10-Q 1 k07408e10vq.htm QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2006 e10vq
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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, 2006
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 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 þ            No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o            No þ
 
 

 

 

Michigan Consolidated Gas Company
Quarterly Report on Form 10-Q
Quarter Ended June 30, 2006
Table of Contents
         
    Page  
    Number  
    1  
 
        
    2  
 
        
PART I — FINANCIAL INFORMATION
        
 
        
Item 1. Financial Statements
        
 
        
    6  
 
        
    7  
 
        
    9  
 
        
    10  
 
        
    11  
 
        
Item 2. Management’s Narrative Analysis of Results of Operations
    3  
 
        
Item 4. Controls and Procedures
    5  
 
        
       
 
        
    17  
 
        
    17  
 
        
    18  
 Chief Executive Officer Section 302
 Chief Financial Officer Section 302
 Chief Executive Officer Section 906
 Chief Financial Officer Section 906

 

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Definitions
     
Company or MichCon
  Michigan Consolidated Gas Company, an indirect, wholly-owned natural gas distribution and intrastate transmission subsidiary of Enterprises.
 
    
Customer Choice
  Statewide initiatives 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, MichCon and numerous non-utility subsidiaries.
 
    
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., a wholly owned subsidiary of DTE Energy and indirectly the parent of MichCon.
 
    
Gas storage
  For MichCon, the process of injecting, storing, and withdrawing natural gas from a depleted underground natural gas field.
 
    
GCR
  A gas cost recovery mechanism authorized by the MPSC, permitting MichCon to pass 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.
 
    
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

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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 presently contemplated, projected, estimated or budgeted. Many factors 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 population growth or decline in the geographic areas where we do business;
 
  •   environmental issues, laws, regulations, and the cost of remediation and compliance;
 
  •   implementation of the gas Customer Choice program;
 
  •   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;
 
  •   impact of regulation by the MPSC and other applicable governmental proceedings and regulations;
 
  •   changes in and application of 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 and application of 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;
 
  •   uncollectible accounts receivable;
 
  •   litigation and related appeals; 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 the Company.
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.

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Management’s Narrative Analysis of Results of Operations
The Management’s Narrative Analysis of Results of Operations discussion for MichCon is presented in accordance with General Instruction H(2)(a) of Form 10-Q.
Certain items reflected in the accompanying consolidated financial statements have been eliminated at DTE Energy as a result of purchase accounting adjustments.
Factors impacting income: MichCon’s net loss decreased $37 million for the second quarter and net income increased $100 million in the 2006 six-month period. The results reflect effective tax rate adjustments in 2005, increased rates and the impacts in 2005 of the MPSC’s April 2005 gas cost recovery and final gas rate orders, partially offset by the effects of milder winter weather in 2006.
The MPSC final gas rate order disallowed recovery of 90% of the costs of a computer billing system that was in place prior to DTE Energy’s acquisition of MCN Energy in 2001. MichCon impaired this asset by approximately $42 million in the first quarter of 2005.
                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
Increase (Decrease) in Income Statement Components Compared to Prior Year
               
(in Millions)
                
Operating revenues
   $ (32 )   $ (3 )
Cost of gas
     (43 )     (46 )
 
            
Gross margin
     11       43  
Operation and maintenance
     14       14  
Depreciation and amortization
     —       (3 )
Taxes other than income
     —       2  
Asset (gains) and losses, net
     3       (45 )
Other (income) and deductions
     1       2  
Income tax provision
     (44 )     (27 )
 
            
Net income (loss)
   $ 37     $ 100  
 
            
Gross margins increased $11 million in the 2006 second quarter and increased $43 million for the 2006 six-month period. Gross margins in 2006 were favorably affected by higher base rates as a result of the April 2005 final gas rate order, increased storage revenue and revenue associated with the uncollectible expense tracking mechanism authorized by the MPSC, partially offset by the effects of milder winter weather in 2006 and customer conservation. In April 2005, the MPSC issued an order in the 2002 GCR reconciliation case that disallowed $26 million representing unbilled revenues at December 2001. We recorded the impact of the disallowance during the first quarter of 2005.
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2006     2005     2006     2005  
Gas Markets (in Millions)
                                
Gas sales
   $ 163     $ 202     $ 944     $ 958  
End user transportation
     27       28       72       73  
 
                        
 
     190       230       1,016       1,031  
Intermediate transportation
     13       11       29       26  
Other
     26       20       47       38  
 
                        
 
   $ 229     $ 261     $ 1,092     $ 1,095  
 
                        

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    Three Months Ended   Six Months Ended
    June 30   June 30
    2006   2005   2006   2005
Gas Markets (in Bcf)
                                
Gas sales
     17       22       82       104  
End user transportation
     27       33       71       82  
 
                        
 
     44       55       153       186  
Intermediate transportation
     125       84       289       218  
 
                        
 
     169       139       442       404  
 
                        
Operation and maintenance expense increased $14 million in the 2006 second quarter and six-month period. The increases are due to increased uncollectible accounts receivable expense, reflecting higher past due amounts attributable to an increase in gas prices, continued weak economic conditions, and inadequate government-sponsored assistance for low-income customers. We also recorded implementation costs associated with our Performance Excellence Process. Increases were partially offset by the DTE Energy parent company no longer allocating merger-related interest to MichCon effective in April 2005 and the 2005 disallowance of certain environmental costs due to the April 2005 final gas rate order. The 2005 final gas rate order provided revenue for an uncollectible expense tracking mechanism to mitigate some of the effect of increasing uncollectible expense.
Asset (gains) and losses, net decreased $45 million for the six-month period due to the 2005 disallowances of approximately $42 million of costs related to a computer billing system and $6 million of certain computer equipment and related depreciation resulting from the April 2005 final gas rate. The 2006 second quarter and six-month period decreased $3 million as a result of a reduction to MichCon’s 2004 GCR underrecovery related to the accounting treatment of the injected base gas remaining in the New Haven storage field when it was sold in early 2004.
Income taxes decreased $44 million and $27 million for the second quarter and six-month period of 2006, respectively, primarily due to a lower effective tax rate in 2006.
Outlook – Operating results are expected to vary due to regulatory proceedings, weather, changes in economic conditions, customer conservation and process improvements. Higher gas prices and economic conditions have resulted in continued pressure on receivables and working capital requirements that are partially mitigated by the GCR mechanism. In the April 2005 final gas rate order, the MPSC adopted MichCon’s proposed tracking mechanism for uncollectible accounts receivable. Each year, MichCon will file an application comparing its actual uncollectible expense for the prior calendar year to its designated revenue recovery of approximately $37 million. Ninety percent of the difference will be refunded or surcharged after an annual reconciliation proceeding before the MPSC.
We will utilize the DTE Operating System and the Performance Excellence Process to seek opportunities to improve productivity, remove waste, decrease our costs, while improving customer satisfaction. We anticipate accruing additional implementation charges in 2006 and 2007. MichCon seeks MPSC authorization to defer and amortize Performance Excellence Process implementation costs for accounting purposes to match the expected savings from the Performance Excellence Process program with the related costs to achieve.

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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 design and operation 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, 2006, 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 effective in ensuring 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 reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Due to the inherent limitations in the effectiveness of any disclosure controls and procedures, management cannot provide absolute assurance that the objectives of its disclosure controls and procedures will be attained.
(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, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
(in Millions)   2006     2005     2006     2005  
Operating Revenues
   $ 229     $ 261     $ 1,092     $ 1,095  
 
                        
 
                                
Operating Expenses
                                
Cost of gas
     88       131       712       758  
Operation and maintenance
     110       96       229       215  
Depreciation and amortization
     24       24       47       50  
Taxes other than income
     13       13       28       26  
Asset (gains) and losses, net
     3       —       3       48  
 
                        
 
     238       264       1,019       1,097  
 
                        
 
                                
Operating Income (Loss)
     (9 )     (3 )     73       (2 )
 
                        
 
                                
Other (Income) and Deductions
                                
Interest expense
     15       13       32       28  
Interest income
     (2 )     (3 )     (4 )     (5 )
Other income
     (2 )     —       (4 )     (2 )
Other expenses
     —       —       1       2  
 
                        
 
     11       10       25       23  
 
                        
 
                                
Income (Loss) Before Income Taxes
     (20 )     (13 )     48       (25 )
Income Tax Provision (Benefit)
     (7 )     37       11       38  
 
                        
Net Income (Loss)
   $ (13 )   $ (50 )   $ 37     $ (63 )
 
                        
See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
                 
    (Unaudited)        
    June 30     December 31  
(in Millions)   2006     2005  
ASSETS
                
Current Assets
                
Cash and cash equivalents
   $ 1     $ 7  
Accounts receivable
                
Customer (less allowance for doubtful accounts of $105 and $78, respectively)
     273       552  
Other
     64       79  
Accrued gas cost recovery revenue
     —       42  
Inventories
                
Gas
     102       119  
Material and supplies
     16       16  
Gas customer choice deferred asset
     50       65  
Other
     20       30  
 
            
 
     526       910  
 
            
 
                
Investments
     92       90  
 
            
 
                
Property
                
Property, plant and equipment
     3,294       3,252  
Less accumulated depreciation
     (1,506 )     (1,468 )
 
            
 
     1,788       1,784  
 
            
 
                
Other Assets
                
Regulatory assets
     98       65  
Notes receivable
     79       80  
Prepaid benefit costs and due from affiliate
     413       399  
Other
     13       15  
 
            
 
     603       559  
 
            
Total Assets
   $ 3,009     $ 3,343  
 
            
See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
                 
    (Unaudited)        
    June 30     December 31  
(in Millions)   2006     2005  
LIABILITIES AND SHAREHOLDER’S EQUITY
                
Current Liabilities
                
Accounts payable
   $ 125     $ 246  
Dividends payable
     13       13  
Short-term borrowings
     127       439  
Current portion of long-term debt, including capital leases
     30       40  
Federal income, property and other taxes payable
     37       24  
Regulatory liabilities
     72       —  
Gas inventory equalization (Note 1)
     52       —  
Other
     65       70  
 
            
 
     521       832  
 
            
 
                
Other Liabilities
                
Deferred income taxes
     185       191  
Regulatory liabilities
     500       490  
Accrued postretirement benefit costs
     136       144  
Other
     186       187  
 
            
 
     1,007       1,012  
 
            
 
                
Long-Term debt, (net of current portion)
     715       745  
 
            
 
                
Contingencies (Notes 3 and 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
     432       432  
Retained earnings
     325       313  
Accumulated other comprehensive loss
     (1 )     (1 )
 
            
 
     766       754  
 
            
Total Liabilities and Shareholder’s Equity
   $ 3,009     $ 3,343  
 
            
See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
                 
    Six Months Ended  
    June 30  
(in Millions)   2006     2005  
Operating Activities
                
Net income (loss)
   $ 37     $ (63 )
Adjustments to reconcile net income (loss) to net cash from operating activities:
                
Depreciation and amortization
     47       50  
Deferred income taxes and investment tax credit, net
     (18 )     23  
Asset (gains) and losses, net
     3       48  
Changes in assets and liabilities:
                
Accounts receivable, net
     294       144  
Inventories
     17       31  
Postretirement obligation
     (8 )     8  
Property taxes assessed applicable to future periods
     2       (2 )
Prepaid benefit costs and due from affiliate
     (14 )     (16 )
Accrued gas cost recovery
     115       17  
Accounts payable
     (111 )     8  
Gas inventory equalization
     52       116  
Federal income, property and other taxes payable
     13       10  
Other assets
     2       28  
Other liabilities
     2       10  
 
            
Net cash from operating activities
     433       412  
 
            
 
                
Investing Activities
                
Plant and equipment expenditures
     (62 )     (51 )
Notes receivable from affiliate
     1       (99 )
Acquisitions, net of cash acquired
     (1 )     —  
Other
     —       1  
 
            
Net cash used for investing activities
     (62 )     (149 )
 
            
 
                
Financing Activities
                
Redemption of long-term debt
     (40 )     —  
Short-term borrowings, net
     (312 )     (237 )
Dividends on common stock
     (25 )     (25 )
 
            
Net cash used for financing activities
     (377 )     (262 )
 
            
 
                
Net Increase (Decrease) in Cash and Cash Equivalents
     (6 )     1  
Cash and Cash Equivalents at Beginning of Period
     7       —  
 
            
Cash and Cash Equivalents at End of Period
   $ 1     $ 1  
 
            
 
                
Supplementary Cash Flow Information
                
Interest paid (excluding interest capitalized)
   $ 33     $ 28  
Income taxes paid
     —       —  
See Notes to Consolidated Financial Statements (Unaudited)

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MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER’S EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
                                                 
                                    Accumulated    
                    Additional           Other    
(Dollars in Millions,   Common Stock   Paid in   Retained   Comprehensive    
Shares in Thousands)   Shares   Amount   Capital   Earnings   Income   Total
     
Balance, December 31, 2005
     10,300     $ 10     $ 432     $ 313     $ (1 )   $ 754  
 
Net income
     —       —       —       37       —       37  
Dividends declared on common stock
     —       —       —       (25 )     —       (25 )
 
Balance, June 30, 2006
     10,300     $ 10     $ 432     $ 325     $ (1 )   $ 766  
 
The following table displays other comprehensive income (loss) for the six-month periods ended June 30:
                 
(in Millions)   2006     2005  
Net income (loss)
   $ 37     $ (63 )
 
            
Comprehensive income (loss)
   $ 37     $ (63 )
 
            
See Notes to Consolidated Financial Statements (Unaudited)

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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 2005 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 may 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 certain prior year balances to match the current year’s financial statement presentation.
Asset Retirement Obligations
We have recorded asset retirement obligations in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations and FASB Interpretation FIN No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143. We identified conditional retirement obligations for gas pipeline retirement costs. To a lesser extent, we have conditional retirement obligations at certain service centers, compressor and gate stations.
As to regulated operations, we believe that adoptions of SFAS No. 143 and FIN 47 result primarily in timing differences in the recognition of legal asset retirement costs that we are currently recovering in rates. We will be deferring such differences under SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.
A reconciliation of the asset retirement obligation for the 2006 six-month period follows:
         
(in Millions)        
Asset retirement obligations at January 1, 2006
   $ 97  
Accretion
     4  
 
      
Asset retirement obligations at June 30, 2006
   $ 101  
 
      
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 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 $5 million and $6 million for the three months ended June 30, 2006 and 2005, respectively, and was approximately $12 million and $13 million for the six months ended June 30, 2006 and 2005, respectively, and is not reflected in the following table. During the second quarter of 2006, we recorded a $1 million pension cost associated with the initial stage of our Performance Excellence Process program.

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In its April 2005 final rate order, the MPSC approved the deferral of the non-capitalized portion of our negative pension expense. At June 30, 2006, we recorded a $26 million regulatory liability.
The components of net periodic benefit costs (credit) for pension benefits and other postretirement benefits follow:
                                 
                    Other Postretirement  
(in Millions)   Pension Benefits     Benefits  
Three Months Ended June 30   2006     2005     2006     2005  
Service Cost
   $ 1     $ 1     $ 3     $ 3  
Interest Cost
     4       3       7       6  
Expected Return on Plan Assets
     (8 )     (7 )     (3 )     (3 )
Amortization of
                                
Net loss
     —       —       3       1  
Prior service cost
     1       1       —       1  
Net transition liability
     —       —       1       1  
 
                        
Net Periodic Benefit Cost (Credit)
   $ (2 )   $ (2 )   $ 11     $ 9  
 
                        
                                 
                    Other Postretirement  
(in Millions)   Pension Benefits     Benefits  
Six Months Ended June 30   2006     2005     2006     2005  
Service Cost
   $ 3     $ 3     $ 7     $ 6  
Interest Cost
     8       7       13       12  
Expected Return on Plan Assets
     (15 )     (14 )     (5 )     (6 )
Amortization of
                                
Net loss
     —       —       5       3  
Prior service cost
     1       1       1       1  
Net transition liability
     —       —       2       3  
 
                        
Net Periodic Benefit Cost (Credit)
   $ (3 )   $ (3 )   $ 23     $ 19  
 
                        
In 2006, we made cash contributions of $20 million to our postretirement benefit plans.
Gas in Inventory
Gas inventory 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 weighted average cost of the LIFO pool 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
Stock-Based Compensation
Effective January 1, 2006, our parent company, DTE Energy, adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective transition method. We receive an allocation of costs associated with stock compensation and the related impact of cumulative accounting adjustments.

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Our allocation for the first six months of 2006 for stock-based compensation expense was approximately $1 million. The cumulative effect of the adoption of SFAS 123(R) had an immaterial impact on our operation and maintenance expense. We have not restated any prior periods as a result of the adoption of SFAS 123(R).
Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued Financial Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 – Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109. Additionally, it prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition and is effective for fiscal years beginning after December 15, 2006. We plan to adopt FIN 48 on January 1, 2007. We are currently assessing the effects of this interpretation, and have not yet determined the impact on the consolidated financial statements.
NOTE 3 — REGULATORY MATTERS
Regulatory Accounting Treatment for Performance Excellence Process
In May 2006, we filed an application with the MPSC to allow deferral of costs associated with the implementation of the Performance Excellence Process, a company-wide cost-savings and performance improvement program. Implementation costs include project management, consultant support and employee severance expenses. We seek MPSC authorization to defer and amortize Performance Excellence Process implementation costs for accounting purposes to match the expected savings from the Performance Excellence Process program with the related costs to achieve. We anticipate that the Performance Excellence Process will be carried out over a two to three year period beginning in 2006. MichCon’s implementation costs are estimated to total between $55 million and $60 million.
Uncollectible Expense Tracker Mechanism and Report of Safety and Training-Related Expenditures
In March 2006, MichCon filed an application with the MPSC for approval of its uncollectible expense tracking mechanism for 2005 and review of 2005 annual safety and training-related expenditures. This is the first filing MichCon has made under the uncollectible tracking mechanism, which was approved by the MPSC in April 2005 as part of MichCon’s last general rate case. MichCon’s 2005 base rates included $37 million for anticipated uncollectible expenses. Actual 2005 uncollectible expenses for Michcon totaled $60 million. The tracker mechanism allows MichCon to recover 90 percent of uncollectibles that exceeded that $37 million base. Under the formula prescribed by the MPSC, MichCon recorded an underrecovery of approximately $11 million for uncollectible expenses from May 2005 (when the mechanism took effect) through the end of 2005. It is expected that the underrecovery will be recovered from customers through a monthly surcharge. MichCon reported that actual safety and training-related expenditures for the initial period exceeded the pro-rated expenditures in base rates and recommended no refund at this time.
Gas Cost Gas Cost Recovery Proceedings
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 runs from April to March of the following year. To accomplish the switch, the 2004 GCR plan reflected a 15-month transitional period,

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January 2004 through March 2005. Under this transition proposal, MichCon filed two reconciliations pertaining to the transition period; one in June 2004 addressing January through March 2004, one filed in June 2005 addressing the remaining April 2004 through March 2005 period and consolidating the two for purposes of the case. The June 2005 filing supported the $46 million under-recovery with interest MichCon had accrued for the period ending March 31, 2005. In March 2006, MPSC Staff filed testimony recommending an adjustment to the accounting treatment of the injected base gas remaining in the New Haven storage field when it was sold in early 2004 that would result in a $3 million reduction to MichCon’s accrued underrecovery. In June 2006, an MPSC ALJ issued a PFD recommending an approximately $43 million underrecovery. MichCon recorded the $3 million reduction to the 2004 underrecovery in the second quarter of 2006. An MPSC order is expected in 2006.
2005-2006 Plan Year — In December 2004, MichCon filed its 2005-2006 GCR plan case proposing a maximum GCR factor of $7.99 per Mcf. The plan includes quarterly contingent GCR factors. These contingent factors allow MichCon to increase the maximum GCR factor to compensate for increases in gas market prices, thereby reducing the possibility of a GCR under-recovery. In April 2005, the MPSC issued an order recognizing that Michigan law allows MichCon to self-implement its quarterly contingent factors. MichCon self-implemented quarterly contingent GCR factors of $8.54 per Mcf in July 2005 and $10.09 per Mcf in October 2005. In response to market price increases in the fall of 2005, MichCon filed a petition to reopen the record in the case during September 2005. MichCon proposed a revised maximum GCR factor of $13.10 per Mcf and a revised contingent factor matrix. In its order issued October 6, 2005, the MPSC reopened the record in the case. On October 28, 2005, the MPSC approved an increase in the GCR factor to a cap of $11.3851 per Mcf for the period November 2005 through March 2006. In June 2006, MichCon filed its GCR reconciliation for the 2005-2006 GCR year. The filing supported a total over-recovery, including interest through March 2006, of $13 million. An MPSC order is expected in 2007.
2006-2007 Plan Year – In December 2005, MichCon filed its 2006-2007 GCR plan case proposing a maximum GCR Factor of $12.15 per Mcf. In July 2006, MichCon and the parties to the case reached a settlement agreement that provides for a maximum GCR factor of $8.95 per Mcf, plus quarterly contingent GCR factors. These contingent factors will allow MichCon to increase the maximum GCR factor to compensate for increases in gas market prices, thereby reducing the possibility of a GCR under-recovery. An MPSC order approving the settlement is expected in 2006.
Other
We are unable to predict the outcome of the regulatory matters discussed herein. Resolution of these matters is dependent upon future MPSC orders and appeals, which may materially impact the financial position, results of operations and cash flows of the Company.
NOTE 4 – LONG -TERM DEBT
Debt Retirements and Redemptions
The following debt was retired, through optional redemption or payment at maturity, during 2006.
                                         
                                    (in Millions)  
    Month                          
Company   Retired     Type   Interest Rate   Maturity     Amount  
 
MichCon
   May   First Mortgage Bonds     7.15 %   May 2006   $ 40  
 
                                      
 
                   Total Retirements           $ 40  
 
                                      

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NOTE 5 – CONTINGENCIES
Environmental Matters
Contaminated Sites — Prior to the construction of major interstate natural gas pipelines, gas for heating and other uses was manufactured locally from processes involving coal, coke or oil. We own, or previously owned, 14 such former manufactured gas plant (MGP) sites. Investigations have revealed contamination related to the by-products of gas manufacturing at each site. In addition to the MGP sites, we are also in the process of cleaning up other contaminated sites. Cleanup activities associated with these sites will be conducted over the next several years.
In 1993, a cost deferral and rate recovery mechanism was approved by the MPSC for investigation and remediation costs incurred at former MGP sites in excess of this reserve. 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. As a result of these studies, we accrued an additional liability and a corresponding regulatory asset of $32 million during 1995. During 2005, we spent approximately $4 million investigating and remediating these former MGP sites. In December 2005, we retained multiple environmental consultants to estimate the projected cost to remediate each MGP site. We accrued an additional $9 million in remediation liabilities associated with two of our MGP sites, to increase the reserve balance to $33 million at December 31, 2005.
Any significant change in assumptions, such as remediation techniques, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites and affect the Company’s financial position and cash flows. However, we anticipate the cost deferral and rate recovery mechanism approved by the MPSC will prevent environmental costs from having a material adverse impact on our results of operations.
Personal Property Taxes
MichCon and other Michigan utilities have asserted that Michigan’s valuation tables result in the substantial overvaluation of utility personal property. Valuation tables established by the Michigan State Tax Commission (STC) are used to determine the taxable value of personal property based on the property’s age. In November 1999, the STC approved new valuation tables that more accurately recognize the value of a utility’s personal property. The new tables became effective in 2000 and are currently used to calculate property tax expense. However, several local taxing jurisdictions have taken legal action attempting to prevent the STC from implementing the new valuation tables and have continued to prepare assessments based on the superseded tables. The legal actions regarding the appropriateness of the new tables were before the Michigan Tax Tribunal (MTT) which, in April 2002, issued its decision essentially affirming the validity of the STC’s new tables. In June 2002, petitioners in the case filed an appeal of the MTT’s decision with the Michigan Court of Appeals. In January 2004, the Michigan Court of Appeals upheld the validity of the new tables. With no further appeal by the petitioners available, the MTT began to schedule utility personal property valuation cases for Prehearing General Calls. After a period of abeyance the MTT issued a scheduling order in a significant number of MichCon appeals that set litigation calendars for these cases extending into mid-2006. After an extended period of settlement discussions, a Memorandum of Understanding has been reached with six principals in the litigation and the Michigan Department of Treasury that is expected to lead to settlement of all outstanding property tax disputes on a global basis.
On December 8, 2005, executed Stipulations for Consent Judgment, Consent Judgments, and Schedules to Consent Judgment were filed with the MTT on behalf of MichCon and a significant number of the largest jurisdictions, in terms of tax dollars, involved in the litigation. The filing of these documents fulfilled the requirements of the global settlement agreement and resolves a number of claims by the litigants against each other including both property and non-property issues. The global settlement agreement resulted in an economic benefit to MichCon in 2005 that included the release of a litigation reserve.

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Income Taxes
The Internal Revenue Service is currently conducting audits of MichCon as a component of the DTE Energy federal income tax returns for the years 2002 and 2003. The Company accrues tax and interest related to tax uncertainties that arise due to actual or potential disagreements with governmental agencies about the tax treatment of specific items. We believe that our accrued tax liabilities are adequate for all years.
Other Commitments
As of December 31, 2005, we were party to numerous long-term purchase commitments relating to a variety of goods and services required for our business. These agreements primarily consist of long-term gas purchase and transportation agreements. We estimate that these commitments will be approximately $1.7 billion through 2051. We also estimate that 2006 base level capital expenditures will be approximately $162 million. We have made certain commitments in connection with expected capital expenditures.
Bankruptcies
We sell gas and/or gas transportation and storage services to numerous companies operating in the steel, automotive, energy, retail and other industries. Certain of our customers have filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. We regularly review contingent matters relating to these customers and our sale contracts and we record provisions for amounts considered at risk of probable loss. We believe our previously accrued amounts are adequate for probable losses. The final resolution of these matters is not expected to have a material effect on our financial statements.
Other
We are involved in certain legal, regulatory, administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning matters arising in the ordinary course of business. These proceedings include certain contract disputes, environmental reviews and investigations, audits, inquiries from various regulators, and pending judicial matters. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss. The resolution of pending proceedings is not expected to have a material effect on our operations or financial statements in the period they are resolved.
See Note 3 for a discussion of contingencies related to regulatory matters.

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OTHER INFORMATION
LEGAL PROCEEDINGS
We are involved in certain legal, regulatory, administrative and environmental 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 and Note 5 for a discussion of specific non-regulatory matters.
EXHIBITS
     
Exhibit    
Number  
Description
 
    
Filed:
 
    
31-25
  Chief Executive Officer Section 302 Form 10-Q Certification
 
    
31-26
  Chief Financial Officer Section 302 Form 10-Q Certification
 
    
Furnished:
 
    
32-25
  Chief Executive Officer Section 906 Form 10-Q Certification
 
    
32-26
  Chief Financial Officer Section 906 Form 10-Q Certification

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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 CONSOLIDATED    
 
  GAS COMPANY    
 
        
Date: August 8, 2006
  /s/ PETER B. OLEKSIAK
 
Peter B. Oleksiak 		   
 
  Controller    

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EXHIBIT INDEX
     
Exhibit    
Number  
Description
 
    
31-25
  Chief Executive Officer Section 302 Form 10-Q Certification
 
    
31-26
  Chief Financial Officer Section 302 Form 10-Q Certification
 
    
32-25
  Chief Executive Officer Section 906 Form 10-Q Certification
 
    
32-26
  Chief Financial Officer Section 906 Form 10-Q Certification

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