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UNITED STATES

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the Quarterly Period Ended September 30, 2003

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

313-235-4000

     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 þ          No o

     Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act.

Yes o          No þ

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THE DETROIT EDISON COMPANY

QUARTERLY REPORT ON FORM 10-Q

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      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;
	•	economic climate and growth in the geographic areas where we do business;
	•	environmental issues, including changes in the climate, and regulations;
	•	nuclear regulations and risks associated with nuclear operations;
	•	implementation of electric Customer Choice programs;
	•	implementation of electric restructuring in Michigan;
	•	employee relations and the impact of collective bargaining agreements;
	•	unplanned outages;
	•	capital market conditions and access to capital markets and other financing efforts that can be affected by credit agency ratings;
	•	the timing and extent of changes in interest rates;
	•	the level of borrowings;
	•	changes in the cost of fuel and purchased power;
	•	effects of competition;
	•	impact of FERC and MPSC proceedings and regulations;
	•	changes in federal or state tax laws and their interpretations, including the code, regulations, rulings, court proceedings and audits;
	•	ability to recover costs through rate increases;
	•	property insurance;
	•	the cost of protecting assets against or damage due to terrorism;
	•	changes in accounting standards and financial reporting regulations; and
	•	changes in federal or state laws and their interpretation with respect to regulation, energy policy and other related business issues.

      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 statement speaks only as of the date on which such statement is made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

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THE DETROIT EDISON COMPANY

Results of Operations

      The Results of Operations discussion for Detroit Edison is presented in accordance with General Instruction H(2) (a) of Form 10-Q.

      We had income of $96 million in the 2003 third quarter compared to income of $105 million for the 2002 third quarter. For the nine-month period, our income was $141 million compared to income of $272 million for the comparable 2002 period. The comparability of earnings for the nine-month period was also 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. Results for the nine-month period were also affected by a $14 million net of tax loss on the sale of our steam heating business in January 2003.

      Detroit Edison has the following two reportable segments.

Energy Resources

      The power generation plants of Detroit Edison comprise our regulated power generation business. Detroit Edison’s numerous fossil plants, hydroelectric pumped storage plant and its nuclear plant generate electricity that is sold principally throughout Michigan and the Midwest to residential, commercial, industrial and wholesale customers.

      Power Generation earnings increased $7 million during the 2003 third quarter and decreased $43 million in the 2003 nine-month period compared to the 2002 periods. Results for both periods were affected by lower gross margins, varying operation and maintenance expenses and lower depreciation and amortization expense. The reduced gross margins were driven by decreased cooling demand due to mild weather, lost margins from customers choosing to purchase power from alternative suppliers under the electric Customer Choice program and lost margins from the August 2003 blackout. As a result of the electric Customer Choice program, Detroit Edison has lost 11% of retail sales during 2003 resulting in lost margins of approximately $70 million. To partially offset the impact of these lost margins, Detroit Edison recorded regulatory assets totaling $8 million in the 2003 third quarter and $30 million in the 2003 nine-month period representing stranded costs that we believe are recoverable under Michigan legislation. Gross margins benefited from lower fuel unit costs reflecting the use of a more favorable power supply mix. We increased the usage of lower-cost power from our generating plants and reduced our usage of higher-cost purchased power. Operation and maintenance expenses were affected by costs associated with the August 2003 blackout (Note 4), higher employee pension and health care benefit costs and expenses due to the timing of planned reliability and maintenance work done to improve the production and availability of the generation fleet. Operation and maintenance expenses benefited from our Company-wide initiative to reduce or defer costs and enhance operating performance. The DTE Operating System involves the rigorous disciplined application of tools and operating practices which have resulted in improvements in plant efficiency and technology systems, among other enhancements. The

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      System output and average fuel and purchased power costs were as follows:

(1)	Represents fuel costs associated with power plants.
(2)	Includes hedging activities.

      Outlook — Detroit Edison lost 6% of retail sales in 2002 and estimates losing up to 13% of such sales in 2003 as a result of customers choosing to purchase power from alternative suppliers under the electric Customer Choice program. We estimate that we will lose between $80 million and $100 million of margins in 2003 under the Customer Choice program. Unrecovered generation-related fixed costs due to electric Customer Choice are considered stranded and are recoverable under Michigan legislation as determined by the MPSC. We estimate that we will record approximately $40 million of regulatory assets relating to these stranded costs in 2003. There are a number of variables and estimates that impact the level of recoverable stranded costs, including weather, sales mix and wholesale prices. As a result, our estimate of stranded costs

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      The June 2000 Michigan legislation imposed a rate freeze for all classes of customers through 2003. In addition, the MPSC determined that adjusting rates for changes in fuel and purchased power through continuance of the Power Supply Cost Recovery (PSCR) clause would be inconsistent with the rate freeze, therefore the MPSC suspended the PSCR clause. It is unclear at this time whether the PSCR clause will remain suspended beyond 2003. Detroit Edison filed a rate case in June 2003 addressing this and other issues. We cannot predict the outcome of this matter. See Note 4 — Regulatory Matters.

      Future operating results are expected to vary as a result of factors such as regulatory proceedings, weather, changes in economic conditions and the level of customer participation in the electric Customer Choice program.

Energy Distribution

      Power Distribution is comprised of the electric distribution services of Detroit Edison. Power Distribution distributes electricity generated by Energy Resources and alternative electric suppliers to Detroit Edison’s 2.1 million customers.

      Power Distribution earnings decreased $16 million during the 2003 third quarter and $82 million in the 2003 nine-month period. Both periods experienced reduced electric deliveries and operating revenues due to milder weather and the impact of a slower economy on manufacturing and commercial customers operations. Restoration costs associated with an April 2003 catastrophic ice storm, resulting in more than 400,000 customers losing power, and a July 2003 windstorm, affecting over 190,000 customers, also contributed to the decline in earnings in the 2003 nine-month period. The operation and maintenance expense comparison in the current quarter was also impacted by heat-related maintenance costs incurred in the 2002 third quarter due to prolonged periods of above normal temperatures and the related stress placed on the distribution system. Operation and maintenance expenses for both periods were also affected by higher employee pension and health care benefit costs and costs associated with customer service process improvements. Operation and maintenance expenses benefited from our Company-wide initiative to reduce or defer costs and enhance operating performance. The DTE Operating System involves the rigorous disciplined application of tools and operating practices which have resulted in inventory reductions and improvements in technology systems,

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      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. Economic conditions and prior billing issues have resulted in an increase in past due receivables. We believe our allowance for doubtful accounts is based on reasonable estimates; however, failure to make continued progress in collecting our past due receivables would unfavorably affect operating results. As previously mentioned, Detroit Edison filed a rate case in June 2003 to address future operating costs and other issues.

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Capital Resources and Liquidity

Operating Activities

      Net cash from operating activities decreased $285 million during the 2003 nine-month period as compared to the same 2002 period. The decrease reflects a decline of $156 million in net income, after adjusting for non-cash items (depreciation and amortization and deferred taxes) and a $129 million increase in working capital and other requirements. The increase in working capital requirements is primarily due to a decrease in accounts payable balances in 2003. We also contributed $222 million of cash to our pension plan in 2003.

      Economic conditions and prior billing issues have resulted in an increase in past due receivables. We are focusing our collection efforts; however, failure to make continued progress in collecting our past due receivables would unfavorably affect operating cash flows.

Investing Activities

      Net cash relating to investing activities improved $149 million in the 2003 nine-month period as compared to the same 2002 period. The improvement is attributed to decreases in cash contractually designated for debt service and other investments and a decrease in plant and equipment expenditures.

Financing Activities

      Net cash from financing activities increased $307 million during the 2003 nine-month period as compared to the same 2002 period. The increase is primarily attributed to higher notes payable to affiliates and a cash infusion from its parent company, partially offset by an increase in redemptions of long-term debt. In August 2003, Detroit Edison issued $49 million of 5.5% tax-exempt bonds due in June 2030. The proceeds were used to redeem $49 million of 6.55% tax-exempt bonds due 2024.

Electric Customer Choice Program

      The electric Customer Choice program as originally structured in Michigan anticipated an eventual transition to a totally competitive environment where customers would be charged market-based rates for their electricity. Various developments in the energy industry have caused the deregulation of electric generation to proceed at a much slower rate. As a result, Detroit Edison’s rates continue to be regulated by the MPSC. This continued regulation has hindered Detroit Edison’s ability to retain customers that are choosing alternative suppliers under the electric Customer Choice program. Detroit Edison’s results have been unfavorably impacted by the lack of recovery of lost margins and other costs associated with the electric Customer Choice

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	•	has not finalized all the components for calculating net stranded costs;
	•	has created a process whereby net stranded costs would be recovered two years after the net stranded costs were actually incurred;
	•	has not authorized Detroit Edison to recover any Customer Choice program implementation costs; and,
	•	has created incentives to encourage participation in electric Customer Choice.

      In addition, the MPSC has historically maintained regulated rates for certain groups of customers that exceed those customers’ cost of service. This has resulted in high levels of participation by these customers in the Customer Choice program. As a result of these factors, retail choice penetration continues to rise beyond original estimates.

      In December 2002, the MPSC initiated a collaborative process to address the issue of stranded costs. Detroit Edison actively participated in the collaborative process. However, this process failed to produce any agreement regarding net stranded cost recovery.

      Detroit Edison addressed the issue of stranded costs in its June 2003 rate filing and is also pursuing a legislative solution to address this issue. The continued delay in the timely and full recovery of stranded costs unfavorably impacts operating results. See Note 4 for a further discussion of the electric Customer Choice program.

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. On October 24, 2003, Detroit Edison filed an application with the MPSC requesting approval to defer the blackout costs until ratemaking treatment of the costs can be determined. See Note 4 for further discussion of the blackout costs filing.

Environmental Matters

      The Environmental Protection Agency (EPA) ozone transport regulations and final new air quality standards relating to ozone and particulate air pollution will continue to impact us. Detroit Edison spent approximately $512 million through September 2003 and estimates that it will incur approximately $300 to $400 million of future capital expenditures over the next five to eight years to comply with the existing air quality standards. Recovery of costs to be incurred through December 2004 is included in our June 2003 electric rate case. In addition, we maintain the option to securitize these costs after the completion of this rate case.

      The EPA has initiated enforcement actions against several major electric utilities citing violations of the Clean Air Act, asserting that older, coal-fired power plants have been modified in ways that would then require them to comply with the more restrictive “new source” provisions of the Clean Air Act. Detroit Edison received and responded to information requests from the EPA on this subject. The EPA has not initiated proceedings against Detroit Edison. The United States District Court for the Southern District of Ohio Eastern Division issued a decision in August 2003 finding Ohio Edison in violation of the new source provisions of the Clean Air Act. If the Court’s decision is upheld, the electric utility industry could be required to invest substantial amounts in pollution control equipment. During the same month, however, a district court in a different division rendered a conflicting decision on the matter. On August 27, 2003, the EPA released new rules, effective December 26, 2003, allowing repair, replacement or upgrade of production equipment without triggering source requirement controls if the cost of the parts and repairs do not exceed 20% of the replacement value of the equipment being upgraded. Such repairs will be considered routine maintenance,

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      We cannot predict the future impact of this issue upon Detroit Edison.

New Accounting Pronouncements

      See Note 2 — New Accounting Pronouncements for discussion of new accounting pronouncements.

(a)     Evaluation of disclosure controls and procedures

      The Company’s Chief Executive Officer and Chief Financial Officer have evaluated 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, 2003, which is the end of the period covered by this report, and 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 Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

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THE DETROIT EDISON COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

See Notes to Consolidated Financial Statements (Unaudited)

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THE DETROIT EDISON COMPANY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

See Notes to Consolidated Financial Statements (Unaudited)

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THE DETROIT EDISON COMPANY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

See Notes to Consolidated Financial Statements (Unaudited)

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THE DETROIT EDISON COMPANY

See Notes to Consolidated Financial Statements (Unaudited)

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THE DETROIT EDISON COMPANY