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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 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  Michigan
    
    38-0478040(State or other jurisdiction of
    
    (I.R.S. Employerincorporation 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. YesX       No ___ Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___       NoX




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MICHIGAN CONSOLIDATED GAS COMPANY QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2004  
 TABLE OF CONTENTS PAGENUMBERDEFINITIONS
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    4PART I   FINANCIAL INFORMATIONItem 1.Financial StatementsConsolidated Statement of Operations
    
    
    8Consolidated Statement of Financial Position
    
    
    9Consolidated Statement of Cash Flows
    
    
    10Consolidated Statement of Retained Earnings
    
    
    11Notes to Consolidated Financial Statements
    
    
    12Report of Independent Registered Public Accounting Firm
    
    
    18Item 2.Managements Narrative Analysis of the Results
of Operations
    
    
    5Item 4.Controls and Procedures
    
    
    7PART II  OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    19Item 6.Exhibits and Reports on Form 8-K
    
    
    19SIGNATURE
    
    
    20Awareness Letter of Deloitte & Touche LLPChief Executive Officer Section 302 Form 10-Q CertificationChief Financial Officer Section 302 Form 10-Q CertificationChief Executive Officer Section 906 Certification of Periodic ReportChief Financial Officer Section 906 Certification of Periodic Report
  2




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DEFINITIONS Customer Choice
    
    The choice program is a statewide initiativegiving customers in Michigan the option tochoose alternative suppliers for gas.DTE Energy
    
    DTE Energy Company, directly or indirectly theparent of Detroit Edison and MichConEnd User Transportation
    
    A gas delivery service historically providedto large-volume commercial and industrialcustomers who purchase natural gas directlyfrom producers or brokerage companies. UnderMichCons Customer Choice program that beganin 1999, this service is also provided toresidential customers and small-volumecommercial and industrial customers.Enterprises
    
    DTE Enterprises Inc. (successor to MCN Energy)and subsidiaries.Gas Sales Program
    
    A three-year program that ended in December2001 under which MichCons gas sales rateincluded a gas commodity component that wasfixed at $2.95 per Mcf.GCR
    
    A gas cost recovery mechanism authorized bythe MPSC that was reinstated by MichCon inJanuary 2002 permitting MichCon to pass on thecost of natural gas to its customers.Intermediate Transportation
    
    A gas delivery service provided to producers,brokers and other gas companies that own thenatural gas, but are not the ultimateconsumers.MichCon
    
    Michigan Consolidated Gas Company, anindirect, wholly-owned natural gasdistribution and intrastate transmissionsubsidiary 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.
 3




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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 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. 4




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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 MonthsIncrease (Decrease) in Income Compared to Prior Year(in Millions)Operating revenues
    
    $
    (13
    )
    
    $
    50Cost of gas
    
    
    (1
    )
    
    
    (68
    )Gross margin
    
    
    (14
    )
    
    
    (18
    )Operation and maintenance
    
    
    (25
    )
    
    
    (42
    )Depreciation, depletion and amortization
    
    
    2
    
    
    
    Taxes other than income
    
    
    
    
    
    
    5Property write-down and contract losses
    
    
    5
    
    
    
    5Other (income) and deductions
    
    
    
    
    
    
    (2
    )Income tax provision
    
    
    6
    
    
    
    21Net income
    
    $
    (26
    )
    
    $
    (31
    )
 Operating revenuesdecreased $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 Months2004
    
    2003
    
    2004
    
    2003Gas Markets (in Millions)Gas sales
    
    $
    216
    
    
    $
    227
    
    
    $
    856
    
    
    $
    788End user transportation
    
    
    25
    
    
    
    28
    
    
    
    67
    
    
    
    85241
    
    
    
    255
    
    
    
    923
    
    
    
    873Intermediate transportation
    
    
    12
    
    
    
    12
    
    
    
    27
    
    
    
    26Other
    
    
    18
    
    
    
    17
    
    
    
    36
    
    
    
    37$
    271
    
    
    $
    284
    
    
    $
    986
    
    
    $
    936Gas Markets (in Bcf)Gas sales
    
    
    22
    
    
    
    32
    
    
    
    105
    
    
    
    112End user transportation
    
    
    29
    
    
    
    25
    
    
    
    79
    
    
    
    8651
    
    
    
    57
    
    
    
    184
    
    
    
    198Intermediate transportation
    
    
    129
    
    
    
    130
    
    
    
    303
    
    
    
    304180
    
    
    
    187
    
    
    
    487
    
    
    
    502
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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 gasis 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 expensesincreased $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-downdeclined $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 taxesdecreased $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. 6




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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
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. 7




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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)  Three Months Ended
    
    Six Months EndedJune 30
    
    June 30(in Millions)
    
    2004
    
    2003
    
    2004
    
    2003Operating Revenues
    
    $
    271
    
    
    $
    284
    
    
    $
    986
    
    
    $
    936Operating ExpensesCost of gas
    
    
    161
    
    
    
    160
    
    
    
    649
    
    
    
    581Operation and maintenance
    
    
    108
    
    
    
    83
    
    
    
    203
    
    
    
    161Depreciation, depletion and amortization
    
    
    26
    
    
    
    28
    
    
    
    53
    
    
    
    53Taxes other than income
    
    
    13
    
    
    
    13
    
    
    
    25
    
    
    
    30Property write-down (Note 4)
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5308
    
    
    
    289
    
    
    
    930
    
    
    
    830Operating Income (Loss)
    
    
    (37
    )
    
    
    (5
    )
    
    
    56
    
    
    
    106Other (Income) and DeductionsInterest expense
    
    
    13
    
    
    
    14
    
    
    
    27
    
    
    
    29Interest income
    
    
    (3
    )
    
    
    (3
    )
    
    
    (5
    )
    
    
    (6
    )Other
    
    
    
    
    
    
    (1
    )
    
    
    1
    
    
    
    (2
    )10
    
    
    
    10
    
    
    
    23
    
    
    
    21Income (Loss) Before Income Taxes
    
    
    (47
    )
    
    
    (15
    )
    
    
    33
    
    
    
    85Income Tax Provision (Benefit)
    
    
    (10
    )
    
    
    (4
    )
    
    
    
    
    
    
    21Net Income (Loss)
    
    $
    (37
    )
    
    $
    (11
    )
    
    $
    33
    
    
    $
    64
 See Notes to Consolidated Financial Statements (Unaudited) 8




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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 302004
    
    December 31(in Millions)
    
    (Unaudited)
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    
    
    
    $
    1Accounts receivableCustomer (less allowance for doubtful accounts of $65 and
$43, respectively)
    
    
    173
    
    
    
    178Accrued unbilled revenues
    
    
    25
    
    
    
    117Other
    
    
    58
    
    
    
    100Accrued gas cost recovery revenue
    
    
    89
    
    
    
    19Notes receivable from affiliate
    
    
    32
    
    
    
    InventoriesGas
    
    
    72
    
    
    
    117Material and supplies
    
    
    15
    
    
    
    14Other
    
    
    54
    
    
    
    67518
    
    
    
    613Property, Plant and Equipment
    
    
    3,153
    
    
    
    3,124Less accumulated depreciation, depletion and amortization
    
    
    (1,383
    )
    
    
    (1,344
    )1,770
    
    
    
    1,780Other AssetsOther investments
    
    
    88
    
    
    
    87Notes receivable
    
    
    82
    
    
    
    83Regulatory assets
    
    
    60
    
    
    
    61Prepaid benefit costs and due from affiliate
    
    
    350
    
    
    
    333Other
    
    
    16
    
    
    
    20596
    
    
    
    584$
    2,884
    
    
    $
    2,977LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    155
    
    
    $
    131Dividends payable
    
    
    13
    
    
    
    13Short-term borrowings
    
    
    3
    
    
    
    235Current portion of long-term debt, including capital leases.
    
    
    3
    
    
    
    3Federal income, property and other taxes payable
    
    
    11
    
    
    
    14Regulatory liabilities
    
    
    26
    
    
    
    26Gas inventory equalization (Note 1)
    
    
    93
    
    
    
    Other
    
    
    62
    
    
    
    73366
    
    
    
    495Other LiabilitiesDeferred income taxes
    
    
    145
    
    
    
    134Regulatory liabilities
    
    
    564
    
    
    
    563Unamortized investment tax credit
    
    
    19
    
    
    
    20Accrued postretirement benefit costs
    
    
    103
    
    
    
    96Accrued environmental costs
    
    
    15
    
    
    
    16Other
    
    
    67
    
    
    
    55913
    
    
    
    884Long-term debt, including capital lease obligations
    
    
    773
    
    
    
    775Contingencies (Note 5)Shareholders EquityCommon stock, $1 par value, 15,100,000 shares authorized,
10,300,000 shares issued and outstanding
    
    
    10
    
    
    
    10Additional paid in capital
    
    
    433
    
    
    
    432Retained earnings
    
    
    389
    
    
    
    381832
    
    
    
    823$
    2,884
    
    
    $
    2,977
  9




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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months EndedJune 302004
    
    2003(in Millions)Operating ActivitiesNet income
    
    $
    33
    
    
    $
    64Adjustments to reconcile net income to net cash
from operating activities:Depreciation, depletion and amortization
    
    
    53
    
    
    
    53Property write-down and contract losses
    
    
    
    
    
    
    5Deferred income taxes and investment tax credit, net
    
    
    2
    
    
    
    Gain on sale of assets
    
    
    (2
    )
    
    
    Changes in assets and liabilities:Accounts receivable, net
    
    
    47
    
    
    
    2Accrued unbilled revenues
    
    
    92
    
    
    
    96Inventories
    
    
    44
    
    
    
    22Property taxes assessed applicable to future periods
    
    
    (1
    )
    
    
    2Prepaid benefit costs and due from affiliate
    
    
    (17
    )
    
    
    (18
    )Accrued gas cost recovery
    
    
    (70
    )
    
    
    (59
    )Accounts payable
    
    
    24
    
    
    
    30Gas inventory equalization
    
    
    93
    
    
    
    75Federal income, property and other taxes payable
    
    
    (3
    )
    
    
    (9
    )Other
    
    
    29
    
    
    
    (9
    )Net cash from operating activities
    
    
    324
    
    
    
    254Investing ActivitiesCapital 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 ActivitiesIssuance of long-term debt
    
    
    
    
    
    
    199Redemption 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
    
    
    
    7Cash and Cash Equivalents at End of Period
    
    $
    
    
    
    $
    1Supplementary Cash Flow InformationInterest paid (excluding interest capitalized)
    
    $
    27
    
    
    $
    28Income taxes paid
    
    
    
    
    
    
    14
 See Notes to Consolidated Financial Statements (Unaudited) 10




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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)  Six Months EndedJune 302004
    
    2003(in Millions)Balance  beginning of period
    
    $
    381
    
    
    $
    398Net income
    
    
    33
    
    
    
    64Common stock dividends declared
    
    
    (25
    )
    
    
    (25
    )Balance  end of period
    
    $
    389
    
    
    $
    437
 See Notes to Consolidated Financial Statements (Unaudited) 11




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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
    
    BenefitsThree Months Ended June 30
    
    2004
    
    2003
    
    2004
    
    2003Service Cost
    
    $
    1
    
    
    $
    1
    
    
    $
    2
    
    
    $
    2Interest Cost
    
    
    3
    
    
    
    3
    
    
    
    6
    
    
    
    6Expected Return on Plan Assets
    
    
    (7
    )
    
    
    (8
    )
    
    
    (3
    )
    
    
    (4
    )Amortization ofNet loss
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Prior service cost
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    Net transition liability
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Net Periodic Benefit Cost (Credit)
    
    $
    (2
    )
    
    $
    (3
    )
    
    $
    8
    
    
    $
    6
 12




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Other Postretirement(in Millions)
    
    Pension Benefits
    
    BenefitsSix Months Ended June 30
    
    2004
    
    2003
    
    2004
    
    2003Service Cost
    
    $
    3
    
    
    $
    2
    
    
    $
    4
    
    
    $
    4Interest Cost
    
    
    7
    
    
    
    7
    
    
    
    11
    
    
    
    11Expected Return on Plan Assets
    
    
    (14
    )
    
    
    (15
    )
    
    
    (5
    )
    
    
    (8
    )Amortization ofNet loss
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Prior service cost
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    Net transition liability
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Net Periodic Benefit Cost (Credit)
    
    $
    (3
    )
    
    $
    (5
    )
    
    $
    15
    
    
    $
    11
 In June 2004, we retroactively adopted Financial Accounting Standards Board
(FASB) Staff Position (FSP) No. 106-2. This FSP provides guidance on the
accounting for the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (Medicare Act). As a result of the retroactive adoption, our other
postretirement benefit costs were reduced by $1 million for the quarter ended
March 31, 2004 and the six months ended June 30, 2004. See Note 2. Gas in Inventory Inventory gas 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 December 2003, the Medicare Act was signed into law. This Act provides for a
non-taxable federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to the benefit
established by law. We elected at that time to defer the provisions of the
Medicare Act, and its impact on our accumulated postretirement benefit
obligation and net periodic postretirement benefit cost pending the issuance of
specific authoritative accounting guidance by the FASB. In May 2004, FSP No. 106-2 was issued on accounting for the effects of the
Medicare Act. The FSP is effective for the first interim period beginning after
June 15, 2004, with earlier application encouraged. The guidance in this FSP is
applicable to sponsors of single-employer defined benefit postretirement health
care plans for which (a) the employer has concluded the prescription drug
benefits available under the plan to some or all participants are actuarially
equivalent to Medicare Part D and thus qualify for the subsidy under the
Medicare Act and (b) the expected subsidy will offset or reduce the employers
share of the cost of the underlying postretirement prescription drug coverage
on which the subsidy is based. We believe we qualify for the subsidy under the
Act and the expected subsidy will partially offset our share of the cost of the
postretirement prescription drug coverage. 13




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The reduction in the accumulated postretirement benefit obligation for the
subsidy related to benefits attributed to past service is approximately $24
million and is accounted for as an actuarial gain as required under the FSP.
The effects of the subsidy on the measurement of net periodic postretirement
benefit costs is expected to reduce cost by $3 million in 2004. The impact of
the Medicare Act on the components of Other Postretirement Benefit Costs in the
first six months of 2004 is as follows: Three
    
    Three
    
    SixMonths
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended(in Millions)
    
    March 31, 2004
    
    June 30, 2004
    
    June 30, 2004Reduction in service cost
    
    $
    
    
    
    $
    
    
    
    $
    Reduction in interest cost
    
    
    1
    
    
    
    
    
    
    
    1Amortization of actuarial gain
    
    
    
    
    
    
    
    
    
    
    Decrease in postretirementbenefit cost
    
    $
    1
    
    
    $
    
    
    
    $
    1
 We have elected to apply the provisions of FSP No. 106-2 retroactive to January
1, 2004, and as a result earnings for the first quarter of 2004 have been
restated. A reconciliation of previously reported first quarter 2004 net income
to the amounts adjusted for the decrease in costs due to the Medicare Act
follows: Net(In Millions, except per share amounts)
    
    IncomeAs reported
    
    $
    69Add: Decrease in costs due toMedicare Act
    
    
    1As adjusted
    
    $
    70
 14




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NOTE 3  REGULATORY MATTERS Gas Rate Case Rate Request In September 2003, MichCon filed an application with the MPSC
for an increase in service and distribution charges (base rates) for its gas
sales and transportation customers. The filing requests an overall increase in
base rates of $194 million per year (approximately 7% increase, inclusive of
gas costs), beginning January 1, 2005. MichCon requested that the MPSC increase
base rates by $154 million per year on an interim basis by April 1, 2004. The
interim request was based on a projected revenue deficiency for the test year
2004. MPSC Staff Report on
Interim Rate Relief  The MPSC Staff report on MichCons
interim rate request was filed on May 3, 2004. After adjusting for several
items that it will address in its final rate relief recommendation, the MPSC
Staff recommended a $25 million interim rate increase. This compares with
MichCons requested total interim base rate relief of $154 million. In
addition, the MPSC Staff proposed a 50% debt and 50% equity capital structure
utilizing MichCons current allowed rate of return of 11.5%. The Staff has
subsequently revised its position and is now recommending a $29 million interim
rate increase. An interim order is expected in the third quarter of 2004 and a
final order in the first quarter of 2005. MPSC Staff Recommendation on Final Rate Relief The Staff report on MichCons
final rate relief request was filed on July 26, 2004. The Staff recommended a
$70 million increase in base rates compared to MichCons requested base rate
relief of $194 million. In addition, the Staff proposed a 50% debt and 50%
equity capital structure utilizing a reduced rate of return of 11%. 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 Mcf for January 2002 billings
and up to $4.38 per Mcf for the remainder of 2002. The order also allowed
MichCon to recognize a regulatory asset of approximately $14 million
representing the difference between the $4.38 factor and the $3.62 factor for
volumes that were unbilled at December 31, 2001. The regulatory asset is
subject to the 2002 GCR reconciliation process. In March 2003, the MPSC issued
an order in MichCons 2002 GCR plan case. The MPSC ordered MichCon to reduce
its gas cost recovery expenses by $26.5 million for purposes of calculating the
2002 GCR factor due to MichCons decision to utilize storage gas during 2001
that resulted in a gas inventory decrement for the 2001 calendar year. Although we recorded a $26.5 million reserve in 2002 to reflect the impact of
this order, a final determination of actual 2002 revenue and expenses including
any disallowances or adjustment will be decided in MichCons 2002 GCR
reconciliation case that was filed with the MPSC in February 2003. The MPSC
Staff and various intervening parties in this proceeding are seeking to have
the MPSC disallow an additional $26 million, representing unbilled revenues at
December 2001. One party has proposed that half of the $8 million related to
the settlement of the Enron bankruptcy also be disallowed. The other parties to
the case have recommended that the Enron bankruptcy settlement be addressed in
the 2003 GCR reconciliation case. An MPSC administrative law judge has
recommended disallowances of $26.5 million related to the use of storage gas in
2001 and $26 million related to the December 2001 unbilled issue, and
recommended that the $8 million related to the Enron issue be addressed in the
2003 GCR reconciliation case. We have included this item in our testimony in
the 2003 GCR reconciliation filed in February 2004. The Staff has recommended
that MichCon be allowed to recover the entire $8 million related to the Enron
issue. A final order in this proceeding is 15




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expected in 2004. In addition, we filed an appeal of the March 2003 MPSC order
with the Michigan Court of Appeals. 2003 Plan Year In July 2003, the MPSC approved an increase in MichCons 2003
GCR rate to a maximum of $5.75 per Mcf for the billing months of August 2003
through December 2003. As of December 31, 2003, MichCon has accrued a $19
million regulatory asset representing the under-recovery of actual gas costs
incurred in 2003 and the 2002 GCR under-recovery. 2004 Plan Year In September 2003, MichCon filed its 2004 GCR plan case
proposing a maximum GCR factor of $5.36 per Mcf. MichCon agreed to switch from
a calendar year to an operational year as a condition of its settlement in the
2003 GCR plan case. The operational GCR year would run from April to March of
the following year. To accomplish the switch, the 2004 GCR plan case reflects
a 15-month transitional period, January 2004 through March 2005. Under the
transition proposal, MichCon would file two reconciliations pertaining to the
transition period; one addressing the January 2004 to March 2004 period, the
other addressing the remaining April 2004 to March 2005 period. The plan also
proposes a quarterly GCR ceiling price adjustment mechanism. This mechanism
allows MichCon to increase the maximum GCR factor to compensate for increases
in market prices, thereby minimizing the possibility of a GCR under recovery.
Due to sustained increase in market prices for natural gas, in June 2004, the
MPSC approved an increase in the maximum GCR factor and a contingent factor
which resulted in a new maximum factor of $6.62 per Mcf, effective July 1,
2004. 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 our financial position, results of operations and
cash flows. NOTE 4  UNUSUAL CHARGES Property Write-down In June 2003, we recorded an additional $5 million pre-tax ($4 million net of
taxes) charge from the planned sale of our former headquarters to further
reduce the carrying value of the property to fair value based on the estimated
selling price less cost to sell. The sale was completed in the fourth quarter
of 2003. NOTE 5  CONTINGENCIES Environmental 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.
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. 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. The
findings of these investigations indicated that the estimated total
expenditures for investigation and remediation activities for these sites could
range from $30 million to $170 million based on undiscounted 1995 costs. As a
result of these studies, we accrued a liability and a corresponding regulatory
asset of $32 million during 1995. At December 31, 2003, the reserve balance was
$21.5 million of which $4.7 million was classified as current. Our current
estimates indicate that the 16




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previously accrued amounts are adequate to cover the costs of required remedial
actions and therefore no additional accrual will be required. Other We are involved in certain legal, regulatory and administrative 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. See Note 3 for a discussion of contingencies related to Regulatory Matters. 17




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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 June 30,
2004, and the related condensed consolidated statement of operations for the
three-month and six-month periods ended June 30, 2004 and 2003, and the
condensed consolidated statements of cash flows and retained earnings for the
six-month periods ended June 30, 2004 and 2003. These interim financial
statements are the responsibility of Michigan Consolidated Gas Companys
management. We conducted our reviews in accordance with 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
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. As discussed in Note 2 to the condensed consolidated interim financial
statements, Michigan Consolidated Gas Company applied the provisions
of Financial Accounting Standards Board Staff Position No. 106-2, which relates to accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003,
retroactive to January 1, 2004. We have previously audited, in accordance with 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, 2003, and the related consolidated statements of operations, cash
flows and retained earnings for the year then ended (not presented herein); and
in our report dated March 1, 2004 (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, 2003 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
August 3, 2004 18




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OTHER INFORMATION 
 LEGAL PROCEEDINGS We are involved in certain legal, regulatory and administrative 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. 
 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits ExhibitNumber
    
    DescriptionFiled:15-9
    
    Awareness Letter of Deloitte & Touche LLP31-9
    
    Chief Executive Officer Section 302 Form 10-Q Certification31-10
    
    Chief Financial Officer Section 302 Form 10-Q CertificationFurnished:32-9
    
    Chief Executive Officer Section 906 Certification of Periodic Report32-10
    
    Chief Financial Officer Section 906 Certification of Periodic Report
 (b) Reports on Form 8-K During the quarterly period ended June 30, 2004, we filed or furnished Current Reports on
Forms 8-K covering matters, as follows: Item 7. Exhibits and Item 12. Results of Operations and Financial
Condition Disclosure furnished on April 29, 2004 and dated April
28, 2004; and Item 7. Exhibits and Item 12. Results of Operations and Financial
Condition furnished and dated April 29, 2004. 19




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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 CONSOLIDATEDGAS COMPANYDate: August 4, 2004
    
    /s/ DANIEL G. BRUDZYNSKIDaniel G. BrudzynskiChief Accounting Officer,Vice President and Controller
 20




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Exhibit Index ExhibitNumber
    
    Description15-9
    
    Awareness Letter of Deloitte & Touche LLP31-9
    
    Chief Executive Officer Section 302 Form 10-Q Certification31-10
    
    Chief Financial Officer Section 302 Form 10-Q Certification32-9
    
    Chief Executive Officer Section 906 Certification of Periodic Report32-10
    
    Chief Financial Officer Section 906 Certification of Periodic Report
 21