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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the fiscal year ended December 31, 2003

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:

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 [X] No [  ]

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. [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

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

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Michigan Consolidated Gas Company

Annual Report on Form 10-K
Year Ended December 31, 2003

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Definitions

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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;
•		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;
•		access to capital markets and capital market conditions and other financing efforts that can be affected by credit agency ratings;
•		the timing and extent of changes in interest rates;
•		the level of borrowings;
•		changes in the cost of natural gas;
•		effects of competition;
•		impact of 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;
•		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.

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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, successor to MCN Energy. 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 billion in assets at December 31, 2003 and revenues of approximately $1.5 billion in 2003.

On May 31, 2001, DTE Energy completed the acquisition of MCN Energy. At that time, MCN Energy merged with Enterprises, with Enterprises being the surviving corporation. See Note 3 for a further discussion of the MCN Energy merger.

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.

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•		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.
•		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 increased revenues through increased rates as a result of our rate case, which was filed in September 2003 (see Note 4).

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 the business, revenues and net income are concentrated in the first and fourth quarters of the calendar year. By the end of the first quarter, the heating season is largely over, and 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 133 Bcf, or 76% of our normal 2004 gas supply requirement. We have entered into fixed-price contracts for approximately 44 Bcf or 25% of our expected 2004 supply requirements. The balance of the gas supply requirement is expected to be met by purchasing gas at market prices. At December 31, 2003, 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 3.0 Bcf, with approximately 68% of the volume coming from underground storage for 2003. Gas costs are recovered through the gas cost recovery (GCR) mechanism.

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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 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 1990’s, 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. The local utility would continue to transport the natural gas supply to the customers’ facilities, thereby retaining distribution margins. In December 2001, the MPSC issued an order that continues the gas Customer Choice program on a permanent and expanding basis beginning with the conclusion of the three-year temporary program on March 31, 2002. Under the expanded program, which began April 1, 2002, up to approximately 40% of our customers could elect to purchase gas from suppliers other than MichCon. Beginning in April 2003, up to approximately 60% of customers could participate and beginning April 2004, all 1.2 million of our gas customers could choose to participate. Since we continue 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 our earnings.

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Under the December 2001 MPSC order, we returned to a GCR mechanism effective January 2002. Under this mechanism, our gas sales rates include a gas commodity component designed to recover our actual gas cost and therefore does not have a commodity price risk for prudently incurred gas costs. During 2001, MichCon was under a Gas Sales Program and incurred commodity price risk associated with its ability to secure gas supplies at prices less than $2.95 per Mcf.

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. MichCon has requested that the MPSC increase base rates by $154 million per year on an interim basis by April 1, 2004. The interim request is based on a projected revenue deficiency for the test year 2004.

For additional information regarding our regulatory environment, see Note 4 - Regulatory Matters.

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 uncollectable accounts receivable and collections expenses.

Our uncollectible accounts receivable expense is directly affected by the level of government funded assistance our qualifying customers receive. 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, 2003, our distribution system included approximately 18,000 miles of distribution mains, approximately 1,148,000 service lines and approximately 1,279,000 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.

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Some properties are being fully utilized, and new properties are being added to meet the expansion requirements of existing areas. Our capital investments for 2003 totaled $98 million, which compares with $90 million in 2002 and $111 million in 2001.

Our subsidiaries own a 67-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 67-mile gathering pipeline and an 83% interest in an additional 32-miles of gathering pipelines in northern Michigan. We lease a portion of our pipeline system to the Vector Pipeline Partnership through a capital lease arrangement (Note 8).

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. As a result of MichCon returning to a GCR mechanism in January 2002, we do not profit from selling gas. 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 revenues to remain at current levels or slightly decline. To partially offset these factors, we plan initiatives to expand our gas markets, as well as by continuing to provide energy-related services that capitalize on our expertise, capabilities and efficient systems. We also anticipate increased revenues through increased rates as a result of our rate case, which was filed on September 30, 2003 (see Note 4).

Competition in the gas business primarily involves other natural gas providers, alternative fuels and energy sources. Developers select natural gas in new construction because of the convenience, cleanliness and relative price advantage compared to propane, fuel oil and other alternative fuels.

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.

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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 related to utility operations through rates charged to our customers. Greater details on environmental issues are provided in the following Notes to the Consolidated Financial Statements:

Prior to the construction of major natural gas pipelines, gas for heating and other uses was manufactured 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 seven of the former MGP sites and conducting more extensive investigations at five 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. 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 – Weather significantly affects our operations. Deviations from normal hot and cold weather conditions affect our earnings and cash flow. Mild temperatures can result in decreased utilization of our assets, lowering income and cash flow.

Competition – Deregulation and restructuring in the gas industry, could result in increased competition and unrecovered costs that could affect the financial condition, results of operations or cash flows of our regulated business.

Rate regulation – We operate in a regulated industry. Our rates are set by the MPSC and cannot be increased without their 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. There is no assurance that our currently pending gas rate increases will be granted.

Credit ratings – 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. Several of the

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credit agencies have placed a “negative outlook” on our ratings or are currently reviewing us for a possible downgrade due primarily to the uncertainty regarding our gas rate cases. A downgrade in our rating could restrict or discontinue our ability to access capital markets at attractive rates and increase our borrowing costs.

Regional and national economic conditions – Our businesses follow 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.

Environmental laws and liability – We are subject to numerous environmental regulations. Compliance with these regulations can significantly increase capital spending and operating expenses. These laws and regulations require us to seek a variety of environmental licenses, permits, inspections, and other regulatory approvals. The regulatory environment is subject to significant change, and therefore we cannot predict future issues.

Additionally, 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.

Supply and price of raw materials – Our access to natural gas supplies is critical to ensure reliability of service for our regulated gas customers.

Labor relations – Unions represent a majority of our employees. A union choosing to strike as a negotiating tactic would have an impact on our business.

Access to capital markets and interest rates – 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.

Property tax reform – We are one of the largest payers of property taxes in the state of Michigan. Should the legislature change how schools are financed, we could face increased property taxes on our Michigan facilities.

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 – Damage to downstream infrastructure or our own assets by terrorist groups would impact our operations.

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EMPLOYEES

We had 2,301 employees at December 31, 2003, of which 1,514 were represented by unions. Of the represented employees, 1,080 are under contracts that expire in October 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 and Related Stockholder Matters

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 2003 and $75 million in 2001. 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 $45 million and $20 million in 2003 and 2002, respectively. Results for 2003 were impacted by increases in operation and maintenance expenses due to higher employee pension and health care benefit costs, higher uncollectible accounts expense and increased costs associated with customer service process improvements. Higher earnings for 2003 were primarily due to improved gross margins, as well as charges recorded in the second quarter of 2002 from the planned sale of our former headquarters and the termination of a contract for computer services. The comparison for 2002 was impacted by $103 million ($67 million net of taxes) of merger and restructuring charges recorded in 2001.

Increase (Decrease) in Income Compared to Prior Year

Operating revenues increased $180 million in 2003 and increased $94 million in 2002, reflecting increased gas sales and end user transportation revenues. Operating revenues reflect the favorable impact of weather, which was 11% colder in 2003 and 6% colder in 2002.

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Gas sales and end user transportation revenues in total increased $172 million in 2003 and $92 million in 2002. The increase in revenues for both 2003 and 2002 is due primarily to an increase in the gas commodity component of sales rates. This portion of revenues is offset by similar gas costs subject to collection through the GCR. During 2001 we operated under the Gas Sales Program in which the gas commodity component of our sales rates was fixed at $2.95 per thousand cubic feet (Mcf). In January 2002, the Gas Sales Program ended and we returned to a gas cost recovery mechanism (GCR) that allows for the recovery of reasonably and prudently incurred gas costs. Our sales rates included a gas commodity component of $3.62 per Mcf for January 2002 and $4.38 per Mcf for the remainder of 2002 compared to $2.95 per Mcf in 2001 which was the primary reason for increased revenues. Revenues in 2002 were also adversely affected by a $26 million accrual for the possible disallowance of gas cost in the 2002 GCR reconciliation case.

End user transportation revenues for 2003 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. There were approximately 129,000 customers participating in the gas Customer Choice program at December 31, 2003, compared to approximately 190,000 customers at December 31, 2002.

Intermediate transportation revenues increased $3 million in 2003 and increased $2 million in 2002. Intermediate transportation deliveries increased 84 Bcf in 2003 and decreased 73 Bcf in 2002. A significant portion of the volume increase in 2003 was due to storage requirements. In 2002, a significant

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portion of the volume decrease was due to weather. Both 2003 and 2002 had 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, and the effects of any permanent liquidation of inventory gas. Cost of gas sold increased $134 million in 2003 and $91 million in 2002 primarily due to prices paid for gas supply. The average cost of gas sold increased $.57 per Mcf (13%) and increased $1.05 per Mcf (32%) for 2003 and 2002, respectively. We recorded the benefits of a 19.6 Bcf inventory liquidation in 2001. The inventory liquidation was priced at $0.38 per Mcf compared to an average gas purchase rate in 2001 of $3.61 per Mcf. The effect of the inventory liquidation lowered cost of gas for 2001 by $63.2 million.

Operation and maintenance expenses increased $72 million in 2003 and decreased $21 million in 2002. The 2003 increase was due to higher employee pension and health care benefit costs, higher uncollectible accounts expense and increased costs associated with customer service process improvements. Operation and maintenance expenses benefited from our Company-wide initiative to reduce or defer costs and enhance operating performance. The DTE Operating System involves the application of tools and operating practices, which have resulted in improvements in technology systems, among other enhancements. As a result of the continued increase in operating costs, MichCon filed a rate case in September of 2003 requesting a $194 million increase in annual service and distribution charges (Note 4). The 2002 decrease was due primarily to lower accruals for injuries and damages and costs allocated from DTE Energy corporate for corporate support services, partially offset by higher uncollectible accounts expense.

Merger and restructuring charges were incurred in 2001. Merger costs associated with the DTE Energy acquisition of MCN Energy consist primarily of system integration, relocation, legal, accounting and consulting costs (Note 3). Restructuring charges consist of charges associated with a work force reduction plan.

Property write-down and contract losses declined $43 million in 2003. During the 2002 second quarter, we recorded a $33 million charge for an anticipated loss from the planned sale of our former headquarters and a $15 million charge related to the termination of a contract for computer services. During the 2003 second quarter, we recorded an additional $5 million charge for the planned sale of our former headquarters (Note 13).

Loss on sale of assets increased $3 million from the sale in the 2003 fourth quarter of our former headquarters.

Other income and deductions decreased $7 million and $9 million in 2003 and 2002, respectively. The 2003 decrease was primarily due to a $6 million gain from the sale of our interests in a series of partnerships. The variance in 2002 is primarily due to a $9 million estimated impairment of our investment in 2001 in Harbortown, a residential community on the Detroit riverfront. Partially offsetting the decrease for the 2002 period were higher interest costs.

Income taxes decreased $3 million in 2003 and increased $38 million in 2002 (Note 5). Income tax comparisons were affected by variations in pre-tax earnings. Income taxes in 2003 were favorably affected by an increase in the amortization of tax benefits previously deferred in accordance with MPSC regulations.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

Prior to the reinstatement of the GCR mechanism in January 2002, our primary market risk arose from fluctuations in natural gas prices. We managed such natural gas price risk by entering into fixed-price contracts for a large portion of our expected supply requirements. If we did not enter into these fixed-price supply contracts, our exposure to such risk would have been substantially higher. See Note 9 – Financial and Other Derivative Instruments.

Interest Rate Risk

We currently have market risk from fluctuations in interest rates. We manage interest rate risk through the use of various derivative instruments and limit the use of such instruments to hedging activities. If we did not use derivative instruments, our exposure to such risk would be higher. We are subject to interest rate risk in connection with the issuance of fixed- and variable-rate debt. In order to manage interest costs, we use interest rate swap agreements to exchange fixed- and variable-rate interest payment obligations over the life of the agreements without exchange of the underlying principal amounts. 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).

At December 31, 2002, we had interest rate swap agreements with notional principal amounts totaling $40 million. This swap was terminated in August 2003. The notional principal amounts are used solely to calculate amounts to be paid or received under the interest rate swap agreements and approximate the principal amount of the underlying debt being hedged.

A sensitivity analysis model was used to calculate the fair values of our debt and interest rate swaps, utilizing applicable forward interest rates in effect at December 31, 2003. The sensitivity analysis involved increasing and decreasing the forward rates by a hypothetical 10% and calculating the resulting change in the fair values or cash flows of the interest rate sensitive instruments.

The results of the sensitivity model calculations follow: