UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2004

Commission file number 1-11607

DTE ENERGY COMPANY

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 [X]     No [   ]    

At March 31, 2004, 173,443,352 shares of DTE Energy’s Common Stock, substantially all held by non-affiliates, were outstanding.

DTE Energy Company

Quarterly Report on Form 10-Q
Quarter Ended March 31, 2004

Table of Contents

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Definitions

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Forward-Looking Statements

Certain information presented herein includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties that may cause actual future results to differ materially from those contemplated, projected, estimated or budgeted in such forward-looking statements. There are many factors that may impact forward-looking statements including, but not limited to, the following:

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the effects of weather and other natural phenomena on operations and sales to, and purchases by, customers;

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economic climate and growth or decline in the geographic areas where we do business;

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environmental issues, laws and regulations, and the cost of remediation and compliance associated therewith;

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nuclear regulations and operations associated with nuclear facilities;

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the ability to utilize Section 29 tax credits and/or sell interests in facilities producing such credits;

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implementation of electric and gas Customer Choice programs;

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impact of electric and gas utility restructuring in Michigan, including legislative amendments;

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employee relations and the impact of collective bargaining agreements;

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unplanned outages;

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access to capital markets and capital market conditions and the results of other financing efforts which can be affected by credit agency ratings;

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the timing and extent of changes in interest rates;

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the level of borrowings;

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changes in the cost and availability of coal and other raw materials, purchased power and natural gas;

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effects of competition;

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impacts of FERC, MPSC, NRC and other applicable governmental proceedings and regulations;

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contributions to earnings by non-regulated businesses;

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changes in federal, state and local tax laws and their interpretations, including the code, regulations, rulings, court proceedings and audits;

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the ability to recover costs through rate increases;

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the availability, cost, coverage and terms of insurance;

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the cost of protecting assets against or damage due to terrorism;

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changes in accounting standards and financial reporting regulations;

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

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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 the Company.

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.

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DTE ENERGY COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

DTE Energy is a diversified energy company with approximately $7 billion in revenues in 2003, and approximately $21 billion in assets at December 31, 2003. We are the parent company of Detroit Edison and MichCon, regulated electric and gas utilities engaged primarily in the business of providing electricity and natural gas sales and distribution services throughout southeastern Michigan. Additionally, we have numerous non-regulated subsidiaries involved in energy-related businesses predominantly in the Midwest and eastern U.S.

The majority of our earnings are derived from utility operations and our synthetic fuel business, which qualifies for Section 29 tax credits. Earnings in the 2004 first quarter were $186 million, or $1.09 per diluted share, up from 2003 first quarter earnings of $155 million, or $.92 per diluted share. Earnings from continuing operations in the 2004 first quarter were $193 million, or $1.13 per diluted share, compared to 2003 first quarter earnings from continuing operations of $108 million, or $.64 per diluted share. The significant improvement in income from continuing operations reflects increased contributions from both our regulated and non-regulated businesses. Our 2004 first quarter financial performance was primarily influenced by:

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Lost revenues from electric Customer Choice penetration;

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An interim electric rate order reducing earnings;

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Lower synfuel related earnings;

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Nonrecurring gain; and

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Effective tax rate adjustments

Electric Customer Choice Program — The electric Customer Choice program, as originally structured in Michigan, anticipated an eventual transition to a totally deregulated and competitive environment where customers would be charged market-based rates for their electricity. However, Detroit Edison’s rates continue to be regulated by the Michigan Public Service Commission (MPSC), while alternative suppliers can charge market-based rates. This continued regulation has hindered Detroit Edison’s ability to retain customers. In addition, the MPSC has maintained regulated rates for certain groups of customers that exceed the cost of service to those customers. This has resulted in high levels of participation in the electric Customer Choice program by those customers that have the highest price relative to their cost of service. As a result, we continue to lose sales. Lost margins and electricity volumes associated with electric Customer Choice were approximately $50 million and 2,142 gigawatthours (gWh) in the first quarter of 2004, compared with approximately $20 million and 1,284 gWh in the comparable 2003 quarter. Partially offsetting the impact of lost margins, we recorded regulatory assets of $25 million in the 2004 first quarter and $6 million in the 2003 first quarter representing an estimate of stranded costs that we believe are recoverable under Michigan legislation. 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 could increase or decrease. The actual amount of stranded costs to be recovered will ultimately be determined by the MPSC.

In February 2004, the MPSC authorized an interim rate increase that recognized a revenue deficiency for lost Choice revenues, and eliminated transition credits and implemented a transition charge for Choice customers. The interim order is expected to reduce the volume of Choice sales. Assuming no further changes to the current electric Customer Choice program, we expect to continue losing margins and volumes throughout 2004 and in future periods. Although the interim order has stabilized the number of customers migrating to the Customer Choice program, current regulation continues to hinder our ability to

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retain customers. Detroit Edison addressed numerous issues with the electric Customer Choice program, including stranded costs, in its June 2003 rate filing and is also pursuing a legislative solution. 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 5 for a further discussion of the electric Customer Choice program and the MPSC interim rate order.

Electric Interim Rate Order — Under Michigan legislation enacted in 2000, electric rates for all residential, commercial and industrial customers were frozen through 2003. The legislation also prevented rate increases or 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, these 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. As previously discussed, 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 reduced 2004 first quarter revenues by $17 million. Additionally, because of these factors, the interim order is only designed to increase revenues by $51 million in 2004 (Note 5). A final order is expected in the third quarter of 2004.

*

Estimate based on forecasted sales.

Synthetic Fuel Operations — We operate nine synthetic fuel production plants at eight locations. Interests in five of the nine plants have been sold since 2002. Synfuel facilities chemically change coal, including waste and marginal coal, into a synthetic fuel as determined under applicable Internal Revenue Service rules. Section 29 of the Internal Revenue Code provides tax credits for the production and sale of solid synthetic fuel produced from coal. Synfuel-related tax credits expire in December 2007.

Operating expenses associated with synfuel projects exceed operating revenues and therefore generate operating losses, which are more than offset by the resulting Section 29 tax credits. In order to utilize

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qualifying Section 29 tax credits, a taxpayer must have sufficient taxable income, or the tax credits are carried forward to future years. We have not had sufficient taxable income to fully utilize tax credits earned in prior periods. As of December 2003, we had nearly $500 million in tax credit carry-forwards. In order to optimize income and cash flow from our synfuel operations, we intend to sell our interests in all remaining synfuel plants during 2004. We will only produce synfuel from plants in which we have sold interests. When we sell an interest in a synfuel facility, we recognize the gain from such sale under the installment method of accounting. Gain recognition is dependent on the synfuel production qualifying for Section 29 tax credits. In substance, we are receiving installment gains and reduced operating losses in exchange for tax credits. Sales of interests in synfuel projects allow us to accelerate cash flow while maintaining a stable income base.

Earnings from our synfuel operations totaled $40 million in the first quarter of 2004, compared to $54 million in the same 2003 period. The 26% decline in earnings is due to lower synfuel production reflecting our strategy of only producing synfuel from the five plants in which we have sold interests.

Nonrecurring gain — During the 2004 first quarter, we modified our future purchase commitments under a transportation agreement and terminated a related long-term gas exchange (storage) agreement with an interstate pipeline company. The agreements were at rates that were not reflective of current market conditions and had been fair valued under generally accepted accounting principles. The fair value net liability totaling approximately $75 million as of December 31, 2003, was being amortized to income through 2016, the life of the related agreements. As a result of the contract modification and termination, we recorded an adjustment to the net liability increasing earnings in the 2004 first quarter by $48 million, net of taxes.

Effective tax rate adjustments — Under generally accepted accounting principles, we are required to adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. This quarterly adjustment at the DTE Energy corporate segment had the effect of increasing income tax expense by $6 million in the 2004 first quarter, and decreasing income tax benefit by $45 million in the 2003 first quarter. Fluctuations in estimated annual earnings and Section 29 tax credits were the primary variables that resulted in the larger adjustments. Annual results are not affected by the quarterly effective tax rate adjustments.

Outlook — We are facing many challenges in 2004 to maintain earnings and cash flow levels while protecting a strong balance sheet. Our financial performance over the short term will be dependent on preserving healthy electric and gas utilities, monetizing our synthetic fuel projects and continuing to grow our non-regulated businesses in a prudent manner.

Remedying the structural issues of the electric Customer Choice program in Michigan is a key priority for the Company. These issues must be corrected to prevent the continued migration of customers to the Choice program based on false market signals. The potential implications to remaining customers over the longer term could be significantly higher electricity rates.

The timing and ultimate amount of final rate relief granted in the current electric and gas rate cases will affect customer service levels and our financial performance. Cash flow and earnings from our utilities will remain under pressure until the regulatory uncertainties are resolved. However, we remain focused on good cash management and a healthy balance sheet.

We are aggressively pursuing the sales of interests in all of our remaining synthetic fuel projects in 2004. These sales, in addition to previously completed sales, are expected to provide a $200 million to $300 million boost to our cash flow in 2004. The availability of qualified buyers and the timing of these sales will impact this financial outcome. In addition, we are continuing development activities intended to grow our non-regulated businesses in areas such as waste coal technologies and on-site energy project development. Due to the regulatory uncertainties over the short term, we remain disciplined and conservative in our pursuit of incremental growth investments.

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RESULTS OF OPERATIONS

Our earnings for the 2004 first quarter were $186 million, or $1.09 per diluted share, compared to earnings of $155 million, or $.92 per diluted share, for the 2003 first quarter. As subsequently discussed, the comparability of earnings was impacted by our two discontinued businesses, Southern Missouri Gas Company and International Transmission Company, and the adoption of two new accounting rules in the 2003 first quarter. Excluding discontinued operations and the cumulative effect of accounting changes, our earnings from continuing operations for the 2004 first quarter were $193 million, or $1.13 per diluted share, compared to earnings of $108 million, or $.64 per diluted share, for the 2003 first quarter. As subsequently discussed, earnings were affected by lost margins under the Customer Choice program, an electric interim rate order, lower synfuel production, non-recurring gains and effective tax rate adjustments. The following sections provide a detailed discussion of our segments, operating performance and future outlook.

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Segment Performance & Outlook — We operate our businesses through three strategic business units (Energy Resources, Energy Distribution and Energy Gas). Each business unit has regulated and non-regulated operations. The balance of our business consists of Corporate & Other. Based on this structure, we set strategic goals, allocate resources and evaluate performance. This results in the following reportable segments.

(1)

Includes Corporate & Other.

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ENERGY RESOURCES

Power Generation — Regulated

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 $10 million during the 2004 first quarter. As subsequently discussed, these results primarily reflect reduced gross margins, partially offset by the recording of higher regulatory deferrals, which lowered depreciation and amortization expenses.

Gross margins declined $36 million due primarily to lost margins from retail customers choosing to purchase power from alternative suppliers under the electric Customer Choice program. Detroit Edison lost 16% of retail sales in the 2004 first quarter and 10% of such sales in the 2003 first quarter as a result of Customer Choice penetration. The loss of retail sales resulted in lower purchase power requirements, as well as excess power capacity which was sold in the wholesale market. Under the interim order previously discussed, revenues from selling excess power reduces the level of recoverable fuel and purchased power costs and therefore do not impact margins. The interim rate order also lowered PSCR revenues, partially offset by increased base rate and transition charge revenues, resulting in a decrease in margins in the 2004 first quarter. Weather in the 2004 first quarter was milder than the 2003 quarter resulting in decreased margins from retail customers of $7 million. Operating revenues and fuel and purchased power costs decreased in the 2004 first quarter compared to the 2003 first quarter reflecting a $2.37 per megawatt hour (MWh) (14%) decline in fuel and purchased power costs which is a pass-through with the reinstatement of the PSCR. 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, which is driven by lost sales under the electric Customer Choice program.

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(1)

Represents fuel costs associated with power plants.

(2)

The average purchased power amounts include hedging activities.

Depreciation and amortization expense decreased $23 million and is attributable to the income effect of recording regulatory assets totaling $35 million in the 2004 first quarter, compared to $19 million in the 2003 first quarter. The regulatory assets represent the deferral of net stranded costs ($25 million in the 2004 first quarter and $6 million in the 2003 first quarter) and other costs we believe are recoverable under Public Act 141. Partially offsetting the decline was increased depreciation associated with generation-related capital expenditures.

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 to continue losing retail sales and margins in future years under 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. We have addressed the issue of stranded costs in our June 2003 electric rate filing and are also pursuing a 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 5 — Regulatory Matters.

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Energy Services

Energy Services is comprised of Coal-Based Fuels, On-Site Energy Projects and non-regulated Power Generation. Coal-Based Fuels operations include producing synthetic fuel from nine synfuel plants and producing coke from three coke batteries. The production of synthetic fuel from all of our synfuel plants and the production of coke from one of our coke batteries generate tax credits under Section 29 of the Internal Revenue Code. On-Site Energy Projects include pulverized coal injection, power generation, steam production, chilled water production, wastewater treatment and compressed air supply. Power Generation owns and operates four gas-fired peaking electric generating plants, manages and operates two additional gas-fired power plants under contract. Additionally, Power Generation develops, operates and potentially acquires gas and coal-fired generation.

Factors impacting income: Energy Services earnings declined $13 million during the 2004 first quarter. As subsequently discussed, these results primarily reflect a decline in synfuel production and related Section 29 tax credits.

Operating revenues increased $33 million primarily reflecting higher coal sales and coke prices, partially offset by lower synfuel sales. Synfuel revenues primarily reflect our decision to only produce synfuel from five of our nine plants. As previously discussed, our strategy is to only produce synfuel from plants in which we have sold interests in order to optimize earnings and cash flow. Additionally, reduced synfuel revenues reflect lower production at one facility due to a fire in the coal mine that has caused a temporary shutdown of the mine and curtailed coal feedstock to the facility. To meet our obligations to provide coal under long-term contracts with synfuel customers, we acquired coal that was resold to such customers. The coal was sold at prices significantly higher than synfuel prices resulting in an increase in total revenues. Revenues from coke sales were higher in the 2004 first quarter reflecting higher market prices for coke due to limited supplies in the U.S.

Operation and maintenance expense decreased $43 million reflecting costs associated with the lower levels of synfuel production. Additionally, the decline is attributable to the recognition of gains in 2004 from the sale of interests in synfuel projects.

Other income and deductions increased $15 million due to our minority partners’ share of operating losses associated with synfuel operations. The sale of interests in our synfuel facilities during 2003 and 2004 resulted in allocating a larger percentage of such losses to our minority partners.

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Income taxes increased $118 million reflecting higher taxable earnings and a decline in the level of Section 29 tax credits from the production and sale of synfuel. Tax credits from our synfuel operations decreased due to the sale of interests in synfuel facilities and lower synfuel production. The level of tax credits has been adjusted at Corporate & Other in order that the DTE Energy consolidated income tax expense during the quarter reflects the estimated calendar year effective rate.

Outlook — A significant portion of Energy Services’ earnings are derived from Section 29 tax credits. Synfuel-related tax credits expire in December 2007. We are aggressively selling interests in all of our synfuel plants. The level of tax credits generated in future periods will be affected by the timing and number of synfuel projects sold. Sales of interests in synfuel projects allow us to accelerate cash flow while maintaining a stable income base. As previously discussed, lower synfuel production in the 2004 first quarter was also due to a fire in a coal mine that temporarily shutdown the mine and curtailed coal feedstock to the facility. We expect the mine to reopen in mid-2004. During this interim shutdown period, we expect to purchase coal feedstock from third parties and resume production at the synfuel facility in which we own a 5% interest.

Although earnings from our synfuel projects were down $14 million or 26% in the 2004 first quarter, due to the mine fire and our decision to only produce synfuel from the five plants in which we have sold interests, we expect a significant increase in synfuel earnings over the balance of the year. The increase in earnings will be directly affected by the sale of interests in our remaining synfuel projects and resuming production at the synfuel location that was affected by the mine fire.

Energy Services will continue leveraging its extensive energy-related operating experience and project management capability to develop and grow the on-site energy business. We continue to explore growth opportunities that will not require significant initial capital investment. We are currently negotiating an on-site energy business arrangement with a major manufacturer in the Midwest.

Power prices over the past few years have been low due, in part, to the current excess capacity in the generation industry. Additionally, the generation tolling agreement that was settled in 2003 was at above market rates. As a result of these factors, we expect lower revenues and earnings from our power generation business in 2004. We expect this reduction to be offset by increased coke sales due to higher market prices for coke.

Energy Marketing & Trading

Energy Marketing & Trading consists of the electric and gas marketing and trading operations of DTE Energy Trading and CoEnergy. DTE Energy Trading focuses on physical power marketing and structured transactions, as well as the enhancement of returns from DTE Energy’s power plants. CoEnergy focuses on physical gas marketing and the optimization of DTE Energy’s owned and contracted natural gas pipelines and gas storage capacity. To this end, both companies enter into derivative financial instruments as part of their marketing and hedging strategies, including forwards, futures, swaps and option contracts. The derivative financial instruments are accounted for under the mark-to-market method, which results in earnings recognition of unrealized gains and losses from changes in the fair value of the derivatives.

Factors impacting income: Energy Marketing & Trading’s earnings increased $13 million in the 2004 first quarter, consisting of a $30 million improvement at CoEnergy, partially offset by a $17 million reduction at DTE Energy Trading.

DTE Energy Trading’s earnings decline was due mainly to margins associated with short-term physical trading and origination activities. Margins in the 2003 first quarter were favorably impacted by increased realized and unrealized gains due to greater pricing variability and reduced liquidity.

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(1)

Realized margins include the settlement of all derivative and non-derivative contracts, as well as the amortization of deferred assets and liabilities.

(2)

Unrealized margins include mark-to-market gains and losses on derivative contracts, net of gains and losses reclassified to realized. See “Fair Value of Contracts” section that follows.

(3)

Excludes the impact on margins from the termination of a transportation agreement with an interstate pipeline company (Note 4).

CoEnergy’s earnings reflect a one-time gain from modifying a future purchase commitment under a transportation agreement and terminating a related long-term gas exchange (storage) agreement with an interstate pipeline company (Note 4). Under the gas exchange agreement, we received gas from the customer during the summer injection period and redelivered the gas during the winter heating season.

Additionally, CoEnergy’s margins were affected by a reduction in realized margins from storage activities compared to the 2003 first quarter which benefited from a lower average cost of inventory and significantly higher gas prices. This decline was partially offset by higher unrealized gains in 2004 on contracts that are required to be marked-to-market while underlying asset positions are not, as subsequently discussed.

Outlook — Energy Marketing & Trading will seek to manage its business in a manner consistent, with and complementary to, the growth of our other business segments. Gas storage and transportation capacity enhances our ability to provide reliable and custom-tailored bundled services to large-volume end users and utilities. This capacity, coupled with the synergies from DTE Energy’s other businesses, positions the segment to add value.

Significant portions of the Energy Marketing & Trading portfolio are economically hedged, and include financial instruments, gas inventory, as well as owned and contracted natural gas pipelines and storage assets. These financial instruments are deemed derivatives, whereas the gas inventory, pipelines and storage assets are not considered derivatives for accounting purposes. As a result, Energy Marketing & Trading will experience earnings volatility as derivatives are marked-to-market without revaluing the underlying non-derivative contracts and assets.

Non-regulated — Other

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Our other non-regulated businesses include Coal Services and Biomass units. Coal Services provides fuel, transportation and rail equipment management services. We specialize in minimizing power production costs and maximizing reliability of supply for energy-intensive customers. Additionally, we participate in coal trading and coal-to-power tolling transactions, as well as sales of excess emissions credits. Coal Services has formed a subsidiary, DTE PepTec Inc., which uses proprietary technology to produce high quality coal products from fine coal slurries typically discarded from coal mining operations. Biomass develops, owns and operates landfill recovery systems in the U.S. Gas produced from these landfill sites qualifies for Section 29 tax credits.

Factors impacting income: Earnings decreased $2 million reflecting operating costs associated with ramping up the DTE PepTec business. Our first waste coal facility in Ohio became operational in late 2003.

Outlook — We expect to continue to grow our Coal Services and Biomass units. We believe a substantial market exists for the use of DTE PepTec Inc. technology and plan to aggressively pursue expansion opportunities. We expect to open three to five operating sites in 2004.

ENERGY DISTRIBUTION

Power Distribution — Regulated

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 $30 million during the 2004 first quarter. As subsequently discussed, these results primarily reflect an increase in operating revenues, a non-recurring loss recorded in the 2003 first quarter and a decrease in operation and maintenance expenses.

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Operating revenues increased $15 million primarily due to residential sales growth and the increase in base rates resulting from the interim order. These improvements were partially offset by the effects of milder weather.

Operation and maintenance expense decreased $20 million 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. The 2004 first quarter also benefited from our Company-wide cost savings initiative and lower transmission expenses, partially offset 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.

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 5 — Regulatory Matters.

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Non-regulated

Non-regulated Energy Distribution operations include DTE Energy Technologies, which markets and distributes distributed generation products, provides application engineering, and monitors and manages generation system operations.

Factors impacting income: Non-regulated losses decreased $1 million due to increased sales and cost reductions.

Outlook — DTE Energy Technologies expects to continue participating in the emerging distributed generation market and to increase our focus on our proprietary pre-engineered and packaged continuous generation products.

ENERGY GAS

Gas Distribution — Regulated

Gas Distribution operations include gas distribution services primarily provided by MichCon, our gas utility that purchases, stores, distributes and sells natural gas to 1.2 million residential, commercial and industrial customers located throughout Michigan.

Factors impacting income: Gas Distribution’s earnings improved $11 million. As subsequently discussed, results primarily reflect an increase in gross margins, partially offset by increased operation and maintenance expenses.

Gross margins increased $21 million reflecting a $26.5 million reserve recorded in the 2003 first quarter for the potential disallowance in gas costs pursuant to an MPSC order in MichCon’s 2002 GCR plan case (Note 5). Gross margins in the 2004 first quarter were also affected by lower sales due to warmer winter weather in 2004 compared to the prior year. Operating revenues and cost of gas increased significantly in the 2004 first quarter compared to the 2003 first quarter reflecting higher gas prices which are recoverable from customers through the gas cost recovery (GCR) mechanism.

Operation and maintenance expense increased $18 million primarily due to higher reserves for uncollectable accounts receivables and increased pension and postretirement costs. The increase in

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uncollectable accounts expense reflects higher past due amounts attributable to an increase in gas prices and economic conditions. Partially offsetting these increases were benefits from Company-wide cost savings initiative.

Income taxes in 2004 were favorably affected by a lower effective tax rate in the 2004 first quarter as compared to the 2003 first quarter which was driven by lower estimated annual earnings.

Outlook — Operating results are expected to vary as a result of external factors such as regulatory proceedings, weather and changes in economic conditions. Higher gas prices and economic conditions 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. Energy assistance programs funded by the federal government and the State of Michigan, remain critical to MichCon’s ability to control uncollectable accounts receivable expenses. We are working with the State of Michigan and others to increase the share of funding allocated to our customers to be representative of the number of low-income individuals in our service territory.

As a result of the continued increase in operating costs, MichCon filed a rate case in September 2003 to increase rates by $194 million annually to address future operating costs and other issues. See Note 5 — Regulatory Matters.

Non-regulated

Non-regulated operations include the Gas Production business and the Gas Storage, Pipelines & Processing business. Our Gas Production business produces gas from proven reserves in northern Michigan and sells the gas to the Energy Marketing & Trading segment. Gas Storage, Pipelines & Processing has a partnership interest in an interstate transmission pipeline, seven carbon dioxide processing facilities and a natural gas storage field, as well as lease rights to another natural gas storage field. The assets of these businesses are well integrated with other DTE Energy entities.

Factors impacting income: Earnings decreased $4 million reflecting one time gains recorded in the 2003 first quarter from selling certain gas properties and the loss of earnings from the 2003 sale of our 16% equity interest in the Portland Natural Gas Transmission System.

Outlook — We expect to further develop our gas production properties in northern Michigan and our pipelines, processing and storage assets to support other DTE Energy businesses. Additionally, we expect to continue to invest in opportunities in the coal bed methane business to leverage our production, coal and low-cost operating capabilities.

CORPORATE & OTHER

Corporate & Other includes the administrative and general expenses of various corporate support functions such as accounting, legal and information technology. As these functions essentially support the entire company, they are allocated to the various segments based on services utilized and therefore can vary from year to year. Additionally, Corporate & Other holds certain non-regulated debt and investments, including assets held for sale and in emerging energy technologies.

Factors impacting income: Corporate & Other’s losses decreased $59 million in the 2004 first quarter. Results reflect adjustments in both years to normalize the effective income tax rate. There was a $6 million unfavorable adjustment in the 2004 first quarter compared to a $45 million unfavorable adjustment in the 2003 first quarter. The income tax provisions of the segments are determined on a stand-alone basis. Corporate & Other records necessary adjustments in order that the consolidated income tax expense during the quarter reflects the estimated calendar year effective rate. The 2003 first quarter earnings were also affected by a $15 million cash contribution to the DTE Energy Foundation,

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funded with proceeds received from the sale of ITC (Note 3). Corporate and Other also benefited from lower financing costs in the 2004 first quarter.

DISCONTINUED OPERATIONS

Southern Missouri Gas Company (SMGC) - We own SMGC, a public utility engaged in the distribution, transmission and sale of natural gas in southern Missouri. In the first quarter of 2004, management approved the marketing of SMGC for sale. Under generally accepted accounting principles, we classified SMGC as a discontinued operation in the 2004 first quarter and recognized a net of tax impairment loss of approximately $7 million representing the write-down to fair value of the assets of SMGC, less costs to sell, and the write-off of allocated goodwill.

International Transmission Company (ITC) - In February 2003, we sold ITC, our electric transmission business, to affiliates of Kohlberg Kravis Roberts & Co. and Trimaran Capital Partners, LLC. Accordingly, we classified ITC as a discontinued operation. The sale generated a preliminary net of tax gain in the 2003 first quarter of $69 million. The gain was subsequently adjusted during 2003 to $63 million, which was net of transaction costs and the portion of the gain that was refundable to customers. We had income from discontinued operations of $5 million in the first quarter of 2003.

See Note 3 for further discussion.

CUMULATIVE EFFECT OF ACCOUNTING CHANGES

As required by generally accepted accounting principles, on January 1, 2003, we adopted new accounting rules for asset retirement obligations and energy trading activities. The cumulative effect of adopting these new accounting rules reduced 2003 first quarter earnings by $27 million. See Note 2 for further discussion.

CAPITAL RESOURCES AND LIQUIDITY

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Operating Activities

We use cash derived from operating activities to maintain and expand our electric and gas utilities and to grow our non-regulated businesses. In addition, we use cash from operations to retire long-term debt and pay dividends. A majority of the company’s operating cash flow is provided by the two regulated utilities, which are significantly influenced by factors such as weather, electric Customer Choice sales loss, regulatory deferrals, regulatory outcomes, economic conditions and operating costs. Our non-regulated businesses also provide sources of cash flow to the enterprise and reflect a range of operating profiles. These vary from our synthetic fuel business, which we believe will provide substantial cash flow through 2008, to new start-ups, such as our coal bed methane or waste coal recovery businesses, which are growing and will require modest investments beyond their cash generation capabilities.

Although DTE Energy’s overall earnings were up $31 million or 20% in the 2004 first quarter, cash from operations totaling $280 million, was up $139 million or 99% from the comparable 2003 period. The operating cash flow comparison reflects an increase of $207 million in net income, after adjusting for non-cash items (depreciation, depletion, amortization, deferred taxes and gains), partially offset by an increase in working capital and other requirements. A portion of this improvement is attributable to the change in our strategy to only produce synfuel from plants in which we have sold interests. As previously discussed, synfuel projects generate operating losses, which are more than offset by tax credits that we have been unable to fully utilize, and therefore negatively affect operating cash flow. Cash used for working capital purposes includes 2003 estimated income tax payments made in the 2004 first quarter reflecting a different payment pattern of taxes in 2004 compared to 2003. The effect on working capital of the higher tax payments was mitigated by improvements in accounts receivables relative to the prior year. The working capital comparison was also affected by a $222 million cash contribution to our pension plan in the 2003 first quarter.

Outlook — We expect cash flow from operations to increase over the long-term, but to remain relatively the same for the full year 2004 as 2003. Cash flow improvements from partial year utility rate increases and the sale of interests in our synfuel projects, will be offset by higher cash requirements, primarily within our gas storage business. We are continuing our efforts that began in 2003 to identify opportunities to improve cash flow through a cash improvement task force.

Investing Activities

Cash inflows associated with investing activities are partially generated from the sale of assets and are utilized to invest in our utilities and non-regulated businesses. In any given year, we will look to harvest cash from under performing or non-strategic assets. Capital spending within the utility business is primarily to maintain our generation and distribution infrastructure and comply with environmental regulations. Capital spending within our non-regulated businesses is for ongoing maintenance, expansion and growth.

Net cash relating to investing activities declined $637 million in the 2004 first quarter as compared to the same 2003 period primarily due to the sale of ITC in February 2003 and cash contractually designated for debt service. Also affecting the comparison was lower regulated and non-regulated plant expenditures in the 2004 first quarter.

Outlook — Our strategic direction anticipates base level capital investments and expenditures for existing businesses in 2004, ranging from $750 million to $1 billion. Our utilities plan to spend higher amounts of capital, but actual spending levels will be matched to available cash flows. Until our two rate cases are resolved, we intend to hold utility capital spending at 2003 levels.

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Capital spending for general corporate purposes will increase in 2004 primarily as a result of DTE2, our Company-wide initiative to improve existing processes and to implement new core information systems including, finance, human resources, supply chain and work management. Non-regulated capital spending will approximate $100 million to $150 million in 2004. Capital spending for growth of existing or new businesses will be constrained in 2004 due to the pending rate cases, electric Customer Choice issues and rating agency concerns about these businesses.

We believe that we will have sufficient capital resources, both internal and external, to fund anticipated capital requirements.

Financing Activities

Our strategy is to have a targeted debt portfolio blend as to fixed and variable interest rates and maturity. We continually evaluate our leverage targets to ensure that they are consistent with our objective to have a strong investment grade debt rating. We have completed a number of refinancings with the effect of extending the average maturity of our long-term debt and strengthening our balance sheet. The extension of the average maturity was accomplished at interest rates that lowered our debt costs.

Net cash used for financing activities decreased $505 million during the 2004 first quarter, compared to the same 2003 period, due to lower issuances of new debt, and fewer redemptions of long- and short-term debt.

We also contributed $170 million of DTE Energy common stock to our pension plan in the first quarter of 2004.

Outlook — Our goal is to maintain a healthy balance sheet. We intend on maintaining a high investment grade credit rating and maintaining leverage in the 50% to 55% range (excluding certain debt, principally securitization debt).

We expect to continue issuing new DTE Energy shares for our dividend reinvestment plan, generating approximately $50 million annually. We believe this is a cost-effective means of raising new equity.

Debt maturing in 2004 totals approximately $500 million. In addition, there are outstanding debt instruments that are likely to be economic to redeem and refund with new debt. Later in 2004, we expect to continue taking advantage of historically low long-term interest rates and issue new securities with a longer life than those maturing or called. In the meantime, we are issuing commercial paper to meet our cash requirements and are currently arranging an additional credit facility of approximately $350 million with a two-year maturity. This new facility will complement our existing $1.3 billion revolving credit facilities that support our use of letters of credit and the issuance of commercial paper.

NEW ACCOUNTING PRONOUNCEMENTS

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

FAIR VALUE OF CONTRACTS

The following disclosures are voluntary and have been developed through efforts of the Committee of Chief Risk Officers (CCRO), a committee of chief risk officers from companies active in both physical and financial energy trading and marketing. We believe the disclosures provide enhanced transparency of the activities and position of our Energy Trading & Marketing segment.

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Roll-Forward of Mark-to-Market Energy Contract Net Assets

The following tables provide details on changes in our mark-to-market (MTM) net asset or (liability) position during the first quarter of 2004.

(1)

“Proprietary Trading” represents derivative activity transacted with the intent of capturing profits on forward price movements.

(2)

“Structured Contracts” represent derivative activity transacted with the intent to capture profits by originating substantially hedged positions with wholesale energy marketers, utilities, retail aggregators and alternative energy suppliers. Although transactions are generally executed with a buyer and seller simultaneously, some positions remain open until a suitable offsetting transaction can be executed.

(3)

“Owned Assets” represent derivative activity associated with assets owned by DTE Energy, including forward sales of gas production and trades associated with owned transportation and storage capacity. Derivatives are generally executed with the intent of locking in and optimizing profits without creating additional risk.

Maturity of Fair Value of MTM Energy Contract Net Assets

We fully reserve all unrealized gains and losses related to periods beyond the liquid trading time frame. Our intent is to recognize MTM activity only when pricing data is obtained from active quotes and published indexes.

The table below shows the maturity of the MTM positions of our energy contracts.

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Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

DTE Energy has commodity price risk arising from market price fluctuations in conjunction with the anticipated purchase of electricity to meet its obligations during periods of peak demand. We also are exposed to the risk of market price fluctuations on gas sale and purchase contracts, gas production and gas inventories. To limit our exposure to commodity price fluctuations, we have entered into a series of electricity and gas futures, forwards, option and swap contracts.

Interest Rate Risk

DTE Energy is subject to interest rate risk in connection with the issuance of debt and preferred securities. In order to manage interest costs, we use treasury locks and interest rate swap agreements. Our exposure to interest rate risk arises primarily from changes in U.S. Treasury rates, commercial paper rates and London Inter-Bank Offered Rates (LIBOR).

Foreign Currency Risk

DTE Energy has foreign currency exchange risk arising from market price fluctuations associated with fixed priced contracts. These contracts are denominated in Canadian dollars and are primarily for the purchase and sale of power as well as for long-term transportation capacity. To limit our exposure to foreign currency fluctuations, we have entered into a series of currency forward contracts through 2008.

Credit Risk

Bankruptcies

We purchase and sell electricity, gas, coal and coke from and to numerous companies operating in the steel, automotive, energy, retail and other industries. A number of customers and suppliers have filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. We closely monitor these bankruptcies, regularly review contingent matters relating to these bankruptcies and record provisions for amounts considered probable of loss. We believe our accrued amounts are adequate for probable losses. The final resolution of these matters is not expected to have a material effect on our financial statements in the period they are resolved.

Summary of Sensitivity Analysis

We performed a sensitivity analysis calculating the impact of changes in fair values utilizing applicable forward commodity rates if they occurred at March 31, 2004:

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CONTROLS AND PROCEDURES

(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 March 31, 2004, 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 timely reported in accordance with Commission’s rules and forms.

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DTE ENERGY COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

See Notes to Consolidated Financial Statements (Unaudited)

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DTE ENERGY COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

See Notes to Consolidated Financial Statements (Unaudited)

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DTE Energy Company
Consolidated Statement of Financial Position

See Notes to Consolidated Financial Statements (Unaudited)

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DTE Energy Company
Consolidated Statement of Cash Flows (Unaudited)