect
    proceeds from the sale to be in excess of selling expenses and remediation
obligations.                                                          

       In 1998, MCN also recorded an impairment loss of $3,899,000 pre-tax
   ($2,534,000 net of taxes) relating to an acquired out-of-service pipeline
    in Michigan. This pipeline was acquired for future development, along with
easements and rights-of-way. In connection with certain lease renewal 
options, MCN reviewed the business alternatives for these assets and  
determined that their development is unlikely. Accordingly, MCN has   
recorded an impairment loss equal to the carrying value of the assets.

B. EXPLORATION & PRODUCTION                                           

         PROPERTY --During 1998, MCN recognized write-downs of its gas and oil
  properties held by its E&P business unit, MCNIC Oil & Gas Company (MOG),
     totaling $416,977,000 pre-tax ($271,035,000 net of taxes). These properties
 were accounted for under the full cost method. The write-downs were due
    primarily to lower oil and gas prices and the under-performance of certain
exploration properties. Under the full cost method of accounting as   
 prescribed by the Securities and Exchange Commission, MCN's capitalized
exploration and development costs exceeded the full cost "ceiling,"   
     resulting in the excess being written off to income. The ceiling is the sum
   of discounted future net cash flows from the production of proved gas and
 oil reserves, and the lower of cost or estimated fair value of unproved
  properties, net of related income tax effects. Future net cash flows are
   required to be estimated based on end-of-quarter prices and costs, unless
     contractual arrangements exist. A significant portion of the write-down was
due to lower-than-expected exploratory drilling results.              

  INVESTMENT --In 1998, MCN also recognized a $6,135,000 pre-tax
    ($3,987,000 net of taxes) loss from the write-down of an investment in the
  common stock of an E&P company. The loss is due to a decline in the fair
value of the securities which is not considered temporary.            

C. GAS DISTRIBUTION                                                   

          PROPERTY -- During 1998, MichCon recognized a $24,800,000 pre-tax loss
   ($11,200,000 net of taxes and minority interest) from the write-down of a
    gas gathering pipeline system. A new gas reserve analysis was performed in
     1998 to determine the impact of the diversion of certain untreated gas away
     from the gathering system. This analysis revealed that projected cash flows
from the gathering system were not sufficient to cover the system's   
     carrying value. Therefore, an impairment loss was recorded representing the
 amount by which the carrying value of the system exceeded its estimated
fair value.                                                           

   INVESTMENT -- During 1998, MCN recognized an $8,500,000 pre-tax
 ($5,525,000 net of taxes) write-down of a joint venture investment in a
  small gas distribution company located in Missouri. As a result of MCN's
     refocused strategic direction, MCN expects to sell this investment in 1999.
   The write-down represents the amount by which the carrying value exceeded
the estimated fair value of the investment.                           

F-38

S-4
168th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 168th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

3. RESTRUCTURING CHARGES                                                        

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

  CORPORATE -- The first part, totaling $10,390,000 pre-tax, consists of a
corporate realignment designed to improve operating efficiencies through a more 
streamlined organizational structure. The realignment includes the reduction of 
37 positions resulting in severance and termination benefits of $4,714,000      
pre-tax. Also included in the charge was $5,676,000 pre-tax relating to net     
lease expenses and the write-down of fixed assets consisting of leasehold       
improvements, office equipment and information systems, which are no longer used
by MCN. As of December 31, 1998, payments of $660,000 have been charged against 
the restructuring accruals relating to severance and termination benefits. These
benefits will continue to be paid through 2000. The remaining restructuring     
costs, primarily for net lease expenses, are expected to be paid over the       
related lease terms, which expire through 2006.                                 

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

4. DISCONTINUED OPERATIONS                                                      

A. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED                      

       In the 1998 MCN Annual Report on Form 10-K/A, 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.                               

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

   LOSS ON INVESTMENT OF E&P COMPANY: MCN recognized an additional
     $7,456,000 pre-tax loss ($4,846,000 net of taxes) from the write-down of an
    investment in the common stock of an E&P company during the second quarter
of 1999. MCN has no carrying value in this investment after this      
write-down.                                                           

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

F-39

S-4
169th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 169th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

B. THE GENIX GROUP, INC.                                              

          In 1996, MCN completed the sale of its computer operations subsidiary,
     The Genix Group, Inc. (Genix), to Affiliated Computer Services, Inc. for an
 adjusted sales price of $132,900,000, resulting in an after-tax gain of
     $36,176,000. Genix's 1996 income from operations totaled $1,595,000 and has
been accounted for as a discontinued operation.                       

5. ACQUISITIONS AND DISPOSITIONS                                                

A. BHOTE KOSHI POWER COMPANY                                          

          In 1997, MCN acquired an approximate 65% interest in Bhote Koshi Power
 Company, a partnership that is constructing a 36 MW hydroelectric power
plant in Nepal. Construction of the plant began in early 1997 and is  
     scheduled to be completed in early 2000. At December 31, 1998, MCN had paid
 $7,200,000 of its total equity commitment of $20,100,000. The remaining
    equity commitment balance will be paid in 1999 and 2000. The investment is
accounted for under the equity method.                                

B. TORRENT POWER LIMITED                                              

        In 1997, MCN acquired a 40% interest in the common equity of Torrent
Power Limited (TPL), a joint venture that holds minority interests in 
    electric distribution companies and power generation facilities located in
the state of Gujarat, India. In 1997 and 1998, MCN acquired preference
     shares in TPL, bringing the total cost of the acquisitions to $121,200,000.
 The joint venture holds a 36% interest in Ahmedabad Electricity Company
   Limited (AEC), a 43% interest in Surat Electricity Company Limited (SECL)
     and a 42% interest in Gujarat Torrent Energy Corporation (GTEC). AEC serves
    the city of Ahmedabad and has 550 MW of electric generating capacity. SECL
    provides electricity to the city of Surat. GTEC owns and operates a 655 MW
 dual fuel generation facility that became fully operational in December
1998. MCN accounts for its interest in TPL under the equity method.   

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

C. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP                   

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

D. LYONDELL METHANOL COMPANY, L.P.                                    

      In 1996, MCN acquired a 25% interest in Lyondell Methanol Company,
L.P., a limited partnership that owns a 248 million gallon-per-year   
     methanol production plant in Texas. MCNIC supplies a portion of the natural
gas to the methanol plant. The acquisition totaled $54,500,000 and is 
accounted for under the equity method.                                

E. DAUPHIN ISLAND GATHERING PARTNERS                                  

          In early 1996, MCN acquired a 99% interest in Dauphin Island Gathering
    Partners (DIGP) for $78,620,000. At the time of the acquisition, DIGP, the
     general partnership, owned a 90-mile gas gathering system in the Mobile Bay
area of offshore Alabama. In mid-1996, MCN sold a 40% interest in the 
   partnership to PanEnergy Dauphin Island Company for $36,000,000. The sale
resulted in a pre-tax gain of $3,986,000.                             
F-40

S-4
170th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 170th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

     In late 1996, a 41% interest in the partnership was sold to three
 additional partners resulting in a pre-tax gain of $4,796,000, of which
    $2,398,000 was deferred until 1997 when a related option agreement expired
unexercised. The three additional partners paid for their interests by
     contributing to DIGP the Main Pass Gathering System, a 57-mile offshore gas
 gathering system in the Gulf of Mexico. As a result of the sales, MCN's
ownership interest in DIGP was reduced to 35%. MCN accounts for its   
interest in DIGP under the equity method.                             

6. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES                                

MCN has equity interests in several joint ventures involved in the    
following businesses: Pipelines & Processing -- 10 1/2% to 80% owned; Electric  
Power -- 23% to 67 1/2% owned; Energy Marketing -- 10% to 50% owned; Gas        
Distribution -- 47 1/2% owned; and Real Estate & Other -- 33% to 50% owned.     
MCN's share of undistributed earnings in these joint ventures totaled           
$54,753,000 at December 31, 1998.                                               

F-41

S-4
171st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 171st
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

     The following is the combined summarized financial information of the joint
ventures. No provision for income taxes has been included, since income taxes   
are paid directly by the joint venture participants.                            

                                                        [Enlarge/Download Table]

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

                                                        [Enlarge/Download Table]

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

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

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

F-42

S-4
172nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 172nd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

7. REGULATORY MATTERS                                                           

A. REGULATORY ASSETS AND LIABILITIES                                  

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

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

                                                                [Download Table]

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

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

B. REGULATORY REFORM PLAN                                             

          In April 1998, the MPSC approved MichCon's Regulatory Reform Plan. The
plan includes a comprehensive experimental three-year customer choice 
     program, which is subject to annual caps on the level of participation. The
   customer choice program begins April 1, 1999, when up to 75,000 customers
  will have the option of purchasing natural gas from suppliers other than
    MichCon. Up to 75,000 additional customers can be added April 1 of each of
    the next two years, eventually allowing up to 225,000 customers the option
     to choose a gas supplier other than MichCon. MCN's gas marketing affiliates
     also participate as alternative suppliers under the program. In each of the
three plan years, there is also a volume limitation on commercial and 
     industrial participants. The volume limitation for these participants is 10
  Bcf in 1999, 20 Bcf in 2000 and 30 Bcf in 2001. MichCon will continue to
 transport and deliver the gas to the customers' premises at prices that
maintain its existing sales margins.                                  

          The plan also suspends the GCR mechanism for customers who continue to
purchase gas from MichCon and fixes the gas commodity component of    
    MichCon's sales rates at $2.95 per Mcf for the three-year period beginning
on January 1, 1999. Prior to January 1999, MichCon did not generate   
 earnings on the gas commodity portion of its operations. However, under
     this plan, changes in cost of gas will directly impact earnings. As part of
its gas acquisition strategy, MichCon has entered into firm-price     

F-43

S-4
173rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 173rd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

     contracts for a substantial portion of its expected gas supply requirements
for the next three years. These contracts, coupled with the use of    
     MichCon's storage facilities, will substantially mitigate risks from winter
price and volume fluctuations.                                        

  Also beginning in 1999, the plan established an income sharing
   mechanism that will allow customers to share in profits if actual utility
 return on equity exceeds predetermined thresholds. In October 1998, the
MPSC denied a rehearing and affirmed its approval of the plan. Various
     parties have appealed the MPSC's decision to the Michigan Court of Appeals.
     While management believes that based upon applicable Michigan law the order
will be upheld on appeal, there can be no assurance as to the outcome.

8. GAS IN INVENTORY                                                             

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

F-44

S-4
174th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 174th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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

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

                                                        [Enlarge/Download Table]

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

Substantially all of the net utility properties of MichCon, totaling  
approximately $1,240,000,000, are pledged as security for the payment of        
outstanding first mortgage bonds.                                               

 Maturities and sinking fund requirements during the next five years for
long-term debt outstanding at December 31, 1998 are $267,400,000 in 1999,       
$27,000,000 in 2000, $86,600,000 in 2001, $113,700,000 in 2002 and $86,000,000  
in 2003.                                                                        

F-45

S-4
175th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 175th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

DIVERSIFIED ENERGY -- At December 31, 1998, MCNIC had credit lines    
permitting borrowings of up to $200,000,000 under a 364-day revolving credit    
facility and up to $200,000,000 under a three-year revolving credit facility,   
both of which were renewed in July 1998. These facilities support MCNIC's       
$400,000,000 commercial paper program. MCNIC usually issues commercial paper in 
lieu of an equivalent amount of borrowings under these lines of credit.         
Commercial paper and bank borrowings outstanding at December 31, 1998 and 1997  
totaling $118,000,000 and $147,358,000, respectively, were classified as        
short-term. The remaining 1998 commercial paper and bank borrowings of          
$107,656,000 were classified as long-term. Commercial paper and bank borrowings 
outstanding as of December 31, 1998 and 1997 were at weighted average interest  
rates of 6.4% and 6.2%, respectively. Fees are paid to compensate banks for     
lines of credit.                                                                

In 1998, MCN issued $260,000,000 of debt under a one-year term loan   
facility, due December 1999. Principal payments are required based on certain   
proceeds received from the sale of E&P assets. Under the terms of the agreement,
certain alternative variable interest rates are available at the borrower's     
option. The weighted average interest rate at December 31, 1998 was 6.2%.       

In 1998, MCNIC issued a total of $300,000,000 of remarketable debt    
securities with various interest rates and maturity dates. These securities are 
senior unsecured obligations of MCNIC and are subject to an MCN support         
agreement. The securities are structured such that at a specified future        
remarketing date the remarketing agents may elect to remarket the securities    
whereby the annual interest rate will be reset. MCNIC received option premiums  
in return for the remarketing option. If the remarketing agents elect not to    
remarket the securities, MCNIC will be required to repurchase the securities at 
their principal amounts. The option premiums received, net of financing costs   
incurred, totaled $5,709,000 and are being amortized to income over the life of 
the debt. The remarketing dates are in April 2001, 2002 and 2003.               

During 1998, MOG retired early a five-year $100,000,000 term loan.    

GAS DISTRIBUTION -- At December 31, 1998, MichCon had credit lines    
permitting borrowings of up to $150,000,000 under a 364-day revolving credit    
facility and up to $150,000,000 under a three-year revolving credit facility,   
both of which were renewed in July 1998. MichCon issues commercial paper in lieu
of an equivalent amount of borrowings under these lines of credit. Commercial   
paper outstanding at December 31, 1998 and 1997 totaled $218,447,000 and        
$236,740,000 and was at weighted average interest rates of 5.6% and 5.8%,       
respectively. This debt is classified as short-term. Fees are paid to compensate
banks for lines of credit.                                                      

In 1998, MichCon issued a total of $150,000,000 of remarketable debt  
securities with various interest rates. These securities are "fall-away         
mortgage" debt and, as such, are secured debt as long as MichCon's current first
mortgage bonds are outstanding and become senior unsecured debt thereafter. The 
securities are structured such that the interest rates of the issues can be     
reset at various remarketing dates over the life of the debt. The initial       
remarketing dates are in June 2003 and 2008. MichCon received option premiums in
return for granting options to underwriters to reset the interest rate for a    
period of ten years at the initial remarketing dates. The option premiums       
received, net of financing costs incurred, totaled $3,052,000 and are being     
amortized to income over the initial interest and corresponding option periods. 
If the underwriters elect not to exercise their reset options, the securities   
become subject to the remarketing feature. If MichCon and the remarketing agent 
cannot agree on an interest rate or the remarketing agent is unable to remarket 
the securities, MichCon will be required to repurchase the securities at their  
principal amounts.                                                              

In 1998, MichCon redeemed through a tender offer $37,000,000 of the   
outstanding $55,000,000 balance of 9 1/8% first mortgage bonds due 2004, and    
$52,686,000 of the outstanding $70,000,000 balance of 8% first mortgage bonds   
due 2002.                                                                       

    During 1997, nonutility subsidiaries of MichCon borrowed $40,000,000 under
a nonrecourse credit agreement. Under terms of the agreement, certain           
alternative variable interest rates are available at the borrowers' option      
during the life of the agreement. Quarterly principal payments commenced in     
1997, with a final installment due November 2005. The loan is secured by a      
pledge of stock of the borrowers and a security interest in certain of their    
assets. MichCon may be required to support the credit agreement through limited 

F-46

S-4
176th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 176th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

capital contributions to the subsidiaries if certain cash flow and operating    
targets are not met. At December 31, 1998 and 1997, $29,200,000 and $36,400,000 
were outstanding at weighted average interest rates of 5.8% and 6.4%,           
respectively.                                                                   

    MichCon has variable interest rate swap agreements with notional principal
amounts aggregating $92,000,000 in connection with its first mortgage bonds.    
Swap agreements of $40,000,000 through May 2002 have reduced the average cost of
the related debt from 7.3% to 6.3% for the year ended December 31, 1998. Swap   
agreements of $40,000,000 through May 2005 have reduced the average cost of the 
related debt from 7.1% to 5.9% for the year ended December 31, 1998. Swap       
agreements of $12,000,000 through April 2000 have reduced the average cost of   
the related debt from 8.3% to 4.4% for the year ended December 31, 1998. A      
nonutility subsidiary of MichCon has an interest rate swap agreement on the     
$14,080,000 outstanding balance of its project loan agreement at December 31,   
1998 that effectively fixes the interest rate at 7.5% through February 2003.    

10. PREFERRED AND HYBRID SECURITIES                                             

A. MCN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF       
SUBSIDIARIES                                                    

       MCN has established various trusts and a partnership formed for the
     sole purpose of issuing preferred securities and lending the gross proceeds
thereof to MCN. The sole assets of the trusts and partnership are     
debentures of MCN with terms similar to those of the related preferred
securities.                                                           

F-47

S-4
177th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 177th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

   Summarized information for MCN-obligated mandatorily redeemable
     preferred securities of subsidiaries holding solely debentures of MCN is as
follows:                                                              

                                                        [Enlarge/Download Table]

                                                            LIQUIDATION   MATURITY OF    EARLIEST 
                                                               VALUE      UNDERLYING    REDEMPTION
                                        1998       1997      PER SHARE     SECURITY        DATE   
                                        ----       ----     -----------   -----------   ----------
                                          (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)     
                                                                                                  
MCN Financing I                                                                                   
  8 5/8% Trust Originated Preferred                                                               
  Securities........................  $ 77,068   $ 77,045     $   25          2036         2001   
  (3,200,000 preferred securities)                                                                
  Dividends payable quarterly                                                                     
MCN Financing II                                                                                  
  8 5/8% Trust Preferred                                                                          
     Securities.....................    96,669         --         25          2038         2003   
  (4,000,000 preferred securities)                                                                
  Dividends payable quarterly                                                                     
MCN Financing V                                                                                   
  6.305% Private Institutional Trust                                                              
  Securities........................        --     99,606      1,000            --           --   
  (100,000 preferred securities)                                                                  
  Dividends payable semi-annually                                                                 
MCN Financing VI                                                                                  
  6.85% Single Point Remarketed                                                                   
  Reset Capital Securities..........    99,397     99,507      1,000          2037         1999   
  (100,000 preferred securities)                                                                  
  Dividends payable semi-annually                                                                 
MCN Michigan Ltd. Partnership                                                                     
  9 3/8% Redeemable Cumulative                                                                    
  Preferred Securities, Series A....    96,819     96,696         25          2024         1999   
  (4,000,000 preferred securities)                                                                
  Dividends payable monthly                                                                       
MCN Financing III                                                                                 
  8% FELINE PRIDES..................   132,250    132,250         50          2002         2002   
  (2,645,000 FELINE PRIDES)                                                                       
  Dividends payable quarterly                                                                     
                                      --------   --------                                         
                                      $502,203   $505,104                                         
                                      ========   ========                                         

         The preferred securities carry similar provisions as described below.

   The preferred securities allow MCN the right to extend interest
    payment periods on the debentures and, as a consequence, dividend payments
   on the preferred securities can be deferred by the trusts and partnership
  during any such interest payment period. In the event that MCN exercises
this right, MCN may not declare dividends on its common stock.        

        In the event of default, holders of the preferred securities will be
 entitled to exercise and enforce the trusts' and partnership's creditor
    rights against MCN, which may include acceleration of the principal amount
   due on the debentures. MCN has issued guaranties with respect to payments
 on the preferred securities. These guaranties, when taken together with
MCN's obligations under the debentures, the related indenture, and the
    trust and partnership documents, provide full and unconditional guaranties
     of the trusts' and partnership's obligations under the preferred securities
to the extent of the funds available therefor.                        

F-48

S-4
178th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 178th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

          Financing costs for these issuances were deferred and are reflected as
    a reduction in the carrying value of the preferred securities. These costs
     are being amortized using the straight-line method over the estimated lives
of the related securities.                                            

        In addition to the similar provisions previously discussed, specific
terms of the securities follow:                                       

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

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

 - 8% FELINE PRIDES -- Each security initially consists of a stock
          purchase contract and a preferred security of MCN Financing III. Under
          each stock purchase contract, MCN is obligated to sell, and the FELINE
    PRIDES holder is obligated to purchase between 1.4132 and 1.7241
       shares of MCN common stock in May 2000 for $50. The exact number of
      MCN common shares to be sold is dependent on the market value of a
       share in May 2000, but will not be less than 3,737,988 or more than
    4,560,345 shares. MCN also is obligated to pay the FELINE PRIDES
        holders a quarterly contract adjustment payment at an annual rate of
        .75% of the stated amount. MCN has recorded the present value of the
contract adjustment as a liability and a reduction to Common
     Shareholders' Equity on MCN's Consolidated Statement of Financial
          Position. The liability is reduced as the contract adjustment payments
are made.                                                   

          Holders of the preferred securities are entitled to receive cumulative
      dividends at an annual rate of 7.25% of the liquidation preference
       value. The preferred securities are pledged as collateral to secure
      the FELINE PRIDES holders' obligation to purchase MCN common stock
       under the stock purchase contracts. Each holder has the right after
 issuance of the FELINE PRIDES to substitute for the preferred
          securities, zero coupon U.S. Treasury securities maturing in May 2000.
 Each FELINE PRIDES holder has the option to use the preferred
   securities, treasury securities or cash to satisfy the May 2000
purchase contract commitment.                               

B. PREFERRED SECURITIES                                               

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

C. ENHANCED PRIDES                                                    

       MCN has issued 5,865,000 of Preferred Redeemable Increased Dividend
    Equity Securities (Enhanced PRIDES) that yield 8 3/4% with a stated amount
     of $23.00 per security. Each security represents a contract to purchase MCN
     common stock in April 1999, or earlier under certain limited circumstances.
As subsequently discussed, proceeds from the issuance totaling        
  approximately $135,000,000 were used to acquire 6.5% U.S. Treasury notes
underlying the security. The interest from the Treasury notes passes  
  through to the Enhanced PRIDES holder. Accordingly, MCN received no cash
from issuing the Enhanced PRIDES.                                     

F-49

S-4
179th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 179th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

          Under each security, MCN is obligated to sell, and the Enhanced PRIDES
  holder is obligated to purchase for $23.00, between .8333 of a share and
    one share of MCN common stock. The exact number of MCN common shares to be
  sold is dependent on the market value of a share in April 1999. However,
    the total number to be sold will not be less than 4,887,500 shares or more
than 5,865,000 shares.                                                

MCN also is obligated to pay the Enhanced PRIDES holders,   
   semi-annually, a yield enhancement payment at an annual rate of 2 1/4% of
the stated amount. MCN has recorded the present value of the yield    
     enhancement payments as a liability and a reduction to Common Shareholders'
     Equity on MCN's Consolidated Statement of Financial Position. The liability
    is reduced when the yield enhancement payments are paid. MCN has the right
   to defer the yield enhancement payments, in which case MCN cannot declare
 dividends on its common stock until the yield enhancement payments have
been made. In addition, MCN has incurred costs in conjunction with the
   issuance of the Enhanced PRIDES and similarly has recorded the costs as a
reduction to Common Shareholders' Equity.                             

          The Treasury notes underlying the securities are pledged as collateral
  to secure the Enhanced PRIDES holders' obligation to purchase MCN common
 stock under the stock purchase contract. At maturity in April 1999, the
principal received from the Treasury notes will be used to satisfy the
  Enhanced PRIDES holders' obligation in full. Neither the Enhanced PRIDES
nor the Treasury notes are included on MCN's Consolidated Statement of
     Financial Position. However, the issuance of common stock will be reflected
    when cash proceeds totaling approximately $135,000,000 are received by MCN
in April 1999.                                                        

11. COMMON STOCK AND EARNINGS PER SHARE                                         

A. COMMON STOCK                                                       

        In 1998, MCN issued approximately 310,000 shares in conjunction with
    the acquisition of heating, ventilating and air conditioning companies. In
   1997, MCN sold 9,775,000 shares of new common stock in a public offering,
generating net proceeds of $276,600,000.                              

       MCN has traditionally issued new shares of common stock pursuant to
its Direct Stock Purchase and Dividend Reinvestment Plan and various  
employee benefit plans. The number of shares issued was approximately 
   1,190,000 in 1998, 1,165,000 in 1997, and 926,000 in 1996, generating net
proceeds of $20,200,000, $17,800,000 and $17,300,000, respectively.   
    Beginning in 1999, shares issued under these plans will be acquired by MCN
through open market purchases.                                        

B. STOCK INCENTIVE PLAN                                               

       MCN's Stock Incentive Plan authorizes the use of performance units,
stock options, restricted stock or other stock-related awards to key  
employees, primarily management. MCN's current policy is to issue     
performance units, which encourages a strategic focus on long-term    
    performance and has a high employee retention value. The performance units
     are denominated in shares of MCN common stock and issued to employees based
    on total shareholder return over a six-year period, as compared to a group
     of peer companies. The initial number of performance units granted is based
    on total shareholder return relative to the peer group during the previous
   three-year period. Participants receive dividend equivalents on the units
  granted. The initial grants will be adjusted upward or downward based on
total shareholder return relative to the peer group for the subsequent
  three-year period. The final awards are then payable in shares of common
     stock or can be deferred. Participants must retain 50% of any common shares
   paid until certain stock ownership guidelines are met. The deferred units
must be retained by the participants until their employment with MCN  
ceases.                                                               

        During 1998, 1997 and 1996, MCN granted 293,116, 245,340 and 301,616
    performance units with a weighted average grant date fair value of $37.00,
 $31.00 and $24.625 per unit, respectively. MCN accounts for stock-based
   compensation awards under the fair value-based method as prescribed under
    SFAS No. 123, "Accounting for Stock-Based Compensation," which was adopted
in 1996. Accordingly,                                                 
F-50

S-4
180th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 180th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

     the costs of performance units awarded, measured at their fair value on the
grant date, are being recorded as compensation expense and Additional 
     Paid-in Capital over their vesting period. MCN adjusts compensation expense
     for changes in the number of performance units that are expected to vest. A
   stock-based compensation benefit of $3,625,000 was recognized during 1998
for all awards outstanding as a result of a reduction in the number of
performance units expected to vest. Stock-based compensation costs    
recognized during 1997 and 1996 for all awards outstanding totaled    
     $15,070,000 and $14,055,000, respectively. At December 31, 1998, there were
 5,143,730 shares available to be issued under the Stock Incentive Plan.

     In February 1999, MCN revised its policy whereby a portion of any
    stock-related awards under the Stock Incentive Plan will be in the form of
   stock options. The remaining portion of any awards will continue to be in
the form of performance units.                                        

C. SHAREHOLDERS' RIGHTS PLAN                                          

      One preferred share purchase right is attached to each outstanding
 share of MCN common stock. The rights are exercisable only upon certain
triggering events and expire in July 2007. The rights, which cannot be
traded separately from MCN's common stock, are intended to maximize   
shareholders' value in the event that MCN is acquired.                

D. EARNINGS PER SHARE                                                 

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

                                                        [Enlarge/Download Table]

                                                                             WTD. AVG.       EARNINGS 
                                                                              COMMON        (LOSS) PER
                                                          INCOME (LOSS)       SHARES          SHARE   
                                                          -------------      ---------      ----------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)  
                                                                                                      
1998                                                                                                  
Basic Loss Per Share.....................................   $(286,468)        78,823          $(3.63) 
                                                                                              ------  
Effect of Dilutive Securities............................          --             --                  
                                                            ---------         ------                  
Diluted Loss Per Share...................................   $(286,468)        78,823          $(3.63) 
                                                            =========         ======          ======  
1997                                                                                                  
Basic Earnings Per Share.................................   $ 133,229         72,887          $ 1.82  
                                                                                              ------  
Effect of Dilutive Securities                                                                         
  FELINE PRIDES..........................................       1,688          1,021                  
  Enhanced PRIDES........................................         222            623                  
  Stock-based compensation plans.........................          --            904                  
                                                            ---------         ------                  
Diluted Earnings Per Share...............................   $ 135,139         75,435          $ 1.79  
                                                            =========         ======          ======  
1996                                                                                                  
Basic Earnings Per Share.................................   $ 112,569         66,944          $ 1.68  
                                                                                              ------  
Effect of Dilutive Securities                                                                         
  Enhanced PRIDES........................................          73             41                  
  Stock-based compensation plans.........................          --            536                  
                                                            ---------         ------                  
Diluted Earnings Per Share...............................   $ 112,642         67,521          $ 1.67  
                                                            =========         ======          ======  

F-51

S-4
181st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 181st
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

12. LEASES                                                                      

   MCN leases certain property (principally a warehouse, office building and
parking structure) under lease arrangements expiring at various dates to 2006,  
with renewal options extending beyond that date. Portions of the office         
buildings and parking structure are subleased to various tenants.               

In January 1998, MCN purchased one of its office buildings previously 
leased, thereby eliminating the related long-term capital lease obligation. As a
result, the long-term capital lease obligation of $6,818,000 was reclassified as
a current capital lease obligation at December 31, 1997. Other long-term capital
lease obligations of MCN are not significant.                                   

Minimum rental commitments related to noncancelable operating leases  
outstanding at December 31, 1998 are $5,952,000 in 1999, $5,072,000 in 2000,    
$4,887,000 in 2001, $4,632,000 in 2002, $3,111,000 in 2003 and $5,735,000       
thereafter.                                                                     

    Total minimum lease payments for operating leases have not been reduced by
future minimum sublease rentals of $1,430,000 under noncancelable subleases.    

  Operating lease payments for the years ended December 31, 1998, 1997 and
1996 were $6,774,000, $5,007,000 and $5,243,000, respectively.                  

13. COMMITMENTS AND CONTINGENCIES                                               

A. GUARANTIES                                                         

    MCN issued a guaranty in conjunction with a Genix building lease
expiring no later than 2010. The lease agreement does not allow MCN to
  transfer its obligation under the guaranty to ACS, who acquired Genix in
 June 1996 (Note 4b). However, ACS is obligated to reimburse MCN for any
    payments made as a result of this guaranty. Obligations under the guaranty
approximated $11,908,000 at December 31, 1998.                        

      MCN has a 47.5% interest in a partnership that owns and operates a
natural gas transmission and distribution system located in southern  
 Missouri. MCN has issued a guaranty for the full amount of construction
financing obtained by the partnership and one of the parties to the   
     partnership is obligated to reimburse MCN for 50% of any payments made as a
     result of this guaranty. Borrowings outstanding under the construction loan
totaled $29,000,000 at December 31, 1998.                             

         A subsidiary of MichCon and an unaffiliated corporation have formed a
 series of partnerships engaged in the construction and development of a
  residential community on the Detroit riverfront (Harbortown). One of the
 partnerships obtained $12,000,000 of tax-exempt financing due June 2004
     through the Michigan State Housing Development Authority. Both partners and
 their parent corporations have issued guaranties for the full amount of
 this financing, and each parent corporation has agreed to reimburse the
other for 50% of any payments made as a result of these guaranties.   

B. ENVIRONMENTAL MATTERS                                              

     Prior to the construction of major natural gas pipelines, gas for
     heating and other uses was manufactured from processes involving coal, coke
or oil. MCN owns, or previously owned, 17 such former manufactured gas
plant (MGP) sites.                                                    

       During the mid-1980s, preliminary environmental investigations were
    conducted at these former MGP sites, and some contamination related to the
     by-products of gas manufacturing was discovered at each site. The existence
 of these sites and the results of the environmental investigations have
   been reported to the Michigan Department of Environmental Quality (MDEQ).
    None of these former MGP sites is on the National Priorities List prepared
by the U.S. Environmental Protection Agency (EPA).                    

F-52

S-4
182nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 182nd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

  MCN is involved in an administrative proceeding before the EPA
   regarding one of the former MGP sites. MCN has executed an order with the
EPA, pursuant to which MCN is legally obligated to investigate and    
     remediate the MGP site. MCN is remediating five of the former MGP sites and
     conducting more extensive investigations at four other former MGP sites. In
 1998, MichCon completed the remediation of one of the former MGP sites,
     which was confirmed by the MDEQ. Additionally, the MDEQ has determined with
respect to one other former MGP site that MichCon is not a responsible
party for the purpose of assessing remediation expenditures.          

     In 1984, MCN established an $11,700,000 reserve for environmental
    investigation and remediation. During 1993, MichCon received MPSC approval
of a cost deferral and rate recovery mechanism for investigation and  
   remediation costs incurred at former MGP sites in excess of this reserve.

         MCN employed outside consultants to evaluate remediation alternatives
   for these sites, to assist in estimating its potential liabilities and to
review its archived insurance policies. The findings of these         
investigations indicate that the estimated total expenditures for     
   investigation and remediation activities for these sites could range from
   $30,000,000 to $170,000,000 based on undiscounted 1995 costs. As a result
   of these studies, MCN accrued an additional liability and a corresponding
regulatory asset of $35,000,000 during 1995.                          

          MCN notified more than 50 current and former insurance carriers of the
environmental conditions at these former MGP sites. MCN concluded     
settlement negotiations with certain carriers in 1996 and 1997 and has
  received payments from several carriers. In October 1997, MCN filed suit
     against major nonsettling carriers seeking recovery of incurred costs and a
declaratory judgment of the carriers' liability for future costs of   
environmental investigation and remediation costs at former MGP sites.
 Discovery is ongoing in the case, and a preliminary trial date has been
scheduled for August 1999.                                            

  During 1998, 1997 and 1996, MCN spent $1,649,000, $835,000 and
$900,000, respectively, investigating and remediating these former MGP
    sites. At December 31, 1998, the reserve balance was $35,092,000, of which
   $92,000 was classified as current. Any significant change in assumptions,
such as remediation techniques, nature and extent of contamination and
     regulatory requirements, could impact the estimate of remedial action costs
  for the sites and, therefore, have an effect on MCN's financial position
  and cash flows. However, management believes that insurance coverage and
 the cost deferral and rate recovery mechanism approved by the MPSC will
    prevent environmental costs from having a material adverse impact on MCN's
results of operations.                                                

    In 1998, MichCon received written notification from ANR Pipeline
  Company (ANR), alleging that MichCon has responsibility for a portion of
     the costs associated with responding to environmental conditions present at
    a natural gas storage field in Michigan currently owned and operated by an
  affiliate of ANR. At least some portion of the natural gas storage field
   was formerly owned by MichCon. MichCon is evaluating ANR's allegations to
determine whether and to what extent, if any, that it may have legal  
responsibility for these costs. Management does not believe that this 
matter will have a material impact on MCN's financial statements.     

c. COMMITMENTS                                                        

In 1997, MCN's 50%-owned partnership, Washington 10 Storage 
   Partnership (W-10), entered into a leveraged lease transaction to finance
  the conversion of a depleted natural gas reservoir into a 42 Bcf storage
    facility. The storage facility is expected to begin operations in mid-1999
     and cost $160,000,000 to develop. MCN has entered into a contract with W-10
     to market 100% of the capacity of the storage field through 2029. Under the
  terms of the marketing contract, MCN is obligated to generate sufficient
    revenues to cover W-10's lease payments and certain operating costs, which
  average approximately $16,000,000 annually. As of December 31, 1998, MCN
   had long-term contracts in place ranging from 1999-2016 for approximately
    40% of the field's capacity effectively reducing its commitments under the
marketing contract. A significant portion of the remaining capacity is
expected to be contracted by                                          

F-53

S-4
183rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 183rd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

MCN's Energy Marketing operations, thereby effectively enhancing its  
ability to offer a reliable gas supply during peak winter months.     

         To ensure a reliable supply of natural gas at competitive prices, MCN
has entered into long-term purchase and transportation contracts with 
various suppliers and producers. In general, purchase prices are under
  fixed price and volume contracts or formulas based on market prices. MCN
 has firm purchase commitments through 2001 for approximately 641 Bcf of
gas, approximately 487 Bcf of which are Gas Distribution purchase     
commitments. MCN expects that sales will exceed its minimum purchase  
  commitments. MCN has long-term transportation and storage contracts with
   various companies expiring on various dates through the year 2016. MCN is
   also committed to pay demand charges of approximately $105,286,000 during
     1999 related to firm purchase and transportation agreements. Of this total,
approximately $54,248,000 relates to Gas Distribution.                

          Capital investments for 1999 are expected to approximate $750,000,000.
Certain commitments have been made in connection with such capital    
investments.                                                          

D. OTHER                                                              

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

14. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE FINANCIAL INSTRUMENTS             

MCN manages commodity price and interest rate risk through the use of 
various derivative instruments and predominantly limits the use of such         
instruments to hedging activities. If MCN did not use derivative instruments,   
its exposure to such risks would be higher. Although this strategy reduces risk,
it also limits potential gains from favorable changes in commodity prices and   
interest rates. Derivative instruments also give rise to credit risks due to    
nonperformance by counterparties. MCN's control procedures are designed to      
minimize overall exposure to credit risk. MCN closely monitors the financial    
condition and credit ratings of counterparties, diversifies its risk by having a
significant number of counterparties, and limits its counterparties to          
investment grade institutions. MCN generally requires cash collateral when      
exposure to each counterparty exceeds certain limits, and its agreements with   
each counterparty generally allow for the netting of positive and negative      
positions.                                                                      

  Commodity price and interest rate risks are actively monitored by a risk
control group to ensure compliance with MCN's risk management policies at both  
the corporate and subsidiary levels. These policies, including related risk     
limits, are regularly assessed to ensure their appropriateness given MCN's      
objectives, strategies and current market conditions. MCN closely monitors and  
manages its exposure to commodity price risk through a variety of risk          
management techniques. MCN's objective is to manage its exposure to commodity   
price risk to increase the likelihood of achieving targeted rates of return.    

     Derivative instruments are reviewed periodically to ensure they continue to
effectively reduce exposure to commodity price and interest rate risks, and,    
therefore, high correlation is maintained between changes in the fair value of  
derivative instruments and the underlying items or transactions being hedged. In
the event that a derivative is no longer deemed effective or does not qualify   
for hedge accounting, the instruments are recorded as an asset or liability at  
fair value, with changes in fair value recorded to income.                      

A. COMMODITY PRICE HEDGING                                            

     Natural gas and oil futures, options and natural gas and oil swap
    agreements are used to manage Diversified Energy's exposure to the risk of
   market price fluctuations on gas sale and purchase contracts, gas and oil
  production and gas inventories. Changes in the market value of contracts
that hedge gas                                                        

F-54

S-4
184th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 184th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

    supply transactions are deferred and included in inventory costs until the
     hedged transaction is completed, at which time the realized gain or loss is
   included in the cost of gas. Market value changes of contracts that hedge
     gas and oil sales transactions are also deferred and recorded as a deferred
 credit or deferred charge until the hedged transaction is completed, at
which time the realized gain or loss is included as an adjustment to  
revenues. Unrealized gains and losses on derivative contracts that are
   terminated or sold continue to be deferred until such time as the initial
  hedged transactions are completed. In the instance when a hedged item no
   longer exists or is no longer probable of occurring, unrealized gains and
     losses would be included in income unless the derivative is redesignated to
a similar transaction and qualifies for hedge accounting.             

      The following assets and liabilities related to the use of gas and oil
  swap agreements are reflected in the Consolidated Statement of Financial
Position at December 31.                                              

                                                                [Download Table]

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

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

                                                        [Enlarge/Download Table]

                                                                1998            1997  
                                                                ----            ----  
                                                             (IN THOUSANDS OF DOLLARS)
                                                                                      
Fixed Price Receiver                                                                  
  Volumes (Bcf equivalent)..................................     280.9           447.5
  Notional value............................................  $675,671        $994,159
  Latest maturity...........................................      2013            2013
                                                              --------        --------
Variable Price Receiver                                                               
  Volumes (Bcf equivalent)..................................     364.0            39.5
  Notional value............................................  $816,414        $ 94,082
  Latest maturity...........................................      2006            2006
                                                              --------        --------

     In addition, at December 31, 1998, MCN had futures contracts that
     permit settlement by delivery of the underlying commodity of 113.5 Bcf with
unrealized gains of $4,699,000. Futures contracts of 73.3 Bcf with    
unrealized gains of $2,031,000 and 21.7 Bcf with unrealized losses of 
$10,120,000 were outstanding at December 31, 1997.                    

Collateral in the form of cash totaling $13,990,000 was provided under
hedging contracts at December 31, 1998.                               

F-55

S-4
185th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 185th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

B. TRADING ACTIVITIES                                                 

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

C. INTEREST RATE HEDGING                                              

  In order to manage interest costs, MCN uses interest rate swap
     agreements to exchange fixed and variable rate interest payment obligations
over the life of the agreements without exchange of the underlying    
principal amounts. Interest rate swaps are subject to market risk as  
  interest rates fluctuate. The difference to be received or paid on these
 agreements is accrued and recorded as an adjustment to interest expense
    over the life of the agreements. The fair value of the swap agreements and
   changes in the fair value as a result of changes in market interest rates
     are not recognized in the financial statements. In the event of an interest
  rate swap termination, any associated gains and losses would be deferred
     and amortized as an adjustment to interest expense related to the debt over
 the remaining term of the original contract life of the terminated swap
 agreement. In the event of an early extinguishment of a designated debt
     obligation, derivative gains and losses would be included in income, unless
   the swap agreement is redesignated as a hedge of another outstanding debt
     obligation with similar characteristics and qualifies for hedge accounting.

    At December 31, 1998, MCN had interest rate swap agreements with
  notional principal amounts totaling $186,100,000 (Note 9) and a weighted
 average remaining life of 3.6 years. At December 31, 1997, the notional
   principal amount of outstanding interest rate swaps totaled $288,000,000.
   The notional principal amounts are used solely to calculate amounts to be
  paid or received under the interest rate swap agreements and approximate
the principal amount of the underlying debt being hedged.             

15. FAIR VALUE OF FINANCIAL AND OTHER SIMILAR INSTRUMENTS                       

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

F-56

S-4
186th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 186th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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

                                                        [Enlarge/Download Table]

                                                          1998                        1997   
                                            CARRYING   ESTIMATED        CARRYING   ESTIMATED 
                                             AMOUNT    FAIR VALUE        AMOUNT    FAIR VALUE
                                            --------   ----------       --------   ----------
                                                             (IN THOUSANDS)                  
                                                                                             
ASSETS                                                                                       
Investment in debt and equity                                                                
  securities.............................. $   69,705  $   69,705      $   97,521  $   97,521
LIABILITIES AND CAPITALIZATION                                                               
Long-term debt, excluding capital lease                                                      
  obligations.............................  1,301,823   1,358,371       1,204,862   1,251,883
Redeemable preferred securities...........    502,203     476,443         505,104     550,197
DERIVATIVE FINANCIAL AND OTHER SIMILAR                                                       
  INSTRUMENTS (NOTE 14)                                                                      
Natural gas & oil swaps                                                                      
  with unrealized gains...................     24,126      24,126          15,005      15,005
  with unrealized losses..................     48,700      48,700          34,736      34,736
Natural gas & oil futures                                                                    
  with unrealized gains...................      4,699       4,699           2,031       2,031
  with unrealized losses..................         --          --          10,120      10,120
Interest rate swaps                                                                          
  with unrealized gains...................         --       9,033              --       5,006
  with unrealized losses..................         --         696              --         415

The fair values are determined based on the following:                

  INVESTMENT IN DEBT AND EQUITY SECURITIES -- carrying amount approximates
fair value taking into consideration interest rates available to MCN for        
investments with similar terms.                                                 

     LONG-TERM DEBT -- interest rates available to MCN for issuance of debt with
similar terms and remaining maturities.                                         

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

     NATURAL GAS AND OIL SWAPS AND FUTURES, AND INTEREST RATE SWAPS -- estimated
amounts that MCN would receive or pay to terminate the swap agreements and      
futures, taking into account current gas and oil prices, interest rates and the 
creditworthiness of the counterparties.                                         

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

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

16. RETIREMENT BENEFITS AND TRUSTEED ASSETS                                     

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

A. PENSION PLAN BENEFITS                                              

          Separate defined benefit retirement plans are maintained for union and
    nonunion employees. The plans are noncontributory, cover substantially all
employees and generally provide for normal retirement                 

F-57

S-4
187th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 187th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

 at age 65, but with the option to retire earlier or later under certain
conditions. The plans provide pension benefits that are based on each 
employee's compensation and years of credited service. Currently these
plans meet the full funding limitations of the Internal Revenue Code. 
  Accordingly, no contributions for the 1998, 1997 or 1996 plan years were
made, and none is expected to be made for the 1999 plan year.         

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

                                                        [Enlarge/Download Table]

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

F-58

S-4
188th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 188th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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

                                                        [Enlarge/Download Table]

                                                                1998             1997    
                                                                ----             ----    
                                                                    (IN THOUSANDS)       
                                                                                         
Measurement Date............................................ October 31       October 31 
Accumulated Benefit Obligation at the End of the Period.....  $ 462,347        $ 413,280 
                                                              ---------        --------- 
Projected Benefit Obligation at the Beginning of the                                     
  Period....................................................  $ 489,779        $ 450,912 
Service Cost................................................     10,993           10,380 
Interest Cost...............................................     38,046           36,059 
Plan Amendments.............................................     22,564               -- 
Actuarial Loss..............................................     45,879           26,357 
Special Termination Benefits................................      5,054               -- 
Settlements Due to Lump Sums................................    (21,033)          (8,844)
Regular Benefits............................................    (28,782)         (25,085)
                                                              ---------        --------- 
Projected Benefit Obligation at the End of the Period.......  $ 562,500        $ 489,779 
                                                              =========        ========= 
Plan Assets at Fair Value at the Beginning of the Period....  $ 844,107        $ 730,820 
Actual Return on Plan Assets................................    106,300          143,859 
Settlements Due to Lump Sums................................    (16,333)          (5,487)
Regular Benefits............................................    (28,782)         (25,085)
                                                              ---------        --------- 
Plan Assets at Fair Value at the End of the Period..........  $ 905,292        $ 844,107 
                                                              =========        ========= 
Funded Status of the Plans..................................  $ 342,792        $ 354,328 
Unrecognized                                                                             
  Net gain..................................................   (221,245)        (244,405)
  Prior service cost........................................     19,448           (1,275)
  Net transition asset......................................    (29,220)         (35,014)
                                                              ---------        --------- 
Prepaid Pension Cost........................................  $ 111,775        $  73,634 
                                                              =========        ========= 
Prepaid Benefit Cost........................................  $ 114,275        $  75,921 
Accrued Benefit Liability...................................     (2,500)          (2,287)
                                                              ---------        --------- 
Total Recognized............................................  $ 111,775        $  73,634 
                                                              =========        ========= 

In determining the actuarial present value of the projected benefit   
  obligation, the weighted average discount rate was 6.5%, 7.5% and 8% for
1998, 1997 and 1996, respectively. The rate of increase in future     
   compensation levels used was 5% for 1998 and 1997. The expected long-term
   rate of return on plan assets, which are invested primarily in equity and
 fixed income securities, was 9.5% for 1998 and 9.25% for 1997 and 1996.

In 1998, MichCon implemented an early retirement program under which  
approximately 6% of its workforce retired in 1998 with incentives. The
   program increased the projected benefit obligation and 1998 pension costs
by $5,054,000.                                                        

MCN also sponsors defined contribution retirement savings plans.      
     Participation in one of these plans is available to substantially all union
  and nonunion employees. MCN matches employee contributions up to certain
     predefined limits based upon salary and years of credited service. The cost
     of these plans for continuing operations was $5,600,000 in 1998, $6,200,000
in 1997 and $6,100,000 in 1996.                                       

F-59

S-4
189th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 189th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

B. OTHER POSTRETIREMENT BENEFITS                                      

   MCN provides certain healthcare and life insurance benefits for
    retired employees who may become eligible for these benefits if they reach
  retirement age while working for MCN. These benefits are being accounted
    for under SFAS No. 106, "Employers' Accounting for Postretirement Benefits
  Other Than Pensions," which requires the use of accrual accounting. Upon
adoption of SFAS No. 106, MCN deferred its 1993 postretirement costs  
   related to Gas Distribution in excess of claims paid until 1994, when new
rates to recover such costs became effective.                         

MCN's policy is to fund certain trusts to the extent its    
postretirement benefit costs are recognized in Gas Distribution rates.
Separate qualified Voluntary Employees' Beneficiary Association (VEBA)
   trusts exist for union and nonunion employees. Funding to the VEBA trusts
totaled $2,200,000, $6,700,000 and $41,918,000 in 1998, 1997 and 1996,
     respectively. The expected long-term rate of return on plan assets that are
 invested in life insurance policies, equity securities and fixed income
securities, was 9.8% for 1998 and 9.1% for 1997 and 1996.             

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

                                                                [Download Table]

                                                    1998        1997       1996   
                                                    ----        ----       ----   
                                                          (IN THOUSANDS)          
                                                                                  
Service Cost..................................... $  4,044    $  4,354    $ 4,541 
Interest Cost....................................   16,891      17,857     16,826 
Expected Return on Plan Assets...................  (13,570)    (11,082)    (9,872)
Amortization of:                                                                  
  Net gain.......................................   (5,723)     (4,933)    (4,332)
  Net transition obligation......................   12,898      13,587     13,587 
Special Termination Benefits.....................    1,186          --         -- 
                                                  --------    --------    ------- 
Total Postretirement Cost........................   15,726      19,783     20,750 
Regulatory Adjustment............................       43       4,907      7,553 
                                                  --------    --------    ------- 
Net Postretirement Cost.......................... $ 15,769    $ 24,690    $28,303 
                                                  ========    ========    ======= 

F-60

S-4
190th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 190th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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

                                                                [Download Table]

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

          The rate at which healthcare costs are assumed to increase is the most
   significant factor in estimating MCN's postretirement benefit obligation.
 MCN used a rate of 6% for 1999, and a rate that gradually declines each
    year until it stabilizes at 5% in 2003. A one percentage point increase in
 the assumed rates would increase the accumulated postretirement benefit
   obligation at December 31, 1998 by $33,046,000 (13%) and increase the sum
     of the service and interest rate cost by $3,057,000 (15%) for the year then
    ended. A one percentage point decrease in the assumed rates would decrease
   the accumulated postretirement benefit obligation at December 31, 1998 by
 $28,926,000 (11%) and decrease the sum of the service and interest rate
cost by $2,626,000 (13%) for the year then ended.                     

        The discount rate used in determining the accumulated postretirement
benefit obligation was 6.5%, 7.5% and 8% for 1998, 1997 and 1996,     
respectively.                                                         

        In 1998, MichCon implemented an early retirement program under which
approximately 6% of its workforce retired in 1998 with incentives. The
program increased the postretirement benefit obligation and 1998      
postretirement costs by $1,186,000.                                   

C. GRANTOR TRUST                                                      

          MichCon has established a Grantor Trust and contributed $28,200,000 in
    1998 and $31,300,000 in 1997 to the trust, which invested such proceeds in
life insurance contracts and income securities. By                    

F-61

S-4
191st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 191st
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

    funding the Grantor Trust and VEBA trusts (Note 16b), MichCon is complying
with MPSC directives that it fund various trusts to the extent its    
postretirement benefit costs are recognized in Gas Distribution rates.
  Employees and retirees have no right, title or interest in the assets of
     the Grantor Trust and MichCon can revoke the trust subject to providing the
MPSC with prior notification.                                         

17. SUMMARY OF INCOME TAXES                                                     

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

                                                        [Enlarge/Download Table]

                                                               1998         1997        1996   
                                                               ----         ----        ----   
                                                                      (IN THOUSANDS)           
                                                                                               
Effective Federal Income Tax Rate...........................     (38.8)%      25.1%       23.4%
                                                             =========    ========    ======== 
Income Taxes Consist of:                                                                       
  Current................................................... $   7,002    $ 18,280         603 
  Deferred, net.............................................  (176,995)     48,728      53,528 
  Gas production tax credits................................   (10,485)    (17,797)    (15,878)
  Other tax credits, net....................................    (2,990)     (1,973)     (1,878)
                                                             ---------    --------    -------- 
                                                             $(183,468)   $ 47,238    $ 36,375 
                                                             =========    ========    ======== 
Reconciliation Between Statutory and Actual Income Taxes                                       
Statutory Federal Income Taxes at a Rate of 35%............. $(164,477)   $ 63,165    $ 52,130 
Adjustments to Federal Taxes                                                                   
  Book over tax depreciation................................     1,071       5,301       6,367 
  Adjustments to taxes provided in prior periods............      (412)       (162)     (3,369)
  Stock-related benefits....................................    (1,095)         --          -- 
  Gas production tax credits................................   (10,485)    (17,797)    (15,878)
  Other tax credits.........................................    (2,990)     (1,973)     (1,878)
  Allowance for funds used during construction..............    (1,900)     (1,105)       (245)
  Undistributed foreign earnings............................    (1,244)         --          -- 
  Other, net................................................    (1,936)       (191)       (752)
                                                             ---------    --------    -------- 
                                                             $(183,468)   $ 47,238    $ 36,375 
                                                             =========    ========    ======== 

  No provision has been made for federal, state or foreign income taxes in
1998 related to approximately $3,553,000 of undistributed earnings of foreign   
subsidiaries that are intended to be permanently reinvested. There were no      
undistributed earnings of foreign subsidiaries in 1997 and 1996.                

     Deferred tax assets and liabilities are recognized for the estimated future
tax effect of temporary differences between the tax basis of assets or          
liabilities and the reported amounts in the financial statements. Deferred tax  
assets and liabilities are classified as current or noncurrent according to the 
classification of the related assets or liabilities. The alternative minimum tax
credits may be carried forward indefinitely.                                    

F-62

S-4
192nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 192nd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

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

                                                                [Download Table]

                                                                1998        1997    
                                                                ----        ----    
                                                                 (IN THOUSANDS)     
                                                                                    
Deferred Tax Assets                                                                 
  Alternative minimum tax credit carryforward...............  $ 71,519    $  60,121 
  Vacation and other benefits...............................    17,745       20,846 
  Postretirement benefits...................................     6,287           -- 
  Uncollectibles............................................     3,234        4,771 
  Restructuring charges.....................................     5,915           -- 
  Other.....................................................    20,257       11,985 
                                                              --------    --------- 
                                                              $124,957    $  97,723 
                                                              ========    ========= 
Deferred Tax Liabilities                                                            
  Depreciation and other property-related basis differences,                        
     net....................................................  $ 12,978    $ 200,216 
  Pensions..................................................    36,751       24,027 
  Property taxes............................................    13,072       12,931 
  Gas cost recovery undercollection.........................        57        4,502 
  Postretirement benefits...................................        --        2,768 
  Other.....................................................    20,959       18,432 
                                                              --------    --------- 
                                                              $ 83,817    $ 262,876 
                                                              ========    ========= 
Net Deferred Tax Asset (Liability)..........................  $ 41,140    $(165,153)
Less: Net Deferred Tax Liability -- Current.................    (9,407)     (11,994)
                                                              --------    --------- 
Net Deferred Tax Asset (Liability) -- Noncurrent............  $ 50,547    $(153,159)
                                                              ========    ========= 

18. SEGMENT INFORMATION                                                         

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

  MCN is a diversified energy holding company with natural gas markets and
investments primarily in North America. MCN is organized into two business      
groups, Diversified Energy and Gas Distribution. The groups operate five major  
business segments as described in the Summary of Significant Accounting         
Policies -- Company Description (Note 1a).                                      

    Information as to MCN's segments is set forth in the following tables. The
segments were determined based on the nature of their products and services and 
how management reviews operating results. MCN evaluates segment performance     
based on several factors, of which the primary measure is net income or loss.   
Inter-segment sales are based on long-term fixed-price or index-price contracts.

   Under Emerging Issues Task Force Issue No. 87-24, "Allocation of Interest
to Discontinued Operations," Diversified Energy's interest and preferred        
dividend expenses were allocated to the E&P segment previously presented as     
discontinued operations based on its ratio of total capital to that of          
Diversified Energy (Note 4a). As discussed in Note 4a, the E&P segment is no    
longer a discontinued operation, and the allocation of the interest and         
preferred dividend expenses to the E&P segment has been changed to be based on  
an imputed debt structure reflective of its industry as is done with MCN's other
segments.                                                                       

F-63

S-4
193rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 193rd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

                                                        [Enlarge/Download Table]

                                                       DIVERSIFIED ENERGY                                     
                                ----------------------------------------------------------------              
                                                                     EXPLORATION &                            
                                PIPELINES &   ELECTRIC    ENERGY      PRODUCTION     CORPORATE &      GAS     
                                PROCESSING     POWER     MARKETING     (NOTE 4A)      OTHER(A)    DISTRIBUTION
                                -----------   --------   ---------   -------------   -----------  ------------
                                                                (IN THOUSANDS)                                
                                                                                                              
1998                                                                                                          
Revenues From Unaffiliated                                                                                    
  Customers...................   $  20,856    $ 47,131   $767,068      $ 150,504      $     --     $1,045,139 
Revenues From Affiliated                                                                                      
  Customers...................         345          --    105,543         56,598            --          6,635 
                                 ---------    --------   --------      ---------      --------     ---------- 
    Total operating                                                                                           
      revenues................      21,201      47,131    872,611        207,102            --      1,051,774 
                                 =========    ========   ========      =========      ========     ========== 
Depreciation, Depletion and                                                                                   
  Amortization................       1,705         208      1,229         80,576         1,998         93,774 
Operating Income (Loss).......    (146,264)     (5,021)    (5,987)      (387,955)      (19,162)       158,537 
Equity in Earnings of Joint                                                                                   
  Ventures....................      29,987      28,546      2,401             --           308            983 
                                 ---------    --------   --------      ---------      --------     ---------- 
    Operating and joint                                                                                       
      venture income (loss)...    (116,277)     23,525     (3,586)      (387,955)      (18,854)       159,520 
                                 =========    ========   ========      =========      ========     ========== 
Interest Income...............       1,001         944      1,676            426        53,100          5,716 
Interest Expense(b)...........     (14,382)     (2,021)    (5,726)       (21,154)      (62,960)       (57,477)
Income Taxes..................     (46,893)      8,212       (510)      (160,900)      (16,377)        33,000 
Net Income (Loss).............     (82,240)     19,271     (1,037)      (253,353)      (40,843)        71,734 
Total Assets..................     575,969     300,529    386,917        988,201        72,388      2,116,173 
Investments In and Advances to                                                                                
  Joint Ventures..............     521,711     231,668     29,435             --        18,939          1,478 
Capital Expenditures..........     113,229       1,602      2,596        200,430         6,966        157,952 
Capital Investments...........     333,128      88,209      3,355        200,430         7,092        158,716 
Significant Noncash Items:                                                                                    
  Property write-downs and                                                                                    
    restructuring charges                                                                                     
    (Notes 2 & 3).............    (137,681)     (2,470)        --       (416,977)      (10,390)       (24,800)
  Investment losses (Notes 2b                                                                                 
    and 2c)...................          --          --         --         (6,135)           --         (8,500)



                                ELIMINATIONS   CONSOLIDATED                                                   
                                  & OTHER         TOTAL                                                       
                                ------------   ------------                                                   
                                      (IN THOUSANDS)                                                          
                                                                                                              
1998                                                                                                          
Revenues From Unaffiliated                                                                                    
  Customers...................   $      --      $2,030,698                                                    
Revenues From Affiliated                                                                                      
  Customers...................    (169,121)             --                                                    
                                 ---------      ----------                                                    
    Total operating                                                                                           
      revenues................    (169,121)      2,030,698                                                    
                                 =========      ==========                                                    
Depreciation, Depletion and                                                                                   
  Amortization................          --         179,490                                                    
Operating Income (Loss).......          --        (405,852)                                                   
Equity in Earnings of Joint                                                                                   
  Ventures....................          --          62,225                                                    
                                 ---------      ----------                                                    
    Operating and joint                                                                                       
      venture income (loss)...          --        (343,627)                                                   
                                 =========      ==========                                                    
Interest Income...............     (51,970)         10,893                                                    
Interest Expense(b)...........      51,970        (111,750)                                                   
Income Taxes..................          --        (183,468)                                                   
Net Income (Loss).............          --        (286,468)                                                   
Total Assets..................     (47,279)      4,392,898                                                    
Investments In and Advances to                                                                                
  Joint Ventures..............          --         803,231                                                    
Capital Expenditures..........          --         482,775                                                    
Capital Investments...........          --         790,930                                                    
Significant Noncash Items:                                                                                    
  Property write-downs and                                                                                    
    restructuring charges                                                                                     
    (Notes 2 & 3).............          --        (592,318)                                                   
  Investment losses (Notes 2b                                                                                 
    and 2c)...................          --         (14,635)                                                   
                                                        [Enlarge/Download Table]

                                                       DIVERSIFIED ENERGY                                                   
                                ----------------------------------------------------------------                            
                                                                     EXPLORATION &                                          
                                PIPELINES &   ELECTRIC    ENERGY      PRODUCTION     CORPORATE &      GAS       ELIMINATIONS
                                PROCESSING     POWER     MARKETING     (NOTE 4A)      OTHER(A)    DISTRIBUTION    & OTHER   
                                -----------   --------   ---------   -------------   -----------  ------------  ------------
                                                                                                                            
1997                                                                                                                        
Revenues From Unaffiliated                                                                                                  
  Customers...................   $  6,971     $ 51,804   $743,793     $  144,033      $     --     $1,261,266    $      --  
Revenues From Affiliated                                                                                                    
  Customers...................        397           --     92,921         71,795            --         10,020     (175,133) 
                                 --------     --------   --------     ----------      --------     ----------    ---------  
    Total operating                                                                                                         
      revenues................      7,368       51,804    836,714        215,828            --      1,271,286     (175,133) 
                                 ========     ========   ========     ==========      ========     ==========    =========  
Depreciation, Depletion and                                                                                                 
  Amortization................      1,153          (22)       915         73,909         1,220        104,437           --  
Operating Income (Loss).......        585        5,377     (7,414)        51,455        (4,433)       176,820           --  
Equity in Earnings of Joint                                                                                                 
  Ventures....................     28,551       12,653      5,182          6,600           139          2,534           --  
                                 --------     --------   --------     ----------      --------     ----------    ---------  
    Operating and joint                                                                                                     
      venture income (loss)...     29,136       18,030     (2,232)        58,055        (4,294)       179,354           --  
                                 ========     ========   ========     ==========      ========     ==========    =========  
Interest Income...............        109          278      2,332            160        37,202          4,735      (33,650) 
Interest Expense(b)...........     (8,436)        (165)    (4,920)       (13,937)      (38,120)       (54,525)      33,650  
Income Taxes..................      8,721        6,341     (1,180)        (1,675)      (12,105)        47,136           --  
Net Income (Loss).............     17,070       12,409     (1,308)        45,884       (21,911)        81,085           --  
Total Assets..................    391,550      208,421    313,669      1,237,813        97,819      2,167,637      (85,972) 
Investments In and Advances to                                                                                              
  Joint Ventures..............    323,597      180,127     25,159             --        19,252          8,841           --  
Capital Expenditures..........     19,491        4,823        663        374,997         4,951        157,732           --  
Capital Investments...........    171,735      243,231      3,893        374,997         5,425        160,329           --  



                                CONSOLIDATED                                                                                
                                   TOTAL                                                                                    
                                ------------                                                                                
                                                                                                                            
1997                                                                                                                        
Revenues From Unaffiliated                                                                                                  
  Customers...................   $2,207,867                                                                                 
Revenues From Affiliated                                                                                                    
  Customers...................           --                                                                                 
                                 ----------                                                                                 
    Total operating                                                                                                         
      revenues................    2,207,867                                                                                 
                                 ==========                                                                                 
Depreciation, Depletion and                                                                                                 
  Amortization................      181,612                                                                                 
Operating Income (Loss).......      222,390                                                                                 
Equity in Earnings of Joint                                                                                                 
  Ventures....................       55,659                                                                                 
                                 ----------                                                                                 
    Operating and joint                                                                                                     
      venture income (loss)...      278,049                                                                                 
                                 ==========                                                                                 
Interest Income...............       11,166                                                                                 
Interest Expense(b)...........      (86,453)                                                                                
Income Taxes..................       47,238                                                                                 
Net Income (Loss).............      133,229                                                                                 
Total Assets..................    4,330,937                                                                                 
Investments In and Advances to                                                                                              
  Joint Ventures..............      556,976                                                                                 
Capital Expenditures..........      562,657                                                                                 
Capital Investments...........      959,610                                                                                 

F-64

S-4
194th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 194th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

                                                        [Enlarge/Download Table]

                                                     DIVERSIFIED ENERGY                                      
                              -----------------------------------------------------------------              
                                                                    EXPLORATION &                            
                              PIPELINES &    ELECTRIC    ENERGY      PRODUCTION     CORPORATE &      GAS     
                               PROCESSING     POWER     MARKETING     (NOTE 4A)      OTHER(A)    DISTRIBUTION
                              -----------    --------   ---------   -------------   -----------  ------------
                                                               (IN THOUSANDS)                                
                                                                                                             
1996                                                                                                         
Revenues From Unaffiliated                                                                                   
  Customers..................   $  5,928     $ 42,142   $589,036      $ 93,790       $     --     $1,266,372 
Revenues From Affiliated                                                                                     
  Customers..................        441           --     84,126        44,151             --          9,882 
                                --------     --------   --------      --------       --------     ---------- 
    Total operating                                                                                          
      revenues...............      6,369       42,142    673,162       137,941             --      1,276,254 
                                ========     ========   ========      ========       ========     ========== 
Depreciation, Depletion and                                                                                  
  Amortization...............        944          (90)       916        44,468            938         98,814 
Operating Income (Loss)......        134        4,823      5,142        33,235         (2,525)       170,484 
Equity in Earnings (Loss) of                                                                                 
  Joint Ventures.............     10,590         (211)     4,208            --          2,026          1,254 
                                --------     --------   --------      --------       --------     ---------- 
    Operating and joint                                                                                      
      venture income                                                                                         
      (loss).................     10,724        4,612      9,350        33,235           (499)       171,738 
                                ========     ========   ========      ========       ========     ========== 
Interest Income..............        189           82        946           207         20,043          3,967 
Interest Expense(b)..........     (6,089)          --     (3,426)       (8,376)       (29,243)       (48,847)
Income Taxes.................      4,055        1,687      2,375        (6,487)        (7,992)        42,737 
Net Income (Loss)............      7,117        3,159      5,574        31,506        (16,183)        81,396 
Total Assets.................    220,943       47,611    310,732       963,273         40,714      2,086,325 
Investments In and Advances                                                                                  
  to Joint Ventures..........    177,026       27,233     34,408            --         20,046          6,675 
Capital Expenditures.........      6,865        2,086      1,114       388,719          2,987        215,317 
Capital Investments..........    157,663       19,641      1,364       388,690          2,997        220,393 



                              ELIMINATIONS   CONSOLIDATED                                                    
                               & OTHER(C)       TOTAL                                                        
                              ------------   ------------                                                    
                                    (IN THOUSANDS)                                                           
                                                                                                             
1996                                                                                                         
Revenues From Unaffiliated                                                                                   
  Customers..................  $      --      $1,997,268                                                     
Revenues From Affiliated                                                                                     
  Customers..................   (138,600)             --                                                     
                               ---------      ----------                                                     
    Total operating                                                                                          
      revenues...............   (138,600)      1,997,268                                                     
                               =========      ==========                                                     
Depreciation, Depletion and                                                                                  
  Amortization...............         --         145,990                                                     
Operating Income (Loss)......         --         211,293                                                     
Equity in Earnings (Loss) of                                                                                 
  Joint Ventures.............         --          17,867                                                     
                               ---------      ----------                                                     
    Operating and joint                                                                                      
      venture income                                                                                         
      (loss).................         --         229,160                                                     
                               =========      ==========                                                     
Interest Income..............    (18,200)          7,234                                                     
Interest Expense(b)..........     18,200         (77,781)                                                    
Income Taxes.................         --          36,375                                                     
Net Income (Loss)............     37,771         150,340                                                     
Total Assets.................    (36,194)      3,633,404                                                     
Investments In and Advances                                                                                  
  to Joint Ventures..........         --         265,388                                                     
Capital Expenditures.........         --         617,088                                                     
Capital Investments..........         --         790,748                                                     

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

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

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

(c) Eliminations and other includes MCN's discontinued computer operations (Note
4b).                                                                    

19. QUARTERLY OPERATING RESULTS (UNAUDITED)                                     

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

F-65

S-4
195th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 195th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

   Subsequent to the issuance of the December 31, 1998 financial statements,
MCN management determined that certain transactions were improperly recorded.   
Certain amounts have been restated primarily to record cost of gas expense,     
including trading losses, in the appropriate accounting periods as described in 
Note 1b. The effects of this restatement on each of the quarterly periods in the
years ended December 31, 1998 and 1997 are presented below. The effect of       
reclassifying E&P from a discontinued operation to a continuing operation is    
also presented below (Note 4a).                                                 

                                                        [Enlarge/Download Table]

                                         FIRST       SECOND        THIRD       FOURTH                
                                        QUARTER      QUARTER      QUARTER     QUARTER        YEAR    
                                        -------      -------      -------     -------        ----    
                                               AS RESTATED AND RECLASSIFIED, NOTES 1B AND 4A         
                                             (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)      
                                                                                                     
1998                                                                                                 
Operating Revenues..................... $701,460    $ 406,214    $ 351,145    $571,879    $2,030,698 
Operating Income (Loss):                                                                             
  Before unusual charges............... $116,626    $  22,040    $    (346)   $ 48,146    $  186,466 
  Unusual charges......................       --     (333,022)    (259,296)         --      (592,318)
                                        --------    ---------    ---------    --------    ---------- 
                                        $116,626    $(310,982)   $(259,642)   $ 48,146    $ (405,852)
                                        ========    =========    =========    ========    ========== 
Operating and Joint Venture Income                                                                   
  (Loss):                                                                                            
  Before unusual charges............... $133,387    $  33,877    $  17,617    $ 63,810    $  248,691 
  Unusual charges......................       --     (333,022)    (259,296)         --      (592,318)
                                        --------    ---------    ---------    --------    ---------- 
                                        $133,387    $(299,145)   $(241,679)   $ 63,810    $ (343,627)
                                        ========    =========    =========    ========    ========== 
Net Income (Loss)                                                                                    
  Before unusual charges............... $ 78,882    $   7,829    $  (7,578)   $ 23,997    $  103,130 
  Unusual charges......................       --     (220,452)    (169,146)         --      (389,598)
                                        --------    ---------    ---------    --------    ---------- 
                                        $ 78,882    $(212,623)   $(176,724)   $ 23,997    $ (286,468)
                                        ========    =========    =========    ========    ========== 
Basic Earnings (Loss) Per Share:                                                                     
  Before unusual charges............... $   1.01    $     .10    $    (.10)   $    .31    $     1.31 
  Unusual charges......................       --        (2.80)       (2.14)         --         (4.94)
                                        --------    ---------    ---------    --------    ---------- 
                                        $   1.01    $   (2.70)   $   (2.24)   $    .31    $    (3.63)
                                        ========    =========    =========    ========    ========== 
Diluted Earnings (Loss) Per Share:                                                                   
  Before unusual charges............... $    .95    $     .10    $    (.10)   $    .30    $     1.31 
  Unusual charges......................       --        (2.80)       (2.14)         --         (4.94)
                                        --------    ---------    ---------    --------    ---------- 
                                        $    .95    $   (2.70)   $   (2.24)   $    .30    $    (3.63)
                                        ========    =========    =========    ========    ========== 
Dividends Paid Per Share............... $  .2550    $   .2550    $   .2550    $  .2550    $   1.0200 
Average Daily Trading Volume...........  195,997      328,005      530,228     395,530       364,558 
Price Per Share:                                                                                     
  High................................. $39.8750    $ 39.8750    $ 26.8125    $20.8125    $  39.8750 
  Low.................................. $36.2500    $ 24.7500    $ 16.4375    $16.8125    $  16.4375 
  Close................................ $37.3750    $ 25.0000    $ 17.0625    $19.0625    $  19.0625 

F-66

S-4
196th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 196th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

                                                        [Enlarge/Download Table]

                                          FIRST       SECOND        THIRD       FOURTH                
                                         QUARTER      QUARTER      QUARTER     QUARTER        YEAR    
                                         -------      -------      -------     -------        ----    
                                                             AS RESTATED, NOTE 1B                     
                                              (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)      
                                                                                                      
1998                                                                                                  
Operating Revenues.....................  $658,584    $ 367,740    $ 316,301    $537,569    $1,880,194 
Operating Income (Loss):                                                                              
  Before unusual charges...............  $107,893    $  13,883    $  (6,883)   $ 42,551    $  157,444 
  Unusual charges......................        --           --     (175,341)         --      (175,341)
                                         --------    ---------    ---------    --------    ---------- 
                                         $107,893    $  13,883    $(182,224)   $ 42,551    $  (17,897)
                                         ========    =========    =========    ========    ========== 
Operating and Joint Venture Income                                                                    
  (Loss):                                                                                             
  Before unusual charges...............  $124,654    $  25,720    $  11,080    $ 58,215    $  219,669 
  Unusual charges......................        --           --     (175,341)         --      (175,341)
                                         --------    ---------    ---------    --------    ---------- 
                                         $124,654    $  25,720    $(164,261)   $ 58,215    $   44,328 
                                         ========    =========    =========    ========    ========== 
Net Income (Loss)                                                                                     
  Continuing operations, before unusual                                                               
     charges...........................  $ 76,940    $   4,509    $  (5,508)   $ 24,958    $  100,899 
  Unusual charges......................        --           --     (114,576)         --      (114,576)
  Discontinued operations..............     1,942     (217,132)     (56,640)       (961)     (272,791)
                                         --------    ---------    ---------    --------    ---------- 
                                         $ 78,882    $(212,623)   $(176,724)   $ 23,997    $ (286,468)
                                         ========    =========    =========    ========    ========== 
Basic Earnings (Loss) Per Share:                                                                      
  Continuing operations, before unusual                                                               
     charges...........................  $    .98    $     .06    $    (.07)   $    .32    $     1.28 
  Unusual charges......................        --           --        (1.45)         --         (1.45)
  Discontinued operations..............       .03        (2.76)        (.72)       (.01)        (3.46)
                                         --------    ---------    ---------    --------    ---------- 
                                         $   1.01    $   (2.70)   $   (2.24)   $    .31    $    (3.63)
                                         ========    =========    =========    ========    ========== 
Diluted Earnings (Loss) Per Share:                                                                    
  Continuing operations, before unusual                                                               
     charges...........................  $    .93    $     .06    $    (.07)   $    .31    $     1.28 
  Unusual charges......................        --           --        (1.45)         --         (1.45)
  Discontinued operations..............       .02        (2.76)        (.72)       (.01)        (3.46)
                                         --------    ---------    ---------    --------    ---------- 
                                         $    .95    $   (2.70)   $   (2.24)   $    .30    $    (3.63)
                                         ========    =========    =========    ========    ========== 
Dividends Paid Per Share...............  $  .2550    $   .2550    $   .2550    $  .2550    $   1.0200 
Average Daily Trading Volume...........   195,997      328,005      530,228     395,530       364,558 
Price Per Share:                                                                                      
  High.................................  $39.8750    $ 39.8750    $ 26.8125    $20.8125    $  39.8750 
  Low..................................  $36.2500    $ 24.7500    $ 16.4375    $16.8125    $  16.4375 
  Close................................  $37.3750    $ 25.0000    $ 17.0625    $19.0625    $  19.0625 

F-67

S-4
197th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 197th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

                                                        [Enlarge/Download Table]

                                          FIRST       SECOND        THIRD       FOURTH                
                                         QUARTER      QUARTER      QUARTER     QUARTER        YEAR    
                                         -------      -------      -------     -------        ----    
                                                       AS PREVIOUSLY REPORTED, NOTE 1B                
                                             (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)      
                                                                                                      
1998                                                                                                  
Operating Revenues.....................  $658,584    $ 367,740    $ 316,301    $537,569    $1,880,194 
Operating Income (Loss):                                                                              
  Before unusual charges...............  $110,397    $  17,764    $  (7,540)   $ 48,380    $  169,001 
  Unusual charges......................        --           --     (175,341)         --      (175,341)
                                         --------    ---------    ---------    --------    ---------- 
                                         $110,397    $  17,764    $(182,881)   $ 48,380    $   (6,340)
                                         ========    =========    =========    ========    ========== 
Operating and Joint Venture Income                                                                    
  (Loss):                                                                                             
  Before unusual charges...............  $127,158    $  29,601    $  10,423    $ 64,044    $  231,226 
  Unusual charges......................        --           --     (175,341)         --      (175,341)
                                         --------    ---------    ---------    --------    ---------- 
                                         $127,158    $  29,601    $(164,918)   $ 64,044    $   55,885 
                                         ========    =========    =========    ========    ========== 
Net Income (Loss)                                                                                     
  Continuing operations, before unusual                                                               
     charges...........................  $ 78,568    $   7,032    $  (5,935)   $ 28,747    $  108,412 
  Unusual charges......................        --           --     (114,576)         --      (114,576)
  Discontinued operations..............     1,942     (217,132)     (56,640)       (961)     (272,791)
                                         --------    ---------    ---------    --------    ---------- 
                                         $ 80,510    $(210,100)   $(177,151)   $ 27,786    $ (278,955)
                                         ========    =========    =========    ========    ========== 
Basic Earnings (Loss) Per Share:                                                                      
  Continuing operations, before unusual                                                               
     charges...........................  $   1.00    $     .09    $    (.07)   $    .36    $     1.38 
  Unusual charges......................        --           --        (1.45)         --         (1.46)
  Discontinued operations..............       .03        (2.76)        (.72)       (.01)        (3.46)
                                         --------    ---------    ---------    --------    ---------- 
                                         $   1.03    $   (2.67)   $   (2.24)   $    .35    $    (3.54)
                                         ========    =========    =========    ========    ========== 
Diluted Earnings (Loss) Per Share:                                                                    
  Continuing operations, before unusual                                                               
     charges...........................  $    .95    $     .09    $    (.07)   $    .36    $     1.38 
  Unusual charges......................        --           --        (1.45)         --         (1.46)
  Discontinued operations..............       .02        (2.76)        (.72)       (.01)        (3.46)
                                         --------    ---------    ---------    --------    ---------- 
                                         $    .97    $   (2.67)   $   (2.24)   $    .35    $    (3.54)
                                         ========    =========    =========    ========    ========== 
Dividends Paid Per Share...............  $  .2550    $   .2550    $   .2550    $  .2550    $   1.0200 
Average Daily Trading Volume...........   195,997      328,005      530,228     395,530       364,558 
Price Per Share:                                                                                      
  High.................................  $39.8750    $ 39.8750    $ 26.8125    $20.8125    $  39.8750 
  Low..................................  $36.2500    $ 24.7500    $ 16.4375    $16.8125    $  16.4375 
  Close................................  $37.3750    $ 25.0000    $ 17.0625    $19.0625    $  19.0625 

F-68

S-4
198th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 198th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

                                                        [Enlarge/Download Table]

                                         FIRST       SECOND        THIRD       FOURTH               
                                        QUARTER      QUARTER      QUARTER     QUARTER        YEAR   
                                        -------      -------      -------     -------        ----   
                                               AS RESTATED AND RECLASSIFIED, NOTES 1B AND 4A        
                                            (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)     
                                                                                                    
1997                                                                                                
Operating Revenues..................... $788,761    $ 387,925    $ 327,817    $703,364    $2,207,867
Operating Income....................... $123,020    $  24,485    $     889    $ 73,996    $  222,390
Operating and Joint Venture Income..... $137,381    $  34,955    $  18,238    $ 87,475    $  278,049
Income from Continuing Operations...... $ 79,919    $   7,181    $   1,242    $ 44,887    $  133,229
Earnings Per Share from Continuing                                                                  
  Operations:                                                                                       
  Basic................................ $   1.18    $     .10    $     .02    $    .57    $     1.82
  Diluted.............................. $   1.16    $     .10    $     .02    $    .55    $     1.79
Dividends Paid Per Share............... $  .2425    $   .2425    $   .2425    $  .2550    $    .9825
Average Daily Trading Volume...........  102,659      153,859      159,057     149,650       141,765
Price Per Share:                                                                                    
  High................................. $32.6250    $ 30.8125    $ 33.0000    $40.5000    $  40.5000
  Low.................................. $28.1250    $ 27.3750    $ 30.3750    $32.0000    $  27.3750
  Close................................ $28.1250    $ 30.6250    $ 32.0000    $40.3750    $  40.3750

                                                        [Enlarge/Download Table]

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

F-69

S-4
199th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 199th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

                                                        [Enlarge/Download Table]

                                         FIRST     SECOND        THIRD       FOURTH             
                                        QUARTER    QUARTER      QUARTER     QUARTER      YEAR   
                                        -------    -------      -------     -------      ----   
                                                    AS PREVIOUSLY REPORTED, NOTE 1B             
                                                                                                
1997                                                                                            
Operating Revenues..................... $753,728  $ 350,807    $ 287,508    $671,791  $2,063,834
Operating Income (Loss)................ $112,485  $  14,508    $ (13,485)   $ 71,390  $  184,898
Operating and Joint Venture Income..... $122,146  $  24,978    $   2,239    $ 84,594  $  233,957
Net Income (Loss):                                                                              
  Continuing operations................ $ 71,735  $   3,261    $  (7,918)   $ 45,069  $  112,147
  Discontinued operations..............   10,034      5,815        9,137       5,173      30,159
                                        --------  ---------    ---------    --------  ----------
                                        $ 81,769  $   9,076    $   1,219    $ 50,242  $  142,306
                                        ========  =========    =========    ========  ==========
Basic Earnings (Loss) Per Share:                                                                
  Continuing operations................ $   1.06  $     .05    $    (.10)   $    .58  $     1.54
  Discontinued operations..............      .15        .08          .12         .06         .41
                                        --------  ---------    ---------    --------  ----------
                                        $   1.21  $     .13    $     .02    $    .64  $     1.95
                                        ========  =========    =========    ========  ==========
Diluted Earnings (Loss) Per Share:                                                              
  Continued operations................. $   1.04  $     .05    $    (.10)   $    .56  $     1.51
  Discontinued operations.............. $    .15        .08    $     .12         .06         .40
                                        --------  ---------    ---------    --------  ----------
                                        $   1.19  $     .13    $     .02    $    .62  $     1.91
                                        ========  =========    =========    ========  ==========
Dividends Paid Per Share............... $  .2425  $   .2425        .2425       .2550       .9825
Average Daily Trading Volume...........  102,659    153,859      159,057     149,650     141,765
Price Per Share:                                                                                
  High................................. $32.6250  $ 30.8125    $ 33.0000    $40.5000  $  40.5000
  Low.................................. $28.1250  $ 27.3750    $ 30.3750    $32.0000  $  27.3750
  Close................................ $28.1250  $ 30.6250    $ 32.0000    $40.3750  $  40.3750

20. SUPPLEMENTARY INFORMATION FOR GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)  

The following information was prepared in accordance with SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities" and related SEC accounting 
rules.                                                                          

CAPITALIZED COSTS                                                               

                                                        [Enlarge/Download Table]

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

F-70

S-4
200th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 200th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

CAPITALIZED COSTS EXCLUDED FROM AMORTIZATION                                    

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

                                                        [Enlarge/Download Table]

                                                                    YEAR COSTS INCURRED          
                                                          ---------------------------------------
                                                                                           1995 &
                                                  TOTAL    1998       1997       1996      PRIOR 
                                                  -----    ----       ----       ----      ------
                                                                 (IN THOUSANDS)                  
                                                                                                 
Acquisition..................................... $43,131  $14,254    $17,119    $ 9,321    $2,437
Exploration.....................................  56,480   13,757     32,655      9,935       133
                                                 =======  =======    =======    =======    ======
                                                 $99,611  $28,011    $49,774    $19,256    $2,570
                                                 =======  =======    =======    =======    ======

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

COST INCURRED                                                                   

                                                        [Enlarge/Download Table]

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

RESULTS OF OPERATIONS                                                           

                                                        [Enlarge/Download Table]

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

F-71

S-4
201st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 201st
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

RESERVE QUANTITY INFORMATION                                                    

MCN's proved reserves are located in the United States. The estimated 
quantities of proved reserves disclosed below are based upon estimates by MCN's 
independent petroleum engineers.                                                

                                                        [Enlarge/Download Table]

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

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS                        

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

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

                                                        [Enlarge/Download Table]

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

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

F-72

S-4
202nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 202nd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

income or loss of MOG as well as MOG's tax credits. Accordingly, it is          
management's opinion that any tax benefits earned by MOG will be utilized by MCN
in its consolidated tax returns.                                                

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

                                                        [Enlarge/Download Table]

                                                               1998         1997         1996   
                                                               ----         ----         ----   
                                                                       (IN THOUSANDS)           
                                                                                                
Beginning of Year........................................... $ 769,564    $ 901,274    $521,907 
  Net changes in sales prices and production costs..........   (67,085)    (261,154)    126,526 
  Net change due to revisions in quantity estimates.........   (59,106)     (26,015)      5,061 
  Extensions, discoveries, additions and improved recovery,                                     
     net of related costs...................................    46,739      153,291     200,026 
  Development costs incurred, previously estimated..........    86,607      103,201      86,810 
  Changes in estimated future development costs.............   (26,573)    (120,219)    (81,069)
  Sales, net of production costs............................  (127,857)    (147,464)    (89,686)
  Net change in future income taxes.........................   105,371      116,366     (85,616)
  Net change in federal tax credits.........................   (41,997)     (17,797)    (15,878)
  Sales of reserves in place................................   (56,924)     (83,985)         -- 
  Purchases of reserves in place............................    41,525       48,685     193,550 
  Accretion of discount and other...........................    70,103      103,381      39,643 
                                                             ---------    ---------    -------- 
End of Year................................................. $ 740,367    $ 769,564    $901,274 
                                                             =========    =========    ======== 

21. CONSOLIDATING FINANCIAL STATEMENTS                                          

    Debt securities issued by MCNIC are subject to a support agreement between
MCN and MCNIC, under which MCN has committed to make payments of interest and   
principal on MCNIC's securities in the event of failure to pay by MCNIC.        
Restrictions in the support agreement prohibit recourse on the part of MCNIC's  
investors against the stock and assets of MichCon. Under the terms of the       
support agreement, the assets of MCN, other than MichCon, and the cash dividends
paid to MCN by any of its subsidiaries are available as recourse to holders of  
MCNIC's securities. The carrying value of MCN's assets on an unconsolidated     
basis, primarily investments in its subsidiaries other than MichCon, is         
$970,072,000 at December 31, 1998.                                              

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

F-73

S-4
203rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 203rd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

CONSOLIDATING STATEMENT OF FINANCIAL POSITION 

                                                        [Enlarge/Download Table]

                                                       MCN                                     ELIMINATIONS                
                                                    AND OTHER                                      AND         CONSOLIDATED
                                                   SUBSIDIARIES      MCNIC        MICHCON       RECLASSES         TOTAL    
                                                   ------------      -----        -------      ------------    ------------
                                                                              DECEMBER 31, 1998                            
                                                   ------------------------------------------------------------------------
                                                                                (IN THOUSANDS)                             
                                                                                                                           
ASSETS                                                                                                                     
CURRENT ASSETS                                                                                                             
  Cash and cash equivalents, at cost.............   $    1,400     $    9,036    $    6,603    $        --      $   17,039 
  Accounts receivable............................       10,039        265,312       151,746        (17,312)        409,785 
    Less -- Allowance for doubtful accounts......           84            653         8,928             --           9,665 
                                                    ----------     ----------    ----------    -----------      ---------- 
    Accounts receivable, net.....................        9,955        264,659       142,818        (17,312)        400,120 
  Accrued unbilled revenues......................        1,121             --        86,767             --          87,888 
  Gas in inventory...............................           --         90,418        56,969             --         147,387 
  Property taxes assessed applicable to future                                                                             
    periods......................................          214          1,172        71,165             --          72,551 
  Other..........................................        5,143         11,872        30,169         (4,712)         42,472 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        17,833        377,157       394,491        (22,024)        767,457 
                                                    ----------     ----------    ----------    -----------      ---------- 
DEFERRED CHARGES AND OTHER ASSETS                                                                                          
  Deferred income taxes..........................        3,305        128,807            --        (81,565)         50,547 
  Investments in debt and equity securities......           --          3,548        65,556            601          69,705 
  Deferred swap losses and receivables...........           --         63,147            --             --          63,147 
  Deferred environmental costs...................        2,604             --        28,169             --          30,773 
  Prepaid benefit costs..........................           --             --       113,879         (2,104)        111,775 
  Other..........................................        9,401         26,870        59,007          3,662          98,940 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        15,310        222,372       266,611        (79,406)        424,887 
                                                    ----------     ----------    ----------    -----------      ---------- 
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND                                                                          
  SUBSIDIARIES...................................    1,550,770        782,471        19,343     (1,549,353)        803,231 
                                                    ----------     ----------    ----------    -----------      ---------- 
PROPERTY, PLANT AND EQUIPMENT, AT COST...........       48,681      1,103,716     2,889,020             --       4,041,417 
  Less -- Accumulated depreciation and                                                                                     
    depletion....................................       17,210        229,944     1,396,940             --       1,644,094 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        31,471        873,772     1,492,080             --       2,397,323 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                    $1,615,384     $2,255,772    $2,172,525    $(1,650,783)     $4,392,898 
                                                    ==========     ==========    ==========    ===========      ========== 
LIABILITIES AND CAPITALIZATION                                                                                             
CURRENT LIABILITIES                                                                                                        
  Accounts payable...............................   $    4,123     $  218,851        98,891    $   (17,516)     $  304,349 
  Notes payable..................................      260,771        137,762       221,169           (851)        618,851 
  Current portion of long-term debt and capital                                                                            
    lease obligations............................           --        211,433        58,288             --         269,721 
  Federal income, property and other taxes                                                                                 
    payable......................................        1,441          6,965        61,059             --          69,465 
  Deferred gas cost recovery revenues............           --             --        14,980             --          14,980 
  Gas payable....................................           --         17,332        25,337             --          42,669 
  Customer deposits..............................           22             --        18,769             --          18,791 
  Other..........................................       18,337         25,276        67,222         (2,525)        108,310 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                       284,694        617,619       565,715        (20,892)      1,447,136 
                                                    ----------     ----------    ----------    -----------      ---------- 
DEFERRED CREDITS AND OTHER LIABILITIES                                                                                     
  Deferred income taxes..........................      (10,308)            --        88,567        (78,259)             -- 
  Unamortized investment tax credit..............          272             --        29,784             --          30,056 
  Tax benefits amortizable to customers..........           --             --       130,120             --         130,120 
  Deferred swap gains and payables...............           --         62,956            --             --          62,956 
  Accrued environmental costs....................        3,000             --        32,000             --          35,000 
  Minority interest..............................           --          2,697         8,201             --          10,898 
  Other..........................................       10,435         15,741        51,460         (2,197)         75,439 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                         3,399         81,394       340,132        (80,456)        344,469 
                                                    ----------     ----------    ----------    -----------      ---------- 
CAPITALIZATION                                                                                                             
  Long-term debt, including capital lease                                                                                  
    obligations..................................           --        687,333       619,835             --       1,307,168 
  Redeemable preferred securities of                                                                                       
    subsidiaries.................................      502,203             --            --             --         502,203 
  Common shareholders' equity....................      825,088        869,426       646,843     (1,549,435)        791,922 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                     1,327,291      1,556,759     1,266,678     (1,549,435)      2,601,293 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                    $1,615,384     $2,255,772    $2,172,525    $(1,650,783)     $4,392,898 
                                                    ==========     ==========    ==========    ===========      ========== 

F-74

S-4
204th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 204th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

CONSOLIDATING STATEMENT OF FINANCIAL POSITION 

                                                        [Enlarge/Download Table]

                                                       MCN                                     ELIMINATIONS                
                                                    AND OTHER                                      AND         CONSOLIDATED
                                                   SUBSIDIARIES      MCNIC        MICHCON       RECLASSES         TOTAL    
                                                   ------------      -----        -------      ------------    ------------
                                                                              DECEMBER 31, 1997                            
                                                   ------------------------------------------------------------------------
                                                                                (IN THOUSANDS)                             
                                                                                                                           
ASSETS                                                                                                                     
CURRENT ASSETS                                                                                                             
  Cash and cash equivalents, at cost.............   $       23     $   25,119    $   14,353    $        --      $   39,495 
  Accounts receivable............................       15,525        242,343       210,677        (46,910)        421,635 
    Less -- Allowance for doubtful accounts......           75            621        15,015             --          15,711 
                                                    ----------     ----------    ----------    -----------      ---------- 
  Accounts receivable, net.......................       15,450        241,722       195,662        (46,910)        405,924 
  Accrued unbilled revenue.......................        1,114             --        91,896             --          93,010 
  Gas in inventory...............................           --         16,576        40,201             --          56,777 
  Property taxes assessed applicable to future                                                                             
    periods......................................          217          2,835        64,827             --          67,879 
  Accrued gas cost recovery revenues.............           --             --        12,862             --          12,862 
  Other..........................................        3,745         17,612        33,361           (629)         54,089 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        20,549        303,864       453,162        (47,539)        730,036 
                                                    ----------     ----------    ----------    -----------      ---------- 
DEFERRED CHARGES AND OTHER ASSETS                                                                                          
  Investments in debt and equity securities......           --         62,060        35,110            351          97,521 
  Deferred swap losses and receivables...........           --         51,023            --             --          51,023 
  Deferred environmental costs...................        2,535             --        27,699             --          30,234 
  Prepaid benefit costs..........................       (3,418)            --        85,790         (2,130)         80,242 
  Other..........................................        8,261         34,287        46,972         (3,339)         86,181 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                         7,378        147,370       195,571         (5,118)        345,201 
                                                    ----------     ----------    ----------    -----------      ---------- 
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND                                                                          
  SUBSIDIARIES...................................    1,641,421        528,492        19,643     (1,632,580)        556,976 
                                                    ----------     ----------    ----------    -----------      ---------- 
PROPERTY, PLANT AND EQUIPMENT, AT COST...........       37,918      1,358,504     2,790,352             --       4,186,774 
  Less -- Accumulated depreciation and                                                                                     
    depletion....................................       12,951        152,707     1,322,392             --       1,488,050 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        24,967      1,205,797     1,467,960             --       2,698,724 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                    $1,694,315     $2,185,523    $2,136,336    $(1,685,237)     $4,330,937 
                                                    ==========     ==========    ==========    ===========      ========== 
LIABILITIES AND CAPITALIZATION                                                                                             
CURRENT LIABILITIES                                                                                                        
  Accounts payable...............................   $    4,385     $  254,391    $  130,267    $   (46,848)     $  342,195 
  Notes payable..................................           --        163,113       241,691         (3,078)        401,726 
  Current portion of long-term debt and capital                                                                            
    lease obligations............................          365          1,557        34,956             --          36,878 
  Federal income, property and other taxes                                                                                 
    payable......................................          401          7,795        78,630             --          86,826 
  Gas payable....................................           --          6,254         2,063             --           8,317 
  Customer deposits..............................           19             --        16,363             --          16,382 
  Other..........................................       13,599         22,944        65,717           (630)        101,630 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        18,769        456,054       569,687        (50,556)        993,954 
                                                    ----------     ----------    ----------    -----------      ---------- 
DEFERRED CREDITS AND OTHER LIABILITIES                                                                                     
  Deferred income taxes..........................       (4,642)        73,874        83,905             22         153,159 
  Unamortized investment tax credit..............          301             --        32,745             --          33,046 
  Tax benefits amortizable to customers..........          443             --       122,922             --         123,365 
  Deferred swap gains and payables...............           --         41,717            --             --          41,717 
  Accrued environmental costs....................        3,000             --        32,000             --          35,000 
  Minority interest..............................           --          1,905        17,283             --          19,188 
  Other..........................................       10,792         16,586        44,663         (2,152)         69,889 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                         9,894        134,082       333,518         (2,130)        475,364 
                                                    ----------     ----------    ----------    -----------      ---------- 
CAPITALIZATION                                                                                                             
  Long-term debt, including capital lease                                                                                  
    obligations..................................           --        595,457       617,107             --       1,212,564 
  Redeemable preferred securities of                                                                                       
    subsidiaries.................................      505,104             --            --             --         505,104 
  Common shareholders' equity....................    1,160,548        999,930       616,024     (1,632,551)      1,143,951 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                     1,665,652      1,595,387     1,233,131     (1,632,551)      2,861,619 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                    $1,694,315     $2,185,523    $2,136,336    $(1,685,237)     $4,330,937 
                                                    ==========     ==========    ==========    ===========      ========== 

F-75

S-4
205th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 205th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

CONSOLIDATING STATEMENT OF OPERATIONS 

                                                        [Enlarge/Download Table]

                                                       MCN                                  ELIMINATIONS               
                                                    AND OTHER                                   AND        CONSOLIDATED
                                                   SUBSIDIARIES     MCNIC       MICHCON      RECLASSES        TOTAL    
                                                   ------------   ----------   ----------   ------------   ------------
                                                                  TWELVE MONTHS ENDED DECEMBER 31, 1998                
                                                   --------------------------------------------------------------------
                                                                              (IN THOUSANDS)                           
                                                                                                                       
OPERATING REVENUES...............................   $  18,262     $  992,828   $1,033,658    $ (14,050)     $2,030,698 
                                                    ---------     ----------   ----------    ---------      ---------- 
OPERATING EXPENSES                                                                                                     
  Cost of gas....................................      10,706        752,207      451,529       (8,668)      1,205,774 
  Operation and maintenance......................     (10,207)       152,607      252,397       (5,382)        389,415 
  Depreciation, depletion and amortization.......       3,206         83,401       92,883           --         179,490 
  Property and other taxes.......................       1,719         12,396       55,438           --          69,553 
  Property write-downs and restructuring                                                                               
    charges......................................       8,669        558,849       24,800           --         592,318 
                                                    ---------     ----------   ----------    ---------      ---------- 
                                                       14,093      1,559,460      877,047      (14,050)      2,436,550 
                                                    ---------     ----------   ----------    ---------      ---------- 
OPERATING INCOME (LOSS)..........................       4,169       (566,632)     156,611           --        (405,852)
                                                    ---------     ----------   ----------    ---------      ---------- 
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND                                                                      
  SUBSIDIARIES...................................    (282,284)        61,242        1,946      281,321          62,225 
                                                    ---------     ----------   ----------    ---------      ---------- 
OTHER INCOME AND (DEDUCTIONS)                                                                                          
  Interest income................................      37,408          6,609        5,688      (38,812)         10,893 
  Interest on long-term debt.....................        (641)       (41,821)     (44,884)          --         (87,346)
  Other interest expense.........................      (2,474)       (48,630)     (12,113)      38,813         (24,404)
  Dividends on preferred securities of                                                                                 
    subsidiaries.................................          --             --           --      (36,370)        (36,370)
  Investment losses..............................      (8,500)        (6,135)          --           --         (14,635)
  Minority interest..............................          --            265        5,727           --           5,992 
  Other..........................................        (605)        20,348         (182)          --          19,561 
                                                    ---------     ----------   ----------    ---------      ---------- 
                                                       25,188        (69,364)     (45,764)     (36,369)       (126,309)
                                                    ---------     ----------   ----------    ---------      ---------- 
INCOME (LOSS) BEFORE INCOME TAXES................    (252,927)      (574,754)     112,793      244,952        (469,936)
INCOME TAX PROVISION (BENEFIT)...................      (2,829)      (216,456)      35,817           --        (183,468)
                                                    ---------     ----------   ----------    ---------      ---------- 
NET INCOME (LOSS)................................    (250,098)      (358,298)      76,976      244,952        (286,468)
DIVIDENDS ON PREFERRED SECURITIES................      36,370             --           --      (36,370)             -- 
                                                    ---------     ----------   ----------    ---------      ---------- 
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK.....   $(286,468)    $ (358,298)  $   76,976    $ 281,322      $ (286,468)
                                                    =========     ==========   ==========    =========      ========== 


                                                                  TWELVE MONTHS ENDED DECEMBER 31, 1997                
                                                   --------------------------------------------------------------------
                                                                                                                       
OPERATING REVENUES...............................   $  17,607     $  951,269   $1,253,679      (14,688)     $2,207,867 
                                                    ---------     ----------   ----------    ---------      ---------- 
OPERATING EXPENSES                                                                                                     
  Cost of gas....................................       9,749        703,145      632,229      (10,090)      1,335,033 
  Operation and maintenance......................       2,281        113,018      282,640       (4,598)        393,341 
  Depreciation, depletion and amortization.......       2,279         75,630      103,703           --         181,612 
  Property and other taxes.......................       1,679         13,068       60,744           --          75,491 
                                                    ---------     ----------   ----------    ---------      ---------- 
                                                       15,988        904,861    1,079,316      (14,688)      1,985,477 
                                                    ---------     ----------   ----------    ---------      ---------- 
OPERATING INCOME.................................       1,619         46,408      174,363           --         222,390 
                                                    ---------     ----------   ----------    ---------      ---------- 
EQUITY IN EARNINGS OF JOINT VENTURES AND                                                                               
  SUBSIDIARIES...................................     135,757         52,356        1,199     (133,653)         55,659 
                                                    ---------     ----------   ----------    ---------      ---------- 
OTHER INCOME AND (DEDUCTIONS)                                                                                          
  Interest income................................      32,857          6,378        4,659      (32,728)         11,166 
  Interest on long-term debt.....................         408        (30,052)     (45,526)          --         (75,170)
  Other interest expense.........................      (1,253)       (34,382)      (8,664)      33,016         (11,283)
  Dividends on preferred securities of                                                                                 
    subsidiaries.................................          --             --           --      (31,090)        (31,090)
  Minority interest..............................          --            (82)      (1,882)          --          (1,964)
  Other..........................................          74         10,149          536           --          10,759 
                                                    ---------     ----------   ----------    ---------      ---------- 
                                                       32,086        (47,989)     (50,877)     (30,802)        (97,582)
                                                    ---------     ----------   ----------    ---------      ---------- 
INCOME BEFORE INCOME TAXES.......................     169,462         50,775      124,685     (164,455)        180,467 
INCOME TAX PROVISION.............................       2,573         (1,000)      45,665           --          47,238 
                                                    ---------     ----------   ----------    ---------      ---------- 
NET INCOME.......................................     166,889         51,775       79,020     (164,455)        133,229 
DIVIDENDS ON PREFERRED SECURITIES................      31,090             --           --      (31,090)             -- 
                                                    ---------     ----------   ----------    ---------      ---------- 
NET INCOME AVAILABLE FOR COMMON STOCK............   $ 135,799     $   51,775   $   79,020    $(133,365)     $  133,229 
                                                    =========     ==========   ==========    =========      ========== 

F-76

S-4
206th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 206th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

CONSOLIDATING STATEMENT OF OPERATIONS 

                                                        [Enlarge/Download Table]

                                                           MCN                                  ELIMINATIONS               
                                                        AND OTHER                                   AND        CONSOLIDATED
                                                       SUBSIDIARIES     MCNIC       MICHCON      RECLASSES        TOTAL    
                                                       ------------     -----       -------     ------------   ------------
                                                                      TWELVE MONTHS ENDED DECEMBER 31, 1996                
                                                       --------------------------------------------------------------------
                                                                                  (IN THOUSANDS)                           
                                                                                                                           
OPERATING REVENUES....................................  $  17,469     $  734,441   $1,258,785    $ (13,427)     $1,997,268 
                                                        ---------     ----------   ----------    ---------      ---------- 
OPERATING EXPENSES                                                                                                         
  Cost of gas.........................................      9,655        557,340      636,594      (10,011)      1,193,578 
  Operation and maintenance...........................        785         80,330      294,281       (3,416)        371,980 
  Depreciation, depletion and amortization............      1,940         45,903       98,147           --         145,990 
  Property and other taxes............................      2,134         10,531       61,762           --          74,427 
                                                        ---------     ----------   ----------    ---------      ---------- 
                                                           14,514        694,104    1,090,784      (13,427)      1,785,975 
                                                        ---------     ----------   ----------    ---------      ---------- 
OPERATING INCOME......................................      2,955         40,337      168,001           --         211,293 
                                                        ---------     ----------   ----------    ---------      ---------- 
EQUITY IN EARNINGS OF JOINT VENTURES AND                                                                                   
  SUBSIDIARIES........................................    152,368         15,915          886     (151,302)         17,867 
                                                        ---------     ----------   ----------    ---------      ---------- 
OTHER INCOME AND (DEDUCTIONS)                                                                                              
  Interest income.....................................     12,675          3,220        3,900      (12,561)          7,234 
  Interest on long-term debt..........................        114        (25,928)     (40,703)          --         (66,517)
  Other interest expense..............................     (1,218)       (14,595)      (8,012)      12,561         (11,264)
  Dividends on preferred securities of subsidiaries...         --             --           --      (12,374)        (12,374)
  Minority interest...................................         --            (71)        (988)          --          (1,059)
  Other...............................................        190          5,330       (1,756)          --           3,764 
                                                        ---------     ----------   ----------    ---------      ---------- 
                                                           11,761        (32,044)     (47,559)     (12,374)        (80,216)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME                                                                            
  TAXES...............................................    167,084         24,208      121,328     (163,676)        148,944 
INCOME TAX PROVISION..................................      1,814         (6,925)      41,486           --          36,375 
                                                        ---------     ----------   ----------    ---------      ---------- 
INCOME FROM CONTINUING OPERATIONS.....................    165,270         31,133       79,842     (163,676)        112,569 
DISCONTINUED OPERATIONS, NET OF TAXES.................         --         37,771           --           --          37,771 
                                                        ---------     ----------   ----------    ---------      ---------- 
NET INCOME............................................    165,270         68,904       79,842     (163,676)        150,340 
DIVIDENDS ON PREFERRED SECURITIES.....................     12,356             --           18      (12,374)             -- 
                                                        ---------     ----------   ----------    ---------      ---------- 
NET INCOME AVAILABLE FOR COMMON STOCK.................  $ 152,914     $   68,904   $   79,824    $(151,302)     $  150,340 
                                                        =========     ==========   ==========    =========      ========== 

F-77

S-4
207th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 207th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS 

                                                        [Enlarge/Download Table]

                                                           MCN                                   ELIMINATIONS                
                                                        AND OTHER                                    AND         CONSOLIDATED
                                                       SUBSIDIARIES      MCNIC       MICHCON      RECLASSES         TOTAL    
                                                       ------------      -----       -------     ------------    ------------
                                                                       TWELVE MONTHS ENDED DECEMBER 31, 1998                 
                                                       ----------------------------------------------------------------------
                                                                                   (IN THOUSANDS)                            
                                                                                                                             
NET CASH FLOW FROM OPERATING ACTIVITIES...............  $  72,476      $ (68,749)   $ 217,918     $ (68,923)      $ 152,722  
                                                        ---------      ---------    ---------     ---------       ---------  
CASH FLOW FROM FINANCING ACTIVITIES                                                                                          
  Notes payable, net..................................    260,771         65,006      (20,522)        2,227         307,482  
  Capital contributions received from affiliates,                                                                            
    net...............................................         --        236,851           --      (236,851)             --  
  Dividends paid......................................    (82,239)            --      (46,084)       46,084         (82,239) 
  Preferred securities dividends paid.................    (17,613)            --           --        17,613              --  
  Issuance of common stock............................     20,192             --           --            --          20,192  
  Issuance of preferred securities....................     96,850             --           --            --          96,850  
  Issuance of long-term debt..........................         --        305,709      153,052            --         458,761  
  Long-term commercial paper and bank borrowings,                                                                            
    net...............................................         --         17,299           --            --          17,299  
  Retirement of long-term debt and preferred                                                                                 
    securities........................................   (100,365)      (102,153)    (126,292)           --        (328,810) 
  Other...............................................         --          8,243           --            --           8,243  
                                                        ---------      ---------    ---------     ---------       ---------  
    Net cash provided from (used for) financing                                                                              
      activities......................................    177,596        530,955      (39,846)     (170,927)        497,778  
                                                        ---------      ---------    ---------     ---------       ---------  
CASH FLOW FROM INVESTING ACTIVITIES                                                                                          
  Capital expenditures................................    (11,024)      (318,276)    (153,475)           --        (482,775) 
  Acquisitions........................................         --        (42,429)          --            --         (42,429) 
  Investment in debt and equity securities, net.......         --         48,527      (30,446)         (250)         17,831  
  Investment in joint ventures and subsidiaries.......   (238,951)      (187,423)         214       236,851        (189,309) 
  Sale of property and joint venture interests........      1,143         49,463           --        (3,421)         47,185  
  Other...............................................        137        (28,151)      (2,115)        6,670         (23,459) 
                                                        ---------      ---------    ---------     ---------       ---------  
    Net cash used for investing activities............   (248,695)      (478,289)    (185,822)      239,850        (672,956) 
                                                        ---------      ---------    ---------     ---------       ---------  
NET INCREASE (DECREASE) IN CASH AND CASH                                                                                     
  EQUIVALENTS.........................................      1,377        (16,083)      (7,750)           --         (22,456) 
CASH AND CASH EQUIVALENTS, JANUARY 1..................         23         25,119       14,353            --          39,495  
                                                        ---------      ---------    ---------     ---------       ---------  
CASH AND CASH EQUIVALENTS, DECEMBER 31................  $   1,400      $   9,036    $   6,603     $      --       $  17,039  
                                                        =========      =========    =========     =========       =========  

                                                                       TWELVE MONTHS ENDED DECEMBER 31, 1997                 
                                                       ----------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES...............  $  97,490      $ 148,242    $ 187,263     $ (89,611)      $ 343,384  
                                                        ---------      ---------    ---------     ---------       ---------  
CASH FLOW FROM FINANCING ACTIVITIES                                                                                          
  Notes payable, net..................................         --         94,513      (23,435)       (3,078)         68,000  
  Capital contributions received from (distributions                                                                         
    paid to) affiliates, net..........................     (3,985)       603,150           --      (599,165)             --  
  Dividends paid......................................    (72,851)            --      (40,000)       40,000         (72,851) 
  Preferred securities dividends paid.................    (31,090)            --           --        31,090              --  
  Issuance of common stock............................    294,402             --           --            --         294,402  
  Issuance of preferred securities....................    326,521             --           --            --         326,521  
  Issuance of long-term debt..........................         --        149,190      124,051            --         273,241  
  Long-term commercial paper and bank borrowings,                                                                            
    net...............................................         --       (261,822)          --            --        (261,822) 
  Retirement of long-term debt and preferred                                                                                 
    securities........................................        (55)       (32,315)     (76,854)           --        (109,224) 
  Other...............................................         --          4,612           --            --           4,612  
                                                        ---------      ---------    ---------     ---------       ---------  
    Net cash provided from (used for) financing                                                                              
      activities......................................    512,942        557,328      (16,238)     (531,153)        522,879  
                                                        ---------      ---------    ---------     ---------       ---------  
CASH FLOW FROM INVESTING ACTIVITIES                                                                                          
  Capital expenditures................................     (6,559)      (399,586)    (155,208)           (1)       (561,354) 
  Acquisitions........................................         --       (166,553)          --            --        (166,553) 
  Investment in debt and equity securities............         --        (48,441)     (31,375)       16,693         (63,123) 
  Investment in joint ventures and subsidiaries.......   (604,750)      (151,360)        (304)      603,772        (152,642) 
  Sale of property and joint venture interests........         --         67,365           --            --          67,365  
  Other...............................................         56         (1,484)      20,205           300          19,077  
                                                        ---------      ---------    ---------     ---------       ---------  
    Net cash used for investing activities............   (611,253)      (700,059)    (166,682)      620,764        (857,230) 
                                                        ---------      ---------    ---------     ---------       ---------  
NET INCREASE (DECREASE) IN CASH AND CASH                                                                                     
  EQUIVALENTS.........................................       (821)         5,511        4,343            --           9,033  
CASH AND CASH EQUIVALENTS, JANUARY 1..................        844         19,608       10,010            --          30,462  
                                                        ---------      ---------    ---------     ---------       ---------  
CASH AND CASH EQUIVALENTS, DECEMBER 31................  $      23      $  25,119    $  14,353     $      --       $  39,495  
                                                        =========      =========    =========     =========       =========  

F-78

S-4
208th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 208th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS 

                                                        [Enlarge/Download Table]

                                                           MCN                                    ELIMINATIONS                
                                                        AND OTHER                                     AND         CONSOLIDATED
                                                       SUBSIDIARIES      MCNIC       MICHCON       RECLASSES         TOTAL    
                                                       ------------      -----       -------      ------------    ------------
                                                                        TWELVE MONTHS ENDED DECEMBER 31, 1996                 
                                                       -----------------------------------------------------------------------
                                                                                   (IN THOUSANDS)                             
                                                                                                                              
NET CASH FLOW FROM OPERATING ACTIVITIES...............  $  38,535      $  84,678    $  101,694     $ (26,575)      $ 198,332  
                                                        ---------      ---------    ----------     ---------       ---------  
CASH FLOW FROM FINANCING ACTIVITIES                                                                                           
  Notes payable, net..................................         --         19,000        68,491            --          87,491  
  Capital contributions received from (distributions                                                                          
    paid to) affiliates, net..........................     (3,069)        41,195         1,614       (39,740)             --  
  Dividends paid......................................    (62,875)            --       (11,263)       11,263         (62,875) 
  Preferred securities dividends paid.................    (12,356)            --           (54)       12,410              --  
  Issuance of common stock............................     17,264             --            --            --          17,264  
  Issuance of preferred securities....................     77,218             --            --            --          77,218  
  Issuance of long-term debt..........................         --        328,895        69,645            --         398,540  
  Long-term commercial paper and bank borrowings,                                                                             
    net...............................................         --        (62,835)           --            --         (62,835) 
  Retirement of long-term debt and preferred                                                                                  
    securities........................................        (55)        (1,701)       (6,384)            1          (8,139) 
  Other...............................................     (6,249)            --            --            --          (6,249) 
                                                        ---------      ---------    ----------     ---------       ---------  
    Net cash provided from financing activities.......      9,878        324,554       122,049       (16,066)        440,415  
                                                        ---------      ---------    ----------     ---------       ---------  
CASH FLOW FROM INVESTING ACTIVITIES                                                                                           
  Capital expenditures................................     (5,474)      (392,181)     (212,668)           --        (610,323) 
  Acquisitions........................................         --       (133,201)           --            --        (133,201) 
  Investment in debt and equity securities............         --        (11,313)      (15,590)           --         (26,903) 
  Investment in joint ventures and subsidiaries.......    (42,809)       (35,793)         (278)       42,663         (36,217) 
  Sale of property and joint venture interest.........         --         36,621            --            --          36,621  
  Sale of Genix.......................................         --        132,889            --            --         132,889  
  Other...............................................        546          2,732         6,334           (22)          9,590  
                                                        ---------      ---------    ----------     ---------       ---------  
    Net cash used for investing activities............    (47,737)      (400,246)     (222,202)       42,641        (627,544) 
                                                        ---------      ---------    ----------     ---------       ---------  
NET INCREASE IN CASH AND CASH EQUIVALENTS.............        676          8,986         1,541            --          11,203  
CASH AND CASH EQUIVALENTS, JANUARY 1..................        168         10,622         8,469            --          19,259  
                                                        ---------      ---------    ----------     ---------       ---------  
CASH AND CASH EQUIVALENTS, DECEMBER 31................  $     844      $  19,608    $   10,010     $      --       $  30,462  
                                                        =========      =========    ==========     =========       =========  

F-79

S-4
209th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 209th

INDEPENDENT AUDITORS' REPORT

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

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

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

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

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

/s/ DELOITTE & TOUCHE LLP                                                       

Detroit, Michigan                                                               
February 25, 1999                                                               
(June 7, 1999 as to the effects of the matters described in Note 1b.)           
(October 15, 1999 as to effects of the matters described in Note 4a.)           

F-80

S-4
210th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 210th

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

JUNE 30, 1999 

RESULTS OF OPERATIONS                                                           

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

                                                        [Enlarge/Download Table]

                                              QUARTER             6 MONTHS             12 MONTHS      
                                         -----------------    -----------------    ------------------ 
                                          1999      1998       1999      1998       1999       1998   
                                          ----      ----       ----      ----       ----       ----   
                                                   (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)            
                                                                                                      
NET INCOME (LOSS)                                                                                     
Diversified Energy:                                                                                   
  Before unusual charges................ $ (9.2)   $   5.1    $ (5.1)   $  21.3    $ (11.7)   $  51.4 
  Unusual charges (Note 2)..............  (83.4)    (220.4)    (83.4)    (220.4)    (235.8)    (220.4)
                                         ------    -------    ------    -------    -------    ------- 
                                          (92.6)    (215.3)    (88.5)    (199.1)    (247.5)    (169.0)
                                         ------    -------    ------    -------    -------    ------- 
Gas Distribution:                                                                                     
  Before unusual charges................    6.3        2.7      90.7       65.4      113.7       81.4 
  Unusual charges (Note 2e).............     --         --        --         --      (16.7)        -- 
                                         ------    -------    ------    -------    -------    ------- 
                                            6.3        2.7      90.7       65.4       97.0       81.4 
                                         ------    -------    ------    -------    -------    ------- 
Total Before Accounting Change:                                                                       
  Before unusual charges................   (2.9)       7.8      85.6       86.7      102.0      132.8 
  Unusual charges (Note 2)..............  (83.4)    (220.4)    (83.4)    (220.4)    (252.5)    (220.4)
                                         ------    -------    ------    -------    -------    ------- 
                                          (86.3)    (212.6)      2.2     (133.7)    (150.5)     (87.6)
Cumulative Effect of Accounting Change,                                                               
  Net of Taxes (Note 4).................     --         --      (2.9)        --       (2.9)        -- 
                                         ------    -------    ------    -------    -------    ------- 
                                         $(86.3)   $(212.6)   $  (.7)   $(133.7)   $(153.4)   $ (87.6)
                                         ======    =======    ======    =======    =======    ======= 
DILUTED EARNINGS (LOSS) PER SHARE                                                                     
Diversified Energy:                                                                                   
  Before unusual charges................ $ (.11)   $   .07    $ (.06)   $   .27    $  (.15)   $   .66 
  Unusual charges (Note 2)..............  (1.00)     (2.80)    (1.01)     (2.80)     (2.94)     (2.82)
                                         ------    -------    ------    -------    -------    ------- 
                                          (1.11)     (2.73)    (1.07)     (2.53)     (3.09)     (2.16)
                                         ------    -------    ------    -------    -------    ------- 
Gas Distribution:                                                                                     
  Before unusual charges................    .08        .03      1.10        .83       1.42       1.04 
  Unusual charges (Note 2e).............     --         --        --         --       (.21)        -- 
                                         ------    -------    ------    -------    -------    ------- 
                                            .08        .03      1.10        .83       1.21       1.04 
                                         ------    -------    ------    -------    -------    ------- 
Total Before Accounting Change:                                                                       
  Before unusual charges................   (.03)       .10      1.04       1.10       1.27       1.70 
  Unusual charges (Note 2)..............  (1.00)     (2.80)    (1.01)     (2.80)     (3.15)     (2.82)
                                         ------    -------    ------    -------    -------    ------- 
                                          (1.03)     (2.70)      .03      (1.70)     (1.88)     (1.12)
Cumulative Effect of Accounting Change                                                                
  (Note 4)..............................     --         --      (.04)        --       (.03)        -- 
                                         ------    -------    ------    -------    -------    ------- 
                                         $(1.03)   $ (2.70)   $ (.01)   $ (1.70)   $ (1.91)   $ (1.12)
                                         ======    =======    ======    =======    =======    ======= 

F-81

S-4
211th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 211th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

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

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

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

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

F-82

S-4
212th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 212th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

A discussion of each unusual charge by segment follows:               

                                                        [Enlarge/Download Table]

                                       QUARTER             6 MONTHS             12 MONTHS      
                                  -----------------    -----------------    ------------------ 
                                   1999      1998       1999      1998       1999       1998   
                                   ----      ----       ----      ----       ----       ----   
                                       (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                 
                                                                                               
UNUSUAL CHARGES                                                                                
Diversified Energy:                                                                            
  Pipelines & Processing......... $   --    $    --    $   --    $    --    $ (89.5)   $    -- 
  Electric Power.................     --         --        --         --       (1.6)        -- 
  Exploration & Production.......  (83.4)    (220.4)    (83.4)    (220.4)    (138.0)    (220.4)
  Corporate & Other..............     --         --        --         --       (6.7)        -- 
                                  ------    -------    ------    -------    -------    ------- 
                                   (83.4)    (220.4)    (83.4)    (220.4)    (235.8)    (220.4)
Gas Distribution.................     --         --        --         --      (16.7)        -- 
                                  ------    -------    ------    -------    -------    ------- 
                                  $(83.4)   $(220.4)   $(83.4)   $(220.4)   $(252.5)   $(220.4)
                                  ======    =======    ======    =======    =======    ======= 
Diluted Loss Per Share........... $(1.00)   $ (2.80)   $(1.01)   $ (2.80)   $ (3.15)   $ (2.82)
                                  ======    =======    ======    =======    =======    ======= 

PIPELINES & PROCESSING                                                          

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

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

ELECTRIC POWER                                                                  

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

EXPLORATION & PRODUCTION                                                        

     Property Write-Downs: In the second quarter of 1999, MCN recognized a $52.0
million pre-tax ($33.8 million net of taxes) write-down of its gas and oil      
properties under the full cost method of accounting, due primarily to an        
unfavorable revision in the timing of production of proved gas and oil reserves 
as well as reduced expectations of sales proceeds on unproved acreage. Under the
full cost method of accounting as prescribed by the Securities and Exchange     
Commission, MCN's capitalized exploration and production costs at June 30, 1999 
exceeded the full cost "ceiling," resulting in the excess being written off to  
income. The                                                                     

F-83

S-4
213th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 213th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

ceiling is the sum of discounted future net cash flows from the production of   
proved gas and oil reserves, and the lower of cost or estimated fair value of   
unproved properties, net of related income tax effects.                         

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

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

  Loss on Investment: In the second quarter of 1999, MCN recognized a $7.5
million pre-tax 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 ($6.7 million net of taxes) restructuring charge related to the 
corporate realignment designed to improve operating efficiencies through a more 
streamlined organizational structure. The realignment included cost saving      
initiatives expected to reduce future operating expenses.                       

GAS DISTRIBUTION                                                                

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

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

DIVERSIFIED ENERGY                                                    

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

F-84

S-4
214th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 214th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

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

                                                        [Enlarge/Download Table]

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

-------------------------                                                       
* Includes intercompany transactions                                            

OPERATING AND JOINT VENTURE INCOME                                              

Operating and joint venture results for the 1999 quarter, six- and    
twelve-month periods (excluding the unusual charges) decreased from the         
comparable 1998 periods by $10.7 million, $6.2 million and $32.8 million,       
respectively. Results for all 1999 periods reflect reduced contributions from   
the Pipelines & Processing and E&P segments, partially offset by lower Corporate
& Other expenses. The Electric Power                                            

F-85

S-4
215th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 215th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

segment had reduced contributions in the current quarter and six-month period.  
Energy Marketing had a larger loss in the current quarter and improved results  
in the current six-month period.                                                

                                                        [Enlarge/Download Table]

                                                QUARTER            6 MONTHS           12 MONTHS     
                                            ----------------   ----------------   ----------------- 
                                             1999     1998      1999     1998      1999      1998   
                                             ----     ----      ----     ----      ----      ----   
                                                                                                    
OPERATING AND JOINT VENTURE INCOME (LOSS)                                                           
Before Unusual Charges:                                                                             
  Pipelines & Processing................... $  4.6   $   6.1   $  9.6   $  15.6   $  15.4   $  31.3 
  Electric Power...........................    3.9       6.9     11.4      12.4      25.0      24.7 
  Energy Marketing.........................   (2.3)      (.2)     2.9        .3      (1.0)     (1.2)
  Exploration & Production.................     .2       8.1      8.2      16.9      20.3      44.0 
  Corporate & Other........................     .9      (2.9)     1.2      (5.7)     (1.5)     (7.8)
                                            ------   -------   ------   -------   -------   ------- 
                                               7.3      18.0     33.3      39.5      58.2      91.0 
Unusual Charges (Note 2)...................  (52.0)   (333.0)   (52.0)   (333.0)   (286.5)   (333.0)
                                            ------   -------   ------   -------   -------   ------- 
                                            $(44.7)  $(315.0)  $(18.7)  $(293.5)  $(228.3)  $(242.0)
                                            ======   =======   ======   =======   =======   ======= 

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

     Pipelines & Processing operating and joint venture income was also affected
by an increase in transportation volumes for all 1999 periods due to new gas    
gathering ventures and the expansion of existing pipeline projects. Volumes     
transported increased for the 1999 quarter, six- and twelve-month periods by    
10.7 billion cubic feet (Bcf), 16.9 Bcf and 40.6 Bcf, respectively. Pipelines & 
Processing results were also higher in all 1999 periods due to an increase in   
gas processed to remove natural gas liquids (NGLs). Gas processed to remove NGLs
increased 10.5 Bcf, 9.0 Bcf and 16.9 Bcf in the 1999 quarter, six- and twelve-  
month periods, respectively, reflecting volumes associated with the acquisition 
and development of additional processing facilities. Pipelines & Processing     
operations include an increase in gas processed to remove carbon dioxide        
(CO(2)). The volume of CO(2) gas treated increased 1.7 Bcf, 2.3 Bcf and 8.0 Bcf 
in the 1999 quarter, six-                                                       

F-86

S-4
216th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 216th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

and twelve-month periods, respectively. However, earnings were not significantly
affected by these increases, since under the terms of Pipelines & Processing's  
CO(2) processing contracts, revenues are not volume sensitive.                  

                                                        [Enlarge/Download Table]

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

-------------------------                                                       
* Includes MCN's share of joint ventures                                        

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

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

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

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

Electric Power's earnings comparison also was impacted by increased   
contributions from the 1,370 megawatt (MW) Midland Cogeneration Venture (MCV)   
facility reflecting an increase in MCN's interest in the MCV partnership from   
18% to 23% in June 1998. Earnings from the MCV partnership for the 1999 six-and 
twelve-month periods include a favorable $2.1 million pre-tax adjustment for the
resolution of a number of contract issues with the electricity purchaser. Also  
contributing favorably to the 1999 results were higher                          

F-87

S-4
217th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 217th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

earnings from MCN's 50%-owned, 123 MW Michigan Power cogeneration facility due  
to higher electricity capacity payments received under its long-term sales      
contract.                                                                       

                                                        [Enlarge/Download Table]

                                              QUARTER          6 MONTHS            12 MONTHS    
                                           -------------   -----------------   -----------------
                                           1999    1998     1999      1998      1999      1998  
                                           ----    ----     ----      ----      ----      ----  
                                                         (THOUSANDS OF MW HOURS)*               
                                                                                                
ELECTRIC POWER                                                                                  
  Electricity Sales -- Domestic........... 691.1   581.0   1,392.0   1,204.0   2,704.6   2,471.0
  Electricity Sales -- International......    --   298.9        --     537.6     750.7     538.1
                                           -----   -----   -------   -------   -------   -------
                                           691.1   879.9   1,392.0   1,741.6   3,455.3   3,009.1
                                           =====   =====   =======   =======   =======   =======

-------------------------                                                       
* Includes MCN's share of joint ventures                                        

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

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

                                                        [Enlarge/Download Table]

                                                    QUARTER       6 MONTHS       12 MONTHS  
                                                 -------------  -------------  -------------
                                                 1999    1998   1999    1998   1999    1998 
                                                 ----    ----   ----    ----   ----    ---- 
                                                                   (BCF)*                   
                                                                                            
ENERGY MARKETING                                                                            
  Gas Sales..................................... 144.5   103.3  282.6   218.5  518.8   401.7
  Exchange Gas Deliveries.......................    .1      .2    5.6     6.8    9.9    11.9
                                                 -----   -----  -----   -----  -----   -----
                                                 144.6   103.5  288.2   225.3  528.7   413.6
                                                 =====   =====  =====   =====  =====   =====

-------------------------                                                       
* Includes MCN's share of joint ventures                                        

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

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

F-88

S-4
218th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 218th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

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

                                                        [Enlarge/Download Table]

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

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

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

OTHER INCOME AND DEDUCTIONS                                                     

 Other income and deductions for the 1999 quarter, six- and twelve-month
periods reflect unfavorable changes of $71.1 million, $87.8 and $110.0 million, 
respectively. The comparability of other income and deductions for all periods  
is affected by unusual charges consisting of losses from the sale of E&P        
properties and the write-down of an E&P investment. Other income and deductions 
for all 1999 periods reflect higher interest expense due to an increase in      
borrowings required to finance capital investments in the Diversified Energy    
group. The 1999 six- and twelve-month periods include lower interest income due 
to the collection in March 1998 of a $46 million advance made to a Philippine   
independent power producer. Other income in the 1999 periods includes a $3.1    
million pre-tax gain recorded in the 1999 second quarter from the sale of a     
pipeline facility. Other income in the 1998 six- and twelve-month periods       
includes $9.9 million of pre-tax gains recorded in the 1998 first quarter from  
the sale of certain gas sales contracts and a 50% interest in the 30            

F-89

S-4
219th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 219th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

MW Ada cogeneration facility. Other income for the 1998 twelve-month period     
includes a $3.2 million pre-tax gain from the December 1997 sale of Diversified 
Energy's 25% interest in a gas storage project.                                 

INCOME TAXES                                                                    

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

OUTLOOK                                                                         

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

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

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

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

- Power develops and manages independent electric power projects.     

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

F-90

S-4
220th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 220th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

GAS DISTRIBUTION                                                      

   Results reflect earnings from new gas sales program -- Gas Distribution's
earnings were $6.3 million and $90.7 million for the 1999 second quarter and    
six-month period, respectively, resulting in increases of $3.6 million and $25.3
million from the comparable 1998 periods. Earnings for the 1999 twelve-month    
period were $97.0 million, which included $16.7 million of unusual charges.     
Excluding the unusual charges, earnings for the 1999 twelve-month period were   
$113.7 million, an increase of $32.3 million over the corresponding 1998 period.
Earnings for all 1999 periods reflect contributions from the new gas sales      
program as subsequently discussed. The 1999 six-month period also reflects the  
impact of more favorable weather.                                               

                                                        [Enlarge/Download Table]

                                              QUARTER            6 MONTHS            12 MONTHS       
                                          ----------------   ----------------   -------------------- 
                                           1999      1998     1999      1998      1999        1998   
                                           ----      ----     ----      ----      ----        ----   
                                                                (IN MILLIONS)                        
                                                                                                     
GAS DISTRIBUTION OPERATIONS                                                                          
Operating Revenues*                                                                                  
  Gas sales.............................. $135.6    $126.0   $578.6    $499.0   $  918.6    $  929.1 
  End user transportation................   23.4      18.3     50.2      43.3       89.2        82.7 
  Intermediate transportation............   13.9      15.9     28.6      33.8       58.0        60.9 
  Other..................................   19.6      15.1     44.8      34.6       77.5        61.9 
                                          ------    ------   ------    ------   --------    -------- 
                                           192.5     175.3    702.2     610.7    1,143.3     1,134.6 
Cost of Sales............................   65.7      58.8    321.4     279.5      504.0       529.8 
                                          ------    ------   ------    ------   --------    -------- 
Gross Margin.............................  126.8     116.5    380.8     331.2      639.3       604.8 
                                          ------    ------   ------    ------   --------    -------- 
Other Operating Expenses*                                                                            
  Operation and maintenance..............   67.7      62.8    138.2     125.9      268.9       266.8 
  Depreciation, depletion and                                                                        
     amortization........................   25.1      23.6     50.0      46.3       97.5        98.4 
  Property and other taxes...............   12.9      14.1     31.5      31.6       55.9        58.8 
  Property write-down (Note 2e)..........     --        --       --        --       24.8          -- 
                                          ------    ------   ------    ------   --------    -------- 
                                           105.7     100.5    219.7     203.8      447.1       424.0 
                                          ------    ------   ------    ------   --------    -------- 
Operating Income.........................   21.1      16.0    161.1     127.4      192.2       180.8 
                                          ------    ------   ------    ------   --------    -------- 
Equity in Earnings (Loss) of Joint                                                                   
  Ventures...............................     .6       (.1)     1.0        .4        1.6         1.0 
                                          ------    ------   ------    ------   --------    -------- 
Other Income and (Deductions)*                                                                       
  Interest income........................     .8       1.0      1.8       2.0        5.5         4.2 
  Interest expense.......................  (12.7)    (12.6)   (26.5)    (28.0)     (56.0)      (55.0)
  Investment loss (Note 2e)..............     --        --       --        --       (8.5)         -- 
  Minority interest......................    (.2)      (.5)     (.5)     (1.2)       6.4        (2.2)
  Other..................................    (.3)       .6       .1        .7        (.7)        1.2 
                                          ------    ------   ------    ------   --------    -------- 
                                           (12.4)    (11.5)   (25.1)    (26.5)     (53.3)      (51.8)
                                          ------    ------   ------    ------   --------    -------- 
Income Before Income Taxes...............    9.3       4.4    137.0     101.3      140.5       130.0 
Income Taxes.............................    3.0       1.7     46.3      35.9       43.5        48.6 
                                          ------    ------   ------    ------   --------    -------- 
Net Income                                                                                           
  Before unusual charges.................    6.3       2.7     90.7      65.4      113.7        81.4 
  Unusual charges (Note 2e)..............     --        --       --        --      (16.7)         -- 
                                          ------    ------   ------    ------   --------    -------- 
                                          $  6.3    $  2.7   $ 90.7    $ 65.4   $   97.0    $   81.4 
                                          ======    ======   ======    ======   ========    ======== 

-------------------------                                                       
* Includes intercompany transactions                                            

F-91

S-4
221st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 221st
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

GROSS MARGIN                                                                    

Gross margin (operating revenues less cost of sales) increased $10.3  
million, $49.6 million and $34.5 million in the 1999 quarter, six- and          
twelve-month periods, respectively. The increase is due primarily to margins    
generated under MichCon's new three-year gas sales program, which is part of its
Regulatory Reform Plan (Note 5a). Under the gas sales program that began in     
January 1999, MichCon's gas sales rates include a gas commodity component that  
is fixed at $2.95 per Mcf. As part of its gas acquisition strategy, MichCon has 
entered into fixed-price contracts at costs below $2.95 per Mcf for a           
substantial portion of its expected gas supply requirements through 2001. This  
strategy is likely to continue producing favorable margins in each of the three 
years.                                                                          

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

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

                                                        [Enlarge/Download Table]

                                                 QUARTER             6 MONTHS           12 MONTHS      
                                             ----------------    ----------------    ----------------  
                                              1999      1998      1999      1998      1999      1998   
                                              ----      ----      ----      ----      ----      ----   
                                                                                                       
EFFECT OF WEATHER ON GAS MARKETS AND                                                                   
  EARNINGS                                                                                             
  Percent Warmer Than Normal................  (21.4)%   (24.8)%    (7.8)%   (20.1)%   (11.6)%   (12.9)%
  Decrease From Normal in:                                                                             
     Gas Markets (Bcf)......................   (5.3)     (6.1)    (10.4)    (25.3)    (25.4)    (26.2) 
     Net Income (Millions).................. $ (5.1)   $ (5.3)   $(10.3)   $(22.0)   $(23.7)   $(22.8) 
     Diluted Earnings Per Share............. $ (.06)   $ (.07)   $ (.13)   $ (.28)   $ (.29)   $ (.29) 

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

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

F-92

S-4
222nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 222nd
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

$.20 per Mcf (7%) and $.18 per Mcf (6%) for the 1999 quarter and six-month      
period, respectively, and decreased $.12 per Mcf (4%) for the 1999 twelve-month 
period.                                                                         

                                                        [Enlarge/Download Table]

                                                      QUARTER         6 MONTHS       12 MONTHS   
                                                   --------------  --------------  --------------
                                                   1999     1998   1999     1998   1999     1998 
                                                   ----     ----   ----     ----   ----     ---- 
                                                                       (BCF)                     
                                                                                                 
GAS DISTRIBUTION                                                                                 
  Gas Sales.......................................  24.1     24.7  116.6    104.7  184.1    183.9
  End User Transportation.........................  31.8     31.1   74.4     73.6  141.1    141.5
                                                   -----    -----  -----    -----  -----    -----
                                                    55.9     55.8  191.0    178.3  325.2    325.4
  Intermediate Transportation*.................... 135.0    148.4  262.4    296.8  503.1    601.2
                                                   -----    -----  -----    -----  -----    -----
                                                   190.9    204.2  453.4    475.1  828.3    926.6
                                                   =====    =====  =====    =====  =====    =====

-------------------------                                                       
* Includes intercompany volumes                                                 

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

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

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

COST OF SALES                                                                   

   Cost of sales is affected by variations in gas sales volumes and the cost
of purchased gas as well as related transportation costs. Under the Gas Cost    
Recovery (GCR) mechanism that was in effect through December 1998 (Note 5b),    
MichCon's sales rates were set to recover all of its reasonably and prudently   
incurred gas costs. Therefore, fluctuations in cost of gas sold had little      
effect on gross margins. Under MichCon's new gas sales program, the gas         
commodity component of its sales rates is fixed. Accordingly, beginning in      
January 1999, changes in cost of gas sold directly impact gross margins and     
earnings.                                                                       

    Cost of sales increased $6.9 million and $41.9 million in the 1999 quarter
and six-month period, respectively, and decreased $25.8 million in the 1999     
twelve-month period. The increase in the current quarter and six-month period   
was due primarily to higher weather-driven gas sales volumes. Cost of sales was 
also                                                                            

F-93

S-4
223rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 223rd
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

impacted by a decrease in average prices paid for gas of $.05 per Mcf (2%) in   
the 1999 six-month period and $.27 per Mcf (9%) in the current twelve-month     
period. Prices paid for gas sold in the 1999 second quarter increased by $.01   
per Mcf. Additionally, all 1999 periods reflect cost of sales associated with   
the operations of the three heating and cooling firms acquired in October 1998. 

OTHER OPERATING EXPENSES                                                        

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

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

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

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

EQUITY IN EARNINGS OF JOINT VENTURES                                            

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

OTHER INCOME AND DEDUCTIONS                                                     

 Other income and deductions changed unfavorably by $.9 million and $1.5
million in the 1999 quarter and twelve-month period, respectively, and changed  
favorably by $1.4 million in the current six-month period. All 1998 periods were
impacted by gains from the sale of property. The 1999 quarter and twelve-month  
period include slightly higher interest costs. Other income and deductions in   
the 1999 twelve-month period also reflect an unusual charge to write down the   
investment in a small natural gas distribution company located in Missouri (Note
2e). Also impacting other income and deductions in the 1999 twelve-month period 
was a change in minority interest reflecting the joint venture partners' share  
of the write-down of the Michigan gas gathering properties (Note 2e).           

INCOME TAXES                                                                    

   Income taxes for all 1999 periods were impacted by an increase in pre-tax
earnings. Income tax comparisons for the 1999 six- and twelve-month periods were
also affected by the favorable resolution of prior                              

F-94

S-4
224th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 224th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

years' tax issues as well as the flow-through effect of certain book-to-tax     
temporary differences. The 1998 six-and twelve-month periods include            
stock-related tax benefits.                                                     

OUTLOOK                                                                         

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

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

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

CHANGES IN ACCOUNTING                                                 

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

In the 1999 first quarter, MCN adopted the Emerging Issues Task Force 
consensus on Issue No. 98-10, "Accounting for Energy Trading and Risk Management
Activities" (EITF 98-10). EITF 98-10 requires all energy trading contracts to be
recognized in the balance sheet as either assets or liabilities measured at     
their fair value, with changes in fair value recognized in earnings. Adoption of
EITF 98-10 did not have a material impact on MCN's financial statements.        

F-95

S-4
225th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 225th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

CAPITAL RESOURCES AND LIQUIDITY 

                                                                [Download Table]

                                                                  6 MONTHS      
                                                              ----------------- 
                                                               1999      1998   
                                                               ----      ----   
                                                                (IN MILLIONS)   
                                                                                
CASH AND CASH EQUIVALENTS                                                       
Cash Flow Provided From (Used For):                                             
  Operating activities......................................  $ 290.9   $ 275.2 
  Financing activities......................................   (249.3)     62.1 
  Investing activities......................................    (38.6)   (295.8)
                                                              -------   ------- 
Net Increase in Cash and Cash Equivalents...................  $   3.0   $  41.5 
                                                              =======   ======= 

OPERATING ACTIVITIES                                                  

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

FINANCING ACTIVITIES                                                  

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

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

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

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

DIVERSIFIED ENERGY                                                              

The Diversified Energy group maintains credit lines that allow for    
borrowings of up to $200 million under a 364-day revolving credit facility and  
up to $200 million under a three-year revolving credit facility. These          
facilities support Diversified Energy's commercial paper program, which is used 
to finance capital investments and to finance Energy Marketing's working capital
requirements. The 364-day facility was renewed in July 1999. During the first   
six months of 1999, Diversified Energy's commercial paper and bank borrowings   
outstanding increased by $112.1 million, leaving borrowings of $337.8 million   
outstanding under this program at June 30, 1999.                                

F-96

S-4
226th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 226th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

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

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

GAS DISTRIBUTION                                                                

    Cash and cash equivalents normally increase and short-term debt is reduced
in the first part of each year as gas inventories are depleted and funds are    
received from winter heating sales. During the latter part of the year, cash and
cash equivalents normally decrease as funds are used to finance increases in gas
inventories and customer accounts receivable. To meet its seasonal short-term   
borrowing needs, MichCon normally issues commercial paper that is backed by     
credit lines with several banks. MichCon has established credit lines that allow
for borrowings of up to $150 million under a 364-day revolving credit facility  
and up to $150 million under a three-year revolving credit facility. The 364-day
facility was renewed in July 1999. During the first six months of 1999, MichCon 
repaid $194.1 million of commercial paper, leaving borrowings of $24.3 million  
outstanding under this program at June 30, 1999.                                

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

INVESTING ACTIVITIES                                                  

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

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

                                                                [Download Table]

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

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

(2) Includes MCN's share of certain debt existing at the date of acquisitions   
F-97

S-4
227th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 227th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

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

OUTLOOK                                                               

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

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

YEAR 2000 

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

                                                        [Enlarge/Download Table]

                                                       INVENTORY  ASSESSMENT  REMEDIATION  TESTING
                                                       ---------  ----------  -----------  -------
                                                                                                  
Business Systems:                                                                                 
  June 30, 1999.......................................    100%       100%          90%        80% 
  September 30, 1999..................................    100%       100%         100%        98% 
  November 30, 1999...................................    100%       100%         100%       100% 
Measurement and Control Systems:                                                                  
  June 30, 1999.......................................    100%       100%          98%        98% 
  September 30, 1999..................................    100%       100%         100%       100% 

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

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

F-98

S-4
228th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 228th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

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

MARKET RISK INFORMATION 

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

COMMODITY PRICE RISK                                                            

     Natural gas and oil futures, options and swap agreements are used to manage
Diversified Energy's exposure to the risk of market price fluctuations on gas   
sale and purchase contracts, gas and oil production and gas inventories. MCN has
entered into offsetting positions for existing hedges of E&P's gas and oil      
production from properties that have been or were expected to be sold in 1999.  
As a result of entering into the offsetting positions, as well as changes in    
commodity prices that occurred during the 1999 six-month period, there have been
significant changes in the outcome of the sensitivity analysis performed for    
commodity price risk at June 30, 1999 as compared to December 31, 1998.         

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

The results of the sensitivity analysis calculations follow:          

                                                        [Enlarge/Download Table]

                                                         JUNE 30, 1999               DECEMBER 31, 1998     
                                                   --------------------------    --------------------------
                                                    ASSUMING       ASSUMING       ASSUMING       ASSUMING  
                                                      A 10%          A 10%          A 10%          A 10%   
                                                   INCREASE IN    DECREASE IN    INCREASE IN    DECREASE IN
                                                    COMMODITY      COMMODITY      COMMODITY      COMMODITY 
                                                     PRICES         PRICES         PRICES         PRICES   
                                                   -----------    -----------    -----------    -----------
                                                                        (IN MILLIONS)                      
                                                                                                           
Commodity Price Sensitive:*                                                                                
Swaps: Pay fixed/receive variable.................    $ 85.2        $(85.2)         $ 53.6        $(53.6)  
        Pay variable/receive fixed................    $(76.6)       $ 76.6          $(54.0)       $ 54.0   
Futures: Longs....................................    $  6.3        $ (6.3)         $  1.9        $ (1.9)  
         Shorts...................................    $ (7.4)       $  7.4          $  (.1)       $   .1   

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

INTEREST RATE RISK                                                              

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

F-99

S-4
229th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 229th
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 

FOREIGN CURRENCY RISK                                                           

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

NEW ACCOUNTING PRONOUNCEMENTS 

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

     SFAS No. 133 requires all derivatives to be recognized in the balance sheet
as either assets or liabilities measured at their fair value and sets forth     
conditions in which a derivative instrument may 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 June 30, 1999 Quarterly Report includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.     
Forward-looking statements involve certain risks and uncertainties as set forth 
in MCN's 1998 Annual Report.                                                    

     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.                                             

 F-100

S-4
230th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 230th

MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

                                                        [Enlarge/Download Table]

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

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

 F-101

S-4
231st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 231st

MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

                                                        [Enlarge/Download Table]

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

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

 F-102

S-4
232nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 232nd

MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

                                                        [Enlarge/Download Table]

                                                    THREE MONTHS ENDED        SIX MONTHS ENDED         TWELVE MONTHS ENDED   
                                                         JUNE 30,                 JUNE 30,                  JUNE 30,         
                                                   ---------------------   -----------------------   ----------------------- 
                                                                 1998                      1998                      1998    
                                                              (RESTATED)                (RESTATED)                (RESTATED) 
                                                     1999       NOTE 3        1999        NOTE 3        1999        NOTE 3   
                                                     ----     ----------      ----      ----------      ----      ---------- 
                                                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                  
                                                                                                                             
OPERATING REVENUES...............................  $488,784   $ 406,214    $1,285,370   $1,107,674   $2,208,394   $2,138,855 
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
OPERATING EXPENSES                                                                                                           
  Cost of sales..................................   314,948     228,249       788,833     652,545     1,342,062    1,282,252 
  Operation and maintenance......................    98,477      91,629       200,427     186,503       403,339      386,158 
  Depreciation, depletion and amortization.......    42,162      46,458        87,337      91,247       175,580      183,918 
  Property and other taxes.......................    16,270      17,838        37,928      38,713        68,768       72,976 
  Property write-downs and restructuring charges                                                                             
    (Note 2).....................................    52,000     333,022        52,000     333,022       311,296      333,022 
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
                                                    523,857     717,196     1,166,525   1,302,030     2,301,045    2,258,326 
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
OPERATING INCOME (LOSS)..........................   (35,073)   (310,982)      118,845    (194,356)      (92,651)    (119,471)
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
EQUITY IN EARNINGS OF JOINT VENTURES.............    12,166      11,837        24,624      28,598        58,251       59,426 
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
OTHER INCOME AND (DEDUCTIONS)                                                                                                
  Interest income................................     2,369       1,815         3,865       6,163         8,595       12,953 
  Interest on long-term debt.....................   (21,604)    (19,424)      (43,506)    (37,953)      (92,899)     (73,072)
  Other interest expense.........................    (6,682)     (4,822)      (15,317)    (11,663)      (28,058)     (16,322)
  Dividends on preferred securities of                                                                                       
    subsidiaries.................................   (10,334)     (9,230)      (20,669)    (18,984)      (38,055)     (38,516)
  Loss on sale of E&P properties (Note 2c).......   (68,798)         --       (68,798)         --       (68,798)          -- 
  Investment losses (Notes 2c and 2e)............    (7,456)     (6,135)       (7,456)     (6,135)      (15,956)      (6,135)
  Recognition of deferred loss related to                                                                                    
    discontinued operations subsequently retained                                                                            
    (Note 6).....................................    (1,982)         --            --          --            --           -- 
  Minority interest (Note 2e)....................      (420)       (635)         (739)     (1,245)        6,498       (2,242)
  Other..........................................     5,701       1,272        10,374      13,961        15,974       22,140 
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
                                                   (109,206)    (37,159)     (142,246)    (55,856)     (212,699)    (101,194)
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
INCOME (LOSS) BEFORE INCOME TAXES................  (132,113)   (336,304)        1,223    (221,614)     (247,099)    (161,239)
INCOME TAX BENEFIT...............................   (45,873)   (123,681)         (952)    (87,873)      (96,547)     (73,627)
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF                                                                                    
  ACCOUNTING CHANGE..............................   (86,240)   (212,623)        2,175    (133,741)     (150,552)     (87,612)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF                                                                               
  TAXES (NOTE 4).................................        --          --        (2,872)         --        (2,872)          -- 
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
NET LOSS.........................................  $(86,240)  $(212,623)   $     (697)  $(133,741)   $ (153,424)  $  (87,612)
                                                   ========   =========    ==========   ==========   ==========   ========== 
BASIC EARNINGS (LOSS) PER SHARE (NOTE 10)                                                                                    
  Before cumulative effect of accounting                                                                                     
    change.......................................  $  (1.03)  $   (2.70)   $      .03   $   (1.70)   $    (1.88)  $    (1.12)
  Cumulative effect of accounting change (Note                                                                               
    4)...........................................        --          --          (.04)         --          (.03)          -- 
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
                                                   $  (1.03)  $   (2.70)   $    (0.01)  $   (1.70)   $    (1.91)  $    (1.12)
                                                   ========   =========    ==========   ==========   ==========   ========== 
DILUTED EARNINGS (LOSS) PER SHARE (NOTE 10)                                                                                  
  Before cumulative effect of accounting                                                                                     
    change.......................................  $  (1.03)  $   (2.70)   $      .03   $   (1.70)   $    (1.88)  $    (1.12)
  Cumulative effect of accounting change (Note                                                                               
    4)...........................................        --          --          (.04)         --          (.03)          -- 
                                                   --------   ---------    ----------   ----------   ----------   ---------- 
                                                   $  (1.03)  $   (2.70)   $    (0.01)  $   (1.70)   $    (1.91)  $    (1.12)
                                                   ========   =========    ==========   ==========   ==========   ========== 
AVERAGE COMMON SHARES OUTSTANDING                                                                                            
  Basic..........................................    83,413      78,758        81,424      78,563        80,242       78,303 
                                                   ========   =========    ==========   ==========   ==========   ========== 
  Diluted........................................    83,413      78,758        82,514      78,563        80,242       78,303 
                                                   ========   =========    ==========   ==========   ==========   ========== 
DIVIDENDS DECLARED PER SHARE.....................  $  .2550   $   .2550    $    .5100   $   .5100    $   1.0200   $   1.0075 
                                                   ========   =========    ==========   ==========   ==========   ========== 

CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)(UNAUDITED)

                                                        [Enlarge/Download Table]

                                                     THREE MONTHS ENDED      SIX MONTHS ENDED      TWELVE MONTHS ENDED  
                                                          JUNE 30,               JUNE 30,                JUNE 30,       
                                                    ---------------------  ---------------------  ----------------------
                                                                  1998                   1998                    1998   
                                                               (RESTATED)             (RESTATED)              (RESTATED)
                                                      1999       NOTE 3      1999       NOTE 3      1999        NOTE 3  
                                                      ----     ----------    ----     ----------    ----      ----------
                                                                               (IN THOUSANDS)                           
                                                                                                                        
BALANCE -- BEGINNING OF PERIOD..................... $ 62,775    $424,157   $ (2,977)  $ 365,730   $ 190,548    $358,825 
ADD -- NET LOSS....................................  (86,240)   (212,623)      (697)   (133,741)   (153,424)    (87,612)
                                                    --------    --------   --------   ---------   ---------    -------- 
                                                     (23,465)    211,534     (3,674)    231,989      37,124     271,213 
DEDUCT -- CASH DIVIDENDS DECLARED..................   21,935      20,986     41,726      41,441      82,524      80,665 
                                                    --------    --------   --------   ---------   ---------    -------- 
BALANCE -- END OF PERIOD........................... $(45,400)   $190,548   $(45,400)  $ 190,548   $ (45,400)   $190,548 
                                                    ========    ========   ========   =========   =========    ======== 

The notes to the consolidated financial statements are an integral part of these
statements. 
 F-103

S-4
233rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 233rd

MCN ENERGY GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

                                                                [Download Table]

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

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

 F-104

S-4
234th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 234th

MCN ENERGY GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL                                                                      

The accompanying consolidated financial statements should be read in  
conjunction with MCN's 1998 Annual Report. Certain reclassifications have been  
made to the prior year's financial statements to conform with the 1999          
presentation. In the opinion of management, the unaudited information furnished 
herein reflects all adjustments necessary for a fair presentation of the        
financial statements for the periods presented.                                 

   Because of seasonal and other factors, revenues, expenses, net income and
earnings per share for the interim periods should not be construed as           
representative of revenues, expenses, net income and earnings per share for all 
or any part of the balance of the current year or succeeding periods.           

2. UNUSUAL CHARGES                                                              

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

A. PIPELINES & PROCESSING                                             

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

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

B. ELECTRIC POWER                                                     

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

C. EXPLORATION AND PRODUCTION                                         

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

 F-105

S-4
235th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 235th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

production of proved gas and oil reserves, and the lower of cost or   
estimated fair value of unproved properties, net of related income tax
effects.                                                              

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

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

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

D. CORPORATE & OTHER                                                  

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

E. GAS DISTRIBUTION                                                   

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

          Loss on Investment: In the third quarter of 1998, MCN also recorded an
     $8,500,000 pre-tax ($5,525,000 net of taxes) loss from the write-down of an
    investment in a Missouri gas distribution company that MCN expects to sell
   in 2000. The write-down represents the amount by which the carrying value
exceeded the estimated fair value of the investment.                  

3. RESTATEMENT                                                                  

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

 F-106

S-4
236th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 236th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

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

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

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

                                                        [Enlarge/Download Table]

                               THREE MONTHS ENDED        SIX MONTHS ENDED        TWELVE MONTHS ENDED   
                                 JUNE 30, 1998            JUNE 30, 1998             JUNE 30, 1998      
                             ----------------------   ----------------------   ----------------------- 
                             PREVIOUSLY               PREVIOUSLY               PREVIOUSLY              
                              REPORTED    RESTATED     REPORTED    RESTATED     REPORTED     RESTATED  
                             ----------   ---------   ----------   ---------   ----------   ---------- 
                                             (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                  
                                                                                                       
CONSOLIDATED STATEMENT OF                                                                              
  OPERATIONS                                                                                           
Cost of Sales............... $ 224,368    $ 228,249   $ 646,160    $ 652,545   $1,267,665   $1,282,252 
Loss Before Income Taxes.... $(332,423)   $(336,304)  $(215,229)   $(221,614)  $ (146,652)  $ (161,239)
Income Tax Benefit.......... $(122,323)   $(123,681)  $ (85,639)   $ (87,873)  $  (68,523)  $  (73,627)
Net Loss.................... $(210,100)   $(212,623)  $(129,590)   $(133,741)  $  (78,129)  $  (87,612)
Basic Loss Per Share........ $   (2.67)   $   (2.70)  $   (1.65)   $   (1.70)  $    (1.00)  $    (1.12)
Diluted Loss Per Share...... $   (2.67)   $   (2.70)  $   (1.65)   $   (1.70)  $    (1.00)  $    (1.12)

                                                                [Download Table]

                                                                 JUNE 30, 1998    
                                                             ---------------------
                                                             PREVIOUSLY           
                                                              REPORTED    RESTATED
                                                             ----------   --------
                                                                                  
CONSOLIDATED STATEMENT OF                                                         
  FINANCIAL POSITION                                                              
Accounts Receivable.........................................  $318,620    $327,653
Gas in Inventory............................................  $114,071    $103,671
Accounts Payable............................................  $298,912    $317,893
Federal Income, Property and Other Taxes Payable............  $ 86,496    $ 79,376
Common Shareholders' Equity.................................  $986,415    $973,187

4. ACCOUNTING FOR START-UP ACTIVITIES                                 

   In January 1999, MCN adopted Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-up Activities," issued by the Accounting Standards        
Executive Committee of the American Institute of Certified Public Accountants.  
SOP 98-5 requires start-up and organizational costs to be expensed as incurred. 
This change in accounting principle resulted in the write-off of start-up and   
organization costs capitalized as of                                            

 F-107

S-4
237th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 237th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

December 31, 1998. The cumulative effect of the change was to decrease earnings 
by $4,418,000 pre-tax ($2,872,000 net of taxes) for the six- and twelve-month   
periods ended June 30, 1999.                                                    

5. REGULATORY MATTERS                                                           

A. REGULATORY REFORM PLAN                                             

     As discussed in MCN's 1998 Annual Report, 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.                                                      

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

6. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED                                

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

In accordance with Emerging Issues Task Force (EITF) Issue No. 85-36, 
"Discontinued Operations with Expected Gain and Interim Operating Losses," E&P's
operating results for the first quarter of 1999 were initially deferred until   
the sale of all E&P properties was completed. Prior to the lowering of the bid  
for the                                                                         
 F-108

S-4
238th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 238th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

Michigan properties, management expected that the disposition of all of the E&P 
properties would result in a gain. As a result of MCN's decision to retain its  
Michigan E&P properties, the deferred loss of $1,982,000 pre-tax ($1,288,000 net
of taxes) was recorded in the second quarter of 1999.                           

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

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

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

                                                        [Enlarge/Download Table]

                              THREE MONTHS ENDED       SIX MONTHS ENDED       TWELVE MONTHS ENDED   
                                   JUNE 30,                JUNE 30,                 JUNE 30,        
                             ---------------------   ---------------------   ---------------------- 
                               1999        1998        1999        1998        1999         1998    
                               ----        ----        ----        ----        ----         ----    
                                                         (IN THOUSANDS)                             
                                                                                                    
Operating Revenues.......... $ 37,918    $  53,101   $ 87,417    $ 108,713   $ 185,806    $ 223,434 
Operating Loss.............. $(51,824)   $(324,864)  $(43,774)   $(316,132)  $(115,596)   $(290,951)
Net Income (Loss):                                                                                  
  Before Unusual Charges.... $  3,657    $   7,241   $  3,657    $  13,061   $  12,267    $  34,330 
  Unusual Charges (Note                                                                             
     2c)....................  (83,365)    (220,452)   (83,365)    (220,452)   (137,935)    (220,452)
                             --------    ---------   --------    ---------   ---------    --------- 
                             $(79,708)   $(213,211)  $(79,708)   $(207,391)  $(125,668)   $(186,122)
                             ========    =========   ========    =========   =========    ========= 

7. GAS IN INVENTORY                                                             

Inventory gas is priced on a last-in, first-out (LIFO) basis. In      
anticipation that interim inventory reductions will be replaced prior to        
year-end, the cost of gas for net withdrawals from inventory is generally       
recorded at the estimated average purchase rate for the calendar year. The      
excess of these changes over the LIFO cost is credited to the gas inventory     
equalization account. During interim periods when there are net injections to   
inventory, the equalization account is reversed. Approximately 95.7 Bcf and 90.7
Bcf of gas was in inventory at June 30, 1999 and 1998, respectively.            

8. CREDIT FACILITIES AND SHORT-TERM BORROWINGS                                  

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

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

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

 F-109

S-4
239th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 239th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

9. ENHANCED PRIDES AND LONG-TERM DEBT                                           

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

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

 F-110

S-4
240th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 240th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

10. EARNINGS PER SHARE COMPUTATION                                              

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

                                                        [Enlarge/Download Table]

                                        NET INCOME (LOSS) BEFORE                                         
                                          CUMULATIVE EFFECT OF      WEIGHTED AVERAGE        EARNINGS     
                                           ACCOUNTING CHANGE         COMMON SHARES         PER SHARE     
                                        ------------------------    ----------------    ---------------- 
                                           1999          1998        1999      1998      1999      1998  
                                           ----          ----        ----      ----      ----      ----  
                                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)             
                                                                                                         
THREE MONTHS ENDED JUNE 30                                                                               
  Basic EPS............................ $ (86,240)    $(212,623)    83,413    78,758    $(1.03)   $(2.70)
                                                                                        ------    ------ 
  Effect of Dilutive Securities:*                                                                        
     FELINE PRIDES.....................        --            --         --        --                     
     Enhanced PRIDES...................        --            --         --        --                     
     Stock-based compensation plans....        --            --         --        --                     
                                        ---------     ---------     ------    ------                     
  Diluted EPS.......................... $ (86,240)    $(212,623)    83,413    78,758    $(1.03)   $(2.70)
                                        =========     =========     ======    ======    ======    ====== 
SIX MONTHS ENDED JUNE 30                                                                                 
  Basic EPS............................ $   2,175     $(133,741)    81,424    78,563    $  .03    $(1.70)
                                                                                        ------    ------ 
  Effect of Dilutive Securities:*                                                                        
     FELINE PRIDES.....................        --            --         --        --                     
     Enhanced PRIDES...................        --            --         --        --                     
     Stock-based compensation plans....        --            --      1,090        --                     
                                        ---------     ---------     ------    ------                     
  Diluted EPS.......................... $   2,175     $(133,741)    82,514    78,563    $  .03    $(1.70)
                                        =========     =========     ======    ======    ======    ====== 
TWELVE MONTHS ENDED JUNE 30                                                                              
  Basic EPS............................ $(150,552)    $ (87,612)    80,242    78,303    $(1.88)   $(1.12)
                                                                                        ------    ------ 
  Effect of Dilutive Securities:*                                                                        
     FELINE PRIDES.....................        --            --         --        --                     
     Enhanced PRIDES...................        --            --         --        --                     
     Stock-based compensation plans....        --            --         --        --                     
                                        ---------     ---------     ------    ------                     
  Diluted EPS.......................... $(150,552)    $ (87,612)    80,242    78,303    $(1.88)   $(1.12)
                                        =========     =========     ======    ======    ======    ====== 

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

 F-111

S-4
241st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 241st
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

11. COMPREHENSIVE INCOME                                                        

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

                                                        [Enlarge/Download Table]

                                  THREE MONTHS ENDED      SIX MONTHS ENDED       TWELVE MONTHS ENDED   
                                       JUNE 30,               JUNE 30,                JUNE 30,         
                                 ---------------------   -------------------   ----------------------- 
                                   1999        1998       1999       1998        1999           1998   
                                   ----        ----       ----       ----        ----           ----   
                                                            (IN THOUSANDS)                             
                                                                                                       
COMPREHENSIVE INCOME (LOSS)                                                                            
Net Loss........................ $(86,240)   $(212,623)  $ (697)   $(133,741)  $(153,424)     $(87,612)
                                 --------    ---------   ------    ---------   ---------      -------- 
Other Comprehensive Income                                                                             
  (Loss), Net of Taxes:                                                                                
     Foreign currency                                                                                  
       translation adjustment...     (898)      (5,314)    (616)      (5,813)     (1,357)      (12,092)
                                 --------    ---------   ------    ---------   ---------      -------- 
     Unrealized loss on                                                                                
       securities:                                                                                     
       Unrealized losses during                                                                        
          period................     (642)      (1,736)  (1,159)      (2,803)     (4,846)       (3,987)
       Less: Reclassification                                                                          
          for losses recognized                                                                        
          in net income.........    4,846        3,987    4,846        3,987       4,846         3,987 
                                 --------    ---------   ------    ---------   ---------      -------- 
                                    4,204        2,251    3,687        1,184          --            -- 
                                 --------    ---------   ------    ---------   ---------      -------- 
  Total Other Comprehensive                                                                            
     Income (Loss), Net of                                                                             
     Taxes......................    3,306       (3,063)   3,071       (4,629)     (1,357)      (12,092)
                                 --------    ---------   ------    ---------   ---------      -------- 
  Total Comprehensive Income                                                                           
     (Loss)..................... $(82,934)   $(215,686)  $2,374    $(138,370)  $(154,781)     $(99,704)
                                 ========    =========   ======    =========   =========      ======== 

12. CONTINGENCIES                                                               

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

 F-112

S-4
242nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 242nd
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

13. COMMODITY SWAP AGREEMENTS                                                   

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

                                                        [Enlarge/Download Table]

                                                                  JUNE 30,         DECEMBER 31,
                                                             ------------------    ------------
                                                              1999       1998          1998    
                                                              ----       ----          ----    
                                                                       (IN THOUSANDS)          
                                                                                               
DEFERRED SWAP LOSSES AND RECEIVABLES                                                           
  Unrealized losses......................................... $42,556    $55,042      $48,700   
  Receivables...............................................  31,156      8,786       25,864   
                                                             -------    -------      -------   
                                                              73,712     63,828       74,564   
  Less -- Current portion...................................   9,145        705       11,417   
                                                             -------    -------      -------   
                                                             $64,567    $63,123      $63,147   
                                                             =======    =======      =======   
DEFERRED SWAP GAINS AND PAYABLES                                                               
  Unrealized gains.......................................... $24,822    $ 5,626      $24,126   
  Payables..................................................  51,720     62,545       54,525   
                                                             -------    -------      -------   
                                                              76,542     68,171       78,651   
  Less -- Current portion...................................  13,925     18,157       15,695   
                                                             -------    -------      -------   
                                                             $62,617    $50,014      $62,956   
                                                             =======    =======      =======   

 F-113

S-4
243rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 243rd
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

14. SEGMENT INFORMATION                                                         

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

                                                        [Enlarge/Download Table]

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

 F-114

S-4
244th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 244th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

15. QUARTERLY OPERATING RESULTS AND COMMON STOCK PRICES (UNAUDITED)             

                                                                [Download Table]

                                                                FIRST      SECOND  
                                                               QUARTER     QUARTER 
                                                               -------     ------- 
                                                                (IN THOUSANDS OF   
                                                              DOLLARS -- EXCEPT PER
                                                                 SHARE AMOUNTS)    
                                                                                   
1999                                                                               
Operating revenues..........................................  $796,586    $488,784 
Operating income (loss):                                                           
  Before unusual charges....................................  $153,918    $ 16,927 
  Unusual charges...........................................        --     (52,000)
                                                              --------    -------- 
                                                              $153,918    $(35,073)
                                                              ========    ======== 
Operating and joint venture income (loss):                                         
  Before unusual charges....................................  $166,376    $ 29,093 
  Unusual charges...........................................        --     (52,000)
                                                              --------    -------- 
                                                              $166,376    $(22,907)
                                                              ========    ======== 
Income (loss) before cumulative effect of accounting change:                       
  Before unusual charges....................................  $ 88,415    $ (2,875)
  Unusual charges...........................................        --     (83,365)
                                                              --------    -------- 
                                                              $ 88,415    $(86,240)
                                                              ========    ======== 
Net income (loss):                                                                 
  Before unusual charges....................................  $ 85,543    $ (2,875)
  Unusual charges...........................................        --     (83,365)
                                                              --------    -------- 
                                                              $ 85,543    $(86,240)
                                                              ========    ======== 
Basic earnings (loss) per share:                                                   
  Before unusual charges and cumulative effect of accounting                       
     change.................................................  $   1.11    $   (.03)
  Unusual charges...........................................        --       (1.00)
  Cumulative effect of accounting change....................      (.04)         -- 
                                                              --------    -------- 
                                                              $   1.07    $  (1.03)
                                                              ========    ======== 
Diluted earnings (loss) per share:                                                 
  Before unusual charges and cumulative effect of accounting                       
     change.................................................  $   1.06    $   (.03)
  Unusual charges...........................................        --       (1.00)
  Cumulative effect of accounting change....................      (.04)         -- 
                                                              --------    -------- 
                                                              $   1.02    $  (1.03)
                                                              ========    ======== 
Dividends paid per share....................................  $  .2550    $  .2550 
Average daily trading volume................................   265,050     306,259 
Price per share:............................................                       
  High......................................................  $19.5625    $22.6250 
  Low.......................................................  $15.8125    $15.9375 
  Close.....................................................  $16.0625    $20.7500 

 F-115

S-4
245th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 245th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

16. CONSOLIDATING FINANCIAL STATEMENTS                                          

 Debt securities issued by MCN Investment Corporation (MCNIC), currently
operating as MCN Energy Enterprises, are subject to a support agreement between 
MCN and MCNIC, under which MCN has committed to make payments of interest and   
principal on MCNIC's securities in the event of failure to pay by MCNIC. Under  
the terms of the support agreement, the assets of MCN, other than MichCon, and  
any cash dividends paid to MCN by any of its subsidiaries are available as      
recourse to holders of MCNIC's securities. The carrying value of MCN's assets on
an unconsolidated basis, which primarily consists of investments in subsidiaries
other than MichCon, is $878,334,000 at June 30, 1999.                           

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

 F-116

S-4
246th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 246th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

                                                        [Enlarge/Download Table]

                                                 MCN                                  ELIMINATIONS                
                                              AND OTHER                                   AND         CONSOLIDATED
                                             SUBSIDIARIES      MCNIC      MICHCON      RECLASSES         TOTAL    
                                             ------------      -----      -------     ------------    ------------
                                                                        (IN THOUSANDS)                            
                                                               THREE MONTHS ENDED JUNE 30, 1999                   
                                             ---------------------------------------------------------------------
                                                                                                                  
OPERATING REVENUES..........................  $   6,908      $ 297,912    $185,555      $ (1,591)      $ 488,784  
                                              ---------      ---------    --------      --------       ---------  
OPERATING EXPENSES                                                                                                
  Cost of sales.............................      5,233        250,736      60,410        (1,431)        314,948  
  Operation and maintenance.................        591         34,130      63,942          (186)         98,477  
  Depreciation, depletion and                                                                                     
    amortization............................        973         16,431      24,758            --          42,162  
  Property and other taxes..................        389          3,187      12,700            (6)         16,270  
  Property write-downs and restructuring                                                                          
    charges.................................         --         52,000          --            --          52,000  
                                              ---------      ---------    --------      --------       ---------  
                                                  7,186        356,484     161,810        (1,623)        523,857  
                                              ---------      ---------    --------      --------       ---------  
OPERATING INCOME (LOSS).....................       (278)       (58,572)     23,745            32         (35,073) 
                                              ---------      ---------    --------      --------       ---------  
EQUITY IN EARNINGS (LOSSES) OF JOINT                                                                              
  VENTURES AND SUBSIDIARIES.................    (83,493)        11,594         572        83,493          12,166  
                                              ---------      ---------    --------      --------       ---------  
OTHER INCOME AND (DEDUCTIONS)                                                                                     
  Interest income...........................     16,336          1,471         946       (16,384)          2,369  
  Interest on long-term debt................        250        (10,329)    (11,525)           --         (21,604) 
  Other interest expense....................     (3,150)       (13,375)     (1,181)       11,024          (6,682) 
  Dividends on preferred securities of                                                                            
    subsidiaries............................         --             --          --       (10,334)        (10,334) 
  Loss on sale of E&P properties............         --        (68,798)         --            --         (68,798) 
  Investment losses.........................         --         (7,456)         --            --          (7,456) 
  Recognition of deferred loss related to                                                                         
    discontinued operations subsequently                                                                          
    retained................................         --         (1,982)         --            --          (1,982) 
  Minority interest.........................         --           (154)       (266)           --            (420) 
  Other.....................................       (127)         6,040        (177)          (35)          5,701  
                                              ---------      ---------    --------      --------       ---------  
                                                 13,309        (94,583)    (12,203)      (15,729)       (109,206) 
                                              ---------      ---------    --------      --------       ---------  
INCOME (LOSS) BEFORE INCOME TAXES...........    (70,462)      (141,561)     12,114        67,796        (132,113) 
INCOME TAX PROVISION (BENEFIT)..............       (967)       (48,855)      3,949            --         (45,873) 
                                              ---------      ---------    --------      --------       ---------  
NET INCOME (LOSS)...........................    (69,495)       (92,706)      8,165        67,796         (86,240) 
DIVIDENDS ON PREFERRED SECURITIES...........     10,334             --          --       (10,334)             --  
                                              ---------      ---------    --------      --------       ---------  
NET INCOME (LOSS) AVAILABLE FOR COMMON                                                                            
  STOCK.....................................  $ (79,829)     $ (92,706)   $  8,165      $ 78,130       $ (86,240) 
                                              =========      =========    ========      ========       =========  
                                                               THREE MONTHS ENDED JUNE 30, 1998                   
                                             ---------------------------------------------------------------------
OPERATING REVENUES..........................  $   2,487      $ 233,228    $172,787      $ (2,288)      $ 406,214  
                                              ---------      ---------    --------      --------       ---------  
OPERATING EXPENSES                                                                                                
  Cost of sales.............................      1,322        170,955      57,512        (1,540)        228,249  
  Operation and maintenance.................        100         30,409      61,868          (748)         91,629  
  Depreciation, depletion and                                                                                     
    amortization............................        693         22,273      23,492            --          46,458  
  Property and other taxes..................        538          3,347      13,953            --          17,838  
  Property write-downs and restructuring                                                                          
    charges.................................         --        333,022          --            --         333,022  
                                              ---------      ---------    --------      --------       ---------  
                                                  2,653        560,006     156,825        (2,288)        717,196  
                                              ---------      ---------    --------      --------       ---------  
OPERATING INCOME (LOSS).....................       (166)      (326,778)     15,962            --        (310,982) 
                                              ---------      ---------    --------      --------       ---------  
EQUITY IN EARNINGS (LOSSES) OF JOINT                                                                              
  VENTURES AND SUBSIDIARIES.................   (209,940)        11,859         361       209,557          11,837  
                                              ---------      ---------    --------      --------       ---------  
OTHER INCOME AND (DEDUCTIONS)                                                                                     
  Interest income...........................      9,527            971         822        (9,505)          1,815  
  Interest on long-term debt................        162         (9,073)    (10,513)           --         (19,424) 
  Other interest expense....................       (210)       (12,163)     (1,891)        9,442          (4,822) 
  Dividends on preferred securities of                                                                            
    subsidiaries............................         --             --          --        (9,230)         (9,230) 
  Investment losses.........................         --         (6,135)         --            --          (6,135) 
  Minority interest.........................         --            (34)       (398)         (203)           (635) 
  Other.....................................       (541)         1,025         585           203           1,272  
                                              ---------      ---------    --------      --------       ---------  
                                                  8,938        (25,409)    (11,395)       (9,293)        (37,159) 
                                              ---------      ---------    --------      --------       ---------  
INCOME (LOSS) BEFORE INCOME TAXES...........   (201,168)      (340,328)      4,928       200,264        (336,304) 
INCOME TAX PROVISION (BENEFIT)..............       (360)      (125,235)      1,914            --        (123,681) 
                                              ---------      ---------    --------      --------       ---------  
NET INCOME (LOSS)...........................   (200,808)      (215,093)      3,014       200,264        (212,623) 
DIVIDENDS ON PREFERRED SECURITIES...........      9,230             --          --        (9,230)             --  
                                              ---------      ---------    --------      --------       ---------  
NET INCOME (LOSS) AVAILABLE FOR COMMON                                                                            
  STOCK.....................................  $(210,038)     $(215,093)   $  3,014      $209,494       $(212,623) 
                                              =========      =========    ========      ========       =========  

 F-117

S-4
247th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 247th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

                                                        [Enlarge/Download Table]

                                                             MCN                                ELIMINATIONS               
                                                          AND OTHER                                 AND           TOTAL    
                                                         SUBSIDIARIES     MCNIC      MICHCON     RECLASSES     CONSOLIDATED
                                                         ------------   ---------   ---------   ------------   ------------
                                                                                   (IN THOUSANDS)                          
                                                                           SIX MONTHS ENDED JUNE 30, 1999                  
                                                         ------------------------------------------------------------------
                                                                                                                           
OPERATING REVENUES......................................  $  18,572     $ 591,479   $683,645      $ (8,326)     $1,285,370 
                                                          ---------     ---------   ---------     --------      ---------- 
OPERATING EXPENSES                                                                                                         
  Cost of sales.........................................     12,638       473,037    308,761        (5,603)        788,833 
  Operation and maintenance.............................       (834)       72,496    131,488        (2,723)        200,427 
  Depreciation, depletion and amortization..............      1,807        36,164     49,366            --          87,337 
  Property and other taxes..............................        777         5,989     31,162            --          37,928 
  Property write-downs and restructuring charges........         --        52,000         --            --          52,000 
                                                          ---------     ---------   ---------     --------      ---------- 
                                                             14,388       639,686    520,777        (8,326)      1,166,525 
                                                          ---------     ---------   ---------     --------      ---------- 
OPERATING INCOME (LOSS).................................      4,184       (48,207)   162,868            --         118,845 
                                                          ---------     ---------   ---------     --------      ---------- 
EQUITY IN EARNINGS OF JOINT VENTURES AND SUBSIDIARIES...        560        23,611      1,013          (560)         24,624 
                                                          ---------     ---------   ---------     --------      ---------- 
OTHER INCOME AND (DEDUCTIONS)                                                                                              
  Interest income.......................................     21,629         1,988      1,945       (21,697)          3,865 
  Interest on long-term debt............................        461       (21,476)   (22,491)           --         (43,506)
  Other interest expense................................     (7,312)      (25,867)    (3,836)       21,698         (15,317)
  Dividends on preferred securities of subsidiaries.....         --            --         --       (20,669)        (20,669)
  Loss on sale of E&P properties........................         --       (68,798)        --            --         (68,798)
  Investment losses.....................................         --        (7,456)        --            --          (7,456)
  Minority interest.....................................         --          (216)      (523)           --            (739)
  Other.................................................       (258)       10,346        287            (1)         10,374 
                                                          ---------     ---------   ---------     --------      ---------- 
                                                             14,520      (111,479)   (24,618)      (20,669)       (142,246)
                                                          ---------     ---------   ---------     --------      ---------- 
INCOME (LOSS) BEFORE INCOME TAXES.......................     19,264      (136,075)   139,263       (21,229)          1,223 
INCOME TAX PROVISION (BENEFIT)..........................       (708)      (47,369)    47,125            --            (952)
                                                          ---------     ---------   ---------     --------      ---------- 
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING                                                                       
  CHANGE................................................     19,972       (88,706)    92,138       (21,229)          2,175 
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES....         --        (2,872)        --            --          (2,872)
                                                          ---------     ---------   ---------     --------      ---------- 
NET INCOME (LOSS).......................................     19,972       (91,578)    92,138       (21,229)           (697)
DIVIDENDS ON PREFERRED SECURITIES.......................     20,669            --         --       (20,669)             -- 
                                                          ---------     ---------   ---------     --------      ---------- 
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK............  $    (697)    $ (91,578)  $ 92,138      $   (560)     $     (697)
                                                          =========     =========   =========     ========      ========== 

                                                        [Enlarge/Download Table]

                                                                          SIX MONTHS ENDED JUNE 30, 1998                  
                                                         -----------------------------------------------------------------
                                                                                                                          
OPERATING REVENUES......................................  $   8,669     $ 505,082   $602,014     $ (8,091)     $1,107,674 
                                                          ---------     ---------   --------     --------      ---------- 
OPERATING EXPENSES                                                                                                        
  Cost of sales.........................................      4,443       377,736   275,101        (4,735)        652,545 
  Operation and maintenance.............................        240        65,529   124,090        (3,356)        186,503 
  Depreciation, depletion and amortization..............      1,339        43,971    45,937            --          91,247 
  Property and other taxes..............................      1,171         6,287    31,255            --          38,713 
  Write-down of E&P properties..........................         --       333,022        --            --         333,022 
                                                          ---------     ---------   --------     --------      ---------- 
                                                              7,193       826,545   476,383        (8,091)      1,302,030 
                                                          ---------     ---------   --------     --------      ---------- 
OPERATING INCOME (LOSS).................................      1,476      (321,463)  125,631            --        (194,356)
                                                          ---------     ---------   --------     --------      ---------- 
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND                                                                         
  SUBSIDIARIES..........................................   (130,687)       28,166       950       130,169          28,598 
                                                          ---------     ---------   --------     --------      ---------- 
OTHER INCOME AND (DEDUCTIONS)                                                                                             
  Interest income.......................................     19,572         4,165     1,934       (19,508)          6,163 
  Interest on long-term debt............................        403       (15,637)  (22,719)           --         (37,953)
  Other interest expense................................       (659)      (25,403)   (5,148)       19,547         (11,663)
  Dividends on preferred securities of subsidiaries.....         --            --        --       (18,984)        (18,984)
  Loss on sale of E&P properties........................         --            --        --            --              -- 
  Investment losses.....................................         --        (6,135)       --            --          (6,135)
  Minority interest.....................................         --          (102)   (1,143)           --          (1,245)
  Other.................................................       (507)       13,762       706            --          13,961 
                                                          ---------     ---------   --------     --------      ---------- 
                                                             18,809       (29,350)  (26,370)      (18,945)        (55,856)
                                                          ---------     ---------   --------     --------      ---------- 
INCOME (LOSS) BEFORE INCOME TAXES.......................   (110,402)     (322,647)  100,211       111,224        (221,614)
INCOME TAX PROVISION (BENEFIT)..........................        244      (123,650)   35,533            --         (87,873)
                                                          ---------     ---------   --------     --------      ---------- 
NET INCOME (LOSS).......................................   (110,646)     (198,997)   64,678       111,224        (133,741)
DIVIDENDS ON PREFERRED SECURITIES.......................     18,984            --        --       (18,984)             -- 
                                                          ---------     ---------   --------     --------      ---------- 
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK............  $(129,630)    $(198,997)  $64,678      $130,208      $ (133,741)
                                                          =========     =========   ========     ========      ========== 

 F-118

S-4
248th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 248th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

                                                        [Enlarge/Download Table]

                                                            MCN                                  ELIMINATIONS               
                                                         AND OTHER                                   AND        CONSOLIDATED
                                                        SUBSIDIARIES     MCNIC       MICHCON      RECLASSES        TOTAL    
                                                        ------------   ----------   ----------   ------------   ------------
                                                                                   (IN THOUSANDS)                           
                                                                         TWELVE MONTHS ENDED JUNE 30, 1999                  
                                                        --------------------------------------------------------------------
                                                                                                                            
OPERATING REVENUES.....................................  $  28,165     $1,079,225   $1,115,289     $(14,285)     $2,208,394 
                                                         ---------     ----------   ----------     --------      ---------- 
OPERATING EXPENSES                                                                                                          
  Cost of sales........................................     18,901        847,508      485,189       (9,536)      1,342,062 
  Operation and maintenance............................    (11,281)       159,574      259,795       (4,749)        403,339 
  Depreciation, depletion and amortization.............      3,674         75,594       96,312           --         175,580 
  Property and other taxes.............................      1,325         12,098       55,345           --          68,768 
  Property write-downs and restructuring charges.......      8,669        277,827       24,800           --         311,296 
                                                         ---------     ----------   ----------     --------      ---------- 
                                                            21,288      1,372,601      921,441      (14,285)      2,301,045 
                                                         ---------     ----------   ----------     --------      ---------- 
OPERATING INCOME (LOSS)................................      6,877       (293,376)     193,848           --         (92,651)
                                                         ---------     ----------   ----------     --------      ---------- 
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND                                                                           
  SUBSIDIARIES.........................................   (143,524)        56,687        2,009      143,079          58,251 
                                                         ---------     ----------   ----------     --------      ---------- 
OTHER INCOME AND (DEDUCTIONS)                                                                                               
  Interest income......................................     20,708          4,432        5,699      (22,244)          8,595 
  Interest on long-term debt...........................       (583)       (47,660)     (44,656)          --         (92,899)
  Other interest expense...............................     (9,127)       (49,094)     (10,801)      40,964         (28,058)
  Dividends on preferred securities of subsidiaries....         --             --           --      (38,055)        (38,055)
  Loss on sale of E&P properties.......................         --        (68,798)          --           --         (68,798)
  Investment losses....................................     (8,500)        (7,456)          --           --         (15,956)
  Minority interest....................................         --            151        6,347           --           6,498 
  Other................................................       (356)        16,932         (601)          (1)         15,974 
                                                         ---------     ----------   ----------     --------      ---------- 
                                                             2,142       (151,493)     (44,012)     (19,336)       (212,699)
                                                         ---------     ----------   ----------     --------      ---------- 
INCOME (LOSS) BEFORE INCOME TAXES......................   (134,505)      (388,182)     151,845      123,743        (247,099)
INCOME TAX PROVISION (BENEFIT).........................     (3,781)      (140,175)      47,409           --         (96,547)
                                                         ---------     ----------   ----------     --------      ---------- 
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING                                                                        
  CHANGE...............................................   (130,724)      (248,007)     104,436      123,743        (150,552)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES...         --         (2,872)          --           --          (2,872)
                                                         ---------     ----------   ----------     --------      ---------- 
NET INCOME (LOSS)......................................   (130,724)      (250,879)     104,436      123,743        (153,424)
DIVIDENDS ON PREFERRED SECURITIES......................     38,055             --           --      (38,055)             -- 
                                                         ---------     ----------   ----------     --------      ---------- 
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK...........  $(168,779)    $ (250,879)  $  104,436     $161,798      $ (153,424)
                                                         =========     ==========   ==========     ========      ========== 

                                                        [Enlarge/Download Table]

                                                                         TWELVE MONTHS ENDED JUNE 30, 1998                  
                                                        --------------------------------------------------------------------
                                                                                                                            
OPERATING REVENUES.....................................  $  16,186     $1,019,010   $1,118,448     $(14,789)     $2,138,855 
                                                         ---------     ----------   ----------     --------      ---------- 
OPERATING EXPENSES                                                                                                          
  Cost of gas..........................................      8,763        761,742      521,026       (9,279)      1,282,252 
  Operation and maintenance............................      1,865        126,572      263,231       (5,510)        386,158 
  Depreciation, depletion and amortization.............      2,491         83,712       97,715           --         183,918 
  Property and other taxes.............................      1,821         13,091       58,064           --          72,976 
  Property write-downs and restructuring charges.......         --        333,022           --           --         333,022 
                                                         ---------     ----------   ----------     --------      ---------- 
                                                            14,940      1,318,139      940,036      (14,789)      2,258,326 
                                                         ---------     ----------   ----------     --------      ---------- 
OPERATING INCOME (LOSS)................................      1,246       (299,129)     178,412           --        (119,471)
                                                         ---------     ----------   ----------     --------      ---------- 
EQUITY IN EARNINGS (LOSSES) OF JOINT VENTURES AND                                                                           
  SUBSIDIARIES.........................................    (77,835)        58,038        1,508       77,715          59,426 
                                                         ---------     ----------   ----------     --------      ---------- 
OTHER INCOME AND (DEDUCTIONS)                                                                                               
  Interest income......................................     40,507          8,729        4,107      (40,390)         12,953 
  Interest on long-term debt...........................        599        (27,740)     (45,931)          --         (73,072)
  Other interest expense...............................     (1,414)       (46,562)      (9,063)      40,717         (16,322)
  Dividends on preferred securities of subsidiaries....         --             --           --      (38,516)        (38,516)
  Investment losses....................................         --         (6,135)          --           --          (6,135)
  Minority interest....................................         --           (150)      (2,092)          --          (2,242)
  Other................................................       (406)        21,201        1,345           --          22,140 
                                                         ---------     ----------   ----------     --------      ---------- 
                                                            39,286        (50,657)     (51,634)     (38,189)       (101,194)
                                                         ---------     ----------   ----------     --------      ---------- 
INCOME (LOSS) BEFORE INCOME TAXES......................    (37,303)      (291,748)     128,286       39,526        (161,239)
INCOME TAX PROVISION (BENEFIT).........................      1,251       (122,590)      47,712           --         (73,627)
                                                         ---------     ----------   ----------     --------      ---------- 
NET INCOME (LOSS)......................................    (38,554)      (169,158)      80,574       39,526         (87,612)
DIVIDENDS ON PREFERRED SECURITIES......................     38,516             --           --      (38,516)             -- 
                                                         ---------     ----------   ----------     --------      ---------- 
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK...........  $ (77,070)    $ (169,158)  $   80,574     $ 78,042      $  (87,612)
                                                         =========     ==========   ==========     ========      ========== 

 F-119

S-4
249th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 249th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED) 

                                                        [Enlarge/Download Table]

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

 F-120

S-4
250th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 250th
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED) 

                                                        [Enlarge/Download Table]

                                                       MCN                                     ELIMINATIONS                
                                                    AND OTHER                                      AND         CONSOLIDATED
                                                   SUBSIDIARIES      MCNIC        MICHCON       RECLASSES         TOTAL    
                                                   ------------      -----        -------      ------------    ------------
                                                                                (IN THOUSANDS)                             
                                                                                JUNE 30, 1999                              
                                                   ------------------------------------------------------------------------
                                                                                                                           
ASSETS                                                                                                                     
CURRENT ASSETS                                                                                                             
  Cash and cash equivalents, at cost.............   $       53     $   60,914    $   20,032    $        --      $   80,999 
  Accounts receivable............................       16,343        193,634       150,380        (18,022)        342,335 
    Less -- Allowance for doubtful accounts......           97            453        14,132             --          14,682 
                                                    ----------     ----------    ----------    -----------      ---------- 
  Accounts receivable, net.......................       16,246        193,181       136,248        (18,022)        327,653 
  Accrued unbilled revenues......................          225             --        15,500             --          15,725 
  Gas in inventory...............................           --         68,054        35,617             --         103,671 
  Property taxes assessed applicable to future                                                                             
    periods......................................           98          1,276        43,152             --          44,526 
  Other..........................................        2,815         45,819        28,408            (70)         76,972 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        19,437        369,244       278,957        (18,092)        649,546 
                                                    ----------     ----------    ----------    -----------      ---------- 
DEFERRED CHARGES AND OTHER ASSETS                                                                                          
  Investments in debt and equity securities......           --         12,084        36,532            351          48,967 
  Deferred swap losses and receivables...........           --         63,123            --             --          63,123 
  Deferred environmental costs...................        2,534             --        27,934             --          30,468 
  Prepaid benefit costs..........................          630             --        95,008         (6,927)         88,711 
  Other..........................................        8,956         32,424        52,612         (2,955)         91,037 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        12,120        107,631       212,086         (9,531)        322,306 
                                                    ----------     ----------    ----------    -----------      ---------- 
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND                                                                          
  SUBSIDIARIES...................................    1,374,445        667,961        20,436     (1,365,624)        697,218 
                                                    ----------     ----------    ----------    -----------      ---------- 
PROPERTY, PLANT AND EQUIPMENT, AT COST...........       42,928      1,192,544     2,843,708             --       4,079,180 
  Less -- Accumulated depreciation and                                                                                     
    depletion....................................       14,274        191,267     1,356,842             --       1,562,383 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        28,654      1,001,277     1,486,866             --       2,516,797 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                    $1,434,656     $2,146,113    $1,998,345    $(1,393,247)     $4,185,867 
                                                    ==========     ==========    ==========    ===========      ========== 
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                       
CURRENT LIABILITIES                                                                                                        
  Accounts payable...............................   $    6,752     $  240,244    $   89,329    $   (18,432)     $  317,893 
  Notes payable..................................           --        147,822         4,067         (2,192)        149,697 
  Current portion of long-term debt and capital                                                                            
    lease obligations............................           --        211,486        58,204             --         269,690 
  Gas inventory equalization.....................           --             12        15,478             --          15,490 
  Federal income, property and other taxes                                                                                 
    payable......................................          543         (2,098)       80,931             --          79,376 
  Deferred gas cost recovery revenues............           --             --        29,139             --          29,139 
  Gas payable....................................           --         13,279        26,998             --          40,277 
  Customer deposits..............................           24             --        14,900             --          14,924 
  Interest payable...............................        1,686         17,032        10,355             --          29,073 
  Other..........................................        5,860          5,317        26,886            (29)         38,034 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        14,865        633,094       356,287        (20,653)        983,593 
                                                    ----------     ----------    ----------    -----------      ---------- 
DEFERRED CREDITS AND OTHER LIABILITIES                                                                                     
  Deferred income taxes..........................       (4,549)       (41,824)       89,549             --          43,176 
  Unamortized investment tax credit..............          286             --        31,823             --          32,109 
  Tax benefits amortizable to customers..........           --             --       123,444             --         123,444 
  Deferred swap gains and payables...............           --         50,014            --             --          50,014 
  Accrued environmental costs....................        3,000             --        32,000             --          35,000 
  Minority interest..............................           --          2,565        16,600              1          19,166 
  Other..........................................       17,063         61,438        43,926         (6,929)        115,498 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                        15,800         72,193       337,342         (6,928)        418,407 
                                                    ----------     ----------    ----------    -----------      ---------- 
LONG-TERM DEBT, INCLUDING CAPITAL LEASE                                                                                    
  OBLIGATIONS....................................           --        781,238       624,014             --       1,405,252 
                                                    ----------     ----------    ----------    -----------      ---------- 
REDEEMABLE PREFERRED SECURITIES OF                                                                                         
  SUBSIDIARIES...................................      405,428             --            --             --         405,428 
                                                    ----------     ----------    ----------    -----------      ---------- 
COMMON SHAREHOLDERS' EQUITY                                                                                                
  Common stock...................................          789              5        10,300        (10,305)            789 
  Additional paid-in capital.....................      816,285        697,823       230,399       (928,221)        816,286 
  Retained earnings (deficit)....................      203,777        (26,092)      440,003       (427,140)        190,548 
  Accumulated other comprehensive loss...........           --        (12,148)           --             --         (12,148)
  Yield enhancement, contract and issuance                                                                                 
    costs........................................      (22,288)            --            --             --         (22,288)
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                       998,563        659,588       680,702     (1,365,666)        973,187 
                                                    ----------     ----------    ----------    -----------      ---------- 
                                                    $1,434,656     $2,146,113    $1,998,345    $(1,393,247)     $4,185,867 
                                                    ==========     ==========    ==========    ===========      ========== 

 F-121

S-4
251st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 251st
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

CONSOLIDATING STATEMENT OF FINANCIAL POSITION (UNAUDITED) 

                                                        [Enlarge/Download Table]

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

 F-122

S-4
252nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 252nd

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED) 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

                                                        [Enlarge/Download Table]

                                                         MCN                                ELIMINATIONS               
                                                      AND OTHER                                 AND        CONSOLIDATED
                                                     SUBSIDIARIES     MCNIC      MICHCON     RECLASSES        TOTAL    
                                                     ------------     -----      -------    ------------   ------------
                                                                               (IN THOUSANDS)                          
                                                                       SIX MONTHS ENDED JUNE 30, 1999                  
                                                     ------------------------------------------------------------------
                                                                                                                       
NET CASH FLOW FROM OPERATING ACTIVITIES.............  $  41,353     $  65,837   $ 222,622     $(38,844)     $ 290,968  
                                                      ---------     ---------   ---------     --------      ---------  
CASH FLOW FROM FINANCING ACTIVITIES                                                                                    
  Notes payable, net................................   (104,331)       25,124    (192,850)          15       (272,042) 
  Capital paid to affiliates, net...................         --         8,993          --       (8,993)            --  
  Dividends paid....................................    (41,726)           --     (17,500)      17,500        (41,726) 
  Preferred securities dividends paid...............    (20,669)           --          --       20,669             --  
  Issuance of common stock..........................    135,120            --          --           --        135,120  
  Reacquisition of common stock.....................       (783)           --          --           --           (783) 
  Issuance of long-term debt........................         --            --     106,535           --        106,535  
  Long-term commercial paper and bank borrowings,                                                                      
    net.............................................         --        92,344          --           --         92,344  
  Retirement of long-term debt and preferred                                                                           
    securities......................................         --      (212,855)    (55,918)          --       (268,773) 
                                                      ---------     ---------   ---------     --------      ---------  
    Net cash provided from (used for) financing                                                                        
      activities....................................    (32,389)      (86,394)   (159,733)      29,191       (249,325) 
                                                      ---------     ---------   ---------     --------      ---------  
CASH FLOW FROM INVESTING ACTIVITIES                                                                                    
  Capital expenditures..............................       (637)     (101,146)    (58,097)          --       (159,880) 
  Acquisitions......................................         --       (31,153)         --           --        (31,153) 
  Investment in debt and equity securities..........         --        (1,952)         --         (645)        (2,597) 
  Investment in joint ventures and subsidiaries.....     (9,493)      (39,477)        (14)       8,993        (39,991) 
  Sale of property and joint venture interests......         --       200,387          --          318        200,705  
  Return of investment in joint ventures............         --         1,193          --           --          1,193  
  Other.............................................        200        (7,512)       (558)         987         (6,883) 
                                                      ---------     ---------   ---------     --------      ---------  
    Net cash provided from (used for) investing                                                                        
      activities....................................     (9,930)       20,340     (58,669)       9,653        (38,606) 
                                                      ---------     ---------   ---------     --------      ---------  
NET INCREASE (DECREASE) IN CASH AND CASH                                                                               
  EQUIVALENTS.......................................       (966)         (217)      4,220           --          3,037  
CASH AND CASH EQUIVALENTS, JANUARY 1................      1,400         9,036       6,603           --         17,039  
                                                      ---------     ---------   ---------     --------      ---------  
CASH AND CASH EQUIVALENTS, JUNE 30..................  $     434     $   8,819   $  10,823     $     --      $  20,076  
                                                      =========     =========   =========     ========      =========  

                                                        [Enlarge/Download Table]

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

 F-123

S-4
253rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 253rd

                                                                      APPENDIX A

AGREEMENT AND PLAN OF MERGER
AMONG 
DTE ENERGY COMPANY
MCN ENERGY GROUP INC. 
AND 
DTE ENTERPRISES, INC. 

DATED AS OF OCTOBER 4, 1999 

S-4
254th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 254th

TABLE OF CONTENTS 

                                                                [Download Table]

                                                                         PAGE
                                                                         ----
                                                                             
RECITALS.............................................................      1 
ARTICLE I                                                                    
  The Merger; Closing; Effective Time................................      1 
  1.1.   The Merger..................................................      1 
  1.2.   Closing.....................................................      1 
  1.3.   Effective Time..............................................      1 
ARTICLE II                                                                   
  Articles of Incorporation and By-Laws of the Surviving                     
     Corporation.....................................................      1 
  2.1.   The Articles of Incorporation...............................      1 
  2.2.   The By-Laws.................................................      2 
ARTICLE III                                                                  
  Officers and Directors of the Surviving Corporation................      2 
  3.1.   Directors...................................................      2 
  3.2.   Officers....................................................      2 
ARTICLE IV                                                                   
  Effect of the Merger on Capital Stock; Election Procedures.........      2 
  4.1.   Effect on Capital Stock.....................................      2 
         (a) Merger Consideration....................................      2 
         (b) Cancellation of Shares..................................      2 
         (c) Merger Sub..............................................      2 
  4.2.   Allocation of Merger Consideration; Election Procedures;            
         Exchange Procedures.........................................      3 
         (a) Allocation..............................................      3 
         (b) Election Procedures.....................................      3 
         (c) Exchange and Payment Procedures.........................      5 
         (d) Distributions with Respect to Unexchanged Shares;               
             Voting..................................................      5 
         (e) Transfers...............................................      5 
         (f) Fractional Shares.......................................      5 
         (g) Termination of Exchange Fund............................      6 
         (h) Lost, Stolen or Destroyed Certificates..................      6 
         (i) Affiliates..............................................      6 
  4.3.   Dissenters' Rights..........................................      6 
  4.4.   Adjustments to Prevent Dilution.............................      6 
  4.5.   Tax Opinion Adjustment......................................      7 
  4.6.   Uncertificated Shares of Parent Common Stock................      7 
ARTICLE V                                                                    
  Representations and Warranties.....................................      7 
  5.1.   Representations and Warranties of the Company, Parent and           
         Merger Sub..................................................      7 
         (a) Organization, Good Standing and Qualification...........      7 
         (b) Capital Structure.......................................      8 
         (c) Corporate Authority; Approval and Fairness..............      9 
         (d) Governmental Filings; No Violations.....................     10 
         (e) Reports; Financial Statements...........................     11 
         (f) Absence of Certain Changes..............................     11 
         (g) Litigation and Liabilities..............................     11 
         (h) Employee Benefits.......................................     12 
         (i) Compliance with Laws; Permits...........................     13 
         (j) Takeover Statutes.......................................     13 

 A-i

S-4
255th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 255th

                                                                [Download Table]

                                                                         PAGE
                                                                         ----
                                                                             
         (k) Environmental Matters...................................     13 
         (l) Taxes...................................................     14 
         (m) Labor Matters...........................................     15 
         (n) Intellectual Property...................................     15 
         (o) Insurance...............................................     15 
         (p) Rights Plan.............................................     15 
         (q) Brokers and Finders.....................................     16 
         (r) Year 2000...............................................     16 
         (s) Regulatory Proceedings..................................     16 
         (t) FERC Jurisdiction.......................................     16 
         (u) Regulation as a Utility.................................     16 
         (v) Ownership of Shares.....................................     16 
ARTICLE VI                                                                   
  Covenants..........................................................     17 
  6.1.   Interim Operations..........................................     17 
  6.2.   Acquisition Proposals.......................................     19 
  6.3.   Information Supplied........................................     21 
  6.4.   Shareholders Meetings.......................................     21 
  6.5.   Filings; Other Actions; Notification........................     21 
  6.6.   Access......................................................     22 
  6.7.   Affiliates..................................................     23 
  6.8.   Stock Exchange Listing and De-listing.......................     23 
  6.9.   Publicity...................................................     23 
  6.10.  Benefits....................................................     23 
         (a) Stock Options...........................................     23 
         (b) Employee Benefits.......................................     24 
         (c) Election to Parent's Board of Directors; Management             
             Executive Committee.....................................     25 
         (d) Employees...............................................     25 
  6.11.  Expenses....................................................     25 
  6.12.  Indemnification; Directors' and Officers' Insurance.........     25 
  6.13.  Takeover Statutes...........................................     26 
  6.14.  Dividends...................................................     26 
  6.15.  Rate Matters................................................     26 
  6.16.  Taxation....................................................     26 
  6.17.  Transition Matters..........................................     26 
  6.18.  Community Involvement.......................................     27 
  6.19.  1935 Act and Power Act......................................     27 
  6.20.  Feline Prides...............................................     27 
ARTICLE VII                                                                  
  Conditions.........................................................     28 
  7.1.   Conditions to Each Party's Obligation to Effect the                 
         Merger......................................................     28 
         (a) Shareholder Approval....................................     28 
         (b) NYSE Listing............................................     28 
         (c) Regulatory Consents.....................................     28 
         (d) Litigation..............................................     28 
         (e) S-4.....................................................     28 
         (f) Blue Sky Approvals......................................     28 
         (g) Certain Transactions....................................     28 
  7.2.   Conditions to Obligations of Parent and Merger Sub..........     28 
         (a) Representations and Warranties..........................     28 

A-ii

S-4
256th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 256th

                                                                [Download Table]

                                                                         PAGE
                                                                         ----
                                                                             
         (b) Performance of Obligations of the Company...............     29 
         (c) Consents Under Agreements...............................     29 
         (d) Accountants Letter......................................     29 
         (e) Affiliates Letters......................................     29 
         (f) Material Adverse Effect.................................     29 
         (g) Tax Opinion.............................................     29 
         (h) Governmental Consents...................................     29 
  7.3.   Conditions to Obligation of the Company.....................     29 
         (a) Representations and Warranties..........................     29 
         (b) Performance of Obligations of Parent and Merger Sub.....     30 
         (c) Consents Under Agreements...............................     30 
         (d) Accountants Letter......................................     30 
         (e) Material Adverse Effect.................................     30 
         (f) Tax Opinion.............................................     30 
ARTICLE VIII                                                                 
  Termination........................................................     30 
  8.1.   Termination by Mutual Consent...............................     30 
  8.2.   Termination by Either Parent or the Company.................     30 
  8.3.   Termination by the Company..................................     31 
  8.4.   Termination by Parent.......................................     31 
  8.5.   Effect of Termination and Abandonment.......................     32 
ARTICLE IX                                                                   
  Miscellaneous and General..........................................     33 
  9.1.   Survival....................................................     33 
  9.2.   Modification or Amendment...................................     33 
  9.3.   Waiver of Conditions........................................     33 
  9.4.   Counterparts................................................     33 
  9.5.   GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL...............     33 
  9.6.   Notices.....................................................     34 
  9.7.   Entire Agreement............................................     34 
  9.8.   No Third Party Beneficiaries................................     34 
  9.9.   Obligations of Parent and of the Company....................     35 
  9.10.  Severability................................................     35 
  9.11.  Interpretation..............................................     35 
  9.12.  Assignment..................................................     35 

 A-iii

S-4
257th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 257th

AGREEMENT AND PLAN OF MERGER

   AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"), dated
as of October 4, 1999, among DTE Energy Company, a Michigan corporation         
("Parent"), MCN Energy Group Inc., a Michigan corporation (the "Company"), and  
DTE Enterprises, Inc., a Michigan corporation and wholly owned subsidiary of    
Parent ("Merger Sub," the Company and Merger Sub sometimes being hereinafter    
collectively referred to as the "Constituent Corporations").                    

RECITALS

   WHEREAS, the respective boards of directors of each of Parent, Merger Sub
and the Company have approved the merger of the Company with and into Merger Sub
(the "Merger") and approved the Merger upon the terms and subject to the        
conditions set forth in this Agreement;                                         

   WHEREAS, it is intended that, for federal income tax purposes, the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the 
Internal Revenue Code of 1986, as amended, and the rules and regulations        
promulgated thereunder (the "Code");                                            

WHEREAS, the Company, Parent and Merger Sub desire to make certain    
representations, warranties, covenants and agreements in connection with this   
Agreement.                                                                      

NOW, THEREFORE, in consideration of the premises, and of the          
representations, warranties, covenants and agreements contained herein, the     
parties hereto agree as follows:                                                

ARTICLE I 

THE MERGER; CLOSING; EFFECTIVE TIME 

    1.1. The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time (as defined in Section 1.3) the Company   
shall be merged with and into Merger Sub and the separate corporate existence of
the Company shall thereupon cease. Merger Sub shall be the surviving corporation
in the Merger (sometimes hereinafter referred to as the "Surviving              
Corporation"), and the separate corporate existence of Merger Sub with all its  
rights, privileges, immunities, powers and franchises shall continue unaffected 
by the Merger, except as set forth in Article III. The Merger shall have the    
effects specified in the Michigan Business Corporation Act, as amended (the     
"MBCA").                                                                        

  1.2. Closing. The closing of the Merger (the "Closing") shall take place
(i) at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York 
at 9:00 A.M. on the fifth business day after the last to be fulfilled or waived 
of the conditions set forth in Article VII (other than those conditions that by 
their nature are to be satisfied at the Closing, but subject to the fulfillment 
or waiver of those conditions) shall be satisfied or waived in accordance with  
this Agreement or (ii) at such other place and time and/or on such other date as
the Company and Parent may agree in writing (the "Closing Date").               

1.3. Effective Time. As soon as practicable following the Closing, the
Company and Parent will cause a Certificate of Merger (the "Michigan Certificate
of Merger") to be executed and filed with the Department of Commerce of the     
State of Michigan as provided in Section 450.1707 of the MBCA. The Merger shall 
become effective at the time when the Michigan Certificate of Merger has been   
duly endorsed by the Department of Commerce of the State of Michigan (the       
"Effective Time").                                                              

ARTICLE II

ARTICLES OF INCORPORATION AND BY-LAWS 
OF THE SURVIVING CORPORATION

  2.1. The Articles of Incorporation. The articles of incorporation of the
Surviving Corporation shall be the articles of incorporation of Merger Sub as in
effect immediately prior to the Effective Time (the "Articles"), until duly     
amended as provided therein or by applicable law.                               
 A-1

S-4
258th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 258th

     2.2. The By-Laws. The by-laws of Merger Sub in effect at the Effective Time
shall be the by-laws of the Surviving Corporation (the "By-Laws"), until        
thereafter amended as provided therein or by applicable law.                    

ARTICLE III 

OFFICERS AND DIRECTORS
OF THE SURVIVING CORPORATION

  3.1. Directors. The directors of Merger Sub at the Effective Time shall,
from and after the Effective Time, be the directors of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or     
until their earlier death, resignation or removal in accordance with the        
Articles and the By-Laws.                                                       

 3.2. Officers. The officers of the Company at the Effective Time shall,
from and after the Effective Time, be the officers of the Surviving Corporation 
until their successors have been duly elected or appointed and qualified or     
until their earlier death, resignation or removal in accordance with the        
Articles and the By-Laws.                                                       

ARTICLE IV

EFFECT OF THE MERGER ON CAPITAL STOCK;
ELECTION PROCEDURES 

 4.1. Effect on Capital Stock. At the Effective Time, as a result of the
Merger and without any action on the part of the holder of any capital stock of 
the Company:                                                                    

     (a) Merger Consideration. Subject to the allocation and election procedures
in Section 4.2 and subject to Section 4.5, each share of the common stock, par  
value $0.01 per share, of the Company (the "Common Stock"), including the       
associated right to purchase Series A Junior Participating Preferred Stock (each
a "Right" and together with the Common Stock, a "Share" and, collectively, the  
"Shares") issued pursuant to the Rights Agreement, dated as of December 20,     
1989, as amended by an amendment dated as of July 23, 1997, by and between the  
Company and First Chicago Trust Company of New York, as Rights Agent, (the      
"Rights Agreement"), issued and outstanding immediately prior to the Effective  
Time (other than Shares owned by Parent or Shares that are owned by the Company 
or any direct or indirect Subsidiary of the Company and in each case not held on
behalf of third parties (each, an "Excluded Share" and collectively, "Excluded  
Shares")) shall be converted into the right to receive either (i) $28.50 in cash
(the "Cash Consideration") or (ii) .775 shares of common stock, without par     
value, of Parent (the "Parent Common Stock") (the "Stock Consideration" and,    
together with the Cash Consideration, the "Merger Consideration"). All          
references in this agreement to Parent Common Stock to be issued pursuant to the
Merger shall be deemed to include the corresponding rights ("Parent Rights") to 
purchase Series A Junior Participating Preferred Stock of Parent pursuant to the
Parent Rights Agreement (as defined in Section 5.1(b)(ii)), except where the    
context otherwise requires. At the Effective Time, all Shares shall no longer be
outstanding and shall be canceled and retired and shall cease to exist, and each
certificate (a "Certificate") representing any of such Shares (other than       
Excluded Shares) shall thereafter represent only the right to receive the Merger
Consideration and the right, if any, to receive pursuant to Section 4.2(f) cash 
in lieu of fractional shares into which such Shares have been converted pursuant
to this Section 4.1(a) and any dividends or other distributions pursuant to     
Section 4.2(d).                                                                 

 (b) Cancellation of Shares. Each Excluded Share shall, by virtue of the
Merger and without any action on the part of the holder thereof, cease to be    
outstanding, shall be canceled and retired without payment of any consideration 
therefor and shall cease to exist.                                              

     (c) Merger Sub. At the Effective Time, each share of common stock of Merger
Sub issued and outstanding immediately prior to the Effective Time shall remain 
outstanding and each certificate therefor shall continue to evidence one share  
of common stock of the Surviving Corporation.                                   

 A-2

S-4
259th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 259th

4.2. Allocation of Merger Consideration; Election Procedures; Exchange
Procedures.                                                                     

  (a) Allocation. Subject to Section 4.5, notwithstanding anything in this
Agreement to the contrary, the number of Shares (the "Cash Election Number") to 
be converted into the right to receive Cash Consideration in the Merger shall be
equal to 55 percent of the number of Shares issued and outstanding immediately  
prior to the Effective Time of the Merger (not including any Excluded Shares).  
Subject to Section 4.5, the number of Shares to be converted into the right to  
receive Stock Consideration in the Merger (the "Stock Election Number") shall be
equal to the number of Shares issued and outstanding immediately prior to the   
Effective Time of the Merger (not including any Excluded Shares) less the Cash  
Election Number.                                                                

(b) Election Procedures.                                              

  (i) As of the Effective Time, Parent shall deposit, or shall cause to be
deposited, with an exchange agent selected by Parent, with the Company's prior  
approval, which shall not be unreasonably withheld (the "Exchange Agent"), for  
the benefit of the holders of Shares, (A) certificates representing the shares  
of Parent Common Stock, (B) cash and (C) any dividends or other distributions   
with respect to the Parent Common Stock to be issued or paid pursuant to        
Sections 4.1 and 4.2(d) in exchange for outstanding Shares upon due surrender of
the Certificates pursuant to the provisions of this Article IV (such cash and   
certificates for shares of Parent Common Stock, together with the amount of any 
dividends or other distributions payable with respect thereto, being hereinafter
referred to as the "Exchange Fund").                                            

    (ii) Subject to allocation and proration in accordance with the provisions
of this Section 4.2 and Section 4.5, if appropriate, each record holder of      
Shares (other than Excluded Shares) issued and outstanding immediately prior to 
the Election Deadline (as defined below) shall be entitled (A) to elect to      
receive in respect of each such Share (x) Cash Consideration (a "Cash Election")
or (y) Stock Consideration (a "Stock Election") or (B) to indicate that such    
record holder has no preference as to the receipt of Cash Consideration or Stock
Consideration for such Shares (a "Non-Election"). Shares in respect of which a  
Non-Election is made (including shares in respect of which such an election is  
deemed to have been made pursuant to this Section 4.2 and Section 4.3           
(collectively, "Non-Election Shares")) shall be deemed by Parent, in its sole   
and absolute discretion, subject to Section 4.2(a), to be, in whole or in part, 
Shares in respect of which Cash Elections or Stock Elections have been made.    

     (iii) Elections pursuant to Section 4.2(b)(ii) shall be made on a form with
such other provisions to be reasonably agreed upon by the Company and Parent (a 
"Form of Election") to be provided by the Exchange Agent for that purpose to    
holders of record of Shares (other than holders of Excluded Shares), together   
with appropriate transmittal materials, at the time of mailing to holders of    
record of Shares of the Prospectus/ Proxy Statement (as defined in Section 6.3) 
in connection with the shareholders meetings referred to in Section 6.4.        
Elections shall be made by mailing to the Exchange Agent a duly completed Form  
of Election. To be effective, a Form of Election must be (x) properly completed,
signed and submitted to the Exchange Agent at its designated office, by 9:00    
a.m., on the Closing Date (which date shall be publicly announced by Parent as  
soon as practicable but in no event less than five trading days prior to the    
Closing Date) (the "Election Deadline") and (y) accompanied by the              
Certificate(s) representing the Shares as to which the election is being made   
(or by an appropriate guarantee of delivery of such Certificate(s) by a         
commercial bank or trust company in the United States or a member of a          
registered national security exchange or of the National Association of         
Securities Dealers, Inc., provided that such Certificates are in fact delivered 
to the Exchange Agent within three trading days after the date of execution of  
such guarantee of delivery). A holder of record of Shares who holds such shares 
as nominee, trustee or in another representative capacity (a "Holder            
Representative") may submit multiple Forms of Election, provided that such      
Holder Representative certifies that each such Form of Election delivered to the
Exchange Agent covers all the Shares held by such Holder Representative on      
behalf of a particular beneficial owner. The Company shall use its best efforts 
to make a Form of Election available to all Persons (as defined below) who      
become holders of record of Shares (other than Excluded Shares) between the date
of mailing described in the first sentence of this Section 4.2(b)(iii) and the  
Election Deadline. Parent shall determine, in its sole and absolute discretion, 
which authority it may delegate in whole or in part to the Exchange Agent,      
whether Forms of Election have been properly completed, signed and submitted or 
revoked. The decision of Parent (or the Exchange Agent, as the case may be) in  
such                                                                            

 A-3

S-4
260th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 260th

matters shall be conclusive and binding. Neither Parent nor the Exchange Agent  
will be under any obligation to notify any Person of any defect in a Form of    
Election submitted to the Exchange Agent. A holder of Shares that does not      
submit an effective Form of Election prior to the Election Deadline shall be    
deemed to have made a Non-Election. For the purposes of this Agreement, the term
"Person" shall mean any individual, corporation (including not-for-profit),     
general or limited partnership, limited liability company, joint venture,       
estate, trust, association, organization, Governmental Entity (as defined in    
Section 5.1(d)) or other entity of any kind or nature organized or existing     
under the laws of any jurisdiction.                                             

     (iv) An election may be revoked, but only by written notice received by the
Exchange Agent prior to the Election Deadline. Any Certificate(s) representing  
Shares that have been submitted to the Exchange Agent in connection with an     
election shall be returned without charge to the holder thereof in the event    
such election is revoked as aforesaid and such holder requests in writing the   
return of such Certificate(s). Upon any such revocation, unless a duly completed
Form of Election is thereafter submitted in accordance with paragraph (b)(ii),  
such Shares shall be Non-Election Shares. In the event that this Agreement is   
terminated pursuant to the provisions hereof, any Shares that have been         
transmitted to the Exchange Agent pursuant to the provisions hereof shall       
promptly be returned without charge to the Person submitting the same.          

    (v) If the aggregate number of Shares covered by Cash Elections (the "Cash
Election Shares") exceeds the Cash Election Number, all Non-Election Shares     
shall be deemed to be Shares in respect of which Stock Elections have been made 
and (x) each Cash Election Share shall be converted into (i) the right to       
receive an amount in cash, without interest, equal to the product of (A) the    
Cash Consideration and (B) a fraction (the "Cash Fraction"), the numerator of   
which shall be the Cash Election Number and the denominator of which shall be   
the total number of Cash Election Shares, and (ii) a number of shares of Parent 
Common Stock equal to the product of (A) the Exchange Ratio and (B) a fraction  
equal to one minus the Cash Fraction and (y) each Stock Election Share          
(including those deemed to be Stock Election Shares (as defined below) pursuant 
to this Section 4.2(b)(v)) shall be converted into the right to receive the     
Stock Consideration.                                                            

(vi) If the aggregate number of Shares covered by Stock Elections (the
"Stock Election Shares") exceeds the Stock Election Number, all Non-Election    
Shares shall be deemed to be Shares in respect of which Cash Elections have been
made and (x) each Stock Election Share shall be converted into (i) the right to 
receive a number of shares of Parent Common Stock, equal to the product of (A)  
the Exchange Ratio and (B) a fraction (the "Stock Fraction"), the numerator of  
which shall be the Stock Election Number and the denominator of which shall be  
the total number of Stock Election Shares, and (ii) an amount in cash, without  
interest, equal to the product of (A) the Cash Consideration and (B) a fraction 
equal to one minus the Stock Fraction and (y) each Cash Election Share          
(including those deemed to be Cash Election Shares) shall be converted into the 
right to receive the Cash Consideration.                                        

    (vii) In the event that neither clause (v) nor clause (vi) of this Section
4.2(b) is applicable, a number of Non-Election Shares shall be deemed Stock     
Election Shares such that the total Stock Election Shares equals the Stock      
Election Number and any remaining Non-Election Shares shall be deemed Cash      
Election Shares and (x) all Cash Election Shares and all Non-Election Shares in 
respect of which Cash Elections are deemed to have been made shall be converted 
into the right to receive Cash Consideration, and (y) all Stock Election Shares 
and all Non-Election Shares in respect of which Stock Elections are deemed to   
have been made shall be converted into the right to receive Stock Consideration 
(and cash in lieu of fractional interests).                                     

     (viii) Each record holder of Shares immediately prior to the Effective Time
shall be entitled to elect to receive the Stock Consideration for part of such  
holder's Shares and the Cash Consideration for the remaining part of such       
holder's Shares (a "Mixed Election" and, collectively with a Stock Election and 
a Cash Election, an "Election"). Mixed Elections shall be made on a Form of     
Election. With respect to each holder of Shares who makes a Mixed Election, the 
Shares such holder elects to be converted into the right to receive Cash        
Consideration shall be treated as Cash Election Shares for purposes of this     
Section 4.2 and Section 4.5, and the Shares such holder elects to be converted  
into the right to receive shares of Parent Common Stock shall be treated as     
Stock Election Shares for purposes of this Section 4.2 and Section 4.5.         

     (ix) The Exchange Agent, in consultation with Parent and the Company, shall
make all computations to give effect to this Section 4.2.                       
 A-4

S-4
261st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 261st

(c) Exchange and Payment Procedures. As soon as practicable after the 
Election Deadline, Parent shall cause the Exchange Agent to mail to each record 
holder of Shares who did not submit a Form of Election or who did not submit a  
Certificate or Certificates to the Exchange Agent with such holder's properly   
submitted Form of Election: (i) a letter of transmittal (which shall specify    
that delivery shall be effected, and risk of loss and title to the Certificates 
shall pass, only upon actual delivery of the Certificates to the Exchange Agent)
and (ii) instructions for effecting the surrender of the Certificates and       
receiving the Merger Consideration to which such holder shall be entitled       
therefor pursuant to this Article IV. Upon surrender of a Certificate (or       
affidavits of loss in lieu thereof) to the Exchange Agent for cancellation,     
together with a duly executed letter of transmittal or Form of Election, as the 
case may be, and such other documents as the Exchange Agent may require, the    
holder of such Certificate shall be entitled to receive in exchange therefor (i)
a certificate representing that number of shares of Parent Common Stock into    
which the Shares previously represented by such Certificate are converted in    
accordance with this Article IV, (ii) the cash to which such holder is entitled 
in accordance with this Article IV, (iii) cash in lieu of fractional shares, if 
any, which such holder has the right to receive pursuant to Section 4.2(f) and  
(iv) any dividends or other distributions pursuant to Section 4.2(d). In the    
event the Merger Consideration and cash in lieu of fractional shares, if any,   
which such holder has the right to receive pursuant to Section 4.2(f), and any  
dividend or other distributions pursuant to Section 4.2(d), is to be delivered  
to any person who is not the person in whose name the Certificate surrendered in
exchange therefor is registered in the transfer records of the Company, the     
Merger Consideration, and cash in lieu of fractional shares which such holder   
has the right to receive pursuant to Section 4.2(f), and any dividends or other 
distributions pursuant to Section 4.2(d) may be delivered to a transferee if the
Certificate is presented to the Exchange Agent, accompanied by all documents    
required to evidence and effect such transfer and by evidence satisfactory to   
the Exchange Agent that any applicable stock transfer taxes have been paid or   
are not payable.                                                                

     (d) Distributions with Respect to Unexchanged Shares; Voting. All Shares of
Parent Common Stock to be issued pursuant to the Merger shall be deemed issued  
and outstanding as of the Effective Time and whenever a dividend or other       
distribution is declared by Parent in respect of the Parent Common Stock, the   
record date for which is at or after the Effective Time, that declaration shall 
include dividends or other distributions in respect of all shares issuable      
pursuant to this Agreement. No dividends or other distributions in respect of   
the Parent Common Stock shall be paid to any holder of any unsurrendered        
Certificate until such Certificate is surrendered for exchange in accordance    
with this Article IV. Subject to the effect of applicable laws, following       
surrender of any such Certificate, there shall be issued and/or paid to the     
holder of the certificates representing Parent Common Stock issued in exchange  
therefor, without interest, (A) at the time of such surrender, the dividends or 
other distributions with a record date after the Effective Time theretofore     
payable with respect to such Parent Common Stock and not paid and (B) at the    
appropriate payment date, the dividends or other distributions payable with     
respect to such Parent Common Stock with a record date after the Effective Time 
but with a payment date subsequent to surrender.                                

     (e) Transfers. After the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the Shares that were outstanding         
immediately prior to the Effective Time.                                        

(f) Fractional Shares. Notwithstanding any other provision of this    
Agreement, no fractional shares of Parent Common Stock will be issued to holders
of Shares and in lieu of any such fractional shares, each holder of Shares who  
would otherwise have been entitled to receive a fractional share of Parent      
Common Stock upon surrender of Certificates for exchange pursuant to this       
Article IV will be paid an amount in cash (without interest) equal to such      
holder's proportionate interest in the net proceeds from the sale or sales in   
the open market by the Exchange Agent, on behalf of all such holders, of the    
aggregate fractional shares of Parent Common Stock issued to the Exchange Agent 
on behalf of such holders pursuant to this Article IV. As soon as practicable   
following the Effective Time, the Exchange Agent shall determine the excess of  
(i) the number of full shares of Parent Common Stock delivered to the Exchange  
Agent by Parent over (ii) the aggregate number of full shares of Parent Common  
Stock to be distributed to holders of Shares (such excess being herein called   
the "Excess Parent Common Shares"). The Exchange Agent, as agent for the former 
holders of Shares, shall sell the Excess Parent Common Shares at the prevailing 
prices on the New York Stock Exchange, Inc. (the "NYSE"). The sales of the      
Excess Parent Common Shares by the Exchange Agent shall                         

 A-5

S-4
262nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 262nd

be executed on the NYSE through one or more member firms of the NYSE and shall  
be executed in round lots to the extent practicable. Parent shall pay all       
commissions, transfer taxes and other out-of-pocket transaction costs, if any,  
including the expenses and compensation of the Exchange Agent, incurred in      
connection with such sale of Excess Parent Common Shares. Until the net proceeds
of such sale have been distributed to the former holders of Shares, the Exchange
Agent will hold such proceeds in trust for such former holders.                 

(g) Termination of Exchange Fund. Any portion of the Exchange Fund    
(including the proceeds of any investments thereof and any Parent Common Stock) 
that remains unclaimed by the shareholders of the Company for 180 days after the
Effective Time shall be returned to Parent. Any shareholders of the Company who 
have not theretofore complied with this Article IV shall thereafter look only to
Parent for payment of the Cash Consideration, their shares of Parent Common     
Stock and any cash, dividends and other distributions in respect thereof payable
and/or issuable pursuant to Section 4.1 and Section 4.2(c) upon due surrender of
their Certificates (or affidavits of loss in lieu thereof), in each case,       
without any interest thereon. Notwithstanding the foregoing, none of Parent, the
Surviving Corporation, the Exchange Agent or any other Person shall be liable to
any former holder of Shares for any amount properly delivered to a public       
official pursuant to applicable abandoned property, escheat or similar laws.    

  (h) Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of   
that fact by the Person claiming such Certificate to be lost, stolen or         
destroyed and, if required by Parent, the posting by such Person of a bond in   
customary amount as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such 
lost, stolen or destroyed Certificate and subject to compliance with the terms  
of Section 4.2, shares of Parent Common Stock and any cash payable and any      
unpaid dividends or other distributions in respect thereof pursuant to Section  
4.1 and Section 4.2(d) upon due surrender of, and deliverable in respect of, the
Shares represented by such Certificate pursuant to this Agreement.              

(i) Affiliates. Notwithstanding anything herein to the contrary,      
Certificates surrendered for exchange by any "affiliate" (as determined pursuant
to Section 6.7) of the Company shall not be exchanged until Parent has received 
a written agreement from such Person as provided in Section 6.7 hereof.         

   4.3. Dissenters' Rights. In accordance with Section 450.1762 of the MBCA,
no dissenters' rights shall be available to holders of Shares in connection with
the Merger.                                                                     

 4.4. Adjustments to Prevent Dilution. (a) In the event that the Company
changes the number of Shares issued and outstanding prior to the Effective Time 
as a result of a reclassification, stock split (including a reverse split),     
stock dividend or distribution, recapitalization, merger, subdivision, issuer   
tender or exchange offer, or other similar transaction, the Merger Consideration
shall be equitably adjusted to reflect such change.                             

(b) In the event Parent (i) changes or establishes a record date for  
changing the number of shares of Parent Common Stock issued and outstanding     
prior to the Effective Time as a result of a stock split, stock dividend, stock 
combination, recapitalization, reclassification, reorganization or similar      
transaction with respect to the outstanding Parent Common Stock or (ii) pays or 
makes an extraordinary dividend or distribution in respect of Parent Common     
Stock (other than a distribution referred to in clause (i) of this sentence)    
and, in either case, the record date therefor shall be prior to the Effective   
Time, the Stock Consideration shall be proportionately adjusted. Regular        
quarterly cash dividends and increases thereon shall not be considered          
extraordinary for purposes of the preceding sentence. If, between the date      
hereof and the Effective Time, Parent shall merge or consolidate with or into   
any other corporation (a "Business Combination")and the terms thereof shall     
provide that Parent Common Stock shall be converted into or exchanged for the   
shares of any other corporation or entity, then provision shall be made so that 
shareholders of the Company who would be entitled to receive shares of Parent   
Common Stock pursuant to this Agreement shall be entitled to receive, in lieu of
each share of Parent Common Stock issuable to such shareholders as provided     
herein, the same kind and amount of securities or assets as shall be            
distributable upon such Business Combination with respect to one share of Parent
Common Stock and, if necessary or advisable, the parties hereto shall agree on  
an appropriate restructuring of the transactions contemplated herein.           

 A-6

S-4
263rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 263rd

 4.5. Tax Opinion Adjustment. In the event that either the condition set
forth in Section 7.2(g) or the condition set forth in Section 7.3(f) is not     
satisfied but would be capable of being satisfied if the number of Shares being 
converted into Parent Common Stock were increased, and all other conditions set 
forth in Article VII have been satisfied (or, with respect to conditions to be  
satisfied at the Effective Time, will in fact be satisfied), then the number of 
Shares being converted into Parent Common Stock shall be increased (and the     
number of Shares converted into cash shall be decreased) to the extent necessary
to permit the satisfaction of the conditions set forth in each of Sections      
7.2(g) and 7.3(f), provided, that, each additional Share that is converted into 
the right to receive shares of Parent Common Stock solely as a result of the    
operation of this Section 4.5, to the extent that the conversion is necessary so
that the value of the Parent Common Stock paid as consideration for Shares is   
not less than 41% of the value of the total consideration for Shares, shall be  
converted into the right to receive a number of shares of Parent Common Stock   
having a value of $28.50 (it being understood that value, in each case, shall be
calculated consistent with the methods used in connection with the provision of 
the tax opinions contemplated by Section 7.2(g) and 7.3(f)). For purposes of    
Section 4.2(b), such additional Shares shall continue to be treated as part of  
the Cash Election Number and the shares of Parent Common Stock issued in respect
thereof shall be treated as Cash Consideration. If required by law or the rules 
of the NYSE, Parent will use its best reasonable efforts to obtain the requisite
approval of its shareholders for the issuance of a number of shares of Parent   
Common Stock sufficient to take into account the revised number of shares of    
Parent Common Stock to be issued. On the Closing Date, Parent and the Company   
each shall obtain from its respective counsel a determination whether the       
conditions set forth in Section 7.2(g) or 7.3(f), as the case may be, can be    
satisfied without making any adjustment set forth in this Section 4.5 and, if   
such condition cannot be satisfied without such an adjustment, a determination  
as to the minimum percentage of the Merger Consideration that the Stock         
Consideration must constitute in order for such counsel to render such opinion. 
Parent and the Company shall jointly inform the Exchange Agent whether any      
adjustment pursuant to this Section 4.5 is required; and, if so, the extent of  
any such adjustment.                                                            

    4.6. Uncertificated Shares of Parent Common Stock. The Company agrees that
if Parent establishes procedures for book-entry transfer of shares of Parent    
Common Stock (or other similar system for uncertificated shares of Parent Common
Stock) prior to the Effective Time, issuance of Parent Common Stock pursuant to 
this Agreement may be made pursuant to such book-entry or similar procedures.   

ARTICLE V 

REPRESENTATIONS AND WARRANTIES

5.1. Representations and Warranties of the Company, Parent and Merger 
Sub. Except as set forth in the corresponding sections or subsections of the    
disclosure letter, dated the date hereof, delivered by the Company to Parent or 
by Parent to the Company (each, a "Disclosure Letter", and the "Company         
Disclosure Letter" and the "Parent Disclosure Letter", respectively), as the    
case may be, the Company (except for subparagraphs (b)(ii), (b)(iii), (c)(ii),  
(q)(ii) and (v)(ii) below and references in paragraphs (a), (e) and (l) below to
documents made available by Parent to the Company) hereby represents and        
warrants to Parent and Merger Sub, and Parent (except for subparagraphs (b)(i), 
(c)(i), (j), (p), (q)(i), (s), (t) and (v)(i) below and references in paragraphs
(a), (e) and (l) below to documents made available by the Company to Parent), on
behalf of itself and Merger Sub, hereby represents and warrants to the Company, 
that:                                                                           

(a) Organization, Good Standing and Qualification. Each of it and its 
Subsidiaries is a corporation or other entity duly organized, validly existing  
and in good standing under the laws of its respective jurisdiction of           
organization and has all requisite corporate or similar power and authority to  
own and operate its properties and assets and to carry on its business as       
presently conducted and is qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where the ownership or operation of its
assets or properties or conduct of its business requires such qualification,    
except where the failure to be so organized, qualified or in good standing, or  
to have given power or authority when taken together with all other such        
failures, is not reasonably likely to have a Material Adverse Effect (as defined
below). It has made available to Parent, in the case of the Company, and to the 
Company, in the case of Parent, a complete and correct copy of its Subsidiaries'
articles of incorporation and by-laws or comparable governing documents for     
non-corporate                                                                   

 A-7

S-4
264th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 264th

entities ("Organizational Documents"), each as amended to date. Such            
Organizational Documents as so made available are in full force and effect.     
Section 5.1(a) of the Disclosure Letters contains a correct and complete list of
each jurisdiction where the Company, in the case of the Company Disclosure      
Letter, and Parent, in the case of the Parent Disclosure Letter, and in each    
case, each of its Subsidiaries is organized.                                    

     As used in this Agreement, the term (i) "Subsidiary" means, with respect to
the Company, Parent or Merger Sub, as the case may be, any entity, whether      
incorporated or unincorporated, of which at least a majority of the securities  
or ownership interests having by their terms ordinary voting power to elect a   
majority of the board of directors or other persons performing similar functions
is directly or indirectly owned or controlled by such party or by one or more of
its respective Subsidiaries or by such party and any one or more of its         
respective Subsidiaries and (ii) "Material Adverse Effect" means, with respect  
to the Company or Parent, as the case may be, a material adverse effect on the  
condition (financial or otherwise), properties, business, operations, results of
operations or prospects of the Company or Parent, as the case may be, and its   
respective Subsidiaries taken as a whole (other than any change or effect       
arising out of (i) any transaction taken to comply with Section 6.17(c), (ii)   
the Company's recognition of a write-down of its gas and oil properties under   
the full cost method of accounting as prescribed by Rule 4-10 of Regulation S-X 
under the Securities Act and Exchange Act, (iii) general economic conditions or 
(iv) conditions generally affecting the electric or gas utility industries).    

(b) Capital Structure. (i) The authorized capital stock of the Company
consists of 250,000,000 Shares (which are entitled to vote as a class), of which
85,655,381 Shares were outstanding as of the close of business on the date      
hereof, and 25,000,000 shares of preferred stock, without par value (the        
"Preferred Shares"), none of which were outstanding as of the date hereof. All  
of the outstanding Shares have been duly authorized and are validly issued,     
fully paid and nonassessable. Other than up to 4,560,345 shares subject to      
issuance related to the 2,645,000 outstanding Preferred Redeemable Increased    
Dividend Equity Securities (the "Feline Prides") and 250,000 shares of Series A 
Junior Participating Preferred Stock subject to issuance pursuant to the Rights 
Agreement, none of which were outstanding as of the close of business on the    
date hereof, the Company has no Shares or Preferred Shares subject to issuance, 
except that, as of the date hereof, there were 2,515,914 Shares subject to      
issuance pursuant to the Company's Stock Incentive Plan, Long Term Incentive    
Performance Share Plan, Mandatory Deferred Compensation Plan and Non-employee   
Directors Compensation Plan (the "Stock Plans"). Section 5.1(b) of the Company  
Disclosure Letter contains a correct and complete list of each outstanding      
option to purchase Shares under the Stock Plans (each a "Company Option"), date 
of grant, exercise price, expiration date and number of Shares subject thereto. 
Each of the outstanding shares of capital stock or other securities of each of  
the Company's Subsidiaries is duly authorized, validly issued, fully paid and   
nonassessable and owned by a direct or indirect wholly owned Subsidiary of the  
Company, free and clear of any lien, pledge, security interest, claim or other  
encumbrance. Except as set forth in this Section 5.1(b), there are no preemptive
or other outstanding rights, options, warrants, conversion rights, stock        
appreciation rights, redemption rights, repurchase rights, agreements,          
arrangements, calls, commitments or rights of any kind that obligate the Company
or any of its Subsidiaries to issue or sell any shares of capital stock or other
securities of the Company or any of its Subsidiaries or any securities or       
obligations convertible or exchangeable into or exercisable for, or giving any  
Person a right to subscribe for or acquire, any securities of the Company or any
of its Subsidiaries, and no securities or obligations evidencing such rights are
authorized, issued or outstanding. After the Effective Time, the Feline Prides  
will be convertible only into, with respect to each Purchase Contract (as       
defined in the Purchase Contract Agreement dated March 25, 1997, between the    
Company and First National Bank of Chicago (the "Purchase Contract Agreement")),
for each Share issuable on account of such Purchase Contract the right to       
receive on the Purchase Contract Settlement Date (as defined in the Purchase    
Contract Agreement) the Merger Consideration and cash in lieu of fractional     
shares, if any, pursuant to Section 4.2(f) into which a Share would be converted
pursuant to Section 4.2 if such Share were a Non-Election Share, assuming for   
purposes of such conversion that the Purchase Contract Settlement Date had      
occurred immediately prior to the Effective Time. The Company does not have     
outstanding any bonds, debentures, notes or other obligations the holders of    
which have the right to vote (or convertible into or exercisable for securities 
having the right to vote) with the shareholders of the Company on any matter    
("Voting Debt"). Section 5.1(b) of the Company Disclosure Letter sets forth a   
true and complete list of each Person in which the Company owns, directly or    
 A-8

S-4
265th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 265th

indirectly, any voting interest that may require a filing by Parent under the   
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act").

    (ii) The authorized capital stock of Parent consists of 400,000,000 shares
of Parent Common Stock (which are entitled to vote as a class), of which        
145,045,159 shares were outstanding as of the close of business on September 30,
1999, 5,000,000 shares of preferred stock, without par value (the "Parent       
Preferred Shares"), none of which were outstanding as of the date hereof. All of
the outstanding shares of Parent Common Stock have been duly authorized and are 
validly issued, fully paid and nonassessable. Other than 1,500,000 shares of    
Series A Junior Participating Preferred Stock reserved for issuance pursuant to 
the Rights Agreement, dated as of September 23, 1997, between Parent and The    
Detroit Edison Company, as Rights Agent (the "Parent Rights Agreement"), none of
which were outstanding as of the date hereof, Parent has no shares of Parent    
Common Stock or Parent Preferred Shares subject to issuance, except that, as of 
September 30, 1999, there were 997,575 shares of Parent Common Stock subject to 
issuance pursuant to Parent's Long-Term Incentive Plan (the "Parent Stock       
Plan"). Section 5.1(b) of the Parent Disclosure Letter contains a correct and   
complete list of each outstanding option to purchase shares of Parent Common    
Stock under the Parent Stock Plan, including the date of grant, exercise price, 
expiration date and number of shares of Parent Common Stock subject thereto.    
Each of the out standing shares of capital stock or other securities of each of 
Parent's Subsidiaries is duly authorized, validly issued, fully paid and        
nonassessable and owned by a direct or indirect wholly owned Subsidiary of      
Parent, free and clear of any lien, pledge, security interest, claim or other   
encumbrance. Except as set forth above, there are no preemptive or other        
outstanding rights, options, warrants, conversion rights, stock appreciation    
rights, redemption rights, repurchase rights, agreements, arrangements, calls,  
commitments or rights of any kind that obligate Parent or any of its            
Subsidiaries to issue or sell any shares of capital stock or other securities of
it or any of its Subsidiaries or any securities or obligations convertible or   
exchangeable into or exercisable for, or giving any Person a right to subscribe 
for or acquire, any securities of Parent or any of its Subsidiaries, and no     
securities or obligations evidencing such rights are authorized, issued or      
outstanding. Parent does not have outstanding any bonds, debentures, notes or   
other obligations the holders of which have the right to vote (or convertible   
into or exercisable for securities having the right to vote) with the           
shareholders of Parent on any matter ("Parent Voting Debt"). As of the date     
hereof, Parent has not granted registration rights to any person or entity which
rights are currently exercisable or will become exercisable between the date    
hereof and the Effective Time.                                                  

    (iii) The authorized capital stock of Merger Sub consists of 60,000 shares
of common stock (entitled to vote as a class), 1,000 of which are validly       
issued, fully paid, nonassessable and outstanding as of the date hereof. All of 
the issued and outstanding capital stock of Merger Sub is, and at the Effective 
Time will be, owned by Parent, and there are (A) no other voting securities of  
Merger Sub, (B) no securities of Merger Sub convertible into or exchangeable for
shares of capital stock or voting securities of Merger Sub and (C) no options or
other rights to acquire from Merger Sub, and no obligations of Merger Sub to    
issue, any capital stock, voting securities or securities convertible into or   
exchangeable for capital stock or voting securities of Merger Sub. Merger Sub   
was formed solely for the purpose of engaging in the transactions contemplated  
in this Agreement and has not conducted any business prior to the date hereof   
and has no, and prior to the Effective Time will have no, assets, liabilities or
obligations of any nature other than those incident to its formation and        
pursuant to this Agreement and the Merger and the other transactions            
contemplated by this Agreement.                                                 

 (c) Corporate Authority; Approval and Fairness. (i) The Company has all
requisite corporate power and authority and has taken all corporate action      
necessary in order to execute, deliver and perform (in the case of consummation 
of the Merger, subject to obtaining requisite shareholder approval) its         
obligations under this Agreement and to consummate, subject only to approval of 
this Agreement by the holders of a majority of the outstanding Shares (the      
"Company Requisite Vote"), the Merger. Assuming the due authorization, execution
and delivery of this Agreement by Parent and Merger Sub, this Agreement is a    
valid and binding agreement of the Company enforceable against the Company in   
accordance with its terms, subject to bankruptcy, insolvency, fraudulent        
transfer, reorganization, moratorium and similar laws of general applicability  
relating to or affecting creditors' rights and to general equity principles (the
"Bankruptcy and Equity Exception"). The board of directors of the Company (A)   
has unanimously adopted this Agreement and (B) has received the                 

 A-9

S-4
266th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 266th

opinion of its financial advisor, Merrill Lynch, Pierce, Fenner & Smith         
Incorporated ("Merrill Lynch"), to the effect that the consideration to be      
received by the holders of the Shares in the Merger is fair to such holders from
a financial point of view, a copy of which opinion has been delivered to Parent.

  (ii) Each of the Parent and Merger Sub has all requisite corporate power
and authority and has taken all corporate action necessary in order to execute, 
deliver and perform (in the case of consummation of the Merger, subject to      
obtaining requisite shareholder approval) its obligations under this Agreement  
and to consummate, subject only to any shareholder approval necessary to permit 
the issuance of the shares of Parent Common Stock required to be issued pursuant
to Article IV (the "Parent Requisite Vote"), the Merger. Assuming the due       
authorization, execution and delivery of this Agreement by the Company, this    
Agreement is a valid and binding agreement of Parent enforceable against Parent 
in accordance with its terms, subject to the Bankruptcy and Equity Exception.   
Assuming the due authorization, execution and delivery of this Agreement by the 
Company, this Agreement is a valid and binding agreement of Merger Sub          
enforceable against Merger Sub in accordance with its terms. The Boards of      
Directors of Parent and Merger Sub (A) have adopted this Agreement and (B) have 
received the opinion of Parent's financial advisor, Warburg Dillon Read LLC, to 
the effect that the consideration to be paid by Parent to the holders of Shares 
in the Merger is fair to Parent from a financial point of view. Prior to the    
Effective Time, Parent will have taken all necessary action to permit it to     
issue the number of shares of Parent Common Stock required to be issued pursuant
to Article IV. The Parent Common Stock, when issued, will be validly issued,    
fully paid and nonassessable, and no shareholder of Parent will have any        
preemptive right of subscription or purchase in respect thereof. The Parent     
Common Stock, when issued, will be registered under the Securities Act and the  
Securities Exchange Act of 1934, as amended (together with the rules and        
regulations thereunder, the "Exchange Act") and registered or exempt from       
registration under any applicable state securities or "blue sky" laws.          

(d) Governmental Filings; No Violations. (i) Other than the reports,  
filings and/or notices (A) pursuant to Section 1.3, (B) under the HSR Act, the  
Exchange Act and the Securities Act, (C) required to be made with the NYSE or   
the Chicago Stock Exchange, (D) to comply with state securities or "blue sky"   
laws, (E) with, to or of the Federal Energy Regulatory Commission (the "FERC")  
pursuant to the Federal Power Act, as amended (the "Power Act"), if required,   
(F) under the Public Utility Holding Company Act of 1935, as amended (the "1935 
Act"), (G) with, to or of federal or state regulatory bodies pursuant to        
Environmental Laws (as defined in Section 5.1(k)) and (H) identified in Section 
5.1(d) of the respective Disclosure Letter, no notices, reports or other filings
are required to be made by it or any of its Subsidiaries with, nor are any      
consents, registrations, approvals, permits or authorizations required to be    
obtained by it or any of its Subsidiaries from, any governmental or regulatory  
authority, agency, commission, body or other governmental entity ("Governmental 
Entity"), in connection with the execution and delivery of this Agreement by it 
and the consummation by it of the Merger and the other transactions contemplated
hereby, except those that the failure to make or obtain are not, individually or
in the aggregate, reasonably likely to have a Material Adverse Effect or        
prevent, materially delay or materially impair the ability of it to consummate  
the transactions contemplated by this Agreement.                                

 (ii) The execution, delivery and performance of this Agreement by it do
not, and the consummation by it of the Merger and the other transactions        
contemplated hereby will not, constitute or result in (A) a breach or violation 
of, or a default under, its articles of incorporation or by-laws or the         
Organizational Documents of any of its Subsidiaries, (B) a breach or violation  
of, a default under, or the acceleration of any obligations or the creation of a
lien, pledge, security interest or other encumbrance on the assets of it or any 
of its Subsidiaries (with or without notice, lapse of time or both) pursuant to,
any agreement, lease, license, contract, note, mortgage, indenture, arrangement 
or other obligation ("Contracts") binding upon it or any of its Subsidiaries or 
any Law (as defined in Section 5.1(i)) or governmental or non-governmental      
permit or license to which it or any of its Subsidiaries is subject or (C) any  
change in the rights or obligations of any party under any of the Contracts,    
except, in the case of clause (B) or (C) above, for any breach, violation,      
default, acceleration, creation or change that, individually or in the          
aggregate, is not reasonably likely to have a Material Adverse Effect or        
prevent, materially delay or materially impair the ability of it to consummate  
the transactions contemplated by this Agreement. Section 5.1(d) of the Company  
Disclosure Letter, with respect to the Company, and the Parent Disclosure       
Letter, with respect to Parent, sets forth a correct and complete list of       

A-10

S-4
267th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 267th

material Contracts of the Company, in the case of the Company Disclosure Letter,
and of Parent, in the case of the Parent Disclosure Letter, and any of its      
respective Subsidiaries pursuant to which consents or waivers are or may be     
required prior to consummation of the transactions contemplated by this         
Agreement (whether or not subject to the exception set forth with respect to    
clauses (B) and (C) above).                                                     

     (e) Reports; Financial Statements. All material filings required to be made
by it and its Subsidiaries since December 31, 1995 under the Securities Act, the
Exchange Act, the 1935 Act, the Power Act and state law applicable to public    
utilities, and under regulations applicable to public utilities in the United   
States, have been made in accordance with the requirements of the relevant      
Governmental Entities, except for such failures to make filings that are not,   
individually or in the aggregate, reasonably likely to have a Material Adverse  
Effect, and it has complied as of their respective dates, in all material       
respects with all applicable requirements of appropriate statutes and rules and 
regulations. It has delivered to the other party each registration statement,   
report, proxy statement or information statement prepared by it since December  
31, 1998 (the "Audit Date"), including (i) its Annual Report on Form 10-K for   
the year ended December 31, 1998, and (ii) its Quarterly Reports on Form 10-Q   
for the periods ended March 31, 1999, and June 30, 1999, each in the form       
(including exhibits, annexes and any amendments thereto) filed with the         
Securities and Exchange Commission (the "SEC") (collectively, including any such
reports filed subsequent to the date hereof and as amended, the "Reports"). As  
of their respective dates, (or, if amended, as of the date of such amendment)   
the Reports did not, and any Reports filed with the SEC subsequent to the date  
hereof will not, contain any untrue statement of a material fact or omit to     
state a material fact required to be stated therein or necessary to make the    
statements made therein, in light of the circumstances in which they were made, 
not misleading. Each of the consolidated balance sheets included in or          
incorporated by reference into the Reports (including the related notes and     
schedules) presents fairly, or will present fairly, in all material respects,   
the consolidated financial position of it and its Subsidiaries as of its date   
and each of the consolidated statements of income, cash flows and changes in    
shareholders' equity included in or incorporated by reference into the Reports  
(including any related notes and schedules) presents fairly, or will present    
fairly, the results of operations, cash flows and changes in shareholders'      
equity, as the case may be, of it and its Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to notes and normal      
year-end audit adjustments that will not be material in amount or effect), in   
each case in accordance with generally accepted accounting principles in the    
United States ("U.S. GAAP") consistently applied during the periods involved,   
except as may be noted therein.                                                 

  (f) Absence of Certain Changes. Except as disclosed in its Reports filed
prior to the date hereof, since the Audit Date it and its Subsidiaries have     
conducted their respective businesses only in, and have not engaged in any      
material transaction other than according to, the ordinary and usual course of  
such businesses and there has not been (i) any change in the condition          
(financial or otherwise), properties, business, operations, results of          
operations or prospects of it and its Subsidiaries or any development or        
combination of developments of which its officers have actual knowledge that,   
individually or in the aggregate, has had or is reasonably likely to have a     
Material Adverse Effect; (ii) any declaration, setting aside or payment of any  
dividend, or other distribution in cash, stock or property in respect of its    
capital stock, except for dividends or other distributions on its capital stock 
publicly announced prior to the date hereof and except as expressly permitted   
hereby; (iii) any split in its capital stock, combination, subdivision or       
reclassification of any of its capital stock or issuance or authorization of any
issuance of any other securities in respect of, in lieu of or in substitution   
for shares of its capital stock, except as expressly contemplated hereby; or    
(iv) any change by it in accounting principles, or material change in its       
accounting practices or methods. Since the Audit Date, except as provided for   
herein or as disclosed in the Reports filed prior to the date hereof, there has 
not been any increase in the compensation payable or that could become payable  
by it or any of its Subsidiaries to officers or key employees or any amendment  
of any of the Compensation and Benefit Plans (as defined in Section 5.1(h)(i))  
other than increases or amendments in the ordinary and usual course.            

  (g) Litigation and Liabilities. Except as disclosed in the Reports filed
prior to the date hereof, there are no (i) civil, criminal or administrative    
actions, suits, claims, hearings, investigations or proceedings pending or, to  
the actual knowledge of its officers, threatened against it or any of its       
Affiliates (as defined below), (ii) obligations or liabilities, whether or not  
accrued, contingent or otherwise and whether or not required to be              

A-11

S-4
268th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 268th

disclosed, or any facts or circumstances of which its officers have actual      
knowledge that could reasonably be expected to result in any claims against, or 
obligations or liabilities of, it or any of its Affiliates or (iii) developments
since the date of such Reports with respect to such disclosed actions, suits,   
claims, hearings, investigations or proceedings, except, in each case, for those
that, individually or in the aggregate, are not reasonably likely to have a     
Material Adverse Effect or prevent or materially burden or materially impair the
ability of it to consummate the transactions contemplated by this Agreement. As 
used herein, the term "Affiliate" shall have the meaning ascribed to such term  
in Rule 12b-2 under the Exchange Act.                                           

(h) Employee Benefits.                                                

(i) A copy (or, if not in writing, a summary) of each bonus, deferred 
compensation, pension, retirement, profit-sharing, thrift, savings, employee    
stock ownership, stock bonus, stock purchase, restricted stock, stock option,   
employment, termination, severance, compensation, medical, health or other plan,
agreement, policy or arrangement that covers employees, directors, former       
employees or former directors of it and its Subsidiaries (the "Compensation and 
Benefit Plans") (other than immaterial policies and arrangements not related to 
severance) and any trust agreement or insurance contract forming a part of such 
Compensation and Benefit Plans has been provided or made available to the other 
party prior to the date hereof. The Compensation and Benefit Plans are listed in
Section 5.1(h) of its Disclosure Letter and those containing any "change of     
control" or similar provisions are specifically identified in Section 5.1(h) of 
its Disclosure Letter.                                                          

    (ii) All Compensation and Benefit Plans are in substantial compliance with
all applicable law, including the Code and the Employee Retirement Income       
Security Act of 1974, as amended ("ERISA"). Each Compensation and Benefit Plan  
that is an "employee pension benefit plan" within the meaning of Section 3(2) of
ERISA (a "Pension Plan") and that is intended to be qualified under Section     
401(a) of the Code has received a favorable determination letter from the       
Internal Revenue Service (the "IRS"), nor are there any existing circumstances  
likely to result in revocation of any such favorable determination letter. No   
actions, suits, or claims (other than routine claims for benefits) have been    
filed or, to the actual knowledge of its officers, are contemplated or          
threatened against any Compensation and Benefits Plan or against the assets of  
any Compensation and Benefits Plan; and, to the actual knowledge of its         
officers, there is no basis for such action, suit or claim. Neither it nor any  
of its Subsidiaries has engaged in a transaction with respect to any            
Compensation and Benefit Plan that, assuming the taxable period of such         
transaction expired as of the date hereof, would subject it or any of its       
Subsidiaries to a material tax or penalty imposed by either Section 4975 of the 
Code or Section 502 of ERISA that has not previously been satisfied.            

   (iii) No liability under Subtitle C or D of Title IV of ERISA has been or
is expected to be incurred by it or any Subsidiary with respect to any ongoing, 
frozen or terminated "single-employer plan", within the meaning of Section      
4001(a)(15) of ERISA, currently or formerly maintained by any of them, or the   
single-employer plan of any entity which is considered one employer with the    
Company under Section 4001 of ERISA or Section 414 of the Code (an "ERISA       
Affiliate"). It and its Subsidiaries have not incurred and do not expect to     
incur any withdrawal liability with respect to a multiemployer plan under       
Subtitle E to Title IV of ERISA regardless of whether based on contributions of 
an ERISA Affiliate. No notice of a "reportable event", within the meaning of    
Section 4043 of ERISA for which the 30-day reporting requirement has not been   
waived, has been required to be filed for any Pension Plan or by any ERISA      
Affiliate within the 12-month period ending on the date hereof or will be       
required to be filed in connection with the transactions contemplated by this   
Agreement.                                                                      

(iv) All contributions required to be made under the terms of any     
Compensation and Benefit Plan as of the date hereof have been timely made or    
have been reflected on the most recent consolidated balance sheet filed or      
incorporated by reference in the Company Reports prior to the date hereof.      
Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has 
an "accumulated funding deficiency" (whether or not waived) within the meaning  
of Section 412 of the Code or Section 302 of ERISA. Neither it nor its          
Subsidiaries has provided, or is required to provide, security to any Pension   
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section   
401(a)(29) of the Code.                                                         

     (v) Under each Pension Plan which is a single-employer plan, as of the last
day of the most recent plan year ended prior to the date hereof, the actuarially
determined present value of all "benefit liabilities", within                   
A-12

S-4
269th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 269th

the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the  
actuarial assumptions contained in the Pension Plan's most recent actuarial     
valuation), did not exceed the then current value of the assets of such Pension 
Plan, and there has been no material change in the financial condition of such  
Pension Plan since the last day of the most recent plan year.                   

(vi) Neither it nor its Subsidiaries have any obligations for retiree 
health and life benefits under any Compensation and Benefit Plan, except as set 
forth in the SEC filings or Section 5.1(h) of the Company Disclosure Letter; the
terms of each such plan provide that such retiree health and life benefits may  
be amended or terminated at any time, except to the extent limited by any       
collective bargaining agreement.                                                

(vii) The consummation of the Merger and the other transactions       
contemplated by this Agreement will not (x) entitle any employees of it or its  
Subsidiaries to severance pay or any increase in severance pay upon any         
termination of employment prior to or after the date hereof, (y) accelerate the 
time of payment or vesting or trigger any payment or funding (through a grantor 
trust or otherwise) of compensation or benefits under, increase the amount      
payable or trigger any other material obligation pursuant to, any of the        
Compensation and Benefit Plans, or (z) result in any breach or violation of, or 
a default under, any of the Compensation and Benefit Plans.                     

  (viii) The Company has amended the terms of any and all Compensation and
Benefit Plans, as applicable, to eliminate the automatic funding of accrued     
benefits under such plans via the Rabbi Trust established effective January 3,  
1991, in connection with the consummation of the Merger and the other           
transactions contemplated by this Agreement.                                    

(ix) No Compensation and Benefit Plan is maintained outside the United
States.                                                                         

     (i) Compliance with Laws; Permits. Except as set forth in the Reports filed
prior to the date hereof, the businesses of each of it and its Subsidiaries have
not been, and are not being, conducted in violation of any federal, state, local
or foreign law, statute, ordinance, rule, regulation, judgment, order,          
injunction, decree, arbitration award, agency requirement, license or permit of 
any Governmental Entity (collectively, "Laws"), except for violations that,     
individually or in the aggregate, are not reasonably likely to have a Material  
Adverse Effect or prevent or materially burden or materially impair the ability 
of it to consummate the transactions contemplated by this Agreement. Except as  
set forth in the Reports filed prior to the date hereof, no investigation or    
review by any Governmental Entity with respect to it or any of its Subsidiaries 
is pending or, to the actual knowledge of its officers, threatened, nor has any 
Governmental Entity indicated an intention to conduct the same, except for those
the outcome of which, individually or in the aggregate, are not reasonably      
likely to have a Material Adverse Effect or prevent or materially burden or     
materially impair its ability to consummate the transactions contemplated by    
this Agreement. Each of it and its Subsidiaries has all permits, licenses,      
franchises, variances, exemptions, orders and other governmental authorizations,
consents and approvals necessary to conduct its business as presently conducted,
except those the absence of which, individually or in the aggregate, are not    
reasonably likely to have a Material Adverse Effect or prevent or materially    
burden or materially impair its ability to consummate the Merger and the other  
transactions contemplated by this Agreement.                                    

(j) Takeover Statutes. No "fair price," "moratorium," "control share  
acquisition" or other similar anti-takeover statute or regulation (each a       
"Takeover Statute") or any anti-takeover provision in the Company's articles of 
incorporation or by-laws is, or at the Effective Time will be, applicable to the
Company, the Shares, the Merger or the other transactions contemplated by this  
Agreement.                                                                      

    (k) Environmental Matters. Except as disclosed in the Reports prior to the
date hereof and except as has not had and is not reasonably likely to have a    
Material Adverse Effect: (i) each of it and its Subsidiaries is in compliance   
with all applicable Environmental Laws; (ii) no property (including soils,      
groundwater, surface water, buildings or other structures) currently owned or   
operated by it or any of its Subsidiaries is contaminated with any Hazardous    
Substance which could reasonably be expected to result in liability relating to 
or require remediation under any Environmental Law; (iii) no property formerly  
owned or operated by it or any of its Subsidiaries has been contaminated with   
any Hazardous Substance during or prior to such period of ownership or operation
which could reasonably be expected to result in liability relating to or require

A-13

S-4
270th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 270th

remediation under any Environmental Law; (iv) neither it nor any of its         
Subsidiaries is subject to liability for any Hazardous Substance disposal or    
contamination on any third party property; (v) neither it nor any of its        
Subsidiaries has been associated with any release or threat of release of any   
Hazardous Substance which could reasonably be expected to result in liability   
relating to or require remediation under any Environmental Law; (vi) neither it 
nor any of its Subsidiaries has received any notice, demand, letter, claim or   
request for information alleging that it or any of its Subsidiaries may be in   
violation of or subject to liability under any Environmental Law; (vii) neither 
it nor any of its Subsidiaries is subject to any order, decree, injunction or   
other arrangement with any Governmental Entity or any indemnity or other        
agreement with any third party relating to liability under any Environmental Law
or relating to Hazardous Substances; (viii) there are no other circumstances or 
conditions involving it or any of its Subsidiaries or the transactions          
contemplated in this Agreement that could reasonably be expected to result in   
any claim, liability, investigation, cost or restriction on the ownership, use, 
or transfer of any property pursuant to any Environmental Law; and (ix) the     
Company has delivered to Parent, and Parent has made available to the Company,  
copies of all environmental reports, studies, assessments, sampling data and    
other environmental information in its possession relating to it or its         
Subsidiaries or their respective current and former properties or operations.   

As used herein, the term "Environmental Law" means any federal, state,
local or foreign statute, law, regulation, order, decree, permit, authorization,
opinion, common law or agency requirement relating to: (A) the protection,      
investigation or restoration of the environment, health, safety, or natural     
resources, (B) the handling, use, presence, disposal, release or threatened     
release of any Hazardous Substance or (C) noise, odor, indoor air, employee     
exposure, wetlands, pollution, contamination or any injury or threat of injury  
to persons or property relating to any Hazardous Substance.                     

     As used herein, the term "Hazardous Substance" means any substance that is:
(A) listed, classified or regulated pursuant to any Environmental Law; (B) any  
petroleum or coal product or by-product, any waste, ash or sludge,              
asbestos-containing material, lead-containing paint or plumbing, polychlorinated
biphenyls, radioactive material or radon; and (C) any other substance which may 
be the subject of regulatory action by any Government Entity in connection with 
any Environmental Law.                                                          

    (l) Taxes. Except for failures and inaccuracies that are not, individually
or in the aggregate, reasonably likely to have a Material Adverse Effect, each  
of it and its Subsidiaries (i) have prepared in good faith and duly and timely  
filed (taking into account any extension of time within which to file) all Tax  
Returns (as defined below) required to be filed by any of them and all such     
filed Tax Returns are complete and accurate; (ii) has paid all Taxes (as defined
below) that are shown as due on such filed Tax Returns or that it or any of its 
Subsidiaries are obligated to withhold from amounts owing to any employee,      
creditor or third party, except with respect to matters contested in good faith;
and (iii) has not waived any statute of limitations with respect to Taxes or    
agreed to any extension of time with respect to a Tax assessment or deficiency. 
Except as set forth in the Company Disclosure Letter, (i) neither it nor any of 
its Subsidiaries is a party to any Tax allocation, indemnity or sharing         
agreement (other than such an agreement between it and any of its Subsidiaries) 
and (ii) neither it nor any of its Subsidiaries has any liability for Taxes as a
result of its or any of its Subsidiaries inclusion in any group's consolidated  
or combined Tax returns other than a group of which it is a common parent,      
except, in the case of clause (ii), as is not reasonably likely to have a       
Material Adverse Effect. As of the date hereof, there are not pending or, to the
actual knowledge of its officers threatened in writing, any audits,             
examinations, investigations or other proceedings in respect of Taxes or Tax    
matters that, individually or in the aggregate are reasonably likely to have a  
Material Adverse Effect. There are not, to the actual knowledge of its officers,
any unresolved questions or claims concerning its or any of its Subsidiaries'   
Tax liability that, individually or in the aggregate, are reasonably likely to  
have a Material Adverse Effect. Neither it nor any of its Subsidiaries has any  
liability with respect to Taxes in excess of the amounts accrued with respect   
thereto that are reflected in the financial statements included in the Reports  
filed on or prior to the date hereof, except as is not, individually or in the  
aggregate reasonably likely to have a Material Adverse Effect.                  

    As used in this Agreement, (i) the term "Tax" (including, with correlative
meaning, the terms "Taxes", and "Taxable") includes all federal, state, local   
and foreign income, profits, alternative minimum tax, franchise, gross receipts,
environmental, customs duty, capital stock, severances, stamp, payroll, sales,  
A-14

S-4
271st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 271st

employment, unemployment, disability, use, property, withholding, excise,       
add-on, production, value added, occupancy and other taxes, duties or           
assessments of any nature whatsoever, together with all interest, penalties and 
additions imposed with respect to such amounts and any interest in respect of   
such penalties and additions, and (ii) the term "Tax Return" includes all       
returns and reports (including elections, declarations, disclosures, schedules, 
estimates and information returns) required to be supplied to a Tax authority   
relating to Taxes.                                                              

    (m) Labor Matters. Except as set forth in Section 5.1(m) of its Disclosure
Letter, neither it nor any of its Subsidiaries is a party to or otherwise bound 
by any collective bargaining agreement, contract or other agreement or          
understanding with a labor union or labor organization, nor is it or any of its 
Subsidiaries the subject of any material proceeding asserting that it or any of 
its Subsidiaries has committed an unfair labor practice or is seeking to compel 
it to bargain with any labor union or labor organization nor is there pending   
or, to the actual knowledge of its officers, threatened, nor has there been for 
the past five years, any labor strike, dispute, walkout, work stoppage,         
slow-down or lockout involving it or any of its Subsidiaries. Each party has    
previously made available to the other correct and complete copies of all labor 
and collective bargaining agreements, Contracts or other agreements or          
understandings with a labor union or labor organization to which it or any of   
its Subsidiaries is party or by which any of them are otherwise bound           
(collectively, the "Labor Agreements"). The consummation of the Merger and the  
other transactions contemplated by this Agreement will not entitle any third    
party (including any labor union or labor organization) to any payments under   
any of the Labor Agreements.                                                    

(n) Intellectual Property.                                            

     (i) It or its Subsidiaries own (free and clear of any and all liens, claims
or encumbrances), or is licensed or otherwise possesses sufficient legally      
enforceable rights to use, all patents, trademarks, trade names, service marks, 
brand marks, brand names, copyrights, and any applications therefor, technology,
know-how, computer software programs or applications, databases, industrial     
designs and tangible or intangible proprietary information or materials that are
currently used (or, with respect to trademarks, trade names, brand marks, brand 
names and service marks, have been used within the last five years) in its and  
its Subsidiaries' businesses (collectively, "Intellectual Property Rights"),    
except for any such failures to own, be licensed or possess that, individually  
or in the aggregate, are not reasonably likely to have a Material Adverse       
Effect.                                                                         

     (ii) Except as disclosed in the Reports filed prior to the date hereof, and
except for such matters that, individually or in the aggregate, are not         
reasonably likely to have a Material Adverse Effect, (i) the use of the         
Intellectual Property Rights by it or its Subsidiaries does not conflict with,  
infringe upon, violate or interfere with or constitute an appropriation of any  
right, title, interest or goodwill including, without limitation, any           
intellectual property right, patent, trademark, trade name, service mark, brand 
mark, brand name, copyright, technology, know-how, computer software program or 
application, database or industrial design of any other Person and (ii) there   
have been no claims made and neither it nor any of its Subsidiaries has received
notice of any claim or otherwise knows that any Intellectual Property Right is  
invalid, conflicts with the asserted right of any other Person, has not been    
used or enforced or has been failed to be used or enforced in a manner that     
would result in the abandonment, cancellation or unenforceability of any        
Intellectual Property Right of it or any of its Subsidiaries.                   

    (o) Insurance. All material fire and casualty, general liability, business
interruption, product liability, and sprinkler and water damage insurance       
policies maintained by it or any of its Subsidiaries are with reputable         
insurance carriers, provide full and adequate coverage for all normal risks     
incident to the business of it and its Subsidiaries and their respective        
properties and assets, and are in character and amount at least equivalent to   
that carried by persons engaged in similar businesses and subject to the same or
similar perils or hazards, except for any such failures to maintain insurance   
policies that, individually or in the aggregate, are not reasonably likely to   
have a Material Adverse Effect.                                                 

(p) Rights Plan. (i) The Company has amended the Rights Agreement to  
provide that (x) Parent shall not be deemed an Acquiring Person (as defined in  
the Rights Agreement), (y) the Distribution Date (as defined in the Rights      
Agreement) shall not be deemed to occur and (z) the Rights will not separate    
from the                                                                        

A-15

S-4
272nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 272nd

Shares, in each case, as a result of entering into this Agreement or            
consummating the Merger and/or the other transactions contemplated hereby.      

    (ii) The Company has taken all necessary action with respect to all of the
outstanding Rights (as defined in the Rights Agreement) so that, as of          
immediately prior to the Effective Time, the Rights Agreement will expire       
without any payment by the Company in respect of the Rights.                    

   (q) Brokers and Finders. Neither it nor any of its officers, directors or
employees has employed any broker or finder or incurred any liability for any   
brokerage fees, commissions or finders fees in connection with the Merger or the
other transactions contemplated in this Agreement except that (i) the Company   
has employed Merrill Lynch as its financial advisor, the arrangements with which
have been disclosed to Parent prior to the date hereof and (ii) Parent has      
employed Warburg Dillon Read LLC as it financial advisor, the arrangements with 
which have been disclosed to the Company prior to the date hereof.              

   (r) Year 2000. Except as disclosed in the Reports filed prior to the date
hereof, all computer systems and computer software used by it or any of its     
Subsidiaries, and the material computer systems and computer software of its    
material commercial counterparties, recognize or are being adapted so that,     
prior to December 31, 1999, they shall recognize the advent of the year A.D.    
2000 and can correctly recognize or are being adapted so that they can correctly
recognize and manipulate date information relating to dates on or after January 
1, 2000 and the operation and functionality of such computer systems and such   
computer software will not be adversely affected by the advent of the year A.D. 
2000 or any manipulation of data featuring information relating to dates before,
on or after January 1, 2000 ("Millennium Functionality"), except in each case   
for such computer systems and computer software, the failure of which to achieve
Millennium Functionality, individually or in the aggregate, has not had and is  
not reasonably likely to have a Material Adverse Effect. Except as disclosed in 
the Reports filed prior to the date hereof, the costs of the adaptions necessary
to achieve Millennium Functionality are not reasonably likely to have a Material
Adverse Effect.                                                                 

     (s) Regulatory Proceedings. Except as set forth in the Reports, neither the
Company nor any of its Subsidiaries, all or part of whose rates or services are 
regulated by a Governmental Entity, (i) has rates which have been or are being  
collected subject to refund, pending final resolution of any proceeding pending 
before a Governmental Entity or on appeal to the courts or (ii) is a party to   
any proceeding before a Governmental Entity or on appeal from orders of a       
Governmental Entity which have had or are reasonably likely to result in orders 
having a Material Adverse Effect.                                               

     (t) FERC Jurisdiction. To the actual knowledge of its officers, neither the
Company nor any of its Subsidiaries, nor any other entity in which the Company, 
directly or indirectly owns or expects to retain any interest, owns or operates 
any FERC jurisdictional facilities giving rise to a requirement for approval of 
the Merger by the FERC.                                                         

     (u) Regulation as a Utility. (i) It is not regulated as a public utility or
public service company by any state. Other than as set forth in Section 5.1(u)  
of its Disclosure Letter, none of its Subsidiaries or Affiliates is subject to  
regulation as a public utility or public service company (or similar            
designation) by any state in the United States or in any foreign country.       

(ii) Each of Parent and the Company is a holding company exempt from  
registration pursuant to Section 3(a)(1) of the 1935 Act, as amended.           

(v) Ownership of Shares. (i) Neither the Company nor any of its       
Subsidiaries "Beneficially Owns" (as such term is defined in the Parent Rights  
Agreement) any shares of Parent Common Stock.                                   

 (ii) Neither Parent nor any of its Subsidiaries "Beneficially Owns" (as
such term is defined in the Rights Agreement) any Shares.                       

A-16

S-4
273rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 273rd

ARTICLE VI

COVENANTS 

6.1. Interim Operations.                                              

     (a) The Company covenants and agrees as to itself and its Subsidiaries that
after the date hereof and prior to the Effective Time (unless Parent shall      
otherwise approve, which approval shall not be unreasonably withheld or delayed,
and except as otherwise expressly contemplated by this Agreement):              

    (i) the business of the Company and its Subsidiaries shall be conducted in
the ordinary and usual course and, to the extent consistent therewith, it and   
its Subsidiaries shall use their respective best reasonable efforts to (A)      
preserve its business organization intact and maintain its existing relations   
and goodwill with customers, suppliers, distributors, creditors, lessors,       
employees and business associates and (B) maintain and keep material properties 
and assets in as good repair and condition as such are in as of the date hereof,
subject to ordinary wear and tear;                                              

    (ii) the Company shall not (A) issue, sell, pledge, dispose of or encumber
any capital stock owned by it in any of its Subsidiaries; (B) amend its articles
of incorporation or by-laws or amend, modify or terminate the Rights Agreement; 
(C) split, combine, subdivide or reclassify its outstanding shares of capital   
stock; (D) declare, set aside or pay any dividend payable in cash, stock or     
property in respect of any capital stock (other than dividends from its direct  
or indirect wholly owned Subsidiaries and other than regular quarterly cash     
dividends not in excess of $0.255 per Share and regular quarterly cash dividends
on the preferred and preference stock of its Subsidiaries); or (E) repurchase,  
redeem or otherwise acquire (except for (I) mandatory sinking funds obligations 
existing on the date hereof and (II) open market repurchases pursuant to the    
terms of the Company's Direct Stock Purchase Plan and Dividend Reinvestment     
Plan), or permit any of its Subsidiaries to purchase or otherwise acquire, any  
shares of its capital stock or any securities convertible into or exchangeable  
or exercisable for any shares of its capital stock;                             

(iii) neither the Company nor any of its Subsidiaries shall (A) issue,
sell, pledge, dispose of or encumber any shares of, or securities convertible   
into or exchangeable or exercisable for, or options, warrants, calls,           
commitments or rights of any kind to acquire, any shares of its capital stock of
any class or any other property or assets (other than (I) Shares issuable       
pursuant to options and other rights outstanding on the date hereof under the   
Stock Plans, issuances of additional options or rights to acquire Shares granted
pursuant to the terms of the Stock Plans as in effect on the date hereof in the 
ordinary and usual course of the operation of such Stock Plans and issuances of 
Shares pursuant to options granted after the date hereof pursuant to the Stock  
Plans and (II) Shares issuable pursuant to the terms of the outstanding Feline  
Prides); (B) (I) transfer, lease, license, guarantee, sell, mortgage, pledge,   
dispose of or encumber any of its coal fines property or assets, or, (II) except
as identified on Section 6.1(a)(iii) of the Company Disclosure Letter, other    
than in the ordinary and usual course of business and other than sales not in   
excess of $100,000,000 in the aggregate or $30,000,000 in respect of any        
transaction or series of related transactions, transfer, lease, license,        
guarantee, sell, mortgage, pledge, dispose of or encumber any other property or 
assets; (C) make or authorize or commit for any capital expenditures or         
operation and maintenance expenditures in excess of 110% of those contemplated  
to be spent pursuant to the year 1999, 2000 or 2001 capital                     
appropriations/spending budgets set forth in Section 6.1(a) of the Company      
Disclosure Letter; or (D) by any means, make any acquisition of, or investment  
in, assets or stock of, or other interest in, any other Person or entity in     
excess of $100,000,000 in the aggregate or $30,000,000 in respect of any        
transaction or series of related transactions;                                  

  (iv) except as set forth in Section 6.1(a)(iv) of the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries shall (A) incur, assume 
or prepay any long-term debt or incur or assume any short-term debt other than  
in the ordinary and usual course of business in amounts and for purposes        
consistent with past practice under existing lines of credit, and except for the
incurrence of long-term indebtedness in connection with the refinancing of      
existing indebtedness either at its stated maturity or at a lower cost of funds,
(B) assume, guarantee, endorse or otherwise become liable or responsible        
(whether directly, contingently or otherwise) for the obligations of any        
third-party, including by means of any "keep well" or other agreement to support
or maintain any financial statement condition of another person, except in the  
ordinary and usual                                                              

A-17

S-4
274th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 274th

course of business, (C) accelerate or delay collection of notes or accounts     
receivable in advance of or beyond their regular due dates or the dates         
consistent with past practice, or (D) change any accounting principle, practice 
or method in a manner that is inconsistent with past practice, except to the    
extent required by U.S. GAAP as advised by the Company's regular independent    
accountants;                                                                    

   (v) neither the Company nor any of its Subsidiaries shall take or fail to
take any action that is reasonably likely to make any representation or warranty
of the Company contained herein inaccurate in any material respect at, or as of 
any time prior to, the Effective Time, or that is, individually or in the       
aggregate, reasonably likely to have a Material Adverse Effect;                 

(vi) except as required by applicable Law, an existing collective     
bargaining agreement or other Contract identified in Section 6.1(a)(vi) of the  
Company Disclosure Letter, neither the Company nor any of its Subsidiaries shall
terminate, establish, adopt, enter into, make any new grants or awards under,   
amend or otherwise modify, any Compensation and Benefit Plans (other than       
issuances of additional options, performance shares or rights to acquire Shares 
granted pursuant to the terms of the Stock Plans as in effect on the date hereof
in the ordinary and usual course of the operation of such Stock Plans, provided,
that any such additional options, performance shares or rights to acquire Shares
shall not vest in connection with the Merger and the other transactions         
contemplated by this Agreement), or except as required by any existing contract 
with a non-officer employer increase the salary, wage, bonus or other           
compensation of any employees, except increases occurring in the ordinary and   
usual course of business (which shall include normal periodic performance       
reviews and related compensation and benefit increases);                        

(vii) except as required by applicable law, an existing collective    
bargaining agreement or other Contract identified in Section 6.1(a)(vii) of the 
Company Disclosure Letter, neither the Company nor any of its Subsidiaries shall
grant any severance or termination pay to, or enter into any employment or      
severance agreement with any director or officer of it or such Subsidiaries,    
provided, that the foregoing shall not require the Company to violate any of its
obligations existing prior to the date hereof as set forth in Section 5.1(h) of 
the Company Disclosure Letter;                                                  

(viii) neither the Company nor any of its Subsidiaries shall settle or
compromise any material claims or litigation or amend or terminate any of its   
material Contracts or waive, release or assign any material rights or claims;   

(ix) neither the Company nor any of its Subsidiaries shall make any   
material Tax election (other than in the ordinary and usual course or as is     
required by Law) or permit any insurance policy naming it as a beneficiary or   
loss-payable payee to be canceled or terminated except in the ordinary and usual
course of business; and                                                         

     (x) neither the Company nor any of its Subsidiaries will authorize or enter
into an agreement to do any of the foregoing.                                   

(b) Parent covenants and agrees as to itself and its Subsidiaries that
after the date hereof and prior to the Effective Time (unless the Company shall 
otherwise approve, which approval shall not be unreasonably withheld or delayed,
and except as otherwise expressly contemplated by this Agreement):              

   (i) the business of Parent and its Subsidiaries shall be conducted in the
ordinary and usual course and, to the extent consistent therewith, it and its   
Subsidiaries shall use their respective best reasonable efforts to (A) preserve 
its business organization intact and maintain its existing relations and        
goodwill with customers, suppliers, distributors, creditors, lessors, employees 
and business associates and (B) maintain and keep material properties and assets
in as good repair and condition as such are in as of the date hereof, subject to
ordinary wear and tear;                                                         

   (ii) it shall not (A) amend its articles of incorporation or by-laws; (B)
split, combine, subdivide or reclassify its outstanding shares of capital stock;
(C) declare, set aside or pay any dividend payable, in cash, stock or property  
in respect of any capital stock, other than dividends from its direct or        
indirect wholly owned Subsidiaries and other than regularly quarterly cash      
dividends not in excess of $0.515 per share of Parent Common Stock and regularly
quarterly cash dividends on the preferred and preference stock of its           

A-18

S-4
275th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 275th

Subsidiaries; (D) repurchase, redeem or otherwise acquire, or permit any of its 
Subsidiaries to purchase or otherwise acquire, any shares of Parent Common Stock
or any securities convertible into or exchangeable or exercisable for any shares
of Parent Common Stock (other than repurchases, redemptions or other            
acquisitions which are made at the then-prevailing market price of Parent Common
Stock on the NYSE and which in the aggregate do not exceed ten percent of the   
shares of Parent Common Stock outstanding as of the date hereof) or (E) except  
as permitted under this Agreement, enter into any agreement with respect to a   
merger, reorganization, share exchange, consolidation or similar transaction    
involving, or any purchase of all or substantially all of the equity securities 
of it or any of its Significant Subsidiaries (as such term is defined in Rule   
1-02 of Regulation S-X under the Exchange Act);                                 

  (iii) neither Parent nor any of its Subsidiaries shall, (A) issue, sell,
pledge, dispose of or encumber any shares of, or securities convertible into or 
exchangeable or exercisable for, or options, warrants, calls, commitments or    
rights of any kind to acquire, any shares of Parent Common Stock (other than (I)
shares of Parent Common Stock issuable pursuant to options outstanding on the   
date hereof under the Parent Stock Plan, issuances of additional options or     
rights to acquire shares of Parent Common Stock granted pursuant to the terms of
the Parent Stock Plan as in effect on the date hereof in the ordinary and usual 
course of the operation of such Parent Stock Plan and issuances of shares of    
Parent Common Stock pursuant to options granted after the date hereof pursuant  
to the Parent Stock Plan and (II) issuances of Parent Common Stock, or          
securities convertible with or exchangeable or exercisable for, or options,     
warrants, calls, commitments or rights of any kind to acquire, shares of Parent 
Common Stock, to a third-party on arms-length terms not in excess of 20% of the 
number of shares of Parent Common Stock outstanding as of the date hereof), (B) 
other than pursuant to the year 1999, 2000 or 2001 capital appropriations/      
spending budgets set forth in Section 6.1(b) of the Parent Disclosure Letter and
other than in the ordinary and usual course of business (I) transfer, lease,    
license, guarantee, sell, mortgage, pledge, dispose of or encumber any property 
or assets, and other than sales not in excess of $250,000,000 in the aggregate; 
or (II) by any means, make any acquisition of, or investment in, assets or stock
of, or other interest in, any other Person or entity in excess of $250,000,000  
in the aggregate or (C) acquire "Beneficial Ownership" (as such term is defined 
in the Rights Agreement) of any Shares;                                         

     (iv) Parent shall not change any material accounting principle, practice or
method in a manner that is inconsistent with past practice, except to the extent
required by U.S. GAAP as advised by Parent's regular independent accountants;   

   (v) neither Parent nor any of its Subsidiaries shall take or fail to take
any action that is reasonably likely to make any representation or warranty of  
such party contained herein inaccurate in any material respect at, or as of any 
time prior to, the Effective Time, or that is, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect; and                        

 (vi) neither Parent nor any of its Subsidiaries will authorize or enter
into an agreement to do any of the foregoing.                                   

    6.2. Acquisition Proposals. (a) The Company agrees that neither it nor any
of its Subsidiaries nor any of the officers and directors of it or its          
Subsidiaries shall, and that it shall direct and use its best efforts to cause  
its and its Subsidiaries' employees, agents and representatives (including any  
investment banker, attorney or accountant retained by it or any of its          
Subsidiaries ("Representatives")) not to, directly or indirectly, initiate,     
solicit, encourage or otherwise facilitate any inquiries or the making of any   
proposal or offer with respect to a merger, reorganization, share exchange,     
consolidation or similar transaction involving, or any purchase of all or,      
except for transactions in the ordinary course of business or expressly         
contemplated by this Agreement that could not interfere with the transactions   
contemplated by this Agreement, including by Section 6.1(a)(iii), any of the    
assets or any equity securities of, it or any of its Subsidiaries (any such     
proposal or offer being hereinafter referred to as a "Company Acquisition       
Proposal"). The Company further agrees that neither it nor any of its           
Subsidiaries nor any of the officers and directors of it or its Subsidiaries    
shall, and that it shall direct and use its best efforts to cause its and its   
Subsidiaries' Representatives not to, directly or indirectly, engage in any     
negotiations concerning, or provide any confidential information or data to, or 
have any discussions with, any Person relating to a Company Acquisition         
Proposal, or otherwise facilitate any effort or attempt to make                 

A-19

S-4
276th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 276th

or implement a Company Acquisition Proposal; provided, however, that nothing    
contained in this Agreement (including the last preceding sentence and Section  
6.1(b)) shall prevent the Company or its Board of Directors or Parent or its    
Board of Directors, as applicable, from (A) complying with Rule 14e-2           
promulgated under the Exchange Act with regard to a Company Acquisition         
Proposal; (B) providing information in response to a request therefor by a      
Person who has made an unsolicited bona fide written Company Acquisition        
Proposal if the Company's Board of Directors receives from the Person so        
requesting such information an executed confidentiality agreement on terms, with
respect to confidentiality, substantially similar to those contained in the     
Confidentiality Agreement (as defined in Section 9.7); (C) engaging in any      
negotiations or discussions with any Person who has made an unsolicited bona    
fide written Company Acquisition Proposal; or (D) recommending such Company     
Acquisition Proposal to the shareholders of the Company if and only to the      
extent that, in each such case referred to in clause (B), (C) or (D) above,     
prior to the time the Company Requisite Vote shall have been obtained, the Board
of Directors of the Company determines in good faith after consultation with    
outside legal counsel and its financial advisor and based upon such other       
matters as it deems relevant that failure to take such action would likely      
result in a breach of their fiduciary duties under applicable law and that such 
Company Acquisition Proposal, if accepted, is reasonably likely to be           
consummated, taking into account all legal, financial and regulatory aspects of 
the proposal and the Person making the proposal and would, if consummated, be   
reasonably likely to result in a transaction more favorable to the Company's    
shareholders from a financial point of view than the transaction contemplated by
this Agreement (any such more favorable Acquisition Proposal being referred to  
in this Agreement as a "Superior Proposal"). The Company agrees that it will    
immediately cease and cause to be terminated any existing activities,           
discussions or negotiations with any parties conducted heretofore with respect  
to any Company Acquisition Proposal. The Company agrees that it will take the   
necessary steps to promptly inform the individuals or entities referred to in   
the first sentence hereof of the obligations undertaken in this Section 6.2 and 
in the Confidentiality Agreement. The Company agrees that it will use its best  
reasonable efforts to notify Parent within one day of the receipt thereof if any
such inquiries, proposals or offers are received by, any such information is    
requested from, or any such discussions or negotiations are sought to be        
initiated or continued with, any of its Representatives indicating, in          
connection with such notice, the name of such Person and the material terms and 
conditions of any proposals or offers and thereafter shall keep Parent informed,
on a current basis, on the status and terms of any such proposals or offers and 
the status of any such discussions or negotiations. The Company also agrees that
it will promptly request each Person that has heretofore executed a             
confidentiality agreement in connection with its consideration of acquiring all 
or substantially all of it, Michigan Consolidated Gas Company or MCN Investment 
Corporation to return all confidential information heretofore furnished to such 
Person by or on behalf of it or any of its Subsidiaries.                        

  (b) Parent agrees that neither it nor any of its Subsidiaries nor any of
the officers and directors of it or its Subsidiaries shall, and that it shall   
direct and use its best efforts to cause its and its Subsidiaries' employees,   
agents and Representatives not to, directly or indirectly, initiate, solicit,   
encourage or otherwise facilitate any inquiries or the making of any proposal or
offer with respect to a merger, reorganization, share exchange, consolidation or
similar transaction involving, or any purchase of all or, except for            
transactions in the ordinary course of business or expressly contemplated by    
this Agreement that could not interfere with the transactions contemplated by   
this Agreement, any of the assets or any equity securities of it or any of its  
Subsidiaries to the extent that such proposal is conditioned on Parent's failure
to obtain the Parent Requisite Vote or could reasonably be expected to result in
a failure to consummate the transactions contemplated by this Agreement (any    
such proposal or offer being hereinafter referred to as a "Parent Adverse       
Proposal"). Parent further agrees that neither it nor any of its Subsidiaries   
nor any of the officers and directors of it or its Subsidiaries shall, and that 
it shall direct and use its best efforts to cause its and its Subsidiaries'     
Representatives not to, directly or indirectly, engage in any negotiations      
concerning, or provide any confidential information or data to, or have any     
discussions with, any Person relating to a Parent Adverse Proposal, or otherwise
facilitate any effort or attempt to make or implement a Parent Adverse Proposal;
provided, however, that nothing contained in this Agreement shall prevent Parent
or its Board of Directors from (A) complying with Rule 14e-2 promulgated under  
the Exchange Act with regard to a Parent Adverse Proposal; (B) providing        
information in response to a request therefor by a Person who has made an       
unsolicited bona fide written Parent Adverse Proposal if Parent's Board of      
Directors receives from the Person so requesting such information an executed   

A-20

S-4
277th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 277th

confidentiality agreement on terms, with respect to confidentiality,            
substantially similar to those contained in the Confidentiality Agreement; (C)  
engaging in any negotiations or discussions with any Person who has made an     
unsolicited bona fide written Parent Adverse Proposal; or (D) recommending such 
Parent Adverse Proposal to the shareholders of Parent, if and only to the extent
that, in each such case referred to in clause (B), (C) or (D) above, prior to   
the time the Parent Requisite Vote shall have been obtained the Board of        
Directors of Parent determines in good faith after consultation with outside    
legal counsel and its financial advisor and based upon such other matters as it 
deems relevant that failure to take such action would likely result in a breach 
of their fiduciary duties under applicable law and that such Parent Adverse     
Proposal, if accepted, is reasonably likely to be consummated, taking into      
account all legal, financial and regulatory aspects of the proposal and the     
Person making the proposal and would, if consummated, be reasonably likely to   
result in a transaction more favorable to the Parent's shareholders from a      
financial point of view than the transaction contemplated by this Agreement.    
Parent agrees that it will take the necessary steps to promptly inform the      
individuals or entities referred to in the first sentence of this Section 6.2(b)
of the obligations undertaken in this Section 6.2(b) and in the Confidentiality 
Agreement. Parent agrees that it will use its best reasonable efforts to notify 
the Company within one day of the receipt thereof if any such inquiries,        
proposals or offers are received by, any such information is requested from, or 
any such discussions or negotiations are sought to be initiated or continued    
with, any of its Representatives indicating, in connection with such notice, the
name of such Person and the material terms and conditions of any proposals or   
offers and thereafter shall keep the Company informed, on a current basis, on   
the status and terms of any such proposals or offers and the status of any such 
discussions or negotiations.                                                    

     6.3. Information Supplied. The Company and Parent each agrees, as to itself
and its Subsidiaries, that none of the information supplied or to be supplied by
it or its Subsidiaries for inclusion or incorporation by reference in (i) the   
Registration Statement on Form S-4 to be filed with the SEC by Parent in        
connection with the issuance of Parent Common Stock in the Merger (including the
joint proxy statement and prospectus (the "Prospectus/Proxy Statement")         
constituting a part thereof) (the "S-4 Registration Statement") will, at the    
time the S-4 Registration Statement becomes effective under the Securities Act, 
contain any untrue statement of a material fact or omit to state any material   
fact required to be stated therein or necessary to make the statements therein, 
in light of the circumstances under which they were made, not misleading, and   
(ii) the Prospectus/Proxy Statement and any amendment or supplement thereto     
will, at the date of mailing to shareholders and at the times of the meetings of
shareholders of the Company and Parent to be held in connection with the Merger 
and the issuance of Parent Common Stock, respectively, contain any untrue       
statement of a material fact or omit to state any material fact required to be  
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Company and   
Parent will cause the Form S-4 to comply as to form in all material respects    
with the applicable provisions of the Securities Act and the rules and          
regulations thereunder.                                                         

6.4. Shareholders Meetings. The Company will take, in accordance with 
applicable law and its articles of incorporation and by-laws, all action        
necessary to convene a meeting of holders of Shares (the "Shareholders Meeting")
as promptly as practicable after the S-4 Registration Statement is declared     
effective to consider and vote upon the approval of this Agreement. Parent will 
take, in accordance with its articles of incorporation and by-laws, all action  
necessary to convene a meeting of holders of Parent Common Stock as promptly as 
practicable after the S-4 Registration Statement is declared effective to       
consider and vote upon the approval of the issuance of Parent Common Stock in   
the Merger. Subject to fiduciary obligations under applicable law, each of the  
Company's and Parent's Board of Directors shall recommend such approval and     
shall take all lawful action to solicit such approval.                          

     6.5. Filings; Other Actions; Notification. (a) Parent and the Company shall
promptly prepare and file with the SEC the Prospectus/Proxy Statement, and      
Parent shall prepare and file with the SEC the S-4 Registration Statement as    
promptly as practicable. Parent and the Company each shall use its best         
reasonable efforts to have the S-4 Registration Statement declared effective    
under the Securities Act as promptly as practicable after such filing, and      
promptly thereafter mail the Prospectus/Proxy Statement to the respective       
shareholders of each of the Company and Parent. Parent shall also use its best  
reasonable efforts to obtain prior to the effective date of the S-4 Registration
Statement all necessary state securities law or "blue sky"                      

A-21

S-4
278th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 278th

permits and approvals required in connection with the Merger and to consummate  
the other transactions contemplated by this Agreement and will pay all expenses 
incident thereto.                                                               

  (b) The Company and Parent each shall use its best reasonable efforts to
cause to be delivered to the other party and its directors a letter of its      
independent auditors, dated (i) the date on which the S-4 Registration Statement
shall become effective and (ii) the Closing Date, and addressed to the other    
party and its directors, in form and substance customary for "comfort" letters  
delivered by independent public accountants in connection with registration     
statements similar to the S-4 Registration Statement.                           

 (c) The Company and Parent shall cooperate with each other and use (and
shall cause their respective Subsidiaries to use) their respective commercially 
reasonable efforts to take or cause to be taken all actions, and do or cause to 
be done all things, necessary, proper or advisable on its part under this       
Agreement and applicable Laws to consummate and make effective the Merger and   
the other transactions contemplated by this Agreement as soon as practicable,   
including preparing and filing as promptly as practicable all documentation to  
effect all necessary notices, reports and other filings and to obtain as        
promptly as practicable all consents, registrations, approvals, permits and     
authorizations necessary or advisable to be obtained from any third party and/or
any Governmental Entity in order to consummate the Merger or any of the other   
transactions contemplated by this Agreement. Subject to applicable laws relating
to the exchange of information (including any obligations pursuant to any       
listing agreement with or rules of any national securities exchange), Parent and
the Company shall have the right to review in advance, and to the extent        
practicable each will consult the other on, all the information relating to     
Parent or the Company, as the case may be, and any of their respective          
Subsidiaries, that appear in any filing made with, or written materials         
submitted to, any third party and/or any Governmental Entity (including any     
national securities exchange) in connection with the Merger and the other       
transactions contemplated by this Agreement. In exercising the foregoing right, 
each of the Company and Parent shall act reasonably and as promptly as          
practicable.                                                                    

   (d) The Company and Parent each shall, upon request by the other, furnish
the other with all information concerning itself, its Subsidiaries, directors,  
officers and shareholders and such other matters as may be reasonably necessary 
or advisable in connection with the Prospectus/Proxy Statement, the S-4         
Registration Statement or any other statement, filing, notice or application    
made by or on behalf of Parent, the Company or any of their respective          
Subsidiaries to any third party and/or any Governmental Entity in connection    
with the Merger and the transactions contemplated by this Agreement.            

     (e) The Company and Parent each shall keep the other apprized of the status
of matters relating to completion of the transactions contemplated hereby,      
including promptly furnishing the other with copies of any notices or other     
communications received by Parent or the Company, as the case may be, or any of 
its Subsidiaries, from any third party and/or any Governmental Entity with      
respect to the Merger and the other transactions contemplated by this Agreement.
The Company and Parent each shall give prompt notice to the other of any change 
that is reasonably likely to result in a Material Adverse Effect on it or       
prevent, materially delay or materially impair the ability of the Company or    
Parent, as the case may be, to consummate the transactions contemplated by this 
Agreement.                                                                      

    (f) In the event any claim, action, suit investigation or other proceeding
by any Governmental Entity or other Person or other legal or administrative     
proceeding is commenced that questions the validity or legality of this         
Agreement or the Merger or the other transaction contemplated by this Agreement 
or claims damages in connection therewith, the Company and Parent each agree to 
cooperate and use their best reasonable efforts to defend against and respond   
thereto.                                                                        

6.6. Access. Upon reasonable notice, and except as may otherwise be   
required by applicable law, the Company and Parent each shall (and shall cause  
its Subsidiaries to) afford the other's officers, employees, counsel,           
accountants and other authorized representatives reasonable access during normal
business hours throughout the period prior to the Effective Time, to its        
properties, books, contracts and records and, during such period, the Company   
and Parent each shall (and shall cause its Subsidiaries to) furnish promptly to 
the other all information concerning its business, properties and personnel as  
may reasonably be requested, provided that no investigation pursuant to this    
Section shall affect or be deemed to modify any representation or warranty made 
by the Company, Parent or Merger Sub and provided, further, that the foregoing  
shall not                                                                       
A-22

S-4
279th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 279th

require the Company or Parent to permit any inspection, or to disclose any      
information, that in the reasonable judgment of the Company or Parent (i) would 
result in the disclosure of any trade secrets of third parties or violate any of
its obligations with respect to confidentiality if the Company or Parent, as the
case may be, shall have used its best reasonable efforts to obtain the consent  
of such third party to such inspection or disclosure or (ii) constitutes        
information protected by attorney-client privilege, but only to the extent that 
disclosure would impair the Company's or Parent's, as the case may be, ability  
to assert such attorney-client privilege. All requests for information made     
pursuant to this Section shall be directed to an executive officer of the       
Company or Parent, as the case may be, or such Person as may be designated by   
either of its executive officers, as the case may be. All such information shall
be governed by the terms of the Confidentiality Agreement.                      

6.7. Affiliates. At least ten business days prior to the date of the  
Shareholders Meeting, the Company shall deliver to Parent a list of names and   
addresses of those Persons who are, in the opinion of the Company, as of the    
time of the Shareholders Meeting referred to in Section 6.4, "affiliates" of the
Company within the meaning of Rule 145 under the Securities Act. There shall be 
added to such list the names and addresses of any other Person subsequently     
identified by either Parent or the Company as a Person who may be deemed to be  
such an affiliate of the Company; provided, however, that no such Person        
identified by Parent shall be added to the list of affiliates of the Company if 
Parent shall receive from the Company, on or before the date of the Shareholders
Meeting, an opinion of counsel reasonably satisfactory to Parent to the effect  
that such Person is not such an affiliate. The Company shall exercise its best  
efforts to deliver or cause to be delivered to Parent, prior to the date of the 
Shareholders Meeting, from each affiliate of the Company identified in the      
foregoing list (as the same may be supplemented as aforesaid), a letter dated as
of the Closing Date substantially in the form attached as Exhibit A-1 (the      
"Affiliates Letter"). Parent shall not be required to maintain the effectiveness
of the S-4 Registration Statement or any other registration statement under the 
Securities Act for the purposes of resale of Parent Common Stock by such        
affiliates received in the Merger and the certificates representing Parent      
Common Stock received by such affiliates shall bear a customary legend regarding
applicable Securities Act restrictions and the provisions of this Section.      

6.8. Stock Exchange Listing and De-listing. Parent shall use its best 
efforts to cause the shares of Parent Common Stock to be issued in the Merger to
be approved for listing on the NYSE subject to official notice of issuance,     
prior to the Closing Date. The Surviving Corporation shall use its best efforts 
to cause the Shares to be de-listed from the NYSE and de-registered under the   
Exchange Act as soon as practicable following the Effective Time.               

  6.9. Publicity. The initial press release shall be a joint press release
and thereafter the Company and Parent each shall consult with each other prior  
to issuing any press releases or otherwise making public announcements with     
respect to the Merger and the other transactions contemplated by this Agreement.

6.10. Benefits.                                                       

  (a) Stock Options. (i) At the Effective Time, each outstanding option to
purchase Shares (a "Company Option") under the Stock Plans, whether vested or   
unvested, shall be deemed to constitute an option to acquire, on the same terms 
and conditions as were applicable under such Company Option, the number of      
shares of Parent Common Stock equal to the result (rounded to the nearest whole 
share) of multiplying the number of Shares subject to the Company Option        
immediately prior to the Effective Time by the Conversion Ratio (as defined     
below), at an exercise price per share equal to the result (rounded to the      
nearest whole cent) of dividing the per share exercise price of such Company    
Option immediately prior to the Effective Time by the Conversion Ratio;         
provided, however, that in the case of any Company Option to which Section 422  
of the Code applies, the adjustments provided for in this Section shall be      
effected in a manner consistent with the requirements of Section 424(a) of the  
Code. At or prior to the Effective Time, the Company shall make all necessary   
arrangements with respect to the Stock Plans to permit the assumption of the    
unexercised Company Options by Parent pursuant to this Section. For purposes of 
this Section, the term "Conversion Ratio" means a fraction, the numerator of    
which is the average of the high and low sales price of one Share on the NYSE on
the three trading days immediately preceding the Effective Time and the         
denominator of which is the average                                             

A-23

S-4
280th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 280th

of the high and low sales price of one share of Parent Common Stock on the NYSE 
on the trading day immediately preceding the Effective Time.                    

(ii) Effective at the Effective Time, Parent shall assume each Company
Option in accordance with the terms of the Stock Plans and the stock option     
agreement by which it is evidenced. At or prior to the Effective Time, Parent   
shall take all corporate action necessary to reserve for issuance a sufficient  
number of shares of Parent Common Stock for delivery upon exercise of Company   
Options assumed by it in accordance with this Section. As soon as practicable   
after the Effective Time, Parent shall file a registration statement on Form S-8
(or any successor or other appropriate forms), or another appropriate form with 
respect to the shares of Parent Common Stock subject to such Company Options,   
and shall use its best reasonable efforts to maintain the effectiveness of such 
registration statement (and maintain the current status of the prospectus or    
prospectuses contained therein) for so long as such Company Options remain      
outstanding.                                                                    

    (iii) Prior to the Effective Time, the Board of Directors of Parent, or an
appropriate committee of non-employee directors thereof, shall adopt a          
resolution consistent with the interpretive guidance of the SEC so that the     
acquisition of shares of Parent Common Stock or options to acquire shares of    
Parent Common Stock pursuant to this Agreement and the Merger and the Merger    
shall be an exempt transaction for purposes of Section 16 by any officer or     
director of the Company who may become a covered person of Parent for purposes  
of Section 16 of the Exchange Act ("Section 16").                               

     (b) Employee Benefits. (i) Parent agrees that, during the period commencing
at the Effective Time and ending on the first anniversary thereof, the employees
of the Company and its Subsidiaries ("Company Employees") will continue to be   
provided with compensation and benefits under employee benefit plans (other than
plans involving the issuance of Shares) that are no less favorable in the       
aggregate than those currently provided by the Company and its Subsidiaries to  
such Company Employees under the Compensation and Benefit Plans of the Company  
and its Subsidiaries.                                                           

  (ii) From and after the Effective Time, Parent shall cause the Surviving
Corporation and The Detroit Edison Company to honor (i) each existing           
employment, change of control, severance and termination agreement between the  
Company or any of its Subsidiaries, and any officer, director or employee of the
Company or its Subsidiaries and (ii) all Compensation and Benefit Plans of the  
Company and its Subsidiaries in accordance with their terms as in effect        
immediately before the Effective Time. Notwithstanding the above, nothing in    
this Agreement precludes Parent or any of its Subsidiaries from amending,       
discontinuing or terminating any Compensation and Benefit Plan in accordance    
with the terms thereof. Parent acknowledges that it has been advised by the     
Company that the Merger constitutes a change of control for purposes of certain 
Company Compensation and Benefit Plans specifically identified in Section       
6.10(b) of the Company Disclosure Letter.                                       

   (iii) For all purposes under the employee benefit plans of Parent and its
Affiliates providing benefits to any current Company Employees after the        
Effective Time (the "New Plans"), each Company Employee shall be credited with  
his or her years of service with the Company and its Affiliates before the      
Effective Time, to the same extent as such Company Employee was entitled, before
the Effective Time, to credit for such service for such purposes under any      
similar Company Employee Plans, except to the extent such credit would result in
a duplication of benefits. In addition, and without limiting the generality of  
the foregoing: (i) each Company Employee shall be immediately eligible to       
participate, without any waiting time, in any and all New Plans to the extent   
coverage under such New Plan replaces coverage under a comparable Company       
Employee Plan in which such Company Employee participated immediately before the
Effective Time (such plans, collectively, the "Old Plans"); and (ii) for        
purposes of each New Plan providing medical, dental, pharmaceutical and/or      
vision benefits to any Company Employee, Parent shall cause all pre-existing    
condition exclusions of such New Plan to be waived for such employee and his or 
her covered dependents to the extent that such exclusions and requirements were 
waived under the corresponding Company Employee Plans, and Parent shall cause   
any eligible expenses incurred by such employee and his or her covered          
dependents during the portion of the plan year of the Old Plan ending on the    
date that such employee's participation in the corresponding New Plan begins to 
be taken into account under such New Plan for purposes of satisfying all        
deductible, coinsurance and                                                     

A-24

S-4
281st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 281st

maximum out-of-pocket requirements applicable to such employee and his or her   
covered dependents for the applicable plan-year as if such amounts had been paid
in accordance with such New Plan.                                               

    (iv) Between the date hereof and December 31, 1999, the Company shall take
such reasonable and appropriate actions as agreed to by Parent to mitigate the  
tax cost to the Company of providing the "change of control" benefits identified
in Section 5.1(h) of the Company Disclosure Letter.                             

(c) Election to Parent's Board of Directors; Management Executive     
Committee. At the Effective Time of the Merger, Parent shall promptly increase  
the size of its Board of Directors or exercise its best efforts to secure the   
resignation of present directors in order to cause Alfred R. Glancy III and two 
additional persons selected by the Company after consultation with Parent from  
among the Company's directors as of the date hereof to be appointed to Parent's 
Board of Directors.                                                             

   (d) Employees. It is the present intention of Parent and the Company that
following the Effective Time, there will be no involuntary reductions in force  
at the Surviving Corporation or its Subsidiaries, and that Parent, the Surviving
Corporation and their respective Subsidiaries will continue Parent's and the    
Company's present strategy of achieving workforce reductions through attrition  
or other voluntary means; provided, however, that if any reductions in workforce
in respect of employees of Parent and its Subsidiaries, including the Surviving 
Corporation and its Subsidiaries, become necessary, they shall be made on a fair
and equitable basis, in light of the circumstances and the objectives to be     
achieved, giving consideration to previous work history, job experience,        
qualifications, and business needs without regard to whether employment prior to
the Effective Time was with the Company or its Subsidiaries or Parent or its    
Subsidiaries, and any employees whose employment is terminated or jobs are      
eliminated by Parent, the Surviving Corporation or any of their respective      
Subsidiaries shall be entitled to participate on a fair and equitable basis in  
the job opportunity and employment placement programs offered by Parent, the    
Surviving Corporation or any of their respective Subsidiaries. Any workforce    
reductions carried out following the Effective Time by Parent or the Surviving  
Corporation and their respective Subsidiaries shall be done in accordance with  
all applicable collective bargaining agreements, and all laws and regulations   
governing the employment relationship and termination thereof including, without
limitation, the Worker Adjustment and Retraining Notification Act and           
regulations promulgated thereunder, and any comparable state or local law.      

   6.11. Expenses. The Surviving Corporation or Parent shall pay all charges
and expenses of the Company, Merger Sub or Parent, including those of the       
Exchange Agent, in connection with the transactions contemplated in Article IV, 
and Parent shall reimburse the Surviving Corporation for such charges and       
expenses paid by the Surviving Corporation. Except as otherwise provided in     
Section 8.5(b), whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the Merger and the other         
transactions contemplated by this Agreement shall be paid by the party incurring
such expense, except that expenses incurred in connection with the filing fee   
for the S-4 Registration Statement and printing and mailing the Prospectus/Proxy
Statement and the S-4 Registration Statement shall be shared equally by Parent  
and the Company.                                                                

 6.12. Indemnification; Directors' and Officers' Insurance. (a) From and
after the Effective Time, Parent agrees that it will indemnify and hold harmless
each present and former director and officer of the Company, (when acting in    
such capacity) determined as of the Effective Time (the "Indemnified Parties"), 
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities (collectively, "Costs") incurred  
in connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of matters        
existing or occurring at or prior to the Effective Time, whether asserted or    
claimed prior to, at or after the Effective Time, to the fullest extent that the
Company would have been permitted under Michigan law and its articles of        
incorporation and its by-laws in effect on the date hereof to indemnify such    
Person (and Parent shall also advance expenses as incurred to the fullest extent
permitted under applicable law, provided, the Person to whom expenses are       
advanced provides an undertaking to repay such advances if it is ultimately     
determined that such Person is not entitled to indemnification).                

    (b) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 6.12, upon learning of any such claim, action, suit,        
proceeding or investigation, shall promptly notify Parent thereof,              
A-25

S-4
282nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 282nd

but the failure to so notify shall not relieve Parent of any liability it may   
have to such Indemnified Party so long as such failure does not materially      
prejudice Parent. In the event of any such claim, action, suit, proceeding or   
investigation (whether arising before or after the Effective Time), (i) Parent  
or the Surviving Corporation shall have the right to assume and control the     
defense thereof and Parent shall not be liable to such Indemnified Parties for  
any legal expenses of other counsel or any other expenses subsequently incurred 
by such Indemnified Parties in connection with the defense thereof, except that 
if Parent or the Surviving Corporation elects not to assume such defense or     
counsel for the Indemnified Parties advises in writing that there are issues    
which raise conflicts of interest between Parent or the Surviving Corporation   
and the Indemnified Parties, the Indemnified Parties may retain counsel         
satisfactory to them subject to the consent of Parent, which shall not be       
unreasonably withheld, and Parent or the Surviving Corporation shall pay all    
reasonable fees and expenses of such counsel for the Indemnified Parties        
promptly as statements setting forth such fees and expenses in reasonable detail
are received; provided, however, that Parent shall be obligated pursuant to this
paragraph (b) to pay for only one firm of counsel for all Indemnified Parties in
any jurisdiction, (ii) the Indemnified Parties will cooperate in the defense of 
any such matter and (iii) Parent shall not be liable for any settlement effected
without its prior written consent; and provided, further, that Parent shall not 
have any obligation hereunder to any Indemnified Party if and when a court of   
competent jurisdiction shall ultimately determine, and such determination shall 
have become final, that the indemnification of such Indemnified Party in the    
manner contemplated hereby is prohibited by applicable law.                     

(c) The Surviving Corporation shall maintain the Company's existing   
officers' and directors' liability insurance ("D&O Insurance") for a period of  
six years after the Effective Time so long as the annual premium therefor is not
in excess of 200% of the last annual premium paid prior to the date hereof (the 
"Current Premium"); provided, however, that (x) the Surviving Corporation may   
substitute therefor policies (which may be "tail" policies) containing terms    
with respect to coverage and amount no less favorable to such directors and     
officers, and (y) if the existing D&O Insurance expires, is terminated or       
canceled during such six-year period, the Surviving Corporation will use its    
best efforts to obtain as much D&O Insurance as can be obtained for the         
remainder of such period for a premium not in excess (on an annualized basis) of
200% of the Current Premium.                                                    

    (d) The provisions of this Section 6.12 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs   
and their representatives.                                                      

6.13. Takeover Statutes. If any Takeover Statute is or may become     
applicable to the Merger or the other transactions contemplated by this         
Agreement, each of Parent and the Company and its Board of Directors shall grant
such approvals and take such actions as are necessary so that such transactions 
may be consummated as promptly as practicable on the terms contemplated by this 
Agreement or by the Merger and otherwise act to eliminate or minimize the       
effects of such statute or regulation on such transactions.                     

    6.14. Dividends. The Company shall coordinate with Parent the declaration,
setting of record dates and payment dates of dividends on Shares so that holders
of Shares do not receive dividends on both Shares and Parent Common Stock       
received in the Merger in respect of any calendar quarter or fail to receive a  
dividend on either Shares or Parent Common Stock received in the Merger in      
respect of any calendar quarter.                                                

    6.15. Rate Matters. Other than currently pending rate filings, the Company
shall, and shall cause its Subsidiaries to, discuss with Parent any material    
changes in its or its Subsidiaries regulated rates or charges (other than       
pass-through fuel rates or charges), standards of service or accounting from    
those in effect on the date hereof and consult with Parent prior to making any  
filing (or any amendment thereto), or effecting any agreement, commitment,      
arrangement or consent, whether written or oral, formal or informal, with       
respect thereto.                                                                

6.16. Taxation. Subject to Section 6.2, neither Parent nor the Company
shall take or cause to be taken any action, whether before or after the         
Effective Time, that would disqualify the Merger as a "reorganization" within   
the meaning of Section 368(a) of the Code.                                      

  6.17. Transition Matters. (a) Promptly after the date hereof, Parent and
the Company each shall designate three persons (the "Transition Coordinators")  
to, subject to applicable laws relating to the exchange                         

A-26

S-4
283rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 283rd

of information, facilitate a full exchange of information concerning the        
business, operations, capital spending and budgets and financial results of     
Parent and the Company and to identify ways in which the operations of Parent   
and the Company can be consolidated or coordinated. The Transition Coordinators 
shall meet at least monthly in person and shall meet together quarterly with the
Chief Executive Officers of Parent and the Company. From and after the date     
hereof, Parent and the Company agree that they shall consult with each other    
regarding all material business plans and decisions.                            

     (b) The Company and Parent each agree to use its reasonable best efforts to
enter into a definitive agreement within 14 days of the date hereof for the sale
to Parent of the Company's 95% membership interest in each of the following     
limited liability companies that own and operate synthetic fuel manufacturing   
facilities: (i) CRC No. 1, LLC Union City, Kentucky, (ii) CRC No. 3, LLC,       
Tazewell County Virginia and McDowell County Virginia, (iii) CRC No. 5, LLC     
Monongalia County, West Virginia, and (iv) CRC No. 6, LLC Laurel County, West   
Virginia. The Company and Parent each agree that the economic terms for each    
such sale shall be designed to produce a payment stream to the Company with a   
net present value of $40 per ton of capacity, utilizing a 12% discount rate.    

   (c) The Company agrees to use its best efforts promptly to enter into, or
to cause its Subsidiaries promptly to enter into, agreements to dispose of (i)  
such of its interests as are necessary so that the transactions contemplated by 
this Agreement will not jeopardize the status of any facilities in which the    
Company directly or indirectly owns any interest as "Qualifying Facilities"     
under the Public Utility Regulatory Policies Act of 1978, as amended, and (ii)  
all FERC-jurisdictional assets or facilities whether directly or indirectly     
owned or wholly or partially owned that would give rise to a requirement for    
approval of the Merger by the FERC, in each case prior to the date when all     
Governmental Consents (as defined below) are obtained and to use commercially   
reasonable efforts to maximize the after-tax proceeds from such sales or        
dispositions; provided, that the obligation to use best efforts shall not       
require the Company to take any action pursuant to this Section 6.17(c) that    
would cause (alone or together with other events) any failure to satisfy any    
condition to Closing. The Company agrees to keep Parent informed on a current   
basis regarding the status and terms of such dispositions and any other asset   
dispositions contemplated by the Company and its Subsidiaries and to work       
cooperatively with Parent to maximize the mutual benefit to the parties of such 
dispositions.                                                                   

  6.18. Community Involvement. After the Effective Time, Parent intends to
continue, and intends to cause the Surviving Corporation to continue, to make   
aggregate annual charitable contributions to the communities served by Parent   
and the Surviving Corporation and otherwise maintain a substantial level of     
involvement in community activities in the State of Michigan that is similar to,
or greater than, the normal aggregate annual level of charitable contributions, 
community development and related activities carried on by Parent and the       
Company prior to the date hereof.                                               

 6.19. 1935 Act and Power Act. (a) None of the parties hereto shall, nor
shall any such party permit any of its Subsidiaries to, without the other       
party's consent, which shall not be unreasonably withheld or delayed, engage in 
any activities that would (i) cause a change in its status, or that of its      
Subsidiaries, under the 1935 Act, including, without limitation, the            
registration of either party pursuant to the 1935 Act or (ii) result in         
jurisdiction by the FERC over the Merger.                                       

   (b) None of the parties hereto shall, nor shall any such party permit any
of its Subsidiaries to, without the other party's consent, which shall not be   
unreasonably withheld or delayed, fail to take such actions that are necessary  
to (i) preserve existing exemptions from registration under the 1935 Act or (ii)
allow the Merger to proceed without a requirement for approval by the FERC.     

   6.20. Feline Prides. At or prior to the Effective Time, Parent shall take
all corporate action necessary to reserve for issuance a sufficient number of   
shares of Parent Common Stock for delivery upon conversion of the Feline Prides 
in accordance with their terms.                                                 

A-27

S-4
284th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 284th

ARTICLE VII 

CONDITIONS

7.1. Conditions to Each Party's Obligation to Effect the Merger. The  
respective obligation of each party to effect the Merger is subject to the      
satisfaction or waiver at or prior to the Effective Time of each of the         
following conditions:                                                           

   (a) Shareholder Approval. This Agreement shall have been duly approved by
holders of Shares constituting the Company Requisite Vote and shall have been   
duly approved by the sole shareholder of Merger Sub in accordance with          
applicable law and the articles of incorporation and by-laws of each such       
corporation, and the issuance of Parent Common Stock pursuant to the Merger     
shall have been duly approved by the holders of Parent Common Stock constituting
the Parent Requisite Vote.                                                      

     (b) NYSE Listing. The shares of Parent Common Stock issuable to the Company
shareholders pursuant to this Agreement shall have been authorized for listing  
on the NYSE upon official notice of issuance.                                   

    (c) Regulatory Consents. The waiting period applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated, and,     
other than the filing provided for in Section 1.3, all notices, reports and     
other filings required to be made prior to the Effective Time by the Company or 
Parent or any of their respective Subsidiaries with, and all consents,          
registrations, approvals, permits and authorizations required to be obtained    
prior to the Effective Time by the Company or Parent or any of their respective 
Subsidiaries from, any Governmental Entity (collectively, "Governmental         
Consents") in connection with the execution and delivery of this Agreement and  
the consummation of the Merger and the other transactions contemplated hereby by
the Company, Parent and Merger Sub shall have been made or obtained (as the case
may be) and become final, except for those that the failure to make or to       
obtain, individually or in the aggregate, are not reasonably likely to have a   
Material Adverse Effect on Parent or the Company, as applicable, or provide a   
reasonable basis to conclude that the parties hereto or any of their affiliates 
or respective directors, officers, agents, advisors or other representatives    
would be subject to the risk of criminal or material financial liability.       

   (d) Litigation. No court or Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute, law,  
ordinance, rule, regulation, judgment, decree, injunction or other order        
(whether temporary, preliminary or permanent) that is in effect and restrains,  
enjoins or otherwise prohibits consummation of the Merger or the other          
transactions contemplated by this Agreement (collectively, an "Order"), and none
of the U.S. Department of Justice, the Michigan Public Service Commission or the
FERC shall have instituted any proceeding or be threatening to institute any    
proceeding seeking any such Order.                                              

   (e) S-4. The S-4 Registration Statement shall have become effective under
the Securities Act. No stop order suspending the effectiveness of the S-4       
Registration Statement shall have been issued, and no proceedings for that      
purpose shall have been initiated or be threatened, by the SEC.                 

     (f) Blue Sky Approvals. Parent shall have received all state securities and
"blue sky" permits and approvals necessary to consummate the transactions       
contemplated hereby.                                                            

    (g) Certain Transactions. The Company shall have completed the disposition
of the interests required to be disposed of by Section 6.17(c) of this          
Agreement.                                                                      

     7.2. Conditions to Obligations of Parent and Merger Sub. The obligations of
Parent and Merger Sub to effect the Merger are also subject to the satisfaction 
or waiver by Parent at or prior to the Effective Time of the following          
conditions:                                                                     

   (a) Representations and Warranties. The representations and warranties of
the Company set forth in Sections 5.1(b)(i), 5.1(c)(i), 5.1(j), 5.1(p) and      
5.1(q) of this Agreement shall be true and correct in all material respects (a) 
on the date hereof and (b) on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of the       
Closing Date (except for representations and warranties that expressly speak    
only as of specific date or time other than the date hereof or the Closing      

A-28

S-4
285th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 285th

Date, which need only be true and correct in all material respects as of such   
date or time) and all other representations and warranties of the Company set   
forth in this Agreement shall be true and correct (i) on the date hereof and    
(ii) on and as of the Closing Date with the same effect as though such          
representations and warranties had been made on and as of the Closing Date      
(except for representations and warranties that expressly speak only as of      
specific date or time other than the date hereof or the Closing Date, which need
only be true and correct as of such date or time) except in each of cases (i)   
and (ii) for such failures of those representations or warranties to be true and
correct (without regard to any Material Adverse Effect, materiality or similar  
qualifications contained therein) which, individually or in the aggregate, have 
not had and are not reasonably likely to have, a Material Adverse Effect on     
Parent, and Parent shall have received a certificate signed on behalf of the    
Company by an executive officer of the Company to such effect.                  

(b) Performance of Obligations of the Company. The Company shall have 
performed in all material respects all obligations required to be performed by  
it under this Agreement at or prior to the Closing Date, and Parent shall have  
received a certificate signed on behalf of the Company by an executive officer  
of the Company to such effect.                                                  

    (c) Consents Under Agreements. The Company shall have obtained the consent
or approval of each Person whose consent or approval shall be required under any
material Contract to which the Company or any of its Subsidiaries is a party.   

   (d) Accountants Letter. Parent shall have received, in form and substance
reasonably satisfactory to Parent, from Deloitte & Touche LLP, the Company's    
independent auditor, the "comfort" letter described in Section 6.5(b).          

 (e) Affiliates Letters. Parent shall have received an Affiliates Letter
from each Person identified as an affiliate of the Company pursuant to Section  
6.7.                                                                            

 (f) Material Adverse Effect. There shall not have occurred any Material
Adverse Effect on the Company.                                                  

(g) Tax Opinion. Parent shall have received the opinion of Sullivan & 
Cromwell, counsel to Parent, dated the Closing Date, to the effect that (based  
on customary assumptions and representations and subject to customary           
exceptions) the Merger will be treated for Federal income tax purposes as a     
reorganization within the meaning of Section 368(a) of the Code, and that each  
of Parent, Merger Sub and the Company will be a party to that reorganization    
within the meaning of Section 368(b) of the Code. The condition set forth in    
this Section 7.2(g) shall not be waivable after the Company Requisite Vote or   
the Parent Requisite Vote has been obtained unless further shareholder approval 
is obtained with appropriate disclosure.                                        

     (h) Governmental Consents. All Governmental Consents in connection with the
execution and delivery of this Agreement and the consummation of the Merger and 
the other transactions contemplated hereby shall have been obtained without     
imposing any terms or conditions that, individually or in the aggregate, in the 
reasonable judgment of Parent, are reasonably likely to have a Material Adverse 
Effect on Parent, the Company or the Surviving Corporation.                     

     7.3. Conditions to Obligation of the Company. The obligation of the Company
to effect the Merger is also subject to the satisfaction or waiver by the       
Company at or prior to the Effective Time of the following conditions:          

   (a) Representations and Warranties. The representations and warranties of
Parent and Merger Sub set forth in Section 5.1(b)(ii), 5.1(c)(ii), 5.1(c)(iii), 
and 5.1(q) this Agreement shall be true and correct in all material respects (a)
on the date hereof and (b) on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of the       
Closing Date (except for representations and warranties that expressly speak    
only as of specific date or time other than the date hereof or the Closing Date,
which need only be true and correct in all material respect as of such date or  
time) and all other representations and warranties of Parent and Merger Sub set 
forth in this Agreement shall be true and correct (i) on the date hereof and    
(ii) on and as of the Closing Date with the same effect as though such          
representations and warranties had been made on and as of the Closing Date      
(except for representations and                                                 

A-29

S-4
286th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 286th

warranties that expressly speak only as of specific date or time other than the 
date hereof or the Closing Date, which need only be true and correct in all     
material respects as of such date or time) except in each of cases (i) and (ii) 
for such failures of those representations or warranties to be true and correct 
(without regard to any Material Adverse Effect, materiality or similar          
qualifications contained therein) which, individually or in the aggregate, have 
not had and are not reasonably likely to have, a Material Adverse Effect on the 
Company, and the Company shall have received a certificate signed on behalf of  
Parent and Merger Sub by an executive officer of Parent to such effect.         

     (b) Performance of Obligations of Parent and Merger Sub. Each of Parent and
Merger Sub shall have performed in all material respects all obligations        
required to be performed by it under this Agreement at or prior to the Closing  
Date, and the Company shall have received a certificate signed on behalf of     
Parent and Merger Sub by the an executive officer of Parent to such effect.     

  (c) Consents Under Agreements. Parent shall have obtained the consent or
approval of each Person whose consent or approval shall be required in order to 
consummate the transactions contemplated by this Agreement under any material   
Contract to which Parent or any of its Subsidiaries is a party.                 

(d) Accountants Letter. The Company shall have received, in form and  
substance reasonably satisfactory to the Company, from Deloitte & Touche LLP,   
Parent's independent auditor, the "comfort" letter described in Section 6.5(b). 

 (e) Material Adverse Effect. There shall not have occurred any Material
Adverse Effect on Parent.                                                       

   (f) Tax Opinion. The Company shall have received the opinion of Wachtell,
Lipton, Rosen & Katz, counsel to the Company, dated the Closing Date, to the    
effect that (based on customary assumptions and representations and subject to  
customary exceptions) the Merger will be treated for Federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code, and that  
each of Parent, Merger Sub and the Company will be a party to that              
reorganization within the meaning of Section 368(b) of the Code. The condition  
set forth in this Section 7.3(f) shall not be waivable after the Company        
Requisite Vote or the Parent Requisite Vote has been obtained unless further    
shareholder approval is obtained with appropriate disclosure.                   

ARTICLE VIII

TERMINATION 

  8.1. Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, whether    
before or after the approval by shareholders of the Company and Parent referred 
to in Section 7.1(a), by mutual written consent of the Company and Parent by    
action of their respective Boards of Directors.                                 

 8.2. Termination by Either Parent or the Company. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective   
Time by action of the Board of Directors of either Parent or the Company if: (i)
the Merger shall not have been consummated by July 15, 2000, whether such date  
is before or after the date of approval by the shareholders of the Company or   
Parent (the "Termination Date"); provided that the Termination Date shall be    
automatically extended for nine months (the "Extended Date") if, on July 15,    
2000: (x) any of the Governmental Consents described in Section 7.1(c) have not 
been obtained or waived, (y) each of the other conditions to the consummation of
the Merger set forth in Article VII has been satisfied or waived or remains     
capable of satisfaction, and (z) any Governmental Consent that has not yet been 
obtained is being pursued diligently and in good faith; (ii) the approval of the
Company's shareholders required by Section 7.1(a) shall not have been obtained  
at a meeting duly convened therefor or at any adjournment or postponement       
thereof; (iii) the approval of Parent's shareholders as required by Section     
7.1(a) shall not have been obtained at a meeting duly convened therefor; (iv)   
any Order permanently restraining, enjoining or otherwise prohibiting           
consummation of the Merger shall become final and non-appealable (whether before
or after the approval by the shareholders of the Company or Parent); or (v) on  
or after the Regulatory Termination Date (as defined below) the Board of        
Directors of Parent or of the Company                                           

A-30

S-4
287th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 287th

reasonably determines that it is more likely than not that Governmental Consents
necessary to satisfy the conditions to the parties' obligation to effect the    
Merger will not be obtained on terms that satisfy the standard set forth in     
Section 7.2(h) prior to the Extended Date; provided, that such party provides   
the other two weeks prior notice. The right to terminate this Agreement pursuant
to clause (i) or (v) of the immediately preceding sentence shall not be         
available to any party that has breached in any material respect its obligations
under this Agreement in any manner that shall have proximately contributed to   
the occurrence of the failure of the Merger to be consummated. As used in this  
Agreement, the term "Regulatory Termination Date" means the date one year from  
the date hereof unless the transactions contemplated by this Agreement shall    
require any approval of the FERC, in which case it shall mean the date 15 months
from the date hereof.                                                           

   8.3. Termination by the Company. This Agreement may be terminated and the
Merger may be abandoned by action of the Board of Directors of the Company if:  

  (a) at any time prior to the Effective Time, whether before or after the
approval by shareholders of the Company referred to in Section 7.1(a),(i) the   
Board of Directors of Parent shall have withdrawn or adversely modified its     
approval or recommendation of this Agreement or failed to reconfirm its         
recommendation of this Agreement within five business days after a written      
request by the Company to do so or (ii) there has been a material breach by     
Parent or Merger Sub of any representation, warranty, covenant or agreement     
contained in this Agreement that is not curable or, if curable, is not cured    
within 30 days after written notice of such breach is given by the Company to   
the party committing such breach; or                                            

   (b) (i) the Company Requisite Vote shall not have been obtained, (ii) the
Company is not in breach of any of the terms of this Agreement, (iii) the Board 
of Directors of the Company authorizes the Company, subject to complying with   
the terms of this Agreement, to enter into a binding written agreement          
concerning a transaction that constitutes a Superior Proposal and the Company   
notifies Parent in writing that it intends to enter into such an agreement, (iv)
Parent does not make, within five business days of receipt of the Company's     
written notification of its intention to enter into a binding agreement for a   
Superior Proposal, an offer that the Board of Directors of the Company          
determines, in good faith after consultation with its financial advisors, is at 
least as favorable, from a financial point of view, to the shareholders of the  
Company as the Superior Proposal, and (v) the Company prior to such termination 
pays to Parent in immediately available funds any fees required to be paid      
pursuant to Section 8.5. The Company agrees (x) that it will not enter into a   
binding agreement referred to in clause (iii) of the last preceding sentence    
until at least the sixth business day after it has provided the notice to Parent
required thereby and (y) to notify Parent promptly if its intention to enter    
into a written agreement referred to in its notification shall change at any    
time after giving such notification.                                            

     8.4. Termination by Parent. This Agreement may be terminated and the Merger
may be abandoned by action of the Board of Directors of Parent if:              

  (a) at any time prior to the Effective Time, whether before or after the
approval by the shareholders of Parent referred to in Section 7.1(a), (i) the   
Board of Directors of the Company shall have withdrawn or adversely modified its
approval or recommendation of this Agreement or failed to reconfirm its         
recommendation of this Agreement within five business days after a written      
request by Parent to do so or (ii) there has been a material breach by the      
Company of any representation, warranty, covenant or agreement contained in this
Agreement that is not curable or, if curable, is not cured within 30 days after 
written notice of such breach is given by Parent to the Company; or             

     (b) (i) the Parent Requisite Vote shall not have been obtained, (ii) Parent
is not in breach of any of the terms of this Agreement, (iii) the Board of      
Directors of Parent authorizes Parent, subject to complying with the terms of   
this Agreement, to enter into a binding written agreement concerning a          
transaction that constitutes a Parent Adverse Proposal and Parent notifies the  
Company in writing that it intends to enter into such an agreement, (iv) the    
Company does not make within five business days of receipt of Parent's          
notification of its intention to enter into a binding agreement for a Parent    
Adverse Proposal, an offer the Board of Directors of Parent determines, in good 
faith after consultation with its financial advisors, is at least as favorable, 
from a financial point of view, to the shareholders of Parent as the Parent     
Adverse Proposal, and (v) Parent prior to such termination pays to the Company  
in immediately available funds any fees required to                             
A-31

S-4
288th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 288th

be paid pursuant to Section 8.5. Parent agrees (x) that it will not enter into  
any binding agreement referred to in clause (iii) of the last preceding sentence
until at least the sixth business day after it has provided the notice to the   
Company required thereby and (y) to notify the Company promptly if its intention
to enter into a written agreement referred to in its notification shall change  
at any time after giving such notification.                                     

     8.5. Effect of Termination and Abandonment. (a) In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article    
VIII, this Agreement (other than as set forth in Section 9.1) shall become void 
and of no effect with no liability on the part of any party hereto (or of any of
its directors, officers, employees, agents, legal and financial advisors or     
other representatives); provided, however, except as otherwise provided herein, 
no such termination shall relieve any party hereto of any liability or damages  
resulting from any breach of this Agreement.                                    

  (b) In the event that (i) a Company Acquisition Proposal shall have been
made to the Company or any of its Subsidiaries or any of its shareholders or any
Person shall have publicly announced an intention (whether or not conditional)  
to make a Company Acquisition Proposal and thereafter this Agreement is         
terminated by either Parent or the Company pursuant to Section 8.2(ii), (ii)    
this Agreement is terminated by Parent pursuant to Section 8.4(a)(i) or, (iii)  
this Agreement is terminated by the Company pursuant to Section 8.3(b) then the 
Company shall, in the case of a termination pursuant to 8.3(b) prior to such    
termination, and otherwise promptly, but in no event later than two days after  
the date of such termination, pay Parent a termination fee of $55,000,000 and   
shall promptly, but in no event later than two days after being notified of such
by Parent, pay all of the charges and expenses, including those of the Exchange 
Agent, incurred by Parent or Merger Sub in connection with this Agreement and   
the transactions contemplated by this Agreement up to a maximum amount of       
$15,000,000, in each case payable by wire transfer of same day funds; provided, 
however, that in the event of a termination pursuant to Section 8.2(ii) under   
the circumstances set forth in clause (i) of this Section 8.5(b), or a          
termination pursuant to Section 8.4(a)(i), the Company shall (a) promptly, but  
in no event later than two days after being notified of such by Parent, pay all 
of the charges and expenses incurred by Parent in connection with this Agreement
and the transactions contemplated by this Agreement up to a maximum amount of   
$15,000,000, and, (b) if the Company enters into a definitive agreement to      
consummate or consummates a Company Acquisition Proposal within 12 months from  
the date of such termination, at the time of the entering into of such agreement
or such consummation, as applicable, pay Parent a termination fee of            
$55,000,000. The Company acknowledges that the agreements contained in this     
Section 8.5(b) are an integral part of the transactions contemplated by this    
Agreement, and that, without these agreements, Parent and Merger Sub would not  
enter into this Agreement; accordingly, if the Company fails to promptly pay the
amount due pursuant to this Section 8.5(b), and, in order to obtain such        
payment, Parent or Merger Sub commences a suit which results in a judgment      
against the Company for the fee set forth in this paragraph (b), the Company    
shall pay to Parent or Merger Sub its costs and expenses (including attorneys'  
fees) in connection with such suit, together with interest on the amount of the 
fee at the prime rate of Citibank, N.A. in effect on the date such payment was  
required to be made.                                                            

     (c) In the event that (i) a Parent Adverse Proposal shall have been made to
Parent or any of its Subsidiaries or any of its shareholders or any Person shall
have publicly announced an intention (whether or not conditional) to make a     
Parent Adverse Proposal and thereafter this Agreement is terminated by either   
the Company or Parent pursuant to Section 8.2(iii), (ii) this Agreement is      
terminated by the Company pursuant to Section 8.3(a)(i) or (iii) this Agreement 
is terminated by Parent pursuant to Section 8.4(b), then Parent shall, in the   
case of a termination pursuant to Section 8.4(b) prior to such termination, and 
otherwise promptly, but in no event later than two days after the date of such  
termination, pay the Company a termination fee of $85,000,000 and shall         
promptly, but in no event later than two days after being notified of such by   
the Company, pay all of the charges and expenses incurred by the Company in     
connection with this Agreement and the transactions contemplated by this        
Agreement up to a maximum amount of $15,000,000, in each case payable by wire   
transfer of same day funds; provided, however, that in the event of a           
termination pursuant to Section 8.2(iii) under the circumstances set forth in   
clause (i) of this Section 8.5(c), or a termination pursuant to Section         
8.3(a)(i), Parent shall (a) promptly, but in no event later than two days after 
being notified of such by the Company, pay all of the charges and expenses      
incurred by the Company in connection with this Agreement and the transactions  
contemplated hereby up to a maximum amount of                                   

A-32

S-4
289th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 289th

$15,000,000 and, (b) if Parent enters into a definitive agreement to consummate 
or consummates a Parent Adverse Proposal within 12 months from the date of such 
termination, at the time of the entering into of such agreement or such         
consummation, as applicable, pay the Company a termination fee of $85,000,000.  
Parent acknowledges that the agreements contained in this Section 8.5(c) are an 
integral part of the transactions contemplated by this Agreement and that,      
without these agreements, the Company would not enter into this Agreement;      
accordingly, if Parent fails to promptly pay the amount due pursuant to this    
Section 8.5(c), and, in order to obtain such payment, the Company commences a   
suit which results in a judgment against Parent for the fee set forth in this   
paragraph (c), Parent shall pay to the Company its costs and expenses (including
attorneys' fees) in connection with such suit, together with interest on the    
amount of the fee at the prime rate of Citibank, N.A. in effect on the date such
payment was required to be made.                                                

ARTICLE IX

MISCELLANEOUS AND GENERAL 

  9.1. Survival. This Article IX and the agreements of the Company, Parent
and Merger Sub contained in Sections 6.8 (Stock Exchange Listing and Delisting),
6.10 (Benefits), 6.11 (Expenses), 6.12 (Indemnification; Directors' and         
Officers' Insurance) and 6.16 (Taxation) shall survive the consummation of the  
Merger. This Article IX, the agreements of the Company, Parent and Merger Sub   
contained in Section 6.11 (Expenses), Section 8.5 (Effect of Termination and    
Abandonment) and the Confidentiality Agreement shall survive the termination of 
this Agreement. All other representations, warranties, covenants and agreements 
in this Agreement shall not survive the consummation of the Merger or the       
termination of this Agreement.                                                  

 9.2. Modification or Amendment. Subject to the provisions of applicable
law, at any time prior to the Effective Time, the parties hereto may modify or  
amend this Agreement, by written agreement executed and delivered by duly       
authorized officers of the respective parties.                                  

9.3. Waiver of Conditions. The conditions to each of the parties'     
obligations to consummate the Merger are for the sole benefit of such party and 
may be waived by such party in whole or in part to the extent permitted by      
applicable law.                                                                 

9.4. Counterparts. This Agreement may be executed in any number of    
counterparts, each such counterpart being deemed to be an original instrument,  
and all such counterparts shall together constitute the same agreement.         

9.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (A) THIS AGREEMENT
SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED,         
CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF        
MICHIGAN WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The parties  
hereby irrevocably submit to the jurisdiction of the courts of the State of     
Michigan and the Federal courts of the United States of America located in the  
State of Michigan solely in respect of the interpretation and enforcement of the
provisions of this Agreement and of the documents referred to in this Agreement,
and in respect of the transactions contemplated hereby, and hereby waive, and   
agree not to assert, as a defense in any action, suit or proceeding for the     
interpretation or enforcement hereof or of any such document, that it is not    
subject thereto or that such action, suit or proceeding may not be brought or is
not maintainable in said courts or that the venue thereof may not be appropriate
or that this Agreement or any such document may not be enforced in or by such   
courts, and the parties hereto irrevocably agree that all claims with respect to
such action or proceeding shall be heard and determined in such a Michigan State
or Federal court. The parties hereby consent to and grant any such court        
jurisdiction over the person of such parties and over the subject matter of such
dispute and agree that mailing of process or other papers in connection with any
such action or proceeding in the manner provided in Section 9.6 or in such other
manner as may be permitted by law shall be valid and sufficient service thereof.

     (b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND 
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND                                

A-33

S-4
290th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 290th

UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN      
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO  
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY   
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY 
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO    
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND        
CERTIFICATIONS IN THIS SECTION 9.5.                                             

9.6. Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered    
personally or sent by registered or certified mail, postage prepaid, or by      
facsimile:                                                                      

if to Parent or Merger Sub                                            

DTE Energy Company                                                    
2000 Second Avenue                                                    
Detroit, MI 48226                                                     
Attention: General Counsel                                            
fax: (313) 235-0121                                                   

(with a copy to Joseph B. Frumkin, Esq.,                              
Sullivan & Cromwell,                                                  
125 Broad Street                                                      
New York, NY 10004                                                    
fax: (212) 558-3588)                                                  

if to the Company                                                     

MCN Energy Group Inc.                                                 
500 Griswold Street                                                   
Detroit, MI 48226                                                     
Attention: General Counsel                                            
fax: (313) 965-0009                                                   

(with a copy to Seth A. Kaplan, Esq.,                                 
Wachtell, Lipton, Rosen & Katz                                        
51 West 52nd Street                                                   
New York, New York 10019                                              
fax: (212) 403-2000)                                                  

or to such other persons or addresses as may be designated in writing by the    
party to receive such notice as provided above.                                 

     9.7. Entire Agreement. This Agreement (including any exhibits or appendices
hereto), the Company Disclosure Letter, the Parent Disclosure Letter and the    
Confidentiality Agreement, dated August 30, 1999, between Parent and the Company
(the "Confidentiality Agreement") constitute the entire agreement, and supersede
all other prior agreements, understandings, representations and warranties both 
written and oral, among the parties, with respect to the subject matter hereof. 

9.8. No Third Party Beneficiaries. Except as provided in Section 6.12 
(Indemnification; Directors' and Officers' Insurance), this Agreement is not    
intended to confer upon any Person other than the parties hereto any rights or  
remedies hereunder.                                                             

A-34

S-4
291st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 291st

9.9. Obligations of Parent and of the Company. Whenever this Agreement
requires a Subsidiary of Parent to take any action, such requirement shall be   
deemed to include an undertaking on the part of Parent to cause such Subsidiary 
to take such action. Whenever this Agreement requires a Subsidiary of the       
Company to take any action, such requirement shall be deemed to include an      
undertaking on the part of the Company to cause such Subsidiary to take such    
action and, after the Effective Time, on the part of the Surviving Corporation  
to cause such Subsidiary to take such action.                                   

9.10. Severability. The provisions of this Agreement shall be deemed  
severable and the invalidity or unenforceability of any provision shall not     
affect the validity or enforceability or the other provisions hereof. If any    
provision of this Agreement, or the application thereof to any Person or any    
circumstance, is invalid or unenforceable, (a) a suitable and equitable         
provision shall be substituted therefor in order to carry out, so far as may be 
valid and enforceable, the intent and purpose of such invalid or unenforceable  
provision and (b) the remainder of this Agreement and the application of such   
provision to other Persons or circumstances shall not be affected by such       
invalidity or unenforceability, nor shall such invalidity or unenforceability   
affect the validity or enforceability of such provision, or the application     
thereof, in any other jurisdiction.                                             

 9.11. Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and     
shall not be deemed to limit or otherwise affect any of the provisions hereof.  
Where a reference in this Agreement is made to a Section or Exhibit, such       
reference shall be to a Section of or Exhibit to this Agreement unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used in  
this Agreement, they shall be deemed to be followed by the words "without       
limitation."                                                                    

  9.12. Assignment. This Agreement shall not be assignable by operation of
law or otherwise; provided, however, that Parent may designate, by written      
notice to the Company, another wholly owned direct or indirect subsidiary to be 
a Constituent Corporation in lieu of Merger Sub, in which event all references  
herein to Merger Sub shall be deemed references to such other subsidiary, except
that all representations and warranties made herein with respect to Merger Sub  
as of the date of this Agreement shall be deemed representations and warranties 
made with respect to such other subsidiary as of the date of such designation.  

A-35

S-4
292nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 292nd

    IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written 
above.                                                                          

                         MCN ENERGY GROUP INC.

                                  By:   /s/ ALFRED R. GLANCY III
                                            ------------------------------------
                                  Name: Alfred R. Glancy III
                                            Title: Chairman, President and Chief
                                       Executive Officer

                      DTE ENERGY COMPANY

                                   By:  /s/ ANTHONY F. EARLEY, JR.
                                            ------------------------------------
                                    Name: Anthony F. Earley, Jr.
                                        Title: Chairman of the Board and
                                                 Chief Executive Officer and
                                                   President and Chief Operating
                             Officer

                         DTE ENTERPRISES, INC.

                                   By:  /s/ ANTHONY F. EARLEY, JR.
                                            ------------------------------------
                                    Name: Anthony F. Earley, Jr.
                                        Title: Chairman, Chief Executive
                                            Officer and President.

A-36

S-4
293rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 293rd

                                                                     EXHIBIT A-1

[FORM OF AFFILIATE LETTER]

                                                                          [DATE]

DTE Energy Company                                                              
2000 2nd Avenue                                                                 
Detroit, Michigan 48226                                                         

Ladies and Gentlemen:                                                           

  I have been advised that as of the date hereof, I may be deemed to be an
"affiliate" of MCN Energy Group, a Michigan corporation (the "Company"), as that
term is defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules 
and Regulations (the "Rules and Regulations") of the Securities and Exchange    
Commission (the "Commission") under the Securities Act of 1933, as amended (the 
"Securities Act"). Pursuant to the terms of the Agreement and Plan of Merger    
dated as of October 4, 1999, as it may be amended, supplemented or modified from
time to time (the "Merger Agreement"), among the Company, DTE Energy Company, a 
Michigan corporation ("Parent"), and DTE Enterprises, Inc. a Michigan           
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), the Company 
will be merged with and into Merger Sub (the "Merger"), with Merger Sub as the  
surviving corporation in the Merger. Capitalized terms used but not defined     
herein shall have the respective meanings ascribed to such terms in the Merger  
Agreement.                                                                      

   In consideration of the agreements contained herein, Parent's reliance on
this letter in connection with the consummation of the Merger and for other good
and valuable consideration, the receipt and sufficiency of which are hereby     
acknowledged, I hereby represent, warrant and agree that I will not make any    
sale, transfer or other disposition of common stock, without par value, of      
Parent (the "Parent Common Stock") received by me pursuant to the Merger in     
violation of the Securities Act or the Rules and Regulations. I have been       
advised that the issuance of the shares of Parent Common Stock pursuant to the  
Merger will have been registered with the Commission under the Securities Act on
a Registration Statement on Form S-4. I have also been advised, however, that   
since I may be deemed to be an affiliate of the Company at the time the Merger  
is submitted for a vote of the shareholders of the Company, the Parent Common   
Stock received by me may be disposed by me only (i) pursuant to an effective    
registration statement under the Securities Act, (ii) in conformity with the    
volume and other limitations of Rule 145 promulgated by the Commission under the
Securities Act, or (iii) in reliance upon an exemption from registration that is
available under the Securities Act.                                             

I also understand that instructions will be given to Parent's transfer
agent with respect to the Parent Common Stock to be received by me pursuant to  
the Merger and that there will be placed on the certificates representing such  
shares of Parent Common Stock, or any substitutes therefor, a legend stating in 
substance as follows:                                                           

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED IN A 
     TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, APPLIES AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IN  
    COMPLIANCE WITH THE REQUIREMENTS OF RULE 145 OR PURSUANT TO A REGISTRATION
STATEMENT UNDER THAT ACT OR AN EXEMPTION FROM SUCH REGISTRATION."     

It is understood and agreed that the legend set forth above shall be  
removed upon surrender of certificates bearing such legend by delivery of       
substitute certificates without such legend if I shall have delivered to Parent 
an opinion of counsel, in form and substance reasonably satisfactory to Parent, 
to the effect that (i) the sale or disposition of the shares represented by the 
surrendered certificates may be effected without registration of the offering,  
sale and delivery of such shares under the Securities Act, and (ii) the shares  
to be so transferred may be publicly offered, sold and delivered by the         
transferee thereof without compliance with the registration provisions of the   
Securities Act.                                                                 

 A-A-1

S-4
294th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 294th

I further understand and agree that Parent is under no obligation to  
register the sale, transfer or other disposition of the Parent Common Stock by  
me or on my behalf under the Securities Act or to take any other action         
necessary in order to make compliance with an exemption from such registration  
available.                                                                      

     This letter agreement constitutes the complete understanding between Parent
and me concerning the subject matter hereof. Any notice required to be sent to  
either party hereunder shall be sent by registered or certified mail, return    
receipt requested, using the addresses set forth herein or such other address as
shall be furnished in writing by the parties. This letter agreement shall be    
governed by, and construed and interpreted in accordance with, the laws of the  
State of New York.                                                              

   If you are in agreement with the foregoing, please so indicate by signing
below and returning a copy of this letter to the undersigned, at which time this
letter shall become a binding agreement between us.                             

                     Very truly yours,

                                          --------------------------------------
         Name:

Accepted this                day                                                
of                , 199  by                                                     

DTE Energy Company                                                              

By:                                                                             
----------------------------------------------------                            
Name:                                                                           
Title:                                                                          

 A-A-2

S-4
295th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 295th

[LETTERHEAD OF WARBURG DILLION READ LLC]

                                                                      APPENDIX B

October 4, 1999                                                                 

The Board of Directors                                                          
DTE Energy Company                                                              
2000 2nd Avenue                                                                 
Detroit, Michigan 48226                                                         

Dear Sirs and Madam:                                                            

   You have requested our opinion as to the fairness, from a financial point
of view, of the Consideration (as defined below) to be paid by DTE Energy       
Company, a Michigan corporation ("DTE" or the "Company"), pursuant to the       
Agreement and Plan of Merger dated October 4, 1999 ("Merger Agreement"), by and 
among DTE, MCN Energy Group Inc., a Michigan corporation ("MCN"), and DTE       
Enterprises, Inc., a Michigan corporation and wholly owned subsidiary of the    
Company ("Merger Sub"). At the Effective Time (as defined in Section 1.3 of the 
Merger Agreement), MCN shall be merged (the "Merger") with and into Merger Sub, 
and the separate corporate existence of MCN shall cease. Merger Sub shall be the
surviving corporation in the Merger, and the separate corporate existence of    
Merger Sub shall continue unaffected, except as specified by the Merger         
Agreement. Pursuant to the terms of the Merger Agreement, at the Effective Time,
(i) each of the issued and outstanding shares of the common stock of MCN, par   
value of $0.01 per share (including the associated Right (as defined in the     
Merger Agreement), the "MCN Common Stock") will be converted into the right to  
receive either $28.50 in cash or 0.775 shares of DTE common stock, without par  
value ("DTE Common Stock"), subject to the Allocation and Election Procedures   
defined in Section 4.2 of the Merger Agreement, whereby 55% of the total        
consideration for the MCN Common Stock will be paid in cash, with the remaining 
45% paid in DTE Common Stock (such consideration, the "MCN Common Stock         
Consideration") and (ii) each outstanding option to purchase MCN Common Stock   
shall be deemed to constitute an option to purchase DTE Common Stock subject to 
the terms of, and in the manner contemplated by, Section 6.10(a) of the Merger  
Agreement (the "MCN Option Consideration" and, together with the MCN Common     
Stock Consideration, the "Consideration").                                      

In arriving at our opinion, we have, among other things: (i) reviewed 
certain publicly available business and historical financial information        
relating to DTE and MCN, (ii) reviewed certain internal financial information   
and other data relating to the business and financial prospects of DTE and MCN, 
including estimates and financial forecasts prepared by management of DTE and   
MCN, that were provided to us by DTE and MCN and not publicly available, (iii)  
conducted discussions with members of the senior management of DTE and MCN with 
respect to the business and prospects of DTE and MCN, (iv) reviewed publicly    
available financial and stock market data of diversified natural gas companies  
which are, in our opinion, generally comparable to MCN, (v) reviewed publicly   
available financial and stock market data of certain natural gas distribution   
companies which are, in our opinion, generally comparable to MCN's natural gas  
distribution subsidiary, (vi) compared the financial terms of the Merger        
Agreement with the publicly available financial terms of certain transactions   
which are, in our opinion, generally comparable, (vii) performed a segment      
analysis of MCN, (viii) performed a discounted cash flow analysis of certain    
business operations of MCN based on financial forecasts provided by management  
of DTE and MCN, (ix) reviewed publicly available financial and stock market data
of certain electric utilities which are, in our opinion, generally comparable to
DTE, (x) considered certain pro forma effects of the Merger on DTE's financial  
statements and reviewed certain estimates of synergies prepared by DTE          
management, (xi) considered the strategic advantages of the Merger, (xii)       
reviewed the Merger Agreement, and (xiii) conducted such other financial        
studies, analyses, and investigations, and considered such other information as 
we deemed necessary or appropriate.                                             

   In connection with our review, at your direction, we have not assumed any
responsibility for independent verification of any of the information reviewed  
by us for the purpose of this opinion and have, at your direction, relied on its
being complete and accurate in all material respects. In addition, at your      
direction, we have not                                                          

S-4
296th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 296th

made any independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of the Company or MCN, nor have we been furnished with
any such evaluation or appraisal. With respect to the financial forecasts       
referred to above, we have assumed, at your direction, that they have been      
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of each company as to the future performance of 
their respective company.                                                       

   In addition, we have assumed with your approval that the future financial
results referred to above will be achieved at the times and in the amounts      
projected by management. Our opinion is necessarily based on economic, monetary,
market and other conditions as in effect on, and the information made available 
to us as of, the date hereof.                                                   

    Our opinion does not address the Company's underlying business decision to
effect the Merger or constitute a recommendation to any shareholder of the      
Company or MCN as to how such shareholder should vote with respect to the       
Merger. At your direction, we have not been asked to, nor do we, offer any      
opinion as to the material terms of the Merger Agreement or the form of the     
Merger. In rendering this opinion, we have assumed, with your consent, that the 
Company and MCN will comply with all the material terms of the Merger Agreement.

     Warburg Dillon Read LLC ("WDR") has acted as financial advisor to the Board
of Directors of the Company in connection with the Merger and will receive a fee
upon the consummation thereof. In the ordinary course of business, WDR, its     
successors and affiliates may trade securities of the Company and MCN for their 
own accounts and, accordingly, may at any time hold a long or short position in 
such securities.                                                                

 Based upon and subject to the foregoing, it is our opinion that, as the
date hereof, the Consideration to be paid by the Company pursuant to the Merger 
Agreement is fair, from a financial point of view, to the Company.              

Very truly yours, 

WARBURG DILLON READ LLC 

 B-2

S-4
297th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 297th

                                                                      APPENDIX C

[Letterhead of Merrill Lynch] 

October 4, 1999 

Board of Directors                                                              
MCN Energy Group Inc.                                                           
500 Griswold Street                                                             
Detroit, Michigan 48226                                                         

Members of the Board of Directors:                                              

   MCN Energy Group Inc. (the "Company"), DTE Energy Company ("DTE") and DTE
Enterprises, Inc., a newly formed, wholly owned subsidiary of DTE ("DTE Sub"),  
propose to enter into an Agreement and Plan of Merger, dated as of October 4,   
1999 (the "Agreement"), pursuant to which the Company will be merged with DTE   
Sub in a transaction (the "Merger") in which each outstanding share of the      
Company's common stock, par value $0.01 per share (the "Company Shares"), will  
be converted into the right to receive either (i) $28.50 in cash (the "Cash     
Consideration") or (ii) 0.775 shares of the common stock of DTE, without par    
value (the "DTE Shares" and together with the Cash Consideration, the "Merger   
Consideration"), as the holder thereof shall have elected, subject to the terms,
limitations and procedures set forth in the Agreement, which include a          
limitation on the aggregate amount of cash available to be paid and the         
aggregate number of DTE Shares to be issued pursuant to the Merger.             

   You have asked us whether, in our opinion, the Merger Consideration to be
received by the holders of the Company Shares pursuant to the Merger is fair    
from a financial point of view to such holders.                                 

    In arriving at the opinion set forth below, we have, among other
things:                                                               

(1) Reviewed certain publicly available business and financial  
        information relating to the Company and DTE that we deemed to be
relevant;                                               

(2) Reviewed certain information, including financial forecasts,
          relating to the business, earnings, cash flow, assets, liabilities
       and prospects of the Company and DTE, as well as the amount and
          timing of the cost savings and related expenses expected to result
from the Merger furnished to us by the Company and DTE, 
respectively;                                           

(3) Conducted discussions with members of senior management and 
     representatives of the Company and DTE concerning the matters
       described in clauses 1 and 2 above, as well as their respective
      businesses and prospects before and after giving effect to the
Merger;                                                 

      (4) Reviewed the market prices and valuation multiples for the Company
     Shares and DTE Shares and compared them with those of certain
publicly traded companies that we deemed to be relevant;

 (5) Reviewed the results of operations of the Company and DTE and
          compared them with those of certain publicly traded companies that
we deemed to be relevant;                               

(6) Compared the proposed financial terms of the Merger with the
          financial terms of certain other transactions that we deemed to be
relevant;                                               

(7) Participated in certain discussions and negotiations among  
            representatives of the Company and DTE and their financial and legal
advisors;                                               

(8) Reviewed the potential pro forma impact of the Merger;      

(9) Reviewed the Agreement; and                                 

S-4
298th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 298th

   (10) Reviewed such other financial studies and analyses and took into
        account such other matters as we deemed necessary, including our
       assessment of general economic, market and monetary conditions.

  In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,     
discussed with or reviewed by or for us, or publicly available, and we have not 
assumed any responsibility for independently verifying such information or      
undertaken an independent evaluation or appraisal of any of the assets or       
liabilities of the Company or DTE or been furnished with any such evaluation or 
appraisal. In addition, we have not assumed any obligation to conduct any       
physical inspection of the properties or facilities of the Company or DTE. With 
respect to the financial forecast information furnished to or discussed with us 
by the Company or DTE, we have assumed that they have been reasonably prepared  
and reflect the best currently available estimates and judgment of the Company's
or DTE's management as to the expected future financial performance of the      
Company or DTE, as the case may be. We have further assumed that the Merger will
qualify as a tax-free reorganization for U.S. federal income tax purposes.      

     Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to 
us as of, the date hereof. We have assumed that in the course of obtaining the  
necessary regulatory or other consents or approvals (contractual or otherwise)  
for the Merger, no restrictions, including any divestiture requirements or      
amendments or modifications, will be imposed that will have a material adverse  
effect on the contemplated benefits of the Merger.                              

In connection with the preparation of this opinion, we have not been  
authorized by the Company or the Board of Directors to solicit, nor have we     
solicited, third-party indications of interest for the acquisition of or        
business combination involving all or any part of the Company.                  

  We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant  
portion of which is contingent upon the consummation of the Merger. In addition,
the Company has agreed to indemnify us for certain liabilities arising out of   
our engagement. We have, in the past, provided financial advisory and financing 
services to the Company and/or its affiliates and may continue to do so and are 
currently providing financing services to an affiliate of DTE and have received,
and may receive, fees for the rendering of such services. In addition, in the   
ordinary course of our business, we may actively trade the Company Shares and   
other securities of the Company, as well as DTE Shares and other securities of  
DTE, for our own account and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.                   

  This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by  
the Company to engage in the Merger and does not constitute a recommendation to 
any shareholder as to how such shareholder should vote on the proposed Merger or
any matter related thereto.                                                     

We are not expressing any opinion herein as to the prices at which the
Company Shares or DTE Shares will trade following the announcement or           
consummation of the Merger, as the case may be.                                 

   On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Merger Consideration to be received by the holders of
the Company Shares pursuant to the Merger is fair from a financial point of view
to the holders of such shares.                                                  

                 Very truly yours,

                                     MERRILL LYNCH, PIERCE, FENNER & SMITH
                                  INCORPORATED

 C-2

S-4
299th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 299th

PART II 

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.                             

   (a) Indemnification. The DTE Energy Company Amended and Restated Articles
of Incorporation provide that, to the fullest extent permitted by the Michigan  
Business Corporations Act (the "Act") or any other applicable law no director of
DTE shall be personally liable to DTE or its shareholders for or with respect to
any acts or omissions in the performance of his or her duties as a director of  
DTE.                                                                            

  DTE's articles of incorporation further state that each person who is or
was or had agreed to become a director or officer of DTE, or each such person   
who is or was serving or who had agreed to serve at the request of DTE's board  
of directors as an employee or agent of DTE or as a director, officer, employee 
or agent of another corporation, partnership, joint venture, trust or other     
enterprise (including the heirs, executors, administrators or estate of such    
person), shall be indemnified by DTE to the fullest extent permitted by the Act 
or by another other applicable law.                                             

   DTE's articles of incorporation further state that DTE may enter into one
or more agreements with any person which agreements provide for indemnification 
greater or different than that provided in the articles of incorporation.       

 Section 209(c) of the Act permits a corporation to eliminate or limit a
director's liability to the corporation or its shareholders for money damages   
for any action taken or any failure to take action as a director, except        
liability for (1) the amount of financial benefit received by a director to     
which he or she is not entitled; (2) the intentional infliction of harm on the  
corporation or the shareholders; (3) a violation of Section 551 of the Act,     
dealing with unlawful distributions; or (4) for an intentional criminal act.    

Sections 561 and 562 of the Act permit a corporation to indemnify its 
directors and officers against expenses (including attorneys' fees), judgments, 
fines and amounts paid in settlement actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties, if such
directors or officers acted in good faith and in a manner they reasonably       
believed to be in or not opposed to the best interests of the corporation and,  
with respect to any criminal action or proceeding, had no reasonable cause to   
believe their conduct was unlawful. In a derivative action, i.e., one by or in  
the right of the corporation, indemnification may be made for expenses actually 
and reasonably incurred by directors and officers in connection with the defense
or settlement of an action or suit, but only with respect to a matter as to     
which they have acted in good faith and in a manner they reasonably believed to 
be in or not opposed to the best interests of the corporation, except that no   
indemnification will be made if such person will have been found liable to the  
corporation, unless and only to the extent that the court in which the action or
suit was brought will determine upon application that the defendant officers or 
directors are fairly and reasonably entitled to indemnity for such expenses     
despite such adjudication of liability.                                         

Section 563 of the Act is an imperative provision which states that a 
director or officer who has been successful on the merits or otherwise in       
defense of an action suit or proceeding referred to in Sections 561 and 562     
shall be indemnified against actual and reasonable expenses, including          
attorney's fees, incurred by him or her in connection with the action, suit or  
proceeding, or proceeding brought to enforce this mandatory indemnification.    

(b) Insurance. DTE (with respect to indemnification liability) and its
directors and officers (in their capacities as such) are insured against        
liability for wrongful acts (to the extent defined) under three insurance       
policies providing aggregate coverage in the amount of $100 million.            

II-1

S-4
300th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 300th

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.                            

                                                                [Download Table]

EXHIBIT                                                                
NUMBER                             DESCRIPTION                         
-------                            -----------                         
                                                                       
   2.1     Agreement and Plan of Merger, among DTE Energy Company, MCN 
           Energy Group Inc. and DTE Enterprises, Inc., dated as of    
           October 4, 1999 (included as Appendix A to the Joint Proxy  
           Statement/Prospectus contained in this Registration         
           Statement).                                                 
   3.1     Amended and Restated Articles of Incorporation of DTE Energy
           Company (incorporated herein by reference to Exhibit 3-5 to 
           DTE's Form 10-Q for the quarter ended September 30, 1997    
           (file No. 1-11607)), dated December 13, 1995, as amended by 
           Certificate of Designation of Series A Junior Participating 
           Preferred Stock of DTE Energy Company (incorporated by      
           reference to Exhibit 3-6 to DTE's Form 10-Q for the quarter 
           ended September 30, 1997).                                  
   3.2     Articles of Incorporation of MCN Energy Group Inc., dated   
           August 12, 1988, as amended by Certificates of Amendment    
           dated December 28, 1989 and May 2, 1994 (incorporated herein
           by reference to Exhibit 3-1 to MCN's Form 10-Q for the      
           quarter ended March 31, 1998 (file No. 1-10007)).           
   3.3     Bylaws of DTE Energy Company, as amended through September  
           22, 1999.                                                   
   3.4     Bylaws of MCN Energy Group Inc., as amended through February
           27, 1998. (Incorporated herein by reference to Exhibit 3-2  
           to MCN's Form 10-K for the fiscal year ended December 31,   
           1997 (file No. 1-10007)).                                   
   3.5     Articles of Incorporation of DTE Enterprises, Inc.          
   3.6     Bylaws of DTE Enterprises, Inc.                             
   4.1     See Exhibits 3.1 and 3.3 for provisions of the DTE Energy   
           Company Amended and Restated Articles of Incorporation and  
           the DTE Energy Company By-Laws defining rights of holders of
           DTE common stock.                                           
   4.2     Rights Agreement, dated as of September 23, 1997, between   
           DTE Energy Company and The Detroit Edison Company, as Rights
           Agent, including the Form of Rights Certificate attached as 
           Exhibit B thereto. (incorporated herein by reference to     
           Exhibit 4.1 to DTE's Current Report on Form 8-K, dated      
           September 23, 1997.                                         
   4.3     Rights Agreement, dated as of December 20, 1989, as amended,
           between MCN Corporation and National Bank of Detroit, as    
           Rights Agent. (incorporated herein by reference to Exhibit  
           28-1 to MCN's Form 8-K dated December 20, 1989, Exhibit 4 to
           MCN's Form 8-K dated July 23, 1997 and Exhibit 4.2 and 4.4  
           to MCN's Form 8-A/A dated October 4, 1999 (file No.         
           1-10007)).                                                  
   5.1     Opinion of Christopher C. Nern, General Counsel of DTE      
           Energy Company, regarding validity of securities being      
           registered.*                                                
   8.1     Opinion of Sullivan & Cromwell regarding material federal   
           income tax consequences.*                                   
   8.2     Opinion of Wachtell, Lipton, Rosen & Katz regarding material
           federal income tax consequences.*                           
  12.1     Computation of Ratio of Earnings to Fixed Charges for MCN   
           Energy Group Inc.                                           
  15.1     Awareness Letter of Deloitte & Touche, LLP relating to DTE. 
  23.1     Consent of Deloitte & Touche, LLP relating to DTE.          
  23.2     Consent of Deloitte & Touche, LLP relating to MCN.          
  23.3     Consent of Christopher C. Nern, General Counsel of DTE      
           Energy Company (included in the opinion filed as Exhibit 5.1
           to this Registration Statement).*                           
  23.4     Consent of Sullivan & Cromwell (included in the opinion     
           filed as Exhibit 8.1 to this Registration Statement).*      
  23.5     Consent of Wachtell, Lipton, Rosen & Katz (included in the  
           opinion filed as Exhibit 8.2 to this Registration           
           Statement).*                                                

II-2

S-4
301st Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 301st

                                                                [Download Table]

EXHIBIT                                                          
NUMBER                             DESCRIPTION                   
-------                            -----------                   
                                                                 
  23.6     Consent of Warburg Dillon Read LLC.                   
  23.7     Consent of Merrill Lynch, Pierce, Fenner & Smith      
           Incorporated.                                         
  23.8     Consent of Ryder Scott Company.                       
  23.9     Consent of Miller and Lents, Ltd.                     
  23.10    Consent of Holditch-Reservoir Technologies.           
  23.11    Consent of Netherland, Sewell & Associates, Inc.      
  23.12    Consent of Williamson Petroleum Consultants, Inc.     
  24.1     Powers of Attorney.                                   
  99.1     Form of Proxy Card of DTE Energy Company.             
  99.2     Form of Proxy Card of MCN Energy Group Inc.           
  99.3     Consent of Person Named as About to Become a Director.

-------------------------                                                       
* To be filed by amendment.                                                     

ITEM 22. UNDERTAKINGS.                                                          

(a) The undersigned Registrant hereby undertakes:                     

     (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:      

           (i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;                                         

             (ii) To reflect in the prospectus any facts or events arising after
    the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the 
      aggregate, represent a fundamental change in the information set forth
 in the Registration Statement. Notwithstanding the foregoing, any
  increase or decrease in volume of securities offered (if the total
  dollar value of securities offered would not exceed that which was
       registered) and any deviation from the low or high end of the estimated
       maximum offering range may be reflected in the form of prospectus filed
       with the Securities and Exchange Commission pursuant to Rule 424(b) if,
        in the aggregate, the changes in volume and price represent no more than
      20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective    
registration statement; and                                     

            (iii) To include any material information with respect to the plan
      of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration  
Statement.                                                      

     provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
  the Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
    information required to be included in a post-effective amendment by those
    paragraphs is contained in periodic reports filed with or furnished to the
     Securities and Exchange Commission by the registrant pursuant to Section 13
  or 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.                              

    (2) That, for the purpose of determining any liability under the
    Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered 
   therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.                         

          (3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the     
termination of the offering;                                          

II-3

S-4
302nd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 302nd

(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the  
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities 
Exchange Act of 1934 that is incorporated by reference in the Registration      
Statement shall be deemed to be a new registration statement relating to the    
securities offered therein, and the offering of such securities at that time    
shall be deemed to be the initial bona fide offering thereof.                   

    (c)(1) The undersigned registrant undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a       
prospectus which is a part of this Registration Statement, by any person or     
party who is deemed to be an underwriter within the meaning of Rule 145(c), the 
issuer undertakes that such reoffering prospectus will contain the information  
called for by the applicable registration form with respect to reofferings by   
persons who may be deemed underwriters, in addition to the information called   
for by the other items of the applicable form.                                  

    (2) The undersigned registrant hereby undertakes that every prospectus (i)
that is filed pursuant to paragraph (1) immediately preceding, or (ii) that     
purports to meet the requirements of Section 10(a)(3) of the Securities Act of  
1933 and is used in connection with an offering of securities subject to Rule   
415, will be filed as a part of an amendment to the Registration Statement and  
will not be used until such amendment is effective, and that, for purposes of   
determining any liability under the Securities Act of 1933, each such post-     
effective amendment shall be deemed to be a new registration statement relating 
to the securities offered therein, and the offering of such securities at that  
time will be deemed to be the initial bona fide offering thereof.               

     (d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of  
the registrant pursuant to the foregoing provisions, or otherwise, the          
registrant has been advised that in the opinion of the Securities and Exchange  
Commission such indemnification is against public policy as expressed in the    
Securities Act of 1933 and is, therefore, unenforceable. In the event that a    
claim for indemnification against such liabilities (other than the payment by   
the registrant of expenses incurred or paid by a director, officer or           
controlling person of the registrant in the successful defense of any action,   
suit or proceeding) is asserted by such director, officer or controlling person 
in connection with the securities being registered, the registrant will, unless 
in the opinion of its counsel the matter has been settled by controlling        
precedent, submit to a court of appropriate jurisdiction the question whether   
such indemnification by it is against public policy as expressed in the         
Securities Act of 1933 and will be governed by the final adjudication of such   
issue.                                                                          

     (e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to   
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other    
equally prompt means. This includes information contained in documents filed    
subsequent to the effective date of the registration statement through the date 
of responding to the request.                                                   

  (f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the      
company being acquired involved therein, that was not the subject of and        
included in the registration statement when it became effective.                

II-4

S-4
303rd Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 303rd

SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the    
requirements for filing on Form S-4 and has duly caused this registration       
statement to be signed on its behalf by the undersigned, thereunto duly         
authorized, in the City of Detroit, State of Michigan on the 15th day of        
October, 1999.                                                                  

                      DTE ENERGY COMPANY
                        (Registrant)

                                   By:  /s/ ANTHONY F. EARLEY, JR.

                                            ------------------------------------
                               (Anthony F. Earley, Jr.
                              Chairman of the Board,
                                Chief Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, this      
registration statement has been signed below by the following persons in the    
capacities and on the dates indicated.                                          

                                                        [Enlarge/Download Table]

             SIGNATURE                                    TITLE                     DATE      
             ---------                                    -----                     ----      
                                                                                              
   PRINCIPAL EXECUTIVE OFFICERS:                                                              

     /s/ ANTHONY F. EARLEY, JR.       Chairman of the Board, Chief Executive  October 15, 1999
------------------------------------  Officer and Director                                    
      (Anthony F. Earley, Jr.)                                                                

       /s/ GERARD M. ANDERSON         President, DTE Energy Resources         October 15, 1999
------------------------------------                                                          
        (Gerard M. Anderson)                                                                  

       /s/ ROBERT J. BUCKLER          President, DTE Energy Distribution      October 15, 1999
------------------------------------                                                          
        (Robert J. Buckler)                                                                   

   PRINCIPAL FINANCIAL OFFICERS:                                                              

      /s/ LARRY G. GARBERDING         Executive Vice President,               October 15, 1999
------------------------------------  Chief Financial Officer and Director                    
       (Larry G. Garberding)                                                                  

        /s/ DAVID E. MEADOR           Vice President                          October 15, 1999
------------------------------------                                                          
         (David E. Meador)                                                                    

        TERENCE E. ADDERLEY           Director                                October 15, 1999
------------------------------------                                                          
       (Terence E. Adderley)                                                                  

II-5

S-4
304th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 304th

                                                                [Download Table]

             SIGNATURE                          TITLE        DATE      
             ---------                          -----        ----      
                                                                       

         /s/ LILLIAN BAUDER           Director         October 15, 1999
------------------------------------                                   
          (Lillian Bauder)                                             

           /s/ DAVID BING             Director         October 15, 1999
------------------------------------                                   
            (David Bing)                                               

       /s/ WILLIAM C. BROOKS          Director         October 15, 1999
------------------------------------                                   
        (William C. Brooks)                                            

        /s/ ALLAN D. GILMOUR          Director         October 15, 1999
------------------------------------                                   
         (Allan D. Gilmour)                                            

     /s/ THEODORE S. LEIPPRANDT       Director         October 15, 1999
------------------------------------                                   
      (Theodore S. Leipprandt)                                         

         /s/ JOHN E. LOBBIA           Director         October 15, 1999
------------------------------------                                   
          (John E. Lobbia)                                             

        /s/ EUGENE A. MILLER          Director         October 15, 1999
------------------------------------                                   
         (Eugene A. Miller)                                            

     /s/ CHARLES W. PRYOR, JR.        Director         October 15, 1999
------------------------------------                                   
      (Charles W. Pryor, Jr.)                                          

       /s/ DEAN E. RICHARDSON         Director         October 15, 1999
------------------------------------                                   
        (Dean E. Richardson)                                           

II-6

S-4
305th Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 305th

EXHIBIT INDEX 

                                                                [Download Table]

EXHIBIT                                                                
NUMBER                             DESCRIPTION                         
-------                            -----------                         
                                                                       
   2.1     Agreement and Plan of Merger, among DTE Energy Company, MCN 
           Energy Group Inc. and DTE Enterprises, Inc., dated as of    
           October 4, 1999 (included as Appendix A to the Joint Proxy  
           Statement/Prospectus contained in this Registration         
           Statement).                                                 
   3.1     Amended and Restated Articles of Incorporation of DTE Energy
           Company (incorporated herein by reference to Exhibit 3-5 to 
           DTE's Form 10-Q for the quarter ended September 30, 1997    
           (file No. 1-11607)), dated December 13, 1995, as amended by 
           Certificate of Designation of Series A Junior Participating 
           Preferred Stock of DTE Energy Company (incorporated by      
           reference to Exhibit 3-6 to DTE's Form 10-Q for the quarter 
           ended September 30, 1997).                                  
   3.2     Articles of Incorporation of MCN Energy Group Inc., dated   
           August 12, 1988, as amended by Certificates of Amendment    
           dated December 28, 1989 and May 2, 1994 (incorporated herein
           by reference to Exhibit 3-1 to MCN's Form 10-Q for the      
           quarter ended March 31, 1998 (file No. 1-10007)).           
   3.3     Bylaws of DTE Energy Company, as amended through September  
           22, 1999.                                                   
   3.4     Bylaws of MCN Energy Group Inc., as amended through February
           27, 1998. (Incorporated herein by reference to Exhibit 3-2  
           to MCN's Form 10-K for the fiscal year ended December 31,   
           1997 (file No. 1-10007)).                                   
   3.5     Articles of Incorporation of DTE Enterprises, Inc.          
   3.6     Bylaws of DTE Enterprises, Inc.                             
   4.1     See Exhibits 3.1 and 3.3 for provisions of the DTE Energy   
           Company Amended and Restated Articles of Incorporation and  
           the DTE Energy Company By-Laws defining rights of holders of
           DTE common stock.                                           
   4.2     Rights Agreement, dated as of September 23, 1997, between   
           DTE Energy Company and The Detroit Edison Company, as Rights
           Agent, including the Form of Rights Certificate attached as 
           Exhibit B thereto. (incorporated herein by reference to     
           Exhibit 4.1 to DTE's Current Report on Form 8-K, dated      
           September 23, 1997.                                         
   4.3     Rights Agreement, dated as of December 20, 1989, as amended,
           between MCN Corporation and National Bank of Detroit, as    
           Rights Agent. (incorporated herein by reference to Exhibit  
           28-1 to MCN's Form 8-K dated December 20, 1989, Exhibit 4 to
           MCN's Form 8-K dated July 23, 1997 and Exhibit 4.2 and 4.4  
           to MCN's Form 8-A/A dated October 4, 1999 (file No.         
           1-10007)).                                                  
   5.1     Opinion of Christopher C. Nern, General Counsel of DTE      
           Energy Company, regarding validity of securities being      
           registered.*                                                
   8.1     Opinion of Sullivan & Cromwell regarding material federal   
           income tax consequences.*                                   
   8.2     Opinion of Wachtell, Lipton, Rosen & Katz regarding material
           federal income tax consequences.*                           
  12.1     Computation of Ratio of Earnings to Fixed Charges for MCN   
           Energy Group Inc.                                           
  15.1     Awareness Letter of Deloitte & Touche, LLP relating to DTE. 
  23.1     Consent of Deloitte & Touche, LLP relating to DTE.          
  23.2     Consent of Deloitte & Touche, LLP relating to MCN.          
  23.3     Consent of Christopher C. Nern, General Counsel of DTE      
           Energy Company (included in the opinion filed as Exhibit 5.1
           to this Registration Statement).*                           
  23.4     Consent of Sullivan & Cromwell (included in the opinion     
           filed as Exhibit 8.1 to this Registration Statement).*      
  23.5     Consent of Wachtell, Lipton, Rosen & Katz (included in the  
           opinion filed as Exhibit 8.2 to this Registration           
           Statement).*                                                

S-4
Last Page of 306
TOC
1st
Previous
Next
↓Bottom
Just 306th

                                                                [Download Table]

EXHIBIT                                                          
NUMBER                             DESCRIPTION                   
-------                            -----------                   
                                                                 
  23.6     Consent of Warburg Dillon Read LLC.                   
  23.7     Consent of Merrill Lynch, Pierce, Fenner & Smith      
           Incorporated.                                         
  23.8     Consent of Ryder Scott Company.                       
  23.9     Consent of Miller and Lents, Ltd.                     
  23.10    Consent of Holditch-Reservoir Technologies.           
  23.11    Consent of Netherland, Sewell & Associates, Inc.      
  23.12    Consent of Williamson Petroleum Consultants, Inc.     
  24.1     Powers of Attorney.                                   
  99.1     Form of Proxy Card of DTE Energy Company.             
  99.2     Form of Proxy Card of MCN Energy Group Inc.           
  99.3     Consent of Person Named as About to Become a Director.

-------------------------                                                       
* To be filed by amendment.