##### 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 June 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. Yes [X]
No [   ] Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [   ]
No [X]




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THE DETROIT EDISON COMPANY QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2004 TABLE OF CONTENTS PageDEFINITIONS
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    4PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Statement of Operations
    
    
    13Consolidated Statement of Financial Position
    
    
    14Consolidated Statement of Cash Flows
    
    
    16Consolidated Statement of Changes in Shareholders Equity and Comprehensive Income
    
    
    17Notes to Consolidated Financial Statements
    
    
    18Report of Independent Registered Public Accounting Firm
    
    
    26Item 2. Managements Narrative Analysis of Results of Operations
    
    
    5Item 4. Controls and Procedures
    
    
    12PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 6. Exhibits and Reports on Form 8-K
    
    
    27SIGNATURE
    
    
    29Fourteenth Supplemental Indenture Dated As Of July 15, 2004Indenture Dated As Of July 1, 2004Awareness Letter of Deloitte & Touche LLPChief Executive Officer Section 302 Form 10-Q CertificationChief Financial Officer Section 302 Form 10-Q CertificationChief Executive Officer Section 906 Certification of Periodic ReportChief Financial Officer Section 906 Certification of Periodic Report
 2




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##### Table of Contents



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 electricityMW
    
    Megawatt of electricityMWh
    
    Megawatthour of electricity
 3




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##### Table of Contents



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;  
    
    contributions to earnings by non-regulated businesses;  
    
    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 $8 million in the 2004 second quarter compared to income of
$30 million for the 2003 second quarter. For the six-month period, our income
was $52 million compared to income of $45 million for the comparable 2003
period. The comparability of earnings for the six-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 six-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  
    
    An interim electric rate order increasing earnings. 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 have continued to lose sales. Lost
margins and electricity volumes associated with electric Customer Choice were
approximately $59 million and 2,480 gigawatthours (gWh) in the 2004 second
quarter and approximately $109 million and 4,622 gWh in the 2004 six-month
period. This compares with lost electric Customer Choice margins and volumes
of approximately $25 million and 1,844 gWh in the 2003 second quarter and $45
million and 3,051 gWh in the 2003 six-month period. Partially offsetting the
impact of lost margins on income, we recorded regulatory assets of
approximately $18 million and $43 million in the 2004 second quarter and
six-month period, respectively, and $6 million and $12 million in the 2003
second quarter and six-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 and wholesale electric prices. 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 lost electric Customer Choice revenues, and
eliminated transition credits and implemented a transition charge for electric
Customer Choice customers. Although the interim order 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. See
Note 3 for a further discussion of the electric Customer Choice program and the
MPSC interim rate order. 5




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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:  
    
    requires mandatory reliability standards and sets a minimum annual
15 percent power reserve margin for all utilities and alternative
energy suppliers;  
    
    requires financial adequacy standards for all alternative energy
suppliers;  
    
    protects against rate shock by requiring a move to 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;  
    
    separates generation, transmission and distribution charges on
electric customers bills;  
    
    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 is scheduled to hold
hearings beginning in August 2004 in an effort to build consensus among
Michigans electric utilities, alternative energy suppliers, and customer
groups. 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 as well as rates designed to recover fuel and purchased
power costs. Historically, fuel and purchased power costs have been a
pass-through under the power supply cost recovery (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, and 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 annually. 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. As a result of rate caps, the different effective dates of the interim base
rate increase, transition charges and the PSCR mechanism, and other factors,
the interim rate order increased revenues in the 2004 second quarter by $16
million and decreased revenues in the 2004 six-month period by $1 million.
Additionally, because of these factors, the interim order was only designed to
increase revenues by $51 million in 2004 (Note 3). A final order from the MPSC
is expected in September 2004. 6




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##### Table of Contents



Quarter
    
    Six MonthsEnded
    
    EndedEffect of Interim Rate Order
    
    June 30
    
    June 30(in Millions)
    
    2004
    
    2004Base Rate Increase and Transition Charges -
effective February 21, 2004
    
    $
    45
    
    
    $
    58PSCR Reduction effective January 1, 2004
    
    
    (29
    )
    
    
    (59
    )Revenue Increase (Decrease)
    
    $
    16
    
    
    $
    (1
    )Net Income Increase (Decrease)
    
    $
    10
    
    
    $
    (1
    )
 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 $45 million during
the 2004 second quarter and $54 million in the 2004 six-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. Three Months Ended
    
    Six Months EndedJune 30
    
    June 30(in Millions)
    
    2004
    
    2003
    
    2004
    
    2003Operating Revenues
    
    $
    508
    
    
    $
    589
    
    
    $
    1,059
    
    
    $
    1,206Fuel and Purchased Power
    
    
    199
    
    
    
    224
    
    
    
    409
    
    
    
    465Gross Margin
    
    
    309
    
    
    
    365
    
    
    
    650
    
    
    
    741Operation and Maintenance
    
    
    165
    
    
    
    158
    
    
    
    347
    
    
    
    341Depreciation and Amortization
    
    
    61
    
    
    
    61
    
    
    
    111
    
    
    
    134Taxes other than Income
    
    
    37
    
    
    
    38
    
    
    
    76
    
    
    
    81Operating Income
    
    
    46
    
    
    
    108
    
    
    
    116
    
    
    
    185Other (Income) and Deductions
    
    
    45
    
    
    
    37
    
    
    
    91
    
    
    
    77Income Tax Provision
    
    
    
    
    
    
    25
    
    
    
    8
    
    
    
    37Net Income
    
    $
    1
    
    
    $
    46
    
    
    $
    17
    
    
    $
    71Operating Income as a Percent of Operating Revenues
    
    
    9
    %
    
    
    18
    %
    
    
    11
    %
    
    
    15
    %
 Gross marginsdeclined $56 million during the 2004 second quarter and $91
million in the 2004 six-month period due primarily to lost margins from retail
customers choosing to purchase power from alternative suppliers under the
electric Customer Choice program. Detroit Edison lost 18% of retail sales in
the first half of 2004, compared to 12% of such sales during the same 2003
period as a result of 7




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Customer Choice penetration. The decline in margins is
also due to a revision of estimate in the 2004
second quarter in the level of sales lost to electric Customer Choice. 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
results in lower purchase power requirements, as well as excess power capacity
that is 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 second quarter. However, as a result of rate caps and the
different effective dates of rate adjustments previously discussed, the interim
order resulted in a decrease in margins in the 2004 six-month period. Weather
during 2004 was warmer than in 2003, resulting in increased margins from retail
customers of $11 million in the 2004 second quarter and $3 million in the 2004
six-month period. Operating revenues and fuel and purchased power costs
decreased in 2004 compared to 2003 reflecting a $1.97 per megawatt hour (MWh)
(12%) decline in fuel and purchased power costs during the current quarter and
a $2.16 per MWh (13%) decline during the six-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 using a
more favorable power supply mix. The favorable mix is due to lower purchases,
driven by lost sales under the electric Customer Choice program. Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003Electric Sales
(in Thousands of MWh)Retail
    
    
    9,434
    
    
    
    10,427
    
    
    
    19,857
    
    
    
    21,602Wholesale and Other
    
    
    1,578
    
    
    
    1,170
    
    
    
    3,764
    
    
    
    2,44611,012
    
    
    
    11,597
    
    
    
    23,621
    
    
    
    24,048Power Generated and Purchased
(in Thousands of MWh)Power Plant GenerationFossil
    
    
    8,507
    
    
    
    9,207
    
    
    
    18,291
    
    
    
    18,341Nuclear
    
    
    2,409
    
    
    
    1,301
    
    
    
    4,817
    
    
    
    3,54910,916
    
    
    
    10,508
    
    
    
    23,108
    
    
    
    21,890Purchased Power
    
    
    1,226
    
    
    
    1,843
    
    
    
    2,424
    
    
    
    3,731System Output
    
    
    12,142
    
    
    
    12,351
    
    
    
    25,532
    
    
    
    25,621Average Unit Cost ($/MWh)Generation (1)
    
    $
    12.68
    
    
    $
    13.56
    
    
    $
    12.78
    
    
    $
    13.42Purchased Power (2)
    
    $
    34.04
    
    
    $
    35.26
    
    
    $
    34.29
    
    
    $
    34.48Overall Average Unit Cost
    
    $
    14.83
    
    
    $
    16.80
    
    
    $
    14.84
    
    
    $
    17.00
  (1)
    
    Represents fuel costs associated with power plants.(2)
    
    The average purchased power amounts include hedging activities. 8




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Depreciation and amortizationexpense was unchanged in the 2004 second quarter
and decreased $23 million in the 2004 six-month period. Depreciation and
amortization expense was affected by increased
charges resulting from generation-related capital expenditures. These expenses
were also affected by the income effect of recording regulatory assets totaling
$22 million and $57 million in the 2004 second quarter and six-month period,
respectively, compared to $21 million and $40 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. Other income and deductionsexpense increased $8 million in the 2004 second
quarter and $14 million in the 2004 six-month period, reflecting expenses
associated with addressing the structural issues of PA 141. The increase also
reflects costs of performing other non-operating activities. 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 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 of $427 million annually 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 increased $23 million in
the 2004 second quarter and $55 million in the 2004 six-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
varying operation and maintenance expenses. 9




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Three Months Ended
    
    Six Months EndedJune 30
    
    June 30(in Millions)
    
    2004
    
    2003
    
    2004
    
    2003Operating Revenues
    
    $
    327
    
    
    $
    281
    
    
    $
    662
    
    
    $
    601Fuel and Purchased Power
    
    
    
    
    
    
    2
    
    
    
    6
    
    
    
    9Operation and Maintenance
    
    
    195
    
    
    
    186
    
    
    
    356
    
    
    
    368Depreciation and Amortization
    
    
    61
    
    
    
    62
    
    
    
    125
    
    
    
    125Taxes other than Income
    
    
    24
    
    
    
    27
    
    
    
    53
    
    
    
    56Operating Income
    
    
    47
    
    
    
    4
    
    
    
    122
    
    
    
    43Other (Income) and Deductions
    
    
    35
    
    
    
    29
    
    
    
    68
    
    
    
    73Income Tax Provision (Benefit)
    
    
    5
    
    
    
    (9
    )
    
    
    19
    
    
    
    (10
    )Net Income (Loss)
    
    $
    7
    
    
    $
    (16
    )
    
    $
    35
    
    
    $
    (20
    )Operating Income as a Percent of Operating Revenues
    
    
    14
    %
    
    
    1
    %
    
    
    18
    %
    
    
    7
    %
 Three Months Ended
    
    Six Months EndedElectric Deliveries
    
    June 30
    
    June 30(in Thousands of MWh)
    
    2004
    
    2003
    
    2004
    
    2003Residential
    
    
    3,472
    
    
    
    3,243
    
    
    
    7,541
    
    
    
    7,098Commercial
    
    
    3,049
    
    
    
    3,962
    
    
    
    6,540
    
    
    
    8,088Industrial
    
    
    2,810
    
    
    
    3,134
    
    
    
    5,564
    
    
    
    6,219Wholesale
    
    
    553
    
    
    
    550
    
    
    
    1,109
    
    
    
    1,126Other
    
    
    103
    
    
    
    89
    
    
    
    212
    
    
    
    1969,987
    
    
    
    10,978
    
    
    
    20,966
    
    
    
    22,727Electric Choice
    
    
    2,480
    
    
    
    1,844
    
    
    
    4,622
    
    
    
    3,051Total Electric Sales and Deliveries
    
    
    12,467
    
    
    
    12,822
    
    
    
    25,588
    
    
    
    25,778
 Operating revenuesincreased $46 million in the 2004 second quarter and $61
million in the 2004 six-month period primarily due to residential sales growth
and the effects of warmer weather. The increase in the 2004 second quarter was
also due to the increase in base rates resulting from the interim order.
Partially offsetting these improvements was the impact of 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 $9 million in the 2004 second
quarter and decreased $12 million in the 2004 six-month period. Both 2004
periods were affected by higher reserves for uncollectable accounts receivables
and increased pension and health care costs. The increase in uncollectable
accounts expense reflects higher past due amounts attributable to economic
conditions. Partially offsetting these increased costs were benefits from our
company-wide cost savings initiative as well as lower transmission expenses in
the 2004 six-month period. The decrease in the current six-month period is due
primarily to 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 future operating costs and other issues. Detroit
Edison received an interim order in this rate case in February 2004. See Note 3
- Regulatory Matters. 10




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ENVIRONMENTAL MATTERS See Note 6  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. 11




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CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures Management of the company carried out an evaluation, under the supervision and
with the participation of the companys Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the companys disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
June 30, 2004, which is the end of the period covered by this report. Based on
this evaluation, the companys Chief Executive Officer and Chief Financial
Officer have concluded that such controls and procedures are effectively
designed to ensure that required information disclosed by the company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and timely reported in accordance with Commissions rules and forms. (b) Changes in internal control over financial reporting There has been no change in the companys internal control over financial
reporting during the quarter ended June 30, 2004 that has materially affected,
or is reasonably likely to materially affect, the companys internal control
over financial reporting. 12




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THE DETROIT EDISON COMPANY 
 CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
 Three Months Ended
    
    Six Months EndedJune 30
    
    June 30(in Millions)
    
    2004
    
    2003
    
    2004
    
    2003Operating Revenues
    
    $
    835
    
    
    $
    870
    
    
    $
    1,721
    
    
    $
    1,807Operating ExpensesFuel and purchased power
    
    
    200
    
    
    
    226
    
    
    
    416
    
    
    
    474Operation and maintenance
    
    
    359
    
    
    
    343
    
    
    
    702
    
    
    
    709Depreciation and amortization
    
    
    122
    
    
    
    124
    
    
    
    236
    
    
    
    259Taxes other than income
    
    
    62
    
    
    
    65
    
    
    
    130
    
    
    
    137743
    
    
    
    758
    
    
    
    1,484
    
    
    
    1,579Operating Income
    
    
    92
    
    
    
    112
    
    
    
    237
    
    
    
    228Other (Income) and DeductionsInterest expense
    
    
    71
    
    
    
    71
    
    
    
    143
    
    
    
    146Other income
    
    
    (15
    )
    
    
    (22
    )
    
    
    (30
    )
    
    
    (33
    )Other expenses
    
    
    23
    
    
    
    17
    
    
    
    45
    
    
    
    3779
    
    
    
    66
    
    
    
    158
    
    
    
    150Income Before Income Taxes
    
    
    13
    
    
    
    46
    
    
    
    79
    
    
    
    78Income Tax Provision
    
    
    5
    
    
    
    16
    
    
    
    27
    
    
    
    27Income Before Accounting Change
    
    
    8
    
    
    
    30
    
    
    
    52
    
    
    
    51Cumulative Effect of Accounting Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Net Income
    
    $
    8
    
    
    $
    30
    
    
    $
    52
    
    
    $
    45
 See Notes to Consolidated Financial Statements (Unaudited) 13




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THE DETROIT EDISON COMPANY 
 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
 (Unaudited)June 30
    
    December 31(in Millions)
    
    2004
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    17
    
    
    $
    6Restricted cash
    
    
    69
    
    
    
    82Accounts receivableCustomer (less allowance for
doubtful accounts of $59 and
$51, respectively)
    
    
    322
    
    
    
    291Accrued unbilled revenues
    
    
    187
    
    
    
    196Other
    
    
    212
    
    
    
    169InventoriesFuel
    
    
    108
    
    
    
    108Materials and supplies
    
    
    123
    
    
    
    124Other
    
    
    55
    
    
    
    291,093
    
    
    
    1,005InvestmentsNuclear decommissioning trust funds
    
    
    544
    
    
    
    518Other
    
    
    56
    
    
    
    54600
    
    
    
    572PropertyProperty, plant and equipment
    
    
    12,906
    
    
    
    12,671Less accumulated depreciation
    
    
    (5,481
    )
    
    
    (5,339
    )7,425
    
    
    
    7,332Other AssetsRegulatory assets
    
    
    2,047
    
    
    
    2,000Securitized regulatory assets
    
    
    1,484
    
    
    
    1,527Other
    
    
    111
    
    
    
    1133,642
    
    
    
    3,640Total Assets
    
    $
    12,760
    
    
    $
    12,549
 See Notes to Consolidated Financial Statements (Unaudited) 14




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##### Table of Contents



THE DETROIT EDISON COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)June 30
    
    December 31(in Millions, Except Shares)
    
    2004
    
    2003LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    274
    
    
    $
    211Accrued interest
    
    
    75
    
    
    
    76Dividends payable
    
    
    76
    
    
    
    74Accrued payroll
    
    
    30
    
    
    
    27Short-term borrowings
    
    
    250
    
    
    
    100Current portion of long-term debt, including capital leases
    
    
    325
    
    
    
    144Other
    
    
    312
    
    
    
    2891,342
    
    
    
    921Other LiabilitiesDeferred income taxes
    
    
    1,875
    
    
    
    1,783Regulatory liabilities
    
    
    252
    
    
    
    254Asset retirement obligations (Note 2)
    
    
    844
    
    
    
    819Unamortized investment tax credit
    
    
    130
    
    
    
    135Accrued pension liability
    
    
    189
    
    
    
    321Nuclear decommissioning
    
    
    70
    
    
    
    67Other
    
    
    626
    
    
    
    6393,986
    
    
    
    4,018Long-Term Debt (net of current portion)Mortgage bonds, notes and other
    
    
    2,884
    
    
    
    3,076Securitization bonds
    
    
    1,446
    
    
    
    1,496Capital lease obligations
    
    
    70
    
    
    
    754,400
    
    
    
    4,647Contingencies (Notes 3 and 6)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
    
    
    585
    
    
    
    686Accumulated other comprehensive income
    
    
    1
    
    
    
    13,032
    
    
    
    2,963Total Liabilities and Shareholders Equity
    
    $
    12,760
    
    
    $
    12,549
 See Notes to Consolidated Financial Statements (Unaudited) 15




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##### Table of Contents



THE DETROIT EDISON COMPANY 
 CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
 Six Months EndedJune 30(in Millions)
    
    2004
    
    2003Operating ActivitiesNet Income
    
    $
    52
    
    
    $
    45Adjustments to reconcile net income to net cash from
operating activities:Depreciation and amortization
    
    
    236
    
    
    
    259Deferred income taxes
    
    
    89
    
    
    
    116Loss on sale of assets
    
    
    
    
    
    
    21Cumulative effect of accounting change
    
    
    
    
    
    
    6Changes in assets and liabilities, exclusive of changes
shown separately (Note 1)
    
    
    39
    
    
    
    (408
    )Net cash from operating activities
    
    
    416
    
    
    
    39Investing ActivitiesPlant and equipment expenditures
    
    
    (320
    )
    
    
    (320
    )Proceeds from sales of assets
    
    
    
    
    
    
    2Restricted cash for debt redemptions
    
    
    13
    
    
    
    45Other investments
    
    
    (31
    )
    
    
    11Net cash used for investing activities
    
    
    (338
    )
    
    
    (262
    )Financing ActivitiesIssuance of long-term debt
    
    
    67
    
    
    
    Redemption of long-term debt
    
    
    (130
    )
    
    
    (411
    )Short-term borrowings, net
    
    
    150
    
    
    
    200Notes payable to affiliates
    
    
    
    
    
    
    392Capital contribution by parent company
    
    
    
    
    
    
    170Dividends on common stock
    
    
    (150
    )
    
    
    (148
    )Other
    
    
    (4
    )
    
    
    (5
    )Net cash from (used for) financing activities
    
    
    (67
    )
    
    
    198Net Decrease in Cash and Cash Equivalents
    
    
    11
    
    
    
    (25
    )Cash and Cash Equivalents at Beginning of the Period
    
    
    6
    
    
    
    36Cash and Cash Equivalents at End of the Period
    
    $
    17
    
    
    $
    11
 See Notes to Consolidated Financial Statements (Unaudited) 16




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THE DETROIT EDISON COMPANY 
 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
 Premium
    
    
    
    
    
    
    
    
    
    AccumulatedCommon Stock
    
    on
    
    Common
    
    
    
    
    
    Other(Dollars in Millions,
    
    
    
    Common
    
    Stock
    
    Retained
    
    ComprehensiveShares in Thousands)
    
    Shares
    
    Amount
    
    Stock
    
    Expense
    
    Earnings
    
    Loss
    
    TotalBalance, December 31, 2003
    
    
    134,288
    
    
    $
    1,343
    
    
    $
    977
    
    
    $
    (44
    )
    
    $
    686
    
    
    $
    1
    
    
    $
    2,963Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    52Dividends declared on
common stock
    
    
    


    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (153
    )
    
    
    
    
    
    
    (153
    )Net change in unrealized
losses
on derivatives, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to
parent company (Note 5)
    
    
    4,344
    
    
    
    43
    
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170Balance, June 30, 2004
    
    
    138,632
    
    
    $
    1,386
    
    
    $
    1,104
    
    
    $
    (44
    )
    
    $
    585
    
    
    $
    1
    
    
    $
    3,032
 The following table displays other comprehensive income for the six-month
periods ended June 30: (in Millions)
    
    2004
    
    2003Net income
    
    $
    52
    
    
    $
    45Other 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
    
    
    
    419Comprehensive income
    
    $
    52
    
    
    $
    464
 See Notes to Consolidated Financial Statements (Unaudited) 17




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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: Six Months EndedJune 30(in Millions)
    
    2004
    
    2003Changes in Assets and Liabilities,
Exclusive of Changes Shown SeparatelyAccounts receivable, net
    
    $
    (12
    )
    
    $
    (27
    )Accrued unbilled receivables
    
    
    9
    
    
    
    7Inventories
    
    
    1
    
    
    
    11Accrued pensions
    
    
    37
    
    
    
    (114
    )Accounts payable
    
    
    63
    
    
    
    (74
    )Income taxes payable
    
    
    (62
    )
    
    
    (125
    )General taxes
    
    
    (12
    )
    
    
    (12
    )Risk management and trading activities
    
    
    (1
    )
    
    
    (3
    )Other
    
    
    16
    
    
    
    (71
    )$
    39
    
    
    $
    (408
    )
 Other cash and non-cash investing and financing activities follow: Six Months EndedJune 30(in Millions)
    
    2004
    
    2003Supplementary Cash Flow InformationInterest paid (excluding interest capitalized)
    
    $
    144
    
    
    $
    151Income taxes paid
    
    $
    1
    
    
    $
    34Common stock issued to parent company
    
    $
    170
    
    
    $
    
 18




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##### 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 PostretirementPension Benefits
    
    Benefits(in Millions)
    
    2004
    
    2003
    
    2004
    
    2003Three Months Ended June 30Service Cost
    
    $
    11
    
    
    $
    11
    
    
    $
    8
    
    
    $
    10Interest Cost
    
    
    33
    
    
    
    32
    
    
    
    17
    
    
    
    17Expected Return on Plan Assets
    
    
    (36
    )
    
    
    (32
    )
    
    
    (11
    )
    
    
    (9
    )Amortization ofNet loss
    
    
    12
    
    
    
    8
    
    
    
    8
    
    
    
    5Prior service cost
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    Net transition liability
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Net Periodic Benefit Cost
    
    $
    23
    
    
    $
    21
    
    
    $
    24
    
    
    $
    25Six Months Ended June 30Service Cost
    
    $
    24
    
    
    $
    22
    
    
    $
    16
    
    
    $
    19Interest Cost
    
    
    66
    
    
    
    64
    
    
    
    35
    
    
    
    34Expected Return on Plan Assets
    
    
    (67
    )
    
    
    (64
    )
    
    
    (23
    )
    
    
    (18
    )Amortization ofNet loss
    
    
    24
    
    
    
    16
    
    
    
    17
    
    
    
    11Prior service cost
    
    
    5
    
    
    
    4
    
    
    
    
    
    
    
    Net transition liability
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Net Periodic Benefit Cost
    
    $
    52
    
    
    $
    42
    
    
    $
    49
    
    
    $
    50
 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 $6 million for the
three and six months ended June 30, 2004. 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. 19




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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 six-month
period follows: (in Millions)Asset retirement obligations at January 1, 2004
    
    $
    819Accretion
    
    
    27Liabilities settled
    
    
    (2
    )Asset retirement obligations at June 30, 2004
    
    $
    844
 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
that provide a benefit that is at least actuarially equivalent to the benefit
established by law. We elected at that time to defer the provisions of the
Medicare Act, and its impact on our accumulated postretirement benefit
obligation and net periodic postretirement benefit cost pending the issuance of
specific authoritative accounting guidance by the FASB. In May 2004, FSP No. 106-2 was issued on accounting for the effects of the
Medicare Act. The FSP is effective for the first interim period beginning after
June 15, 2004, with earlier application encouraged. The guidance in this FSP is
applicable to sponsors of single-employer defined benefit postretirement health
care plans for which (a) the employer has concluded the prescription drug
benefits available under the plan to some or all participants are actuarially
equivalent to Medicare Part D and thus qualify for the subsidy under the
Medicare Act and (b) the expected subsidy will offset or reduce the employers
share of the cost of the underlying postretirement prescription drug coverage
on which the subsidy is based. We believe we qualify for the subsidy under the
Act and the expected subsidy will partially offset our share of the cost of the
postretirement prescription drug coverage. 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 in the
first six months of 2004 is as follows: 20




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ThreeMonths
    
    ThreeMonths
    
    SixMonths(in Millions)
    
    EndedMarch 31, 2004
    
    EndedJune 30, 2004
    
    EndedJune 30, 2004Reduction in service cost
    
    $
    
    
    
    $
    1
    
    
    $
    1Reduction in interest cost
    
    
    1
    
    
    
    1
    
    
    
    2Amortization of actuarial gain
    
    
    2
    
    
    
    1
    
    
    
    3Decrease in postretirement benefit cost
    
    $
    3
    
    
    $
    3
    
    
    $
    6
 We have elected to apply the provisions of FSP No. 106-2 retroactive to January
1, 2004, and as a result earnings for the first quarter of 2004 have been
restated. A reconciliation of previously reported first quarter 2004 net income
and earnings per share to the amounts adjusted for the decrease in costs due to
the Medicare Act follows: Net(In Millions)
    
    IncomeAs reported
    
    $
    41Add:
Decrease in costs due to Medicare Act
    
    
    3As adjusted
    
    $
    44
 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 discussed below, 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. 21




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Detroit Edison is also requesting recovery of $187 million of historical
stranded costs, through the date of the final order in this case, to be
collected pursuant to PA 141. A summary of the rate requests follows: Initial Final
    
    Revised Final(in Millions)
    
    Rate Request
    
    Rate RequestBase 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 $187 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 change 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
interim order is only designed to result in an increase in 2004 revenues of $51
million. 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. Amounts collected are subject to a potential refund
pending a final order in this rate case. 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 September 2004. We cannot predict the amount of final rate
relief that will be granted by the MPSC. 22




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##### Table of Contents



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 stranded costs be recovered using two basic provisions. Detroit
Edison will be allowed to retain 90% of the net third-party revenue earned from
wholesale sales up to 110% of each years electric Customer Choice sales.
Secondly, the Staff proposed 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. 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
six-month period, we recorded $43 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 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. 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. 23




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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 will be 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 will be
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  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 6  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
expenditures for remediating 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 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, 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. 24




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NOTE 7  SEGMENT INFORMATION Detroit Edison has the following two reportable segments. Inter-segment
revenues are not material. Three Months Ended
    
    Six Months EndedJune 30
    
    June 30(in Millions)
    
    2004
    
    2003
    
    2004
    
    2003Operating RevenuesEnergy Resources
    
    $
    508
    
    
    $
    589
    
    
    $
    1,059
    
    
    $
    1,206Energy Distribution
    
    
    327
    
    
    
    281
    
    
    
    662
    
    
    
    601$
    835
    
    
    $
    870
    
    
    $
    1,721
    
    
    $
    1,807Net IncomeEnergy Resources
    
    $
    1
    
    
    $
    46
    
    
    $
    17
    
    
    $
    71Energy Distribution
    
    
    7
    
    
    
    (16
    )
    
    
    35
    
    
    
    (20
    )Cumulative Effect of Accounting Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Total
    
    $
    8
    
    
    $
    30
    
    
    $
    52
    
    
    $
    45
 25




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder of
The Detroit Edison Company We have reviewed the accompanying condensed consolidated statement of financial
position of The Detroit Edison Company and subsidiaries as of June 30, 2004,
and the related condensed consolidated statement of operations for the
three-month and six-month periods ended June 30, 2004 and 2003, the condensed
consolidated statement of cash flows for the six-month periods ended June 30,
2004 and 2003, and the condensed consolidated statement of changes in
shareholders equity and comprehensive income for the six-month period ended
June 30, 2004 and the six-month periods ended June 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. As discussed in Note 2 to the condensed consolidated interim financial
statements, The Detroit Edison Company applied the provisions of Financial Accounting Standards Board Staff
Position No. 106-2, which relates to accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, retroactive to
January 1, 2004. We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated statement of
financial position of The Detroit Edison Company and subsidiaries as of
December 31, 2003, and the related consolidated statements of operations, cash
flows and changes in stockholder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
August 3, 2004 26




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##### Table of Contents



OTHER INFORMATION 
 LEGAL PROCEEDINGS We are involved in certain legal, regulatory and administrative proceedings
before various courts, arbitration panels and governmental agencies concerning
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 AND REPORTS ON FORM 8-K (a) Exhibits ExhibitNumber
    
    DescriptionFiled:4-239
    
    Fourteenth Supplemental Indenture dated July 15, 2004, supplementing the
Collateral Trust Indenture dated as of June 30, 1993 providing for the
2004 Series D 5.40% senior notes due 2014 between The Detroit Edison
Company and J.P. Morgan Trust Company, National Association (successor to
Bank One Trust Company, National Association).4-240
    
    Supplemental Indenture dated as of July 1, 2004, supplementing the
Mortgage and Deed of Trust dated as of October 1, 1924 between The Detroit
Edison Company and J.P. Morgan Trust Company, National Association
(successor to Bank One, National Association) establishing the 2004 Series
D Mortgage Bonds.15-27
    
    Awareness Letter of Deloitte & Touche LLP31-9
    
    Chief Executive Officer Section 302 Form 10-Q Certification31-10
    
    Chief Financial Officer Section 302 Form 10-Q CertificationFurnished:32-9
    
    Chief Executive Officer Section 906 Certification of Periodic Report32-10
    
    Chief Financial Officer Section 906 Certification of Periodic Report
 27




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##### Table of Contents



(b)
    
    Reports onForm 8-K.During the quarterly period ended June 30, 2004, we filed or furnished
Current Reports on Form 8-K covering matters, as follows:Item 7. Exhibits and Item 12. Results of Operations and Financial Condition
furnished on April 29, 2004 and dated April 28, 2004; andItem 7. Exhibits and Item 12. Results of Operations and Financial Condition
furnished and dated April 29, 2004. 28




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. THE DETROIT EDISON COMPANYDate: August 4, 2004
    
    /s/ DANIEL G. BRUDZYNSKIDaniel G. BrudzynskiChief Accounting Officer,Vice President and Controller
 29




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##### Table of Contents



Exhibit Index Number
    
    Description4-239
    
    Fourteenth Supplemental Indenture dated July 15, 2004, supplementing the
Collateral Trust Indenture dated as of June 30, 1993 providing for the
2004 Series D 5.40% senior notes due 2014 between The Detroit Edison
Company and J.P. Morgan Trust Company, National Association (successor to
Bank One Trust Company, National Association).4-240
    
    Supplemental Indenture dated as of July 1, 2004, supplementing the
Mortgage and Deed of Trust dated as of October 1, 1924 between The Detroit
Edison Company and J.P. Morgan Trust Company, National Association
(successor to Bank One, National Association) establishing the 2004 Series
D Mortgage Bonds.15-27
    
    Awareness Letter of Deloitte & Touche LLP31-9
    
    Chief Executive Officer Section 302 Form 10-Q Certification31-10
    
    Chief Financial Officer Section 302 Form 10-Q Certification32-9
    
    Chief Executive Officer Section 906 Certification of Periodic Report32-10
    
    Chief Financial Officer Section 906 Certification of Periodic Report
 30