Edgar Filing: DTE ENERGY CO

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

DTE Energy 2012.9.30 10Q

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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):

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
DEFINITIONS	1
FORWARD-LOOKING STATEMENTS	3
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	4
Consolidated Statements of Operations (Unaudited)	4
Consolidated Statements of Comprehensive Income (Unaudited)	5
Consolidated Statements of Financial Position (Unaudited)	6
Consolidated Statements of Cash Flows (Unaudited)	8
Consolidated Statement of Changes in Equity (Unaudited)	9
Notes to Consolidated Financial Statements (Unaudited)	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3. Quantitative and Qualitative Disclosures About Market Risk	46
Item 4. Controls and Procedures	48
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	48
Item 1A. Risk Factors	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds; Purchases of Equity Securities by the Issuer and Affiliated Purchasers	50
Item 6. Exhibits	51
SIGNATURE	52
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

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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.

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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

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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						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)

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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)

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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)

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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)

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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)

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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		Retained Earnings									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)

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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 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.

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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 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

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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

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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.

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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.

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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

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	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