##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended September 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. 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]




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Michigan Consolidated Gas Company Quarterly Report on Form 10-Q
Quarter Ended September 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 and Comprehensive Income
    
    
    11Notes to Consolidated Financial Statements
    
    
    12Report of Independent Registered Public Accounting Firm
    
    
    17Item 2. Managements Narrative Analysis of the Results
of Operations
    
    
    5Item 4. Controls and Procedures
    
    
    7PART II - OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 6. Exhibits
    
    
    18SIGNATURE
    
    
    19EXHIBIT
INDEX
    
    
    20Thirty-eighth Supplemental Indenture, dated as of October 1, 2004Fifth Supplemental Indenture, dated as of October 1, 2004Chief Executive Officer Section 302 CertificationChief Financial Officer Section 302 CertificationChief Executive Officer Section 906 CertificationChief Financial Officer Section 906 Certification
  2




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Definitions Customer Choice
    
    The choice program is a statewide initiative
giving customers in Michigan the option to
choose alternative suppliers for gas.DTE Energy
    
    DTE Energy Company, directly or indirectly the
parent of The Detroit Edison Company and
MichConEnd 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.
 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 $53 million and $20 million for the third quarter
and nine-month period of 2004, respectively, compared with losses of $37
million and earnings of $27 million for comparable 2003 periods. Results for
the third quarter and nine-month period of 2004 were adversely impacted by a
negative effective income tax rate. Results for the nine-month period of 2004
were primarily impacted by increases in operation and maintenance expenses due
to higher uncollectable accounts expense, increased employee benefit costs and
higher injuries and damages accruals. Additionally, results for the nine-month
period of 2004 were impacted by lower gross margins. Increase (Decrease) in Income StatementComponents Compared to Prior Year(in Millions)
    
    Quarter
    
    Nine MonthsOperating revenues
    
    $
    13
    
    
    $
    63Cost of gas
    
    
    8
    
    
    
    76Gross margin
    
    
    5
    
    
    
    (13
    )Operation and maintenance
    
    
    
    
    
    
    42Depreciation, depletion and amortization
    
    
    2
    
    
    
    2Taxes other than income
    
    
    
    
    
    
    (5
    )Property write-down
    
    
    
    
    
    
    (5
    )Other (income) and deductions
    
    
    3
    
    
    
    5Income tax provision
    
    
    16
    
    
    
    (5
    )Net income
    
    $
    (16
    )
    
    $
    (47
    )
 Operating revenuesincreased $13 million in the third quarter of 2004,
reflecting increased gas sales and end user transportation revenues. Operating
revenues increased $63 million in the nine-month period of 2004, reflecting
increased gas sales and reduced end user transportation revenues. Quarter
    
    Nine Months2004
    
    2003
    
    2004
    
    2003Gas Markets (in Millions)Gas sales
    
    $
    107
    
    
    $
    97
    
    
    $
    963
    
    
    $
    885End user transportation
    
    
    20
    
    
    
    19
    
    
    
    88
    
    
    
    104127
    
    
    
    116

    
    
    
    1,051
    
    
    
    989Intermediate transportation
    
    
    11
    
    
    
    12
    
    
    
    38
    
    
    
    38Other
    
    
    17
    
    
    
    14
    
    
    
    52
    
    
    
    51$
    155
    
    
    $
    142
    
    
    $
    1,141
    
    
    $
    1,078Gas Markets (in Bcf)Gas sales
    
    
    12
    
    
    
    12
    
    
    
    117
    
    
    
    124End user transportation
    
    
    27
    
    
    
    27
    
    
    
    107
    
    
    
    11339
    
    
    
    39
    
    
    
    224
    
    
    
    237Intermediate transportation
    
    
    128
    
    
    
    139
    
    
    
    431
    
    
    
    443167
    
    
    
    178
    
    
    
    655
    
    
    
    680
 5




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Gas sales and end user transportation revenues in total increased $11 million
and increased $62 million in the third quarter and nine-month period of 2004,
respectively. The increase in the third quarter of 2004 is primarily
attributed to a $10 million increase in Gas Cost Recovery (GCR) revenue due to
higher average gas purchase rates and a $1 million increase in end-user
transportation due to higher average rates. The increase for the nine-month
period of 2004 is due primarily to an increase in GCR revenues of $78 million,
partially offset by $18 million in weather related demand. End user
transportation revenues for the nine-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 111,000 customers
participating in the Customer Choice program at September 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 $8 million and
$76 million in the third quarter and nine-month period of 2004, respectively.
The average cost of gas sold increased $1.04 per Mcf (25%) and $.97 per Mcf
(19%) for the third quarter and nine-month period, respectively, from the
comparable 2003 periods. Operation and maintenance expensewas unchanged and increased $42 million for
the third quarter and nine-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 the nine-month period of 2004 due
to a charge in 2003 for the planned sale of our former headquarters. Income taxesincreased $16 million and decreased $5 million for the 2004 third
quarter and nine-month period, respectively, attributed to a negative effective
income tax rate in 2004 driven by lower estimated annual earnings. ENVIRONMENTAL MATTERS See Note 7  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
September 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 information required to be 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 The Company has established a formal assessment process and related procedures
to evaluate the effectiveness of internal control over financial reporting
using criteria specified by Internal Control  Integrated Frameworkissued by
the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
The assessment process is comprehensive in scope, utilizes internal and
external resources and involves many individuals at various levels of the
Company in the design, testing and evaluation of internal control. As part of the evaluation and assessment process, the Company has been
improving the design and operating effectiveness of many entity-level and
process-level controls. Control testing and remediation activities provide
reasonable, but not absolute, assurance that a material weakness in internal
control over financial reporting will be avoided. The inherent limitations of
our current internal controls, a portion of which are manual by their nature,
contribute to the potential for control deficiencies. Although management has
not yet completed its assessment and continues to implement control
improvements, management does not believe any areas requiring further
improvement will constitute a material weakness in internal control over
financial reporting as of December 31, 2004. There has been no change in the Companys internal control over financial
reporting during the quarter ended September 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
    
    Nine Months EndedSeptember 30
    
    September 30(in Millions)
    
    2004
    
    2003
    
    2004
    
    2003Operating Revenues
    
    $
    155
    
    
    $
    142
    
    
    $
    1,141
    
    
    $
    1,078Operating ExpensesCost of gas
    
    
    64
    
    
    
    56
    
    
    
    713
    
    
    
    637Operation and maintenance
    
    
    90
    
    
    
    90
    
    
    
    293
    
    
    
    251Depreciation, depletion and amortization
    
    
    28
    
    
    
    26
    
    
    
    81
    
    
    
    79Taxes other than income
    
    
    12
    
    
    
    12
    
    
    
    37
    
    
    
    42Property write-down (Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5194
    
    
    
    184
    
    
    
    1,124
    
    
    
    1,014Operating Income (Loss)
    
    
    (39
    )
    
    
    (42
    )
    
    
    17
    
    
    
    64Other (Income) and DeductionsInterest expense
    
    
    14
    
    
    
    13
    
    
    
    41
    
    
    
    42Interest income
    
    
    (2
    )
    
    
    (2
    )
    
    
    (7
    )
    
    
    (8
    )Other
    
    
    
    
    
    
    (2
    )
    
    
    1
    
    
    
    (4
    )12
    
    
    
    9
    
    
    
    35
    
    
    
    30Income (Loss) Before Income Taxes
    
    
    (51
    )
    
    
    (51
    )
    
    
    (18
    )
    
    
    34Income Tax Provision (Benefit)
    
    
    2
    
    
    
    (14
    )
    
    
    2
    
    
    
    7Net Income (Loss)
    
    $
    (53
    )
    
    $
    (37
    )
    
    $
    (20
    )
    
    $
    27
 See Notes to Consolidated Financial Statements (Unaudited) 8




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MICHIGAN CONSOLIDATED GAS COMPANY 
 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
 September 302004
    
    December 31(in Millions)
    
    (Unaudited)
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1
    
    
    $
    1Accounts receivableCustomer (less allowance for doubtful accounts of $65 and
$43, respectively)
    
    
    109
    
    
    
    178Accrued unbilled revenues
    
    
    27
    
    
    
    117Other
    
    
    79
    
    
    
    100Accrued gas cost recovery revenue
    
    
    71
    
    
    
    19Inventories
Gas
    
    
    182
    
    
    
    117Material and supplies
    
    
    14
    
    
    
    14Other
    
    
    78
    
    
    
    67561
    
    
    
    613Property, Plant and Equipment
    
    
    3,180
    
    
    
    3,124Less accumulated depreciation, depletion and amortization
    
    
    (1,403
    )
    
    
    (1,344
    )1,777
    
    
    
    1,780Other AssetsOther investments
    
    
    90
    
    
    
    87Notes receivable
    
    
    82
    
    
    
    83Regulatory assets
    
    
    59
    
    
    
    61Prepaid benefit costs and due from affiliate
    
    
    359
    
    
    
    333Other
    
    
    9
    
    
    
    20599
    
    
    
    584$
    2,937
    
    
    $
    2,977LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    145
    
    
    $
    131Dividends payable
    
    
    13
    
    
    
    13Short-term borrowings
    
    
    212
    
    
    
    235Current portion of long-term debt, including capital leases
    
    
    
    
    
    
    3Federal income, property and other taxes payable
    
    
    4
    
    
    
    14Regulatory liabilities
    
    
    27
    
    
    
    26Other
    
    
    60
    
    
    
    73461
    
    
    
    495Other LiabilitiesDeferred income taxes
    
    
    168
    
    
    
    134Regulatory liabilities
    
    
    564
    
    
    
    563Unamortized investment tax credit
    
    
    19
    
    
    
    20Accrued postretirement benefit costs
    
    
    107
    
    
    
    96Accrued environmental costs
    
    
    15
    
    
    
    16Other
    
    
    66
    
    
    
    55939
    
    
    
    884Long-term debt, including capital lease obligations
    
    
    773
    
    
    
    775Contingencies (Note 7)Shareholders EquityCommon stock, $1 par value, 15,100,000 shares authorized,
10,300,000 shares issued and outstanding
    
    
    10
    
    
    
    10Additional paid in capital
    
    
    432
    
    
    
    432Retained earnings
    
    
    323
    
    
    
    381Accumulated other comprehensive loss
    
    
    (1
    )
    
    
    764
    
    
    
    823$
    2,937
    
    
    $
    2,977
 See Notes to Consolidated Financial Statements (Unaudited) 9




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MICHIGAN CONSOLIDATED GAS COMPANY 
 CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
 Nine Months EndedSeptember 30(in Millions)
    
    2004
    
    2003Operating ActivitiesNet income (loss)
    
    $
    (20
    )
    
    $
    27Adjustments to reconcile net income to net cash from
operating activities:Depreciation, depletion and amortization
    
    
    81
    
    
    
    79Property write-down
    
    
    
    
    
    
    5Deferred income taxes and investment tax credit, net
    
    
    22
    
    
    
    12Gain on sale of assets
    
    
    (2
    )
    
    
    Changes in assets and liabilities:Accounts receivable, net
    
    
    90
    
    
    
    45Accrued unbilled revenues
    
    
    90
    
    
    
    87Inventories
    
    
    (65
    )
    
    
    (103
    )Property taxes assessed applicable to future periods
    
    
    (10
    )
    
    
    (5
    )Prepaid benefit costs and due from affiliate
    
    
    (26
    )
    
    
    (29
    )Accrued gas cost recovery
    
    
    (52
    )
    
    
    (42
    )Accounts payable
    
    
    14
    
    
    
    24Federal income, property and other taxes payable
    
    
    (18
    )
    
    
    (28
    )Other
    
    
    26
    
    
    
    (20
    )Net cash from operating activities
    
    
    130
    
    
    
    52Investing ActivitiesCapital expenditures
    
    
    (72
    )
    
    
    (67
    )Proceeds from sale of assets
    
    
    5
    
    
    
    Other
    
    
    1
    
    
    
    (2
    )Net cash used for investing activities
    
    
    (66
    )
    
    
    (69
    )Financing ActivitiesIssuance of long-term debt
    
    
    
    
    
    
    199Redemption of long-term debt
    
    
    (3
    )
    
    
    (194
    )Short-term borrowings, net
    
    
    (23
    )
    
    
    44Dividends paid
    
    
    (38
    )
    
    
    (37
    )Net cash (used for) from financing activities
    
    
    (64
    )
    
    
    12Net Decrease in Cash and Cash Equivalents
    
    
    
    
    
    
    (5
    )Cash and Cash Equivalents at Beginning of Period
    
    
    1
    
    
    
    7Cash and Cash Equivalents at End of Period
    
    $
    1
    
    
    $
    2Supplementary Cash Flow InformationInterest paid (excluding interest capitalized)
    
    $
    46
    
    
    $
    47Income taxes paid
    
    
    
    
    
    
    14
 See Notes to Consolidated Financial Statements (Unaudited) 10




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MICHIGAN CONSOLIDATED GAS COMPANY 
 CONSOLIDATED STATEMENT OF RETAINED EARNINGS
AND COMPREHENSIVE INCOME (Unaudited)
 Nine Months EndedSeptember 30(in Millions)
    
    2004
    
    2003Balance  beginning of period
    
    $
    381
    
    
    $
    398Net income (loss)
    
    
    (20
    )
    
    
    27Common stock dividends declared
    
    
    (38
    )
    
    
    (37
    )Balance  end of period
    
    $
    323
    
    
    $
    388
 The following table displays other comprehensive loss for the nine-month
periods ended September 30: (in Millions)
    
    2004
    
    2003Net income (loss)
    
    $
    (20
    )
    
    $
    27Other comprehensive loss, net of tax:Net unrealized losses on derivatives:Losses arising during the period, net of taxes of $(1) and $-, respectively
    
    
    (1
    )
    
    
    (1
    )
    
    
    Comprehensive income (loss)
    
    $
    (21
    )
    
    $
    27
 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 $8 million for the
three months ended September 30, 2004 and 2003, respectively, and was
approximately $21 million and $23 million for the nine months ended September 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 September 30
    
    2004
    
    2003
    
    2004
    
    2003Service Cost
    
    $
    1
    
    
    $
    1
    
    
    $
    2
    
    
    $
    1Interest Cost
    
    
    4
    
    
    
    3
    
    
    
    6
    
    
    
    4Expected Return on Plan Assets
    
    
    (7
    )
    
    
    (7
    )
    
    
    (3
    )
    
    
    (2
    )Amortization of:Net loss (gain)
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )Prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net transition liability
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Net Periodic Benefit Cost (Credit)
    
    $
    (2
    )
    
    $
    (3
    )
    
    $
    8
    
    
    $
    4
 12




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Other Postretirement(in Millions)
    
    Pension Benefits
    
    BenefitsNine Months Ended September 30
    
    2004
    
    2003
    
    2004
    
    2003Service Cost
    
    $
    4
    
    
    $
    3
    
    
    $
    6
    
    
    $
    5Interest Cost
    
    
    11
    
    
    
    10
    
    
    
    17
    
    
    
    15Expected Return on Plan Assets
    
    
    (21
    )
    
    
    (22
    )
    
    
    (8
    )
    
    
    (10
    )Amortization of:Net loss (gain)
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (1
    )Prior service cost
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    Net transition liability
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Net Periodic Benefit Cost (Credit)
    
    $
    (5
    )
    
    $
    (8
    )
    
    $
    23
    
    
    $
    15
 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 and $2 million for the
quarter and nine-months ended September 30, 2004, respectively. See Note 2. 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
providing 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
Medicare 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 is as
follows: Three
    
    NineMonths Ended
    
    Months EndedSeptember 30,
    
    September 30,(in Millions)
    
    2004
    
    2004Reduction in service cost
    
    $
    
    
    
    $
    Reduction in interest cost
    
    
    1
    
    
    
    2Amortization of actuarial gain
    
    
    
    
    
    
    Decrease in postretirement
benefit cost
    
    $
    1
    
    
    $
    2
 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 Interim Rate Order In September 2004, the MPSC issued an order granting
interim rate relief to MichCon in the amount of $35 million. The interim rate
order was based on a 50% debt and 50% equity capital structure, and an 11.5%
rate of return. Amounts collected are subject to a potential refund pending a
final order in this rate case. MPSC Staff Recommendation on Final Rate Relief The Staff has recommended a
$76 million increase in base rates compared to MichCons requested base rate
relief of $194 million. The Staff also supports a provision, proposed by
MichCon, that would allow MichCon to recover or refund 90% of uncollectable
accounts receivables expense above or below the amount that is reflected in
base rates. In addition, the Staff proposed a 50% debt and 50% equity capital
structure utilizing a reduced rate of return of 11%. MichCons current allowed
rate of return is 11.5%. MichCon expects a final order in the first quarter of
2005. 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 14




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##### Table of Contents



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 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 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 reducing the possibility of a GCR under recovery. Due
to sustained increase in market prices for natural gas, in June 2004, the MPSC
approved a temporary increase in the maximum GCR factor and a contingent factor
which resulted in a new temporary maximum factor of $6.62 per Mcf, effective
from July 1, 2004 until the MPSC issues its final order in this case. We are unable to predict the outcome of the regulatory matters discussed
herein. Resolution of these matters is dependent upon future MPSC orders,
which may materially impact the financial position, results of operations and
cash flows of the company. NOTE 4 - 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. 15




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NOTE 5  LONG -TERM DEBT In October 2004, we issued $120 million of 5.0% senior notes due in 2019. The
proceeds will be principally used to redeem the following two issues: $52
million of 6.85% senior notes due 2038 and $55 million of 6.85% senior notes
due 2039. These securities are expected to be called for redemption in
November 2004 at a price of 100 percent of the principal amount plus accrued
and unpaid interest from September 1, 2004. NOTE 6  SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS On October 15, 2004, we entered into a $243.75 million, five-year unsecured
revolving credit facility and lowered our existing three-year revolving credit
facility from $162.5 million to $81.25 million. The five-year facility replaces
the October 2003 364-day facility, which expired. The three-year revolving
credit facility expires in October 2006. The five- and three-year credit
facilities are with a syndicate of banks and may be utilized for general
corporate borrowings, but primarily are intended to provide liquidity support
for our commercial paper program. Borrowings under the facilities will be
available at prevailing short-term interest rates. The agreements require us to
maintain a debt to total capitalization ratio of no more than .65 to l and an
earnings before interest, taxes, depreciation and amortization (EBITDA) to
interest ratio of no less than 2 to 1. We currently are in compliance with
these financial covenants. NOTE 7  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 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. 16




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##### Table of Contents



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 September
30, 2004, and the related condensed consolidated statement of operations for
the three-month and nine-month periods ended September 30, 2004 and 2003, and
the condensed consolidated statements of cash flows and retained earnings and
comprehensive income for the nine-month periods ended September 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. 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
November 4, 2004 17




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##### Table of Contents



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 ExhibitNumber
    
    DescriptionFiled:4-5
    
    Thirty-eighth Supplemental Indenture, dated as of October 1, 2004,
establishing the 2004 Series E Collateral Bonds4-6
    
    Fifth Supplemental Indenture, dated as of October 1, 2004,
establishing the 5.00% Senior Notes, 2004 Series E due 201931-11
    
    Chief Executive Officer Section 302 Form 10-Q Certification31-12
    
    Chief Financial Officer Section 302 Form 10-Q CertificationFurnished:32-11
    
    Chief Executive Officer Section 906 Certification of Periodic Report32-12
    
    Chief Financial Officer Section 906 Certification of Periodic Report
 18




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##### Table of Contents



Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. MICHIGAN CONSOLIDATED
GAS COMPANYDate: November 4, 2004
    
    /s/ DANIEL G. BRUDZYNSKIDaniel G. BrudzynskiChief Accounting Officer,Vice President and Controller
 19




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description4-5
    
    Thirty-eighth Supplemental Indenture, dated as of October 1, 2004,
establishing the 2004 Series E Collateral Bonds4-6
    
    Fifth Supplemental Indenture, dated as of October 1, 2004,
establishing the 5.00% Senior Notes, 2004 Series E due 201931-11
    
    Chief Executive Officer Section 302 Form 10-Q Certification31-12
    
    Chief Financial Officer Section 302 Form 10-Q Certification32-11
    
    Chief Executive Officer Section 906 Certification of Periodic Report32-12
    
    Chief Financial Officer Section 906 Certification of Periodic Report
 20