DTE Energy 2012.9.30 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, 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 September 30, 2012, 172,073,378 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 SEPTEMBER 30, 2012

TABLE OF CONTENTS

 
PAGE
 
 
EX-31-77
EX-31-78
EX-32-77
EX-32-78
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 allowed 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
 
 
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 that is designed to minimize the impact on revenues of changes in average customer usage.
 
 
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.

1

Table of Contents

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.


3

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
 
2012
 
2011
 
2012
 
2011
 
(In millions, except per share amounts)
Operating Revenues
$
2,206

 
$
2,265

 
$
6,480

 
$
6,724

Operating Expenses
 
 
 
 
 
 
 
Fuel, purchased power and gas
761

 
866

 
2,347

 
2,708

Operation and maintenance
692

 
670

 
2,126

 
1,948

Depreciation, depletion and amortization
265

 
259

 
747

 
752

Taxes other than income
80

 
79

 
254

 
239

Asset (gains) and losses, reserves and impairments, net
(2
)
 
(8
)
 
(10
)
 

 
1,796

 
1,866

 
5,464

 
5,647

Operating Income
410

 
399

 
1,016

 
1,077

Other (Income) and Deductions
 
 
 
 
 
 
 
Interest expense
112

 
120

 
334

 
370

Interest income
(2
)
 
(3
)
 
(7
)
 
(8
)
Other income
(47
)
 
(20
)
 
(125
)
 
(59
)
Other expenses
9

 
16

 
28

 
31

 
72

 
113


230

 
334

Income Before Income Taxes
338

 
286


786

 
743

Income Tax Expense
108

 
101

 
251

 
180

 
 
 
 
 
 
 
 
Net Income
230

 
185

 
535

 
563

 
 
 
 
 
 
 
 
Less: Net Income Attributable to Noncontrolling Interests
3

 
2

 
6


2

Net Income Attributable to DTE Energy Company
$
227

 
$
183

 
$
529

 
$
561

 
 
 
 
 
 
 
 
Basic Earnings per Common Share
 
 
 
 
 
 
 
Net Income Attributable to DTE Energy Company
$
1.32

 
$
1.08

 
$
3.09

 
$
3.31

 
 
 
 
 
 
 
 
Diluted Earnings per Common Share
 
 
 
 
 
 
 
Net Income Attributable to DTE Energy Company
$
1.31

 
$
1.07

 
$
3.08

 
$
3.30

 
 
 
 
 
 
 
 
Weighted Average Common Shares Outstanding
 
 
 
 
 
 
 
Basic
172

 
169

 
171

 
169

Diluted
172

 
170

 
171

 
170

Dividends Declared per Common Share
$
0.62

 
$
0.59

 
$
1.80

 
$
1.74


See Notes to Consolidated Financial Statements (Unaudited)


4

Table of Contents

DTE ENERGY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2012
 
2011
 
2012
 
2011
 
(In millions)
Net income
$
230

 
$
185

 
$
535

 
$
563

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Benefit obligations, net of taxes of $1, $1, $4 and $2, respectively
3

 
3

 
9

 
5

Net unrealized gains on investments, net of taxes of $—, $—, $— and $—, respectively

 
(1
)
 
1

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

 
(2
)
 
1

 
(1
)
Comprehensive income
234

 
185

 
546

 
566

Less: Comprehensive income attributable to noncontrolling interests
3

 
2

 
6

 
2

Comprehensive income attributable to DTE Energy Company
$
231

 
$
183

 
$
540

 
$
564


See Notes to Consolidated Financial Statements (Unaudited)



5

Table of Contents

DTE ENERGY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)

 
September 30
 
December 31
 
2012
 
2011
 
(In millions)
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
59

 
$
68

Restricted cash, principally Securitization
69

 
147

Accounts receivable (less allowance for doubtful accounts of $150 and $162, respectively)
 
 
 
Customer
1,164

 
1,317

Other
71

 
90

Inventories
 
 
 
Fuel and gas
554

 
572

Materials and supplies
231

 
219

Deferred income taxes
58

 
51

Derivative assets
123

 
222

Regulatory assets
157

 
314

Other
244

 
196

 
2,730

 
3,196

Investments
 
 
 
Nuclear decommissioning trust funds
1,029

 
937

Other
537

 
525

 
1,566

 
1,462

Property
 
 
 
Property, plant and equipment
23,442

 
22,541

Less accumulated depreciation, depletion and amortization
(9,038
)
 
(8,795
)
 
14,404

 
13,746

Other Assets
 
 
 
Goodwill
2,020

 
2,020

Regulatory assets
4,299

 
4,539

Securitized regulatory assets
456

 
577

Intangible assets
67

 
73

Notes receivable
114

 
123

Derivative assets
63

 
74

Other
190

 
199

 
7,209

 
7,605

Total Assets
$
25,909

 
$
26,009


See Notes to Consolidated Financial Statements (Unaudited)

6

Table of Contents

DTE ENERGY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) — (Continued)

 
September 30
 
December 31
 
2012
 
2011
 
(In millions, except shares)
LIABILITIES AND EQUITY
Current Liabilities
 
 
 
Accounts payable
$
724

 
$
782

Accrued interest
122

 
95

Dividends payable
107

 
99

Short-term borrowings
98

 
419

Current portion long-term debt, including capital leases
633

 
526

Derivative liabilities
146

 
158

Other
479

 
549

 
2,309

 
2,628

Long-Term Debt (net of current portion)
 
 
 
Mortgage bonds, notes and other
6,526

 
6,405

Securitization bonds
302

 
479

Junior subordinated debentures
280

 
280

Capital lease obligations
12

 
23

 
7,120

 
7,187

Other Liabilities
 

 
 

Deferred income taxes
3,273

 
3,116

Regulatory liabilities
990

 
1,019

Asset retirement obligations
1,683

 
1,591

Unamortized investment tax credit
58

 
65

Derivative liabilities
30

 
89

Accrued pension liability
1,216

 
1,298

Accrued postretirement liability
1,341

 
1,484

Nuclear decommissioning
156

 
148

Other
302

 
331

 
9,049

 
9,141

Commitments and Contingencies (Notes 6 and 11)
 
 
 
Equity
 
 
 
Common stock, without par value, 400,000,000 shares authorized, 172,073,378 and 169,247,282 shares issued and outstanding, respectively
3,567

 
3,417

Retained earnings
3,969

 
3,750

Accumulated other comprehensive loss
(147
)
 
(158
)
Total DTE Energy Company Equity
7,389

 
7,009

Noncontrolling interests
42

 
44

Total Equity
7,431

 
7,053

Total Liabilities and Equity
$
25,909

 
$
26,009


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
 
2012
 
2011
 
(In millions)
Operating Activities
 
 
 
Net income
$
535

 
$
563

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
747

 
752

Deferred income taxes
96

 
123

Asset (gains) and losses, reserves and impairments, net
(7
)
 

Changes in assets and liabilities, exclusive of changes shown separately (Note 14)
358

 
48

Net cash from operating activities
1,729

 
1,486

Investing Activities
 
 
 
Plant and equipment expenditures — utility
(1,008
)
 
(968
)
Plant and equipment expenditures — non-utility
(214
)
 
(61
)
Proceeds from sale of assets
20

 
13

Restricted cash for debt redemption, principally Securitization
55

 
47

Proceeds from sale of nuclear decommissioning trust fund assets
48

 
69

Investment in nuclear decommissioning trust funds
(61
)
 
(97
)
Other
(24
)
 
(55
)
Net cash used for investing activities
(1,184
)
 
(1,052
)
Financing Activities
 
 
 
Issuance of long-term debt
495

 
908

Redemption of long-term debt
(447
)
 
(1,161
)
Short-term borrowings, net
(321
)
 
126

Issuance of common stock
29

 

Repurchase of common stock

 
(18
)
Dividends on common stock
(300
)
 
(289
)
Other
(10
)
 
(19
)
Net cash used for financing activities
(554
)
 
(453
)
Net Decrease in Cash and Cash Equivalents
(9
)
 
(19
)
Cash and Cash Equivalents at Beginning of Period
68

 
65

Cash and Cash Equivalents at End of Period
$
59

 
$
46


See Notes to Consolidated Financial Statements (Unaudited)

8

Table of Contents

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

 

 
529

 

 
6

 
535

Dividends declared on common stock

 

 
(307
)
 

 

 
(307
)
Issuance of common stock
521

 
29

 

 

 

 
29

Contribution of common stock to pension plan
1,335

 
80

 

 

 

 
80

Benefit obligations, net of tax

 

 

 
9

 

 
9

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
970

 
41

 
(3
)
 

 
(8
)
 
30

Balance, September 30, 2012
172,073

 
$
3,567

 
$
3,969

 
$
(147
)
 
$
42

 
$
7,431


See Notes to Consolidated Financial Statements (Unaudited)


9

Table of Contents

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 plants. 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.

10

Table of Contents

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 the Company shares control of all significant activities for those entities with the Company's 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 September 30, 2012, the carrying amount of assets and liabilities in the Consolidated Statements 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 September 30, 2012 and December 31, 2011. Amounts at September 30, 2012 and December 31, 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 (in millions):

 
September 30, 2012
 
December 31, 2011
 
Securitization
 
Other
 
Total
 
Restricted
Amounts
 
Securitization
 
Other
 
Total
 
Restricted
Amounts
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
4

 
$
4

 
$

 
$

 
$
25

 
$
25

 
$

Restricted cash
50

 
5

 
55

 
55

 
107

 
7

 
114

 
114

Accounts receivable
39

 
10

 
49

 
40

 
34

 
17

 
51

 
36

Inventories

 
144

 
144

 

 

 
183

 
183

 

Other current assets

 
3

 
3

 

 

 
1

 
1

 

Property, plant and equipment

 
65

 
65

 
20

 

 
73

 
73

 
23

Securitized regulatory assets
456

 

 
456

 
456

 
577

 

 
577

 
577

Other assets
8

 
6

 
14

 
14

 
10

 
6

 
16

 
16

 
$
553

 
$
237

 
$
790

 
$
585

 
$
728

 
$
312

 
$
1,040

 
$
766

LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued current liabilities
$
3

 
$

 
$
3

 
$
3

 
$
14

 
$
24

 
$
38

 
$
14

Current portion long-term debt, including capital leases
177

 
8

 
185

 
185

 
164

 
7

 
171

 
171

Other current liabilities
55

 

 
55

 
55

 
55

 

 
55

 
55

Mortgage bonds, notes and other

 
26

 
26

 
26

 

 
30

 
30

 
30

Securitization bonds
302

 

 
302

 
302

 
479

 

 
479

 
479

Capital lease obligations

 
11

 
11

 
11

 

 
14

 
14

 
14

Other long-term liabilities
7

 
1

 
8

 
7

 
7

 
2

 
9

 
8

 
$
544

 
$
46

 
$
590

 
$
589

 
$
719

 
$
77

 
$
796

 
$
771



Amounts for non-consolidated VIEs as of September 30, 2012 and December 31, 2011 are as follows (in millions):
 
September 30, 2012
 
December 31, 2011
Other investments
$
122

 
$
117

Notes receivable
7

 
7



11

Table of Contents

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 September 30, 2012 and December 31, 2011 (in millions):
 
September 30, 2012
 
December 31, 2011
Emission allowances
$
7

 
$
10

Renewable energy credits
43

 
39

Contract intangible assets
65

 
65

 
115

 
114

Less accumulated amortization
30

 
28

Intangible assets, net
85

 
86

Less current intangible assets
18

 
13

 
$
67

 
$
73


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 for the three and nine months ended September 30, 2012 was 32 percent for both periods, as compared to a 35 percent and 24 percent for the three and nine months ended September 30, 2011, respectively. The year to date increase in the effective tax rate in 2012 is due primarily to the recognition of an $88 million income tax benefit due to the enactment of the MCIT in the second quarter of 2011. The 2012 periods were also impacted by higher production tax credits.

The Company had $3 million and $4 million of unrecognized tax benefits at September 30, 2012 and at December 31, 2011, respectively, that, if recognized, would favorably impact its effective tax rate. In 2012, the Company settled a federal tax audit for the 2009 and 2010 tax years and, as a result, the unrecognized tax benefit decreased by $30 million. The Company does not anticipate any material changes to the unrecognized tax benefits within the next twelve months.

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 September 30, 2012, the total cash collateral received, net of cash collateral posted, was $24 million. There was no collateral related to unrealized positions to net against derivative assets and $1 million of collateral related to unrealized positions to net against derivative liabilities as of September 30, 2012. The Company recorded cash collateral paid of $5 million and cash collateral received of $30 million not related to unrealized derivative positions as of September 30, 2012. 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, 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

12

Table of Contents

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.

Cash Equivalents

Cash equivalents include investments with maturities of three months or less when purchased. The cash equivalents shown in the fair value table are comprised of short-term investments and money market funds. The fair values of the shares in these investments are based upon observable market prices for similar securities and, therefore, have been categorized as Level 2 in the fair value hierarchy.

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. The Company has established a Risk Management Committee whose responsibilities include directly or indirectly ensuring all valuation methods are applied in accordance with predefined policies. The development and maintenance of our forward price curves has been assigned to our Risk Management Department which is separate and distinct from the trading functions within the Company.


13

Table of Contents

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 (in millions):

 
September 30, 2012
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Net Balance
 
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Net Balance
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents (c)
$

 
$
69

 
$

 
$

 
$
69

 
$

 
$
140

 
$

 
$

 
$
140

Nuclear decommissioning trusts
651

 
378

 

 

 
1,029

 
577

 
360

 

 

 
937

Other investments (b)(c)(d)
64

 
42

 

 

 
106

 
57

 
38

 

 

 
95

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 
Foreign currency exchange contracts

 
1

 

 
(1
)
 

 

 
3

 

 
(3
)
 

Commodity Contracts:
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 
Natural Gas
845

 
94

 
20

 
(918
)
 
41

 
1,926

 
78

 
20

 
(1,991
)
 
33

Electricity

 
273

 
158

 
(295
)
 
136

 

 
523

 
224

 
(490
)
 
257

Other
41

 
5

 
7

 
(44
)
 
9

 
23

 
2

 
6

 
(25
)
 
6

Total derivative assets
886

 
373

 
185

 
(1,258
)
 
186

 
1,949

 
606

 
250

 
(2,509
)
 
296

Total
$
1,601

 
$
862

 
$
185

 
$
(1,258
)
 
$
1,390

 
$
2,583

 
$
1,144

 
$
250

 
$
(2,509
)
 
$
1,468

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
(2
)
 
$

 
$
1

 
$
(1
)
 
$

 
$
(5
)
 
$

 
$
3

 
$
(2
)
Interest rate contracts

 
(1
)
 

 

 
(1
)
 

 
(1
)
 

 

 
(1
)
Commodity Contracts:
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 
Natural Gas
(824
)
 
(87
)
 
(64
)
 
919

 
(56
)
 
(1,940
)
 
(126
)
 
(14
)
 
1,976

 
(104
)
Electricity

 
(285
)
 
(134
)
 
295

 
(124
)
 

 
(513
)
 
(192
)
 
565

 
(140
)
Other
(36
)
 
(1
)
 
(1
)
 
44

 
6

 
(19
)
 
(1
)
 

 
20

 

Total derivative liabilities
(860
)
 
(376
)
 
(199
)
 
1,259

 
(176
)
 
(1,959
)
 
(646
)
 
(206
)
 
2,564

 
(247
)
Total
$
(860
)
 
$
(376
)
 
$
(199
)
 
$
1,259

 
$
(176
)
 
$
(1,959
)
 
$
(646
)
 
$
(206
)
 
$
2,564

 
$
(247
)
Net Assets (Liabilities) at the end of the period
$
741

 
$
486

 
$
(14
)
 
$
1

 
$
1,214

 
$
624

 
$
498

 
$
44

 
$
55

 
$
1,221

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
$
698

 
$
387

 
$
145

 
$
(1,038
)
 
$
192

 
$
1,571

 
$
660

 
$
181

 
$
(2,050
)
 
$
362

Noncurrent (e)
903

 
475

 
40

 
(220
)
 
1,198

 
1,012

 
484

 
69

 
(459
)
 
1,106

Total Assets
$
1,601

 
$
862

 
$
185

 
$
(1,258
)
 
$
1,390

 
$
2,583

 
$
1,144

 
$
250

 
$
(2,509
)
 
$
1,468

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
$
(696
)
 
$
(324
)
 
$
(165
)
 
$
1,039

 
$
(146
)
 
$
(1,603
)
 
$
(527
)
 
$
(152
)
 
$
2,124

 
$
(158
)
Noncurrent
(164
)
 
(52
)
 
(34
)
 
220

 
(30
)
 
(356
)
 
(119
)
 
(54
)
 
440

 
(89
)
Total Liabilities
$
(860
)
 
$
(376
)
 
$
(199
)
 
$
1,259

 
$
(176
)
 
$
(1,959
)
 
$
(646
)
 
$
(206
)
 
$
2,564

 
$
(247
)
Net Assets (Liabilities) at the end of the period
$
741

 
$
486

 
$
(14
)
 
$
1

 
$
1,214

 
$
624

 
$
498

 
$
44

 
$
55

 
$
1,221

_____________________________
(a)
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.
(b)
Excludes cash surrender value of life insurance investments.
(c)
At September 30, 2012, available-for-sale securities of $69 million, included $55 million and $14 million of cash equivalents included in Restricted cash and Other investments on the Consolidated Statements of Financial Position, respectively. At December 31, 2011, available-for-sale securities of $140 million, included $124 million and $16 million of cash equivalents included in Restricted cash and Other investments on the Consolidated Statements of Financial Position, respectively.
(d)
Available-for-sale equity securities at September 30, 2012 and December 31, 2011 of $6 million and $5 million are included in Other investments on the Consolidated Statements of Financial Position, respectively.
(e)
Includes $106 million and $95 million of other investments that are included in the Consolidated Statements of Financial Position in Other investments at September 30, 2012 and December 31, 2011, respectively.




14

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, 2012 and 2011 (in millions):

 
Three Months Ended
 
Three Months Ended
 
September 30, 2012
 
September 30, 2011
 
Natural Gas
 
Electricity
 
Other
 
Total
 
Natural Gas
 
Electricity
 
Other
 
Total
Net Assets at the beginning of the period
$
2

 
$
50

 
$
5

 
$
57

 
$
1

 
$
57

 
$
7

 
$
65

Transfers into Level 3

 

 

 

 
(1
)
 
(6
)
 

 
(7
)
Transfers out of Level 3

 

 

 

 

 
(42
)
 

 
(42
)
Total gains:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
(43
)
 
12

 
1

 
(30
)
 
6

 
23

 

 
29

Recorded in regulatory assets/liabilities

 

 
7

 
7

 

 

 

 

Purchases, issuances and settlements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases

 

 

 

 

 

 

 

Settlements
(3
)
 
(38
)
 
(7
)
 
(48
)
 
(1
)
 
(35
)
 

 
(36
)
Net Assets (Liabilities) at the end of the period
$
(44
)
 
$
24

 
$
6

 
$
(14
)
 
$
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, 2012 and 2011 and reflected in Operating revenues and Fuel, purchased power and gas in the Consolidated Statements of Operations
$
(43
)
 
$
5

 
$
1

 
$
(37
)
 
$
6

 
$
5

 
$

 
$
11


 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
Natural Gas
 
Electricity
 
Other
 
Total
 
Natural Gas
 
Electricity
 
Other
 
Total
Net Assets at the beginning of the period
$
6

 
$
32

 
$
6

 
$
44

 
$
1

 
$
54

 
$
4

 
$
59

Transfers into Level 3
1

 
28

 

 
29

 

 
(4
)
 

 
(4
)
Transfers out of Level 3
(2
)
 

 

 
(2
)
 
1

 
(25
)
 

 
(24
)
Total gains:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
(38
)
 
53

 

 
15

 
3

 
34

 
2

 
39

Recorded in regulatory assets/liabilities

 

 
12

 
12

 

 

 
3

 
3

Purchases, issuances and settlements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases

 
1

 


1

 

 
1

 

 
1

Settlements
(11
)
 
(90
)
 
(12
)

(113
)
 

 
(63
)
 
(2
)
 
(65
)
Net Assets (Liabilities) at the end of the period
$
(44
)
 
$
24

 
$
6

 
$
(14
)
 
$
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, 2012 and 2011 and reflected in Operating revenues and Fuel, purchased power and gas in the Consolidated Statements of Operations
$
(39
)
 
$
43

 
$

 
$
4

 
$
5

 
$
17

 
$
2

 
$
24


Derivatives are transferred between levels primarily due to changes in the source data used to construct price curves as a result of changes in market liquidity. Transfers in and transfers out are reflected as if they had occurred at the beginning of the period. The following table shows transfers between the levels of the fair value hierarchy for the three and nine months ended September
30, 2012 and 2011 (in millions):
 
Three Months Ended
 
Three Months Ended
 
September 30, 2012
 
September 30, 2011
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Transfers into Level 1 from
N/A

 
$

 
$

 
N/A

 
$

 
$

Transfers into Level 2 from
$

 
N/A

 

 
$

 
N/A

 
42

Transfers into Level 3 from

 

 
N/A

 

 
(7
)
 
N/A


15

Table of Contents

 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Transfers into Level 1 from
N/A

 
$

 
$

 
N/A

 
$

 
$

Transfers into Level 2 from
$

 
N/A

 
2

 
$

 
N/A

 
24

Transfers into Level 3 from

 
29

 
N/A

 

 
(4
)
 
N/A


The following table presents the unobservable inputs related to Level 3 assets and liabilities as of September 30, 2012 (in millions):
 
 
September 30, 2012
 
 
 
 
 
 
 
 
Commodity Contracts
 
Derivative Assets
 
Derivative Liabilities
 
Valuation Techniques
 
Unobservable Input
 
Range
Natural Gas
 
$
20

 
$
(64
)
 
Discounted Cash Flow
 
Forward basis price (per MMBtu)
 
$
(0.63
)
$
1.90
/MMBtu
Electricity
 
158

 
(134
)
 
Discounted Cash Flow
 
Forward market price (per Mwh)
 
21

32
/Mwh
 
 
 
 
 
 
 
 
Forward basis price (per Mwh)
 
(1
)
15
/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.

The inputs listed above would have a direct impact on the fair values of the above security types if they were adjusted. A significant increase (decrease) in the forward market or basis price would result in a higher (lower) fair value for long positions, with offsetting impacts to short positions.

Fair Value of Financial Instruments

The fair value of financial instruments included in the table below 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 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 following table presents the carrying amount and fair value of financial instruments as of September 30, 2012 and December 31, 2011 (in millions):
 
September 30, 2012
 
December 31, 2011
 
Carrying
 
Fair Value
 
Carrying
 
Fair
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Value
Notes receivable, excluding capital leases
$
42

 
$

 
$

 
$
42

 
$
48

 
$
48

Dividends payable
107

 
107

 

 

 
99

 
99

Short-term borrowings
98