Back to GetFilings.com

Table of Contents

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 June 30, 2003

Commission file number 1-7310

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

MICHIGAN CONSOLIDATED GAS COMPANY
(Exact name of registrant as specified in its charter)

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 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

Yes o No x

Table of Contents

MICHIGAN CONSOLIDATED GAS COMPANY
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2003

TABLE OF CONTENTS

2

Table of Contents

DEFINITIONS

3

Table of Contents

4

Table of Contents

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;
•		economic climate and growth in the geographic areas where we do business;
•		environmental issues, including changes in the climate, and regulations;
•		implementation of gas Customer Choice programs;
•		implementation of gas utility restructuring in Michigan;
•		employee relations;
•		capital market conditions and access to capital markets and 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 of natural gas;
•		effects of competition;
•		impact of FERC and MPSC proceedings and regulations;
•		changes in federal or state tax laws and their interpretations, including the code, regulations, rulings, court proceedings and audits;
•		ability to recover costs through rate increases;
•		property insurance;
•		the cost of protecting assets against or damage due to terrorism; and
•		changes in accounting standards and financial reporting regulations.

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

5

Table of Contents

MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

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

MichCon reported losses of $11 million and earnings of $64 million for the second quarter and six-month period of 2003, respectively, compared with losses of $34 million and earnings of $21 million for the comparable 2002 periods. The reduced loss in the second quarter and the higher earnings for the six-month period were primarily due to charges recorded in the second quarter of 2002 from the planned sale of our former headquarters and the termination of a contract for computer services and higher gross margins in 2003.

Operating revenues increased $49 million and $111 million in the second quarter and six-month period of 2003, respectively, reflecting increased gas sales and end user transportation revenues.

6

Table of Contents

Gas sales and end user transportation revenues in total increased $44 million and $104 million in the second quarter and six-month period of 2003, respectively. The increase is due primarily to an increase in Gas Cost Recovery (GCR) revenues of $47 million and $79 million for the second quarter and six-month period of 2003, respectively. Also, the increase for the six-month period of 2003 is due to $28 million in weather related demand. Since returning to the GCR mechanism in January 2002, MichCon has no commodity price risk associated with its prudently incurred gas costs. End user transportation revenues reflect higher rates and lower volumes for deliveries associated with a varying number of customers participating in the Customer Choice program. Customers participating in this program purchase gas from suppliers other than MichCon, 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.

Intermediate transportation revenues remained unchanged in the 2003 second quarter and intermediate transportation deliveries increased 13 billion cubic feet (Bcf) for the same period. Intermediate transportation revenues increased $2 million for the six-month period of 2003 and intermediate transportation deliveries increased 46 billion cubic feet (Bcf) for the same period. A significant portion of the volume increase was due to storage requirements combined with a volume increase attributable to customers who pay a fixed fee for intermediate transportation capacity regardless of actual usage. Although volumes associated with these fixed-fee customers may vary, the related revenues are not affected.

Cost of gas is affected by variations in sales volumes, cost of purchased gas and related transportation costs. Cost of gas sold increased by $44 million and $81 million in the second quarter and six-month period of 2003, respectively. The average cost of gas sold increased $1.26 per Mcf (33.4%) and $.47 per Mcf (10.1%) for the second quarter and six-month period, respectively, from the comparable 2002 periods.

Operation and maintenance expenses increased $10 million and $21 million for the second quarter and six-month period, respectively, from the comparable 2002 periods due to higher employee pension and health care benefit costs, higher uncollectible accounts expense and increased costs associated with customer service process improvements. As a result of the continued increase in operating costs, MichCon expects to file a rate case in the latter half of 2003.

Property write-down was $5 million in 2003 due to an additional charge from the planned sale of our former headquarters. The 2002 second quarter property write-down and contract loss included a $33 million charge from the planned sale of our former headquarters and a $15 million charge related to the termination of a contract for computer services (Note 6).

Other income and deductions decreased $2 million and $3 million for the 2003 second quarter and six-month period, respectively, primarily due to lower interest expense associated with long term debt.

Income taxes increased $14 million and $9 million for the 2003 second quarter and six-month period, respectively, due to an increase in pre-tax earnings. The income tax provision for the six-month period of 2003 was favorably affected by an increase in the amortization of tax benefits previously deferred in accordance with MPSC regulations.

7

Table of Contents

CAPITAL RESOURCES AND LIQUIDITY

Operating Activities

Net cash from operating activities increased $101 million during the 2003 six-month period as compared to the same 2002 period primarily due to improved working capital, specifically accounts payable and gas in inventory, partially offset by a decline in net income, after adjusting for non-cash items (depreciation, depletion, amortization, deferred taxes, property write-down and contract losses).

Investing Activities

Net cash used for investing activities increased $86 million reflecting an intercompany loan to DTE Energy, resulting from temporary excess cash.

Financing Activities

Net cash used for financing activities increased $19 million reflecting the redemption of long-term debt, reduction of short-term borrowings and the payment of a dividend, partially offset by the issuance of $200 million of long-term debt (Note 5).

8

Table of Contents

CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - - 15(e)) as of the end of the period covered by this report, and have concluded that, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in reports filed under the Exchange Act.

(b) Changes in internal controls

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in the Company’s internal controls or in other factors that could significantly affect these controls.

9

Table of Contents

MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

See Notes to Consolidated Financial Statements (Unaudited)

10

Table of Contents

MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION