e10vq

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 March 31, 2007

Commission file number 1-7310

Michigan Consolidated Gas Company meets the conditions set forth in General Instruction 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 2^nd 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. (Check one):

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

All of the registrant’s 10,300,000 outstanding shares of common stock, par value $1 per share, are indirectly owned by DTE Energy Company.

Definitions


CTA		Costs to achieve, consisting of project management, consultant support and employee severance, related to the Performance Excellence Process

Customer Choice		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, 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.

MGP		Manufactured Gas Plant

MichCon		Michigan Consolidated Gas Company, an indirect, wholly owned natural gas distribution and intrastate transmission subsidiary of Enterprises.

MPSC		Michigan Public Service Commission

SFAS		Statement of Financial Accounting Standards

Units of Measurement

Bcf		Billion cubic feet of gas

Mcf		Thousand cubic feet of gas

MMcf		Million cubic feet of gas

Forward-Looking Statements

Certain information presented herein includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties that may cause actual future results to differ materially from those 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 negotiation and impacts 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 borrowing;

•		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, including any associated impact on rate structures;

•		changes in and application of federal, state and local tax laws or 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 or their interpretation with respect to regulation, energy policy and other business issues;

•		uncollectible accounts receivable;

•		binding arbitration, litigation and related appeals;

•		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; and

•		implementation of new processes and new core information systems.

New factors emerge from time to time. We cannot predict what factors may arise or how such factors may cause our results to differ materially from those contained in any forward-looking statement. Any forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Michigan Consolidated Gas Company
Management’s Narrative Analysis of 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.

Factors impacting income: Net income increased $17 million in the first quarter of 2007 due primarily to higher gross margin and lower operation and maintenance expenses.

Increase (Decrease) in Statement of Operations Components
Compared to Prior Year


	Three
(in Millions)	Months
Operating revenues	$	(2	)
Cost of gas		(11	)

Gross margin		9
Operation and maintenance		(10	)
Depreciation and amortization		(2	)
Taxes other than income		(1	)
Asset losses		3
Other (income) and deductions		(3	)
Income tax provision		5

Net income	$	17

Gross margin increased $9 million in the first quarter of 2007. The increase is due to $17 million representing the impacts of colder weather in 2007, $11 million related to an increase in midstream services including storage and transportation, partially offset by a $16 million unfavorable impact in lost gas recognized and $3 million related to customer conservation. Revenues include a component for the cost of gas sold that is recoverable through the GCR mechanism.


	Three Months Ended
	March 31
	2007		2006
Gas Markets (in Millions)
Gas sales	$	759	$	782
End user transportation		52		45

		811		827
Intermediate transportation		19		15
Other		31		21

	$	861	$	863


Gas Markets (in Bcf)
Gas sales		68		65
End user transportation		49		44

		117		109
Intermediate transportation		128		163

		245		272

Operation and maintenance expense was lower by $10 million due to lower uncollectible accounts receivable expense primarily due to improved customer payment trends resulting from increased collection efforts.

Depreciation and amortization expenses were lower by $2 million due to an adjustment resulting from an MPSC order related to pipeline assets.

Asset losses increased $3 million attributable to an MPSC disallowance of certain costs related to the acquisition of pipeline assets.

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 MPSC’s uncollectible true-up mechanism and GCR mechanism.

We will utilize the DTE Energy Operating System and the Performance Excellence Process to seek opportunities to improve productivity, remove waste and decrease our costs while improving customer satisfaction.

ENTERPRISE BUSINESS SYSTEMS

In 2003, we began the development of our Enterprise Business Systems (EBS) project, an enterprise resource planning system initiative to improve existing processes and to implement new core information systems, relating to finance, human resources, supply chain and work management. As part of this initiative, we are implementing EBS software including, among others, products developed by SAP AG and MRO Software, Inc. The first phase of implementation occurred in 2005 in the DTE Energy’s regulated electric fossil generation unit. The second phase of implementation, including MichCon, began in April 2007. The conversion of data and the implementation and operation of EBS will be continuously monitored and reviewed and should ultimately strengthen our internal control structure and lead to increased cost efficiencies. Although our implementation plan includes detailed testing and contingency arrangements to ensure a smooth and successful transition, we can provide no assurance that complications will not arise that could interrupt our operations.

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 the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of March 31, 2007, 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 March 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In April 2007, we began implementing the second phase of our Enterprise Business Systems (EBS) project. EBS is an enterprise resource planning system initiative to improve existing processes and to implement new core information systems, relating to finance, human resources, supply chain and work management.

MICHIGAN CONSOLIDATED GAS COMPANY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)


	March 31			December 31
(in Millions)	2007			2006

ASSETS
Current Assets
Cash and cash equivalents	$	2		$	1
Accounts Receivable (less allowance for doubtful accounts of $104 and $96, respectively
Customer		495			364
Other		71			101
Accrued gas cost recovery revenue		25			—
Inventories
Gas		21			77
Material and supplies		18			17
Gas customer choice deferred asset		40			101
Other		52			37

		724			698


Investments		96			94


Property
Property, Plant and Equipment		3,423			3,391
Less accumulated depreciation		(1,558	)		(1,539	)

		1,865			1,852


Other Assets
Regulatory assets		370			362
Notes receivable		78			79
Prepaid benefit costs and due from affiliate		374			365
Other		20			20

		842			826

Total Assets	$	3,527		$	3,470

See Notes to Consolidated Financial Statements (Unaudited)

MICHIGAN CONSOLIDATED GAS COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)


	March 31			December 31
(in Millions, Except Shares)	2007			2006

LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Accounts payable	$	212		$	211
Dividends payable		13			13
Short-term borrowings		123			342
Current portion of long-term debt		30			30
Federal income, property and other taxes payable		47			14
Gas inventory equalization		278			—
Accrued gas cost recovery refund		7			81
Other		63			74

		773			765


Long-Term debt, (net of current portion)		715			715


Other Liabilities
Deferred income taxes		179			181
Regulatory liabilities		517			510
Accrued postretirement benefit costs		348			347
Other		185			196

		1,229			1,234


Commitments and Contingencies (Notes 4 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		369			315
Accumulated other comprehensive loss		(1	)		(1	)

		810			756

Total Liabilities and Shareholder’s Equity	$	3,527		$	3,470

See Notes to Consolidated Financial Statements (Unaudited)

MICHIGAN CONSOLIDATED GAS COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


	Three Months Ended
	March 31
(in Millions)	2007			2006

Operating Activities
Net income	$	67		$	50
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		21			23
Deferred income taxes and investment tax credit, net		(8	)		(19	)
Asset losses		3			—
Changes in assets and liabilities:
Accounts receivable, net		(101	)		(26	)
Inventories		55			50
Postretirement obligation		1			(14	)
Property taxes assessed applicable to future periods		(6	)		(7	)
Prepaid benefit costs and due from affiliate		(9	)		(8	)
Accrued gas cost recovery		(98	)		51
Accounts payable		17			(36	)
Gas inventory equalization		278			158
Federal income, property and other taxes payable		33			33
Other assets		49			38
Other liabilities		(18	)		(1	)

Net cash from operating activities		284			292


Investing Activities
Capital expenditures		(53	)		(32	)
Proceeds from sale of assets		1			—
Other		1			—

Net cash used for investing activities		(51	)		(32	)


Financing Activities
Short-term borrowings, net		(219	)		(254	)
Dividends paid		(13	)		(12	)

Net cash used for financing activities		(232	)		(266	)


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

Cash and Cash Equivalents at End of Period	$	2		$	1


Supplementary Cash Flow Information
Interest paid (excluding interest capitalized)	$	24		$	21
Income taxes paid		—			—

See Notes to Consolidated Financial Statements (Unaudited)

MICHIGAN CONSOLIDATED GAS COMPANY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER’S
EQUITY AND COMPREHENSIVE INCOME


										Accumulated
					Additional					Other
(Dollars in Millions,	Common Stock				Paid in		Retained			Comprehensive
Shares in Thousands)	Shares		Amount		Capital		Earnings			Loss			Total

Balance, December 31, 2006		10,300	$	10	$	432	$	315		$	(1	)	$	756

Net income		—		—		—		67			—			67
Dividends declared on common stock		—		—		—		(13	)		—			(13	)

Balance, March 31, 2007		10,300	$	10	$	432		369			(1	)	$	810

The following table displays other comprehensive income for the three-month periods ended March 31:


(in Millions)	2007		2006

Net income	$	67	$	50


Comprehensive income	$	67	$	50

See Notes to Consolidated Financial Statements (Unaudited)

Michigan Consolidated Gas Company

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 — GENERAL

These Consolidated Financial Statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the 2006 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 reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from our 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 presented. All adjustments are of a normal recurring nature, except as otherwise disclosed in these Consolidated Financial Statements and Notes to Consolidated Financial Statements. Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year.

References in this report to “we,” “us,” “our” or “Company” are to Michigan Consolidated Gas Company and its subsidiaries, collectively.

Asset Retirement Obligations

We have conditional asset retirement obligations for gas pipeline retirement costs. To a lesser extent, we have conditional asset retirement obligations at certain service centers and compressor and gate stations. We recognize such obligations as liabilities at fair market value at the time the associated assets are placed in service. Fair value is measured using expected cash outflows discounted at our credit-adjusted risk-free rate.

Timing differences arise in the expense recognition of legal asset retirement costs that we are currently recovering in rates. We defer such differences under SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.

A reconciliation of the asset retirement obligations for the first quarter of 2007 follows:


(in Millions)
Asset retirement obligations at January 1, 2007	$	103
Accretion		2
Liabilities settled		(1	)

Asset retirement obligations at March 31, 2007	$	104

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 non-represented 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 $8 million and $7 million for the three months ended March 31, 2007 and 2006 and is not reflected in the following table.

In its April 2005 final rate order, the MPSC approved the deferral of the non-capitalized portion of our negative pension expense. At March 31, 2007 and 2006, we recorded a $47 million and a $19 million regulatory liability, respectively.

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 March 31	2007			2006			2007			2006

Service cost	$	2		$	2		$	4		$	4
Interest cost		4			4			7			6
Expected return on plan assets		(8	)		(7	)		(3	)		(2	)
Net loss		—			—			2			2
Prior service cost		1			—			1			1
Net transition liability		—			—			1			1

Net periodic benefit cost (credit)	$	(1	)	$	(1	)	$	12		$	12

During the first quarter of 2006, we made a cash contribution of $20 million to our postretirement benefit plans. We made no cash contributions to our postretirement benefit plans in the first quarter of 2007.

Income Taxes

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48) on January 1, 2007. This interpretation prescribes a recognition threshold and a measurement attribute for the financial statement reporting of tax positions taken or expected to be taken on a tax return. As a result of the implementation of FIN 48, we recognized a $0.2 million increase in liabilities which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. The total amount of unrecognized tax benefits amounted to $0.2 million at January 1, 2007, all of which would impact our effective tax rate if recognized. We had no unrecognized tax benefits at March 31, 2007. The decline in unrecognized tax benefits during the three months ended March 31, 2007 was attributable to settlements with the Internal Revenue Service (IRS) for the 2002 and 2003 tax years.

We recognize interest and penalties pertaining to income taxes in Interest expense and Other expenses, respectively, on our Consolidated Statement of Operations. We had no accrued interest pertaining to income taxes and no accrued penalties at January 1, 2007 and March 31, 2007. We had no interest expense in relation to income taxes for the three months ended March 31, 2007 and 2006.

Our U.S. federal income tax returns for years 2004 and beyond remain subject to examination by the IRS.

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. Our allocation for the three months ended March 31, 2007 and 2006 for stock-based compensation expense was approximately $1 million in each period. The cumulative effect of the adoption of SFAS 123(R) was immaterial.

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.

Asset losses

Asset losses were $3 million in the first quarter of 2007 representing a disallowance of certain costs related to the acquisition of pipeline assets.

NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

Fair Value Accounting

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We plan to adopt SFAS 157 on January 1, 2008. We are currently assessing the effects of this statement, and have not yet determined the impact on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair-value. The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. An entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We are currently assessing the effects of this statement, and have not yet determined the impact on the consolidated financial statements.

Accounting for Defined Benefit Pension and Other Postretirement Plans

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an Amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires companies to (1) recognize the overfunded or underfunded status of defined benefit pension and defined benefit other postretirement plans in its financial statements, (2) recognize as a component of other comprehensive income, net of tax, the actuarial gains or losses and the prior service costs or credits that arise during the period but are not immediately recognized as components of net periodic benefit cost, (3) recognize adjustments to other comprehensive income when the actuarial gains or losses, prior service costs or credits, and transition assets or obligations are recognized as components of

net periodic benefit cost, (4) measure postretirement benefit plan assets and plan obligations as of the date of the employer’s statement of financial position, and (5) disclose additional information in the notes to financial statements about certain effects on net periodic benefit cost in the upcoming fiscal year that arise from delayed recognition of the actuarial gains and losses and the prior service cost credits.

The requirement to recognize the funded status of a defined benefit pension or defined benefit other postretirement plan and the related disclosure requirements was effective for fiscal years ending after December 15, 2006, and we adopted this portion of the standard on December 31, 2006. We requested and received agreement from the MPSC to record the additional liability amounts for Detroit Edison and MichCon on the balance sheet as a regulatory asset.

The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Statement provides two options for the transition to a fiscal year end measurement date. We have not yet determined which of the available transition measurement options we will use.

NOTE 3 — RESTRUCTURING

Performance Excellence Process

In mid-2005, we initiated a company-wide review of our operations called the Performance Excellence Process. We began a series of focused improvement initiatives and expect this process will be carried out over a two-to three- year period that began in 2005.

We have incurred CTA for employee severance and other costs, consisting primarily of project management and consultant support. We cannot defer CTA costs at this time because a recovery mechanism has not been established.

Amounts expensed are recorded within the Operation and maintenance line in the Consolidated Statement of Operations. Expenses incurred for the three months ended March 31, 2007 and 2006 are as follows:


	Employee Severance Costs (1)				Other Costs				Total Cost
(in Millions)	2007		2006		2007		2006		2007		2006

Costs incurred:	$	2	$	—	$	—	$	3	$	2	$	3


(1)		Includes corporate allocations.

A liability for future CTA associated with the Performance Excellence Process has not been recognized because we have not met the recognition criteria of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

NOTE 4 — REGULATORY MATTERS

Regulation

We are subject to the regulatory jurisdiction of the MPSC, which issues orders pertaining to rates, recovery of certain costs, including the costs of regulatory assets, conditions of service, accounting and operating-related 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 sought 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 CTA. We anticipate that the Performance Excellence Process will be carried out over a two- to three-year period beginning in 2005. MichCon’s CTA is estimated to total between $55 million and $60 million. In September 2006, the MPSC issued an order approving a settlement agreement that allows MichCon, commencing in 2006, to defer the incremental CTA. Further, the order provides for MichCon to amortize the CTA deferrals over a ten-year period beginning with the year subsequent to the year the CTA was deferred. MichCon cannot defer CTA costs at this time because a recovery mechanism has not been established.

Uncollectible Expense True-Up Mechanism (UETM) and Report of Safety and Training-Related Expenditures

2005 UETM — In March 2006, MichCon filed an application with the MPSC for approval of its uncollectible expense true-up mechanism for 2005. 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 totaled $60 million. The true-up mechanism allows MichCon to recover ninety 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. In December 2006, the MPSC issued an order authorizing MichCon to implement the UETM monthly surcharge for service rendered on and after January 1, 2007.

As part of the March 2006 application with the MPSC, MichCon filed a review of its 2005 annual safety and training — related expenditures. MichCon reported that actual safety and training-related expenditures for the initial period exceeded the pro-rata amounts included in base rates and based on the under-recovered position, recommended no refund at this time. In the December 2006 order, the MPSC also approved MichCon’s 2005 safety and training report.

2006 UETM — In March 2007, MichCon filed an application with the MPSC for approval of its uncollectible expense true-up mechanism for 2006 requesting $33 million of underrecovery plus applicable carrying costs of $3 million. The March 2007 application included a report of MichCon’s 2006 annual safety and training — related expenditures, which shows a $2 million over-recovery.

Gas Cost Recovery Proceedings

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 October 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. MPSC Staff and other interveners filed testimony regarding the reconciliation in December 2006 in which they recommended disallowances related to MichCon’s implementation of its dollar cost averaging fixed price program and its use of fixed basis in contracting purchases. In January 2007, MichCon filed testimony rebutting these recommendations. The 2005-2006 GCR reconciliation case is still in the regulatory review and approval process, and the final resolution is uncertain. Based on available information, MichCon is unable to assess the range of a reasonably possible loss related to the proposed disallowances. An MPSC order is expected in 2007.

2007-2008 Plan Year / Native Base Gas Sale Consolidated – In August 2006, MichCon filed an application with the MPSC requesting permission to sell native base gas that would become accessible with storage facilities upgrades. MichCon’s estimated sale of this base gas would be worth $34 million. In December 2006, the administrative law judge in the case approved a motion made by the Residential Ratepayer Consortium to consolidate this case with MichCon’s 2007-2008 GCR plan case. In December 2006, MichCon filed its 2007-2008 GCR plan case proposing a maximum GCR factor of $8.49 per Mcf. An MPSC Order in the consolidated cases is expected by the end of 2007.

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 5 – COMMITMENTS AND CONTINGENCIES

Environmental Matters

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 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 a previously established reserve. As a result of a study completed in 1995, we accrued an additional liability and a corresponding regulatory asset of $32 million. During 2006 we spent approximately $2 million investigating and remediating these former MGP sites. In December 2006 we retained multiple environmental consultants to estimate the projected cost to remediate each MGP site. We accrued an additional $7 million in remediation liabilities associated with former MGP holders and additional cleanup cost, to increase the reserve balance to $39 million at December 31, 2006, with a corresponding increase in the regulatory asset. The reserve balance amounted to $37 million at March 31, 2007.

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.

Labor Contracts

There are several bargaining units for our represented employees. Approximately 970 of our represented employees are under contracts that expire in October 2007. The contracts of the remaining represented employees expire in 2008.

Purchase Commitments

As of March 31, 2007, 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 $1.5 billion from 2007 through 2051. We also estimate that 2007 capital expenditures will be approximately $215 million. We have made certain commitments in connection with expected capital expenditures.

Bankruptcies

We sell gas and 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 that we can estimate and are 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 we can estimate and 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 periods they are resolved.

See Note 4 for a discussion of contingencies related to Regulatory Matters.


		Page
		Number
DEFINITIONS			1

FORWARD-LOOKING STATEMENTS			2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

	Consolidated Statement of Operations		6

	Consolidated Statement of Financial Position		7

	Consolidated Statement of Cash Flows		9

	Consolidated Statement of Changes in Shareholder’s Equity and Comprehensive Income		10

	Notes to Consolidated Financial Statements		11

Item 2. Management’s Narrative Analysis of Results of Operations			3

Item 4. Controls and Procedures			5

PART II — OTHER INFORMATION

Item 6. Exhibits			18

SIGNATURE			19
Chief Executive Officer Section 302 Form 10-Q Certification
Chief Financial Officer Section 302 Form 10-Q Certification
Chief Executive Officer Section 906 Form 10-Q Certification
Chief Financial Officer Section 906 Form 10-Q Certification


Exhibit
Number		Description

Filed:

31-31		Chief Executive Officer Section 302 Form 10-Q Certification

31-32		Chief Financial Officer Section 302 Form 10-Q Certification

Furnished:

32-31		Chief Executive Officer Section 906 Form 10-Q Certification

32-32		Chief Financial Officer Section 906 Form 10-Q Certification


		MICHIGAN CONSOLIDATED
		GAS COMPANY

Date: May 9, 2007		/s/ PETER B. OLEKSIAK
		Peter B. Oleksiak
		Vice President and Controller and Chief
		Accounting Officer


Exhibit
Number		Description


31-31		Chief Executive Officer Section 302 Form 10-Q Certification

31-32		Chief Financial Officer Section 302 Form 10-Q Certification

32-31		Chief Executive Officer Section 906 Form 10-Q Certification

32-32		Chief Financial Officer Section 906 Form 10-Q Certification

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