Fair Value

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

FAIR VALUE

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 June 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 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. Detroit Edison has obtained an understanding of how these prices are derived, including the nature and observability of the inputs used in deriving such prices. Additionally, Detroit Edison 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. The Company 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. The Company 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. The Company has obtained an understanding of how these prices are derived. Additionally, the Company 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 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 group, which is part of the corporate treasury function.

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

	June 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Net Balance		Level 1		Level 2		Level 3		Net Balance
Assets:
Cash equivalents	$	—	$	108	$	—	$	108	$	—	$	129	$	—	$	129
Nuclear decommissioning trusts	624		361		—		985		577		360		—		937
Other investments	58		41		—		99		55		38		—		93
Derivative assets — FTRs	—		—		2		2		—		—		1		1
Net Assets	$	682	$	510	$	2	$	1,194	$	632	$	527	$	1	$	1,160
Assets:
Current	$	—	$	108	$	2	$	110	$	—	$	129	$	1	$	130
Noncurrent	682		402		—		1,084		632		398		—		1,030
Total Assets	$	682	$	510	$	2	$	1,194	$	632	$	527	$	1	$	1,160

The following table presents the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2012 and 2011 (in millions):

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Asset balance as of beginning of the period	$	—		$	1		$	1		$	2
Changes in fair value recorded in regulatory assets/liabilities	4			4			5			3
Purchases, issuances and settlements:
Settlements	(2		)	$	(2	)	(4		)	(2		)
Asset balance as of June 30	$	2		$	3		$	2		$	3
The amount of total gains (losses) included in regulatory assets and liabilities attributed to the change in unrealized gains (losses) related to assets and liabilities held at June 30, 2012 and 2011	$	2		$	3		$	2		$	3

No significant transfers between Levels 1, 2 or 3 occurred in the three months and six months ended June 30, 2012 and June 30, 2011.

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. The Company has obtained an understanding of how the fair values are derived. The Company 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 as 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 the Company's Treasury Department which reports to the Company's Vice President and Treasurer. The table below shows the fair value and the carrying value for long-term debt securities. The carrying value of other financial instruments, such as notes receivable and short-term borrowings approximates fair value.

The following table presents fair value of financial instruments as of June 30 , 2012 and December 31, 2012 (in millions):

	June 30, 2012								December 31, 2011
	Carrying		Fair Value						Carrying		Fair
	Amount		Level 1		Level 2		Level 3		Amount		Value
Notes receivable, excluding capital leases	$	6	$	—	$	—	$	6	$	6	$	6
Notes receivable — affiliates	192		—		—		192		26		26
Short-term borrowings — affiliates	81		—		—		81		64		64
Long-term debt	5,453		—		6,128		43		5,051		5,740

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

Nuclear Decommissioning Trust Funds

Detroit Edison has a legal obligation to decommission its nuclear power plants following the expiration of their operating licenses. This obligation is reflected as an asset retirement obligation on the Consolidated Statements of Financial Position. Rates approved by the MPSC provide for the recovery of decommissioning costs of Fermi 2 and the disposal of low-level radioactive waste. Detroit Edison is continuing to fund FERC jurisdictional amounts for decommissioning even though explicit provisions are not included in FERC rates. See Note 5.

The following table summarizes the fair value of the nuclear decommissioning trust fund assets (in millions):

	June 30, 2012		December 31, 2011
Fermi 2	$	960	$	915
Fermi 1	3		3
Low level radioactive waste	22		19
Total	$	985	$	937

The costs of securities sold are determined on the basis of specific identification. The following table sets forth the gains and losses and proceeds from the sale of securities by the nuclear decommissioning trust funds (in millions):

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Realized gains	$	8		$	12		$	14		$	26
Realized losses	(7		)	(9		)	(11		)	(17		)
Proceeds from sales of securities	25			39			36			59

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

	June 30, 2012				December 31, 2011
	Fair Value		Unrealized Gains		Fair Value		Unrealized Gains
Equity securities	$	581	$	102	$	533	$	80
Debt securities	397		26		385		22
Cash and cash equivalents	7		—		19		—
	$	985	$	128	$	937	$	102

The debt securities at June 30, 2012 and December 31, 2011 had an average maturity of approximately 7 years. Securities held in the nuclear decommissioning trust funds are classified as available-for-sale. As Detroit Edison does not have the ability to hold impaired investments for a period of time sufficient to allow for the anticipated recovery of market value, all unrealized losses are considered to be other than temporary impairments.

Unrealized losses incurred by the Fermi 2 trust are recognized as a Regulatory asset. Detroit Edison recognized $65 million and $67 million of unrealized losses as Regulatory assets at June 30, 2012 and December 31, 2011, respectively. Since the decommissioning of Fermi 1 is funded by Detroit Edison rather than through a regulatory recovery mechanism, there is no corresponding regulatory asset treatment. Therefore, unrealized losses incurred by the Fermi 1 trust are recognized in earnings immediately. There were no unrealized losses recognized for the three and six months ended June 30, 2012 and June 30, 2011 for Fermi 1 trust assets.

Other Available-For-Sale Securities

The following table summarizes the fair value of the Company's investment in available-for-sale debt and equity securities, excluding nuclear decommissioning trust fund assets (in millions):

	Fair Value
	June 30, 2012		December 31, 2011
Cash equivalents (a)	$	108	$	129
Equity securities (b)	5		4

(a) Cash equivalents at June 30, 2012 of $92 million and $16 million are included in Restricted cash and Other investments on the Consolidated Statements of Financial Position, respectively. Cash equivalents at December 31, 2011 of $113 million and $16 million are included in Restricted cash and Other investments on the Consolidated Statements of Financial Position, respectively.

(b) Equity securities at June 310 2012 and December 31, 2011 of $5 million and $4 million are included in Other investments on the Consolidated Statements of Financial Position, respectively.

As of June 30, 2012, these securities were comprised primarily of money-market funds and equity securities. Gains related to trading securities held at June 30, 2012 and June 30, 2011 were $5 million and $4 million, respectively.