UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

Commission file number 1-2198

The Detroit Edison Company meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure format.

THE DETROIT EDISON COMPANY

(Exact name of registrant as specified in its charter)

Michigan		38-0478650
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
One Energy Plaza, Detroit, Michigan		48226-1279
(Address of principal executive offices)		(Zip Code)

313-235-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

All of the registrant’s 138,632,324 outstanding shares of common stock are owned by DTE Energy Company.

 

 

The Detroit Edison Company
Quarterly Report on Form 10-Q
Quarter Ended September 30, 2010

Table Of Contents

		Page
Definitions			1
Forward-Looking Statements			2
Part I — Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Position (Unaudited)			4
Consolidated Statements of Operations (Unaudited)			6
Consolidated Statements of Cash Flows (Unaudited)			7
Consolidated Statements of Changes in Shareholder’s Equity and Comprehensive Income (Unaudited)			8
Notes to Consolidated Financial Statements (Unaudited)			9
Item 2. Management’s Narrative Analysis of Results of Operations			24
Item 4. Controls and Procedures			28
Part II — Other Information
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 6. Exhibits			30
Signature			31
EX-4.269
EX-4.270
EX-4.271
EX-4.272
EX-12.38
EX-31.59
EX-31.60
EX-32.59
EX-32.60

Definitions

ASC		Accounting Standards Codification
ASU		Accounting Standards Update
Customer Choice		Michigan legislation giving customers the option to choose alternative suppliers for electricity.
Detroit Edison		The Detroit Edison Company (a direct wholly owned subsidiary of DTE Energy) and subsidiary companies
DTE Energy		DTE Energy Company, directly or indirectly the parent of Detroit Edison, Michigan Consolidated Gas Company and numerous non-utility subsidiaries
EPA		United States Environmental Protection Agency
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FTRs		Financial transmission rights are financial instruments that entitle the holder to receive payments related to costs incurred for congestion on the transmission grid.
MISO		Midwest Independent System Operator is an Independent System Operator and the Regional Transmission Organization serving the Midwest United States and Manitoba, Canada.
MNRE		Michigan Department of Natural Resources and Environment
MPSC		Michigan Public Service Commission
NRC		United States Nuclear Regulatory Commission
PSCR		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 costs.
RDM		Revenue Decoupling Mechanism
Securitization		Detroit Edison financed specific stranded costs at lower interest rates through the sale of rate reduction bonds by a wholly-owned special purpose entity, The Detroit Edison Securitization Funding LLC.
VIE		Variable Interest Entity
Units of Measurement
GWh		Gigawatthour of electricity
kWh		Kilowatthour of electricity
MW		Megawatt of electricity
MWh		Megawatthour of electricity

Forward-Looking Statements

Certain information presented herein includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of Detroit Edison. Forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause actual future results to be materially different from those contemplated, projected, estimated or budgeted. Many factors may impact forward-looking statements including, but not limited to, the following:

•		economic conditions resulting in changes in demand, customer conservation and increased thefts of electricity;
•		changes in the economic and financial viability of our customers, suppliers, and trading counterparties, and the continued ability of such parties to perform their obligations to the Company;
•		economic climate and population growth or decline in the geographic areas where we do business;
•		high levels of uncollectible accounts receivable;
•		access to capital markets and capital market conditions and the results of other financing efforts which can be affected by credit agency ratings;
•		instability in capital markets which could impact availability of short and long-term financing;
•		the timing and extent of changes in interest rates;
•		the level of borrowings;
•		the potential for losses on investments, including nuclear decommissioning and benefit plan assets and the related increases in future expense and contributions;
•		the potential for increased costs or delays in completion of significant construction projects;
•		the effects of weather and other natural phenomena on operations and sales to customers, and purchases from suppliers;
•		environmental issues, laws, regulations, and the increasing costs of remediation and compliance, including actual and potential new federal and state requirements that include or could include carbon and more stringent mercury emission controls, a renewable portfolio standard, energy efficiency mandates, carbon tax or cap and trade structure and ash landfill regulations;
•		nuclear regulations and operations associated with nuclear facilities;
•		impact of electric utility restructuring in Michigan, including legislative amendments and Customer Choice programs;
•		employee relations and the impact of collective bargaining agreements;
•		unplanned outages;
•		changes in the cost and availability of coal and other raw materials and purchased power;
•		cost reduction efforts and the maximization of plant and distribution system performance;
•		the effects of competition;

•		impact of regulation by the FERC, MPSC, NRC and other applicable governmental proceedings and regulations, including any associated impact on rate structures;
•		changes in and application of federal, state and local tax laws and their interpretations, including the Internal Revenue Code, regulations, rulings, court proceedings and audits;
•		the amount and timing of cost recovery allowed as a result of regulatory proceedings, related appeals or new legislation;
•		the cost of protecting assets against, or damage due to, terrorism or cyber attacks;
•		the availability, cost, coverage and terms of insurance and stability of insurance providers;
•		changes in and application of accounting standards and financial reporting regulations;
•		changes in federal or state laws and their interpretation with respect to regulation, energy policy and other business issues; and
•		binding arbitration, litigation and related appeals.

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 refer 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.

Part I — Item 1.

The Detroit Edison Company
Consolidated Statements of Financial Position (Unaudited)

		September 30				December 31
(in Millions)		2010				2009
ASSETS
Current Assets
Cash and cash equivalents		$	22			$	34
Restricted cash			43				79
Accounts receivable (less allowance for doubtful accounts of $99 and $118, respectively)
Customer			695				696
Affiliates			15				3
Other			29				108
Inventories
Fuel			180				135
Materials and supplies			180				173
Notes Receivable
Affiliates			89				65
Other			—				3
Prepaid property taxes			89				44
Other			67				35
			1,409				1,375
Investments
Nuclear decommissioning trust funds			890				817
Other			107				104
			997				921
Property
Property, plant and equipment			15,868				15,451
Less accumulated depreciation and amortization			(6,384	)			(6,133	)
			9,484				9,318
Other Assets
Regulatory assets			3,260				3,333
Securitized regulatory assets			767				870
Intangible assets			21				9
Notes receivable — affiliates			9				17
Other			139				118
			4,196				4,347
Total Assets		$	16,086			$	15,961

See Notes to Consolidated Financial Statements (Unaudited)

The Detroit Edison Company
Consolidated Statements of Financial Position (Unaudited)

		September 30				December 31
(in Millions, Except Shares)		2010				2009
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Accounts payable
Affiliates		$	54			$	74
Vendors and other			274				251
Accrued interest			77				83
Current portion of long-term debt, including capital leases			311				660
Other			317				261
			1,033				1,329
Long-Term Debt (net of current portion)
Mortgage bonds, notes and other			4,026				3,579
Securitization bonds			643				793
Capital lease obligations			20				25
			4,689				4,397
Other Liabilities
Deferred income taxes			1,939				1,871
Regulatory liabilities			758				711
Asset retirement obligations			1,357				1,285
Unamortized investment tax credit			69				75
Nuclear decommissioning			147				136
Accrued pension liability — affiliates			808				987
Accrued postretirement liability — affiliates			1,072				1,058
Other			226				239
			6,376				6,362
Commitments and Contingencies (Notes 7 and 10)
Shareholder’s Equity
Common stock, $10 par value, 400,000,000 shares authorized, and 138,632,324 shares issued and outstanding			3,196				3,196
Retained earnings			807				693
Accumulated other comprehensive income (loss)			(15	)			(16	)
			3,988				3,873
Total Liabilities and Shareholder’s Equity		$	16,086			$	15,961

See Notes to Consolidated Financial Statements (Unaudited)

The Detroit Edison Company
Consolidated Statements of Operations (Unaudited)

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in Millions)		2010				2009				2010				2009
Operating Revenues		$	1,444			$	1,289			$	3,798			$	3,515
Operating Expenses
Fuel and purchased power			484				400				1,217				1,112
Operation and maintenance			325				306				960				928
Depreciation and amortization			230				222				644				607
Taxes other than income			54				43				180				147
Asset gains, net			—				—				(1	)			—
			1,093				971				3,000				2,794
Operating Income			351				318				798				721
Other (Income) and Deductions
Interest expense			83				82				241				245
Interest income			(1	)			—				(1	)			(1	)
Other income			(10	)			(12	)			(27	)			(29	)
Other expenses			6				5				23				5
			78				75				236				220
Income Before Income Taxes			273				243				562				501
Income Tax Provision			108				94				219				195
Net Income		$	165			$	149			$	343			$	306

See Notes to Consolidated Financial Statements (Unaudited)

The Detroit Edison Company
Consolidated Statements of Cash Flows (Unaudited)

		Nine Months Ended
		September 30
(in Millions)		2010				2009
Operating Activities
Net income		$	343			$	306
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			644				607
Deferred income taxes			78				(2	)
Asset gains, net			(1	)			—
Changes in assets and liabilities, exclusive of changes shown separately			(87	)			112
Net cash from operating activities			977				1,023
Investing Activities
Plant and equipment expenditures			(641	)			(640	)
Restricted cash for debt redemptions			36				60
Proceeds from sale of nuclear decommissioning trust fund assets			179				237
Investment in nuclear decommissioning trust funds			(204	)			(251	)
Notes receivable from affiliates			(30	)			(148	)
Other			(34	)			(28	)
Net cash used for investing activities			(694	)			(770	)
Financing Activities
Issuance of long-term debt			595				65
Redemption of long-term debt			(652	)			(213	)
Short-term borrowings, net			—				(75	)
Capital contribution by parent company			—				250
Dividends on common stock			(228	)			(228	)
Other			(10	)			(13	)
Net cash used for financing activities			(295	)			(214	)
Net Increase (Decrease) in Cash and Cash Equivalents			(12	)			39
Cash and Cash Equivalents at Beginning of Period			34				30
Cash and Cash Equivalents at End of Period		$	22			$	69

The Detroit Edison Company
Consolidated Statements of Changes in Shareholder’s Equity and Comprehensive Income
(Unaudited)

																		Accumulated
										Additional								Other
		Common Stock								Paid In				Retained				Comprehensive
(Dollars in Millions, shares in thousands)		Shares				Amount				Capital				Earnings				Loss				Total
Balance, December 31, 2009			138,632			$	1,386			$	1,810			$	693			$	(16	)		$	3,873
Net income			—				—				—				343				—				343
Dividends declared on common stock			—				—				—				(229	)			—				(229	)
Benefit obligations, net of tax			—				—				—				—				1				1
Balance, September 30, 2010			138,632			$	1,386			$	1,810			$	807			$	(15	)		$	3,988

The following table displays other comprehensive income for the nine-month periods ended September 30:

(in Millions)		2010				2009
Net income		$	343			$	306
Other comprehensive income, net of tax:
Benefit obligations, net of taxes			1				2
Net unrealized gains on investments:
Amounts reclassified to income, net of taxes			—				(2	)
Comprehensive income		$	344			$	306

See Notes to Consolidated Financial Statements (Unaudited)

The Detroit Edison Company

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 — BASIS OF PRESENTATION

Corporate Structure

Detroit Edison is an electric utility engaged in the generation, purchase, distribution and sale of electricity to approximately 2.1 million customers in southeast Michigan. Detroit Edison is regulated by the MPSC and FERC. In addition, we are regulated by other federal and state regulatory agencies including the NRC, the EPA and the MNRE.

References in this report to “we,” “us,” “our” or “Company” are to Detroit Edison and its subsidiaries, collectively.

Basis of Presentation

These Consolidated Financial Statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the 2009 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 management to use estimates and assumptions that impact reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from the Company’s estimates.

The Consolidated Financial Statements are unaudited, but in the Company’s opinion include all adjustments necessary for a fair presentation of such financial statements. All adjustments are of a normal recurring nature, except as otherwise disclosed in these Consolidated Financial Statements and Notes to Consolidated Financial Statements. Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending December 31, 2010.

Certain prior year balances were reclassified to match the current year’s financial statement presentation.

Principles of Consolidation — Variable Interest Entity (VIE)

As discussed in Note 3, effective January 1, 2010, the Company adopted the provisions of ASU 2009-17, Amendments to FASB Interpretation 46(R). ASU 2009-17 changed the methodology for determining the primary beneficiary of a VIE from a quantitative risk and rewards-based model to a qualitative determination. There is no grandfathering of previous consolidation conclusions. As a result, the Company re-evaluated all prior VIE and primary beneficiary determinations. The requirements of ASU 2009-17 were adopted on a prospective basis.

The Company evaluates whether an entity is a VIE whenever reconsideration events occur. The Company consolidates VIEs for which it is the primary beneficiary. If the Company is not the primary beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of accounting. When assessing the determination of the primary beneficiary, the Company considers all relevant facts and circumstances, including: the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the expected losses and/or the right to receive the expected returns of the VIE. The Company performs ongoing reassessments of all VIEs to determine if the primary beneficiary status has changed.

In 2001, Detroit Edison financed a regulatory asset related to Fermi 2 and certain other regulatory assets through the sale of rate reduction bonds by a wholly-owned special purpose entity, Securitization. Detroit Edison performs servicing activities including billing and collecting surcharge revenue for Securitization. Under ASU 2009-17, this

entity is now a VIE, and continues to be consolidated as the Company is the primary beneficiary. The maximum risk exposure related to Securitization is reflected on the Company’s Consolidated Statements of Financial Position.

The following table summarizes the major balance sheet items at September 30, 2010 restricted for Securitization that are either (1) assets that can be used only to settle their obligations or (2) liabilities for which creditors do not have recourse to the general credit of the primary beneficiary.

		September 30,
(in Millions)		2010
ASSETS
Restricted cash		$	43
Accounts receivable			48
Securitized regulatory assets			767
Other assets			14
		$	872
LIABILITIES
Accounts payable and accrued current liabilities		$	4
Other current liabilities			59
Current portion long-term debt, including capital leases			150
Securitization bonds			643
Other long term liabilities			6
		$	862

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

Income Taxes

The Company had $6 million and $5 million of unrecognized tax benefits at September 30, 2010 and December 31, 2009, respectively, that, if recognized, would favorably impact its effective tax rate. During the next twelve months, it is reasonably possible that DTE Energy and its subsidiaries will settle certain federal tax audits. As a result, the Company believes that it is possible that there will be a decrease in unrecognized tax benefits of up to $77 million within the next twelve months.

Stock-Based Compensation

The Company received an allocation of costs from DTE Energy associated with stock-based compensation of $5 million and $6 million for the three months ended September 30, 2010 and 2009, respectively, while such allocation was $17 million and $11 million for the nine months ended September 30, 2010 and 2009, respectively.

Government Grants

Grants are recognized when there is reasonable assurance that the grant will be received and that any conditions associated with the grant will be met. When grants are received related to Property, Plant and Equipment, the Company reduces the basis of the assets on the Consolidated Statements of Financial Position, resulting in lower depreciation expense over the life of the associated asset. Grants received related to expenses are reflected as a reduction of the associated expense in the period in which the expense is incurred.

NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS

Variable Interest Entity

In June 2009, the FASB issued ASU 2009-17, Amendments to FASB Interpretation 46(R). This standard amends the consolidation guidance that applies to VIEs and affects the overall consolidation analysis under ASC 810-10, Consolidation. The amendments to the consolidation guidance affect all entities and enterprises currently within the scope of ASC 810-10, as well as qualifying special purpose entities that are currently outside the scope of ASC 810-

10. Accordingly, the Company reconsidered its previous ASC 810-10 conclusions, including (1) whether an entity is a VIE, (2) whether the enterprise is the VIE’s primary beneficiary, and (3) what type of financial statement disclosures are required. ASU 2009-17 is effective as of the beginning of the first fiscal year that begins after November 15, 2009. The Company adopted the standard as of January 1, 2010.

Fair Value Measurements and Disclosures

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires details of transfers in and out of Level 1 and 2 fair value measurements and the gross presentation of activity within the Level 3 fair value measurement roll forward. The new disclosures are required of all entities that are required to provide disclosures about recurring and nonrecurring fair value measurements. The Company adopted ASU 2010-06 effective January 1, 2010, except for the gross presentation of the Level 3 fair value measurement roll forward which is effective for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years.

NOTE 4 — FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company makes certain assumptions it believes that market participants would use in pricing assets or liabilities, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. Credit risk of the Company and its counterparties is incorporated in the valuation of assets and liabilities through the use of credit reserves, the impact of which was immaterial at September 30, 2010 and December 31, 2009. The Company believes it uses valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.

A fair value hierarchy has been established, which prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. All assets and liabilities are required to be classified in their entirety based on the lowest level of input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The Company classifies fair value balances based on the fair value hierarchy defined as follows:

•		Level 1 — Consists of unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date.
•		Level 2 — Consists of inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
•		Level 3 — Consists of unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of September 30, 2010:

														Net Balance at
(in Millions)		Level 1				Level 2				Level 3				September 30, 2010
Assets:
Nuclear decommissioning trusts		$	606			$	284			$	—			$	890
Other investments			42				55				—				97
Derivative assets — FTRs			—				—				2				2
Total		$	648			$	339			$	2			$	989
Liabilities:
Derivative liabilities — Emissions			—				(7	)			—				(7	)
Total		$	—			$	(7	)		$	—			$	(7	)
Net Assets at September 30, 2010		$	648			$	332			$	2			$	982

														Net Balance at
(in Millions)		Level 1				Level 2				Level 3				September 30, 2010
Assets:
Current		$	—			$	—			$	2			$	2
Noncurrent(1)			648				339				—				987
Total Assets		$	648			$	339			$	2			$	989
Liabilities:
Current		$	—			$	(6	)		$	—			$	(6	)
Noncurrent			—				(1	)			—				(1	)
Total Liabilities		$	—			$	(7	)		$	—			$	(7	)
Net Assets at September 30, 2010		$	648			$	332			$	2			$	982

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2009:

														Net Balance at
(in Millions)		Level 1				Level 2				Level 3				December 31, 2009
Assets:
Cash equivalents		$	15			$	—			$	—			$	15
Nuclear decommissioning trusts and other investments			589				325				—				914
Derivative assets			—				—				2				2
Total		$	604			$	325			$	2			$	931
Liabilities:
Derivative liabilities			—				(8	)			—				(8	)
Total		$	—			$	(8	)		$	—			$	(8	)
Net Assets at December 31, 2009		$	604			$	317			$	2			$	923

The following table presents the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2010 and 2009:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in Millions)		2010				2009				2010				2009
Asset balance as of beginning of the period		$	3			$	2			$	2			$	4
Changes in fair value recorded in regulatory assets/liabilities			—				(1	)			4				(2	)
Purchases, issuances and settlements			(1	)			—				(4	)			1
Transfers in/out of Level 3			—				—				—				(2	)
Asset balance as of September 30		$	2			$	1			$	2			$	1
The amount of total gains (losses) included in regulatory assets and liabilities attributed to the change in unrealized gains (losses) related to assets and liabilities held at September 30, 2010 and 2009		$	—			$	(1	)		$	2			$	2

Transfers in/out of Level 3 represent existing assets or liabilities that were either previously categorized as a higher level and for which the inputs to the model became unobservable or assets and liabilities that were previously classified as Level 3 for which the lowest significant input became observable during the period. Transfers in/out of Level 3 are reflected as if they had occurred at the beginning of the period. No significant transfers between Levels 1, 2 or 3 occurred in the three and nine months ended September 30, 2010. Transfers out of Level 3 in 2009 reflect increased reliance on broker quotes for certain transactions.

Cash Equivalents

Cash equivalents include investments with maturities of three months or less when purchased. The cash equivalents shown in the fair value table are comprised of investments in money market funds. The fair values of the shares of these funds are based on observable market prices and, therefore, have been categorized as Level 1 in the fair value hierarchy.

Nuclear Decommissioning Trusts and Other Investments

The nuclear decommissioning trusts and other investments hold debt and equity securities directly and indirectly through commingled funds and institutional mutual funds. Exchange-traded debt and equity securities held directly are valued using quoted market prices in actively traded markets. The commingled funds and institutional mutual funds which hold exchange-traded equity or debt securities are valued based on the underlying securities, using quoted prices in actively traded markets. Non-exchange-traded fixed income securities are valued based upon quotations available from brokers or pricing services. A primary price source is identified by asset type, class or issue for each security. The trustees monitor prices supplied by pricing services and may use a supplemental price source or change the primary price source of a given security if the trustees determine that another price source is considered to be preferable. Detroit Edison has obtained an understanding of how these prices are derived, including the nature and observability of the inputs used in deriving such prices. Additionally, Detroit Edison selectively corroborates the fair values of securities by comparison of market-based price sources.

Derivative Assets and Liabilities

Derivative assets and liabilities are comprised of physical and financial derivative contracts, including futures, forwards, options and swaps that are both exchange-traded and over-the-counter traded contracts. Various inputs are used to value derivatives depending on the type of contract and availability of market data. Exchange-traded derivative contracts are valued using quoted prices in active markets. The Company considers the following criteria in determining whether a market is considered active: frequency in which pricing information is updated, variability in pricing between sources or over time and the availability of public information. Other derivative contracts are valued based upon a variety of inputs including commodity market prices, broker quotes, interest rates, credit ratings, default rates, market-based seasonality and basis differential factors. The Company monitors the prices that

are supplied by brokers and pricing services and may use a supplemental price source or change the primary price source of an index if prices become unavailable or another price source is determined to be more representative of fair value. The Company has obtained an understanding of how these prices are derived. Additionally, the Company selectively corroborates the fair value of its transactions by comparison of market-based price sources. Mathematical valuation models are used for derivatives for which external market data is not readily observable, such as contracts which extend beyond the actively traded reporting period.

Fair Value of Financial Instruments

The fair value of long-term debt is determined by using quoted market prices when available and a discounted cash flow analysis based upon estimated current borrowing rates when quoted market prices are not available. The table below shows the fair value relative to the carrying value for long-term debt securities. Certain other financial instruments, such as notes payable, customer deposits and notes receivable are not shown as carrying value approximates fair value. See Note 5 for further information on financial and derivative instruments.

September 30, 2010

December 31, 2009

Fair Value

Carrying Value

Fair Value

Carrying Value

Long-Term Debt

$5.5 billion

$5.0 billion

$5.2 billion

$5.0 billion

Nuclear Decommissioning Trust Funds

Detroit Edison has a legal obligation to decommission its nuclear power plants following the expiration of their operating licenses. This obligation is reflected as an asset retirement obligation on the Consolidated Statements of Financial Position. See Note 6 for additional information.

The NRC has jurisdiction over the decommissioning of nuclear power plants and requires decommissioning funding based upon a formula. The MPSC and FERC regulate the recovery of costs of decommissioning nuclear power plants and both require the use of external trust funds to finance the decommissioning of Fermi 2. Rates approved by the MPSC provide for the recovery of decommissioning costs of Fermi 2 and the disposal of low-level radioactive waste. Detroit Edison is continuing to fund FERC jurisdictional amounts for decommissioning even though explicit provisions are not included in FERC rates. The Company believes the MPSC and FERC collections will be adequate to fund the estimated cost of decommissioning using the NRC formula. The decommissioning assets, anticipated earnings thereon and future revenues from decommissioning collections will be used to decommission Fermi 2. The Company expects the liabilities to be reduced to zero at the conclusion of the decommissioning activities. If amounts remain in the trust funds for Fermi 2 following the completion of the decommissioning activities, those amounts will be disbursed based on rulings by the MPSC and FERC.

The decommissioning of Fermi 1 is funded by Detroit Edison. Contributions to the Fermi 1 trust are discretionary.

The following table summarizes the fair value of the nuclear decommissioning trust fund assets:

		September 30,				December 31,
(in Millions)		2010				2009
Fermi 2		$	861			$	790
Fermi 1			3				3
Low level radioactive waste			26				24
Total		$	890			$	817

The costs of securities sold are determined on the basis of specific identification. The following table sets forth the gains and losses and proceeds from the sale of securities by the nuclear decommissioning trust funds:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in Millions)		2010				2009				2010				2009
Realized gains		$	8			$	9			$	29			$	28
Realized losses			(6	)			(12	)			(25	)			(45	)
Proceeds from sales of securities			51				55				179				237

Realized gains and losses from the sale of securities for the Fermi 2 and the low level radioactive waste funds are recorded to the Regulatory asset and Nuclear decommissioning liability. The following table sets forth the fair value and unrealized gains for the nuclear decommissioning trust funds:

		Fair				Unrealized
(in Millions)		Value				Gains
As of September 30, 2010
Equity securities		$	462			$	151
Debt securities			417				29
Cash and cash equivalents			11				—
		$	890			$	180
As of December 31, 2009
Equity securities		$	420			$	135
Debt securities			388				17
Cash and cash equivalents			9				—
		$	817			$	152

The debt securities at both September 30, 2010 and December 31, 2009 had an average maturity of approximately 5 years. Securities held in the nuclear decommissioning trust funds are classified as available-for-sale. As Detroit Edison does not have the ability to hold impaired investments for a period of time sufficient to allow for the anticipated recovery of market value, all unrealized losses are considered to be other than temporary impairments.

Impairment charges for unrealized losses incurred by the Fermi 2 trust are recognized as a Regulatory asset. Detroit Edison recognized $51 million and $48 million of unrealized losses as Regulatory assets at September 30, 2010 and December 31, 2009, respectively. Since the decommissioning of Fermi 1 is funded by Detroit Edison rather than through a regulatory recovery mechanism, there is no corresponding regulatory asset treatment. Therefore, impairment charges for unrealized losses incurred by the Fermi 1 trust are recognized in earnings immediately. There were no impairment charges for the three and nine months ended September 30, 2010 and September 30, 2009, for Fermi 1.

Other Available-For-Sale Securities

The following table summarizes the fair value of the Company’s investment in available-for-sale debt and equity securities, excluding nuclear decommissioning trust fund assets:

		September 30, 2010								December 31, 2009
(in Millions)		Fair Value				Carrying value				Fair Value				Carrying Value
Cash equivalents		$	64			$	64			$	105			$	105
Equity securities			4				4				4				4

As of September 30, 2010, these securities are comprised primarily of money-market and equity securities. Gains related to trading securities held at September 30, 2010 and September 30, 2009 were $3 million and $6 million, respectively.

NOTE 5 — FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS

The Company recognizes all derivatives on the Consolidated Statements of Financial Position at their fair value unless they qualify for certain scope exceptions, including the normal purchases and normal sales exception. Further, derivatives that qualify and are designated for hedge accounting are classified as either hedges of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), or as hedges of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge). For cash flow hedges, the portion of the derivative gain or loss that is effective in offsetting the change in the value of the underlying exposure is deferred in Accumulated other comprehensive income and later reclassified into earnings when the underlying transaction occurs. For fair value hedges, changes in fair values for the derivative are recognized in earnings each period. Gains and losses from the ineffective portion of any hedge are recognized in earnings immediately. For derivatives that do not qualify or are not designated for hedge accounting, changes in fair value are recognized in earnings each period.

Detroit Edison’s primary market risk exposure is associated with commodity prices, credit and interest rates. The Company has risk management policies to monitor and manage market risks. The Company uses derivative instruments to manage some of the exposure. Detroit Edison generates, purchases, distributes and sells electricity. Detroit Edison uses forward energy and capacity contracts to manage changes in the price of electricity and fuel. Substantially all of these contracts meet the normal purchases and sales exemption and are therefore accounted for under the accrual method. Other derivative contracts are recoverable through the PSCR mechanism when settled. This results in the deferral of unrealized gains and losses as Regulatory assets or liabilities, until realized.

The following represents the fair value of derivative instruments as of September 30, 2010:

		Balance Sheet		Fair
(in Millions)		Location		Value
FTRs		Other current assets		$	2
Emissions		Other current liabilities			(6	)
Emissions		Other non-current liabilities			(1	)
Total derivatives not designated as hedging instrument				$	(5	)

The effect of derivative instruments recoverable through the PSCR mechanism when realized on the Consolidated Statements of Financial Position are $1 million in losses related to Emissions recognized in Regulatory assets and $4 million in gains related to FTRs recognized in Regulatory liabilities for the nine months ended September 30, 2010.

The following represents the cumulative gross volume of derivative contracts outstanding as of September 30, 2010:

Commodity		Number of Units
Emissions (Tons)			4,650
FTRs (MW)			87,013

NOTE 6 — ASSET RETIREMENT OBLIGATIONS

A reconciliation of the asset retirement obligations for the nine months ended September 30, 2010 follows:

(in Millions)
Asset retirement obligations at December 31, 2009		$	1,300
Accretion			64
Liabilities incurred			10
Liabilities settled			(4	)
Asset retirement obligations at September 30, 2010			1,370
Less amount included in current liabilities			(13	)
		$	1,357

Substantially all of the asset retirement obligations represent nuclear decommissioning liabilities that are funded through a surcharge to electric customers over the life of the Fermi 2 nuclear plant.

NOTE 7 — REGULATORY MATTERS

2010 Electric Rate Case Filing

Detroit Edison filed a rate case on October 29, 2010 based on a projected twelve-month period ending March 31, 2012. The filing with the MPSC requested a $443 million increase in base rates that is required to recover higher costs associated with environmental compliance, operation and maintenance of the Company’s electric distribution system and generation plants, inflation, the capital costs of plant additions, the reduction in territory sales, the impact from the expiration of certain wholesale for resale contracts and the increased migration of customers to the electric Customer Choice program. Detroit Edison also proposed certain adjustments which could reduce the net impact on the required increase in rates by approximately $190 million. These adjustments relate to electric Customer Choice migration, pension and other postretirement benefits expenses and the Nuclear Decommissioning surcharge.

Detroit Edison Uncollectible Expense True-Up Mechanism (UETM)

In March 2010, Detroit Edison filed an application with the MPSC for approval of its UETM for 2009 requesting recovery of approximately $4.5 million consisting of costs related to 2009 uncollectible expense and associated carrying charges. In August 2010, the MPSC determined that the UETM was effective with its January 2010 order in Detroit Edison’s rate case and dismissed the request for UETM expenses for 2009.

Power Supply Cost Recovery Proceedings

The PSCR process is designed to allow Detroit Edison to recover all of its power supply costs if incurred under reasonable and prudent policies and practices. Detroit Edison’s power supply costs include fuel costs, purchased and net interchange power costs, nitrogen oxide and sulfur dioxide emission allowances costs, urea costs, transmission costs and MISO costs. The MPSC reviews these costs, policies and practices for prudence in annual plan and reconciliation filings.

2011 Plan Year — In September 2010, Detroit Edison filed its 2011 PSCR plan case seeking approval of a levelized PSCR factor of 2.98 mills/kWh below the amount included in base rates for all PSCR customers. The filing supports a total power supply expense forecast of $1.2 billion. The plan also includes approximately $36 million for the recovery of its projected 2010 PSCR under-recovery.

The following table summarizes Detroit Edison’s PSCR reconciliation filing currently pending with the MPSC:

Net Over-recovery,

PSCR Cost of

PSCR Year

Date Filed

including interest

Power Sold

2009

March 2010

$15.6 million

$1.1 billion

Other

The Company is unable to predict the outcome of the unresolved regulatory matters discussed herein. Resolution of these matters is dependent upon future MPSC orders and appeals, which may materially impact the financial position, results of operations and cash flows of the Company.

NOTE 8 — LONG-TERM DEBT

Debt Issuances

In 2010, the Company has issued the following long-term debt:

(in Millions)

Month Issued		Type				Interest Rate				Maturity				Amount
August		Senior Notes(1)					3.45	%			2020			$	300
September		Senior Notes(1)(2)					4.89	%			2020				300
														$	600

Debt Retirements and Redemptions

In 2010, the following debt has been retired:

(in Millions)

Month Retired		Type				Interest Rate				Maturity				Amount
September		Senior Notes(1)					6.125	%			2010			$	500

NOTE 9 — SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS

In August 2010, Detroit Edison entered into an amended and restated $212 million two-year unsecured revolving credit agreement and a new $63 million three-year unsecured revolving credit agreement with a syndicate of 23 banks that may be used for general corporate borrowings, but are intended to provide liquidity support for the Company’s commercial paper program. No one bank provides more than 8.25% of the commitment in any facility. Borrowings under the facilities are available at prevailing short-term interest rates.

The above agreements require the Company to maintain a total funded debt to capitalization ratio of no more than 0.65 to 1. In the agreements, “total funded debt” means all indebtedness of the Company and its consolidated subsidiaries, including capital lease obligations, hedge agreements and guarantees of third parties’ debt, but excluding contingent obligations and nonrecourse and junior subordinated debt. “Capitalization” means the sum of (a) total funded debt plus (b) “consolidated net worth,” which is equal to consolidated total stockholders’ equity of the Company and its consolidated subsidiaries (excluding pension effects under certain FASB statements), as determined in accordance with accounting principles generally accepted in the United States of America. At September 30, 2010, the total funded debt to total capitalization ratio for Detroit Edison was 0.51 to 1. Should we have delinquent obligations of at least $50 million to any creditor, such delinquency will be considered a default under our credit agreements.

NOTE 10 — COMMITMENTS AND CONTINGENCIES

Environmental

Air — Detroit Edison is subject to the EPA ozone transport and acid rain regulations that limit power plant emissions of sulfur dioxide and nitrogen oxides. Since 2005, the EPA and the State of Michigan have issued additional emission reduction regulations relating to ozone, fine particulate, regional haze and mercury air pollution. The new rules will lead to additional controls on fossil-fueled power plants to reduce nitrogen oxide, sulfur dioxide and mercury emissions. To comply with these requirements, Detroit Edison has spent approximately $1.5 billion through 2009. The Company estimates Detroit Edison will make capital expenditures of approximately $70 million in 2010 and up to $2.2 billion of additional capital expenditures through 2019 based on current regulations. Further, additional rulemakings are expected over the next few years which could require additional controls for sulfur dioxide, nitrogen oxides and hazardous air pollutants. It is not possible to quantify the impact of those expected rulemakings at this time.

In July 2009, DTE Energy received a Notice of Violation/Finding of Violation (NOV/FOV) from the EPA alleging, among other things, that five of Detroit Edison’s power plants violated New Source Performance standards, Prevention of Significant Deterioration requirements, and Title V operating permit requirements under the Clean Air Act. In June 2010, the EPA issued a NOV/FOV making similar allegations related to a recent project and outage at Unit 2 of the Monroe Power Plant.

On August 5, 2010, the United States Department of Justice, at the request of the EPA, brought a civil suit in the U.S. District Court for the Eastern District of Michigan against DTE Energy and Detroit Edison, related to the June 2010 NOV/FOV and the outage work performed at Unit 2 of the Monroe Power Plant, but not relating to the July 2009 NOV/FOV. Among other relief, the EPA is requesting the court to require Detroit Edison to install and operate the best available control technology at Unit 2 of the Monroe Power Plant. Further, the EPA is requesting the court to issue a preliminary injunction to require Detroit Edison to (i) begin the process of obtaining the necessary permits for the Monroe Unit 2 modification and (ii) offset the pollution from Monroe Unit 2 through emissions reductions from Detroit Edison’s fleet of coal-fired power plants until the new control equipment is operating.

Detroit Edison believes that the plants identified by the EPA, including Unit 2 of the Monroe Power Plant, have complied with all applicable federal environmental regulations. Depending upon the outcome of discussions with the EPA regarding the NOV/FOV and the result of the civil action, Detroit Edison could also be required to install additional pollution control equipment at some or all of the power plants in question, consider early retirement of facilities where control equipment is not economical, engage in supplemental environmental programs, and/or pay fines. Detroit Edison cannot predict the financial impact or outcome of this matter, or the timing of its resolution.

Water — In response to an EPA regulation, Detroit Edison is required to examine alternatives for reducing the environmental impacts of the cooling water intake structures at several of its facilities. Based on the results of completed studies and expected future studies, Detroit Edison may be required to install additional control technologies to reduce the impacts of the water intakes. Initially, it was estimated that Detroit Edison could incur up to approximately $55 million in additional capital expenditures over the four to six years subsequent to 2008 to comply with these requirements. However, a January 2007 circuit court decision remanded back to the EPA several provisions of the federal regulation that has resulted in a delay in compliance dates. The decision also raised the possibility that Detroit Edison may have to install cooling towers at some facilities at a cost substantially greater than was initially estimated for other mitigative technologies. In 2008, the Supreme Court agreed to review the remanded cost-benefit analysis provision of the rule and in April 2009 upheld the EPA’s use of this provision in determining best technology available for reducing environmental impacts. Concurrently, the EPA continues to develop a revised rule, a draft of which is expected to be published in the first quarter of 2011, with a final rule scheduled for mid-2012. The EPA has also issued an information collection request to begin a review of steam electric effluent guidelines. It is not possible at this time to quantify the impacts of these developing requirements.

Contaminated Sites — Prior to the construction of major interstate natural gas pipelines, gas for heating and other uses was manufactured locally from processes involving coal, coke or oil. The facilities, which produced gas, have

been designated as manufactured gas plant (MGP) sites. Detroit Edison conducted remedial investigations at contaminated sites, including three former MGP sites. The investigations have revealed contamination related to the by-products of gas manufacturing at each site. In addition to the MGP sites, the Company is also in the process of cleaning up other contaminated sites, including the area surrounding an ash landfill, electrical distribution substations, and underground and aboveground storage tank locations. The findings of these investigations indicated that the estimated cost to remediate these sites is expected to be incurred over the next several years. At September 30, 2010 and December 31, 2009, the Company had $9 million accrued for remediation. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites and affect the Company’s financial position and cash flows.

Landfill — Detroit Edison owns and operates a permitted engineered ash storage facility at the Monroe Power Plant to dispose of fly ash from the coal fired power plant. Detroit Edison performed an engineering analysis in 2009 and identified the need for embankment side slope repairs and reconstruction.

The EPA has published proposed rules to regulate coal ash under the authority of the Resources Conservation and Recovery Act (RCRA). The proposed rule published on June 21, 2010 contains two primary regulatory options to regulate coal ash residue. The EPA is currently considering either designating coal ash as a “Hazardous Waste” as defined by RCRA or regulating coal ash as non-hazardous waste under RCRA. Agencies and legislatures have urged the EPA to regulate coal ash as a non-hazardous waste. If the EPA designates coal ash as a hazardous waste, the agency could apply some, or all, of the disposal and reuse standards that have been applied to other existing hazardous wastes to disposal and reuse of coal ash. Some of the regulatory actions currently being contemplated could have a significant impact on our operations and financial position and the rates we charge our customers. It is not possible to quantify the impact of those expected rulemakings at this time.

Nuclear Operations

Property Insurance

Detroit Edison maintains property insurance policies specifically for the Fermi 2 plant. These policies cover such items as replacement power and property damage. The Nuclear Electric Insurance Limited (NEIL) is the primary supplier of the insurance policies.

Detroit Edison maintains a policy for extra expenses, including replacement power costs necessitated by Fermi 2’s unavailability due to an insured event. This policy has a 12-week waiting period and provides an aggregate $490 million of coverage over a three-year period.

Detroit Edison has $500 million in primary coverage and $2.25 billion of excess coverage for stabilization, decontamination, debris removal, repair and/or replacement of property and decommissioning. The combined coverage limit for total property damage is $2.75 billion.

In 2007, the Terrorism Risk Insurance Extension Act of 2005 (TRIA) was extended through December 31, 2014. A major change in the extension is the inclusion of “domestic” acts of terrorism in the definition of covered or “certified” acts. For multiple terrorism losses caused by acts of terrorism not covered under the TRIA occurring within one year after the first loss from terrorism, the NEIL policies would make available to all insured entities up to $3.2 billion, plus any amounts recovered from reinsurance, government indemnity, or other sources to cover losses.

Under the NEIL policies, Detroit Edison could be liable for maximum assessments of up to approximately $28 million per event if the loss associated with any one event at any nuclear plant in the United States should exceed the accumulated funds available to NEIL.

Public Liability Insurance

As of January 1, 2010, as required by federal law, Detroit Edison maintains $375 million of public liability insurance for a nuclear incident. For liabilities arising from a terrorist act outside the scope of TRIA, the policy is subject to one industry aggregate limit of $300 million. Further, under the Price-Anderson Amendments Act of 2005, deferred premium charges up to $117.5 million could be levied against each licensed nuclear facility, but not more than $17.5 million per year per facility. Thus, deferred premium charges could be levied against all owners of licensed nuclear facilities in the event of a nuclear incident at any of these facilities.

Nuclear Fuel Disposal Costs

In accordance with the Federal Nuclear Waste Policy Act of 1982, Detroit Edison has a contract with the U.S. Department of Energy (DOE) for the future storage and disposal of spent nuclear fuel from Fermi 2. Detroit Edison is obligated to pay the DOE a fee of 1 mill per kWh of Fermi 2 electricity generated and sold. The fee is a component of nuclear fuel expense. Delays have occurred in the DOE’s program for the acceptance and disposal of spent nuclear fuel at a permanent repository and the proposed fiscal year 2011 federal budget recommends termination of funding for completion of the government’s long-term storage facility. Detroit Edison is a party in the litigation against the DOE for both past and future costs associated with the DOE’s failure to accept spent nuclear fuel under the timetable set forth in the Federal Nuclear Waste Policy Act of 1982. Detroit Edison currently employs a spent nuclear fuel storage strategy utilizing a fuel pool. In 2011, the Company expects to begin loading spent nuclear fuel into an on-site dry cask storage facility which is expected to provide sufficient storage capability for the life of the plant as defined by the original operating license. Issues relating to long-term waste disposal policy and to the disposition of funds contributed by Detroit Edison ratepayers to the federal waste fund await future governmental action.

Guarantees

In certain limited circumstances, the Company enters into contractual guarantees. The Company may guarantee another entity’s obligation in the event it fails to perform. The Company may provide guarantees in certain indemnification agreements. Finally, the Company may provide indirect guarantees for the indebtedness of others.

Detroit Edison has guaranteed a bank term loan of $11 million related to the sale of its steam heating business to Thermal Ventures II, L.P. At September 30, 2010, the Company has reserves for the entire amount of the bank loan guarantee.

Labor Contracts

There are several bargaining units for the Company’s approximately 2,800 represented employees. In the 2010 third quarter, a new three-year agreement was ratified covering approximately 2,400 represented employees. The remaining represented employees are under a contract that expires in August 2012.

Purchase Commitments

As of September 30, 2010, the Company was party to numerous long-term purchase commitments relating to a variety of goods and services required for the Company’s business. These agreements primarily consist of fuel supply commitments and energy contracts. The Company estimates that these commitments will be approximately $1.5 billion from 2010 through 2025. The Company also estimates that 2010 capital expenditures will be approximately $900 million. The Company has made certain commitments in connection with expected capital expenditures.

Bankruptcies

The Company sells electricity to numerous companies operating in the steel, automotive, energy, retail, financial and other industries. Certain of its customers have filed for bankruptcy protection under Chapter 11 of the U.S.

Bankruptcy Code. The Company regularly reviews contingent matters relating to these customers and its sale contracts and records provisions for amounts considered at risk of probable loss. The Company believes its accrued amounts are adequate for probable loss. The final resolution of these matters may have a material effect on its consolidated financial statements.

Other Contingencies

The Company is involved in certain other legal, regulatory, administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning claims arising in the ordinary course of business. These proceedings include certain contract disputes, additional environmental reviews and investigations, audits, inquiries from various regulators, and pending judicial matters. The Company cannot predict the final disposition of such proceedings. The Company regularly reviews legal matters and records provisions for claims that it can estimate and are considered probable of loss. The resolution of these pending proceedings is not expected to have a material effect on the Company’s operations or financial statements in the periods they are resolved.

See Notes 5 and 7 for a discussion of contingencies related to derivatives and regulatory matters.

NOTE 11 — RETIREMENT BENEFITS AND TRUSTEED ASSETS

The following details the components of net periodic benefit costs for pension benefits and other postretirement benefits:

										Other Postretirement
		Pension Benefits								Benefits
(in Millions)		2010				2009				2010				2009
Three Months Ended September 30
Service cost		$	13			$	11			$	12			$	11
Interest cost			38				39				24				26
Expected return on plan assets			(43	)			(41	)			(13	)			(10	)
Amortization of:
Net actuarial loss			18				9				10				13
Prior service cost			1				2				—				—
Net transition liability			—				—				—				1
Net periodic benefit cost		$	27			$	20			$	33			$	41
Nine Months Ended September 30
Service cost		$	39			$	32			$	35			$	34
Interest cost			115				119				71				77
Expected return on plan assets			(129	)			(124	)			(39	)			(31	)
Amortization of:
Net actuarial loss			53				29				29				39
Prior service cost			4				5				1				1
Net transition liability			—				—				2				2
Net periodic benefit cost		$	82			$	61			$	99			$	122

Pension and Other Postretirement Contributions

The Company contributed $200 million to its pension plans during the first quarter of 2010, including a contribution of DTE Energy stock of $100 million (consisting of approximately 2.2 million shares valued at an average price of $44.97 per share).

The Company expects to contribute $90 million to its postretirement medical and life insurance benefit plans during 2010. No contributions were made to the plans for the three and nine month periods ended September 30, 2010.

Healthcare Legislation

In March 2010, the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA) were enacted into law (collectively, the “Act”). The Act is a comprehensive health care reform bill. A provision of the PPACA repeals the current rule permitting deduction of the portion of the drug coverage expense that is offset by the Medicare Part D subsidy, effective for taxable years beginning after December 31, 2012.

Detroit Edison’s retiree healthcare plan includes the provision of postretirement prescription drug coverage (“coverage”) which is included in the calculation of the recorded other postemployment benefit (OPEB) obligation. Because the Company’s coverage meets certain criteria, Detroit Edison is eligible to receive the Medicare Part D subsidy. With the enactment of the Act, the subsidy will continue to not be subject to tax, but an equal amount of prescription drug coverage expenditures will not be deductible. Income tax accounting rules require the impact of a change in tax law be recognized in continuing operations in the Consolidated Statements of Operations in the period that the tax law change is enacted.

This change in tax law required a remeasurement of the Deferred Tax Asset related to the OPEB obligation and the Deferred Tax Liability related to the OPEB Regulatory Asset. The net impact of the remeasurement is $18 million and has been deferred as a Regulatory Asset as the traditional rate setting process allows for the recovery of income tax costs.

NOTE 12 — SUPPLEMENTAL CASH FLOW INFORMATION

The following provides detail of the changes in assets and liabilities that are reported in the Consolidated Statements of Cash Flows:

		Nine Months Ended
		September 30
(in Millions)		2010				2009
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
Accounts receivable, net		$	(8	)		$	22
Inventories			(38	)			(11	)
Accrued pension liability — affiliates			(179	)			(65	)
Accounts payable			34				(52	)
Income taxes payable			119				46
Postretirement obligation — affiliates			14				25
Other assets			(47	)			40
Other liabilities			18				107
		$	(87	)		$	112

Part I — Item 2.

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

Detroit Edison has experienced increased electric sales in 2010 driven by higher residential and interconnection sales, partially offset by decreases in industrial and commercial sales. The residential sales increase is a result of warmer summer weather. Industrial sales are lower due to reduced demand from customers in the automotive and steel industries and their related suppliers and other ancillary businesses. Commercial sales continue to be lower due primarily to customers participating in the electric Customer Choice program. The impact of customers participating in the electric Customer Choice program is mitigated by the Choice Incentive Mechanism (CIM). The CIM is an over/under recovery mechanism which measures non-fuel revenues that are lost or gained as a result of fluctuations in electric Customer Choice sales. If annual electric Customer Choice sales exceed the baseline amount from Detroit Edison’s most recent rate case, 90 percent of its lost non-fuel revenues associated with sales above that level may be recovered from bundled customers. If annual electric Customer Choice sales decrease below the baseline, the Company must refund 100 percent of its increase in non-fuel revenues associated with sales below that level to bundled customers.

We have an RDM that is designed to minimize the impact on revenues of changes in average customer usage of electricity. The January 2010 MPSC order in Detroit Edison’s 2009 rate case provided for, among other items, the implementation of a pilot RDM effective February 1, 2010. The RDM enables Detroit Edison to recover or refund the change in revenue resulting from the difference between actual average sales per customer compared to the base level of average sales per customer established in the MPSC order. The RDM for Detroit Edison addresses changes in customer usage due to general economic conditions and conservation, but does not shield Detroit Edison from the impacts of lost customers. In addition, the pilot RDM materially shields Detroit Edison from the impact of weather on customer usage. The RDM is subject to review by the MPSC after the initial one-year pilot program.

As discussed further below, economic conditions impact our ability to collect amounts due from our customers and drive increased thefts of electricity. In the face of these economic conditions, we are continuing our efforts to identify opportunities to improve cash flow through working capital initiatives and maintaining flexibility in the timing and extent of our long-term capital projects. We are actively managing our cash, capital expenditures, cost structure and liquidity to maintain our financial strength. See the Capital Resources and Liquidity section that follows for further discussion of our liquidity outlook.

We continue to experience high levels of past due receivables primarily attributable to economic conditions. Our service territory continues to experience high levels of unemployment, underemployment and low income households, home foreclosures and a lack of adequate levels of assistance for low-income customers. We have taken actions to manage the level of past due receivables, including customer assistance forums, contracting with collection agencies, working with Michigan officials and others to increase the share of low-income funding allocated to our customers, and increasing customer disconnections. As a result of actions taken to manage the level of past due receivables, arrears were reduced in 2010. Detroit Edison has an uncollectible expense tracking mechanism that enables it to recover or refund 80 percent of the difference between the actual uncollectible expense for each year and the $66 million level reflected in base rates. The uncollectible tracking mechanism requires an annual reconciliation proceeding before the MPSC.

Results of Operations

Detroit Edison’s results for the three and nine months ended September 30, 2010 as compared to the comparable 2009 periods are discussed below:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in Millions)		2010				2009				2010				2009
Operating Revenues		$	1,444			$	1,289			$	3,798			$	3,515
Fuel and Purchased Power			484				400				1,217				1,112
Gross Margin			960				889				2,581				2,403
Operation and Maintenance			325				306				960				928
Depreciation and Amortization			230				222				644				607
Taxes Other Than Income			54				43				180				147
Asset Gains, Net			—				—				(1	)			—
Operating Income			351				318				798				721
Other (Income) and Deductions			78				75				236				220
Income Tax Provision			108				94				219				195
Net Income		$	165			$	149			$	343			$	306
Operating Income as a Percentage of Operating Revenues			24	%			25	%			21	%			21	%

Gross margin increased $71 million in the third quarter of 2010 and $178 million in the nine-month period ended September 30, 2010. Revenues associated with certain tracking mechanisms and surcharges are offset by related expenses elsewhere in the Statement of Operations. The following table details changes in various gross margin components relative to the comparable prior period:

(in Millions)		Three Months				Nine Months
Weather, net of RDM			50				50
Restoration and line clearance tracker			29				27
Customer Choice, net of CIM			(9	)			(17	)
2010 rate order, surcharges and other			1				118
Increase in gross margin		$	71			$	178

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in Thousands of MWh)		2010				2009				2010				2009
Electric Sales
Residential			5,034				4,107				12,301				10,992
Commercial			4,730				4,806				12,660				13,764
Industrial			2,357				2,562				7,438				7,584
Other			798				799				2,398				2,399
			12,919				12,274				34,797				34,739
Interconnections sales (1)			1,270				1,644				4,031				3,868
Total Electric Sales			14,189				13,918				38,828				38,607
Electric Deliveries
Retail and Wholesale			12,919				12,274				34,797				34,739
Electric Customer Choice, including self generators (2)			1,289				337				3,675				998
Total Electric Sales and Deliveries			14,208				12,611				38,472				35,737