DTE Energy 2012.3.31 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 March 31, 2012
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 filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(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 March 31, 2012, 170,112,217 shares of DTE Energy’s common stock were outstanding, substantially all of which were held by non-affiliates.
 



DTE ENERGY COMPANY
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED March 31, 2012

TABLE OF CONTENTS

 
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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, which 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.
 
 
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.

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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 using a standard ratio of one barrel of oil and/or natural gas liquids to 6 Mcf of natural gas equivalents.
 
 
Btu
Heat value (energy content) of fuel
 
 
dth/d
Decatherms per day
 
 
kWh
Kilowatthour of electricity
 
 
MMBtu
Million Btu
 
 
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:

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;
impact of electric and gas utility restructuring in Michigan, including legislative amendments and Customer Choice programs;
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;
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;
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;
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;
the potential for increased costs or delays in completion of significant construction projects;
the uncertainties of successful exploration of unconventional gas and oil 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 effects of weather and other natural phenomena on operations and sales to customers, and purchases from suppliers;
unplanned outages;
the cost of protecting assets against, or damage due to, terrorism or cyber attacks;
employee relations and the impact of collective bargaining agreements;
the availability, cost, coverage and terms of insurance and stability of insurance providers;
cost reduction efforts and the maximization of plant and distribution system performance;
the effects of competition;
changes in and application of accounting standards and financial reporting regulations;
changes in federal or state laws and their interpretation with respect to regulation, energy policy and other business issues;
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 speak only as of the date on which such statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.


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Part I — Item 1.
DTE ENERGY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
Three Months Ended March 31
 
2012
 
2011
 
(In millions, except per share amounts)
Operating Revenues
$
2,249

 
$
2,431

Operating Expenses
 
 
 
Fuel, purchased power and gas
889

 
1,071

Operation and maintenance
726

 
631

Depreciation, depletion and amortization
232

 
245

Taxes other than income
95

 
83

Asset (gains) and losses, reserves and impairments, net
(5
)
 
11

 
1,937

 
2,041

Operating Income
312

 
390

Other (Income) and Deductions
 
 
 
Interest expense
113

 
126

Interest income
(2
)
 
(3
)
Other income
(37
)
 
(21
)
Other expenses
7

 
7

 
81

 
109

Income Before Income Taxes
231

 
281

Income Tax Expense
73

 
103

 
 
 
 
Net Income
158

 
178

 
 
 
 
Less: Net Income Attributable to Noncontrolling Interests
2


2

Net Income Attributable to DTE Energy Company
$
156

 
$
176

 
 
 
 
Basic Earnings per Common Share
 
 
 
Net Income Attributable to DTE Energy Company
$
0.91

 
$
1.04

 
 
 
 
Diluted Earnings per Common Share
 
 
 
Net Income Attributable to DTE Energy Company
$
0.91

 
$
1.04

 
 
 
 
Weighted Average Common Shares Outstanding
 
 
 
Basic
170

 
169

Diluted
170

 
170

Dividends Declared per Common Share
$
0.59

 
$
0.56


See Notes to Consolidated Financial Statements (Unaudited)


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DTE ENERGY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended March 31
 
2012
 
2011
 
(In millions)
Net income
$
158

 
$
178

Other comprehensive income, net of tax:
 

 
 

Benefit obligations:
 

 
 

Benefit obligations, net of taxes of $2 and $1
3

 
1

 
3

 
1

Net unrealized gains on investments:
 

 
 

Gains arising during the period, net of taxes of $— and $—
1

 

 
1

 

 
 
 
 
Foreign currency translation, net of taxes of $— and $—
1

 

 
 
 
 
Comprehensive income
163

 
179

Less: Comprehensive income attributable to noncontrolling interests
2

 
2

Comprehensive income attributable to DTE Energy Company
$
161

 
$
177


See Notes to Consolidated Financial Statements (Unaudited)



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DTE ENERGY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
 
March 31
 
December 31
 
2012
 
2011
 
(In millions)
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
57

 
$
68

Restricted cash, principally Securitization
86

 
147

Accounts receivable (less allowance for doubtful accounts of $160 and $162, respectively)
 
 
 
Customer
1,262

 
1,317

Other
122

 
90

Inventories
 
 
 
Fuel and gas
447

 
572

Materials and supplies
219

 
219

Deferred income taxes
62

 
51

Derivative assets
277

 
222

Regulatory assets
232

 
314

Other
187

 
196

 
2,951

 
3,196

Investments
 
 
 
Nuclear decommissioning trust funds
1,004

 
937

Other
532

 
525

 
1,536

 
1,462

Property
 
 
 
Property, plant and equipment
22,780

 
22,541

Less accumulated depreciation, depletion and amortization
(8,856
)
 
(8,795
)
 
13,924

 
13,746

Other Assets
 
 
 
Goodwill
2,020

 
2,020

Regulatory assets
4,423

 
4,539

Securitized regulatory assets
536

 
577

Intangible assets
70

 
73

Notes receivable
120

 
123

Derivative assets
78

 
74

Other
188

 
199

 
7,435

 
7,605

Total Assets
$
25,846

 
$
26,009


See Notes to Consolidated Financial Statements (Unaudited)

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DTE ENERGY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) — (Continued)
 
March 31
 
December 31
 
2012
 
2011
 
(In millions, except shares)
LIABILITIES AND EQUITY
Current Liabilities
 
 
 
Accounts payable
$
690

 
$
782

Accrued interest
121

 
95

Dividends payable
100

 
99

Short-term borrowings
313

 
419

Current portion long-term debt, including capital leases
530

 
526

Derivative liabilities
238

 
158

Gas inventory equalization
114

 

Other
424

 
549

 
2,530

 
2,628

Long-Term Debt (net of current portion)
 
 
 
Mortgage bonds, notes and other
6,404

 
6,405

Securitization bonds
391

 
479

Junior subordinated debentures
280

 
280

Capital lease obligations
18

 
23

 
7,093

 
7,187

Other Liabilities
 

 
 

Deferred income taxes
3,188

 
3,116

Regulatory liabilities
1,018

 
1,019

Asset retirement obligations
1,615

 
1,591

Unamortized investment tax credit
63

 
65

Derivative liabilities
99

 
89

Accrued pension liability
1,300

 
1,298

Accrued postretirement liability
1,342

 
1,484

Nuclear decommissioning
156

 
148

Other
295

 
331

 
9,076

 
9,141

Commitments and Contingencies (Notes 6 and 9)
 
 
 
Equity
 
 
 
Common stock, without par value, 400,000,000 shares authorized, 170,112,217 and 169,247,282 shares issued and outstanding, respectively
3,453

 
3,417

Retained earnings
3,804

 
3,750

Accumulated other comprehensive loss
(153
)
 
(158
)
Total DTE Energy Company Equity
7,104

 
7,009

Noncontrolling interests
43

 
44

Total Equity
7,147

 
7,053

Total Liabilities and Equity
$
25,846

 
$
26,009


See Notes to Consolidated Financial Statements (Unaudited)

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DTE ENERGY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
Three Months Ended March 31
 
2012
 
2011
 
(In millions)
Operating Activities
 
 
 
Net income
$
158

 
$
178

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
232

 
245

Deferred income taxes
58

 
48

Asset (gains) and losses, reserves and impairments, net
(19
)
 
11

Changes in assets and liabilities, exclusive of changes shown separately (Note 12)
191

 
240

Net cash from operating activities
620

 
722

Investing Activities
 
 
 
Plant and equipment expenditures — utility
(331
)
 
(253
)
Plant and equipment expenditures — non-utility
(61
)
 
(17
)
Proceeds from sale of assets
11

 
4

Restricted cash for debt redemption, principally Securitization
63

 
53

Proceeds from sale of nuclear decommissioning trust fund assets
11

 
20

Investment in nuclear decommissioning trust funds
(15
)
 
(28
)
Other
(21
)
 
(23
)
Net cash used for investing activities
(343
)
 
(244
)
Financing Activities
 
 
 
Redemption of long-term debt
(86
)
 
(94
)
Short-term borrowings, net
(106
)
 
(150
)
Issuance of common stock
10

 

Repurchase of common stock

 
(9
)
Dividends on common stock
(99
)
 
(95
)
Other
(7
)
 
2

Net cash used for financing activities
(288
)
 
(346
)
Net Increase (Decrease) in Cash and Cash Equivalents
(11
)
 
132

Cash and Cash Equivalents at Beginning of Period
68

 
65

Cash and Cash Equivalents at End of Period
$
57

 
$
197


See Notes to Consolidated Financial Statements (Unaudited)

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DTE ENERGY COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

 
 
 
 
 
 
 
Accumulated
Other Comprehensive Loss
 
Non-Controlling Interest
 
 
 
Common Stock
 
Retained Earnings
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
 
(Dollars in millions, shares in thousands)
Balance, December 31, 2011
169,247

 
$
3,417

 
$
3,750

 
$
(158
)
 
$
44

 
$
7,053

Net Income

 

 
156

 

 
2

 
158

Dividends declared on common stock

 

 
(100
)
 

 

 
(100
)
Issuance of common stock
180

 
10

 

 

 

 
10

Benefit obligations, net of tax

 

 

 
3

 

 
3

Net change in unrealized losses on investments, net of tax

 

 

 
1

 

 
1

Foreign currency translation, net of tax

 

 

 
1

 

 
1

Stock-based compensation, distributions to noncontrolling interests and other
685

 
26

 
(2
)
 

 
(3
)
 
21

Balance, March 31, 2012
170,112

 
$
3,453

 
$
3,804

 
$
(153
)
 
$
43

 
$
7,147


See Notes to Consolidated Financial Statements (Unaudited)


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DTE ENERGY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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 “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 2011 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, 2012.

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 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 evaluates whether an entity is a VIE whenever reconsideration events occur. The Company performs ongoing reassessments of all VIEs to determine if the primary beneficiary status has changed.

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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.

The Company has variable interests in VIEs through certain of its long-term purchase contracts. As of March 31, 2012, 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 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 March 31, 2012 and December 31, 2011. Amounts at March 31, 2012 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.
 
 
March 31, 2012
 
 
Securitization
 
Other
 
Total
 
Restricted
Amounts
 
 
(In millions)
ASSETS
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
12

 
$
12

 
$

Restricted cash
 
46

 
6

 
52

 
52

Accounts receivable
 
34

 
16

 
50

 
36

Inventories
 

 
106

 
106

 

Other current assets
 

 
2

 
2

 

Property, plant and equipment
 

 
72

 
72

 
22

Securitized regulatory assets
 
536

 

 
536

 
536

Other assets
 
9

 
6

 
15

 
15

 
 
$
625

 
$
220

 
$
845

 
$
661

LIABILITIES
 
 
 
 
 
 
 
 
Accounts payable and accrued current liabilities
 
$
3

 
$
32

 
$
35

 
$
3

Current portion long-term debt, including capital leases
 
168

 
8

 
176

 
176

Other current liabilities
 
48

 

 
48

 
48

Mortgage bonds, notes and other
 

 
28

 
28

 
28

Securitization bonds
 
391

 

 
391

 
391

Capital lease obligations
 

 
12

 
12

 
12

Other long-term liabilities
 
7

 
2

 
9

 
8

 
 
$
617

 
$
82

 
$
699

 
$
666


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December 31, 2011
 
 
Securitization
 
Other
 
Total
 
Restricted
Amounts
 
 
(In millions)
ASSETS
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
25

 
$
25

 
$

Restricted cash
 
107

 
7

 
114

 
114

Accounts receivable
 
34

 
17

 
51

 
36

Inventories
 

 
183

 
183

 

Other current assets
 

 
1

 
1

 

Property, plant and equipment
 

 
73

 
73

 
23

Securitized regulatory assets
 
577

 

 
577

 
577

Other assets
 
10

 
6

 
16

 
16

 
 
$
728

 
$
312

 
$
1,040

 
$
766

LIABILITIES
 
 
 
 
 
 
 
 
Accounts payable and accrued current liabilities
 
$
14

 
$
24

 
$
38

 
$
14

Current portion long-term debt, including capital leases
 
164

 
7

 
171

 
171

Other current liabilities
 
55

 

 
55

 
55

Mortgage bonds, notes and other
 

 
30

 
30

 
30

Securitization bonds
 
479

 

 
479

 
479

Capital lease obligations
 

 
14

 
14

 
14

Other long term liabilities
 
7

 
2

 
9

 
8

 
 
$
719

 
$
77

 
$
796

 
$
771


Amounts for non-consolidated VIEs as of March 31, 2012 and December 31, 2011 are as follows:
 
March 31, 2012
 
December 31, 2011
 
(In millions)
Other investments
$
123

 
$
117

Notes receivable
7

 
7


NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

Intangible Assets

The Company has certain intangible assets relating to emission allowances, renewable energy credits and non-utility contracts. Summary of intangible assets as of March 31, 2012 and December 31, 2011:
 
March 31,
 
December 31,
 
2012
 
2011
 
(In millions)
Emission allowances
$
9

 
$
10

Renewable energy credits
40

 
39

Contract intangible assets
64

 
65

 
113

 
114

Less accumulated amortization
28

 
28

Intangible assets, net
$
85

 
$
86

Less current intangible assets
$
15

 
$
13

 
$
70

 
$
73



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Emission allowances and renewable energy credits are charged to expense, using average cost, as the allowances and credits are consumed in the operation of the business. The Company amortizes contract intangible assets on a straight-line basis over the expected period of benefit, ranging from 3 to 20 years.

Income Taxes

The Company's effective tax rate from continuing operations for the three months ended March 31, 2012 is 32 percent as compared to 37 percent for the three months ended March 31, 2011. The decrease in the effective tax rate in 2012 is due primarily to the increase in the generation of production tax credits in 2012.

The Company had $4 million of unrecognized tax benefits at March 31, 2012 and at December 31, 2011, that, if recognized, would favorably impact its effective tax rate. 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 the unrecognized tax benefits of up to $30 million.

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 the Company’s total assets and total liabilities. As of March 31, 2012 , the total cash collateral posted, net of cash collateral received, was $138 million. Derivative assets and derivative liabilities are shown net of collateral of $1 million and $127 million, respectively, as of March 31, 2012. As of March 31, 2012, the Company recorded cash collateral paid of $15 million and cash collateral received of $3 million not related to unrealized 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 March 31, 2012 and December 31, 2011. 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:

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.

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The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of March 31, 2012:
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustments (2)
 
Net Balance at
March 31, 2012
 
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
Cash equivalents
$

 
$
68

 
$

 
$

 
$
68

Nuclear decommissioning trusts
629

 
375

 
$

 
$

 
1,004

Other investments (1)
62

 
41

 

 

 
103

Derivative assets:
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
2

 

 
(2
)
 

Commodity Contracts:
 
 
 
 
 
 
 
 
 
Natural Gas
1,568

 
102

 
31

 
(1,671
)
 
30

Electricity

 
675

 
363

 
(720
)
 
318

Other
45

 
2

 
6

 
(46
)
 
7

Total derivative assets
1,613

 
781

 
400

 
(2,439
)
 
355

Total
$
2,304

 
$
1,265

 
$
400

 
$
(2,439
)
 
$
1,530

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
(3
)
 
$

 
$
2

 
$
(1
)
Interest rate contracts

 
(1
)
 

 

 
(1
)
Commodity Contracts:
 
 
 
 
 
 
 
 
 
Natural Gas
(1,681
)
 
(143
)
 
(25
)
 
1,741

 
(108
)
Electricity

 
(674
)
 
(338
)
 
783

 
(229
)
Other
(37
)
 

 

 
39

 
2

Total derivative liabilities
(1,718
)
 
(821
)
 
(363
)
 
2,565

 
(337
)
Total
$
(1,718
)
 
$
(821
)
 
$
(363
)
 
$
2,565

 
$
(337
)
Net Assets as of March 31, 2012
$
586

 
$
444

 
$
37

 
$
126

 
$
1,193

Assets:
 
 
 
 
 
 
 
 
 
Current
$
1,339

 
$
711

 
$
327

 
$
(2,048
)
 
$
329

Noncurrent (3)
965

 
554

 
73

 
(391
)
 
1,201

Total Assets
$
2,304

 
$
1,265

 
$
400

 
$
(2,439
)
 
$
1,530

Liabilities:
 
 
 
 
 
 
 
 
 
Current
$
(1,391
)
 
$
(687
)
 
$
(290
)
 
$
2,130

 
$
(238
)
Noncurrent
(327
)
 
(134
)
 
(73
)
 
435

 
(99
)
Total Liabilities
$
(1,718
)
 
$
(821
)
 
$
(363
)
 
$
2,565

 
$
(337
)
Net Assets as of March 31, 2012
$
586

 
$
444

 
$
37

 
$
126

 
$
1,193



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, 2011:
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustments (2)
 
Net Balance at
December 31, 2011
 
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
Nuclear decommissioning trusts
$
577

 
$
360

 
$

 
$

 
$
937

Other investments (1)
57

 
54

 

 

 
111

Derivative assets:
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
3

 

 
(3
)
 

Commodity Contracts:
 
 
 
 
 
 
 
 
 
Natural Gas
1,926

 
78

 
20

 
(1,991
)
 
33

Electricity

 
523

 
224

 
(490
)
 
257

Other
23

 
2

 
6

 
(25
)
 
6

Total derivative assets
1,949

 
606

 
250

 
(2,509
)
 
296

Total
$
2,583

 
$
1,020

 
$
250

 
$
(2,509
)
 
$
1,344

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
(5
)
 
$

 
$
3

 
$
(2
)
Interest rate contracts

 
(1
)
 

 

 
(1
)
Commodity Contracts:
 
 
 
 
 
 
 
 
 
Natural Gas
(1,940
)
 
(126
)
 
(14
)
 
1,976

 
(104
)
Electricity

 
(513
)
 
(192
)
 
565

 
(140
)
Other
(19
)
 
(1
)
 

 
20

 

Total derivative liabilities
(1,959
)
 
(646
)
 
(206
)
 
2,564

 
(247
)
Total
$
(1,959
)
 
$
(646
)
 
$
(206
)
 
$
2,564

 
$
(247
)
Net Assets as of December 31, 2011
$
624

 
$
374

 
$
44

 
$
55

 
$
1,097

Assets:
 
 
 
 
 
 
 
 
 
Current
$
1,571

 
$
520

 
$
181

 
$
(2,050
)
 
$
222

Noncurrent (3)
1,012

 
500

 
69

 
(459
)
 
1,122

Total Assets
$
2,583

 
$
1,020

 
$
250

 
$
(2,509
)
 
$
1,344

Liabilities:
 
 
 
 
 
 
 
 
 
Current
$
(1,603
)
 
$
(527
)
 
$
(152
)
 
$
2,124

 
$
(158
)
Noncurrent
(356
)
 
(119
)
 
(54
)
 
440

 
(89
)
Total Liabilities
$
(1,959
)
 
$
(646
)
 
$
(206
)
 
$
2,564

 
$
(247
)
Net Assets as of December 31, 2011
$
624

 
$
374

 
$
44

 
$
55

 
$
1,097


(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 $103 million and $111 million of other investments that are included in the Consolidated Statements of Financial Position in Other investments at March 31, 2012 and December 31, 2011, respectively.

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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 months ended March 31, 2012 and 2011:
 
Three Months Ended March 31, 2012
 
Natural Gas
 
Electricity
 
Other
 
Total
 
(In millions)
Net Assets as of January 1, 2012
$
6

 
$
32

 
$
6

 
$
44

Transfers into Level 3

 
27

 

 
27

Transfers out of Level 3
(2
)
 

 

 
(2
)
Total gains:
 
 
 
 
 
 
 
Included in earnings
6

 
(14
)
 
1

 
(7
)
Recorded in regulatory assets/liabilities

 

 
1

 
1

Purchases, issuances and settlements:
 
 
 
 
 
 
 
Settlements
(4
)
 
(20
)
 
(2
)
 
(26
)
Net Assets as of March 31, 2012
$
6

 
$
25

 
$
6

 
$
37

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 March 31, 2012 and reflected in Operating revenues and Fuel, purchased power and gas in the Consolidated Statements of Operations.
$
6

 
$
1

 
$
1

 
$
8


 
Three Months Ended March 31, 2011
 
Natural Gas
 
Electricity
 
Other
 
Total
 
(In millions)
Net Assets as of January 1, 2011
$
1

 
$
54

 
$
4

 
$
59

Transfers into Level 3

 
2

 

 
2

Transfers out of Level 3
3

 
(25
)
 

 
(22
)
Total gains or (losses):
 
 
 
 
 
 
 
Included in earnings
(4
)
 
(15
)
 
2

 
(17
)
Recorded in regulatory assets/liabilities

 

 
(1
)
 
(1
)
Purchases, issuances and settlements:
 
 
 
 
 
 
 
Settlements
3

 
(8
)
 

 
(5
)
Net Assets as of March 31, 2011
$
3

 
$
8

 
$
5

 
$
16

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 March 31, 2011 and reflected in Operating revenues and Fuel, purchased power and gas in the Consolidated Statements of Operations.
$
(1
)
 
$
(8
)
 
$
2

 
$
(7
)

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 months ended March 31, 2012, $27 million of net assets reflecting inputs related to certain electricity transactions identified as unobservable due to lack of available broker quotes were transferred from Level 2 to Level 3, and $2 million of net assets reflecting inputs related to certain gas transactions identified as observable due to available broker quotes were transferred from Level 3 to Level 2. No transfers between Levels 1 and 2 occurred in the three months ended March 31, 2012. For the three months ended March 31, 2011, $2 million of net assets reflecting inputs related to certain electricity transactions identified as unobservable due to lack of available broker quotes were transferred from Level 2 to Level 3, and $25 million of net assets reflecting inputs related to certain electricity transactions and $3 million of net liabilities reflecting inputs related to certain gas transactions identified as observable due to available broker quotes were transferred from Level 3 to Level 2. No transfers between Levels 1 and 2 occurred in the three months ended March 31, 2011.






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The following table presents the unobservable inputs related to Level 3 assets and liabilities for the three months ended March 31, 2012.
 
 
March 31, 2012
 
 
 
 
 
 
 
 
Security Type
 
Derivative Assets
 
Derivative Liabilities
 
Valuation Techniques
 
Unobservable Input
 
Range
 
 
(In millions)
 
 
 
 
 
 
 
 
Natural Gas
 
$
31

 
$
(25
)
 
Discounted Cash Flow
 
Forward basis price (per MMBtu)
 
$
(0.16
)
$
0.28
/MMBtu
Electricity
 
363

 
(338
)
 
Discounted Cash Flow
 
Forward market price (per Mwh)
 
$
9

$
27
/Mwh
 
 
 
 
 
 
 
 
Forward basis price (per Mwh)
 
$
(1
)
$
10
/Mwh

The unobservable inputs used in the fair value measurement of the electricity and natural gas commodity types consists of inputs that are less observable due in part to lack of available broker quotes, supported by little, if any, market activity at the measurement date or are based on internally developed models. Certain forward market and/or basis prices (i.e. the difference in pricing between two locations) that were included in the valuation of natural gas and electricity contracts were deemed unobservable. Significant increases (decreases) in any of the unobservable inputs in isolation would not result in a significantly lower (higher) fair value measurement.

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. DTE Energy's Risk Management group maintains the Company's valuation policies and procedures for, and verifies pricing and fair value valuation of, commodity derivatives. The Risk Management group reports to the Company's Vice President and Treasurer.

Fair Value of Financial Instruments

The fair value of financial instruments is determined by using quoted market prices when available. When quoted prices are not available, pricing services may be used to determine the fair value with reference to observable interest rate indexes. DTE Energy has obtained an understanding of how the fair values are derived. DTE Energy also selectively corroborates the fair value of its transactions by comparison of market-based price sources. Discounted cash flow analyses based upon estimated current borrowing rates are also used to determine fair value when quoted market prices are not available. The fair values of notes receivable, excluding capital leases, are estimated using discounted cash flow techniques that incorporate market interest rates as well assumptions about the

17

Table of Contents

remaining life of the loans and credit risk. Depending on the information available, other valuation techniques may be used that rely on internal assumptions and models. Valuation policies and procedures are determined by DTE Energy's Treasury Department which reports to the Company's Vice President and Treasurer. The table below shows the fair value and the carrying value for long-term debt securities. The carrying value of other financial instruments, such as notes receivable, dividends payable and short-term borrowings approximates fair value.
 
March 31, 2012
 
December 31, 2011
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Long-term debt
$
8.6
 billion
 
$
7.6
 billion
 
$
8.8
 billion
 
$
7.7
 billion

The following table presents fair value of financial instruments as of March 31, 2012:
 
 
 
 
 
 
 
Total at
 
Level 1
 
Level 2
 
Level 3
 
March 31, 2012
 
(In millions)
Notes receivable, excluding capital leases
$

 
$

 
$
46

 
$
46

Dividends payable
100

 

 

 
100

Short-term borrowings

 
313

 

 
313

Long-term debt
300

 
7,700

 
600

 
8,600


See Note 4 for further fair value information on financial and derivative instruments.

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. 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. See Note 5.

The following table summarizes the fair value of the nuclear decommissioning trust fund assets:
 
March 31, 2012
 
December 31, 2011
 
(In millions)
Fermi 2
$
981

 
$
915

Fermi 1
3

 
3

Low level radioactive waste
20

 
19

Total
$
1,004

 
$
937


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 March 31
 
2012
 
2011
 
(In millions)
Realized gains
$
6

 
$
14

Realized losses
$
(4
)
 
$
(8
)
Proceeds from sales of securities
$
11

 
$
20


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:

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Table of Contents

 
Fair
Value
 
Unrealized
Gains
 
(In millions)
As of March 31, 2012
 
 
 
Equity securities
$
594

 
$
116

Debt securities
389

 
22

Cash and cash equivalents
21

 

 
$
1,004

 
$
138

As of December 31, 2011
 
 
 
Equity securities
$
533

 
$
80

Debt securities
385

 
22

Cash and cash equivalents
19

 

 
$
937

 
$
102


The debt securities at both March 31, 2012 and December 31, 2011 had an average maturity of approximately 7 years. 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 $47 million and $67 million of unrealized losses as Regulatory assets at March 31, 2012 and December 31, 2011, 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 months ended March 31, 2012 and March 31, 2011 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:
 
March 31, 2012
 
December 31, 2011
 
Fair Value
 
Carrying value
 
Fair Value
 
Carrying Value
 
(In millions)
Cash equivalents (1)
$
68

 
$
68

 
$
140

 
$
140

Equity securities (2)
$
6

 
$
6

 
$
5

 
$
5


(1) Cash equivalents at March 31, 2012 of $53 million and $15 million are included in Restricted cash and Other investments on the Consolidated Statements of Financial Position, respectively. Cash equivalents at December 31, 2011 of $124 million and $16 million are included in Restricted cash and Other investments on the Consolidated Statements of Financial Position, respectively.

(2) Equity securities at March 31, 2012 and December 31, 2011 of $6 million and $5 million are included in Other investments on the Consolidated Statements of Financial Position, respectively.

At March 31, 2012 and 2011, these securities are comprised primarily of money-market and equity securities. During the three months ended March 31, 2012 and March 31, 2011 no amounts of unrealized losses on available-for-sale securities were reclassified out of other comprehensive income into losses for the periods. Gains related to trading securities held at March 31, 2012, and 2011, were $7 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

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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 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 and oil 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 2015. 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 and storage of natural gas. Primarily fixed-priced contracts are used in the marketing and management of transportation 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 gas and 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 2012, the Company estimates reclassifying less than $1 million of losses to earnings.

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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 March 31, 2012 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.

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.


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The following tables present the fair value of derivative instruments as of March 31, 2012:
 
Derivative Assets
 
Derivative Liabilities
 
(In millions)
Derivatives designated as hedging instruments:
 
 
 
Interest rate contracts
$

 
$
(1
)
Derivatives not designated as hedging instruments:
 
 
 
Foreign currency exchange contracts
$
2

 
$
(3
)
Commodity Contracts:
 
 
 
Natural Gas
1,701

 
(1,849
)
Electricity
1,038

 
(1,012
)
Other
53

 
(37
)
Total derivatives not designated as hedging instruments:
$
2,794

 
$
(2,901
)
Total derivatives:
 
 
 
Current
$
2,325

 
$
(2,368
)
Noncurrent
469

 
(534
)
Total derivatives
$
2,794

 
$
(2,902
)

 
Derivative Assets
 
Derivative Liabilities
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Reconciliation of derivative instruments to Consolidated Statements of Financial Position:
 
 
 
 
 
 
 
Total fair value of derivatives
$
2,325

 
$
469

 
$
(2,368
)
 
$
(534
)
Counterparty netting
(2,047
)
 
(391
)
 
2,047

 
391

Collateral adjustment
(1
)
 

 
83

 
44

Total derivatives as reported
$
277

 
$
78

 
$
(238
)
 
$
(99
)

The following tables present the fair value of derivative instruments as of December 31, 2011:
 
Derivative Assets
 
Derivative Liabilities
 
(In millions)
Derivatives designated as hedging instruments:
 
 
 
Interest rate contracts
$

 
$
(1
)
Derivatives not designated as hedging instruments:
 
 
 
Foreign currency exchange contracts
$
3

 
$
(5
)
Commodity Contracts:
 
 
 
Natural Gas
2,024

 
(2,080
)
Electricity
747

 
(705
)
Other
31

 
(20
)
Total derivatives not designated as hedging instruments:
$
2,805

 
$
(2,810
)
Total derivatives:
 
 
 
Current
$
2,272

 
$
(2,282
)
Noncurrent
533

 
(529
)
Total derivatives
$
2,805

 
$
(2,811
)

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Derivative Assets
 
Derivative Liabilities
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Reconciliation of derivative instruments to Consolidated Statements of Financial Position:
 
 
 
 
 
 
 
Total fair value of derivatives