DTE-9.30.2011-10Q
Table of Contents

 
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, 2011
Commission file number 1-11607
DTE ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Michigan
 
38-3217752
(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 þ 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):
Large accelerated filerþ
 
Accelerated filero
 
Non-accelerated filero
 
Smaller reporting companyo
 
 
 
 
(Do not check if a smaller reporting company)
 
 
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
At September 30, 2011, 169,250,934 shares of DTE Energy’s common stock were outstanding, substantially all of which were held by non-affiliates.
 


Table of Contents

DTE ENERGY COMPANY
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED September 30, 2011
TABLE OF CONTENTS

 
PAGE
 
 
Item 1. Legal Proceedings
 EX-3-11
 
 EX-12.48
 EX-31.69
 EX-31.70
 EX-32.69
 EX-32.70
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

Table of Contents

DEFINITIONS
ASC
 
Accounting Standards Codification
 
 
 
ASU
 
Accounting Standards Update
 
 
 
CIM
 
A Choice Incentive Mechanism authorized by the MPSC that allows Detroit Edison to recover or refund non-fuel revenues lost or gained as a result of fluctuations in electric Customer Choice sales.
 
 
 
Citizens
 
Citizens Fuel Gas Company distributes natural gas in Adrian, Michigan
 
 
 
Company
 
DTE Energy Company and any subsidiary companies
 
 
 
CTA
 
Costs to achieve, consisting of project management, consultant support and employee severance, related to the Performance Excellence Process
 
 
 
Customer Choice
 
Michigan legislation giving customers the option to choose alternative suppliers for electricity and gas.
 
 
 
Detroit Edison
 
The Detroit Edison Company (a direct wholly owned subsidiary of DTE Energy Company) and subsidiary companies
 
 
 
DTE Energy
 
DTE Energy Company, directly or indirectly the parent of Detroit Edison, MichCon and numerous non-utility subsidiaries
 
 
 
EPA
 
United States Environmental Protection Agency
 
 
 
FASB
 
Financial Accounting Standards Board
 
 
 
FERC
 
Federal Energy Regulatory Commission
 
 
 
FTRs
 
Financial transmission rights are financial instruments that entitle the holder to receive payments related to costs incurred for congestion on the transmission grid.
 
 
 
GCR
 
A Gas Cost Recovery mechanism authorized by the MPSC that allows MichCon to recover through rates its natural gas costs.
 
 
 
MCIT
 
Michigan Corporate Income Tax
 
 
 
MDEQ
 
Michigan Department of Environmental Quality
 
 
 
MichCon
 
Michigan Consolidated Gas Company (an indirect wholly owned subsidiary of DTE Energy) and subsidiary companies
 
 
 
MISO
 
Midwest Independent System Operator is an Independent System Operator and the Regional Transmission Organization serving the Midwest United States and Manitoba, Canada.
 
 
 
MPSC
 
Michigan Public Service Commission
 
 
 
Non-utility
 
An entity that is not a public utility. Its conditions of service, prices of goods and services and other operating related matters are not directly regulated by the MPSC.
 
 
 
NRC
 
United States Nuclear Regulatory Commission
 
 
 
Production tax credits
 
Tax credits as authorized under Sections 45K and 45 of the Internal Revenue Code that are designed to stimulate investment in and development of alternate fuel sources. The amount of a production tax credit can vary each year as determined by the Internal Revenue Service.

1

Table of Contents

Proved reserves
 
Estimated quantities of natural gas, natural gas liquids and crude oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reserves under existing economic and operating conditions.
 
 
 
PSCR
 
A Power Supply Cost Recovery mechanism authorized by the MPSC that allows Detroit Edison to recover through rates its fuel, fuel-related and purchased power costs.
 
 
 
RDM
 
A Revenue Decoupling Mechanism authorized by the MPSC that is designed to minimize the impact on revenues of changes in average customer usage of electricity and natural gas.
 
 
 
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.
 
 
 
Subsidiaries
 
The direct and indirect subsidiaries of DTE Energy Company
 
 
 
Unconventional Gas
 
Includes those gas and oil deposits that originated and are stored in coal bed, tight sandstone and shale formations
 
 
 
VIE
 
Variable Interest Entity
 
 
 
Units of Measurement
 
 
 
 
 
Bcf
 
Billion cubic feet of gas
 
 
 
Bcfe
 
Conversion metric of natural gas, the ratio of 6 Mcf of gas to 1 barrel of oil
 
 
 
BTU
 
Heat value (energy content) of fuel
 
 
 
dth/d
 
Decatherms per day
 
 
 
kWh
 
Kilowatthour of electricity
 
 
 
Mcf
 
Thousand cubic feet of gas
 
 
 
MMcf
 
Million cubic feet of gas
 
 
 
MW
 
Megawatt of electricity
 
 
 
MWh
 
Megawatthour of electricity


2

Table of Contents

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 DTE Energy. Words such as “anticipate,” “believe,” “expect,” “projected” and “goals” signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to numerous assumptions, risks and uncertainties that may cause actual future results to be materially different from those contemplated, projected, estimated or budgeted. Many factors may impact forward-looking statements including, but not limited to, the following:
economic conditions and population changes in our geographic area resulting in changes in demand, customer conservation, increased thefts of electricity and gas and high levels of uncollectible accounts receivable;
changes in the economic and financial viability of suppliers and trading counterparties, and the continued ability of such parties to perform their obligations to the Company;
access to capital markets and the results of other financing efforts which can be affected by credit agency ratings;
instability in capital markets which could impact availability of short and long-term financing;
the timing and extent of changes in interest rates;
the level of borrowings;
the potential for losses on investments, including nuclear decommissioning and benefit plan assets and the related increases in future expense and contributions;
impact of regulation by the FERC, MPSC, NRC and other applicable governmental proceedings and regulations, including any associated impact on rate structures;
the amount and timing of cost recovery allowed as a result of regulatory proceedings, related appeals or new legislation;
the potential for increased costs or delays in completion of significant construction projects;
the effects of weather and other natural phenomena on operations and sales to customers, and purchases from suppliers;
environmental issues, laws, regulations, and the increasing costs of remediation and compliance, including actual and potential new federal and state requirements;
health, safety, financial, environmental and regulatory risks associated with ownership and operation of nuclear facilities;
impact of electric and gas 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, purchased power and natural gas;
volatility in the short-term natural gas storage markets impacting third-party storage revenues;
cost reduction efforts and the maximization of plant and distribution system performance;
the effects of competition;
the uncertainties of successful exploration of unconventional gas resources and challenges in estimating gas and oil reserves with certainty;
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 cost of protecting assets against, or damage due to, terrorism or cyber attacks;
the availability, cost, coverage and terms of insurance and stability of insurance providers;
changes in and application of accounting standards and financial reporting regulations;
changes in federal or state laws and their interpretation with respect to regulation, energy policy and other

3

Table of Contents

business issues;
binding arbitration, litigation and related appeals; and
the risks discussed in our public filings with the Securities and Exchange Commission.
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.


4

Table of Contents

Part I — Item 1.

DTE ENERGY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
(in Millions, Except per Share Amounts)
2011
 
2010
 
2011
 
2010
Operating Revenues
$
2,265

 
$
2,139

 
$
6,724

 
$
6,384

Operating Expenses
 
 
 
 
 
 
 
Fuel, purchased power and gas
866

 
763

 
2,708

 
2,366

Operation and maintenance
670

 
649

 
1,948

 
1,898

Depreciation, depletion and amortization
259

 
271

 
752

 
775

Taxes other than income
79

 
69

 
239

 
231

Asset (gains) and losses, reserves and impairments, net
(8
)
 
1

 

 

 
1,866

 
1,753

 
5,647

 
5,270

Operating Income
399

 
386

 
1,077

 
1,114

Other (Income) and Deductions
 
 
 
 
 
 
 
Interest expense
120

 
142

 
370

 
418

Interest income
(3
)
 
(3
)
 
(8
)
 
(9
)
Other income
(20
)
 
(20
)
 
(59
)
 
(62
)
Other expenses
16

 
9

 
31

 
32

 
113

 
128

 
334

 
379

Income Before Income Taxes
286

 
258

 
743

 
735

Income Tax Expense
101

 
92

 
180

 
252

Net Income
185

 
166

 
563

 
483

Less: Net Income Attributable to Noncontrolling Interests
2

 
3

 
2

 
5

Net Income Attributable to DTE Energy Company
$
183

 
$
163

 
$
561

 
$
478

Basic Earnings per Common Share
 
 
 
 
 
 
 
Net Income Attributable to DTE Energy Company
$
1.08

 
$
0.97

 
$
3.31

 
$
2.85

Diluted Earnings per Common Share
 
 
 
 
 
 
 
Net Income Attributable to DTE Energy Company
$
1.07

 
$
0.96

 
$
3.30

 
$
2.84

Weighted Average Common Shares Outstanding
 
 
 
 
 
 
 
Basic
169

 
169

 
169

 
168

Diluted
170

 
170

 
170

 
168

Dividends Declared per Common Share
$
0.59

 
$
0.56

 
$
1.74

 
$
1.62

See Notes to Consolidated Financial Statements (Unaudited)


5

Table of Contents

DTE ENERGY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
 
September 30,
 
December 31,
(in Millions)
2011
 
2010
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
46

 
$
65

Restricted cash, principally Securitization
73

 
120

Accounts receivable (less allowance for doubtful accounts of $168 and $196, respectively)
 
 
 
Customer
1,206

 
1,393

Other
121

 
402

Inventories
 
 
 
Fuel and gas
567

 
460

Materials and supplies
209

 
202

Deferred income taxes
130

 
139

Derivative assets
109

 
131

Regulatory assets
201

 
58

Other
249

 
197

 
2,911

 
3,167

Investments
 
 
 
Nuclear decommissioning trust funds
893

 
939

Other
527

 
518

 
1,420

 
1,457

Property
 
 
 
Property, plant and equipment
22,312

 
21,574

Less accumulated depreciation, depletion and amortization
(8,890
)
 
(8,582
)
 
13,422

 
12,992

Other Assets
 
 
 
Goodwill
2,020

 
2,020

Regulatory assets
3,940

 
4,058

Securitized regulatory assets
618

 
729

Intangible assets
74

 
67

Notes receivable
124

 
123

Derivative assets
59

 
77

Other
192

 
206

 
7,027

 
7,280

Total Assets
$
24,780

 
$
24,896

See Notes to Consolidated Financial Statements (Unaudited)

6

Table of Contents

DTE ENERGY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
 
September 30,
 
December 31,
(in Millions, Except Shares)
2011
 
2010
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
708

 
$
729

Accrued interest
121

 
111

Dividends payable
99

 
95

Short-term borrowings
275

 
150

Current portion long-term debt, including capital leases
247

 
925

Derivative liabilities
114

 
142

Other
536

 
597

 
2,100

 
2,749

Long-Term Debt (net of current portion)
 
 
 
Mortgage bonds, notes and other
6,702

 
6,114

Securitization bonds
479

 
643

Trust preferred-linked securities
289

 
289

Capital lease obligations
27

 
43

 
7,497

 
7,089

Other Liabilities
 
 
 
Deferred income taxes
3,076

 
2,632

Regulatory liabilities
1,040

 
1,328

Asset retirement obligations
1,560

 
1,498

Unamortized investment tax credit
68

 
75

Derivative liabilities
62

 
110

Liabilities from transportation and storage contracts
73

 
83

Accrued pension liability
680

 
866

Accrued postretirement liability
1,216

 
1,275

Nuclear decommissioning
141

 
149

Other
258

 
275

 
8,174

 
8,291

Commitments and Contingencies (Notes 6 and 10)

 


Equity
 
 
 
Common stock, without par value, 400,000,000 shares authorized, 169,250,934 and 169,428,406 shares issued and outstanding, respectively
3,418

 
3,440

Retained earnings
3,698

 
3,431

Accumulated other comprehensive loss
(146
)
 
(149
)
Total DTE Energy Company Equity
6,970

 
6,722

Noncontrolling interests
39

 
45

Total Equity
7,009

 
6,767

Total Liabilities and Equity
$
24,780

 
$
24,896

See Notes to Consolidated Financial Statements (Unaudited)


7

Table of Contents

DTE ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine Months Ended
 
September 30
(in Millions)
2011
 
2010
Operating Activities
 
 
 
Net income
$
563

 
$
483

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
752

 
775

Deferred income taxes
123

 
173

Asset losses, reserves and impairments, net

 
5

Changes in assets and liabilities, exclusive of changes shown separately (Note 13)
48

 
73

Net cash from operating activities
1,486

 
1,509

Investing Activities
 
 
 
Plant and equipment expenditures — utility
(968
)
 
(743
)
Plant and equipment expenditures — non-utility
(61
)
 
(75
)
Proceeds from sale of assets
13

 
28

Restricted cash for debt redemption, principally Securitization
47

 
33

Proceeds from sale of nuclear decommissioning trust fund assets
69

 
179

Investment in nuclear decommissioning trust funds
(97
)
 
(204
)
Consolidation of VIEs

 
19

Investment in Millennium Pipeline Project

 
(49
)
Other
(55
)
 
(22
)
Net cash used for investing activities
(1,052
)
 
(834
)
Financing Activities
 
 
 
Issuance of long-term debt, net
908

 
595

Redemption of long-term debt
(1,161
)
 
(660
)
Short-term borrowings
126

 
(307
)
Issuance of common stock

 
26

Repurchase of common stock
(18
)
 

Dividends on common stock
(289
)
 
(265
)
Other
(19
)
 
(32
)
Net cash used for financing activities
(453
)
 
(643
)
Net Increase (Decrease) in Cash and Cash Equivalents
(19
)
 
32

Cash and Cash Equivalents at Beginning of Period
65

 
52

Cash and Cash Equivalents at End of Period
$
46

 
$
84

See Notes to Consolidated Financial Statements (Unaudited)


8

Table of Contents

DTE ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND
COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
 
Accumulated
Other
 
 
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
Noncontrolling
 
 
(Dollars in Millions, Shares in Thousands)
Shares
 
Amount
 
Earnings
 
Loss
 
Interest
 
Total
Balance, December 31, 2010
169,428

 
$
3,440

 
$
3,431

 
$
(149
)
 
$
45

 
$
6,767

Net income
 
 
 
 
561

 
 
 
2

 
563

Dividends declared on common stock
 
 
 
 
(294
)
 
 
 
 
 
(294
)
Repurchase of common stock
(928
)
 
(45
)
 
 
 
 
 
 
 
(45
)
Benefit obligations, net of tax
 
 
 
 
 
 
5

 
 
 
5

Foreign currency translation, net of tax
 
 
 
 
 
 
(1
)
 
 
 
(1
)
Net change in unrealized losses on investments, net of taxes
 
 
 
 
 
 
(1
)
 
 
 
(1
)
Stock-based compensation, distributions to noncontrolling interests and other
751

 
23

 
 
 
 
 
(8
)
 
15

Balance, September 30, 2011
169,251

 
$
3,418

 
$
3,698

 
$
(146
)
 
$
39

 
$
7,009




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

(in Millions)
2011
 
2010
Net income
$
563

 
$
483

Other comprehensive income (loss), net of tax:
 
 
 
Benefit obligations:
 
 
 
Benefit obligation, net of taxes of $2 and $3
5

 
6

Amounts reclassified to benefit obligations related to consolidation of VIEs (Note 1), net of taxes of $— and $5

 
10

 
5

 
16

Net unrealized gains (losses) on derivatives:
 
 
 
Gains (losses) during the period, net of taxes of $— and $1

 
1

Amounts reclassified to income, net of taxes of $— and $1

 
1

 

 
2

Net unrealized gains (losses) on investments:
 
 
 
Gains (losses) during the period, net of taxes of $— and $(6)
(1
)
 
(11
)
Amounts reclassified to benefit obligations related to consolidation of VIEs (Note 1), net of taxes of $— and $(5)

 
(10
)
 
(1
)
 
(21
)
Foreign currency translation, net of taxes of $— and $—
(1
)
 

Comprehensive income
566

 
480

Less: Comprehensive income attributable to noncontrolling interests
2

 
5

Comprehensive income attributable to DTE Energy Company
$
564

 
$
475

See Notes to Consolidated Financial Statements (Unaudited)


9

Table of Contents

DTE ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITIED)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Corporate Structure
DTE Energy owns the following businesses:
Detroit Edison, an electric utility engaged in the generation, purchase, distribution and sale of electricity to approximately 2.1 million customers in southeastern Michigan;
MichCon, a natural gas utility engaged in the purchase, storage, transportation, distribution and sale of natural gas to approximately 1.2 million customers throughout Michigan and the sale of storage and transportation capacity; and
Other businesses involved in (1) natural gas pipelines, gathering and storage; (2) unconventional gas and oil project development and production; (3) power and industrial projects and coal transportation and marketing; and (4) energy marketing and trading operations.
Detroit Edison and MichCon are regulated by the MPSC. Certain activities of Detroit Edison and MichCon, as well as various other aspects of businesses under DTE Energy are regulated by the FERC. In addition, the Company is regulated by other federal and state regulatory agencies including the NRC, the EPA and the MDEQ.
References in this report to “we,” “us,” “our,” “Company” or “DTE” are to DTE Energy and its subsidiaries, collectively.
Basis of Presentation
These Consolidated Financial Statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the 2010 Annual Report on Form 10-K.
The accompanying Consolidated Financial Statements are prepared using accounting principles generally accepted in the United States of America. These accounting principles require management to use estimates and assumptions that impact reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from the Company’s estimates.
The Consolidated Financial Statements are unaudited, but in the Company’s opinion include all adjustments necessary to a fair statement of the results for the interim periods. 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, 2011.
Certain prior year balances were reclassified to match the current year's financial statement presentation.
Principles of Consolidation
The Company consolidates all majority owned subsidiaries and investments in entities in which it has controlling influence. Non-majority owned investments are accounted for using the equity method when the Company is able to influence the operating policies of the investee. Non-majority owned investments include investments in limited liability companies, partnerships or joint ventures. When the Company does not influence the operating policies of an investee, the cost method is used. These consolidated financial statements also reflect the Company’s proportionate interests in certain jointly owned utility plant. The Company eliminates all intercompany balances and transactions.
The Company evaluates whether an entity is a VIE whenever reconsideration events occur. The Company consolidates VIEs for which it is the primary beneficiary. If the Company is not the primary beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of accounting. When assessing the determination of the primary beneficiary, the Company considers all relevant facts and circumstances, including: the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the expected losses and/or the right to receive the expected returns of the VIE. The Company performs ongoing reassessments of all VIEs to determine if the primary beneficiary status has changed.
Legal entities within the Company’s Power and Industrial Projects segment enter into long-term contractual arrangements with customers to supply energy-related products or services. The entities are generally designed to pass-through the commodity risk associated with these contracts to the customers, with the Company retaining operational and customer default risk. These entities generally are VIEs. In addition, the Company has interests in certain VIEs that we share control of all significant activities for those entities with our partners, and therefore are accounted for under the equity method.

10

Table of Contents


The Company has variable interests in VIEs through certain of its long-term purchase contracts. As of September 30, 2011, the carrying amount of assets and liabilities in the Consolidated Statement of Financial Position that relate to its variable interests under long-term purchase contracts are predominately related to working capital accounts and generally represent the amounts owed by the Company for the deliveries associated with the current billing cycle under the contracts. The Company has not provided any form of financial support associated with these long-term contracts. There is no significant potential exposure to loss as a result of its variable interests through these long-term purchase contracts.
In 2001, Detroit Edison financed a regulatory asset related to Fermi 2 and certain other regulatory assets through the sale of rate reduction bonds by a wholly owned special purpose entity, Securitization. Detroit Edison performs servicing activities including billing and collecting surcharge revenue for Securitization. This entity is a VIE, and is consolidated as the Company is the primary beneficiary.
DTE Energy has interests in two unconsolidated trusts that were formed for the purpose of issuing preferred securities and lending the gross proceeds to the Company. The assets of the trusts are debt securities of DTE Energy with terms similar to those of the related preferred securities. Payments the Company makes are used by the trusts to make cash distributions on the preferred securities it has issued. DTE Energy has reviewed these trusts and has determined they are VIEs, but the Company is not the primary beneficiary as it does not have variable interests in the trusts and therefore, the trusts are not consolidated by the Company.
The maximum risk exposure for consolidated VIEs is reflected on the Company’s Consolidated Statements of Financial Position. For non-consolidated VIEs, the maximum risk exposure is generally limited to its investment and amounts which it has guaranteed.
The following table summarizes the major balance sheet items for consolidated VIEs as of September 30, 2011 and December 31, 2010. Amounts at September 30, 2011 for consolidated VIEs that are either (1) assets that can be used only to settle obligations of the VIE or (2) liabilities for which creditors do not have recourse to the general credit of the primary beneficiary are segregated in the restricted amounts column. VIEs, in which the Company holds a majority voting interest and is the primary beneficiary, that meet the definition of a business and whose assets can be used for purposes other than the settlement of the VIE’s obligations have been excluded from the table below.

 
September 30, 2011
 
 
 
 
 
 
 
Restricted
(in Millions)
Securitization
 
Other
 
Total
 
Amounts
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
8

 
$
8

 
$

Restricted cash
58

 
7

 
65

 
64

Accounts receivable
38

 
14

 
52

 
40

Inventories

 
145

 
145

 

Other current assets

 
1

 
1

 

Property, plant and equipment

 
58

 
58

 
25

Securitized regulatory assets
618

 

 
618

 
618

Other assets
10

 
6

 
16

 
18

 
$
724

 
$
239

 
$
963

 
$
765

LIABILITIES
 
 
 
 
 
 
 
Accounts payable and accrued current liabilities
$
4

 
$
38

 
$
42

 
$
4

Current portion long-term debt, including capital leases
164

 
7

 
171

 
171

Other current liabilities
62

 
1

 
63

 
64

Mortgage bonds, notes and other

 
31

 
31

 
31

Securitization bonds
479

 

 
479

 
479

Capital lease obligations

 
20

 
20

 
20

Other long term liabilities
6

 
2

 
8

 
7

 
$
715

 
$
99

 
$
814

 
$
776


11

Table of Contents

 
December 31, 2010
 
 
 
 
 
 
 
Restricted
(in Millions)
Securitization
 
Other
 
Total
 
Amounts
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
4

 
$
4

 
$

Restricted cash
104

 
8

 
112

 
112

Accounts receivable
42

 
8

 
50

 
44

Inventories

 
99

 
99

 

Other current assets

 
1

 
1

 

Property, plant and equipment

 
54

 
54

 
38

Securitized regulatory assets
729

 

 
729

 
729

Other assets
13

 
9

 
22

 
21

 
$
888

 
$
183

 
$
1,071

 
$
944

LIABILITIES
 
 
 
 
 
 
 
Accounts payable and accrued current liabilities
$
17

 
$
27

 
$
44

 
$
18

Current portion long-term debt, including capital leases
150

 
7

 
157

 
157

Other current liabilities
62

 
6

 
68

 
66

Mortgage bonds, notes and other

 
35

 
35

 
35

Securitization bonds
643

 

 
643

 
643

Capital lease obligations

 
23

 
23

 
23

Other long term liabilities
6

 
7

 
13

 
12

 
$
878

 
$
105

 
$
983

 
$
954


Amounts for non-consolidated VIEs as September 30, 2011 and December 31, 2010 were as follows:

 
September 30,
 
December 31,
(in Millions)
2011
 
2010
Other investments
$
121

 
$
98

Note receivable
5

 
6

Trust preferred — linked securities
289

 
289


NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Intangible Assets
The Company has certain intangible assets relating to emission allowances, renewable energy credits and non-utility contracts. Emission allowances and renewable energy credits are charged to expense as the allowances and credits are consumed in the operation of the business. The Company’s intangible assets related to emission allowances were $9 million at September 30, 2011 and December 31, 2010. The Company’s intangible assets related to renewable energy credits were $26 million and $17 million at September 30, 2011 and December 31, 2010, respectively. The gross carrying amount and accumulated amortization of contract intangible assets at September 30, 2011were $65 million and $26 million, respectively. The gross carrying amount and accumulated amortization of contract intangible assets at December 31, 2010 were $63 million and $22 million, respectively. The Company amortizes contract intangible assets on a straight-line basis over the expected period of benefit, ranging from 4 to 30 years.
Income Taxes
The Company’s effective tax rate for the three months ended September 30, 2011was 35 percent as compared to 36 percent for the three months ended September 30, 2010. The Company’s effective tax rate for the nine months ended September 30, 2011 was 24 percent as compared to 34 percent for the nine months ended September 30, 2010. The decrease in the effective tax rate in 2011 is due primarily to the recognition of an $88 million income tax benefit due to the enactment of the Michigan Corporate Income Tax which is discussed below.


12

Table of Contents

The Company had $4 million of unrecognized tax benefits at September 30, 2011 and $5 million at December 31, 2010, that, if recognized, would favorably impact its effective tax rate. The Company has increased its unrecognized tax benefit by $40 million in the nine months ended September 30, 2011, as a result of a change in a tax position taken during a prior period. During the next twelve months, it is reasonably possible that the Company will settle certain federal tax audits. As a result, the Company believes that it is possible that there will be a decrease in unrecognized tax benefits of up to $49 million.
Michigan Corporate Income Tax (MCIT)
On May 25, 2011, the Michigan Business Tax (MBT) was repealed and the MCIT was enacted and will become effective January 1, 2012. The MCIT subjects corporations with business activity in Michigan to a 6 percent tax rate on an apportioned income tax base and eliminates the modified gross receipts tax and nearly all credits available under the MBT. The MCIT also eliminated the future deductions allowed under MBT that enabled companies to establish a one-time deferred tax asset upon enactment of the MBT to offset deferred tax liabilities that resulted from enactment of the MBT.
Effective with the enactment of the MCIT in the second quarter of 2011, the net state deferred tax liability was remeasured to reflect the impact of the MCIT tax rate on cumulative temporary differences expected to reverse after the effective date. The net impact of this remeasurement was a decrease in deferred income tax liabilities of $41 million attributable to our regulated utilities that was offset against the regulatory asset established upon the enactment of the MBT.
Due to the elimination of the future tax deductions allowed under the MBT, the one-time MBT deferred tax asset that was established upon the enactment of the MBT has been remeasured to zero. The net impact of this remeasurement is a reduction of net deferred tax assets of $307 million, with $395 million of this decrease in deferred tax assets attributable to our regulated utilities, partially offset by an $88 million decrease in deferred tax liabilities attributable to our non-utility entities. The $395 million decrease in deferred tax assets at our regulated utilities was offset against the regulatory liabilities established upon enactment of the MBT. The $88 million is primarily due to a lower apportionment factor from inclusion of non-utility entities in DTE Energy’s unitary Michigan tax return. The $88 million was recognized as a reduction to income tax expense in the second quarter of 2011.
Consistent with the original establishment of these deferred tax liabilities (assets), no recognition of these non-cash transactions have been reflected in the Consolidated Statements of Cash Flows.
Offsetting Amounts Related to Certain Contracts
The Company offsets the fair value of derivative instruments with cash collateral received or paid for those derivative instruments executed with the same counterparty under a master netting agreement, which reduces both the Company’s total assets and total liabilities. As of September 30, 2011, the total cash collateral posted, net of cash collateral received, was $66 million. Derivative liabilities are shown net of collateral of $3 million. At September 30, 2011, the Company recorded cash collateral received of $1 million and cash collateral paid of $64 million not related to derivative positions. These amounts are included in accounts receivable and accounts payable and are recorded net by counterparty.

NOTE 3 — FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company makes certain assumptions it believes that market participants would use in pricing assets or liabilities, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. Credit risk of the Company and its counterparties is incorporated in the valuation of assets and liabilities through the use of credit reserves, the impact of which was immaterial at September 30, 2011 and December 31, 2010.
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, that 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:

13

Table of Contents


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, 2011:

 
 
 
 
 
 
 
Netting
 
Net Balance at
(in Millions)
Level 1
 
Level 2
 
Level 3
 
Adjustments(2)
 
September 30, 2011
Assets:
 
 
 
 
 
 
 
 
 
Nuclear decommissioning trusts
$
532

 
$
361

 
$

 
$

 
$
893

Other investments(1)
48

 
56

 

 

 
104

Derivative assets:
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
6

 

 
(6
)
 

Commodity Contracts:
 
 
 
 
 
 
 
 
 
Natural Gas
1,650

 
79

 
17

 
(1,698
)
 
48

Electricity

 
326

 
67

 
(282
)
 
111

Other
22

 

 
7

 
(20
)
 
9

Total derivative assets
1,672

 
411

 
91

 
(2,006
)
 
168

Total
$
2,252

 
$
828

 
$
91

 
$
(2,006
)
 
$
1,165

Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
(9
)
 
$

 
$
6

 
$
(3
)
Interest rate contracts

 
(1
)
 

 

 
(1
)
Commodity Contracts:
 
 
 
 
 
 
 
 
 
Natural Gas
(1,616
)
 
(167
)
 
(12
)
 
1,698

 
(97
)
Electricity

 
(295
)
 
(70
)
 
285

 
(80
)
Other
(14
)
 
(1
)
 

 
20

 
5

Total derivative liabilities
(1,630
)
 
(473
)
 
(82
)
 
2,009

 
(176
)
Total
$
(1,630
)
 
$
(473
)
 
$
(82
)
 
$
2,009

 
$
(176
)
Net Assets as of September 30, 2011
$
622

 
$
355

 
$
9

 
$
3

 
$
989

Assets:
 
 
 
 
 
 
 
 
 
Current
$
1,251

 
$
322

 
$
62

 
$
(1,526
)
 
$
109

Noncurrent(3)
1,001

 
506

 
29

 
(480
)
 
1,056

Total Assets
$
2,252

 
$
828

 
$
91

 
$
(2,006
)
 
$
1,165

Liabilities:
 
 
 
 
 
 
 
 
 
Current
$
(1,235
)
 
$
(348
)
 
$
(60
)
 
$
1,529

 
$
(114
)
Noncurrent
(395
)
 
(125
)
 
(22
)
 
480

 
(62
)
Total Liabilities
$
(1,630
)
 
$
(473
)
 
$
(82
)
 
$
2,009

 
$
(176
)
Net Assets as of September 30, 2011
$
622

 
$
355

 
$
9

 
$
3

 
$
989




14

Table of Contents


The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2010:
 
 
 
 
 
 
 
Netting
 
Net Balance at
(in Millions)
Level 1
 
Level 2
 
Level 3
 
Adjustments(2)
 
December 31, 2010
Assets:
 
 
 
 
 
 
 
 
 
Nuclear decommissioning trusts
$
599

 
$
340

 
$

 
$

 
$
939

Other investments(1)
56

 
55

 

 

 
111

Derivative assets:
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
20

 

 
(20
)
 

Commodity Contracts:
 
 
 
 
 
 
 
 
 
Natural Gas
1,846

 
128

 
12

 
(1,960
)
 
26

Electricity

 
649

 
117

 
(589
)
 
177

Other
68

 
4

 
4

 
(71
)
 
5

Total derivative assets
1,914

 
801

 
133

 
(2,640
)
 
208

Total
$
2,569

 
$
1,196

 
$
133

 
$
(2,640
)
 
$
1,258

Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
(30
)
 
$

 
$
20

 
$
(10
)
Interest rate contracts

 
(1
)
 

 

 
(1
)
Commodity Contracts:
 
 
 
 
 
 
 
 
 
Natural Gas
(1,844
)
 
(263
)
 
(11
)
 
1,955

 
(163
)
Electricity

 
(653
)
 
(63
)
 
643

 
(73
)
Other
(63
)
 
(8
)
 

 
66

 
(5
)
Total derivative liabilities
(1,907
)
 
(955
)
 
(74
)
 
2,684

 
(252
)
Total
$
(1,907
)
 
$
(955
)
 
$
(74
)
 
$
2,684

 
$
(252
)
Net Assets as of December 31, 2010
$
662

 
$
241

 
$
59

 
$
44

 
$
1,006

Assets:
 
 
 
 
 
 
 
 
 
Current
$
1,299

 
$
663

 
$
49

 
$
(1,880
)
 
$
131

Noncurrent(3)
1,270

 
533

 
84

 
(760
)
 
1,127

Total Assets
$
2,569

 
$
1,196

 
$
133

 
$
(2,640
)
 
$
1,258

Liabilities:
 
 
 
 
 
 
 
 
 
Current
$
(1,290
)
 
$
(730
)
 
$
(21
)
 
$
1,899

 
$
(142
)
Noncurrent
(617
)
 
(225
)
 
(53
)
 
785

 
(110
)
Total Liabilities
$
(1,907
)
 
$
(955
)
 
$
(74
)
 
$
2,684

 
$
(252
)
Net Assets as of December 31, 2010
$
662

 
$
241

 
$
59

 
$
44

 
$
1,006

_____________________________
(1)
Excludes cash surrender value of life insurance investments.
(2)
Amounts represent the impact of master netting agreements that allow the Company to net gain and loss positions and cash collateral held or placed with the same counterparties.
(3)
Includes $104 million and $111 million at September 30, 2011 and December 31, 2010, respectively, of other investments that are included in the Consolidated Statements of Financial Position in Other Investments.





15

Table of Contents



The following tables present the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2011 and 2010:

 
Three Months Ended September 30, 2011
(in Millions)
Natural Gas
 
Electricity
 
Other
 
Total
Net Assets as of July 1, 2011
$
1

 
$
57

 
$
7

 
$
65

Transfers into Level 3
(1
)
 
(6
)
 

 
(7
)
Transfers out of Level 3

 
(42
)
 

 
(42
)
Total gains or (losses):
 
 
 
 
 
 
 
Included in earnings
6

 
23

 

 
29

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
Settlements
(1
)
 
(35
)
 

 
(36
)
Net Assets (Liabilities) as of September 30, 2011
$
5

 
$
(3
)
 
$
7

 
$
9

The amount of total gains (losses) included in net income attributed to the change in unrealized gains (losses) related to assets and liabilities held at September 30, 2011
$
6

 
$
5

 
$

 
$
11


 
Three Months Ended September 30, 2010
(in Millions)
Natural Gas
 
Electricity
 
Other
 
Total
Net Assets as of July 1, 2010
$
2

 
$
155

 
$
4

 
$
161

Changes in fair value recorded in income
3

 
21

 
1

 
25

Purchases, issuances and settlements
(1
)
 
(29
)
 
(1
)
 
(31
)
Transfers in/out of Level 3

 
(22
)
 

 
(22
)
Net Assets as of September 30, 2010
$
4

 
$
125

 
$
4

 
$
133

The amount of total gains (losses) included in net income attributed to the change in unrealized gains (losses) related to assets and liabilities held at September 30, 2010
$
2

 
$
(4
)
 
$
1

 
$
(1
)

 
Nine Months Ended September 30, 2011
(in Millions)
Natural Gas
 
Electricity
 
Other
 
Total
Net Assets as of January 1, 2011
$
1

 
$
54

 
$
4

 
$
59

Transfers into Level 3

 
(4
)
 

 
(4
)
Transfers out of Level 3
1

 
(25
)
 

 
(24
)
Total gains or (losses):
 
 
 
 
 
 
 
Included in earnings
3

 
34

 
2

 
39

Recorded in regulatory assets/liabilities

 

 
3

 
3

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
Purchases

 
1

 

 
1

Settlements

 
(63
)
 
(2
)
 
(65
)
Net Assets (Liabilities) as of September 30, 2011
$
5

 
$
(3
)
 
$
7

 
$
9

The amount of total gains (losses) included in net income attributed to the change in unrealized gains (losses) related to assets and liabilities held at September 30, 2011
$
5

 
$
17

 
$
2

 
$
24



16

Table of Contents

 
Nine Months Ended September 30, 2010
(in Millions)
Natural Gas
 
Electricity
 
Other
 
Total
Net Assets as of January 1, 2010
$
2

 
$
19

 
$
3

 
$
24

Changes in fair value recorded in income
4

 
117

 
1

 
122

Changes in fair value recorded in regulatory assets/liabilities

 

 
4

 
4

Purchases, issuances and settlements
(6
)
 
(59
)
 
(4
)
 
(69
)
Transfers in/out of Level 3
4

 
48

 

 
52

Net Assets as of September 30, 2010
$
4

 
$
125

 
$
4

 
$
133

The amount of total gains (losses) included in net income attributed to the change in unrealized gains (losses) related to assets and liabilities held at September 30, 2010
$
(2
)
 
$
58

 
$
1

 
$
57


Transfers in and transfers 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 and transfers out of Level 3 are reflected as if they had occurred at the beginning of the period. For the three and nine months ended September 30, 2011, $42 million and $25 million, respectively, of net assets reflecting inputs related to certain power transactions identified as observable due to available broker quotes were transferred from Level 3 to Level 2. For the three and nine months ended September 30, 2011, $6 million and $4 million, respectively, of net assets reflecting inputs related to certain power transactions identified as unobservable due to lack of available broker quotes were transferred from Level 2 to Level 3.
Transfers from Level 3 to Level 2 of $22 million reflect inputs related to certain power transactions identified as observable due to available broker quotes for the three months ended September 30, 2010. Transfers from Level 2 to Level 3 of $48 million reflect inputs related to certain power transactions identified as unobservable due to lack of available broker quotes for the nine months ended September 30, 2010. No significant transfers between Levels 1 and 2 occurred in the three and nine months ended September 30, 2011 and 2010.
Nuclear Decommissioning Trusts and Other Investments
The nuclear decommissioning trusts and other investments hold debt and equity securities directly and indirectly through commingled funds and institutional mutual funds. Exchange-traded debt and equity securities held directly are valued using quoted market prices in actively traded markets. The commingled funds and institutional mutual funds which hold exchange-traded equity or debt securities are valued based on the underlying securities, using quoted prices in actively traded markets. Non-exchange-traded fixed income securities are valued based upon quotations available from brokers or pricing services. A primary price source is identified by asset type, class or issue for each security. The trustees monitor prices supplied by pricing services and may use a supplemental price source or change the primary price source of a given security if the trustees determine that another price source is considered to be preferable. DTE Energy has obtained an understanding of how these prices are derived, including the nature and observability of the inputs used in deriving such prices. Additionally, DTE Energy 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. DTE Energy considers the following criteria in determining whether a market is considered active: frequency in which pricing information is updated, variability in pricing between sources or over time and the availability of public information. Other derivative contracts are valued based upon a variety of inputs including commodity market prices, broker quotes, interest rates, credit ratings, default rates, market-based seasonality and basis differential factors. DTE Energy monitors the prices that are supplied by brokers and pricing services and may use a supplemental price source or change the primary price source of an index if prices become unavailable or another price source is determined to be more representative of fair value. DTE Energy has obtained an understanding of how these prices are derived. Additionally, DTE Energy selectively corroborates the fair value of its transactions by comparison of market-based price sources. Mathematical valuation models are used for derivatives for which external market data is not readily observable, such as contracts which extend beyond the actively traded reporting period.


17

Table of Contents

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 and the carrying value for long-term debt securities. Certain other financial instruments, such as notes payable, customer deposits and notes receivable are not shown as carrying value approximates fair value. See Note 4 for further fair value information on financial and derivative instruments.

 
September 30, 2011
 
December 31, 2010
(in Billions)
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Long-Term Debt
$
8.8

 
$
7.7

 
$
8.5

 
$
8.0

Nuclear Decommissioning Trust Funds
Detroit Edison has a legal obligation to decommission its nuclear power plants following the expiration of their operating licenses. This obligation is reflected as an asset retirement obligation on the Consolidated Statements of Financial Position. See Note 5.
The NRC has jurisdiction over the decommissioning of nuclear power plants and requires decommissioning funding based upon a formula. The MPSC and FERC regulate the recovery of costs of decommissioning nuclear power plants and both require the use of external trust funds to finance the decommissioning of Fermi 2. Rates approved by the MPSC provide for the recovery of decommissioning costs of Fermi 2 and the disposal of low-level radioactive waste. Detroit Edison is continuing to fund FERC jurisdictional amounts for decommissioning even though explicit provisions are not included in FERC rates. The Company believes the MPSC and FERC collections will be adequate to fund the estimated cost of decommissioning using the NRC formula. The decommissioning assets, anticipated earnings thereon and future revenues from decommissioning collections will be used to decommission Fermi 2. The Company expects the liabilities to be reduced to zero at the conclusion of the decommissioning activities. If amounts remain in the trust funds for Fermi 2 following the completion of the decommissioning activities, those amounts will be disbursed based on rulings by the MPSC and FERC.
The decommissioning of Fermi 1 is funded by Detroit Edison. Contributions to the Fermi 1 trust are discretionary.
The following table summarizes the fair value of the nuclear decommissioning trust fund assets:
 
September 30,
 
December 31,
(in Millions)
2011
 
2010
Fermi 2
$
858

 
$
910

Fermi 1
3

 
3

Low level radioactive waste
32

 
26

Total
$
893

 
$
939


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)
2011
 
2010
 
2011
 
2010
Realized gains
$
8

 
$
8

 
$
34

 
$
29

Realized losses
(9
)
 
(6
)
 
(26
)
 
(25
)
Proceeds from sales of securities
10

 
51

 
69

 
179


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


18

Table of Contents

 
Fair
 
Unrealized
(in Millions)
Value
 
Gains
As of September 30, 2011
 
 
 
Equity securities
$
485

 
$
52

Debt securities
395

 
22

Cash and cash equivalents
13

 

 
$
893

 
$
74

As of December 31, 2010
 
 
 
Equity securities
$
572

 
$
77

Debt securities
361

 
11

Cash and cash equivalents
6

 

 
$
939

 
$
88


The debt securities at September 30, 2011 and December 31, 2010 had an average maturity of approximately 7 and 6 years, respectively. 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.
Unrealized losses incurred by the Fermi 2 trust are recognized as a Regulatory asset. Detroit Edison recognized $87 million and $26 million of unrealized losses as Regulatory assets at September 30, 2011 and December 31, 2010, 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, unrealized losses incurred by the Fermi 1 trust are recognized in earnings immediately. There were no unrealized losses recognized for the three and nine months ended September 30, 2011 and September 30, 2010 for Fermi 1 trust assets.
Other Available-For-Sale Securities
The following table summarizes the fair value of the Company’s investment in available-for-sale debt and equity securities, excluding nuclear decommissioning trust fund assets:

 
September 30, 2011
 
December 31, 2010
(in Millions)
Fair Value
 
Carrying value
 
Fair Value
 
Carrying Value
Cash equivalents
$
85

 
$
85

 
$
133

 
$
133

Equity securities
5

 
5

 
6

 
6


As of September 30, 2011, these securities were comprised primarily of money-market funds and equity securities. During the nine months ended September 30, 2011 and 2010, no amounts of unrealized losses on available for sale securities were reclassified out of other comprehensive income into losses for the period. Gains (losses) related to trading securities held at September 30, 2011 and September 30, 2010 were $(3) million and $3 million, respectively.

NOTE 4 — FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
The Company recognizes all derivatives at their fair value as Derivative Assets or Liabilities on the Consolidated Statements of Financial Position unless they qualify for certain scope exceptions, including the normal purchases and normal sales exception. Further, derivatives that qualify and are designated for hedge accounting are classified as either hedges of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), or as hedges of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge). For cash flow hedges, the portion of the derivative gain or loss that is effective in offsetting the change in the value of the underlying exposure is deferred in Accumulated other comprehensive income and later reclassified into earnings when the underlying transaction occurs. For fair value hedges, changes in fair values for the derivative are recognized in earnings each period. Gains and losses from the ineffective portion of any hedge are recognized in earnings immediately. For derivatives that do not qualify or are not designated for hedge accounting, changes in the fair value are recognized in earnings each period.
The Company's primary market risk exposure is associated with commodity prices, credit, interest rates and foreign currency exchange. The Company has risk management policies to monitor and manage market risks. The Company uses derivative instruments to manage some of the exposure. The Company uses derivative instruments for trading purposes in its Energy

19

Table of Contents

Trading segment and the coal marketing activities of its Power and Industrial Projects segment. Contracts classified as derivative instruments include power, gas, oil and certain coal forwards, futures, options and swaps, and foreign currency exchange contracts. Items not classified as derivatives include natural gas inventory, unconventional gas reserves, power transmission, pipeline transportation and certain storage assets.
Electric Utility — Detroit Edison generates, purchases, distributes and sells electricity. Detroit Edison uses forward energy and capacity contracts to manage changes in the price of electricity and fuel. Substantially all of these contracts meet the normal purchases and sales exemption and are therefore accounted for under the accrual method. Other derivative contracts are recoverable through the PSCR mechanism when settled. This results in the deferral of unrealized gains and losses as Regulatory assets or liabilities until realized.
Gas Utility — MichCon purchases, stores, transports, distributes and sells natural gas and sells storage and transportation capacity. MichCon has fixed-priced contracts for portions of its expected gas supply requirements through March 2014. Substantially all of these contracts meet the normal purchases and sales exemption and are therefore accounted for under the accrual method. MichCon may also sell forward transportation and storage capacity contracts. Forward transportation and storage contracts are not derivatives and are therefore accounted for under the accrual method.
Gas Storage and Pipelines — This segment is primarily engaged in services related to the transportation, gathering and storage of natural gas. Primarily fixed-priced contracts are used in the marketing and management of transportation, gathering and storage services. Generally these contracts are not derivatives and are therefore accounted for under the accrual method.
Unconventional Gas Production — The Unconventional Gas Production business is engaged in unconventional natural gas and oil project development and production. The Company may use derivative contracts to manage changes in the price of natural gas and crude oil.
Power and Industrial Projects — Business units within this segment manage and operate onsite energy and pulverized coal projects, coke batteries, landfill gas recovery and power generation assets. These businesses utilize fixed-priced contracts in the marketing and management of their assets. These contracts are generally not derivatives and are therefore accounted for under the accrual method. The segment also engages in coal marketing which includes the marketing and trading of physical coal and coal financial instruments, and forward contracts for the purchase and sale of emission allowances. Certain of these physical and financial coal contracts and contracts for the purchase and sale of emission allowances are derivatives and are accounted for by recording changes in fair value to earnings.
Energy Trading — Commodity Price Risk — Energy Trading markets and trades electricity and natural gas physical products and energy financial instruments, and provides energy and asset management services utilizing energy commodity derivative instruments. Forwards, futures, options and swap agreements are used to manage exposure to the risk of market price and volume fluctuations in its operations. These derivatives are accounted for by recording changes in fair value to earnings unless hedge accounting criteria are met.
Energy Trading — Foreign Currency Exchange Risk — Energy Trading has foreign currency exchange forward contracts to economically hedge fixed Canadian dollar commitments existing under power purchase and sale contracts and gas transportation contracts. The Company enters into these contracts to mitigate price volatility with respect to fluctuations of the Canadian dollar relative to the U.S. dollar. These derivatives are accounted for by recording changes in fair value to earnings unless hedge accounting criteria are met.
Corporate and Other — Interest Rate Risk — The Company uses interest rate swaps, treasury locks and other derivatives to hedge the risk associated with interest rate market volatility. In 2004 and 2000, the Company entered into a series of interest rate derivatives to limit its sensitivity to market interest rate risk associated with the issuance of long-term debt. Such instruments were designated as cash flow hedges. The Company subsequently issued long-term debt and terminated these hedges at a cost that is included in other comprehensive loss. Amounts recorded in other comprehensive loss will be reclassified to interest expense through 2033. In 2011, the Company estimates reclassifying less than $1 million of losses to earnings.
Credit Risk — The utility and non-utility businesses are exposed to credit risk if customers or counterparties do not comply with their contractual obligations. The Company maintains credit policies that significantly minimize overall credit risk. These policies include an evaluation of potential customers’ and counterparties’ financial condition, credit rating, collateral requirements or other credit enhancements such as letters of credit or guarantees. The Company generally uses standardized agreements that allow the netting of positive and negative transactions associated with a single counterparty. The Company maintains a provision for credit losses based on factors surrounding the credit risk of its customers, historical trends, and other information. Based on the Company’s credit policies and its September 30, 2011 provision for credit losses, the Company’s exposure to counterparty nonperformance is not expected to have a material adverse effect on the Company’s financial statements.


20

Table of Contents

Derivative Activities
The Company manages its mark-to-market (MTM) risk on a portfolio basis based upon the delivery period of its contracts and the individual components of the risks within each contract. Accordingly, it records and manages the energy purchase and sale obligations under its contracts in separate components based on the commodity (e.g., electricity or gas), the product (e.g., electricity for delivery during peak or off-peak hours), the delivery location (e.g., by region), the risk profile (e.g., forward or option), and the delivery period (e.g., by month and year). The following describe the four categories of activities represented by their operating characteristics and key risks:

Asset Optimization - Represents derivative activity associated with assets owned and contracted by DTE Energy, including forward sales of gas production and trades associated with power transmission, gas transportation and storage capacity. Changes in the value of derivatives in this category economically offset changes in the value of underlying non-derivative positions, which do not qualify for fair value accounting. The difference in accounting treatment of derivatives in this category and the underlying non-derivative positions can result in significant earnings volatility.

Marketing and Origination - Represents derivative activity transacted by originating substantially hedged positions with wholesale energy marketers, producers, end users, utilities, retail aggregators and alternative energy suppliers.

Fundamentals Based Trading - Represents derivative activity transacted with the intent of taking a view, capturing market price changes, or putting capital at risk. This activity is speculative in nature as opposed to hedging an existing exposure.

Other - Includes derivative activity at Detroit Edison related to FTRs and forward contracts related to emissions. Changes in the value of derivative contracts at Detroit Edison are recorded as Derivative Assets or Liabilities, with an offset to Regulatory Assets or Liabilities as the settlement value of these contracts will be included in the PSCR mechanism when realized.
The following tables present the fair value of derivative instruments as of September 30, 2011:

(in Millions)
Derivative Assets
 
Derivative Liabilities
Derivatives designated as hedging instruments:
 
 
 
Interest rate contracts
$

 
$
(1
)
Derivatives not designated as hedging instruments:
 
 
 
Foreign currency exchange contracts
$
6

 
$
(9
)
Commodity Contracts:
 
 
 
  Natural Gas
1,746

 
(1,795
)
  Electricity
393

 
(365
)
  Other
29

 
(15
)
Total derivatives not designated as hedging instruments
$
2,174

 
$
(2,184
)
Total derivatives:
 
 
 
Current
$
1,635

 
$
(1,643
)
Noncurrent
539