UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

   FOR ANNUAL REPORT & TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934

   þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number 1-7310

Michigan Consolidated Gas Company, a Michigan corporation, meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is, therefore, filing this form with the reduced disclosure format.

MICHIGAN CONSOLIDATED GAS COMPANY

313-235-4000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ

All of the registrant’s 10,300,000 outstanding shares of common stock, par value $1 per share, are indirectly owned by DTE Energy Company.

DOCUMENTS INCORPORATED BY REFERENCE

None

Michigan Consolidated Gas Company

Annual Report on Form 10-K
Year Ended December 31, 2004

Table of Contents

Definitions

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2

Forward-Looking Statements

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, and purchases from suppliers;

•	economic climate and growth or decline in the geographic areas where we do business;

•	environmental issues, laws and regulations, and the cost of remediation and compliance associated therewith;

•	implementation of the gas Customer Choice program;

•	impact of gas utility restructuring in Michigan, including legislative amendments;

•	employee relations and the impact of collective bargaining agreements;

•	access to capital markets and capital market conditions and the results of other financing efforts which can be affected by credit agency ratings;

•	the timing and extent of changes in interest rates;

•	the level of borrowings;

•	changes in the cost and availability of natural gas;

•	effects of competition;

•	impacts of regulations by the MPSC and other applicable governmental proceedings and regulations;

•	changes in federal, state and local tax laws and their interpretations, including the Internal Revenue Code, regulations, rulings, court proceedings and audits;

•	the ability to recover costs through rate increases;

•	the availability, cost, coverage and terms of insurance;

•	the cost of protecting assets against or damage due to terrorism;

•	changes in accounting standards and financial reporting regulations;

•	changes in federal or state laws and their interpretation with respect to regulation, energy policy and other business issues;

•	uncollectible accounts receivable; and

•	changes in the economic and financial viability of our suppliers and customers, and the continued ability of such parties to perform their obligations to the Company.

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 statements speak only as of the date on which such statements are 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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Part I

Items 1. & 2. Business & Properties

DESCRIPTION

Michigan Consolidated Gas Company (MichCon or the Company) is a Michigan corporation organized in 1898. MichCon is an indirect, wholly-owned subsidiary of Enterprises, an exempt holding company under the Public Utility Holding Company Act of 1935. MichCon is a natural gas utility subject to regulation by the MPSC. MichCon is engaged in the purchase, storage, transmission, distribution and sale of natural gas in the State of Michigan. MichCon also has subsidiaries involved in the gathering and transmission of natural gas in northern Michigan. MichCon operates one of the largest natural gas distribution and transmission systems in the United States and the largest in Michigan.

MichCon serves approximately 1.2 million residential, commercial and industrial customers located in a 14,700 square mile area throughout Michigan. MichCon had approximately $3.1 billion in assets at December 31, 2004 and revenues of approximately $1.6 billion in 2004.

References in this report to “we”, “us”, and “our” are to MichCon.

A discussion of the services we provide, and the amount and percentage of revenue contributed from such services follows:

•	Gas Sales–Includes the sale and delivery of natural gas primarily to residential and small-volume commercial and industrial customers.

•

End User Transportation–A gas delivery service provided primarily to large-volume commercial and industrial customers. Additionally, the service is provided to residential customers, and small-volume commercial and industrial customers who have elected to participate in our Customer Choice program. End user transportation customers purchase natural gas directly from producers or brokerage companies and utilize our pipeline network to transport the gas to their facilities or homes.

•

Intermediate Transportation–A gas delivery service provided to producers, brokers and other gas companies that own the natural gas, but are not the ultimate consumers. Intermediate transportation customers utilize our gathering and high-pressure transmission system to transport the gas to storage fields, processing plants, pipeline interconnections or other locations.

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•	Other–Includes revenues from providing appliance maintenance, facility development and other energy-related services.

We expect to achieve modest revenue growth, net of changes in weather and purchased gas costs, through initiatives to expand our gas markets and our residential, commercial and industrial customer base, as well as by continuing to provide energy-related services that capitalize on our expertise, capabilities and efficient systems. We also anticipate revenue growth through increased rates as a result of our current rate case, which was filed in September 2003. In September 2004, the MPSC issued an order granting interim relief of $35 million annually (see Note 3).

Our operations are not dependent upon a limited number of customers, and the loss of any one or a few customers is not reasonably likely to have a material adverse effect on MichCon.

Our gas sales, end user transportation and intermediate transportation volumes, revenues and net income are impacted by weather. Given the seasonal nature of our 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 we typically realize substantially reduced revenues and earnings in the second quarter and losses in the third quarter.

We obtain our natural gas supply from various sources in different geographic areas (the Gulf Coast, the Mid-Continent, Canada and Michigan) under agreements that vary in both pricing and terms. Because of our geographic diversity of supply and our 124 billion cubic feet (Bcf) of storage capacity, we are able to reliably meet our supply requirements.

We have purchase commitments of approximately 108 Bcf, or 58% of our normal 2005 gas supply requirement. We have entered into fixed-price contracts for approximately 22 Bcf or 12% of our expected 2005 supply requirements. The balance of the gas supply requirement is expected to be met by purchasing gas at market prices. At December 31, 2004, we 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 to our customers. Generally, we use our storage capacity to supplement our supply during the winter months, replacing the gas in April through October when demand and prices are historically at lower levels. The use of storage capacity also allows us to lower our peak-day entitlements, thereby reducing interstate pipeline charges. Our gas distribution system has a planned maximum daily send-out capacity of 2.8 Bcf, with approximately 67% of the volume coming from underground storage for 2004.

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Following is a listing of our sources of gas supply:

We have long-term firm transportation agreements expiring on various dates through 2011 with ANR Pipeline Company (ANR), Panhandle Eastern Pipeline Company (Panhandle), Trunkline Gas Company (Trunkline), Viking Gas Transmission Company (Viking), Vector Pipeline L.P. (Vector) and Great Lakes Gas Transmission Limited Partnership (Great Lakes). The ANR capacity delivers 120 million cubic feet per day (MMcf/d) of supply sourced from the Gulf Coast, 75 MMcf/d sourced from the Midcontinent and 50 MMcf/d from Canada. Viking transports the 50 MMcf/d of Canadian supply to the ANR system for delivery to us. Trunkline transports 10 MMcf/d of Gulf Coast supply into the Panhandle system. Panhandle transports the 10 MMcf/d of Gulf Coast supply from the Trunkline system and 65 MMcf/d from the Mid-Continent production area to us. Additional Canadian supplies of 30 MMcf/d are delivered through firm transport agreements with Great Lakes. Vector transports up to 50 MMcf/d from the Chicago hub.

We have supply contracts with independent Michigan producers, for less than 1% of our supply, which expire on various dates through 2006. Many of these contracts tie prices to spot market indices coupled with transportation rates.

REGULATION

We are subject to the regulatory jurisdiction of the MPSC, which issues orders pertaining to rates, recovery of certain costs, including the costs of regulatory assets, conditions of service, accounting and other operating-related matters. We are subject to the requirements of other regulatory agencies with respect to safety, the environment and health.

In the late 1990s, the MPSC began an initiative designed to give all of Michigan’s natural gas customers added choices and the opportunity to benefit from lower gas costs resulting from competition. In 1999, the MPSC approved a comprehensive experimental three-year gas Customer Choice program that allowed an increasing number of customers to purchase natural gas from suppliers other than their local utility. In December 2001, the MPSC issued an order that continued the gas Customer Choice program on a permanent and expanding basis. The permanent gas Customer Choice program was phased in over a three-year period, with all customers having the option to choose their gas supplier by April 2004. Since MichCon continues to transport and deliver the gas to the participating customer premises at prices comparable to margins earned on gas sales, customers switching to other suppliers have little impact on MichCon’s earnings.

Under the December 2001 MPSC order, we returned to a gas cost recovery (GCR) mechanism, effective January 2002. Under this mechanism, our gas sales rates include a gas commodity component designed to

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recover our actual gas costs and therefore does not have a commodity price risk for prudently incurred gas costs.

In September 2003, we filed an application with the MPSC for an increase in service and distribution charges (base rates) for our 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. In September 2004, the MPSC issued an order granting interim rate relief of $35 million annually. A final order is expected in the first quarter of 2005.

See Note 3 — Regulatory Matters, for additional information regarding the September 2004 interim rate order and our regulatory environment.

ENERGY ASSISTANCE PROGRAMS

Energy assistance programs funded by the federal government and the State of Michigan remain critical to MichCon’s ability to control its uncollectible accounts receivable expenses.

We are working with the State of Michigan and others to increase the share of funding allocated to our customers to be representative of the number of low-income individuals in our service territory.

PROPERTIES

We own distribution, transmission and storage properties and facilities that are all located in the State of Michigan. At December 31, 2004, our distribution system included approximately 18,000 miles of distribution mains, approximately 1,164,000 service lines and approximately 1,275,000 active meters. We own approximately 2,600 miles of transmission lines that deliver natural gas to the distribution districts and interconnect our storage fields with the sources of supply and the market areas. We own properties relating to four underground natural gas storage fields with an aggregate working gas storage capacity of approximately 124 Bcf. Substantially all of our property is subject to the lien of our Indenture of Mortgage and Deed of Trust under which our First Mortgage Bonds are issued.

Some properties are being fully utilized, and new properties are being added to meet the expansion requirements of existing areas. Our capital investments for 2004 totaled $112 million, which compares with $98 million in 2003 and $90 million in 2002.

Our subsidiaries own a 68-mile gathering pipeline that transports natural gas and natural gas liquids from reserves in east-central Michigan to natural gas processing plants in northern Michigan and 132 miles of gathering lines and a 2,400 horsepower compressor station located in northern Michigan. Other MichCon subsidiaries have a 46% interest in a partnership that owns lateral lines related to the 68-mile gathering pipeline and an 80% interest in an additional 32-miles of gathering pipelines in northern Michigan. We also operate through a wholly owned subsidiary, 210 miles of pipeline and 325 miles of gathering lines in northern Michigan. We lease a portion of our pipeline system to the Vector Pipeline Partnership through a capital lease arrangement (Note 7).

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STRATEGY & COMPETITION

We generate approximately 95% of our revenues from providing gas sales and transportation and distribution services to end user and intermediate transportation service customers. Our strategy is to expand our role as the preferred provider of natural gas in Michigan. As a result of more efficient furnaces and appliances, we expect future sales volumes to remain at current levels or slightly decline. To offset these factors, we plan to expand our gas markets and to continue providing energy-related services that capitalize on our expertise, capabilities and efficient systems.

Competition in the gas business primarily involves other natural gas providers, alternative fuels and energy sources.

Other natural gas providers — As previously discussed, we are operating under the gas Customer Choice program that allows our customers to purchase natural gas from other suppliers. We continue to transport and deliver gas to customers who choose to purchase gas from other suppliers thereby retaining favorable distribution margins.

Alternative fuels — Natural gas continues to be the preferred space and water-heating fuel for Michigan residences and businesses. Developers in our service territories select natural gas in new construction because of the convenience, cleanliness and relative price advantage compared to propane, fuel oil and other alternative fuels.

The primary focus of competition in the end user transportation market is cost and reliability. Some large commercial and industrial customers have the ability to switch to alternative fuel sources such as coal, electricity, oil and steam. If these customers were to choose an alternative fuel source, they would not have a need for our end user transportation service. In addition, some of these customers could bypass our pipeline system and have their gas delivered directly from an interstate pipeline. However, price differentials must be sufficient to offset the costs, risks and loss of service flexibility associated with fuel switching or bypass. Since 1988, only one MichCon industrial customer has bypassed our distribution system. We compete against alternative fuel sources by providing competitive pricing and reliable service, supported by our extensive storage capacity.

Our extensive transmission pipeline system has enabled us to develop a 500 to 600 Bcf annual market for transportation services for Michigan gas producers, marketers, distribution companies and other pipeline companies. We operate 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.

ENVIRONMENTAL MATTERS

We are subject to extensive environmental regulation. Additional costs may result as the effects of various chemicals on the environment are studied and governmental regulations are developed and implemented. We expect to continue recovering environmental costs through rates charged to our customers. Greater details on environmental issues are provided in Note 9 – Commitments and Contingencies.

Contaminated Sites - Prior to the construction of major interstate natural gas pipelines, gas for heating and other uses was manufactured locally from processes involving coal, coke or oil. We own, or previously owned, 17 such former manufactured gas plant (MGP) sites. Investigations have revealed contamination related to the by-products of gas manufacturing at each site. We are remediating eight of the former MGP

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sites and conducting more extensive investigations at four other former MGP sites. We received Michigan Department of Environmental Quality (MDEQ) closure of one site and a determination that we are not a responsible party for three other sites. We received closure from the EPA in 2002 for one site. While we cannot make any assurances, we believe that a cost deferral and rate recovery mechanism approved by the MPSC will prevent these costs from having a material adverse impact on our results of operations.

RISK FACTORS

There are various risks associated with the operations of our business. To provide a framework to understand our operating environment, we are providing a brief explanation of the more significant risks associated with our business. Although we have tried to identify and discuss key risk factors, others could emerge in the future. Each of the following risks could affect our performance.

Weather significantly affects our operations. Deviations from normal cold weather conditions affect our earnings and cash flow. Mild temperatures can result in decreased utilization of our assets, lowering income and cash flow.

We are subject to rate regulation. We operate in a regulated industry. Our gas rates are set by the MPSC and cannot be increased without regulatory authorization. We may be impacted by new regulations or interpretations by the MPSC or other regulatory bodies. New legislation, regulations or interpretations could change how our business operates, impact our ability to recover costs through rate increases or require us to incur additional expenses.

Adverse changes in our credit ratings may affect us. Increased scrutiny of the energy industry and regulatory changes, as well as changes in our economic performance could result in credit agencies reexamining our credit rating. While credit ratings reflect the opinions of the credit agencies issuing such ratings and may not necessarily reflect actual performance, a downgrade in our credit rating could restrict or discontinue our ability to access capital markets at attractive rates and increase our borrowing costs.

Regional and national economic conditions may unfavorably impact us. Our business follows the economic cycles of the customers we serve. Should national or regional economic conditions decline, reduced volumes of gas we supply will result in decreased earnings and cash flow. Economic conditions in our service territory also impact our collections of accounts receivable and financial results.

Environmental laws and liability may be costly. We are subject to numerous environmental regulations. We may become a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of future expenditures related to environmental matters because of the difficulty of estimating clean up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

The regulatory environment is subject to significant change and, therefore, we cannot predict future issues. Since there can be no assurances that environmental costs may be recovered through the regulatory process, our financial performance may be negatively impacted as a result of environmental matters.

The supply of natural gas may impact our financial results. Our access to natural gas supplies is critical to ensure reliability of service for our customers.

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A work interruption may affect us. Unions represent a majority of our employees. A union choosing to strike as a negotiating tactic would have an impact on our business.

Our ability to access capital markets at attractive interest rates is important. Our ability to access capital markets is important to operate our business. Heightened concerns about the energy industry, the level of borrowing by other energy companies and the market as a whole could limit our access to capital markets. Changes in interest rates could increase our borrowing costs and financial performance.

Property tax reform may be costly. We are a large payer of property taxes in the State of Michigan. Should the legislature change how schools are financed, we could face increased property taxes.

We may not be fully covered by insurance. While we have a comprehensive insurance program in place to provide coverage for various types of risks, catastrophic damage as a result of acts of God, terrorism, war or a combination of significant unforeseen events could impact our operations and economic losses might not be covered in full by insurance.

Terrorism could affect our business. Damage to downstream infrastructure or our own assets by terrorist groups would impact our operations.

Failure to successfully implement new information systems could interrupt our operations. Our business depends on numerous information systems for operations and financial information and billings. We are in the process of implementing our DTE2 project, a multiyear Company-wide initiative to improve existing processes and implement new core information systems. Failure to successfully implement DTE2 and other new systems could interrupt our operations.

EMPLOYEES

We had 2,276 employees at December 31, 2004, of which 1,479 were represented by unions. Of the represented employees, 1,041 are under a three year contract that was ratified in 2004. The contracts of the remaining represented employees expire in 2005.

Item 3. Legal Proceedings

We are involved in certain legal, regulatory, administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning matters arising in the ordinary course of business. These proceedings include certain contract disputes, environmental reviews and investigations, audits, inquiries from various regulators, 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 operations or financial statements in the period they are resolved. For additional discussion on legal matters, see the following Notes to the Consolidated Financial Statements:

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Item 4. Submission of Matters to a Vote of Security Holders

Omitted per general instruction I (2) (c) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

All of the 10,300,000 issued and outstanding shares of common stock of MichCon, par value $1 per share, are indirectly owned by DTE Energy, and constitute 100% of the voting securities of MichCon. Therefore, no market exists for our common stock.

We paid cash dividends on our common stock of $50 million in 2004 and $50 million in 2003. We did not pay cash dividends in 2002.

Item 6. Selected Financial Data

Omitted per general instruction I (2) (a) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

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Item 7. Management’s Narrative Analysis of Results of Operations

The Results of Operations discussion for MichCon is presented in accordance with General Instruction I (2) (a) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

Certain losses reflected in the accompanying consolidated financial statements have been eliminated at DTE Energy as a result of purchase accounting adjustments.

We had earnings of $19 million in 2004, compared to earnings of $45 million in 2003 and $20 million in 2002. Results for 2004 were impacted by increases in operation and maintenance expenses due to higher uncollectible accounts expense and increased pension and health care costs. Partially offsetting these higher 2004 expenses was a $6 million benefit from interim rate relief (Note 3) and additional margin from the acceleration of several midstream services contracts. The higher earnings for 2003 were primarily due to improved gross margins, as well as charges recorded in 2002 from the sale of our former headquarters and the termination of a contract for computer services.

Operating revenues increased $153 million in 2004 and $180 million in 2003. Both periods reflect an increase in gas sales and intermediate transportation revenues. The comparisons were also affected by varying levels of end user transportation revenues.

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Gas sales revenues in total increased $164 million in 2004 and $159 million in 2003. The increase in revenues for both 2004 and 2003 is due primarily to an increase in the gas commodity component of sales rates reflecting higher natural gas prices. This portion of revenues is offset by a similar increase in gas costs which are collectible through the Gas Cost Recovery (GCR) mechanism. The comparison was also affected by an interim rate increase in 2004 and a $26 million accrual in 2002 for the possible disallowance of gas cost in a GCR reconciliation case. Additionally, gas sales revenues and volumes in both periods reflect the impact of weather, which was 6% warmer in 2004 and 6% colder in 2003 compared to the prior year.

End user transportation revenues for 2004 and 2003 reflect the impact of weather and lower deliveries associated with customers participating in the Customer Choice program. Customers participating in this program purchase gas from other suppliers, while MichCon continues to deliver the gas to their premises. Accordingly, margins earned from selling gas and margins generated from providing end user transportation services to Customer Choice participants are the same. There were approximately 111,000 and 129,000 and 190,000 customers participating in the gas Customer Choice program at December 31, 2004, 2003 and 2002, respectively.

Intermediate transportation revenues increased $4 million in 2004 and increased $3 million in 2003. Intermediate transportation deliveries decreased 40 billion cubic feet (Bcf) in 2004 and increased 84 Bcf in 2003. A significant portion of the volume variations is 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, and the effects of any permanent liquidation of inventory gas. Cost of gas sold increased $160

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million in 2004 and $134 million in 2003 primarily due to prices paid for gas supply. The average cost of gas sold increased $1.17 per Mcf (24%) and increased $.57 per Mcf (13%) for 2004 and 2003, respectively.

Operation and maintenance expenses increased $38 million in 2004 and increased $72 million in 2003, reflecting higher reserves for uncollectible accounts receivable and pension and health care costs. The increase in uncollectible accounts expense reflects high past due amounts attributable to an increase in gas prices, continued weak economic conditions and a lack of adequate public assistance for low-income customers.

Property write-down and contract losses declined $43 million in 2003. The decline reflects charges recorded in 2002 for an anticipated loss from the sale of our former headquarters and for the termination of a contract for computer services. See Note 12.

Loss on sale of assets decreased $6 million in 2004 and increased $3 million in 2003. In 2004, we recorded a $3 million gain from sales of a storage facility and land. In 2003, we recorded a $3 million loss from the sale of our former headquarters.

Other income and deductions increased $10 million in 2004 and decreased $7 million in 2003. The comparisons primarily reflect a $6 million gain from the sale of our interests in a series of partnerships.

Income taxes decreased $18 million in 2004 and decreased $3 million in 2003 (Note 4). Income tax comparisons were affected by variations in pre-tax earnings. Income taxes in 2004 and 2003 were also favorably affected by an increase in the amortization of tax benefits previously deferred in accordance with MPSC regulations.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

We have commodity price risk arising from market price fluctuations on gas purchase contracts and gas inventories. To limit our exposure to commodity price fluctuations, we have entered into forward contracts. Our commodity price risk is limited due to the GCR mechanism (Note 1).

See Note 8 — Financial and Other Derivative Instruments for further discussion.

Interest Rate Risk

We are subject to interest rate risk in connection with the issuance of debt securities. Our exposure to interest rate risk arises primarily from changes in U.S. Treasury rates, commercial paper rates and London Inter-Bank Offered Rates (LIBOR). We estimate that if interest rates were 10% higher or lower, the fair value of long-term debt at December 31, 2004 would decrease $30 million and increase $32 million, respectively.

Credit Risk

We sell gas to numerous companies operating in the steel, automotive, energy and retail industries. A number of customers have filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. We have negotiated or are currently involved in negotiations with each of the companies, or their successor companies, that have filed for bankruptcy protection. We regularly review contingent matters relating to sale contracts and record provisions for amounts considered probable of loss. We believe our accrued amounts are adequate for probable losses. The final resolution of these matters is not expected to have a material effect on our financial statements in the period they are resolved.

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Item 8. Financial Statements and Supplementary Data

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of
Michigan Consolidated Gas Company

We have audited the consolidated statement of financial position of Michigan Consolidated Gas Company and subsidiaries (the “Company”) as of December 31, 2004 and 2003 and the related consolidated statements of operations, cash flows, and retained earnings and comprehensive income for each of the three years in the period ended December 31, 2004. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements present fairly, in all material respects, the financial position of Michigan Consolidated Gas Company and subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, in connection with the required adoption of a new accounting principle, in 2003 the Company changed its method of accounting for asset retirement obligations.

/S/ DELOITTE & TOUCHE LLP

Detroit, Michigan
March 15, 2005

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MICHIGAN CONSOLIDATED GAS COMPANY

See Notes to Consolidated Financial Statements

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MICHIGAN CONSOLIDATED GAS COMPANY

See Notes to Consolidated Financial Statements

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MICHIGAN CONSOLIDATED GAS COMPANY

See Notes to Consolidated Financial Statements

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MICHIGAN CONSOLIDATED GAS COMPANY

     The following table displays other comprehensive loss:

See Notes to Consolidated Financial Statements

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Michigan Consolidated Gas Company

NOTE 1– SIGNIFICANT ACCOUNTING POLICIES

Corporate Structure

Michigan Consolidated Gas Company (MichCon) is a public utility engaged in the purchase, storage, transmission, distribution and sale of natural gas in the State of Michigan. MichCon is subject to the accounting requirements of and rate regulation by the Michigan Public Service Commission (MPSC) with respect to the distribution and intrastate transportation of natural gas. The major services provided by MichCon are gas sales, end user transportation and intermediate transportation. MichCon serves more than 1.2 million residential, commercial and industrial customers throughout Michigan. MichCon’s non-regulated operations are not significant. MichCon is an indirect, wholly owned subsidiary of DTE Enterprises Inc. (Enterprises), an exempt holding company under the Public Utility Holding Company Act of 1935. Enterprises is a wholly owned subsidiary of DTE Energy Company (DTE Energy).

References in this report to “we,” “us,” and “our” are to MichCon.

Principles of Consolidation

We consolidate all majority owned subsidiaries and investments in entities in which we have controlling influence. Non-majority owned investments are accounted for using the equity method when the Company is able to influence the operating policies of the investee. Non-majority owned investments include investments in limited liability companies, partnerships or joint ventures. When we do not influence the operating policies of an investee, the cost method is used. We eliminate all intercompany balances and transactions.

For entities that are considered variable interest entities, we apply the provisions of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46-R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” For a detailed discussion of FIN 46-R see Note 2 – New Accounting Pronouncements.

Basis of Presentation

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

We reclassified certain prior year balances to match the current year’s financial statement presentation.

Revenues and Cost of Gas

Revenues from the transportation and storage of natural gas are recognized as services are provided. We record revenues for gas services provided but unbilled at the end of each month.

Our accrued revenues include a component for the cost of gas sold that is recoverable through the Gas Cost Recovery (GCR) mechanism. Annual GCR proceedings before the MPSC permit MichCon to recover prudent and reasonable supply costs. Any overcollection or undercollection of costs, including interest, will be reflected in future rates.

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Comprehensive Income

We comply with Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income,” that established standards for reporting comprehensive income. SFAS No. 130 defines comprehensive income as the change in common shareholders’ equity during a period from transactions and events from non-owner sources, including net income. As shown in the following table, amounts recorded to other comprehensive income at December 31, 2004 include unrealized gains and losses from derivatives accounted for as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

Cash Equivalents

Cash and cash equivalents include cash on hand, cash in banks and temporary investments with remaining maturities of three months or less.

Inventories

Materials and supplies are valued at average cost. Gas inventory is determined using the last-in, first-out (LIFO) method. At December 31, 2004, the replacement cost of gas remaining in storage exceeded the $89 million LIFO cost by $330 million. At December 31, 2003, the replacement cost of gas remaining in storage exceeded the $117 million LIFO cost by $251 million. During 2004, MichCon liquidated 5.7 billion cubic feet of prior years’ LIFO layers. The liquidation benefited 2004 cost of gas by approximately $7 million, but had no impact on earnings as a result of the GCR mechanism

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Property, Retirement and Maintenance, and Depreciation and Depletion

Property is stated at cost and includes construction-related labor, materials, overheads and an “allowance for fund used during construction” (AFUDC). The cost of properties retired, less salvage are charged to accumulated depreciation. Expenditures for maintenance and repairs are charged to expense when incurred.

We base depreciation provisions on straight-line and units of production rates approved by the MPSC. Unit of production depreciation and depletion is used for certain production and transmission property. Our composite depreciation rate was 3.6% in 2004, 3.5% in 2003 and 3.6% in 2002.

The average estimated useful life for gas distribution and transmission property was 26 years and 28 years, respectively, at December 31, 2004.

Long-Lived Assets

Long-lived assets that we own are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset exceeds the expected future cash flows generated by the asset, an impairment loss is recognized resulting in the asset being written down to its estimated fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

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Intangible Assets, Including Software Costs

Our intangible assets consist primarily of software. We capitalize the costs associated with computer software we develop or obtain for use in our business. We amortize intangible assets on a straight-line basis over expected periods of benefit. Intangible assets amortization expense was $10 million in 2004, $9 million in 2003 and $10 million in 2002. The gross carrying amount and accumulated amortization of intangible assets at December 31, 2004 were $162 million and $55 million, respectively. The gross carrying amount and accumulated amortization of intangible assets at December 31, 2003 were $161 million and $50 million, respectively. Amortization expense of intangible assets is estimated to be $10 million annually for 2005 through 2009.

Excise and Sales Taxes

We record the billing of excise and sales taxes as receivable with an offsetting payable to the applicable taxing authority, with no impact on the consolidated statement of operations.

Deferred Debt Costs

The costs related to the issuance of long-term debt are deferred and amortized over the life of each debt issue. In accordance with MPSC regulations, the unamortized discount, premium and expense related to debt redeemed with a refinancing are amortized over the life of the replacement issue.

Insured and Uninsured Risks

We have a comprehensive insurance program in place to provide coverage for various types of risks. Our insurance policies cover risk of loss from various events, including property damage, general liability, workers' compensation, auto liability and officers' liability.

Under our risk management policy, we self-insure portions of certain risks up to specified limits, depending on the type of exposure. We periodically review our insurance coverage. During 2003, we reviewed our process for estimating and recognizing reserves for self-insured risks. As a result of this review, we revised the process for estimating liabilities under our self-insured layers to include an actuarially determined estimate of “incurred but not reported” (IBNR) claims. We have an actuarially determined estimate of our IBNR liability prepared annually and adjust the related reserve as appropriate.

Investments in Debt and Equity Securities

We generally classify investments in debt and equity securities as trading and have recorded such investments at market value with unrealized gains or losses included in earnings.

See the following notes for other accounting policies impacting our financial statements:

NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

Asset Retirement Obligations

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. We believe that adoption of SFAS No. 143 results primarily in timing differences in the recognition of legal asset retirement costs that we are currently recovering in rates and are deferring such differences under SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.”

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, 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.

A reconciliation of the asset retirement obligation for 2004 follows.

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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 December 31, 2003, we reclassified approximately $417 million of previously accrued asset removal costs, which had been previously netted against accumulated depreciation to regulatory liabilities. There is a generic case before the MPSC to determine the accounting and regulatory treatment of removal costs for Michigan utilities.

Consolidation of Variable Interest Entities

In January 2003, FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51,” was issued and requires an investor with a majority of the variable interests (primary beneficiary) in a variable interest entity to consolidate the assets, liabilities and results of operations of the entity. A variable interest entity is an entity in which the equity investors do not have controlling interests, the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties, or equity investors do not share proportionally in gains or losses.

In October 2003 and December 2003, the FASB issued Staff Position No. FIN 46-6 and FIN 46-Revised (FIN 46-R), respectively, which clarified and replaced FIN 46 and also provided for the deferral of the effective date of FIN 46 for certain variable interest entities. We have evaluated all of our equity and non-equity interests and have adopted all current provisions of FIN 46-R. The adoption of FIN 46-R did not have a material effect on our financial statements.

Medicare Act Accounting

In December 2003, the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (Medicare Act) was signed into law. The Medicare Act provides for a non-taxable federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least “actuarially equivalent” to the benefit established by law. We elected at that time to defer the provisions of the Medicare Act, and its impact on our accumulated postretirement benefit obligation and net periodic postretirement benefit cost, pending the issuance of specific authoritative accounting guidance by the FASB.

In May 2004, FASB Staff Position (FSP) No. 106-2 was issued on accounting for the effects of the Medicare Act. The guidance in this FSP is applicable to sponsors of single-employer defined benefit postretirement health care plans for which (a) the employer has concluded the prescription drug benefits available under the plan to some or all participants are “actuarially equivalent” to Medicare Part D and thus qualify for the subsidy under the Medicare Act and (b) the expected subsidy will offset or reduce the employer’s share of the cost of the underlying postretirement prescription drug coverage on which the subsidy is based. We believe we qualify for the subsidy under the Medicare Act and the expected subsidy will partially offset our share of the cost of postretirement prescription drug coverage.

In June 2004, we adopted FSP No. 106-2, retroactive to January 1, 2004. As a result of the adoption, our accumulated postretirement benefit obligation for the subsidy related to benefits attributed to past service was reduced by approximately $24 million and was accounted for as an actuarial gain. The effects of the subsidy reduced net postretirement costs by $3 million in 2004.

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NOTE 3 — REGULATORY MATTERS

Regulation

We are subject to the regulatory jurisdiction of the MPSC, which issues orders pertaining to rates, recovery of certain costs, including the costs of regulatory assets, conditions of service, accounting and operating-related matters.

Regulatory Assets and Liabilities

We apply the provisions of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” SFAS No. 71 requires the recording of regulatory assets and liabilities for certain transactions that would have been treated as revenue and expense in non-regulated businesses. Continued applicability of SFAS No. 71 requires that rates be designed to recover specific costs of providing regulated services and be charged to and collected from customers. Future regulatory changes or changes in the competitive environment could result in the Company discontinuing the application of SFAS No. 71 for some or all of its business and require the write-off of the portion of any regulatory asset or liability that was no longer probable of recovery through regulated rates. Management believes that currently available facts support the continued application of SFAS No. 71.

The following are the balances of the regulatory assets and liabilities as of December 31:

ASSETS

•	Deferred environmental costs — The MPSC approved the deferral and recovery of investigation and remediation costs associated with former manufactured gas plant sites.

•	Unamortized loss on reacquired debt — The unamortized discount, premium and expense related to debt redeemed with a refinancing are deferred, amortized and recovered over the life of the replacement issue.

•	Accrued GCR revenue — Receivable for the temporary under-recovery of and a return on gas costs incurred by MichCon which are recoverable through the GCR mechanism.

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•

Recoverable minimum pension liability — An additional minimum pension liability was recorded under generally accepted accounting principles due to the current under funded status of certain pension plans. The traditional rate setting process allows for the recovery of pension costs as measured by generally accepted accounting principles. Accordingly, the minimum pension liability associated with utility operations is recoverable. See Note 10.

LIABILITIES

•	Asset removal costs — The amount collected from customers for the funding of future asset removal activities.

•	Refundable income taxes — Income taxes refundable to MichCon’s customers representing the difference in property-related deferred income taxes payable and amounts recognized pursuant to MPSC authorization.

•	Accrued GCR potential disallowance — Potential refund resulting from an MPSC order in MichCon’s 2002 GCR plan case that required MichCon to reduce revenues in the calculation of its 2002 GCR expense.

Gas Rate Case

Rate Request — In September 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. MichCon requested that the MPSC increase base rates by $154 million per year on an interim basis by April 1, 2004.

MPSC Interim Rate Order – In September 2004, the MPSC issued an order granting interim rate relief to MichCon in the amount of $35 million. The interim rate order was based on a 50% debt and 50% equity capital structure, and an 11.5% rate of return on common equity. Amounts collected are subject to a potential refund pending a final order in this rate case.

MPSC Staff Recommendation on Final Rate Relief – The Staff has recommended a $76 million increase in base rates compared to MichCon’s requested base rate relief of $194 million. The Staff also supports a provision, proposed by MichCon, that would allow MichCon to recover or refund 90% of uncollectible accounts receivables expense above or below the amount that is reflected in base rates. In addition, the Staff proposed a 50% debt and 50% equity capital structure utilizing a reduced rate of return on common equity of 11%. MichCon’s current allowed rate of return on common equity is 11.5%.

MPSC Proposal for Decision (PFD) – The Administrative Law Judge (ALJ) issued a PFD on MichCon’s rate request on December 10, 2004. The PFD provides for an increase in base rates of $60 million. The PFD supports the Staff’s recommendations for capital structure, rate of return on common equity and for the proposed reconciliation of uncollectible accounts receivables. MichCon expects a final order in the first quarter of 2005.

Gas Industry Restructuring

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. The number of customers eligible to participate in the gas Customer Choice program increased over a three-year period. Effective April 2004, all of MichCon’s 1.2 million customers could elect to participate in the Customer Choice program thereby purchasing their gas from suppliers other than MichCon. The MPSC also approved the use of deferred accounting for the recovery of implementation costs of the gas

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Customer Choice program. As of December 2004, approximately 111,000 customers are participating in the gas Customer Choice program.

Gas Cost Recovery Proceedings

2002 Plan Year - In December 2001, the MPSC issued an order that permitted MichCon to implement GCR factors up to $3.62 per thousand cubic feet (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 is subject to the 2002 GCR reconciliation process. In March 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 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 that was filed with the MPSC in February 2003. The Staff and various intervening parties in this proceeding are seeking to have the MPSC disallow an additional $26 million, representing unbilled revenues at December 2001. One party has also proposed the disallowance of half of an $8 million payment made to settle Enron bankruptcy issues. The other parties to the case have recommended that the Enron bankruptcy settlement be addressed in the 2003 GCR reconciliation case. An MPSC Administrative Law Judge has recommended disallowances of $26.5 million related to the use of storage gas in 2001 and $26 million related to the December 2001 unbilled issue, and recommended that the $8 million related to the Enron issue be addressed in the 2003 GCR reconciliation case. We have included this item in our testimony in the 2003 GCR reconciliation filed in February 2004. The Staff has recommended that MichCon be allowed to recover the entire $8 million related to the Enron issue. A final order in this proceeding is expected in 2005. In addition, we filed an appeal of the March 2003 MPSC order with the Michigan Court of Appeals. In November 2004, the Michigan Court of Appeals denied the appeal.

2003 Plan Year — In July 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. MichCon’s 2003 GCR reconciliation case was filed with the MPSC in February 2004. In November 2004, the ALJ issued a PFD in the 2003 reconciliation case. The ALJ recommended that MichCon recover the full $8 million related to the Enron issue since MichCon had reason to believe at that time that cancellation of the contract was in the best interests of customers and since customers ultimately realized a benefit from the cancellation. The ALJ agreed with the MPSC Staff that a $2 million accounting adjustment related to exchange gas be disallowed.

2004 Plan Year — In September 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 transitional period, January 2004 through March 2005. Under the transition proposal, MichCon would file two reconciliations pertaining to the transition period; one addressing the January 2004 to March 2004 period, the other addressing the remaining April 2004 to March 2005 period. The plan also proposes a quarterly GCR ceiling price adjustment mechanism. This mechanism allows MichCon to increase the maximum GCR factor to compensate for increases in market prices, thereby reducing the possibility of a GCR under recovery. Due to the sustained increase in market prices for natural gas, in June 2004 the MPSC approved a temporary increase in the maximum GCR factor and a contingent factor

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which resulted in a new temporary maximum factor of $6.62 per Mcf, effective from July 1, 2004 until the MPSC issues its final order in this case. As of December 31, 2004, MichCon has accrued a $55 million regulatory asset representing the under-recovery of actual gas costs incurred in 2004, and the 2003 and 2002 GCR under-recovery.

2005-2006 Plan Year — In December 2004, MichCon filed its 2005-2006 GCR plan case proposing a maximum GCR factor of $7.99 per Mcf. The plan includes a quarterly GCR ceiling price adjustment mechanism. This mechanism allows MichCon to increase the maximum GCR factor to compensate for increases in market prices, thereby reducing the possibility of a GCR under recovery.

Other

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 the financial position, results of operations and cash flows of the Company.

NOTE 4 — INCOME TAXES

We are part of the consolidated federal income tax return of DTE Energy. Our federal income tax expense is determined on an individual company basis with no allocation of tax benefits or expenses from other affiliates of DTE Energy.

Total income tax expense (benefit) varied from the statutory federal income tax rate for the following reasons:

Components of income tax expense (benefit) were as follows:

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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. Deferred tax assets and liabilities not related to assets or liabilities are classified according to the expected reversal date of the temporary differences.

Deferred income tax assets (liabilities) were comprised of the following at December 31:

The Internal Revenue Service is currently conducting audits of MichCon for the years 1999 through 2001. The Company accrues tax and interest related to tax uncertainties that arise due to actual or potential disagreements with governmental agencies about the tax treatment of specific items. At December 31, 2004, the Company had accrued approximately $4 million for such uncertainties. We believe that our accrued tax liabilities are adequate for all years.

NOTE 5 – LONG-TERM DEBT AND PREFERRED SECURITIES

Long-Term Debt

Our long-term debt outstanding and interest rates of debt outstanding at December 31 were:

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In October 2004, we issued $120 million of 5.0% senior notes due in 2019. The proceeds will be principally used to redeem the following two issues: $52 million of 6.85% senior notes due 2038 and $55 million of 6.85% senior notes due 2039. These securities were called for redemption in November 2004 at a price of 100 percent of the principal amount plus accrued and unpaid interest from September 1, 2004.

In 2003, we redeemed various issues of long-term debt totaling $192 million. The redeemed debt securities had an average interest rate of 6.8% and were due in 2003 — 2038. We issued $200 million of 5.7% senior secured notes due 2033.

In 1998, we issued a total of $150 million of remarketable debt securities with various interest rates. These securities are structured such that the interest rates of the issues can be reset at various remarketing dates over the life of the debt. In June 2003, we redeemed $75 million of the remarketable securities. The remarketing date on the remaining $75 million is in June 2008. In the event that a remarketing fails, we would be required to purchase these securities.

Our remarketable securities and senior notes are secured by “fall-away mortgage” debt and, as such, are secured debt as long as our other first mortgage bonds are outstanding and become senior unsecured debt thereafter.

In 2004, we paid $4 million and terminated a nonrecourse credit agreement for our non-utility subsidiaries.

In 2003, we terminated a variable interest rate swap agreement with notional principal amount of $40 million issued in connection with our first mortgage bonds.

Substantially all of the net utility property of MichCon is subject to the lien of a Mortgage and Deed of Trust (Mortgage). Should we fail to timely pay our indebtedness under the Mortgage, such failure will create cross defaults in the indebtedness of DTE Energy.

Maturities and sinking fund requirements during the next five years for long-term debt outstanding at December 31, 2004 are $40 million in 2006, $30 million in 2007 and $275 million in 2008. There are no long-term debt maturities due in 2005 and 2009.

Preferred and Preference Securities – Authorized and Unissued

At December 31, 2004, MichCon had 7 million shares of preferred stock with a par value of $1 per share and 4 million shares of preference stock with a par value of $1 per share authorized, with no shares issued.

NOTE 6 – SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS

In October 2004, we entered into a $243.75 million, five-year unsecured revolving credit facility and lowered our existing three-year revolving credit facility from $162.5 million to $81.25 million. The five-year facility replaces the October 2003 364-day facility, which expired. The three-year revolving credit

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facility expires in October 2006. The five- and three-year credit facilities are with a syndicate of banks and may be utilized for general corporate borrowings, but primarily are intended to provide liquidity support for our commercial paper program. Borrowings under the facilities will be available at prevailing short-term interest rates. The agreements require us to maintain a debt to total capitalization ratio of no more than .65 to l and an “earnings before interest, taxes, depreciation and amortization” (EBITDA) to interest ratio of no less than 2 to 1. We currently are in compliance with these financial covenants.

At December 31, 2004, we had outstanding commercial paper of $232 million and other short-term borrowings of $10 million. As of December 31, 2003, we had outstanding commercial paper of $232 million and other short-term borrowings of $3 million.

The weighted average interest rates for short-term borrowings were 2.4% and 1.1% at December 31, 2004 and 2003, respectively.

NOTE 7 – CAPITAL AND OPERATING LEASES

Lessee - We lease certain property under capital and operating lease arrangements expiring at various dates to 2024. Some leases contain renewal options.

Rental expense for operating leases was $3 million in 2004 and $2 million in 2003 and 2002.

Lessor – We lease a portion of our pipeline system to the Vector Pipeline Partnership through a capital lease contract that expires in 2020, with renewal options extending for five years. The components of the net investment in the capital lease at December 31, 2004 were as follows:

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NOTE 8 – FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS

We comply with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, established accounting and reporting standards for derivative instruments and hedging activities.

Listed below are important SFAS No. 133 requirements:

•	All derivative instruments must be recognized as assets or liabilities and measured at fair value, unless they meet the normal purchases and sales exemption.

•	The accounting for changes in fair value depends upon the purpose of the derivative instrument and whether it is designated as a hedge and qualifies for hedge accounting.

•

Special accounting is allowed for a derivative instrument qualifying as a hedge and designated as a hedge for the variability of cash flow associated with a forecasted transaction. Gain or loss associated with the effective portion of the hedge is recorded in other comprehensive income. The ineffective portion is recorded to earnings. Amounts recorded in other comprehensive income will be reclassified to net income when the forecasted transaction affects earnings. If a cash flow hedge is discontinued because it is likely the forecasted transaction will not occur, net gains or losses are immediately recorded to earnings.

•

Special accounting is also allowed for a derivative instrument qualifying as a hedge and designated as a hedge of the changes in fair value of an existing asset, liability or firm commitment. Gain or loss on the hedging instrument is recorded into earnings. An offsetting loss or gain on the underlying asset, liability or firm commitment is also recorded to earnings.

Our primary market risk exposure is associated with commodity prices, credit and interest rates. We have risk management policies to monitor and decrease market risks. We use derivative instruments to manage some of the exposure.

Commodity Price Risk

We purchase, store, transmit and distribute and sell natural gas. We have fixed-priced contracts for portions of our expected gas supply requirements through 2005. These contracts are designated and qualify for the normal purchases and sales exemption and are therefore accounted for under the accrual method. Our commodity price risk is limited due to the GCR mechanism (Note 1).

Credit Risk

We are exposed to credit risk if our customers or counterparties do not comply with their contractual obligations. We maintain credit policies that significantly minimize overall credit risk. These policies include an evaluation of potential customers’ and counterparties’ financial condition, credit rating, collateral requirements or other credit enhancements such as letters of credit or guarantees. We use standardized agreements that allow the netting of positive and negative transactions associated with a single counterparty.

Interest Rate Risk

We occasionally use treasury locks and other interest rate derivatives to hedge the risk associated with interest rate market volatility. In 2004, we entered into an interest rate derivative to limit our sensitivity to market interest rate risk associated with the issuance of long-term debt. Such instrument was designated as a cash flow hedge. We subsequently issued long-term debt and terminated the hedge at a cost that is included in other comprehensive loss.

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Fair Value of Financial Instruments

The fair value of financial instruments is determined by using various market data and other valuation techniques. The table below shows the fair value relative to the carrying value for long-term debt securities. The carrying value of certain other financial instruments, such as notes payable, customer deposits and notes receivable approximate fair value and are not shown.

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Environmental Matters

Contaminated Sites – Prior to the construction of major interstate natural gas pipelines, gas for heating and other uses was manufactured locally from processes involving coal, coke or oil. We own, or previously owned, 17 such former manufactured gas plant (MGP) sites.

During the mid-1980’s, we conducted preliminary environmental investigations at 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).

We are remediating eight of the former MGP sites and conducting more extensive investigations at four other former MGP sites. We received MDEQ closure of one site and a determination that we are not a responsible party for three other sites. We received closure from the EPA in 2002 for one site.

In 1984, we established a $12 million reserve for costs associated with environmental investigation and remediation activities. During 1993, we 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. We employed outside consultants to evaluate remediation alternatives for these sites, to assist in estimating its potential liabilities and to review its archived insurance policies. As a result of these studies, we recorded an additional liability and a corresponding regulatory asset of $32 million during 1995. In early December 2004, we retained multiple environmental consultants to estimate the projected cost to remediate each MGP facility. The results of the evaluation indicated that the MGP reserve should be set at $22 million.

During 2004, 2003 and 2002, we spent $2.3 million, $1.5 million and $3.2 million, respectively, investigating and remediating these former MGP sites. At December 31, 2004, the reserve balance was $21.5 million, of which $4.5 million 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 our financial position and cash flows. However, we anticipate the cost deferral and rate recovery mechanism approved by the MPSC will prevent environmental costs from having a material adverse impact on our results of operations.

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Personal Property Taxes

Prior to 1999, MichCon and other Michigan utilities asserted that Michigan’s valuation tables result in the substantial overvaluation of utility personal property. Valuation tables established by the Michigan State Tax Commission (STC) are used to determine the taxable value of personal property based on the property’s age. In November 1999, the STC approved new valuation tables that more accurately recognize the value of a utility’s personal property. The new tables became effective in 2000 and are currently used to calculate property tax expense. However, several local taxing jurisdictions have taken legal action attempting to prevent the STC from implementing the new valuation tables and have continued to prepare assessments based on the superseded tables. The legal actions regarding the appropriateness of the new tables were before the Michigan Tax Tribunal (MTT) which, in April 2002, issued its decision essentially affirming the validity of the STC’s new tables. In June 2002, petitioners in the case filed an appeal of the MTT’s decision with the Michigan Court of Appeals. In January 2004, the Michigan Court of Appeals upheld the validity of the new tables. With no further appeal by the petitioners available, the MTT began to schedule utility personal property valuation cases for Prehearing General Calls. MichCon has filed motions and the MTT agreed to place their cases in abeyance pending the conclusion of settlement negotiations being conducted by State of Michigan Treasury officials. On February 14, 2005, MTT issued a scheduling order that lifts the prior abeyances in a significant number of our appeals. The scheduling order sets litigation calendars for these cases extending into mid-2006.

We continue to record property tax expense based on the new tables. We will continue through settlement or litigation to seek to apply the new tables retroactively and to ultimately resolve the pending tax appeals related to 1997 through 1999. This is a solution supported by the STC in the past. To the extent that settlements cannot be achieved with the jurisdictions, litigation regarding the valuation of utility property will delay any recoveries by MichCon.

Other Commitments

At December 31, 2004, we have entered into numerous long-term purchase commitments relating to a variety of goods and services required for our business. These agreements primarily consist of long-term gas purchase and transportation agreements. We estimate that these commitments will be approximately $1.1 billion through 2011. We also estimate that our 2005 base level capital expenditures will be approximately $115 million. We have made certain commitments in connection with such expected capital expenditures.

Bankruptcies

We sell gas to numerous companies operating in the steel, automotive, energy and retail industries. A number of customers have filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. We have negotiated or are currently involved in negotiations with each of the companies, or their successor companies, that have filed for bankruptcy protection. We regularly review contingent matters relating to sale contracts and record provisions for amounts considered probable of loss. We believe our previously accrued amounts are adequate for probable losses. The final resolution of these matters is not expected to have a material effect on our financial statements in the period they are resolved.

Other

We are involved in certain legal, regulatory, administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning matters arising in the ordinary course of business. These proceedings include certain contract disputes, environmental reviews and investigations,

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audits, inquiries from various regulators, 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 operations or financial statements in the period they are resolved.

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

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NOTE 10- RETIREMENT BENEFITS AND TRUSTEED ASSETS

Measurement Date

In the fourth quarter of 2004, we changed the date for actuarial measurement of our obligations for benefit programs from December 31 to November 30. We believe the one-month change of the measurement date is a preferable change as it allows time for management to plan and execute its review of the completeness and accuracy of its benefit programs results and to fully reflect the impact on its financial results. The change did not have a material effect on retained earnings as of January 1, 2004, and net income amounts for any interim period in 2004. Accordingly, all amounts reported in the following tables for balances as of December 31, 2004 are based on a measurement date of November 30, 2004. Amounts reported in tables for the year ended December 31, 2003 and for balances as of December 31, 2002 are based on a measurement date of December 31, 2003 and December 31, 2002.

Pension Plan Benefits

We have a defined benefit retirement plan for MichCon represented employees and participate in a defined benefit retirement plan for other DTE Energy represented and nonrepresented employees. The plans are noncontributory, cover substantially all employees and provide retirement benefits to MichCon employees based on the employee’s years of benefit service, average final compensation and age at retirement. Certain nonrepresented employees are covered under cash balance benefits based on annual employer contributions and interest credits. Currently these plans meet the full funding requirements of the Internal Revenue Code. Accordingly, no contributions for the 2004, 2003 or 2002 plan years were made. We do not anticipate making a contribution to our qualified pension plan in 2005.

Effective December 31, 2001, the MCN Energy Group Retirement Plan, that covered nonrepresented employees, merged into the DTE Energy Company Retirement Plan. Detroit Edison operates as the sponsor of the merged DTE Energy represented and nonrepresented plan, which is treated as a plan covering employees of various affiliates of DTE Energy from the affiliates’ perspective. Accordingly, the liabilities and assets associated with this Plan are no longer reflected in the tables below, and the associated prepaid pension asset of $246 million and $219 million at December 31, 2004 and December 31, 2003, respectively, are now reflected as an amount due from affiliate. We are allocated income or an expense each year as a result of our participation in the DTE Energy Retirement Plan. The annual income for 2004, 2003 and 2002 was $27 million, $31 million and $44 million, respectively.

Net pension credit includes the following components:

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The following table reconciles 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 at December 31:

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At December 31, 2004, the benefits expected to be paid in each of the next five years and in the aggregate for the five fiscal years thereafter are as follows:

We employ a consistent formal process in determining the long-term rate of return for various asset classes. We evaluate input from our consultants, including their review of historic financial market risks and returns and long-term historic relationships between the asset classes of equities, fixed income and other assets, consistent with the widely accepted capital market principle that asset classes with higher volatility generate a greater return over the long-term. Current market factors such as inflation, interest rates, asset class risks and asset class returns are evaluated and considered before long-term capital market assumptions are determined. The long-term portfolio return is also established employing a consistent formal process, with due consideration of diversification, active investment management and rebalancing. Peer data is reviewed to check for reasonability.

We employ a total return investment approach whereby a mix of equities, fixed income and other investments are used to maximize the long-term return of plan assets consistent with prudent levels of risk. The intent of this strategy is to minimize plan expenses over the long term. Risk tolerance is established through consideration of future plan cash flows, plan funded status, and corporate financial considerations. The investment portfolio contains a diversified blend of equity, fixed income and other investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, growth and value investment styles, and large and small market capitalizations. Other assets such as private equity and absolute return funds are used judiciously to enhance long term returns while improving portfolio diversification. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews.

Our plan’s weighted-average asset allocations by asset category at December 31 were as follows:

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Our plan’s weighted-average asset target allocations by asset category at December 31, 2004 were as follows:

We also sponsor a defined contribution retirement savings plan for union employees, the MichCon Investment and Stock Ownership Plan, and participate in a defined contribution plan for nonunion employees. Effective December 31, 2001, the MCN Energy Group Savings and Stock Ownership Plan, that covered nonunion employees of MichCon, MCN Energy and MCN Energy Enterprises, merged into the DTE Energy Company Savings and Stock Ownership Plan. Participation in one of these plans is available to substantially all union and nonunion employees. We match employee contributions up to certain predefined limits based upon eligible compensation, the employee’s contribution rate and, in some cases, years of credited service. The cost of these plans was $5 million in 2004, $5 million in 2003, and $4 million in 2002.

Other Postretirement Benefits

We provide certain postretirement health care and life insurance benefits for retired employees who are eligible for these benefits. Our policy is to fund certain trusts to meet our postretirement benefit obligations. Separate qualified Voluntary Employees’ Beneficiary Association (VEBA) trusts exist for represented and nonrepresented employees. No contributions were made to the VEBA trusts in 2004, 2003 or 2002. Net postretirement cost includes the following components: