INCOME TAXES

Income Tax Summary

We are part of the consolidated federal income tax return of DTE Energy. The federal income tax expense for DTE Electric is determined on an individual company basis with no allocation of tax expenses or benefits from other affiliates of DTE Energy. We had an income tax receivable from DTE Energy of $23 million at December 31, 2013 and we had an income tax payable due to DTE Energy of $13 million at December 31, 2012.

Total income tax expense varied from the statutory federal income tax rate for the following reasons:



	2013			2012			2011
	(In millions)
Income before income taxes	$	741		$	768		$	704
Income tax expense at 35% statutory rate	$	260		$	269		$	246
Production tax credits	(15		)	(5		)	—
Investment tax credits	(5		)	(6		)	(6		)
Depreciation	3			3			3
AFUDC - Equity	(5		)	(4		)	(1		)
Employee Stock Ownership Plan dividends	(2		)	(3		)	(3		)
Domestic production activities deduction	(18		)	(16		)	(6		)
State and other income taxes, net of federal benefit	41			40			39
Other, net	(5		)	4			(5		)
Income tax expense	$	254		$	282		$	267
Effective income tax rate	34.3		%	36.7		%	38.0		%

Components of income tax expense were as follows:



	2013		2012			2011
	(In millions)
Current income tax expense (benefit)
Federal	$	123	$	267		$	15
State and other income tax	23		67			21
Total current income taxes	146		334			36
Deferred income tax expense (benefit)
Federal	68		(47		)	193
State and other income tax	40		(5		)	38
Total deferred income taxes	108		(52		)	231
Total	$	254	$	282		$	267

Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts in the financial statements. Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related assets or liabilities. Deferred tax assets and liabilities not related to assets or liabilities are classified according to the expected reversal date of the temporary differences. Consistent with rate making treatment, deferred taxes are offset in the table below for temporary differences which have related regulatory assets and liabilities.

Deferred tax assets (liabilities) were comprised of the following at December 31:



	2013			2012
	(In millions)
Property, plant and equipment	$	(2,807	)	$	(2,578	)
Securitized regulatory assets	(130		)	(261		)
Pension and benefits	27			73
Other comprehensive income	—			15
Other, net	12			(24		)
	$	(2,898	)	$	(2,775	)

Current deferred income tax liabilities	$	(91	)	$	(14	)
Long-term deferred income tax liabilities	(2,807		)	(2,761		)
	$	(2,898	)	$	(2,775	)

Deferred income tax assets	$	1,158		$	557
Deferred income tax liabilities	(4,056		)	(3,332		)
	$	(2,898	)	$	(2,775	)

The above table excludes deferred tax liabilities associated with unamortized investment tax credits that are shown separately on the Consolidated Statements of Financial Position. Investment tax credits are deferred and amortized to income over the average life of the related property.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2013		2012			2011
	(In millions)
Balance at January 1	$	4	$	59		$	18
Additions for tax positions of prior years	—		—			45
Reductions for tax positions of prior years	—		(3		)	(5		)
Additions for tax positions of current year	—		—			1
Settlements	—		(52		)	—
Balance at December 31	$	4	$	4		$	59

The Company had $2 million and $3 million of unrecognized tax benefits at December 31, 2013 and 2012, respectively, that, if recognized, would favorably impact our effective tax rate. The Company does not anticipate any material decrease in unrecognized tax benefits in the next twelve months.

The Company recognizes interest and penalties pertaining to income taxes in Interest expense and Other expenses, respectively, on its Consolidated Statements of Operations. Accrued interest pertaining to income taxes totaled $1 million and $1 million at December 31, 2013 and 2012, respectively. The Company had no accrued penalties pertaining to income taxes. The Company recognized a nominal amount of interest expense (income) related to income taxes in 2013 and $(3) million and $1 million in 2012 and 2011, respectively.

In 2013, DTE Energy and its subsidiaries settled a federal tax audit for the 2011 tax year, which resulted in the recognition of a nominal amount of unrecognized tax benefits by DTE Electric. DTE Energy's federal income tax returns for years 2012 and subsequent years remain subject to examination by the IRS. The DTE Energy's Michigan Business Tax and Michigan Corporate Income Tax returns for the year 2008 and subsequent years remain subject to examination by the State of Michigan. DTE Energy also files tax returns in numerous state and local jurisdictions with varying statutes of limitation.

Michigan Corporate Income Tax (MCIT)

In May 2011 the Michigan Business Tax (MBT) was repealed and the MCIT was enacted effective January 1, 2012. The MCIT subjects corporations with business activity in Michigan to a 6% tax rate on an apportioned income tax base and eliminates the modified gross receipts tax and nearly all credits available under the old MBT. The MCIT also eliminated the future deductions allowed under MBT that enabled companies to establish a one-time deferred tax asset upon enactment of the MBT to offset deferred tax liabilities that resulted from enactment of the MBT. As a result of the enactment of the MCIT, the net state deferred tax liability was remeasured to reflect the impact of the MCIT tax rate on cumulative temporary differences expected to reverse after the effective date.

No recognition of these non-cash transactions have been reflected in the Consolidated Statements of Cash Flows.