THE DETROIT EDISON COMPANY

Proposed Michigan Legislation - We are pursuing a legislative solution in addressing the structural issues associated with the electric Customer Choice program. On July 1, 2004, a package of six bills was introduced in the Michigan Senate to address unintended consequences of Public Act (PA) 141, Michigan legislation enacted in 2000 that began the restructuring of the electric utility industry in Michigan. We believe that this legislation would address a number of the most important issues in the Michigan electric sector. The proposed legislation:

The Michigan Senate Technology and Energy Committee is scheduled to hold hearings beginning in August 2004 in an effort to build consensus among Michigan’s electric utilities, alternative energy suppliers, and customer groups.

Electric Interim Rate Order - Under PA 141, electric rates for all residential, commercial and industrial customers were frozen through 2003. The legislation also capped rates for residential customers through 2005, and for small commercial and industrial customers through 2004. The rate freeze and caps apply to base rates as well as rates designed to recover fuel and purchased power costs. Historically, fuel and purchased power costs have been a pass-through under the power supply cost recovery (PSCR) mechanism.

In June 2003, Detroit Edison filed an application with the MPSC for: 1) an increase in retail electric rates of $427 million annually, 2) the resumption of the PSCR mechanism, and 3) the recovery of net stranded and other costs as permitted under Michigan legislation. Detroit Edison received an interim order in this rate case authorizing an increase in base rates of $248 million annually, effective February 21, 2004, and is applicable to all customers not subject to the rate cap. The order also terminated certain transition credits and authorized transition charges to Choice customers designed to result in $30 million in additional revenues. Additionally, the interim order reaffirmed the resumption of the PSCR mechanism for both capped and uncapped customers, effective January 1, 2004, which is expected to reduce PSCR revenues by $126 million annually. However, the interim order allowed Detroit Edison to increase base rates for customers still subject to the cap in an equal and offsetting amount with the change in the PSCR factor to maintain the total capped rate levels in effect for these customers.

As a result of rate caps, the different effective dates of the interim base rate increase, transition charges and the PSCR mechanism, and other factors, the interim rate order increased revenues in the 2004 second quarter by $16 million and decreased revenues in the 2004 six-month period by $1 million. Additionally, because of these factors, the interim order was only designed to increase revenues by $51 million in 2004 (Note 3). A final order from the MPSC is expected in September 2004.

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Detroit Edison has the following two reportable segments.

ENERGY RESOURCES

Power Generation

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

Factors impacting income: Power Generation earnings declined $45 million during the 2004 second quarter and $54 million in the 2004 six-month period. As subsequently discussed, these results primarily reflect reduced gross margins, partially offset by the recording of higher regulatory assets, which affected depreciation and amortization expenses.

Gross margins declined $56 million during the 2004 second quarter and $91 million in the 2004 six-month period due primarily to lost margins from retail customers choosing to purchase power from alternative suppliers under the electric Customer Choice program. Detroit Edison lost 18% of retail sales in the first half of 2004, compared to 12% of such sales during the same 2003 period as a result of

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Customer Choice penetration. The decline in margins is also due to a revision of estimate in the 2004 second quarter in the level of sales lost to electric Customer Choice. Sales lost under the electric Customer Choice program are estimated each month and are finalized in subsequent months when actual data is available. Variances between estimated and actual lost electric Customer Choice sales directly impact the accrual of unbilled sales to full service customers. Electric Customer Choice sales adjustments in the 2004 second quarter had the effect of increasing Customer Choice-related lost sales, thereby reducing unbilled sales by $19 million. The adjustment also reduced sales within Energy Distribution’s Power Distribution segment.

The loss of retail sales under the electric Customer Choice program also results in lower purchase power requirements, as well as excess power capacity that is sold in the wholesale market. Under the interim order previously discussed, revenues from selling excess power reduce the level of recoverable fuel and purchased power costs and therefore do not impact margins. The interim rate order also lowered PSCR revenues which were more than offset by increased base rate and transition charge revenues, resulting in an increase in margins in the 2004 second quarter. However, as a result of rate caps and the different effective dates of rate adjustments previously discussed, the interim order resulted in a decrease in margins in the 2004 six-month period. Weather during 2004 was warmer than in 2003, resulting in increased margins from retail customers of $11 million in the 2004 second quarter and $3 million in the 2004 six-month period. Operating revenues and fuel and purchased power costs decreased in 2004 compared to 2003 reflecting a $1.97 per megawatt hour (MWh) (12%) decline in fuel and purchased power costs during the current quarter and a $2.16 per MWh (13%) decline during the six-month period. Fuel and purchased power costs are a pass-through with the reinstatement of the PSCR, and therefore do not affect margins or earnings. The decrease in fuel and purchased power costs is attributable to lower priced purchases and using a more favorable power supply mix. The favorable mix is due to lower purchases, driven by lost sales under the electric Customer Choice program.

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Depreciation and amortization expense was unchanged in the 2004 second quarter and decreased $23 million in the 2004 six-month period. Depreciation and amortization expense was affected by increased charges resulting from generation-related capital expenditures. These expenses were also affected by the income effect of recording regulatory assets totaling $22 million and $57 million in the 2004 second quarter and six-month period, respectively, compared to $21 million and $40 million in the same 2003 periods. The regulatory assets represent the deferral of net stranded costs and other costs we believe are recoverable under Public Act 141.

Other income and deductions expense increased $8 million in the 2004 second quarter and $14 million in the 2004 six-month period, reflecting expenses associated with addressing the structural issues of PA 141. The increase also reflects costs of performing other non-operating activities.

Outlook - Future operating results are expected to vary as a result of external factors such as regulatory proceedings, new legislation, changes in market prices of power, coal and gas, plant performance, changes in economic conditions, weather and the levels of customer participation in the electric Customer Choice program.

As previously discussed, we expect cash flows and operating performance will continue to be adversely affected by the electric Customer Choice program until the inequities associated with this program are addressed. We will accrue as regulatory assets our unrecovered generation-related fixed costs due to electric Customer Choice that we believe are recoverable under Michigan legislation and MPSC orders. We have addressed the issue of stranded costs in our June 2003 electric rate filing and are also supporting the proposed legislative solution. Additionally, we requested an increase in retail electric rates of $427 million annually to recover higher operating costs. The actual timing and level of recovering stranded and operating costs will ultimately be determined by the MPSC or legislation. We cannot predict the outcome of these matters. See Note 3 — Regulatory Matters.

ENERGY DISTRIBUTION

Power Distribution

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

Factors impacting income : Power Distribution earnings increased $23 million in the 2004 second quarter and $55 million in the 2004 six-month period. As subsequently discussed, these results primarily reflect an increase in operating revenues, a non-recurring loss recorded in the 2003 first quarter and varying operation and maintenance expenses.

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ENVIRONMENTAL MATTERS

See Note 6 — Contingencies for discussion of environmental matters.

REPRESENTED EMPLOYEES

Approximately 3,600 of the company’s employees were under a contract that expired in June 2004. A new three-year contract was ratified in July 2004.

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CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Management of the company carried out an evaluation, under the supervision and with the participation of the company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2004, which is the end of the period covered by this report. Based on this evaluation, the company’s Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effectively designed to ensure that required information disclosed by the company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and timely reported in accordance with Commission’s rules and forms.

(b) Changes in internal control over financial reporting

There has been no change in the company’s internal control over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

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THE DETROIT EDISON COMPANY

As a result of adopting SFAS No. 143 on January 1, 2003, we recorded a plant asset of $278 million with offsetting accumulated depreciation of $103 million, a retirement obligation liability of $771 million and reversed previously recognized obligations of $366 million, principally nuclear decommissioning liabilities. We also recorded a cumulative effect amount related to regulated operations as a regulatory asset of $221 million, and a cumulative effect charge against earnings of $6 million (net of taxes of $3 million) for 2003.

A reconciliation of the asset retirement obligation for the 2004 six-month period follows:

A significant portion of the asset retirement obligations represents nuclear decommissioning liabilities which are funded through a surcharge to electric customers over the life of the Fermi 2 nuclear plant.

Medicare Act Accounting

In December 2003, the Medicare Act was signed into law. This Act provides for a non-taxable federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at “least actuarially” equivalent to the benefit established by law. We elected at that time to defer the provisions of the Medicare Act, and its impact on our accumulated postretirement benefit obligation and net periodic postretirement benefit cost pending the issuance of specific authoritative accounting guidance by the FASB.

In May 2004, FSP No. 106-2 was issued on accounting for the effects of the Medicare Act. The FSP is effective for the first interim period beginning after June 15, 2004, with earlier application encouraged. The guidance in this FSP is applicable to sponsors of single-employer defined benefit postretirement health care plans for which (a) the employer has concluded the prescription drug benefits available under the plan to some or all participants are “actuarially equivalent” to Medicare Part D and thus qualify for the subsidy under the Medicare Act and (b) the expected subsidy will offset or reduce the employer’s share of the cost of the underlying postretirement prescription drug coverage on which the subsidy is based. We believe we qualify for the subsidy under the Act and the expected subsidy will partially offset our share of the cost of the postretirement prescription drug coverage.

The reduction in the accumulated postretirement benefit obligation for the subsidy related to benefits attributed to past service is approximately $70 million and is accounted for as an actuarial gain as required under the FSP. The effects of the subsidy on the measurement of net periodic postretirement benefit costs is expected to reduce cost by $12 million in 2004. The impact of the Medicare Act on the components of Other Postretirement Benefit Costs in the first six months of 2004 is as follows:

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We have elected to apply the provisions of FSP No. 106-2 retroactive to January 1, 2004, and as a result earnings for the first quarter of 2004 have been restated. A reconciliation of previously reported first quarter 2004 net income and earnings per share to the amounts adjusted for the decrease in costs due to the Medicare Act follows:

NOTE 3 – REGULATORY MATTERS

Electric Rate Case

Rate Request - In June 2003, Detroit Edison filed an application with the MPSC requesting a change in retail electric rates, resumption of the Power Supply Cost Recovery (PSCR) mechanism, and recovery of net stranded costs. The application requested a base rate increase for both full-service and electric Customer Choice customers totaling $416 million annually (approximately 12% increase) in 2006, with a three-year phase-in starting in 2004 as the caps on customer rates expire. Detroit Edison proposed that the $416 million increase be allocated between full-service customers ($265 million) and electric Customer Choice customers ($151 million). In November 2003, Detroit Edison increased its original rate request by $11 million to $427 million.

During the second quarter of 2004, based upon the MPSC Staff’s (Staff) filing for final rate relief, as discussed below, and more current information regarding the level of electric Customer Choice sales penetration, Detroit Edison revised its base rate increase request from $427 million to $457 million.

In addition, Detroit Edison has updated its request for recovery of regulatory assets from $109 million to $93 million annually over a 5-year period, which includes recovery of deferred return on and of Clean Air Act costs and capital expenditures in excess of base depreciation amounts, transmission costs and electric Customer Choice implementation costs as allowed by Public Act (PA) 141.

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Detroit Edison is also requesting recovery of $187 million of historical stranded costs, through the date of the final order in this case, to be collected pursuant to PA 141.

A summary of the rate requests follows:

The revised rate request did not allocate the phase in amounts by year, but the amounts would be allocated to the customer classes as the rate caps expire.

MPSC Interim Rate Order - On February 20, 2004, the MPSC issued an order for interim rate relief. The order authorized an interim increase in base rates, a transition charge for customers participating in the electric Customer Choice program and a new PSCR factor.

The interim base rate increase totaled $248 million annually, effective February 21, 2004, and is applicable to all customers not subject to the rate cap. The increase has been allocated to both full-service customers ($240 million) and electric Customer Choice customers ($8 million). However, because of the rate caps under PA 141, not all of the increase will be realized in 2004. The interim order also terminated certain transition credits and authorized transition charges to electric Customer Choice customers designed to result in $30 million in additional revenues. Additionally, the MPSC authorized a PSCR factor for all customers, a credit of 1.05 mills per kilowatthour (kWh) compared to the 2.04 mills per kWh charge previously in effect. However, the MPSC order allows Detroit Edison to increase base rates for customers still subject to the cap in an equal and offsetting amount with the change in the PSCR factor to maintain the total capped rate levels currently in effect for these customers.

Although the base rate increase and transition charges total $278 million, the interim order is only designed to result in an increase in 2004 revenues of $51 million. This lower amount is a result of the rate caps, the February 21, 2004 effective date of the interim base rate increase and the PSCR reduction effective January 1, 2004. Amounts collected are subject to a potential refund pending a final order in this rate case.

The MPSC deferred addressing other items in the rate request, including a surcharge to recover regulatory assets, until a final rate order is issued, which is expected in September 2004. We cannot predict the amount of final rate relief that will be granted by the MPSC.

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MPSC Staff Recommendation on Final Rate Relief - On March 5, 2004, the Staff filed testimony regarding final rate relief requested by Detroit Edison. The Staff recommended a base rate increase of $275 million. The recommended amount was subsequently adjusted to $254 million, a $6 million increase over the $248 million interim order. The Staff’s proposed $254 million base rate increase excluded an estimated $93 million of stranded costs from sales lost to electric Customer Choice. The Staff’s proposal would provide Detroit Edison the opportunity to mitigate this loss with third-party wholesale sales by modifying the PSCR mechanism to remove the revenue credit from these sales. The revenue credit from third-party wholesale sales currently included in the PSCR mechanism flows this benefit to full-service customers. The Staff recommends that any future stranded costs be recovered using two basic provisions. Detroit Edison will be allowed to retain 90% of the net third-party revenue earned from wholesale sales up to 110% of each year’s electric Customer Choice sales. Secondly, the Staff proposed that non-cost Choice margin loss (impact of inter-class rate subsidization) be recovered through future rate increases from full-service customers.

The Staff recommended that accrued regulatory assets be recovered through three mechanisms. The first mechanism would recover electric Customer Choice implementation costs through a charge to both full- service and electric Customer Choice customers of approximately $25 million per year, effective in 2006 when all current rate caps expire. The second mechanism recovers accrued regulatory assets, including deferred costs under the Clean Air Act through a five-year surcharge that would only be collected from full-service customers as their rate caps expire for an average of approximately $38 million per year. The third mechanism would recover prior period stranded costs determined pursuant to the MPSC’s existing production fixed cost revenue deficiency methodology. The Staff estimated that Detroit Edison’s stranded costs for 2002, 2003 and 2004 through the date of the interim rate order of February 20, 2004 are approximately $44 million. These stranded costs would be recovered from electric Customer Choice customers utilizing the transition charge approved in the interim rate order.

The Staff recommended a capital structure of 54% debt and 46% equity and proposed an 11% return on equity.

Electric Industry Restructuring

Electric Rates, Customer Choice and Stranded Costs - PA 141 provides Detroit Edison with the right to recover net stranded costs. The MPSC authorized Detroit Edison to establish a regulatory asset to defer recovery of its incurred stranded costs, subject to review in a subsequent annual net stranded cost proceeding. During each quarter, Detroit Edison records a regulatory asset representing an estimate of the cumulative stranded costs as of that period. Our revised and ongoing calculations concluded that the $68 million of net stranded costs recorded as of December 31, 2003 is appropriate. During the 2004 six-month period, we recorded $43 million of additional stranded costs as a regulatory asset.

An April 1, 2004 Michigan Court of Appeals order found that the MPSC should not defer recovery of Detroit Edison’s electric Customer Choice implementation costs indefinitely. On June 29, 2004, the MPSC issued an order authorizing Detroit Edison to recover $20 million in implementation costs incurred during 2002. Detroit Edison elected to collect these costs as well as implementation costs incurred in 2000 and 2001 as part of the $93 million regulatory asset recovery previously discussed.

We are unable to predict the outcome of the regulatory matters and proposed legislation discussed herein. Resolution of these matters is dependent upon future MPSC orders and the legislative process, which may materially impact the financial position, results of operations and cash flows of the company.

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NOTE 4 – LONG -TERM DEBT

In April 2004, Detroit Edison issued $36 million of 4-7/8% tax-exempt bonds due 2029, the proceeds of which will be used to redeem $36 million of 6.55% tax-exempt bonds due 2024. In April 2004, Detroit Edison also issued $32 million of 4.65% tax-exempt bonds due in 2028, the proceeds of which will be used to redeem the following tax-exempt issues: $11.5 million of 6.05% bonds due 2023, $7.5 million of 5.875% bonds due 2024, and $13 million of 6.45% bonds due 2024 .

In July 2004, Detroit Edison issued $200 million of 5.40% senior notes due in 2014. The proceeds were used to repay short-term borrowings and for general corporate purposes.

NOTE 5 – COMMON STOCK

In March 2004, we issued 4,344,492 shares of common stock, valued at $170 million to DTE Energy. DTE Energy contributed a like amount of its stock to our defined benefit retirement plan.

NOTE 6 – CONTINGENCIES

Environmental

Detroit Edison conducted remedial investigations at contaminated sites, including 2 former manufactured gas plants, the area surrounding an ash landfill and several underground and aboveground storage tank locations. The findings of these investigations indicated that the estimated total expenditures for remediating these sites is approximately $8 million which is expected to be incurred over the next several years. As a result of the investigation, Detroit Edison accrued an $8 million liability during 2004.

In July 2004, the Environmental Protection Agency (EPA) published final regulations establishing requirements and a permitting process for existing power plant cooling water intake structures. These regulations require individual facility studies, and permitting and intake modifications that will be determined and implemented over the next 5 to 7 years and could require up to $50 million in additional capital expenditures for Detroit Edison.

Other

We are involved in certain legal, regulatory and administrative proceedings before various courts, arbitration panels and governmental agencies concerning claims arising in the ordinary course of business. These proceedings include certain contract disputes, environmental reviews and investigations, audits, inquiries from various regulators, and pending judicial matters. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss. The resolution of pending proceedings is not expected to have a material effect on our financial statements in the period they are resolved.

See Note 3 for a discussion of contingencies related to Regulatory Matters.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of
The Detroit Edison Company

We have reviewed the accompanying condensed consolidated statement of financial position of The Detroit Edison Company and subsidiaries as of June 30, 2004, and the related condensed consolidated statement of operations for the three-month and six-month periods ended June 30, 2004 and 2003, the condensed consolidated statement of cash flows for the six-month periods ended June 30, 2004 and 2003, and the condensed consolidated statement of changes in shareholder’s equity and comprehensive income for the six-month period ended June 30, 2004 and the six-month periods ended June 30, 2004 and 2003, respectively. These interim financial statements are the responsibility of The Detroit Edison Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the condensed consolidated interim financial statements, The Detroit Edison Company applied the provisions of Financial Accounting Standards Board Staff Position No. 106-2, which relates to accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, retroactive to January 1, 2004.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of The Detroit Edison Company and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, cash flows and changes in stockholder’s equity and comprehensive income for the year then ended (not presented herein); and in our report dated March 1, 2004 (which report includes an explanatory paragraph relating to the change in the methods of accounting for asset retirement obligations in 2003 and derivative instruments and hedging activities in 2001), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

/S/ DELOITTE & TOUCHE LLP

Detroit, Michigan
August 3, 2004

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OTHER INFORMATION

LEGAL PROCEEDINGS

We are involved in certain legal, regulatory and administrative proceedings before various courts, arbitration panels and governmental agencies concerning matters arising in the ordinary course of business. These proceedings include certain contract disputes, environmental reviews and investigations, audits, inquiries from various regulators, and pending judicial matters. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss. The resolution of pending proceedings is not expected to have a material effect on our operations or financial statements in the period they are resolved. For additional discussion on legal matters, see the Notes to the Consolidated Financial Statements.

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