UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the Quarterly Period ended September 30, 2009

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 (Check one):

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, 2009

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 Shareholders’ 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			26
Part II — Other Information
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 6. Exhibits			28
Signature			29
EX-12.35
EX-31.51
EX-31.52
EX-32.51
EX-32.52

Definitions

ASC		Accounting Standards Codification
Customer Choice		Statewide initiatives giving customers in Michigan the option to choose alternative suppliers for electricity.
Detroit Edison		The Detroit Edison Company (a direct wholly owned subsidiary of DTE Energy Company) and subsidiary companies
DTE Energy		DTE Energy Company, the parent of Detroit Edison and directly or indirectly the parent company of numerous non-utility subsidiaries
EPA		United States Environmental Protection Agency
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FSP		FASB Staff Position
FTRs		Financial Transmission Rights
MDEQ		Michigan Department of Environmental Quality
MISO		Midwest Independent System Operator, a Regional Transmission Organization
MPSC		Michigan Public Service Commission
NRC		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 expenses.
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.
SFAS		Statement of Financial Accounting Standards
Units of Measurement
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:

	•		the length and severity of ongoing economic decline resulting in lower 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;
	•		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;
	•		potential for continued loss on investments, including nuclear decommissioning and benefit plan assets and the related increases in future expense and contributions;
	•		the timing and extent of changes in interest rates;
	•		the level of borrowings;
	•		the availability, cost, coverage and terms of insurance and stability of insurance providers;
	•		the effects of weather and other natural phenomena on operations and sales to customers, and purchases from suppliers;
	•		economic climate and population growth or decline in the geographic areas where we do business;
	•		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, and a carbon tax or cap and trade structure;
	•		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;
	•		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)		2009				2008
ASSETS
Current Assets
Cash and cash equivalents		$	69			$	30
Restricted cash			24				84
Accounts receivable (less allowance for doubtful accounts of $125 and $121, respectively)
Customer			709				709
Affiliates			1				5
Other			10				34
Inventories
Fuel			174				170
Materials and supplies			175				169
Notes receivable
Affiliates			169				41
Other			4				3
Prepaid property taxes			92				43
Other			46				52
			1,473				1,340
Investments
Nuclear decommissioning trust funds			791				685
Other			94				99
			885				784
Property
Property, plant and equipment			15,335				14,977
Accumulated depreciation			(6,058	)			(5,828	)
			9,277				9,149
Other Assets
Regulatory assets			3,255				3,456
Securitized regulatory assets			905				1,001
Intangible assets			9				19
Notes receivable
Affiliates			20				—
Other			—				3
Other			112				90
			4,301				4,569
Total Assets		$	15,936			$	15,842

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)		2009				2008
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Accounts payable — affiliates		$	55			$	103
Accounts payable — other			241				346
Accrued interest			88				80
Accrued vacation			48				58
Accrued power supply cost recovery revenue			63				27
Income taxes payable			83				39
Short-term borrowings — other			—				75
Current portion of long-term debt, including capital leases			160				153
Other			173				197
			911				1,078
Long-Term Debt (net of current portion)
Mortgage bonds, notes and other			4,079				4,091
Securitization bonds			793				932
Capital lease obligations			28				33
			4,900				5,056
Other Liabilities
Deferred income taxes			1,867				1,894
Regulatory liabilities			630				593
Asset retirement obligations			1,269				1,205
Unamortized investment tax credit			78				85
Nuclear decommissioning			131				114
Accrued pension liability — affiliates			912				978
Accrued postretirement liability — affiliates			1,101				1,075
Other			247				208
			6,235				6,152
Commitments and Contingencies (Notes 4 and 8)
Shareholder’s Equity
Common stock, $10 par value, 400,000,000 shares authorized, and 138,632,324 shares issued and outstanding			3,196				2,946
Retained earnings			706				622
Accumulated other comprehensive income			(12	)			(12	)
			3,890				3,556
Total Liabilities and Shareholder’s Equity		$	15,936			$	15,842

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)		2009				2008				2009				2008
Operating Revenues		$	1,300			$	1,440			$	3,526			$	3,766
Operating Expenses
Fuel and purchased power			400				586				1,112				1,403
Operation and maintenance			306				292				928				1,019
Depreciation and amortization			222				193				607				563
Taxes other than income			43				54				147				176
Asset (gains) and reserves, net			—				(1	)			—				(1	)
			971				1,124				2,794				3,160
Operating Income			329				316				732				606
Other (Income) and Deductions
Interest expense			82				73				245				220
Interest income			—				(1	)			(1	)			(3	)
Other income			(12	)			(16	)			(29	)			(39	)
Other expenses			5				11				5				34
			75				67				220				212
Income Before Income Taxes			254				249				512				394
Income Tax Provision			98				90				199				143
Net Income		$	156			$	159			$	313			$	251

See Notes to Consolidated Financial Statements (Unaudited)

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

		Nine Months Ended
		September 30
(in Millions)		2009				2008
Operating Activities
Net income		$	313			$	251
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			607				563
Deferred income taxes			(2	)			70
Asset (gains) and reserves, net			—				(1	)
Changes in assets and liabilities, exclusive of changes shown separately			105				(33	)
Net cash from operating activities			1,023				850
Investing Activities
Plant and equipment expenditures			(640	)			(651	)
Restricted cash for debt redemptions			60				101
Proceeds from sale of nuclear decommissioning trust fund assets			237				180
Investment in nuclear decommissioning trust funds			(251	)			(202	)
Other investments			(176	)			(33	)
Net cash used for investing activities			(770	)			(605	)
Financing Activities
Issuance of long-term debt			65				566
Redemption of long-term debt			(213	)			(166	)
Repurchase of long-term debt			—				(238	)
Short-term borrowings, net			(82	)			(301	)
Capital contribution by parent company			250				175
Dividends on common stock			(228	)			(228	)
Other			(6	)			(7	)
Net cash used for financing activities			(214	)			(199	)
Net Increase (Decrease) in Cash and Cash Equivalents			39				46
Cash and Cash Equivalents at Beginning of Period			30				47
Cash and Cash Equivalents at End of Period		$	69			$	93

See Notes to Consolidated Financial Statements (Unaudited)

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				Income				Total
Balance, December 31, 2008			138,632			$	1,386			$	1,560			$	622			$	(12	)		$	3,556
Net income			—				—				—				313				—				313
Capital contribution by parent company			—				—				250				—				—				250
Dividends declared on common stock			—				—				—				(228	)			—				(228	)
Net change in unrealized gains on investments, net of tax			—				—				—				—				(2	)			(2	)
Benefits, net of tax			—				—				—				—				2				2
Other			—				—				—				(1	)			—				(1	)
Balance, September 30, 2009			138,632			$	1,386			$	1,810			$	706			$	(12	)		$	3,890

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

(in Millions)		2009				2008
Net income		$	313			$	251
Other comprehensive income, net of tax:
Net unrealized gains on investments:
Amounts reclassified to income, net of taxes			(2	)			(1	)
Benefits, net of taxes			2				—
Comprehensive income		$	313			$	250

See Notes to Consolidated Financial Statements (Unaudited)

The Detroit Edison Company
Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 — GENERAL

These Consolidated Financial Statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the 2008 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 our 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, 2009.

Certain prior year amounts have been reclassified to reflect current year classifications.

Asset Retirement Obligations

The Company has a legal retirement obligation for the decommissioning costs for its Fermi 1 and Fermi 2 nuclear plants. The Company has conditional retirement obligations for disposal of asbestos at certain of its power plants. To a lesser extent, the Company has conditional retirement obligations at certain service centers, and disposal costs for PCB contained within transformers and circuit breakers. The Company recognizes such obligations as liabilities at fair market value when they are incurred, which generally is at the time the associated assets are placed in service. Fair value is measured using expected future cash outflows discounted at our credit-adjusted risk-free rate. The Company defers timing differences that arise in the expense recognition of legal asset retirement costs that are currently recovered in rates.

A reconciliation of the asset retirement obligations for the nine months ended September 30, 2009 follows:

(in Millions)
Asset retirement obligations at January 1, 2009		$	1,226
Accretion			60
Liabilities settled			(6	)
Revision in estimated cash flows			5
Asset retirement obligations at September 30, 2009			1,285
Less amount included in current liabilities			(16	)
		$	1,269

Approximately $1.2 billion 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 power plant.

Retirement Benefits and Trusteed Assets

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

(in Millions)		Pension Benefits								Other Postretirement Benefits
Three Months Ended September 30		2009				2008				2009				2008
Service cost		$	11			$	11			$	11			$	12
Interest cost			39				38				26				23
Expected return on plan assets			(41	)			(41	)			(10	)			(14	)
Amortization of:
Net actuarial loss			9				6				13				7
Prior service cost			2				2				—				1
Net transition liability			—				—				1				—
Net periodic benefit cost		$	20			$	16			$	41			$	29

(in Millions)		Pension Benefits								Other Postretirement Benefits
Nine Months Ended September 30		2009				2008				2009				2008
Service cost		$	32			$	34			$	34			$	36
Interest cost			119				112				77				70
Expected return on plan assets			(124	)			(123	)			(31	)			(43	)
Amortization of:
Net actuarial loss			29				19				39				21
Prior service cost			5				5				1				1
Net transition liability			—				—				2				2
Net periodic benefit cost		$	61			$	47			$	122			$	87

The Company expects to contribute up to $250 million to its pension plans during 2009. A $20 million contribution was made to the plans in the third quarter of 2009 and approximately $90 million of contributions were made to the plans in the nine-month period ended September 30, 2009.

The Company expects to contribute up to $90 million to its postretirement medical and life insurance benefit plans during 2009. No contributions were made to the plans in the first nine months of 2009.

Income Taxes

Unrecognized tax benefits at September 30, 2009 and at December 31, 2008, if recognized, would not materially impact our effective tax rate. We do not anticipate any significant changes in the unrecognized tax benefits during the next twelve months.

Stock-Based Compensation

The Company received an allocation of costs from DTE Energy associated with stock-based compensation. The allocation of stock-based compensation expense for the 2009 and 2008 third quarters was approximately $6 million and $3 million, respectively, while such allocation was $11 million and $13 million for the nine months ended September 30, 2009 and 2008, respectively.

Consolidated Statements of Cash Flows

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

		Nine Months Ended
		September 30
(in Millions)		2009				2008
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
Accounts receivable, net		$	22			$	(48	)
Inventories			(11	)			(31	)
Accrued pension liability — affiliates			(65	)			59
Accounts payable			(52	)			(46	)
Accrued PSCR refund			55				22
Income taxes payable			50				(10	)
General taxes			—				(11	)
Postretirement obligation — affiliates			25				12
Other assets			42				(14	)
Other liabilities			39				34
		$	105			$	(33	)

Subsequent Events

The Company has evaluated subsequent events through October 30, 2009, the date that these financial statements were issued.

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS

FASB Accounting Standards Codification™ (Codification)

In June 2009, the FASB voted to approve that on July 1, 2009, the Codification will become the single source of authoritative nongovernmental U.S. GAAP. The Codification is a reorganization of current GAAP into a topical format that eliminates the current GAAP hierarchy and establishes two levels of guidance — authoritative and non-authoritative. According to the FASB, all “non-grandfathered, non-SEC accounting literature” that is not included in the Codification would be considered non-authoritative. The FASB has indicated that the Codification does not change current GAAP. Instead, the proposed changes aim to (1) reduce the time and effort it takes for users to research accounting questions and (2) improve the usability of current accounting standards. The Codification is effective for interim and annual periods ending after September 15, 2009.

Fair Value Accounting

In September 2006, the FASB issued ASC 820 (SFAS No. 157, Fair Value Measurements). The standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability. Effective January 1, 2008, the Company adopted ASC 820 (SFAS No. 157). As permitted by ASC 820-10 (FSP No. 157-2), the Company elected to defer the effective date of the standard as it pertains to measurement and disclosures about the fair value of non-financial assets and liabilities made on a nonrecurring basis. The Company has adopted the recognition provisions for non-financial assets and liabilities as of January 1, 2009. See Note 3.

In April 2009, the FASB issued three FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. The FSPs are effective for interim and annual periods ending after June 15, 2009.

	•		ASC 825-10 (FSP No. 107-1 and APB No. 28-1), Interim Disclosures about Fair Value of Financial Instruments, expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107 to interim periods.
	•		ASC 820-10 (FSP No. 157-4), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which applies to all assets and liabilities, i.e., financial and nonfinancial, reemphasizes that the objective of fair value remains

			unchanged (i.e., an exit price notion). The FSP provides application guidance on measuring fair value when the volume and level of activity has significantly decreased and identifying transactions that are not orderly. The FSP also emphasizes that an entity cannot presume that an observable transaction price is not orderly even when there has been a significant decline in the volume and level of activity.
	•		ASC 320-10 (FSP No. 115-2 and SFAS No. 124-2), Recognition and Presentation of Other-Than-Temporary Impairments, is intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold.

The Company adopted these FSPs in the second quarter of 2009. The adoption of these FSPs did not have a significant impact on Detroit Edison’s consolidated financial statements.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued ASC 810-10 (SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51). This standard establishes accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The standard is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2008. This standard shall be applied prospectively as of the beginning of the fiscal year in which this standard is initially applied, except for the presentation and disclosure requirements which shall be applied retrospectively for all periods presented. The Company adopted the standard as of January 1, 2009. Adoption of ASC 810-10 (SFAS No. 160) did not have a material effect on the Company’s consolidated financial statements.

Disclosures about Derivative Instruments and Guarantees

In March 2008, the FASB issued ASC 815-10 (SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133). This standard requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815 (SFAS No. 133) and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.

The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Comparative disclosures for earlier periods at initial adoption are encouraged but not required. The Company adopted the standard effective January 1, 2009. See Note 3.

Subsequent Events

In May 2009, the FASB issued ASC 855 (SFAS No. 165, Subsequent Events). This standard provides guidance on management’s assessment of subsequent events. The new standard clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date “through the date that the financial statements are issued or are available to be issued.” Management must perform its assessment for both interim and annual financial reporting periods. The standard does not significantly change the Company’s practice for evaluating such events. ASC 855 (SFAS No. 165) is effective prospectively for interim and annual periods ending after June 15, 2009 and requires disclosure of the date subsequent events are evaluated through. The Company adopted the standard during the quarter ended June 30, 2009. See Note 1.

Transfers of Financial Assets

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB No. 140 (not yet effective nor codified). This standard amends ASC 860, (SFAS No. 140), eliminates the concept of a “qualifying special-purpose entity” (QSPE) and associated guidance and creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. SFAS No. 166 is intended to enhance

reporting in the wake of the subprime mortgage crisis and the deterioration in the global credit markets. The standard is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. Early adoption is prohibited. SFAS No. 166 must be applied prospectively to transfers of financial assets occurring on or after its effective date. The adoption of SFAS No. 166 will not have a material impact on Detroit Edison’s consolidated financial statements.

Variable Interest Entities (VIE)

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation 46(R) (not yet effective nor codified). This standard amends the consolidation guidance that applies to VIEs and affects the overall consolidation analysis under ASC 810 -10(Interpretation 46(R)). 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 will need to reconsider 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. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009. Early adoption is prohibited. The Company is currently assessing the impact of SFAS No. 167 on Detroit Edison’s consolidated financial statements.

Fair Value Measurements and Disclosures

In September and August 2009, respectively, the FASB issued Accounting Standards Update (ASU) 2009-12, Fair Value Measurements and Disclosure, and ASU 2009-05, Measuring Liabilities at Fair Value. ASU 2009-12 provides guidance for the fair value measurement of investments in certain entities that calculate the net asset value per share (or its equivalent) determined as of the reporting entity’s measurement date. Certain attributes of the investment (such as restrictions on redemption) and transaction prices from principal-to-principal or brokered transactions will not be considered in measuring the fair value of the investment. The amendments in this standard are effective for interim and annual periods ending after December 15, 2009.

ASU 2009-05 provides guidance on measuring the fair value of liabilities under ASC 820. This standard clarifies that in the absence of a quoted price in an active market for an identical liability at the measurement date, companies may apply approaches that use the quoted price of an investment in the identical liability or similar liabilities traded as assets or other valuation techniques consistent with the fair-value measurement principles in ASC 820. The standard permits fair value measurements of liabilities that are based on the price that a company would pay to transfer the liability to a new obligor. It also permits a company to measure the fair value of liabilities using an estimate of the price it would receive to enter into the liability at that date. The new standard is effective for interim and annual periods beginning after August 27, 2009 and applies to all fair-value measurements of liabilities required by GAAP. The Company is currently assessing the impact of ASU 2009-12 and ASU 2009-05 on Detroit Edison’s consolidated financial statements.

Revenue Arrangements

In September 2009, the FASB ratified Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (not yet codified). Issue 08-1 provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This standard shall be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity may elect to adopt this standard on a retrospective basis. The Company is currently assessing the impact of Issue No. 08-1 on Detroit Edison’s consolidated financial statements.

NOTE 3 — FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS AND FAIR VALUE

Financial and Other Derivative Instruments

The Company recognizes all derivatives on the Consolidated Statement of Financial Position at their fair value unless they qualify for certain scope exceptions, including 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 both the derivative and the underlying hedged exposure are recognized in earnings each period. Gains and losses from the ineffective portion of any hedge are recognized in earnings immediately.

The Company’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. Contracts the Company typically classifies as derivative instruments include power, certain coal forwards, futures, options and swaps.

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 realized. 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, 2009:

		Balance Sheet		Fair
		Location		Value
FTRs		Other current assets		$	1
Emissions		Other current liabilities			(2	)
Emissions		Other non-current liabilities			(7	)
Total derivatives not designated as hedging instrument				$	(8	)
Total derivatives:
Current				$	(1	)
Noncurrent					(7	)
Total derivatives as reported				$	(8	)

The effect of derivative instruments recoverable through the PSCR mechanism when realized on the Consolidated Statement of Financial Position for the three and nine months ended September 30, 2009 is as follows:

Three Months

Ended

Nine Months Ended

Location of Gain

Gain (Loss)

Gain (Loss)

(Loss) Recognized

Recognized in

Recognized in

in Regulatory

Regulatory Assets

Regulatory Assets

Assets / Liabilities

/ Liabilities on

/ Liabilities on

On Derivative

Derivative

Derivative

FTRs and Emissions

Regulatory Asset

$

(1

)

$

(13

)

FTRs and Emissions

Regulatory Liability

—

(3

)

Total

$

(1

)

$

(16

)

The following represents the cumulative gross volume of derivative contracts outstanding as of September 30, 2009:

Commodity		Number of Units
Emissions (Tons)			5,236
FTRs (MW)			100,338

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 is immaterial for the three and nine months ended

September 30, 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, 2009:

														Net Balance at
(in Millions)		Level 1				Level 2				Level 3				September 30, 2009
Assets:
Cash equivalents		$	50			$	—			$	—			$	50
Nuclear decommissioning trusts and other investments			558				320				—				878
Derivative assets			—				—				1				1
Total		$	608			$	320			$	1			$	929
Liabilities:
Derivative liabilities			—				(9	)			—				(9	)
Total		$	—			$	(9	)		$	—			$	(9	)
Net Assets at September 30, 2009		$	608			$	311			$	1			$	920

The following table presents the fair value reconciliation of Level 3 derivative assets and liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2009 and 2008:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in Millions)		2009				2008				2009				2008
Asset balance as of beginning of period		$	2			$	4			$	4				4
Changes in fair value recorded in income			—				(1	)			—				2
Changes in fair value recorded in regulatory assets/liabilities			(1	)			—				(2	)			—
Purchases, issuances and settlements			—				—				1				(3	)
Transfers in/out of Level 3			—				—				(2	)			—
Asset balance as of September 30		$	1			$	3			$	1			$	3
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, 2009 and 2008		$	(1	)		$	—			$	2			$	3

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.

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 trust fund investments have been established to satisfy Detroit Edison’s nuclear decommissioning obligations. The nuclear decommissioning trusts and other fund 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 on 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. For non-exchange traded fixed income securities, the trustees receive prices from 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 challenge an assigned price and 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. Other derivative contracts are valued based upon a variety of inputs including commodity market prices, interest rates, credit ratings, default rates, market-based seasonality and basis differential factors. Mathematical valuation models are used for derivatives for which external market data is not readily observable.

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.

September 30, 2009

December 31, 2008

Fair Value

Carrying Value

Fair Value

Carrying Value

Long-Term Debt

$5.3 billion

$5.0 billion

$5.0 billion

$5.2 billion

Investments in Debt and Equity Securities

The Company generally classifies investments in debt and equity securities as either trading or available-for-sale and has recorded such investments at market value with unrealized gains or losses included in earnings or in other comprehensive income or loss, respectively. Changes in the fair value of Fermi 2 nuclear decommissioning investments are recorded as adjustments to regulatory assets or liabilities, due to a recovery mechanism from

customers. The Company’s investments are reviewed for impairment each reporting period. If the assessment indicates that the impairment is other than temporary, a loss is recognized resulting in the investment being written down to its estimated fair value.

Decommissioning

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

		September 30				December 31
(in Millions)		2009				2008
Fermi 2		$	762			$	649
Fermi 1			3				3
Low level radioactive waste			26				33
Total		$	791			$	685

At September 30, 2009, investments in the nuclear decommissioning trust funds consisted of approximately 51% in publicly traded equity securities, 48% in fixed debt instruments and 1% in cash equivalents. At December 31, 2008, investments in the nuclear decommissioning trust funds consisted of approximately 42% in publicly traded equity securities, 57% in fixed income and 1% in cash equivalents. The debt securities at both September 30, 2009 and December 31, 2008 had an average maturity of approximately 5 years.

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)		2009				2008				2009				2008
Realized gains		$	9			$	7			$	28			$	18
Realized losses		$	(12	)		$	(15	)		$	(45	)		$	(31	)
Proceeds from sales of securities		$	55			$	68			$	237			$	180

Realized gains and losses from the sale of securities for the Fermi 2 and the low level radioactive waste funds are recorded to the asset retirement obligation 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, 2009
Equity securities		$	400			$	118
Debt securities			381				19
Cash and cash equivalents			10				—
		$	791			$	137
As of December 31, 2008
Equity securities		$	288			$	65
Debt securities			388				17
Cash and cash equivalents			9				—
		$	685			$	82

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 $52 million and $56 million of unrealized losses as regulatory assets at September 30, 2009 and 2008, 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 nine months ended September 30, 2009 and 2008 for Fermi 1 due to an immaterial amount remaining in the fund as a result of ongoing decommissioning activities.

Other

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

		September 30, 2009								December 31, 2008
(in Millions)		Fair Value				Carrying value				Fair Value				Carrying Value
Cash equivalents		$	47			$	47			$	98			$	98
Equity securities		$	3			$	3			$	20			$	20

As of September 30, 2009, these securities are comprised primarily of money-market and equity instruments. Additionally, gains related to trading securities held at September 30, 2009 were $6 million.

NOTE 4 — REGULATORY MATTERS

2009 Electric Rate Case Filing

Detroit Edison filed a general rate case on January 26, 2009 based on a twelve months ended June 2008 historical test year. The filing with the MPSC requested a $378 million, or 8.1 percent average increase in Detroit Edison’s annual revenues for the twelve months ended June 30, 2010 projected test year. The requested $378 million increase in revenues is required to recover the increased costs associated with environmental compliance, operation and maintenance of the Company’s electric distribution system and generation plants, customer uncollectible accounts, inflation, the capital costs of plant additions and the reduction in territory sales.

In addition, Detroit Edison’s filing made, among other requests, the following proposals:

•

Continued progress toward correcting the existing rate structure to more accurately reflect the actual cost of providing service to business customers;

•

Continued application of an adjustment mechanism to enable the Company to address the costs associated with retail electric customers migrating to and from Detroit Edison’s full service retail electric tariff service;

•

Application of an uncollectible expense true-up mechanism based on the $87 million expense level of uncollectible expenses that occurred during the 12 month period ended June 2008;

•

Continued application of the storm restoration expense recovery mechanism and modification to the line clearance expense recovery mechanism; and

•

Implementation of a revenue decoupling mechanism. Revenue decoupling is an adjustment mechanism that would provide revenues consistent with the allowed revenue requirement with a periodic adjustment for changes in sales levels.

Pursuant to an MPSC order issued May 26, 2009, Detroit Edison filed proposed tariffs on June 26, 2009 to implement $280 million of its requested annual increase on July 26, 2009. On July 16, 2009, the MPSC issued an order requiring Detroit Edison to implement the increase by applying the rate design reflected in its January 26, 2009 application. This increase will remain in place until a final order is issued by the MPSC, which is expected in January 2010. Detroit Edison recorded approximately $40 million of increased revenues in the third quarter of 2009 as a result of the self-implemented rates. If the final rate case order does not support the self-implemented rate increase, Detroit Edison must refund the difference with interest. We have assessed whether a refund will be likely in accordance with the requirements of ASC 450-20 “Loss Contingencies” and believe that it is reasonably possible, but not probable, that Detroit Edison will be required to refund some or all of its self-implemented rate increase and therefore have not recorded a refund liability as of September 30, 2009.

Renewable Energy Plan

In March 2009, Detroit Edison filed its Renewable Energy Plan with the MPSC as required under 2008 PA 295. The Renewable Energy Plan application requests authority to recover approximately $35 million of additional revenue in

2009. The proposed revenue increase is necessary in order to properly implement Detroit Edison’s 20-year renewable energy plan to address the provisions of 2008 PA 295, to deliver new, cleaner, renewable electric generation to its customers, to further diversify Detroit Edison’s and the State of Michigan’s sources of electric supply, and to address the state and national goals of increasing energy independence. An MPSC order was issued June 2, 2009 approving the renewable energy plan and customer surcharges. The Renewable Energy Plan surcharges became effective in September 2009.

Energy Optimization Plans

In March 2009, Detroit Edison filed an Energy Optimization Plan with the MPSC as required under 2008 PA 295. The Energy Optimization Plan applications are designed to help each customer class reduce their electric usage by: (1) building customer awareness of energy efficiency options and (2) offering a diverse set of programs and participation options that result in energy savings for each customer class. Detroit Edison’s Energy Optimization Plan application proposed energy optimization expenditures for the period 2009-2011 of $134 million and further requests approval of surcharges that are designed to recover these costs. An MPSC order was issued June 2, 2009 approving the Energy Optimization Plans of $117 million for Detroit Edison. The surcharges to recover these costs were implemented effective June 3, 2009. A new financial incentive proposal was filed on July 2, 2009. An MPSC order was issued September 29, 2009 approving incentive mechanisms for Detroit Edison. The mechanism allows a maximum payout of 15% of program expenditures when the utility meets or exceeds the savings target by 15%.

Power Supply Cost Recovery Proceedings

2008 Plan Year — In September 2007, Detroit Edison filed its 2008 PSCR plan case seeking approval of a levelized PSCR factor of 9.23 mills/kWh above the amount included in base rates for all PSCR customers. Also included in the filing was a request for approval of the Company’s emission compliance strategy which included pre-purchases of emission allowances as well as a request for pre-approval of a contract for capacity and energy associated with a renewable (wind) energy project. On January 31, 2008, Detroit Edison filed a revised PSCR plan case seeking approval of a levelized PSCR factor of 11.22 mills/kWh above the amount included in base rates for all PSCR customers. The revised filing supports a 2008 power supply expense forecast of $1.4 billion and includes $43 million for the recovery of a projected 2007 PSCR under-collection. On July 29, 2008, the MPSC issued a temporary order approving Detroit Edison’s request to increase the PSCR factor to 11.22 mills/kWh. In January 2009, the MPSC approved the Company’s 2008 PSCR plan and authorized the Company to charge a maximum PSCR factor of 11.22 mills/kWh for 2008. The Company filed its 2008 PSCR reconciliation case in March 2009. The filing requests recovery of a $19 million PSCR under-collection. In addition, the filing requests authorization to refund its total 2005 PSCR under-collection surcharge at year-end 2008 of $10 million, including interest, to all commercial and industrial customers. Included in the 2008 PSCR reconciliation filing was the Company’s 2008 pension expense mechanism reconciliation that reflects a $50 million over-collection. The Company expects an order in this proceeding in the second quarter of 2010.

2009 Plan Year — In September 2008, Detroit Edison filed its 2009 PSCR plan case seeking approval of a levelized PSCR factor of 17.67 mills/kWh above the amount included in base rates for residential customers and a levelized PSCR factor of 17.29 mills/kWh above the amount included in base rates for commercial and industrial customers. The Company is supporting a total power supply expense forecast of $1.73 billion. The plan also includes approximately $69 million for the recovery of its projected 2008 PSCR under-collection from all customers and approximately $12 million for the refund of its 2005 PSCR reconciliation surcharge over-collection to commercial and industrial customers only. Also included in the filing is a request for approval of the Company’s expense associated with the use of urea in the selective catalytic reduction units at Monroe power plant as well as a request for approval of a contract for capacity and energy associated with a renewable (wind) energy project. The Company’s PSCR Plan will allow the Company to recover its reasonably and prudently incurred power supply expense including, fuel costs, purchased and net interchange power costs, nitrogen oxide and sulfur dioxide emission allowance costs, transmission costs and MISO costs. The Company self-implemented a PSCR factor of 11.64 mills/kWh above the amount included in base rates for residential customers and a PSCR factor of 11.22 mills/kWh above the amount included in base rates for commercial and industrial customers on bills rendered in January 2009. Subsequently, as a result of the December 23, 2008 MPSC order in the 2007 Detroit Edison rate case, the Company implemented a PSCR factor of 3.18 mills/kWh below the amount included in base rates for residential customers and a PSCR factor of 3.60 mills/kWh below the amount included in base rates for commercial and

industrial customers for service rendered effective January 14, 2009. The Company self-implemented a PSCR factor of 10.18 mills/kWh below the amount included in base rates for residential customers and a PSCR factor of 10.46 mills/kWh below the amount included in base rates for commercial and industrial customers for bills rendered effective August 1, 2009. On June 29, 2009, the parties to this proceeding executed a Settlement Agreement in this matter agreeing to maximum PSCR factors of 1.67 mills/kWh for residential customers and 1.35 mills/kWh for commercial and industrial customers and otherwise resolving this 2009 PSCR Plan case. The Company awaits an MPSC order approving the settlement.

2010 Plan Year — In September 2009, Detroit Edison filed its 2010 PSCR plan case seeking approval of a levelized PSCR factor of 5.64 mills/kWh below the amount included in base rates for all PSCR customers. The filing supports a 2010 power supply expense forecast of $1.2 billion. Also included in the filing is a request for approval of the Company’s expense associated with the use of urea in the selective catalytic reduction units at Monroe power plant as well as a request for approval of a contract for capacity and energy associated with a wind energy project. The Company’s PSCR Plan will allow the Company to recover its reasonably and prudently incurred power supply expense including, fuel costs, purchased and net interchange power costs, nitrogen oxide and sulfur dioxide emission allowance costs, transmission costs and MISO costs. The Company has also requested authority to recover transfer prices for renewable energy, coke oven gas expense, and other potential expenses.

Merger Control Premium Costs

In July 2007, the State of Michigan Court of Appeals published its decision with respect to an appeal by Detroit Edison and others of certain provisions of a November 2004 MPSC order, including reversing the MPSC’s denial of recovery of merger control premium costs. In its published decision, the Court of Appeals held that Detroit Edison is entitled to recover its allocated share of the merger control premium and remanded this matter to the MPSC for further proceedings to establish the precise amount and timing of this recovery. Other parties filed requests for leave to appeal to the Michigan Supreme Court from the Court of Appeals decision and in September 2008, the Michigan Supreme Court granted the requests to address the merger control premium as well as the recovery of transmission costs through the PSCR. On May 1, 2009, the Michigan Supreme Court issued an order reversing the Court of Appeals decision with respect to recovery of the merger control premium, and reinstated the MPSC’s decision excluding the control premium costs from Detroit Edison’s general rates. The Court affirmed the lower court’s decision upholding the right of Detroit Edison to recover electric transmission costs through the Company’s PSCR clause. The Company requested rehearing of the Supreme Court order on the merger premium and the Michigan Attorney General requested rehearing of the transmission portion of the order. On June 26, 2009, the Michigan Supreme Court denied request for a rehearing.

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 5 — SHAREHOLDER’S EQUITY

In March 2009, DTE Energy made a capital contribution of $250 million to the Company.

NOTE 6 — LONG-TERM DEBT

Debt Issuances

In 2009, the Company has issued or remarketed the following long-term debt:

(in Millions)

Month Issued		Type		Interest Rate				Maturity				Amount
April		Tax-Exempt Revenue Bonds (1)(2)			6.00	%			2036			$	69
June		Tax-Exempt Revenue Bonds (1)(3)			5.625	%			2020				32
June		Tax-Exempt Revenue Bonds (1)(4)			5.25	%			2029				60
June		Tax-Exempt Revenue Bonds (1)(5)			5.50	%			2029				59
												$	220

Debt Retirements and Redemptions

In 2009, the following debt has been retired through optional redemption:

(in Millions)

Month Retired

Type

Interest Rate

Maturity

Amount

April

Tax-Exempt Revenue Bonds (1)

Variable

2036

$

69

$

69

NOTE 7 — SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS

Detroit Edison has a $69 million, five-year unsecured revolving credit agreement expiring in October 2010 and a $212 million, two-year unsecured revolving credit agreement expiring in April 2011. The five-year and two-year revolving credit facilities are with a syndicate of 22 banks and may be utilized for general corporate borrowings, but are intended to provide liquidity support for our commercial paper program. No one bank provides more than 8.5% of the combined credit facilities. Borrowings under the facilities are available at prevailing short-term interest rates. The agreements require us to maintain a debt to total capitalization ratio of no more than 0.65 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. Detroit Edison is currently in compliance with its covenants.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Environmental

Electric Utility

Air — Detroit Edison is subject to EPA ozone transport and acid rain regulations that limit power plant emissions of sulfur dioxide and nitrogen oxides. Since 2005, EPA and the State of Michigan issued additional emission reduction regulations and continue to develop additional rules and emission standards 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 $1.4 billion through 2008. The Company estimates Detroit Edison’s future undiscounted capital expenditures at up to approximately $100 million in 2009 and up to approximately $2.3 billion of additional capital expenditures through 2019 based on current regulations.

In July 2009, DTE Energy received a Notice of Violation/Finding of Violation (NOV/FOV) from the EPA alleging, among other things, that five Detroit Edison power plants violated New Source Performance standards, Prevention of Significant Deterioration requirements, and Title V operating permit requirements under the Clean Air Act. We believe that the plants identified by the EPA have complied with applicable regulations. Depending upon the outcome of our discussions with the EPA regarding the NOV/FOV, the EPA could bring legal action against Detroit Edison. We could also be required to install additional pollution control equipment at some or all of the power plants in question, engage in Supplemental Environmental Programs, and/or pay fines. We 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 the studies to be conducted over the next several years, 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 over the four to six years subsequent to 2008 in additional capital expenditures to comply with these requirements. However, a January 2007 circuit court decision remanded back to the EPA several provisions of the federal regulation that may result 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. In April 2009, the Supreme Court ruled that a cost-benefit analysis is a permissible provision of the rule. Concurrently, the EPA continues to develop a revised rule, which is expected to be published later in 2009.

Landfill— Detroit Edison owns and operates a permitted slurry landfill 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 results of the engineering study show that the estimated cost to perform the embankment repairs are $20 million which we expect to incur over the next five years.

Contaminated Sites — Detroit Edison conducted remedial investigations at contaminated sites, including three former manufactured gas plant (MGP) sites, the area surrounding an ash landfill and several 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, 2009 and December 31, 2008, the Company had $10 million and $12 million, respectively, accrued for remediation.

Guarantees

In January 2003, the Company sold the steam heating business of Detroit Edison to Thermal Ventures II, LP. Under the terms of sale, Detroit Edison guaranteed a bank term loan of $12 million that was used for capital improvements to the steam heating system. At September 30, 2009, the Company has reserves for the entire amount of the bank loan guarantee.

Labor Contracts

There are several bargaining units for the Company’s union employees. The majority of our union employees are under contracts that expire in June 2010 and August 2012.

Purchase Commitments

Detroit Edison has an Energy Purchase Agreement to purchase electricity from the Greater Detroit Resource Recovery Authority (GDRRA). The term of the Energy Purchase Agreement for the purchase of electricity runs through June 2024. The Company estimates electric purchase commitments from 2009 through 2024 will not exceed $300 million in the aggregate.

As of September 30, 2009, 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 trading contracts. The Company estimates that these commitments will be approximately $1.2 billion from 2009 through 2024. The Company also estimates that 2009 capital expenditures will be approximately $790 million. The Company has made certain commitments in connection with expected capital expenditures.

Bankruptcies

The Company purchases and sells electricity from and to numerous companies operating in the steel, automotive, energy, retail 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 purchase and 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.

The Company provides services to the domestic automotive industry, including General Motors Corporation (GM), Ford Motor Company (Ford) and Chrysler LLC (Chrysler) and many of their vendors and suppliers. Chrysler filed for bankruptcy protection on April 30, 2009. We have reserved approximately $7 million of pre-petition accounts receivable related to Chrysler as of September 30, 2009. GM filed for bankruptcy protection on June 1, 2009. We have no reserves related to GM as of September 30, 2009.

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 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 3 and 4 for a discussion of contingencies related to derivatives and regulatory matters.

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.

Detroit Edison’s results for the three and nine months ended September 30, 2009 as compared to the comparable periods in 2008 are discussed below:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in Millions)		2009				2008				2009				2008
Operating Revenues		$	1,300			$	1,440			$	3,526			$	3,766
Fuel and Purchased Power			400				586				1,112				1,403
Gross Margin			900				854				2,414				2,363
Operation and Maintenance			306				292				928				1,019
Depreciation and Amortization			222				193				607				563
Taxes Other Than Income			43				54				147				176
Asset (Gains) and Reserves, Net			—				(1	)			—				(1	)
Operating Income			329				316				732				606
Other (Income) and Deductions			75				67				220				212
Income Tax Provision			98				90				199				143
Net Income Attributable to DTE Energy Company		$	156			$	159			$	313			$	251
Operating Income as a Percentage of Operating Revenues			25	%			22	%			21	%			16	%

Gross margin increased $46 million in the third quarter of 2009 and increased $51 million in the nine-month period ended September 30, 2009. The following table details changes in various gross margin components relative to the comparable prior period:

(in Millions)		Three Months				Nine Months
December 2008 rate order		$	33			$	94
Securitization bond and tax surcharge rate increase			20				45
July 2009 rate self-implementation			40				40
Energy Optimization and Renewable Energy surcharge			17				19
Weather			(41	)			(57	)
Reduction in customer demand and other			(23	)			(90	)
Increase in gross margin		$	46			$	51

Electric Sales

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in Thousands of MWh)		2009				2008				2009				2008
Residential			4,107				4,595				10,992				11,955
Commercial			4,806				5,072				13,764				14,347
Industrial			2,562				3,327				7,584				10,074
Wholesale			720				700				2,119				2,123
Other			79				89				280				285
			12,274				13,783				34,739				38,784
Interconnections sales (1)			1,644				618				3,868				2,627
Total Electric Sales			13,918				14,401				38,607				41,411
Electric Deliveries
Retail and Wholesale			12,274				13,783				34,739				38,784
Electric Customer Choice (2)			337				329				998				1,081
Total Electric Sales and Deliveries			12,611				14,112				35,737				39,865

Power Generated and Purchased

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in Thousands of MWh)		2009				2008				2009				2008
Power Plant Generation
Fossil			10,729				10,566				30,424				31,153
Nuclear			2,367				2,405				6,106				7,156
			13,096				12,971				36,530				38,309
Purchased Power			1,753				2,486				4,569				5,725
System Output			14,849				15,457				41,099				44,034
Less Line Loss and Internal Use			(931	)			(1,056	)			(2,492	)			(2,623	)
Net System Output			13,918				14,401				38,607				41,411
Average Unit Cost ($/MWh)
Generation (1)		$	18.01			$	19.32			$	18.07			$	17.98
Purchased Power		$	35.50			$	88.43			$	37.07			$	73.23
Overall Average Unit Cost		$	20.08			$	30.43			$	20.18			$	25.16