MICHIGAN CONSOLIDATED GAS CO /MI/ - 10-Q Quarterly Report

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, 2004

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		38-0478040
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2000 2nd Avenue, Detroit, Michigan		48226-1279
(Address of principal executive offices)		(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 (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 ___

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

Yes ___ No X

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 Detroit Edison and MichCon

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. (successor to MCN Energy)
		and subsidiaries.

Gas Sales Program		A three-year program that ended in December
		2001 under which MichCon’s gas sales rate
		included a gas commodity component that was
		fixed at $2.95 per Mcf.

GCR		A gas cost recovery mechanism authorized by
		the MPSC that was reinstated by MichCon in
		January 2002 permitting MichCon to pass on 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.

MMcf		Million cubic feet of gas.

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 gas Customer Choice programs;

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

• employee relations and the impact of collective bargaining agreements;

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

• the timing and extent of changes in interest rates;

• the level of borrowings;

• changes in the cost and availability of natural gas;

• effects of competition;

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

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

• the ability to recover costs through rate increases;

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

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

• changes in accounting standards and financial reporting regulations;

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

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.

MICHIGAN CONSOLIDATED GAS COMPANY
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 $37 million and earnings of $33 million for the second quarter and six-month period of 2004, respectively, compared with losses of $11 million and earnings of $64 million for comparable 2003 periods. Results for the second quarter and six-month period of 2004 were primarily impacted by increases in operation and maintenance expenses due to higher uncollectable accounts expense and higher employee benefit costs. Additionally, results for the second quarter and six-month period of 2004 were impacted by lower gross margins offset by a decrease in the income tax provision due to lower pre-tax earnings.



	Quarter			Six Months
Increase (Decrease) in Income Compared to Prior Year
(in Millions)
Operating revenues	$	(13	)	$	50
Cost of gas		(1	)		(68	)

Gross margin		(14	)		(18	)
Operation and maintenance		(25	)		(42	)
Depreciation, depletion and amortization		2			—
Taxes other than income		—			5
Property write-down and contract losses		5			5
Other (income) and deductions		—			(2	)
Income tax provision		6			21

Net income	$	(26	)	$	(31	)

Operating revenues decreased $13 million in the second quarter of 2004, reflecting decreased gas sales and reduced end user transportation revenues. Operating revenues increased $50 million in the six-month period of 2004, reflecting increased gas sales and reduced end user transportation revenues.



	Quarter				Six Months
	2004		2003		2004		2003
Gas Markets (in Millions)
Gas sales	$	216	$	227	$	856	$	788
End user transportation		25		28		67		85

		241		255		923		873
Intermediate transportation		12		12		27		26
Other		18		17		36		37

	$	271	$	284	$	986	$	936

Gas Markets (in Bcf)
Gas sales		22		32		105		112
End user transportation		29		25		79		86

		51		57		184		198
Intermediate transportation		129		130		303		304

		180		187		487		502

Gas sales and end user transportation revenues in total decreased $14 million and increased $50 million in the second quarter and six-month period of 2004, respectively. The decrease in the second quarter of 2004 is due primarily to a decrease in Gas Cost Recovery (GCR) revenues of $4 million, which are offset by similar gas costs subject to collection through the GCR, and a decrease of $6 million in weather related demand. The increase for the six month period of 2004 is due primarily to an increase in GCR revenues of $68 million, partially offset by $16 million in weather related demand. End user transportation revenues for the six-month period of 2004 reflect 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 115,000 customers participating in the Customer Choice program at June 30, 2004, compared with approximately 129,000 customers at December 31, 2003.

Cost of gas is affected by variations in sales volumes, cost of purchased gas and related transportation costs. Cost of gas sold increased by $1 million and $68 million in the second quarter and six-month period of 2004, respectively. The average cost of gas sold increased $1.89 per Mcf (37%) and $.97 per Mcf (19%) for the second quarter and six-month period, respectively, from the comparable 2003 periods.

Operation and maintenance expenses increased $25 million and $42 million for the second quarter and six-month period of 2004, respectively, from the comparable 2003 period primarily due to higher uncollectable accounts expense, reflecting higher past due amounts attributable to an increase in gas prices, continued weak economic conditions and a lack of adequate assistance for low-income customers. Higher employee benefit costs and accruals for injuries and damages also contributed to the increase.

Property write-down declined $5 million for both the second quarter and six-month period of 2004 due to a charge in 2003 for the planned sale of our former headquarters.

Income taxes decreased $6 million and $21 million for the 2004 second quarter and six-month period, respectively, primarily due to a lower effective tax rate in 2004 driven by lower estimated annual earnings.

ENVIRONMENTAL MATTERS

See Note 5 — Contingencies for discussion of environmental matters.

REPRESENTED EMPLOYEES

Approximately 1,100 of the company’s employees were under a contract that expired in October 2004. A new three-year contract was ratified in August 2004.

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 June 30, 2004, 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 to ensure that required information disclosed by the company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and timely reported in accordance with Commission’s rules and forms.

(b) Changes in internal control over financial reporting

There has been no change in the company’s internal control over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)



	Three Months Ended						Six Months Ended
	June 30						June 30
(in Millions)	2004			2003			2004			2003
Operating Revenues	$	271		$	284		$	986		$	936

Operating Expenses
Cost of gas		161			160			649			581
Operation and maintenance		108			83			203			161
Depreciation, depletion and amortization		26			28			53			53
Taxes other than income		13			13			25			30
Property write-down (Note 4)		—			5			—			5

		308			289			930			830

Operating Income (Loss)		(37	)		(5	)		56			106

Other (Income) and Deductions
Interest expense		13			14			27			29
Interest income		(3	)		(3	)		(5	)		(6	)
Other		—			(1	)		1			(2	)

		10			10			23			21

Income (Loss) Before Income Taxes		(47	)		(15	)		33			85
Income Tax Provision (Benefit)		(10	)		(4	)		—			21

Net Income (Loss)	$	(37	)	$	(11	)	$	33		$	64

See Notes to Consolidated Financial Statements (Unaudited)

MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION



	June 30
	2004			December 31
(in Millions)	(Unaudited)			2003
ASSETS
Current Assets
Cash and cash equivalents	$	—		$	1
Accounts receivable
Customer (less allowance for doubtful accounts of $65 and $43, respectively)		173			178
Accrued unbilled revenues		25			117
Other		58			100
Accrued gas cost recovery revenue		89			19
Notes receivable from affiliate		32			—
Inventories
Gas		72			117
Material and supplies		15			14
Other		54			67

		518			613

Property, Plant and Equipment		3,153			3,124
Less accumulated depreciation, depletion and amortization		(1,383	)		(1,344	)

		1,770			1,780

Other Assets
Other investments		88			87
Notes receivable		82			83
Regulatory assets		60			61
Prepaid benefit costs and due from affiliate		350			333
Other		16			20

		596			584

	$	2,884		$	2,977

LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Accounts payable	$	155		$	131
Dividends payable		13			13
Short-term borrowings		3			235
Current portion of long-term debt, including capital leases.		3			3
Federal income, property and other taxes payable		11			14
Regulatory liabilities		26			26
Gas inventory equalization (Note 1)		93			—
Other		62			73

		366			495

Other Liabilities
Deferred income taxes		145			134
Regulatory liabilities		564			563
Unamortized investment tax credit		19			20
Accrued postretirement benefit costs		103			96
Accrued environmental costs		15			16
Other		67			55

		913			884

Long-term debt, including capital lease obligations		773			775


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		433			432
Retained earnings		389			381

		832			823

	$	2,884		$	2,977

See Notes to Consolidated Financial Statements (Unaudited)

MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)



	Six Months Ended
	June 30
	2004			2003
(in Millions)
Operating Activities
Net income	$	33		$	64
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, depletion and amortization		53			53
Property write-down and contract losses		—			5
Deferred income taxes and investment tax credit, net		2			—
Gain on sale of assets		(2	)		—
Changes in assets and liabilities:
Accounts receivable, net		47			2
Accrued unbilled revenues		92			96
Inventories		44			22
Property taxes assessed applicable to future periods		(1	)		2
Prepaid benefit costs and due from affiliate		(17	)		(18	)
Accrued gas cost recovery		(70	)		(59	)
Accounts payable		24			30
Gas inventory equalization		93			75
Federal income, property and other taxes payable		(3	)		(9	)
Other		29			(9	)

Net cash from operating activities		324			254

Investing Activities
Capital expenditures		(41	)		(37	)
Proceeds from sale of assets		5			—
Notes receivable from affiliate		(32	)		(81	)
Other		1			(3	)

Net cash used for investing activities		(67	)		(121	)

Financing Activities
Issuance of long-term debt		—			199
Redemption of long-term debt		(1	)		(193	)
Short-term borrowings, net		(232	)		(120	)
Dividends paid		(25	)		(25	)

Net cash used for financing activities		(258	)		(139	)

Net Decrease in Cash and Cash Equivalents		(1	)		(6	)
Cash and Cash Equivalents at Beginning of Period		1			7

Cash and Cash Equivalents at End of Period	$	—		$	1

Supplementary Cash Flow Information
Interest paid (excluding interest capitalized)	$	27		$	28
Income taxes paid		—			14

See Notes to Consolidated Financial Statements (Unaudited)

MICHIGAN CONSOLIDATED GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 — GENERAL

These consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements included in our 2003 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 could differ from those estimates.

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

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

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 and $7 million for the three months ended June 30, 2004 and 2003, respectively, and was approximately $14 million and $15 million for the six months ended June 30, 2004 and 2003, respectively, and is not reflected in the table below.

The components of net periodic benefit costs for qualified and non-qualified pension benefits and other postretirement benefits follow:



							Other Postretirement
(in Millions)	Pension Benefits						Benefits
Three Months Ended June 30	2004			2003			2004			2003

Service Cost	$	1		$	1		$	2		$	2
Interest Cost		3			3			6			6
Expected Return on Plan Assets		(7	)		(8	)		(3	)		(4	)


	PAGE
	NUMBER

DEFINITIONS		3

FORWARD-LOOKING STATEMENTS		4

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Statement of Operations		8

Consolidated Statement of Financial Position		9

Consolidated Statement of Cash Flows		10

Consolidated Statement of Retained Earnings		11

Notes to Consolidated Financial Statements		12

Report of Independent Registered Public Accounting Firm		18

Item 2. Management’s Narrative Analysis of the Results of Operations		5

Item 4. Controls and Procedures		7

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		19

Item 6. Exhibits and Reports on Form 8-K		19

SIGNATURE		20
Awareness Letter of Deloitte & Touche LLP
Chief Executive Officer Section 302 Form 10-Q Certification
Chief Financial Officer Section 302 Form 10-Q Certification
Chief Executive Officer Section 906 Certification of Periodic Report
Chief Financial Officer Section 906 Certification of Periodic Report

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•		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 gas Customer Choice programs;

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

•		employee relations and the impact of collective bargaining agreements;

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

•		the timing and extent of changes in interest rates;

•		the level of borrowings;

•		changes in the cost and availability of natural gas;

•		effects of competition;

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

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

•		the ability to recover costs through rate increases;

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

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

•		changes in accounting standards and financial reporting regulations;

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