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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the Quarterly Period ended March 31, 2005

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

(Exact name of registrant as specified in its charter)
     
Michigan
(State or other jurisdiction of
incorporation or organization)
  38-0478040
(I.R.S. Employer
Identification No.)
     
2000 2nd Avenue, Detroit, Michigan
(Address of principal executive offices)
  48226-1279
(Zip Code)

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

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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o No þ

 
 

 


Michigan Consolidated Gas Company

Quarterly Report on Form 10-Q
Quarter Ended March 31, 2005

Table of Contents

         
    Page  
    Number  
    1  
 
       
    2  
 
       
PART I - FINANCIAL INFORMATION
       
 
       
Item 1. Financial Statements
       
    7  
 
       
    8  
 
       
    10  
 
       
    11  
 
       
    12  
 
       
    17  
 
       
    3  
 
       
    6  
 
       
PART II - OTHER INFORMATION
       
 
       
    18  
 
       
    18  
 
       
    18  
 
       
    19  
 Form of Consent Memorandum dated as of May 9, 2005
 Chief Executive Officer Section 302 Certification
 Chief Financial Officer Section 302 Certification
 Chief Executive Officer Section 906 Certification
 Chief Financial Officer Section 906 Certification
 Form of Consent Memorandum dated as of May 9, 2005

 


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Definitions

     
Customer Choice
  The choice program is a statewide initiative giving customers in Michigan the option to choose alternative suppliers for gas.
 
   
DTE Energy
  DTE Energy Company, directly or indirectly, the parent of The Detroit Edison Company, MichCon and numerous non-utility subsidiaries.
 
   
End user transportation
  A gas delivery service historically provided to large-volume commercial and industrial customers who purchase natural gas directly from producers or brokerage companies. Under MichCon’s Customer Choice program that began in 1999, this service is also provided to residential customers and small-volume commercial and industrial customers.
 
   
Enterprises
  DTE Enterprises Inc., indirectly the parent of MichCon.
 
   
Gas storage
  For MichCon, the process of injecting, storing and withdrawing natural gas from a depleted underground natural gas field.
 
   
GCR
  A gas cost recovery mechanism authorized by the MPSC, permitting MichCon to pass the cost of natural gas to its customers.
 
   
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.
 
   
MichCon
  Michigan Consolidated Gas Company, an indirect, wholly-owned natural gas distribution and intrastate transmission subsidiary of Enterprises.
 
   
MPSC
  Michigan Public Service Commission.
 
   
SFAS
  Statement of Financial Accounting Standards.
 
   
Units of Measurement
   
 
   
Bcf
  Billion cubic feet of gas.
 
   
Mcf
  Thousand cubic feet of gas.

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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;
 
•   impact of regulation 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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MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

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

MichCon reported a loss of $13 million for the first quarter of 2005 compared to earnings of $70 million for the 2004 first quarter. Results for the first quarter of 2005 were impacted by the April 2005 MPSC gas cost recovery and final rate orders. Results for the first quarter of 2005 were also impacted by increases in operation and maintenance expenses due to higher uncollectible accounts expense.

Gas cost recovery order - In December 2001, the MPSC issued an order that permitted MichCon to implement gas cost recovery (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 representing the difference between the $4.38 factor and the $3.62 factor for volumes that were unbilled at December 31, 2001. MichCon’s 2002 GCR reconciliation case was filed with the MPSC in February 2003. The Staff and various intervening parties in this proceeding sought to have the MPSC disallow $26 million representing unbilled revenues at December 2001. On April 28, 2005, the MPSC issued an order in the 2002 GCR reconciliation case that disallowed $26 million plus accrued interest of $3 million. We recorded the impact of the disallowance in the first quarter of 2005.

Gas final rate order - On April 28, 2005, the MPSC issued an order for final rate relief. The MPSC granted a base rate increase to MichCon of $61 million annually, effective April 29, 2005. This amount is an increase of $26 million over the $35 million in interim rate relief approved in September 2004. The rate increase was based on a 50% debt and 50% equity capital structure and an 11% rate of return on common equity.

The MPSC adopted MichCon’s proposed tracking mechanism for uncollectible accounts receivable. Each year, MichCon will file an application comparing its actual uncollectible expense to its designated revenue recovery of approximately $37 million. Ninety percent of the difference will be refunded or surcharged after an annual reconciliation proceeding before the MPSC. The MPSC also approved the deferral of the non–capitalized portion of the negative pension expense. MichCon will record a regulatory liability in its financial statements for any negative pension costs as determined under generally accepted accounting principles. In addition, the MPSC approved a one-way tracker which provided for $25 million which is refundable in the event that the funds are not expended by safety and training operation and maintenance expenses.

The MPSC order reduces MichCon’s depreciation rates, and the related revenue requirement associated with depreciation expense by $14.5 million with no impact on net income.

The MPSC did not allow the recovery of approximately $25 million of costs allocated to MichCon that were incurred by DTE Energy as a result of the acquisition of MCN Energy.

The MPSC order also resulted in the disallowance of computer system and equipment costs and adjustments to environmental regulatory assets and liabilities. The MPSC disallowed recovery of 90% of the costs of a computer billing system that was in place prior to DTE Energy’s acquisition of MCN Energy in 2001. We impaired this asset by approximately $42 million. The MPSC disallowed approximately $6 million of certain computer equipment and related depreciation. The MPSC order also disallowed recovery of certain internal labor and legal costs related to remediation of manufactured gas plants of approximately $6 million.

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Increase (Decrease) in Income Statement Components
Compared to Prior Year
         
(in Millions)   2005  
Operating revenues
  $ 119  
Cost of gas
    139  
 
     
Gross margin
    (20 )
Operation and maintenance
    22  
Depreciation, depletion and amortization
    (1 )
Taxes other than income
    1  
Asset (gains) and losses, net
    50  
Other (income) and deductions
     
Income tax provision
    (9 )
 
     
Net income
  $ (83 )
 
     


Operating revenues increased $119 million in the first quarter of 2005. Gas sales revenues increased $116 million in the first quarter of 2005 due primarily to an increase in the gas commodity component of sales rates reflecting higher natural gas prices and higher base rates due to the interim rate increase in 2004. The gas commodity component portion of revenues is offset by a similar increase in gas costs, which is collectible through the GCR mechanism. The comparison was also affected by the impact of the April 2005 MPSC GCR order that disallowed $26 million representing unbilled revenues at December 2001. Additionally, gas sales revenues and volumes in both periods reflect the impact of weather, which was 2% colder in the first quarter of 2005 from the comparable 2004 period. End user transportation revenues increased $3 million in the first quarter of 2005 due to contractually driven adjustments to end user transportation contracts.


                 
    Quarter  
    2005     2004  
Gas Markets (in Millions)
               
Gas sales
  $ 756     $ 640  
End user transportation
    45       42  
 
           
 
    801       682  
Intermediate transportation
    14       15  
Other
    19       18  
 
           
 
  $ 834     $ 715  
 
           
 
               
Gas Markets (in Bcf)
               
Gas sales
    82       83  
End user transportation
    50       50  
 
           
 
    132       133  
Intermediate transportation
    134       174  
 
           
 
    266       307  
 
           


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 $139 million in the first quarter of 2005, primarily due to prices paid for gas supply. The average cost of gas sold increased $1.65 per Mcf (28%) in the first quarter of 2005 from the comparable 2004 period.

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Operation and maintenance expense increased $22 million in the first quarter of 2005, reflecting higher reserves for uncollectible accounts receivable, increased postretirement benefit costs and the impact of the April 2005 MPSC final rate order which increased our environmental costs, as previously discussed. The increase in uncollectible accounts expense reflects higher 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.

Asset gains and losses, net decreased $50 million due to the disallowances of approximately $42 million of costs related to a computer billing system and $6 million of certain computer equipment and related depreciation, as previously discussed. In March 2004, we recorded a $2 million gain from the sale of a gas storage facility.

Income taxes decreased $9 million in the first quarter of 2005. Income tax comparisons were affected by variations in pre-tax earnings. The decrease in income taxes is due primarily to a lower effective tax rate in 2005 compared to 2004 based on estimated lower pretax income in 2005.

SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS

We currently have an $81.25 million, three-year unsecured credit agreement originally entered into in October 2003, and a $243.75 million, five-year unsecured revolving credit facility entered into in October 2004. These 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. This credit facility facilitates short-term borrowing primarily for seasonal needs to buy gas in the summer for use in the winter heating season. In the last twelve months, the peak borrowing for this facility was $324.8 million. Borrowings under the facilities are available at prevailing short-term interest rates. Among other things, the agreements require us to maintain an “earnings before interest, taxes, depreciation and amortization” (EBITDA) to interest ratio of no less than 2 to 1 for each twelve-month period ending on the last day of March, June, September and December of each year.

As a result of the non-recurring accounting adjustments that were required due to the MPSC gas rate orders issued on April 28, 2005, we did not meet the EBITDA to interest ratio at March 31, 2005. The lenders have agreed to amend the credit facilities to exclude the EBITDA to interest ratio for the first quarter of 2005. If lenders had not amended the credit facility, our access to the commercial paper markets would be limited. At March 31, 2005 and the date of the amendments, we did not have any indebtedness under the credit facilities or any commercial paper outstanding.

We plan to seek rehearing of the MPSC orders to improve our resulting underlying cash flows. If unsuccessful in rehearing, we may file a follow on rate case in 2005. In addition, we may seek further amendments to the EBITDA to interest ratio for future periods. If we experience diminished ability to access the short-term and /or long-term capital markets, we would have to seek additional sources of liquidity. This may have a material negative impact on our financial position and significantly harm the operation of the business. We believe that we will have sufficient internal and external capital resources to manage liquidity and to fund anticipated capital requirements.

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CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of 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 March 31, 2005, which is the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effectively designed and operating to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting

There has been no change in the Company’s internal control over financial reporting during the first quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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MICHIGAN CONSOLIDATED GAS COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)


                 
    Three Months Ended  
    March 31  
(in Millions)   2005     2004  
Operating Revenues
  $ 834     $ 715  
 
           
 
               
Operating Expenses
               
Cost of gas
    627       488  
Operation and maintenance
    119       97  
Depreciation, depletion and amortization
    26       27  
Taxes other than income
    13       12  
Asset (gains) and losses, net (Note 3)
    48       (2 )
 
           
 
    833       622  
 
           
 
               
Operating Income
    1       93  
 
           
 
               
Other (Income) and Deductions
               
Interest expense
    15       14  
Interest income
    (2 )     (2 )
Other
          1  
 
           
 
    13       13  
 
           
 
               
Income (Loss) Before Income Taxes
    (12 )     80  
Income Tax Provision
    1       10  
 
           
Net Income (Loss)
  $ (13 )   $ 70  
 
           


See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION


                 
    March 31, 2005     December 31  
(in Millions)   (Unaudited)     2004  
ASSETS
               
Current Assets
               
Cash and cash equivalents
  $ 1     $  
Accounts receivable
               
Customer (less allowance for doubtful accounts of $80 and $71, respectively)
    336       184  
Accrued unbilled revenues
    134       167  
Other
    56       82  
Accrued gas cost recovery revenue
    53       55  
Due from affiliate
    46        
Inventories
               
Gas
    15       89  
Material and supplies
    16       15  
Other
    59       77  
 
           
 
    716       669  
 
           
 
               
Property, Plant and Equipment
    3,147       3,195  
Less accumulated depreciation, depletion and amortization
    (1,413 )     (1,409 )
 
           
 
    1,734       1,786  
 
           
 
               
Other Assets
               
Other investments
    89       92  
Notes receivable
    81       81  
Regulatory assets
    62       64  
Prepaid benefit costs and due from affiliate
    375       367  
Other
    15       17  
 
           
 
    622       621  
 
           
Total Assets
  $ 3,072     $ 3,076  
 
           


See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION


                 
    March 31, 2005     December 31  
(in Millions)   (Unaudited)     2004  
LIABILITIES AND SHAREHOLDER’S EQUITY
               
Current Liabilities
               
Accounts payable
  $ 150     $ 149  
Dividends payable
    13       13  
Short-term borrowings
    5       242  
Current portion of long-term debt, including capital leases
           
Federal income, property and other taxes payable
    61       38  
Regulatory liabilities
          28  
Gas inventory equalization (Note 1)
    278        
Other
    68       72  
 
           
 
    575       542  
 
           
 
               
Other Liabilities
               
Deferred income taxes
    165       184  
Regulatory liabilities
    565       564  
Unamortized investment tax credit
    18       18  
Accrued postretirement benefit costs
    123       118  
Accrued environmental costs
    20       17  
Other
    56       57  
 
           
 
    947       958  
 
           
 
               
Long-Term debt, including capital lease obligations
    785       785  
 
           
 
               
Contingencies (Note 5)
               
 
               
Shareholder’s Equity
               
Common stock, $1 par value, 15,100,000 shares authorized, 10,300,000 shares issued and outstanding
    10       10  
Additional paid in capital
    432       432  
Retained earnings
    324       350  
Accumulated other comprehensive loss
    (1 )     (1 )
 
           
 
    765       791  
 
           
Total Liabilities and Shareholder’s Equity
  $ 3,072     $ 3,076  
 
           


See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


                 
    Three Months Ended  
    March 31  
    2005     2004  
(in Millions)                
Operating Activities
               
Net income (loss)
  $ (13 )   $ 70  
Adjustments to reconcile net income (loss) to net cash from operating activities:
               
Depreciation, depletion and amortization
    26       27  
Deferred income taxes and investment tax credit, net
    (22 )     (7 )
Asset (gains) and losses, net
    48       (2 )
Changes in assets and liabilities:
               
Accounts receivable, net
    (126 )     (84 )
Accrued unbilled revenues
    33       43  
Inventories
    73       86  
Postretirement obligation
    5       3  
Property taxes assessed applicable to future periods
    (10 )     (9 )
Prepaid benefit costs and due from affiliate
    (8 )     (9 )
Accrued gas cost recovery
    (26 )     (38 )
Accounts payable
    1       (3 )
Gas inventory equalization
    278       167  
Federal income, property and other taxes payable
    23       23  
Other
    34       5  
 
             
Net cash from operating activities
    316       272  
 
           
 
               
Investing Activities
               
Capital expenditures
    (20 )     (14 )
Proceeds from sale of assets
          5  
Notes receivable from affiliate
    (46 )     (12 )
 
           
Net cash used for investing activities
    (66 )     (21 )
 
           
 
               
Financing Activities
               
Redemption of long-term debt
          (1 )
Short-term borrowings, net
    (237 )     (232 )
Dividends paid
    (12 )     (12 )
 
           
Net cash used for financing activities
    (249 )     (245 )
 
           
Net Increase in Cash and Cash Equivalents
    1       6  
Cash and Cash Equivalents at Beginning of Period
          1  
 
           
Cash and Cash Equivalents at End of Period
  $ 1     $ 7  
 
           
 
               
Supplementary Cash Flow Information
               
Interest paid (excluding interest capitalized)
  $ 18     $ 19  
Income taxes paid
           


See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY

CONSOLIDATED STATEMENT OF RETAINED EARNINGS
AND COMPREHENSIVE INCOME (UNAUDITED)


                 
    Three Months Ended  
    March 31  
(in Millions)   2005     2004  
Balance – beginning of period
  $ 350     $ 381  
Net income (loss)
    (13 )     70  
Common stock dividends declared
    (13 )     (13 )
 
           
Balance – end of period
  $ 324     $ 438  
 
           


The following table displays other comprehensive income (loss) for the three-month periods ended March 31:


                 
(in Millions)   2005     2004  
Net income (loss)
  $ (13 )   $ 70  
 
           
 
Comprehensive income (loss)
  $ (13 )   $ 70  
 
           


See Notes to Consolidated Financial Statements (Unaudited)

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Michigan Consolidated Gas Company

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1– SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements included in our 2004 Annual Report 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 may 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 certain prior year balances to match the current year’s financial statement presentation.

Asset Retirement Obligations

SFAS No. 143, “Accounting for Asset Retirement Obligations,” requires that 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 will be deferring such differences under SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.”

A reconciliation of the asset retirement obligation for the 2005 three-month period follows:


         
(in Millions)        
Asset retirement obligations at January 1, 2005
  $ 5  
Accretion
     
Liabilities settled
     
 
     
Asset retirement obligations at March 31, 2005
  $ 5  
 
     


Retirement Benefits and Trusteed Assets

MichCon sponsors a defined benefit retirement plan for eligible MichCon represented employees. MichCon also participates in a defined benefit retirement plan sponsored by Detroit Edison for its other nonrepresented employees, which is treated as a plan covering employees of various affiliates of DTE Energy from the affiliates’ perspective. We are allocated income or an expense each year as a result of our participation in the DTE Energy Company Retirement Plan. Income was approximately $7 million for the three months ended March 31, 2005 and for the three months ended March 31, 2004 and is not reflected in following table.

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The components of net periodic benefit cost (credit) for pension benefits and other postretirement benefits follow:


                                 
                    Other Postretirement  
    Pension Benefits     Benefits  
(in Millions)   2005     2004     2005     2004  
Three Months Ended March 31
                               
 
Service Cost
  $ 2     $ 2     $ 3     $ 2  
Interest Cost
    4       4       6       5  
Expected Return on Plan Assets
    (7 )     (7 )     (3 )     (2 )
Amortization of
                               
Net loss
                2        
Prior service cost
                       
Net transition liability
                2       2  
 
                       
Net Periodic Benefit Cost (Credit)
  $ (1 )   $ (1 )   $ 10     $ 7  
 
                       


Gas in Inventory

Gas inventory is priced on a last-in, first-out (LIFO) basis. In anticipation that interim inventory reductions will be replaced prior to year end, the cost of gas of net withdrawals from inventory is recorded at the estimated average purchase rate for the calendar year. The excess of these charges over the LIFO cost is credited to the gas inventory equalization account. During interim periods when there are net injections to inventory, the equalization account is reversed.

NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

Medicare Act Accounting

In May 2004, FASB Staff Position (FSP) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” was issued on accounting for the effects of the Medicare Act. In the second quarter of 2004, we adopted FSP No. 106-2, retroactive to January 1, 2004 and as a result earnings for the first quarter of 2004 have been restated. 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 $1 million in the first quarter of 2004.

Accounting for Conditional Asset Retirement Obligations

In March 2005, the FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” FIN 47 seeks to clarify the requirement to record liabilities stemming from a legal obligation to perform asset retirement activities on fixed assets when that retirement is conditioned on a future event. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently assessing the effects of this interpretation, but has not yet determined the impact on the consolidated financial statements.

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NOTE 3 — REGULATORY MATTERS

Gas Rate Case

MPSC Final Rate Order - 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 requested an overall increase in base rates of $194 million per year 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. The final rate request was subsequently revised to $159 million.

On April 28, 2005, the MPSC issued an order for final rate relief. The MPSC determined that the base rate increase granted to MichCon should be $61 million annually effective April 29, 2005. This amount is an increase of $26 million over the $35 million in interim rate relief approved in September 2004. The rate increase was based on a 50% debt and 50% equity capital structure and an 11% rate of return on common equity.

The MPSC adopted MichCon’s proposed tracking mechanism for uncollectible accounts receivable. Each year, MichCon will file an application comparing its actual uncollectible expense to its designated revenue recovery of approximately $37 million. Ninety percent of the difference will be refunded or surcharged after an annual reconciliation proceeding before the MPSC. The MPSC also approved the deferral of the non-capitalized portion of the negative pension expense. MichCon will record a regulatory liability in its financial statements for any negative pension costs as determined under generally accepted accounting principles. In addition, the MPSC approved a one-way tracker which provided for $25 million which is refundable in the event that the funds are not expended for safety and training operation and maintenance expenses.

The MPSC order reduces MichCon’s depreciation rates, and the related revenue requirement associated with depreciation expense by $14.5 million with no impact on net income.

The MPSC did not allow the recovery of approximately $25 million of costs allocated to MichCon that were incurred by DTE Energy as a result of the acquisition of MCN Energy.

The MPSC order also resulted in the disallowance of computer system and equipment costs and adjustments to environmental regulatory assets and liabilities. The MPSC disallowed recovery of 90% of the costs of a computer billing system that was in place prior to DTE Energy’s acquisition of MCN Energy in 2001. We impaired this asset by approximately $42 million. The MPSC disallowed approximately $6 million of certain computer equipment and related depreciation. The MPSC order also disallowed recovery of certain internal labor and legal costs related to remediation of manufactured gas plants of approximately $6 million.

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. Consistent with prior orders, MichCon recognized a regulatory asset 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 was 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. We recorded a $26.5 million reserve in 2002 to reflect the impact of this order.

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MichCon’s 2002 GCR reconciliation case was filed with the MPSC in February 2003. The Staff and various intervening parties in this proceeding sought to have the MPSC disallow an additional $26 million, representing unbilled revenues at December 2001. One party also proposed the disallowance of half of an $8 million payment made to settle Enron bankruptcy issues. The other parties to the case recommended that the Enron bankruptcy settlement be addressed in the 2003 GCR reconciliation case. In April 2005, the MPSC issued an order in the 2002 GCR reconciliation case affirming the order in the 2002 GCR plan case disallowing $26.5 million related to the use of storage gas in 2001. The April 2005 order also disallowed the additional $26 million representing unbilled revenues at December 2001. We recorded the impact of the disallowance in the first quarter of 2005. The MPSC agreed that the $8 million related to the Enron issue be addressed in the 2003 GCR reconciliation case. MichCon included this item in testimony in the 2003 GCR reconciliation filed in February 2004 and the Staff has recommended that MichCon be allowed to recover the entire $8 million related to the Enron issue.

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 quarterly contingent GCR factors. These contingent factors allow MichCon to increase the maximum GCR factor to compensate for increases in market prices, thereby reducing the possibility of a GCR under-recovery. In April 2005, the MPSC issued an order recognizing that Michigan law allows MichCon to self-implement its quarterly contingent factors. Approval of the contingent factors will be determined in the MPSC’s final order in this case.

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 - SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS

We currently have an $81.25 million, three-year unsecured credit agreement originally entered into in October 2003, and a $243.75 million, five-year unsecured revolving credit facility entered into in October 2004. These 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 are available at prevailing short-term interest rates. Among other things, the agreements require us to maintain an “earnings before interest, taxes, depreciation and amortization” (EBITDA) to interest ratio of no less than 2 to 1 for each twelve-month period ending on the last day of March, June, September and December of each year.

As a result of the non-recurring accounting adjustments that were required due to the MPSC gas rate orders issued on April 28, 2005, we did not meet the EBITDA to interest ratio at March 31, 2005. The lenders have agreed to amend the credit facilities to exclude the EBITDA to interest ratio for the first quarter of 2005. At March 31, 2005 and the date of the amendments, we did not have any indebtedness under the credit facilities or any commercial paper outstanding.

NOTE 5 - 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, we spent $2.3 million, 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, 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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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying condensed consolidated statement of financial position of Michigan Consolidated Gas Company and subsidiaries as of March 31, 2005, and the related condensed consolidated statements of operations, cash flows and retained earnings and comprehensive income for the three-month periods ended March 31, 2005 and 2004. These interim financial statements are the responsibility of Michigan Consolidated Gas Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board (United States), 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of Michigan Consolidated Gas Company and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, cash flows and retained earnings and comprehensive income for the year then ended (not presented herein); and in our report dated March 15, 2005 (which report includes an explanatory paragraph relating to the change in the method of accounting for asset retirement obligations in 2003), 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, 2004 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
May 10, 2005

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OTHER INFORMATION

LEGAL PROCEEDINGS

We are involved in certain legal, regulatory, 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, 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 financial statements in the period they are resolved.

OTHER INFORMATION

Pursuant to consent memoranda dated May 9, 2005, MichCon’s Three-Year Credit Agreement, dated as of October 24, 2003 and Amended and Restated Five-Year Credit Agreement, dated as of October 15, 2004 were amended. Forms of each such consent memorandum are filed as exhibits to this report. See “Management’s Narrative Analysis of the Results of Operation” for more information.

EXHIBITS

     
Exhibit    
Number   Description
  (i) Exhibits filed herewith:
 
   
10-16
  Form of Consent Memorandum dated as of May 9, 2005 and amending the Amended and Restated Five-Year Credit Agreement, dated as of October 15, 2004.
 
   
31-15
  Chief Executive Officer Section 302 Form 10-Q Certification
 
   
31-16
  Chief Financial Officer Section 302 Form 10-Q Certification
 
   
99-13
  Form of Consent Memorandum dated as of May 9, 2005 and amending the Three-Year Credit Agreement, dated as of October 24, 2003.
 
   
  (ii) Exhibits furnished herewith:
 
   
32-15
  Chief Executive Officer Section 906 Form 10-Q Certification
 
   
32-16
  Chief Financial Officer Section 906 Form 10-Q Certification

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Signature

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

         
      MICHIGAN CONSOLIDATED
GAS COMPANY
 
       
Date: May 10, 2005
      /s/ DANIEL G. BRUDZYNSKI
       
      Daniel G. Brudzynski
      Chief Accounting Officer,
      Vice President and Controller

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Exhibit Index

     
Exhibit    
Number   Description
  (i) Exhibits filed herewith:
 
   
10-16
  Form of Consent Memorandum dated as of May 9, 2005 and amending the Amended and Restated Five-Year Credit Agreement, dated as of October 15, 2004.
 
   
31-15
  Chief Executive Officer Section 302 Form 10-Q Certification
 
   
31-16
  Chief Financial Officer Section 302 Form 10-Q Certification
 
   
32-15
  Chief Executive Officer Section 906 Form 10-Q Certification
 
   
32-16
  Chief Financial Officer Section 906 Form 10-Q Certification
 
   
99-13
  Form of Consent Memorandum dated as of May 9, 2005 and amending the Three-Year Credit Agreement, dated as of October 24, 2003.