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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 Quarter Ended September 30, 2002

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 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      

At September 30, 2002, 167,461,430 shares of DTE Energy’s Common Stock, substantially all held by non-affiliates, were outstanding.

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DTE Energy Company

Quarterly Report on Form 10-Q
Quarter Ended September 30, 2002

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DEFINITIONS

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DTE Energy Company
Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Forward-Looking Statements

Certain information presented herein includes forward-looking statements. 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. Factors that may impact forward-looking statements include, but are not limited to, interest rates, the use of derivative instruments and their related accounting treatment, access to the capital markets and capital market conditions, the level of borrowings, the effects of weather and other natural phenomena on operations, actual sales, the capital intensive nature of our business, economic climate and growth in the geographic areas in which the Company does business, the timing and extent of changes in commodity prices for electricity and gas, unscheduled generation outages, maintenance or repairs, conditions of capital markets including the effect on our pension plan investments, nuclear power plant performance, the nature, availability and projected profitability of potential projects and other investments available to us, changes in the cost of fuel and purchased power due to the suspension of the power supply cost recovery mechanism, the effects of increased competition from other energy suppliers and the implementation of electric and gas Customer Choice programs, as well as alternative forms of energy, the implementation of electric utility restructuring in Michigan (which involves pending regulatory and related judicial proceedings and actual and possible reductions in authorized rates and earnings), the effects of changes in governmental policies including income taxes, environmental compliance and nuclear requirements and the ability to recover these costs through rate increases, the impact of FERC and MPSC proceedings and existing and proposed regulations, the contributions to earnings by our non-regulated businesses, changes in the cost of natural gas, the effects of new accounting pronouncements and the timing of the accretive effects of DTE Energy’s merger with MCN Energy.

RESULTS OF OPERATIONS

DTE Energy reported earnings of $161 million or $.96 per diluted share for the 2002 third quarter, compared to earnings of $63 million or $.38 per diluted share for the 2001 third quarter. For the 2002 nine-month period, net income was $429 million or $2.62 per diluted share, compared to $114 million or $.76 per diluted share for the same period in 2001. The comparability of earnings was affected by merger and restructuring charges and goodwill amortization associated with the MCN Energy merger that reduced after-tax earnings for the 2001 third quarter by $21 million or $.13 per diluted share and the 2001 nine-month period by $190 million or $1.26 per diluted share. Excluding merger and restructuring charges and goodwill amortization, earnings increased $77 million and $125 million in the 2002 third quarter and nine-month period, respectively, compared to the corresponding 2001 periods. The significant improvements reflect increased contributions from both the regulated and non-regulated businesses and a favorable adjustment in the effective income tax rate. The issuance of 29 million shares of DTE Energy common stock in conjunction with the May 2001 MCN Energy merger, net of 10.5 million shares repurchased in 2001, and the issuance of 6.325 million shares in June 2002 also impacted the earnings per share comparison.

New reporting alignment — Beginning in 2002, DTE Energy realigned its internal and external financial reporting structure into three strategic business units (Energy Resources, Energy Distribution and Energy Gas). Each business unit has regulated and non-regulated operations. Based on this structure, management sets strategic goals, allocates resources and evaluates performance. The realignment resulted in the following nine reportable segments:

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Energy Resources

•		Regulated operations include the power generation services of Detroit Edison, the Company’s electric utility. Electricity is generated from Detroit Edison’s numerous fossil plants or its nuclear plant and sold throughout Southeastern Michigan to residential, commercial, industrial and wholesale customers.
•		Non-regulated

	•		Energy Services is comprised of various businesses that develop and manage energy-related assets and services. Such projects include coke production, synfuels production, independent power plants, on-site energy projects and cogeneration facilities. The economic viability of synfuels projects is tied to their generation of alternate fuels tax credits.
	•		Wholesale Marketing & Trading consists of the electric and gas marketing and trading operations of DTE Energy Trading Company and the natural gas marketing and trading operations of DTE Enterprises, which was acquired as part of the MCN Energy merger. Wholesale Marketing & Trading enters into forwards, futures, swaps and option contracts as part of its trading strategy. Wholesale Marketing & Trading focuses on physical power marketing and structured transactions, as well as the enhancement of returns from its power plant, pipeline and storage assets.
	•		Other non-regulated operations consist of businesses involved in coal services and landfill gas recovery along with an independent generating unit.

Energy Distribution

•		Regulated operations include the electric distribution services of Detroit Edison, and the electric transmission services of the International Transmission Company (ITC). Energy Distribution distributes electricity generated by Energy Resources and alternative electric suppliers to Detroit Edison’s 2.1 million residential, commercial and industrial customers. The transmission assets of ITC are operated by the Midwest Independent System Operator, a regional transmission operator.
•		Non-regulated operations primarily consist of DTE Energy Technologies, businesses that market and distribute a broad portfolio of distributed generation products, provide application engineering, and monitor and manage system operations.

Energy Gas

•		Regulated operations include gas distribution services primarily provided by MichCon, the Company’s gas utility that purchases, stores and distributes natural gas throughout Michigan to 1.2 million residential, commercial and industrial customers.
•		Non-regulated operations include the exploration and production of gas and the gathering, processing and storing of gas. Certain pipeline and storage assets are used to support the Wholesale Marketing & Trading segment.

Corporate & Other includes administrative and general expenses, and interest costs of DTE Energy corporate that have not been allocated to the regulated and non-regulated businesses. Corporate & Other also includes various other non-regulated operations, including investments in new emerging energy technologies.

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Management’s Discussion and Analysis

The following tables and related discussion depict the operations of each of these segments.

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Energy Resources

Regulated earnings increased $8 million and $30 million during the 2002 third quarter and nine-month period, respectively, reflecting higher gross margins due to lower purchased power costs. The lower purchased power costs reflect favorable energy market prices in 2002. Mark to market accounting for forward and option contracts in 2001 impacted revenues and purchased power, resulting in a favorable impact on margins of $36 million in the 2001 third quarter, and an unfavorable impact on margins of $9 million in the 2001 nine-month period. Margins were also impacted by higher revenues due to greater cooling demand in the 2002 third quarter and the loss of revenues resulting from customers switching to alternative electric suppliers under the electric Customer Choice program. Revenues for the 2002 nine-month period also were reduced due to the impact of a 5% legislatively mandated, securitization based, rate reduction for commercial and industrial customers that began in April 2001. The higher gross

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margins were partially offset by increased employee benefit costs and higher operations and maintenance expenses due to planned and unplanned reliability and maintenance work done to improve the production and availability of the generation fleet. Depreciation and amortization expense decreased in the nine-month period reflecting the extension of the amortization period from seven years to 15 years for certain regulatory assets that were securitized in 2001.

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

Non-regulated earnings increased $18 million and $2 million for the 2002 third quarter and nine-month period, respectively, reflecting increased contributions from the Energy Services segment. The increase in Energy Services’ earnings is primarily attributable to greater synfuel production. Partially offsetting the improvement in the 2002 nine-month period were reduced contributions from the Wholesale Marketing & Trading segment. See Note 10 for a discussion regarding the reclassification of revenues and fuel, purchased power and gas expenses.

Outlook — Electric restructuring will continue to result in increased competition in the electric generation business. Effective January 1, 2002, the electric Customer Choice program in Michigan was expanded to allow all electric customers to choose to purchase their electricity from suppliers other than their local utility. Detroit Edison expects to lose between 5% to 8% of retail sales in 2002 and between 10% to 15% of such sales in 2003 as a result of customers choosing to participate in the electric Customer Choice program. To the extent Detroit Edison experiences net stranded costs as a result of customers switching

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to an alternative electric supplier, Michigan law allows the recovery of all amounts of such net stranded costs. Detroit Edison disagreed with the MPSC initial methodology for determining and recovering net stranded costs and has asked for rehearing, clarification and modification of the December 2001 order. In May 2002, the MPSC denied Detroit Edison’s request for rehearing and clarification on certain aspects of the order. In June 2002, Detroit Edison filed a claim of appeal of the December 2001 MPSC order with the Michigan Court of Appeals.

In May 2002, Detroit Edison filed a new net stranded cost case with the MPSC that seeks to refine the methodology approved by the MPSC in December 2001 and calculates actual net stranded costs for 2000 and 2001. The MPSC Staff and interveners submitted their net stranded cost filings in November 2002. Detroit Edison expects to record 2002 net stranded costs as a regulatory asset with the offsetting entry reducing expense in the fourth quarter of 2002. See Note 4.

Energy Distribution

Regulated earnings increased $14 million and $16 million during the 2002 third quarter and nine-month period, respectively, due primarily to higher operating revenues which were partially offset by increased operation and maintenance expenses. Operating revenues increased due primarily to higher residential sales attributable to greater cooling demand. The increased operation and maintenance expenses are attributable to heat-related maintenance expenses due to prolonged periods of above normal temperatures and the related stress placed on the distribution system, higher employee benefit costs, and expenses associated with restoring power to customers who lost service during two storms in the 2002 nine-month period.

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Management’s Discussion and Analysis

Non-regulated results declined $1 million and $3 million during the 2002 third quarter and nine-month period, respectively, due primarily to expenses associated with the establishment of new sales offices in the distributed generation business.

Outlook — Regulated electric system deliveries are expected to continue to increase for the remainder of 2002 and into 2003 due to the economic recovery. Operating results will vary as a result of various external factors such as weather, changes in economic conditions and the severity and frequency of storms. As a result of the continued restructuring of the electric industry, DTE Energy is in negotiations to sell ITC and expects to reach an agreement in the fourth quarter of 2002. The sale is expected to close in the first quarter of 2003.

Energy Gas

Regulated had a loss of $23 million for both the 2002 and 2001 third quarters, and had income of $30 million for the 2002 nine-month period compared to losses of $23 million in the comparable 2001 period. Due to the seasonal nature of the gas utility business, MichCon typically records third quarter losses. The significant improvement in the 2002 nine-month period reflects the operations of MichCon that were acquired in conjunction with the MCN Energy merger in May 2001. Accordingly, the 2001 nine-month period only includes MichCon’s operations for four months.

Non-regulated earnings were $6 million for both the 2002 and 2001 third quarter, and $20 million for the 2002 nine-month period compared to earnings of $8 million for the comparable 2001 periods. The results reflect the operations of the gas exploration and production business, and pipeline and processing activities. The non-regulated operations were also acquired in conjunction with the MCN Energy merger in May 2001, and were part of DTE Energy’s operations for only four months in the 2001 nine-month period.

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Outlook — In December 2001, the MPSC issued an order that continues the gas Customer Choice program on a permanent and expanding basis. Beginning April 1, 2002, up to 40% of customers can elect to purchase gas from suppliers other than MichCon. Beginning in April 2003, up to 60% of customers could participate and beginning April 2004, all 1.2 million of MichCon’s gas customers could choose to participate. The MPSC also approved the use of deferred accounting for the recovery of implementation costs of the gas Customer Choice program. As of September 2002, approximately 187,000 customers are participating in the gas Customer Choice program. Since MichCon continues to transport and deliver the gas to the participating customers’ premises at prices comparable to margins earned on gas sales, customers switching to other suppliers have little impact on MichCon’s earnings.

Weather is the most significant factor that will effect Energy Gas’ sales.

Corporate & Other

Corporate & Other had income of $12 million and a loss of $30 million in the 2002 third quarter and nine-month period, respectively, compared to a loss of $26 million and $45 million in the comparable 2001 periods. The changes were due primarily to a favorable adjustment in the effective income tax rate. The income tax provisions of the segments are determined on a standalone basis. Corporate & Other records necessary adjustments in order that the consolidated income tax expense during the quarter reflects the estimated calendar year 2002 effective rate.

CAPITAL RESOURCES AND LIQUIDITY

Operating Activities

Net cash from operating activities increased $88 million during the 2002 nine-month period as compared to the same 2001 period. The increase reflects an $83 million improvement in net income, after adjusting for non-cash items (depreciation, depletion and amortization, and merger and restructuring charges), and a $5 million improvement in working capital and other requirements. The working capital requirements reflect a significant decline in accounts payable balances in 2001, to more normalized levels, offset by an increase in gas inventories, electric customer account receivable balances and taxes paid. Gas inventories reflect the seasonal requirements in the latter half of the year of the gas business where cash is used to finance

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increases in gas storage balances. Electric receivables reflect the seasonality of the electric utility industry where receivable balances were driven higher by the hot 2002 third quarter weather. Additionally, cash flow was negatively impacted by the under-recovery of gas costs totaling $18 million, as part of the GCR mechanism implemented in January 2002, where MichCon is allowed to recover its prudently incurred gas costs. Any remaining balance at year-end will be trued-up as part of 2002’s GCR reconciliation process.

Investing Activities

Net cash used for investing activities decreased $1.42 billion during the 2002 nine-month period as compared to the same 2001 period. The decrease is primarily due to the acquisition of MCN Energy in the 2001 nine-month period and a decrease in regulated and non-regulated plant and equipment expenditures.

Financing Activities

Net cash from financing activities decreased $1.71 billion during the 2002 nine-month period as compared to the same 2001 period. The decrease is primarily due to the issuance of $1.75 billion of securitization bonds in March 2001 and the issuance of $1.35 billion of long-term debt to finance the cash consideration portion of the acquisition of MCN Energy.

In April 2002, DTE Energy issued $200 million of 6.65% senior notes due 2009. The proceeds were used to retire MCN Energy Enterprises Remarketed Securities that had an aggregate principal amount of $100 million, and to reduce short-term borrowings.

In June 2002, DTE Energy issued 6.9 million equity security units at $25 per unit. An equity security unit consists of a stock purchase contract and a senior note of DTE Energy. DTE Energy used the net proceeds of $166.9 million from this issuance for general corporate purposes, including the repayment of short-term borrowings.

In June 2002, DTE Energy also issued 6.325 million shares of common stock at $43.25 per share, grossing $273.6 million. Net proceeds from the common stock offering were $265 million and are recorded in the accompanying consolidated statement of shareholders’ equity.

In October 2002, DTE Energy, Detroit Edison and MichCon entered into separate revolving credit facilities with a syndicate of banks totaling $1.2 billion. See Note 7.

Also in October 2002, Detroit Edison issued $450 million of senior notes collateralized by its General and Refunding Mortgage Bonds.

Outlook — DTE Energy, Detroit Edison and MichCon have effective shelf registrations with the SEC that allow for the issuance of up to a combined amount of $1.9 billion of debt and equity securities.

Detroit Edison expects to refinance approximately $90 million and issue approximately $40 million of tax exempt revenue bonds in the fourth quarter of 2002.

DTE Energy expects capital investments and expenditures in 2002 totaling approximately $950 million to $1 billion, of which approximately $200 million will be in the non-regulated businesses and the remaining balance will be in the regulated electric and gas operations.

The proposed level of investments in future years is expected to be financed primarily with internally generated funds, including proceeds received from the sale of non-strategic assets. DTE Energy will continue to evaluate its portfolio of assets and investments. The Company will evaluate divesting of assets and investments that do not meet certain return criteria or are not consistent with its strategic direction to maximize shareholder value.

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Management’s Discussion and Analysis

The Company’s capitalization objective is to maintain its credit ratings through a strong balance sheet. It is management’s opinion that DTE Energy and its subsidiaries will have sufficient capital resources, both internal and external, to meet anticipated capital requirements.

PENSION AND POSTRETIREMENT COSTS

The Company’s costs of providing pension and postretirement benefits are dependent upon a number of factors, such as the rates of return on plan assets, the discount rate and the rate of increase in health care costs. The market value of plan assets has been affected by sharp declines in the equity market since 2000. As a result, at December 31, 2002, the Company could be required to recognize an additional minimum pension liability as prescribed by SFAS No. 87 “Employers’ Accounting for Pensions” and SFAS No. 132 “Employers’ Disclosures about Pensions and Postretirement Benefits.” The offset to any liability would be recorded as a reduction in shareholders’ equity, net of tax, or as a regulatory asset. The additional minimum pension liability and related accounting entries would be reversed on the balance sheet in future periods if the fair value of plan assets exceeds the accumulated pension benefit obligations. The additional minimum pension liability recorded, if any, will depend upon actual asset returns and interest rates in 2002, but could exceed $500 million pre-tax ($325 million after tax). The recording of any minimum pension liability would not affect net income or cash flow in 2002. Pension and postretirement costs and pension cash funding requirements could increase in future years without a substantial recovery in the equity markets. It is estimated that the increase in 2003 pension and postretirement costs could range from $90 million-$140 million, pretax, depending on actual plan asset returns, the discount rate and other actuarial assumptions that will not be determined until December 31, 2002. The Company will initiate cost saving strategies to significantly offset the earnings impact of higher pension and postretirement costs.

ENVIRONMENTAL MATTERS

EPA ozone transport regulations and new air quality standards relating to ozone and particulate air pollution will impact the Company. Detroit Edison has spent approximately $409 million through September 2002 and estimates that it will incur an additional $400 to $450 million of future capital expenditures over the next five years to comply.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued new accounting pronouncements concerning business combinations, goodwill and other intangible assets, asset retirement obligations, impairment or disposal of long-lived assets and energy trading contracts. See Note 10 for a discussion of the Company’s evaluation of the adoption of these new accounting pronouncements.

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FAIR VALUE OF CONTRACTS

The following table reflects the maturity and sources of the net fair value gain (loss) of contracts at September 30, 2002: