##### 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 1-2198 The registrant 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. THE DETROIT EDISON COMPANY  Michigan
(State or other jurisdiction of
incorporation or organization)
    
    38-0478650
(I.R.S. Employer
Identification No.)2000 2nd Avenue, Detroit, Michigan
(Address of principal executive offices)
    
    48226-1279
(Zip Code)
 313-235-4000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act)
during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YesX No Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes NoX




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THE DETROIT EDISON COMPANY QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004 TABLE OF CONTENTS PAGEDEFINITIONS
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    4PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Statement of Operations
    
    
    12Consolidated Statement of Financial Position
    
    
    13Consolidated Statement of Cash Flows
    
    
    15Consolidated Statement of Changes in Shareholders Equity
and Comprehensive Income
    
    
    16Notes to Consolidated Financial Statements
    
    
    17Report of Independent Registered Public Accounting Firm
    
    
    26Item 2. Managements Narrative Analysis of Results of Operations
    
    
    5Item 4. Controls and Procedures
    
    
    11PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 6. Exhibits
    
    
    27SIGNATURE
    
    
    28EXHIBIT INDEX
    
    
    29Awareless Letter of Deloitte & Touche LLPChief 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 Company
    
    DTE Energy Company and subsidiary companiesCustomer Choice
    
    Statewide initiatives giving customers in Michigan the option
to choose alternative suppliers for electricity.Detroit Edison
    
    The Detroit Edison Company (a direct wholly owned subsidiary of
DTE Energy Company) and subsidiary companiesDTE Energy
    
    DTE Energy Company, directly or indirectly the parent of
Detroit Edison and MichConFERC
    
    Federal Energy Regulatory CommissionMichCon
    
    Michigan Consolidated Gas Company (an indirect wholly owned
subsidiary of DTE Energy) and subsidiary companiesMPSC
    
    Michigan Public Service CommissionNRC
    
    Nuclear Regulatory CommissionPSCR
    
    A power supply cost recovery mechanism authorized by the MPSC
that allows Detroit Edison to recover through rates its fuel,
fuel-related and purchased power electric expenses. The
clause was suspended pursuant to Michigans restructuring
legislation signed into law June 5, 2000, which lowered and
froze electric customer rates. The clause was reinstated by
the MPSC effective January 1, 2004.SFAS
    
    Statement of Financial Accounting StandardsStranded Costs
    
    Costs incurred by utilities in order to serve customers in a
regulated environment that are not expected to be recoverable
if customers switch to alternative suppliers of electricity.Units Of Measurement:gWh
    
    Gigawatthour of electricitykWh
    
    Kilowatthour of electricityMWh
    
    Megawatthour of electricity
 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;
    
    nuclear regulations and operations associated with nuclear facilities;
    
    implementation of electric Customer Choice programs;
    
    impact of electric utility restructuring in Michigan, including legislative amendments;
    
    employee relations and the impact of collective bargaining agreements;
    
    unplanned outages;
    
    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 coal and other raw materials, and purchased power;
    
    effects of competition;
    
    impacts of regulations by FERC, MPSC, NRC 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, customers and trading counterparties, and the continued
ability of such parties to perform their obligations to Detroit Edison. 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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THE DETROIT EDISON COMPANY
MANAGEMENTS NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS The Managements Narrative Analysis of Results of Operations discussion for
Detroit Edison is presented in accordance with General Instruction H(2) (a) of
Form 10-Q. OVERVIEW We had income of $62 million in the 2004 third quarter compared to income of
$96 million for the 2003 third quarter. For the nine-month period, our income
was $114 million compared to income of $141 million for the comparable 2003
period. The comparability of earnings for the nine-month period was impacted by
the adoption of a new accounting rule in the 2003 first quarter. As required
by generally accepted accounting principles, on January 1, 2003, we adopted a
new accounting rule for asset retirement obligations as discussed in Note 2.
The cumulative effect of adopting this new accounting rule was to reduce the
2003 nine-month period earnings by $6 million. Significant items that influenced our 2004 financial performance and/or may
affect future results are:  
    
    Lost revenues from electric Customer Choice penetration;
    
    Proposed Michigan legislation to address electric Customer Choice issues; and
    
    Interim electric rate orders. Electric Customer Choice
Program Detroit Edisons rates are regulated by the
Michigan Public Service Commission (MPSC), while alternative suppliers can
charge market-based rates. This regulation has hindered Detroit Edisons
ability to retain customers. In addition, the MPSC has maintained regulated
rates for certain groups of customers that exceed the cost of service to those
customers. This has resulted in high levels of participation in the electric
Customer Choice program by those customers that have the highest price relative
to their cost of service. As a result, we continue to lose margins. To address
this issue, we expect to file a rate case in 2005 designed to adjust rates for
each customer class to be reflective of the full costs incurred to service such
customers. Lost margins and electricity volumes associated with electric Customer Choice
were approximately $63 million and 2,655 gigawatthours (gWh) in the 2004 third
quarter and approximately $172 million and 7,277 gWh in the 2004 nine-month
period. This compares with lost electric Customer Choice margins and volumes
of approximately $35 million and 2,141 gWh in the 2003 third quarter and $80
million and 5,192 gWh in the 2003 nine-month period. The financial
impact of electric Customer Choice was
also affected by the issuance of the electric interim
rate order that increased base rates, authorized
transition charges and reaffirmed the resumption of
the power supply cost recovery (PSCR) mechanism, as subsequently discussed.
 Partially offsetting the
impact of lost margins on income, we recorded regulatory assets of
approximately $24 million and $67 million in the 2004 third quarter and
nine-month period, respectively, and $8 million and $20 million in the 2003
third quarter and nine-month period. The regulatory assets represent an
estimate of stranded costs that we believe are recoverable under existing
Michigan legislation and MPSC orders. There are a number of variables and
estimates that impact the level of recoverable stranded costs, including
weather, sales mix, wholesale electric prices and transition charges. As a result, our estimate of
stranded costs could increase or decrease. The actual amount of stranded costs
to be recovered and the timing of recovery will ultimately be determined by the
MPSC. In February 2004, the MPSC authorized an interim electric rate increase that
recognized a revenue deficiency for a portion of the lost electric Customer
Choice revenues, and eliminated transition credits and implemented a transition
charge for electric Customer Choice customers. Although the interim order,
along with changes in wholesale market prices, has stabilized electric Customer
Choice sales volumes, current regulation continues to hinder our ability to
retain customers. In Detroit Edisons June 2003 electric rate filing, we
addressed numerous issues with the electric Customer Choice program, including
stranded costs. The continued delay in addressing the structural problems of
the electric Customer Choice program and the timely and full recovery of
stranded costs, unfavorably impacts earnings and cash flow. 5




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See Note 3 for a further discussion of the electric Customer Choice program and
the MPSC interim rate order. Proposed Michigan Legislation- We are pursuing a legislative solution in
addressing the structural issues associated with the electric Customer Choice
program. On July 1, 2004, a package of six bills was introduced in the
Michigan Senate to address unintended consequences of Public Act (PA) 141,
Michigan legislation enacted in 2000 that began the restructuring of the
electric utility industry in Michigan. We believe that this legislation would
address a number of the most important issues in the Michigan electric sector.
The proposed legislation:  
    
    protects against rate shock by requiring electric utility rates to
reflect a full cost of service for all electric customer classes over a
10-year period;
    
    allows current electric Customer Choice customers to return to
utility service at regulated rates until December 31, 2005 and at
market rates thereafter;
    
    requires mandatory reliability standards and sets a minimum annual
15 percent power reserve margin for all utilities and alternative
energy suppliers;
    
    establishes a transition charge formula;
    
    establishes a low-income energy assistance surcharge to all
customers receiving distribution service from an electric or gas
utility;
    
    establishes a lower special rate for public and private K-12 schools;
    
    clarifies that environmental compliance costs can be securitized; and
    
    authorizes an environmental recovery surcharge applicable to all
electric customers to recover the costs of government-mandated
pollution control measures. The Michigan Senate Technology and Energy Committee held hearings that began in
August 2004 in an effort to build consensus among Michigans electric
utilities, alternative energy suppliers, and customer groups. The committee is
expected to convene in November 2004 and commence discussions regarding moving
the legislative package to the Michigan Senate floor. Electric Interim Rate
Order Under PA 141, electric rates for all residential,
commercial and industrial customers were frozen through 2003. The legislation
also capped rates for residential customers through 2005, and for small
commercial and industrial customers through 2004. The rate freeze and caps
apply to base rates and rates designed to recover fuel and purchased power
costs. Historically, fuel and purchased power costs have been a pass-through
under the PSCR mechanism. In June 2003, Detroit Edison filed an application with the MPSC for: 1) an
increase in retail electric rates of $427 million annually, 2) the resumption
of the PSCR mechanism, and 3) the recovery of net stranded and other costs as
permitted under Michigan legislation. Detroit Edison received an interim order
in this rate case authorizing an increase in base rates of $248 million
annually, effective February 21, 2004, which is applicable to all customers not
subject to the rate cap. The order also terminated certain transition credits
and authorized transition charges to Choice customers designed to result in $30
million in additional revenues. Additionally, the interim order reaffirmed the
resumption of the PSCR mechanism for both capped and uncapped customers,
effective January 1, 2004, which is expected to reduce PSCR revenues by $126
million in 2004. However, the interim order allowed Detroit Edison to increase
base rates for customers still subject to the cap in an equal and offsetting
amount with the change in the PSCR factor to maintain the total capped rate
levels in effect for these customers. Although the base rate increase and transition charges total $278 million, the
effects of the interim order are estimated to have increased income by $5 million,
net of taxes, in the 2004 third quarter, and decreased income by $3 million, net of
taxes, in the 2004 nine-month period. This lower amount is a
result of the rate caps, the February 21, 2004 effective date of the interim
base rate increase and the PSCR reduction effective January 1, 2004. Revenues
from the interim rate order increased income $11 million, net of taxes, in the
2004 third quarter, and increased income $10 million, net of taxes, in the 2004
nine-month period. Revenues from the interim rate order also relate to items
that were previously deferred as regulatory assets. The reduction in regulatory
asset deferrals related to previously capped customers decreased income by
$6 million, net of taxes, in the 2004 third quarter, and decreased income
by $13 million, net of taxes, in the 2004 nine-month period. Amounts collected are
subject to a potential refund pending a final order in this proceeding. A final
order from the MPSC is expected in November 2004. See Note 3. 6




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Detroit Edison has the following two reportable segments. ENERGY RESOURCES Power Generation The power generation plants of Detroit Edison comprise our regulated power
generation business. Detroit Edisons numerous fossil plants, its
hydroelectric pumped storage plant and its nuclear plant generate electricity.
The generated electricity, supplemented with purchased power, is sold
principally throughout Michigan and the Midwest to residential, commercial,
industrial and wholesale customers. Factors impacting income:Power Generation earnings declined $27 million during
the 2004 third quarter and $81 million in the 2004 nine-month period. As
subsequently discussed, these results primarily reflect reduced gross margins,
partially offset by the recording of higher regulatory assets, which affected
depreciation and amortization expenses. Increased operation and maintenance
expenses and costs associated with the August 2003 blackout also affected the
comparison (Note 3).  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(in Millions)Operating Revenues
    
    $
    587
    
    
    $
    669
    
    
    $
    1,646
    
    
    $
    1,874Fuel and Purchased Power
    
    
    234
    
    
    
    284
    
    
    
    643
    
    
    
    749Gross Margin
    
    
    353
    
    
    
    385
    
    
    
    1,003
    
    
    
    1,125Operation and Maintenance
    
    
    159
    
    
    
    147
    
    
    
    506
    
    
    
    487Depreciation and Amortization
    
    
    66
    
    
    
    65
    
    
    
    177
    
    
    
    199Taxes Other Than Income
    
    
    38
    
    
    
    40
    
    
    
    114
    
    
    
    121Operating Income
    
    
    90
    
    
    
    133
    
    
    
    206
    
    
    
    318Other (Income) and Deductions
    
    
    38
    
    
    
    39
    
    
    
    129
    
    
    
    115Income Tax Provision
    
    
    18
    
    
    
    33
    
    
    
    26
    
    
    
    71Net Income
    
    $
    34
    
    
    $
    61
    
    
    $
    51
    
    
    $
    132Operating Income as a Percent of Operating Revenues
    
    
    15
    %
    
    
    20
    %
    
    
    13
    %
    
    
    17
    %
  Gross marginsdeclined $32 million during the 2004 third quarter and $122
million in the 2004 nine-month period due primarily to lost margins from retail
customers choosing to purchase power from alternative suppliers under the
electric Customer Choice program. As a result of electric Customer Choice
penetration, Detroit Edison lost 18% of retail sales in the first nine months
of 2004, compared to 13% of such sales during the same 2003 period. The decline
in margins in the current nine-month period is also due to a revision of
estimate in the level of sales lost to electric Customer Choice in the 2004
second quarter. Sales lost under the electric Customer Choice program are
estimated each month and are finalized in subsequent months when actual data is
available. Variances between estimated and actual lost electric Customer
Choice sales directly impact the accrual of unbilled sales to full service
customers. Electric Customer Choice sales adjustments in the 2004 second
quarter had the effect of increasing Customer Choice-related lost sales,
thereby reducing unbilled sales by $19 million. The adjustment also reduced
sales within Energy Distributions Power Distribution  segment. The loss of retail sales under the electric Customer Choice program also
resulted in lower purchase power requirements, as well as excess power capacity
that was sold in the wholesale market. Under the interim order previously
discussed, revenues from selling excess power reduce the level of recoverable
fuel and purchased power costs and therefore do not impact margins. The interim
rate order also lowered PSCR revenues which were more than offset by increased
base rate and transition charge revenues, resulting in an increase in margins
in the 2004 third quarter and nine-month period (Note 3). Weather during 2004 7




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was milder than in 2003, resulting in decreased margins from retail customers.
Operating revenues and fuel and purchased power costs decreased in 2004
compared to 2003 reflecting a $2.79 per megawatt hour (MWh) (15%) decline in
fuel and purchased power costs during the current quarter and a $2.41 per MWh
(14%) decline during the nine-month period. Fuel and purchased power costs are
a pass-through with the reinstatement of the PSCR, and therefore do not affect
margins or earnings. The decrease in fuel and purchased power costs is
attributable to lower priced purchases and the use of a more favorable power
supply mix. The favorable mix is due to lower purchases, driven by lost sales
under the electric Customer Choice program. The 2003 third quarter and
nine-month period includes higher costs associated with substitute power
purchased to meet customer demand during the August 2003 blackout. We were
required to purchase additional power during the 36-day period it took for our
generation fleet to return to pre-blackout capacity.  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Electric Sales(in Thousands of MWh)Retail
    
    
    10,623
    
    
    
    11,762
    
    
    
    30,480
    
    
    
    33,364Wholesale and Other
    
    
    1,974
    
    
    
    1,603
    
    
    
    5,738
    
    
    
    4,04912,597
    
    
    
    13,365
    
    
    
    36,218
    
    
    
    37,413Power Generated and Purchased(in Thousands of MWh)Power Plant GenerationFossil
    
    
    10,407
    
    
    
    10,308
    
    
    
    28,698
    
    
    
    28,649Nuclear
    
    
    2,043
    
    
    
    2,096
    
    
    
    6,860
    
    
    
    5,64512,450
    
    
    
    12,404
    
    
    
    35,558
    
    
    
    34,294Purchased Power
    
    
    1,209
    
    
    
    1,868
    
    
    
    3,633
    
    
    
    5,599System Output
    
    
    13,659
    
    
    
    14,272
    
    
    
    39,191
    
    
    
    39,893Average Unit Cost ($/MWh)Generation (1)
    
    $
    13.33
    
    
    $
    13.21
    
    
    $
    12.98
    
    
    $
    13.34Purchased Power (2)
    
    $
    42.77
    
    
    $
    55.38
    
    
    $
    37.12
    
    
    $
    43.79Overall Average Unit Cost
    
    $
    15.94
    
    
    $
    18.73
    
    
    $
    15.21
    
    
    $
    17.62
  (1)
    
    Represents fuel costs associated with power plants.(2)
    
    The average purchased power amounts include hedging activities. Operation and maintenanceexpense increased $12 million in the 2004 third
quarter and $19 million in the 2004 nine-month period. The increases reflect
costs associated with maintaining our generation fleet and higher allocations
for corporate support services. Additionally, the increases are due to costs
associated with our DTE2 implementation project, a company-wide initiative to
improve existing processes and to implement new core information systems,
including finance, human resources, supply chain and work management. Depreciation and amortizationexpense increased $1 million and decreased $22
million in the 2004 third quarter and nine-month period, respectively.
Depreciation and amortization expense was affected by increased charges
resulting from generation-related capital expenditures. Depreciation and
amortization expense was reduced by the income effect of recording regulatory
assets totaling $29 million and $86 million in the 2004 third quarter and
nine-month period, respectively, compared to $27 million and $67 million in the
same 2003 periods. The regulatory assets represent the deferral of net
stranded costs and other costs we believe are recoverable under Public Act 141. 8




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Other income and deductionsexpense increased $14 million in the 2004
nine-month period, primarily due to lower income associated with recording a
return on regulatory assets, as well as costs associated with addressing the
structural issues of Public Act 141. Outlook Future operating results are expected to vary as a result of external
factors such as regulatory proceedings, new legislation, changes in market
prices of power, coal and gas, plant performance, changes in economic
conditions, weather and the levels of customer participation in the electric
Customer Choice program. As previously discussed, we expect cash flows and operating performance will
continue to be adversely affected by the electric Customer Choice program until
the inequities associated with this program are addressed. We will accrue as
regulatory assets our unrecovered generation-related fixed costs (stranded
costs) due to electric Customer Choice that we believe are recoverable under
Michigan legislation and MPSC orders. We have addressed the issue of stranded
costs in our June 2003 electric rate filing and are also supporting the
proposed legislative solution. Additionally, we requested an increase in retail
electric rates to recover higher operating costs. The actual timing and level
of recovering stranded and operating costs will ultimately be determined by the
MPSC or legislation. We cannot predict the outcome of these matters.
See Note 3  Regulatory Matters. ENERGY DISTRIBUTION Power Distribution Power Distribution operations include the electric distribution services of
Detroit Edison. Power Distribution distributes electricity generated and
purchased by Energy Resources and alternative electric suppliers to Detroit
Edisons 2.1 million customers. Factors impacting income: Power Distribution earnings decreased $7 million in
the 2004 third quarter and increased $48 million in the 2004 nine-month period.
As subsequently discussed, these results primarily reflect an increase in
operating revenues, a non-recurring loss recorded in the 2003 first quarter and
higher operation and maintenance expenses.  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(in Millions)Operating Revenues
    
    $
    371
    
    
    $
    348
    
    
    $
    1,033
    
    
    $
    950Fuel and Purchased Power
    
    
    4
    
    
    
    4
    
    
    
    10
    
    
    
    13Operation and Maintenance
    
    
    202
    
    
    
    169
    
    
    
    558
    
    
    
    538Depreciation and Amortization
    
    
    62
    
    
    
    62
    
    
    
    187
    
    
    
    187Taxes Other Than Income
    
    
    25
    
    
    
    27
    
    
    
    78
    
    
    
    83Operating Income
    
    
    78
    
    
    
    86
    
    
    
    200
    
    
    
    129Other (Income) and Deductions
    
    
    36
    
    
    
    33
    
    
    
    104
    
    
    
    107Income Tax Provision (Benefit)
    
    
    14
    
    
    
    18
    
    
    
    33
    
    
    
    7Net Income (Loss)
    
    $
    28
    
    
    $
    35
    
    
    $
    63
    
    
    $
    15Operating Income as a Percent of Operating Revenues
    
    
    21
    %
    
    
    25
    %
    
    
    19
    %
    
    
    14
    %
  9




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Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30Electric Deliveries
    
    2004
    
    2003
    
    2004
    
    2003(in Thousands of MWh)Residential
    
    
    4,114
    
    
    
    4,457
    
    
    
    11,655
    
    
    
    11,555Commercial
    
    
    3,557
    
    
    
    4,162
    
    
    
    10,097
    
    
    
    12,251Industrial
    
    
    2,854
    
    
    
    3,044
    
    
    
    8,418
    
    
    
    9,264Wholesale
    
    
    531
    
    
    
    556
    
    
    
    1,640
    
    
    
    1,682Other
    
    
    98
    
    
    
    97
    
    
    
    310
    
    
    
    29411,154
    
    
    
    12,316
    
    
    
    32,120
    
    
    
    35,046Electric Choice
    
    
    2,655
    
    
    
    2,141
    
    
    
    7,277
    
    
    
    5,192Total Electric Sales and Deliveries
    
    
    13,809
    
    
    
    14,457
    
    
    
    39,397
    
    
    
    40,238
   Operating revenuesincreased $23 million in the 2004 third quarter and $83
million in the 2004 nine-month period primarily due to the increase in base
rates resulting from the interim order and residential sales growth, partially
offset by the effects of milder weather. Additionally, the nine-month period
comparison was affected by a revision of estimated unbilled sales in the 2004
second quarter, which reduced revenues by $6 million. As previously discussed,
the revision also reduced sales within Energy Resources Power
Generation  segment. Operation and maintenanceexpense increased $33 million in the 2004 third
quarter and $20 million in the 2004 nine-month period. Both 2004 periods were
affected by higher reserves for uncollectable accounts receivables, reflecting
higher past due amounts attributable to economic conditions. Additionally, the
increases are due to higher transmission expenses, resulting from a refund in
the 2003 third quarter, as well as costs associated with our DTE2
implementation project. The comparison for the nine-month period was also
affected by a $22 million loss ($14 million net of tax) on the sale of our
steam heating business in the 2003 first quarter. Outlook Operating results are expected to vary as a result of external
factors such as weather, changes in economic conditions and the severity and
frequency of storms. As previously mentioned, Detroit Edison filed a
rate case in June 2003 to address higher operating costs and other issues. Detroit
Edison received an interim order in this rate case in February 2004. See Note 3  Regulatory Matters. In conjunction with the sale of transmission assets to International
Transmission Company (ITC) in February 2003, the Federal Energy Regulatory
Commission froze ITCs transmission rates through December 2004. It is expected
that annual rate adjustments pursuant to a formulistic pricing mechanism
beginning in January 2005 will result in an estimated increase in Detroit
Edisons annual transmission expense of $40 million. Additionally, several
Midwest utilities seek to recover lost transmission revenues associated with
the creation of multiple regional transmission organizations in the Midwest.
This Federal Energy Regulatory Commission proceeding could require that Detroit
Edison and its customers be responsible for increased transmission costs of up
to $30 million annually. Included in the electric rate case filing and 2005
PSCR plan case, Detroit Edison has proposed transmission expenses, above the
level established in base rates, be recoverable through the PSCR mechanism. See
Note 3. ENVIRONMENTAL MATTERS See Note 7  Contingencies for discussion of environmental matters. REPRESENTED EMPLOYEES Approximately 3,600 of the companys employees were under a contract that
expired in June 2004. A new three-year contract was ratified in July 2004. 10




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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. 11
    Table of Contents  THE DETROIT EDISON COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30(in Millions)
    
    2004
    
    2003
    
    2004
    
    2003Operating Revenues
    
    $
    958
    
    
    $
    1,017
    
    
    $
    2,679
    
    
    $
    2,824Operating ExpensesFuel and purchased power
    
    
    238
    
    
    
    288
    
    
    
    654
    
    
    
    762Operation and maintenance
    
    
    361
    
    
    
    316
    
    
    
    1,063
    
    
    
    1,025Depreciation and amortization
    
    
    128
    
    
    
    127
    
    
    
    364
    
    
    
    386Taxes other than income
    
    
    62
    
    
    
    67
    
    
    
    192
    
    
    
    204789
    
    
    
    798
    
    
    
    2,273
    
    
    
    2,377Operating Income
    
    
    169
    
    
    
    219
    
    
    
    406
    
    
    
    447Other (Income) and DeductionsInterest expense
    
    
    72
    
    
    
    71
    
    
    
    215
    
    
    
    217Other income
    
    
    (13
    )
    
    
    (29
    )
    
    
    (43
    )
    
    
    (62
    )Other expenses
    
    
    16
    
    
    
    30
    
    
    
    61
    
    
    
    6775
    
    
    
    72
    
    
    
    233
    
    
    
    222Income Before Income Taxes
    
    
    94
    
    
    
    147
    
    
    
    173
    
    
    
    225Income Tax Provision
    
    
    32
    
    
    
    51
    
    
    
    59
    
    
    
    78Income Before Accounting Change
    
    
    62
    
    
    
    96
    
    
    
    114
    
    
    
    147Cumulative Effect of Accounting Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Net Income
    
    $
    62
    
    
    $
    96
    
    
    $
    114
    
    
    $
    141
   See Notes to Consolidated Financial Statements (Unaudited) 12
    Table of Contents  THE DETROIT EDISON COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION  (Unaudited)September 30
    
    December 312004
    
    2003(in Millions)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    12
    
    
    $
    6Restricted cash
    
    
    26
    
    
    
    82Accounts receivableCustomer (less allowance for
doubtful accounts of $61 and
$51, respectively)
    
    
    341
    
    
    
    291Accrued unbilled revenues
    
    
    147
    
    
    
    196Other
    
    
    150
    
    
    
    169InventoriesFuel
    
    
    99
    
    
    
    108Materials and supplies
    
    
    117
    
    
    
    124Other
    
    
    76
    
    
    
    29968
    
    
    
    1,005InvestmentsNuclear decommissioning trust funds
    
    
    558
    
    
    
    518Other
    
    
    53
    
    
    
    54611
    
    
    
    572PropertyProperty, plant and equipment
    
    
    13,004
    
    
    
    12,671Less accumulated depreciation
    
    
    (5,538
    )
    
    
    (5,339
    )7,466
    
    
    
    7,332Other AssetsRegulatory assets
    
    
    2,071
    
    
    
    2,000Securitized regulatory assets
    
    
    1,462
    
    
    
    1,527Other
    
    
    109
    
    
    
    1133,642
    
    
    
    3,640Total Assets
    
    $
    12,687
    
    
    $
    12,549
   See Notes to Consolidated Financial Statements (Unaudited) 13
    Table of Contents  THE DETROIT EDISON COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION  (Unaudited)September 30
    
    December 312004
    
    2003(in Millions, Except Shares)LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    262
    
    
    $
    211Accrued interest
    
    
    56
    
    
    
    76Dividends payable
    
    
    76
    
    
    
    74Accrued payroll
    
    
    21
    
    
    
    27Short-term borrowings
    
    
    29
    
    
    
    100Current portion of long-term debt, including capital leases
    
    
    323
    
    
    
    144Other
    
    
    350
    
    
    
    2891,117
    
    
    
    921Other LiabilitiesDeferred income taxes
    
    
    1,844
    
    
    
    1,783Regulatory liabilities
    
    
    247
    
    
    
    254Asset retirement obligations (Note 2)
    
    
    857
    
    
    
    819Unamortized investment tax credit
    
    
    128
    
    
    
    135Accrued pension liability
    
    
    207
    
    
    
    321Nuclear decommissioning
    
    
    72
    
    
    
    67Other
    
    
    646
    
    
    
    6394,001
    
    
    
    4,018Long-Term Debt (net of current portion)Mortgage bonds, notes and other
    
    
    3,082
    
    
    
    3,076Securitization bonds
    
    
    1,400
    
    
    
    1,496Capital lease obligations
    
    
    69
    
    
    
    754,551
    
    
    
    4,647Contingencies (Notes 3 and 7)Shareholders EquityCommon stock, $10 par value, 400,000,000 shares
authorized, 138,632,324 and 134,287,832 shares issued
and outstanding, respectively
    
    
    1,386
    
    
    
    1,343Premium on common stock
    
    
    1,104
    
    
    
    977Common stock expense
    
    
    (44
    )
    
    
    (44
    )Retained earnings
    
    
    571
    
    
    
    686Accumulated other comprehensive income
    
    
    1
    
    
    
    13,018
    
    
    
    2,963Total Liabilities and Shareholders Equity
    
    $
    12,687
    
    
    $
    12,549
   See Notes to Consolidated Financial Statements (Unaudited) 14
    Table of Contents  THE DETROIT EDISON COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)  Nine Months EndedSeptember 302004
    
    2003(in Millions)Operating ActivitiesNet Income
    
    $
    114
    
    
    $
    141Adjustments to reconcile net income to net cash from
operating activities:Depreciation and amortization
    
    
    364
    
    
    
    386Deferred income taxes
    
    
    57
    
    
    
    53Loss on sale of assets
    
    
    
    
    
    
    21Cumulative effect of accounting change
    
    
    
    
    
    
    6Changes in assets and liabilities, exclusive of changes
shown separately (Note 1)
    
    
    161
    
    
    
    (336
    )Net cash from operating activities
    
    
    696
    
    
    
    271Investing ActivitiesPlant and equipment expenditures
    
    
    (480
    )
    
    
    (438
    )Proceeds from sales of assets
    
    
    
    
    
    
    2Restricted cash for debt redemptions
    
    
    56
    
    
    
    93Other investments
    
    
    (49
    )
    
    
    (16
    )Net cash used for investing activities
    
    
    (473
    )
    
    
    (359
    )Financing ActivitiesIssuance of long-term debt
    
    
    266
    
    
    
    49Redemption of long-term debt
    
    
    (181
    )
    
    
    (502
    )Short-term borrowings, net
    
    
    (71
    )
    
    
    203Notes payable to affiliates
    
    
    
    
    
    
    378Capital contribution by parent company
    
    
    
    
    
    
    170Dividends on common stock
    
    
    (226
    )
    
    
    (222
    )Other
    
    
    (5
    )
    
    
    (5
    )Net cash from (used for) financing activities
    
    
    (217
    )
    
    
    71Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    6
    
    
    
    (17
    )Cash and Cash Equivalents at Beginning of the Period
    
    
    6
    
    
    
    36Cash and Cash Equivalents at End of the Period
    
    $
    12
    
    
    $
    19
   See Notes to Consolidated Financial Statements (Unaudited) 15
    Table of Contents  THE DETROIT EDISON COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)  (Dollars in Millions,Shares in Thousands)
    
    Common Stock
    
    Premiumon
    
    Common
    
    
    
    
    
    AccumulatedOtherCommon
    
    Stock
    
    Retained
    
    ComprehensiveShares
    
    Amount
    
    Stock
    
    Expense
    
    Earnings
    
    Loss
    
    TotalBalance, December 31, 2003
    
    
    134,288
    
    
    $
    1,343
    
    
    $
    977
    
    
    $
    (44
    )
    
    $
    686
    
    
    $
    1
    
    
    $
    2,963Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    114Dividends declared on
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (229
    )
    
    
    
    
    
    
    (229
    )Net change in unrealized losses
on derivatives, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to
parent company (Note 6)
    
    
    4,344
    
    
    
    43
    
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170Balance, September 30, 2004
    
    
    138,632
    
    
    $
    1,386
    
    
    $
    1,104
    
    
    $
    (44
    )
    
    $
    571
    
    
    $
    1
    
    
    $
    3,018
   The following table displays other comprehensive income for the nine-month
periods ended September 30:   2004
    
    2003(in Millions)Net income
    
    $
    114
    
    
    $
    141Other comprehensive income (loss), net of tax:Net unrealized income (losses) on derivatives:Gains arising during the period, net of taxes of $- and $3, respectively
    
    
    
    
    
    
    8Amounts reclassified to earnings, net of taxes of $- and $(3), respectively
    
    
    
    
    
    
    (6
    )2Pension obligations, net of taxes of $- and $224, respectively
    
    
    
    
    
    
    417Comprehensive income
    
    $
    114
    
    
    $
    560
   See Notes to Consolidated Financial Statements (Unaudited) 16
    Table of Contents  THE DETROIT EDISON 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 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 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. 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. We reclassified certain prior year balances to match the current years
presentation. Consolidated Statement of Cash Flows The components of changes in assets and liabilities follow:  Nine Months EndedSeptember 302004
    
    2003(in Millions)Changes in Assets and Liabilities, Exclusive of
Changes Shown SeparatelyAccounts receivable, net
    
    $
    (33
    )
    
    $
    (113
    )Accrued unbilled receivables
    
    
    49
    
    
    
    20Inventories
    
    
    16
    
    
    
    12Accrued pensions
    
    
    77
    
    
    
    (131
    )Accounts payable
    
    
    51
    
    
    
    (57
    )Accrued power supply cost recovery revenue
    
    
    62
    
    
    
    Income taxes payable
    
    
    2
    
    
    
    (10
    )General taxes
    
    
    (8
    )
    
    
    (10
    )Risk management and trading activities
    
    
    (1
    )
    
    
    (7
    )Other
    
    
    (54
    )
    
    
    (40
    )$
    161
    
    
    $
    (336
    )
  Other cash and non-cash investing and financing activities follow:  Nine Months EndedSeptember 30(in Millions)
    
    2004
    
    2003Supplementary Cash Flow InformationInterest paid (excluding interest capitalized)
    
    $
    235
    
    
    $
    246Income taxes paid
    
    $
    2
    
    
    $
    34Common stock issued to parent company
    
    $
    170
    
    
    $
    
  17
    Table of Contents  Retirement Benefits and Trusteed Assets 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
    
    $
    12
    
    
    $
    9
    
    
    $
    8
    
    
    $
    4Interest Cost
    
    
    33
    
    
    
    33
    
    
    
    17
    
    
    
    16Expected Return on Plan Assets
    
    
    (34
    )
    
    
    (33
    )
    
    
    (11
    )
    
    
    (9
    )Amortization of:Net loss
    
    
    13
    
    
    
    9
    
    
    
    8
    
    
    
    6Prior service cost
    
    
    2
    
    
    
    3
    
    
    
    
    
    
    
    Net transition liability
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    6Net Periodic Benefit Cost
    
    $
    26
    
    
    $
    21
    
    
    $
    24
    
    
    $
    23Nine Months Ended September 30Service Cost
    
    $
    36
    
    
    $
    31
    
    
    $
    24
    
    
    $
    23Interest Cost
    
    
    99
    
    
    
    97
    
    
    
    52
    
    
    
    50Expected Return on Plan Assets
    
    
    (101
    )
    
    
    (97
    )
    
    
    (34
    )
    
    
    (27
    )Amortization of:Net loss
    
    
    37
    
    
    
    25
    
    
    
    25
    
    
    
    17Prior service cost
    
    
    7
    
    
    
    7
    
    
    
    
    
    
    
    Net transition liability
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    10Net Periodic Benefit Cost
    
    $
    78
    
    
    $
    63
    
    
    $
    73
    
    
    $
    73
  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 $3 million and $9 million for the
three and nine months ended September 30, 2004, respectively. See Note 2. In March 2004, DTE Energy common stock, valued at $170 million, was contributed
to our defined benefit retirement plan. In January 2004, we made a $40 million
cash contribution to our postretirement health care and life insurance plans.
We do not expect to make any additional contributions during 2004. NOTE 2  NEW ACCOUNTING PRONOUNCEMENTS Asset Retirement Obligations On January 1, 2003, we adopted Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset Retirement Obligations, which requires
that the fair value of an asset retirement obligation be recognized in the
period in which it is incurred. We identified a legal retirement obligation for
the decommissioning costs for our Fermi 1 and Fermi 2 nuclear plants. We
believe that adoption of SFAS No. 143 results primarily in timing differences
in the recognition of legal asset retirement costs that we are currently
recovering in rates and will be deferring such differences under SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation. 18
    Table of Contents  As a result of adopting SFAS No. 143 on January 1, 2003, we recorded a plant
asset of $278 million with offsetting accumulated depreciation of $103 million,
a retirement obligation liability of $771 million and reversed previously
recognized obligations of $366 million, principally nuclear decommissioning
liabilities. We also recorded a cumulative effect amount related to regulated
operations as a regulatory asset of $221 million, and a cumulative effect
charge against earnings of $6 million (net of taxes of $3 million) for 2003. A reconciliation of the asset retirement obligation for the 2004 nine-month
period follows:  (in Millions)Asset retirement obligations at January 1, 2004
    
    $
    819Accretion
    
    
    41Liabilities settled
    
    
    (3
    )Asset retirement obligations at September 30, 2004
    
    $
    857
  A significant portion of the asset retirement obligations represents nuclear
decommissioning liabilities which are funded through a surcharge to electric
customers over the life of the Fermi 2 nuclear plant. 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. The reduction in the accumulated postretirement benefit obligation for the
subsidy related to benefits attributed to past service is approximately $70
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 $12 million in 2004. The impact of
the Medicare Act on the components of other postretirement benefit costs is as
follows: 19
    Table of Contents  Three Months
    
    Nine MonthsEnded
    
    Ended(in Millions)
    
    September 30, 2004
    
    September 30, 2004Reduction in service cost
    
    $
    
    
    
    $
    1Reduction in interest cost
    
    
    1
    
    
    
    3Amortization of actuarial gain
    
    
    2
    
    
    
    5Decrease in
postretirement benefit cost
    
    $
    3
    
    
    $
    9
  NOTE 3  REGULATORY MATTERS Electric Rate Case Rate Request- In June 2003, Detroit Edison filed an application with the MPSC
requesting a change in retail electric rates, resumption of the power supply
cost recovery (PSCR) mechanism, and recovery of net stranded costs. The
application requested a base rate increase for both full-service and electric
Customer Choice customers totaling $416 million annually (approximately 12%
increase) in 2006, with a three-year phase-in starting in 2004 as the caps on
customer rates expire. Detroit Edison proposed that the $416 million increase
be allocated between full-service customers ($265 million) and electric
Customer Choice customers ($151 million). In November 2003, Detroit Edison
increased its original rate request by $11 million to $427 million. During the second quarter of 2004, based upon the MPSC Staffs (Staff) filing
for final rate relief, as subsequently discussed, and more current information
regarding the level of electric Customer Choice sales penetration, Detroit
Edison revised its base rate increase request from $427 million to $457
million. In addition, Detroit Edison has updated its request for recovery of regulatory
assets from $109 million to $93 million annually over a 5-year period, which
includes recovery of deferred return on and of Clean Air Act costs and capital
expenditures in excess of base depreciation amounts, transmission costs and
electric Customer Choice implementation costs as allowed by Public Act (PA)
141. Detroit Edison is also requesting recovery of $107 million of historical
stranded costs, through the date of the interim order. 20
    Table of Contents  A summary of the rate requests follows:  Initial Final
    
    Revised FinalRate Request
    
    Rate Request(in Millions)Base Rate Revenue Deficiency
    
    $
    553
    
    
    $
    583PSCR Savings/Choice Mitigation
    
    
    (126
    )
    
    
    (126
    )Base Rate Increase
    
    
    427
    
    
    
    457Regulatory Asset Recovery Surcharge
    
    
    109
    
    
    
    93
    (1)Total
    
    $
    536
    
    
    $
    550Phase in By Year2004
    
    $
    2992005
    
    
    572006
    
    
    180Total
    
    $
    536
   (1)
    
    Does not include recovery of $107 million of historical stranded
costs. The revised rate request did not allocate the phase in amounts by year, but the
amounts would be allocated to the customer classes as the rate caps expire. MPSC Interim Rate Order- On February 20, 2004, the MPSC issued an order for
interim rate relief. The order authorized an interim increase in base rates, a
transition charge for customers participating in the electric Customer Choice
program and a new PSCR factor. The interim base rate increase totaled $248 million annually, effective
February 21, 2004, and is applicable to all customers not subject to the rate
cap. The increase has been allocated to both full-service customers ($240
million) and electric Customer Choice customers ($8 million). However, because
of the rate caps under PA 141, not all of the increase will be realized in
2004. The interim order also terminated certain transition credits and
authorized transition charges to electric Customer Choice customers designed to
result in $30 million in additional revenues. Additionally, the MPSC authorized
a PSCR factor for all customers, a credit of 1.05 mills per kilowatthour (kWh)
compared to the 2.04 mills per kWh charge previously in effect. However, the
MPSC order allows Detroit Edison to increase base rates for customers still
subject to the cap in an equal and offsetting amount with the required
reduction in the PSCR factor to maintain the total capped rate levels currently
in effect for these customers. Although the base rate increase and transition charges total $278 million, the
effects of the interim order are estimated to have increased income by $5
million, net of taxes, in the 2004 third quarter, and decreased income by $3
million, net of taxes, in the 2004 nine-month period. This lower amount is a
result of the rate caps, the February 21, 2004 effective date of the interim
base rate increase and the PSCR reduction effective January 1, 2004.
Revenues from the interim rate order increased income
$11 million, net of taxes,
in the 2004 third quarter, and increased income $10 million, net of taxes, in the
2004 nine-month period.
Revenues from the interim rate order also relate to items that were previously deferred
as regulatory assets.
The reduction in regulatory asset deferrals related to previously
capped customers decreased
income by $6 million, net of taxes, in the 2004
third quarter, and decreased income by $13 million, net of taxes, in the 2004 nine-month period.
Amounts collected are subject to a potential refund pending a final order in this proceeding. 21
    Table of Contents  The MPSC deferred addressing other items in the rate request, including a
surcharge to recover regulatory assets, until a final rate order is issued,
which is expected in November 2004. We cannot predict the amount of final rate
relief that will be granted by the MPSC. MPSC Staff Recommendation
on Final Rate Relief On March 5, 2004, the Staff
filed testimony regarding final rate relief requested by Detroit Edison. The
Staff recommended a base rate increase of $275 million. The recommended amount
was subsequently adjusted to $254 million, a $6 million increase over the $248
million interim order. The Staffs proposed $254 million base rate increase
excluded an estimated $93 million of stranded costs from sales lost to electric
Customer Choice. The Staffs proposal would provide Detroit Edison the
opportunity to mitigate this loss with third-party wholesale sales by modifying
the PSCR mechanism to remove the revenue credit from these sales. The revenue
credit from third-party wholesale sales currently included in the PSCR
mechanism flows this benefit to full-service customers. The Staff recommends
that any future Customer Choice margin loss be recovered using two basic
provisions; (1) allowing Detroit Edison to retain 90% of the net third-party
revenue earned from wholesale sales up to 110% of each years electric Customer
Choice sales, and (2) that non-cost Choice margin loss (impact of inter-class
rate subsidization) be recovered through future rate increases from
full-service customers. The Staff recommended that accrued regulatory assets be recovered through three
mechanisms. The first mechanism would recover electric Customer Choice
implementation costs through a charge to both full-service and electric
Customer Choice customers of approximately $25 million per year, effective in
2006 when all current rate caps expire. The second mechanism recovers accrued
regulatory assets, including deferred costs under the Clean Air Act through a
five-year surcharge that would only be collected from full-service customers as
their rate caps expire for an average of approximately $38 million per year.
The third mechanism would recover prior period stranded costs determined
pursuant to the MPSCs existing production fixed cost revenue deficiency
methodology. The Staff estimated that Detroit Edisons stranded costs for 2002,
2003 and 2004 through the date of the interim rate order of February 20, 2004
are approximately $44 million. These stranded costs would be recovered from
electric Customer Choice customers utilizing the transition charge approved in
the interim rate order. The Staff recommended a capital structure of 54% debt and 46% equity and
proposed an 11% return on equity. ALJs Recommendation
on Final Rate Relief On August 26, 2004, an MPSC
Administrative Law Judge (ALJ) issued a Proposal for Decision (PFD) regarding
final rate relief requested by Detroit Edison. The ALJ agreed with the Staff
and recommended a $254 million base rate increase which excluded $93 million of
stranded costs. The recommended base rate increase is predicated upon Detroit
Edison being allowed to retain third-party wholesale sales due to electric
Customer Choice to recover the $93 million of stranded costs. The ALJ also
endorsed the Staffs position on regulatory assets and historical stranded
costs. Electric Industry Restructuring Electric Rates, Customer
Choice and Stranded Costs PA 141 provides Detroit
Edison with the right to recover net stranded costs. The MPSC authorized
Detroit Edison to establish a regulatory asset to defer recovery of its
incurred stranded costs, subject to review in a subsequent annual net stranded
cost proceeding. During each quarter, Detroit Edison records a regulatory asset
representing an estimate of the cumulative stranded costs as of that period.
Our revised and ongoing calculations concluded that the $68 million of net
stranded costs recorded as of December 31, 2003 is appropriate. During the 2004
nine-month period, Detroit Edison recorded $67 million of additional stranded
costs as a regulatory asset. An April 1, 2004 Michigan Court of Appeals order found that the MPSC should not
defer recovery of Detroit Edisons electric Customer Choice implementation
costs indefinitely. On June 29, 2004, the MPSC 22
    Table of Contents  issued an order authorizing Detroit Edison to recover $20 million in
implementation costs incurred during 2002. Detroit Edison elected to collect
these costs as well as implementation costs incurred in 2000 and 2001 as part
of the $93 million regulatory asset recovery previously discussed. Blackout Costs On August 14, 2003, failures in the regional power transmission grid caused
nine of Detroit Edisons power plants to trip offline, which left virtually all
of its 2.1 million customers without power. We estimate that amounts expensed
in 2003 related to the blackout, excluding lost margins, were approximately $25
million ($16 million net of tax). In October 2003, Detroit Edison filed an
accounting application with the MPSC requesting authority to defer outage
related costs associated with the blackout until a future rate proceeding to
recover outage costs from customers in a manner consistent with the provisions
of PA 141. On September 21, 2004, the MPSC denied Detroit Edisons application
to defer and recover these blackout related expenses. DTE2 Accounting Application In 2003, we began the implementation of DTE2, a company-wide initiative to
improve existing processes and to implement new core information systems
including, finance, human resources, supply chain and work management. The new
information systems are replacing systems that are approaching the end of their
useful lives. We expect the benefits of DTE2 to include lower costs, faster
business cycles, repeatable and optimized processes, enhanced internal
controls, improvements in inventory management and reductions in system support
costs. In July 2004, Detroit Edison filed an accounting application with the MPSC
requesting authority to capitalize and amortize DTE2 costs, consisting of
computer equipment, software and development costs, as well as related
training, maintenance and overhead costs. Through September 30, 2004, DTE
Energy has expensed approximately $22 million of training, maintenance and
overhead costs pending MPSC action on our application. The costs have been
allocated to the various affiliates of DTE Energy based on the expected
benefits. Detroit Edison is proposing a 15-year amortization period for the
costs, exclusive of the computer equipment costs. Power Supply Cost Recovery Proceedings 2005 Plan Year In September 2004, Detroit Edison filed its 2005 PSCR plan
case seeking approval of a levelized PSCR factor of 1.82 mills/kWh above the
amount included in base rates to be established in the electric rate case final
order. Included in the factor are power supply costs, transmission expenses and
emission credit costs. In accordance with the Staffs recommendation in the
electric rate case, the filing includes Detroit Edisons retention of 90% of
the net third-party revenues earned from wholesale sales. Detroit Edison may
self-implement the proposed factor on January 1, 2005 if an MPSC order is not
received prior to that time. Transmission Proceedings Several Midwest utilities seek to recover lost transmission revenues associated
with the creation of multiple regional transmission organizations in the
Midwest. Positions advocated by several parties in a Federal Energy Regulatory
Commission (FERC) proceeding could require that Detroit Edison and its
customers be responsible for increased transmission costs. Detroit Edison
continues to actively participate in this proceeding and estimates that
increased transmission expenses of up to $30 million annually may arise as a
result of this proceeding. A FERC decision in this proceeding is expected in
November 2004. 23
    Table of Contents  We are unable to predict the outcome of the regulatory matters and proposed
legislation discussed herein. Resolution of these matters is dependent upon
future MPSC orders and the legislative process, which may materially impact the
financial position, results of operations and cash flows of the company. NOTE 4  LONG-TERM DEBT In April 2004, Detroit Edison issued $36 million of 4-7/8% tax-exempt bonds due
2029, the proceeds of which were used to redeem $36 million of 6.55% tax-exempt
bonds due 2024. In April 2004, Detroit Edison also issued $32 million of 4.65%
tax-exempt bonds due in 2028, the proceeds of which were used to redeem the
following tax-exempt issues: $11.5 million of 6.05% bonds due 2023, $7.5
million of 5.875% bonds due 2024, and $13 million of 6.45% bonds due 2024. In July 2004, Detroit Edison issued $200 million of 5.40% senior notes due in
2014. The proceeds were used to repay short-term borrowings and for general
corporate purposes. NOTE 5  SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS On October 15, 2004, Detroit Edison entered into a $206.25 million, five-year
unsecured revolving credit facility and lowered its existing three-year
facility from $137.5 million to $68.75 million. The five-year facility
replaces the October 2003 364-day facility, that 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 Detroit Edisons commercial paper program. Borrowings under the facilities
will be available at prevailing short-term interest rates. The agreements
require Detroit Edison to maintain a debt to total capitalization ratio of no
more than .65 to l and earnings before interest, taxes,
depreciation and amortization (EBITDA) to interest ratio of no less than 2 to 1. Detroit Edison
is currently in compliance with these financial covenants. NOTE 6  COMMON STOCK In March 2004, we issued 4,344,492 shares of common stock, valued at $170
million to DTE Energy. DTE Energy contributed a like amount of its stock to our
defined benefit retirement plan. NOTE 7  CONTINGENCIES Environmental Detroit Edison conducted remedial investigations at contaminated sites,
including 2 former manufactured gas plants, the area surrounding an ash
landfill and several underground and aboveground storage tank locations. The
findings of these investigations indicated that the estimated total costs to
remediate these sites is approximately $8 million which is expected to be
incurred over the next several years. As a result of the investigation,
Detroit Edison accrued an $8 million liability during 2004. In July 2004, the Environmental Protection Agency (EPA) published final
regulations establishing requirements and a permitting process for existing
power plant cooling water intake structures. These regulations require
individual facility studies, and permitting and intake modifications that will
be determined and implemented over the next 5 to 7 years and which could
require up to $50 million in additional capital expenditures for Detroit
Edison. 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, 24
    Table of Contents  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. NOTE 8  SEGMENT INFORMATION Detroit Edison has the following two reportable segments. Inter-segment
revenues are not material.   Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30(in Millions)
    
    2004
    
    2003
    
    2004
    
    2003Operating RevenuesEnergy Resources
    
    $
    587
    
    
    $
    669
    
    
    $
    1,646
    
    
    $
    1,874Energy Distribution
    
    
    371
    
    
    
    348
    
    
    
    1,033
    
    
    
    950$
    958
    
    
    $
    1,017
    
    
    $
    2,679
    
    
    $
    2,824Net IncomeEnergy Resources
    
    $
    34
    
    
    $
    61
    
    
    $
    51
    
    
    $
    132Energy Distribution
    
    
    28
    
    
    
    35
    
    
    
    63
    
    
    
    15Cumulative Effect of Accounting Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Total
    
    $
    62
    
    
    $
    96
    
    
    $
    114
    
    
    $
    141
  25
    Table of Contents  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder ofThe Detroit Edison Company We have reviewed the accompanying condensed consolidated statement of financial
position of The Detroit Edison 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, the
condensed consolidated statement of cash flows for the nine-month periods ended
September 30, 2004 and 2003, and the condensed consolidated statement of
changes in shareholders equity and comprehensive income for the nine-month
period ended September 30, 2004 and the nine-month periods ended September 30,
2004 and 2003, respectively. These interim financial statements are the
responsibility of The Detroit Edison 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 The Detroit Edison Company and subsidiaries as of
December 31, 2003, and the related consolidated statements of operations, cash
flows and changes in shareholders equity and comprehensive income 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 methods
of accounting for asset retirement obligations in 2003 and derivative
instruments and hedging activities in 2001), 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 26
    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
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. For
additional discussion on legal matters, see the Notes to the Consolidated
Financial Statements. 
 EXHIBITS ExhibitNumber
    
    DescriptionFiled:15-28
    
    Awareness Letter of Deloitte & Touche LLP31-11
    
    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
 27
    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. THE DETROIT EDISON COMPANYDate: November 4, 2004
    
    /s/ DANIEL G. BRUDZYNSKIDaniel G. Brudzynski
Chief Accounting Officer,
Vice President and Controller
 28
    Table of Contents  EXHIBIT INDEX ExhibitNumber
    
    Description15-28
    
    Awareness Letter of Deloitte & Touche LLP31-11
    
    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
 29