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UNITED STATES

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the Quarterly Period ended September 30, 2003

Commission file number 1-7310

     The registrant meets the conditions set forth in General Instructions H (1)(a) and (b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure format.

Michigan Consolidated Gas Company

313-235-4000

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ          No o

     Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act.

Yes o          No þ

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MICHIGAN CONSOLIDATED GAS COMPANY

QUARTERLY REPORT ON FORM 10-Q

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Units of Measurement:

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      Certain information presented herein 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. There are many factors that may impact forward-looking statements including, but not limited to, the following:

	•	the effects of weather and other natural phenomena on operations and sales to customers;
	•	economic climate and growth in the geographic areas where we do business;
	•	environmental issues, including changes in the climate, and regulations;
	•	implementation of gas Customer Choice programs;
	•	implementation of gas utility restructuring in Michigan;
	•	employee relations and the impact of collective bargaining agreements;
	•	capital market conditions and access to capital markets and other financing efforts that can be affected by credit agency ratings;
	•	the timing and extent of changes in interest rates;
	•	the level of borrowings;
	•	changes in the cost of natural gas;
	•	effects of competition;
	•	impact of FERC and MPSC proceedings and regulations;
	•	changes in federal or state tax laws and their interpretations, including the code, regulations, rulings, court proceedings and audits;
	•	ability to recover costs through rate increases;
	•	property insurance;
	•	the cost of protecting assets against or damage due to terrorism;
	•	changes in accounting standards and financial reporting regulations; and
	•	changes in federal or state laws and their interpretation with respect to regulation, energy policy and other related business issues.

      New factors emerge from time to time. We cannot predict what factors may arise or how such factors may cause our results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

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      The Results of Operations discussion for MichCon is presented in accordance with General Instruction H(2)(a) of Form 10-Q.

      MichCon reported losses of $37 million and earnings of $27 million for the third quarter and nine-month period of 2003, respectively, compared with losses of $20 million and earnings of $1 million for the comparable 2002 periods. Results for both the 2003 quarter and nine-month period were impacted by increases in operation and maintenance expenses due to higher employee pension and health care benefit costs, higher uncollectible accounts expense and increased costs associated with customer service process improvements. Higher earnings for the 2003 nine-month period were primarily due to improved gross margins, as well as charges recorded in the second quarter of 2002 from the planned sale of our former headquarters and the termination of a contract for computer services.

      Operating revenues increased $25 million and $136 million in the third quarter and nine-month period of 2003, respectively, reflecting increased gas sales and varying end user transportation revenues.

      Gas sales and end user transportation revenues in total increased $22 million and $126 million in the third quarter and nine-month period of 2003, respectively. The increase is due primarily to an increase in Gas Cost

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      Intermediate transportation revenues remained unchanged in the 2003 third quarter and increased $2 million for the 2003 nine-month period. Intermediate transportation deliveries increased 32 billion cubic feet (Bcf) in the 2003 third quarter and 78 Bcf in the 2003 nine-month period. A significant portion of the volume increase was due to storage requirements combined with a volume increase attributable to 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.

      Cost of gas is affected by variations in sales volumes, cost of purchased gas and related transportation costs. Cost of gas sold increased by $25 million and $106 million in the third quarter and nine-month period of 2003, respectively. The average cost of gas sold increased $1.85 per Mcf (82.9%) and $.56 per Mcf (12.5%) for the third quarter and nine-month period, respectively, from the comparable 2002 periods.

      Operation and maintenance expenses increased $17 million and $38 million for the third quarter and nine-month period, respectively, from the comparable 2002 periods due to higher employee pension and health care benefit costs, higher uncollectible accounts expense and increased costs associated with customer service process improvements. Operation and maintenance expenses benefited from our Company-wide initiative to reduce or defer costs and enhance operating performance. The DTE Operating System involves the rigorous disciplined application of tools and operating practices which have resulted in inventory reductions and improvements in technology systems, among other enhancements. As a result of the continued increase in operating costs, MichCon filed a rate case in September of 2003 requesting a $194 million increase in annual service and distribution charges (Note 3).

      Property write-down and contract losses declined $43 million in the 2003 nine-month period. During the 2002 second quarter, we recorded a $33 million charge for an anticipated loss from the planned sale of our former headquarters and a $15 million charge related to the termination of a contract for computer services. During the 2003 second quarter we recorded an additional $5 million charge for the planned sale of our former headquarters (Note 6).

      Income taxes decreased $2 million and increased $7 million for the 2003 third quarter and nine-month period, respectively, due to variations in pre-tax earnings. Income taxes in 2003 were favorably affected by an increase in the amortization of tax benefits previously deferred in accordance with MPSC regulations.

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Capital Resources and Liquidity

Operating Activities

      Net cash from operating activities increased $17 million during the 2003 nine-month period as compared to the same 2002 period primarily due to improved working capital, specifically gas in inventory and accounts payable, partially offset by accounts receivable and a decline in net income, after adjusting for non-cash items (depreciation, depletion and amortization, deferred taxes, and property write-down and contract losses). Economic conditions and prior billing issues have resulted in an increase in past due receivables. We are focusing our collection efforts; however, failure to make continued progress in collecting our past due receivables would unfavorably affect operating cash flows.

Investing Activities

      Net cash used for investing activities increased $11 million reflecting increases in plant and equipment expenditures.

Financing Activities

      Net cash from financing activities decreased $30 million reflecting the increased redemption of long-term debt, the payment of a dividend and reduced short-term borrowings, partially offset by the issuance of $200 million of long-term debt (Note 4).

(a) Evaluation of disclosure controls and procedures

      The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2003, which is the end of the period covered by this report, and have concluded that such controls and procedures are effectively designed to ensure that required information disclosed by the Company in reports that it files or submits under the Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

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MICHIGAN CONSOLIDATED GAS COMPANY

See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY

See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY

See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY

See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY

Note 1 — General

      These consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements included in our 2002 Annual Report to the Securities and Exchange Commission on Form 10-K.

      The accompanying consolidated financial statements are prepared using accounting principles generally accepted in the United States of America. These accounting principles require us to use estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

      The consolidated financial statements are unaudited, but in our opinion, include all adjustments necessary for a fair statement of the results for the interim periods. Financial results for this interim period are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year.

      We reclassified some prior year balances to match the current year’s presentation.

      On January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires the fair value of an asset retirement obligation be recognized in the period in which it is incurred. It applies to legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and (or) the normal operation of a long-lived asset. When a new liability is recorded, an entity capitalizes the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

      If a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, such as assets with an indeterminate life, the liability is to be recognized when a reasonable estimate of fair value can be made. Generally, our distribution assets have an indeterminate life, retirement cash flows cannot be determined and there is a low probability of retirement, therefore no liability has been recorded for these assets. The adoption of SFAS No. 143 had an immaterial impact on the consolidated financial statements.

      SFAS No. 143 also requires the quantification of the estimated cost of removal obligations, arising from other than legal obligations, which have been accrued through depreciation charges. At January 1, 2003, we had approximately $400 million of previously accrued asset removal costs related to our regulated operations, for other than legal obligations, included in accumulated depreciation.

Note 3 — Regulatory Matters

      On September 30, 2003, MichCon filed an application with the MPSC for an increase in service and distribution charges (base rates) for its gas sales and transportation customers. The filing requests an overall increase in base rates of $194 million per year (approximately 7% increase, inclusive of gas costs), beginning January 1, 2005. Although a final order relating to the base rate increase request is not anticipated prior to the fourth quarter of 2004, MichCon has requested that the MPSC increase base rates by $154 million per year on an interim basis by April 1, 2004. The interim request is based on a projected revenue deficiency for the test year 2004.

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      Primary factors that necessitate MichCon’s request for increased base rates include significant increases in routine and mandated infrastructure improvements, increased operation and maintenance expenses, including employee pension and health care costs, and a decline in customer consumption. The filing also requests a permanent capital structure based on 50% debt and 50% equity, and a proposed return on equity (ROE) of 11.5%. MichCon is also proposing a symmetrical ROE sharing mechanism which would provide that shareholders retain all earnings within a 1% band above and below the authorized ROE. If the actual ROE falls outside of the band, customers would share between 20% and 80% of the excess or shortfall of earnings, depending on actual ROE.

      On September 30, 2003, MichCon also filed an application with the MPSC for the approval of depreciation rates, which will result in a modest increase in its composite depreciation rate. The Company anticipates that any depreciation change will be implemented contemporaneously with a MPSC order in MichCon’s base rate case.

      In December 2001, the MPSC approved MichCon’s application for a voluntary, expanded permanent gas Customer Choice program, which replaced the experimental program that expired in March 2002. Effective April 2002, up to 40% of MichCon’s customers could elect to purchase gas from suppliers other than MichCon. Effective April 2003, up to 60% of customers are eligible and by April 2004, all of MichCon’s 1.2 million customers may participate in the program. The MPSC also approved the use of deferred accounting for the recovery of implementation costs of the Customer Choice program. As of September 2003, approximately 124,000 customers are participating in the Customer Choice program.

      2002 Plan Year — In December 2001, the MPSC issued an order that permitted MichCon to implement GCR factors up to $3.62 per Mcf for January 2002 billings and up to $4.38 per Mcf for the remainder of 2002. The order also allowed MichCon to recognize a regulatory asset of approximately $14 million representing the difference between the $4.38 factor and the $3.62 factor for volumes that were unbilled at December 31, 2001. The regulatory asset will be subject to the 2002 GCR reconciliation process. In July 2002, in response to a petition for rehearing filed by the Michigan Attorney General, the MPSC directed the parties to address MichCon’s implementation of the December 2001 order and the impact of that implementation on rates charged to MichCon’s customers. On March 12, 2003, the MPSC issued an order in MichCon’s 2002 GCR plan case. The MPSC ordered MichCon to reduce its gas cost recovery expenses by $26.5 million for purposes of calculating the 2002 GCR factor due to MichCon’s decision to utilize storage gas during 2001 that resulted in a gas inventory decrement for the 2001 calendar year. Although we have recorded a $26.5 million reserve in 2002 to reflect the impact of this order, a final determination of actual 2002 revenue and expenses including any disallowances or adjustment will be decided in MichCon’s 2002 GCR reconciliation case. In addition, we filed an appeal of the March 12, 2003 MPSC order with the Michigan Court of Appeals. The 2002 GCR reconciliation case was filed with the MPSC in February 2003. Intervening parties in this proceeding are seeking to have the MPSC disallow an additional approximately $34 million representing unbilled revenues at December 2001 and the Enron bankruptcy settlement. A final order in this proceeding is not expected until 2004.

      2003 Plan Year — On July 23, 2003, the MPSC approved an increase in MichCon’s 2003 GCR rate to a maximum of $5.75 per Mcf for the billing months of August 2003 through December 2003. As of September 30, 2003, MichCon has accrued a $64 million regulatory asset representing the under-recovery of actual gas costs incurred. It is expected that the billing of the $5.75 GCR rate will substantially eliminate the under-recovery by year-end 2003.

      2004 Plan Year — On September 30, 2003, MichCon filed its 2004 GCR plan case proposing a maximum GCR factor of $5.36 per Mcf. MichCon agreed to switch from a calendar year to an operational year as a condition of its settlement in the 2003 GCR Plan Case. The operational GCR year would run from April to March of the following year. To accomplish the switch, the 2004 GCR Plan Case reflects a 15-month

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      We are unable to predict the outcome of the regulatory matters discussed herein. Resolution of these matters is dependent upon future MPSC orders, which may materially impact our financial position, results of operations and cash flows.

Note 4 — Long Term Debt

      In February 2003, MichCon issued $200 million of 5.7% senior notes due in March 2033. The proceeds were used for debt redemptions.

Note 5 — Short Term Credit Arrangements and Borrowings

      On October 24, 2003, MichCon entered into a $162.5 million 364-day revolving credit facility and a $162.5 million three-year revolving credit facility with a syndicate of banks. These credit facilities may be utilized for general corporate borrowings, but primarily are intended to provide liquidity support for MichCon’s existing commercial paper program. These agreements require MichCon to maintain a debt to total capitalization ratio of no more than .65 to 1 and an “earnings before interest, taxes, depreciation and amortization” (EBITDA) to interest ratio of no less than 2 to 1. MichCon is currently in compliance with these financial covenants.

Note 6 — Unusual Charges

      In June 2002, we recorded a $33 million pre-tax ($22 million net of taxes) charge from the planned sale of our former headquarters. An additional $5 million pre-tax ($4 million net of taxes) charge was recorded in June 2003 to further reduce the carrying value of the property to fair value based on the estimated selling price less cost to sell.

      In June 2002, we recorded a $15 million pre-tax ($10 million net of taxes) charge related to the termination of a contract for computer services with an unrelated third party.

Note 7 — Contingencies

      We are involved in certain legal (including commercial matters), administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning claims arising in the ordinary course of business. These proceedings include certain contract disputes, environmental reviews and investigations, and pending judicial matters. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss. The resolution of pending proceedings is not expected to have a material impact on our financial statements in the period they are resolved.

      See Note 3 for a discussion of contingencies related to Regulatory Matters.

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To the Board of Directors and Shareholder of

      We have reviewed the accompanying condensed consolidated statement of financial position of Michigan Consolidated Gas Company and subsidiaries as of September 30, 2003, the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2003 and 2002 and the condensed consolidated statements of cash flows and retained earnings for the nine-month periods ended September 30, 2003 and 2002. These interim financial statements are the responsibility of Michigan Consolidated Gas Company’s management.

      We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

      Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

      We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial position of Michigan Consolidated Gas Company and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, cash flows and retained earnings for the year then ended (not presented herein); and in our report dated February 11, 2003 (March 12, 2003 as to Note 17), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

/S/ DELOITTE & TOUCHE LLP

Detroit, Michigan

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Legal Proceedings

      We are involved in certain legal (including commercial matters), administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning claims arising in the ordinary course of business. These proceedings include contract disputes, environmental reviews and investigations, and pending judicial matters. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss. The resolution of pending proceedings is not expected to have a material effect on our financial statements in the period they are resolved. For additional discussion on legal matters, see the Notes to the Consolidated Financial Statements.

Exhibits and Reports on Form 8-K

      (a) Exhibits

      (b) Reports on Form 8-K

      During the quarterly period ended September 30, 2003, we filed Current Reports on Forms 8-K covering matters, as follows:

      Item 7. Exhibits and Item 9. Regulation FD Disclosure-Information Provided Under Item 12. (Results of Operations and Financial Condition) filed and dated July 28, 2003; and

      Item 5. Other Events, Item 7. Exhibits and Item 9. Regulation FD Disclosure-Information Provided Under Item 12. (Results of Operations and Financial Condition) filed and dated August 1, 2003.

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      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MICHIGAN CONSOLIDATED GAS COMPANY

	/S/ DANIEL G. BRUDZYNSKI
	_______________________________________
	DANIEL G. BRUDZYNSKI
	Chief Accounting Officer,
	Vice President and Controller

Date: November 7, 2003

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