RETIREMENT BENEFITS AND TRUSTEED ASSETS

Pension Plan Benefits

DTE Electric participates in various plans that provide pension and other postretirement benefits for DTE Energy and its affiliates. The plans are sponsored by DTE Energy Corporate Services, LLC (LLC), a subsidiary of DTE Energy. DTE Electric is allocated net periodic benefit costs for its share of the amounts of the combined plans.

Effective January 1, 2012 for non-represented employees, and in June 2011 and March 2013 for the majority of represented employees, the Company discontinued offering a defined benefit retirement plan. In its place, the Company will annually contribute an amount equivalent to 4% of an employee's eligible pay to the employee's defined contribution retirement savings plan.

The Company’s policy is to fund pension costs by contributing amounts consistent with the provisions of the Pension Protection Act of 2006 and additional amounts when it deems appropriate. The Company contributed $275 million to its qualified pension plans in 2013. At the discretion of management, and depending upon financial market conditions, we anticipate making up to $275 million in contributions to the pension plans in 2014.

Net pension cost includes the following components:



	2013			2012			2011
	(In millions)
Service cost	$	73		$	64		$	55
Interest cost	146			155			154
Expected return on plan assets	(184		)	(166		)	(168		)
Amortization of:
Net loss	148			124			99
Prior service cost	1			1			4
Settlements	—			2			2
Net pension cost	$	184		$	180		$	146



	2013			2012
	(In millions)
Other changes in plan assets and benefit obligations recognized in Regulatory assets and Other comprehensive income
Net actuarial (gain) loss	$	(418	)	$	289
Amortization of net actuarial loss	(148		)	(125		)
Amortization of prior service cost	(1		)	(1		)
Total recognized in Regulatory assets and Other comprehensive income	$	(567	)	$	163
Total recognized in net periodic pension cost, Regulatory assets and Other comprehensive income	$	(383	)	$	343
Estimated amounts to be amortized from Regulatory assets and Accumulated other comprehensive income into net periodic benefit cost during next fiscal year
Net actuarial loss	$	106		$	143
Prior service cost	$	1		$	1

The following table reconciles the obligations, assets and funded status of the plan as well as the amount recognized as prepaid pension cost or pension liability in the Consolidated Statements of Financial Position at December 31:



	2013			2012
	(In millions)
Accumulated benefit obligation, end of year	$	3,111		$	3,307
Change in projected benefit obligation
Projected benefit obligation, beginning of year	$	3,585		$	3,196
Service cost	73			64
Interest cost	146			155
Actuarial (gain) loss	(286		)	342
Settlements	—			2
Benefits paid	(177		)	(174		)
Projected benefit obligation, end of year	$	3,341		$	3,585
Change in plan assets
Plan assets at fair value, beginning of year	$	2,211		$	1,957
Actual return on plan assets	316			220
Company contributions	282			208
Benefits paid	(177		)	(174		)
Plan assets at fair value, end of year	$	2,632		$	2,211
Funded status of the plan	$	(709	)	$	(1,374	)
Amount recorded as:
Current liabilities	$	(4	)	$	(6	)
Noncurrent liabilities	(705		)	(1,368		)
	$	(709	)	$	(1,374	)
Amounts recognized in Regulatory assets (see Note 8)
Net actuarial loss	$	1,248		$	1,805
Prior service cost	9			10
	$	1,257		$	1,815

At December 31, 2013, the benefits related to the Company’s qualified and nonqualified pension plans expected to be paid in each of the next five years and in the aggregate for the five fiscal years thereafter are as follows:



	(In millions)
2014	$	187
2015	193
2016	200
2017	208
2018	216
2019 - 2023	1,182
Total	$	2,186

Assumptions used in determining the projected benefit obligation and net pension costs are listed below:



	2013		2012		2011
Projected benefit obligation
Discount rate	4.95	%	4.15	%	5.00	%
Rate of compensation increase	4.20	%	4.20	%	4.20	%
Net pension costs
Discount rate	4.15	%	5.00	%	5.50	%
Rate of compensation increase	4.20	%	4.20	%	4.00	%
Expected long-term rate of return on plan assets	8.25	%	8.25	%	8.50	%

The Company employs a formal process in determining the long-term rate of return for various asset classes. Management reviews historic financial market risks and returns and long-term historic relationships between the asset classes of equities, fixed income and other assets, consistent with the widely accepted capital market principle that asset classes with higher volatility generate a greater return over the long-term. Current market factors such as inflation, interest rates, asset class risks and asset class returns are evaluated and considered before long-term capital market assumptions are determined. The long-term portfolio return is also established employing a consistent formal process, with due consideration of diversification, active investment management and rebalancing. Peer data is reviewed to check for reasonableness. As a result of this process, the Company has long-term rate of return assumptions for its pension plans of 7.75% and other postretirement benefit plans of 8.00%, for 2014. The Company believes these rates are a reasonable assumption for the long-term rate of return on its plan assets for 2014 given its investment strategy.

The Company employs a total return investment approach whereby a mix of equities, fixed income and other investments are used to maximize the long-term return on plan assets consistent with prudent levels of risk, with consideration given to the liquidity needs of the plan. Risk tolerance is established through consideration of future plan cash flows, plan funded status and corporate financial considerations. The investment portfolio contains a diversified blend of equity, fixed income and other investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, growth and value stocks and large and small market capitalizations. Fixed income securities generally include market and long duration bonds of companies from diversified industries, mortgage-backed securities, non-US securities, bank loans and U.S. Treasuries. Other assets such as private markets and hedge funds are used to enhance long-term returns while improving portfolio diversification. Derivatives may be utilized in a risk controlled manner, to potentially increase the portfolio beyond the market value of invested assets and/or reduce portfolio investment risk. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews.

Target allocations for pension plan assets as of December 31, 2013 are listed below:



U.S. Large Cap Equity Securities	22	%
U.S. Small Cap and Mid Cap Equity Securities	5
Non U.S. Equity Securities	20
Fixed Income Securities	25
Hedge Funds and Similar Investments	20
Private Equity and Other	8
	100	%

Fair Value Measurements for pension plan assets at December 31, 2013 and 2012 (a):



	December 31, 2013								December 31, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In millions)
Asset Category:
Short-term investments (b)	$	15	$	—	$	—	$	15	$	—	$	16	$	—	$	16
Equity securities
U.S. Large Cap (c)	639		—		—		639		478		31		—		509
U.S. Small/Mid Cap (d)	160		—		—		160		108		3		—		111
Non U.S. (e)	440		94		—		534		372		85		—		457
Fixed income securities (f)	11		623		—		634		61		491		—		552
Hedge Funds and Similar Investments (g)	193		50		285		528		147		56		238		441
Private Equity and Other (h)	—		—		122		122		—		—		125		125
Total	$	1,458	$	767	$	407	$	2,632	$	1,166	$	682	$	363	$	2,211

_______________________________________


(a)	See Note 3 — Fair Value for a description of levels within the fair value hierarchy.


(b)	This category predominantly represents certain short-term fixed income securities and money market investments that are managed in separate accounts or commingled funds. Pricing for investments in this category are obtained from quoted prices in actively traded markets or valuations from brokers or pricing services.


(c)	This category comprises both actively and not actively managed portfolios that track the S&P 500 low cost equity index funds. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(d)	This category represents portfolios of small and medium capitalization domestic equities. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(e)	This category primarily consists of portfolios of non-U.S. developed and emerging market equities. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(f)	This category includes corporate bonds from diversified industries, U.S. Treasuries, and mortgage-backed securities. Pricing for investments in this category is obtained from quoted prices in actively traded markets and quotations from broker or pricing services. Non-exchange traded securities and exchange-traded securities held in commingled funds are classified as Level 2 assets.

(g)

This category utilizes a diversified group of strategies that attempt to capture financial market inefficiencies and includes publicly traded debt and equity, publicly traded mutual funds, commingled and limited partnership funds and non-exchange traded securities. Pricing for Level 1 and Level 2 assets in this category is obtained from quoted prices in actively traded markets and quoted prices from broker or pricing services. Non-exchange traded securities held in commingled funds are classified as Level 2 assets. Valuations for some Level 3 assets in this category may be based on limited observable inputs as there may be little, if any, publicly available pricing.

(h)

This category includes a diversified group of funds and strategies that primarily invests in private equity partnerships. This category also includes investments in timber and private mezzanine debt. Pricing for investments in this category is based on limited observable inputs as there is little, if any, publicly available pricing. Valuations for assets in this category may be based on discounted cash flow analyses, relevant publicly-traded comparables and comparable transactions.

The pension trust holds 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 hold exchange-traded equity or debt securities and are valued based on net asset values (NAV). Non-exchange traded fixed income securities are valued by the trustee 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 trustee monitors 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 challenge an assigned price and determine that another price source is considered to be preferable. DTE Electric 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 Electric selectively corroborates the fair values of securities by comparison of market-based price sources.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):



	Year Ended December 31, 2013								Year Ended December 31, 2012
	Hedge Funds and Similar		Private Equity						Hedge Funds and Similar			Private Equity
	Investments		and Other			Total			Investments			and Other			Total
	(In millions)
Beginning Balance at January 1	$	238	$	125		$	363		$	205		$	116		321
Total realized/unrealized gains (losses):
Realized gains (losses)	—		12			12			13			(4		)	9
Unrealized gains (losses)	29		(10		)	19			(3		)	8			5
Purchases, sales and settlements:
Purchases	18		15			33			176			23			199
Sales	—		(20		)	(20		)	(153		)	(18		)	(171		)
Ending Balance at December 31	$	285	$	122		$	407		$	238		$	125		$	363
The amount of total gains for the period attributable to the change in unrealized gains or losses related to assets still held at the end of the period	$	27	$	2		$	29		$	11		$	4		$	15

There were no transfers between Level 3 and Level 2 and there were no significant transfers between Level 2 and Level 1 in the years ended December 31, 2013 and 2012.

Other Postretirement Benefits

The Company participates in plans sponsored by LLC that provide certain other postretirement health care and life insurance benefits for employees who are eligible for these benefits. The Company’s policy is to fund certain trusts to meet our other postretirement benefit obligations. Separate qualified Voluntary Employees Beneficiary Association (VEBA) trusts exist for represented and non-represented employees. The Company contributed $239 million to its other postretirement medical and life insurance benefit plans during 2013. At the discretion of management, we anticipate making up to $120 million of contributions to the VEBA trusts in 2014.

Starting in 2012, in lieu of offering future employees post-employment health care and life insurance benefits, the Company allocates a fixed amount per year to an account in a tax-exempt trust for each employee. These trusts are managed either by the Company (for non-represented and certain represented groups), or by the Utility Workers of America (UWUA) for Local 223 employees. The cost of these plans was $1 million in 2013 and less than $1 million in 2012.

Beginning in 2013, the Company replaced sponsored retiree medical, prescription drug and dental coverage with a Retiree Health Care Allowance (RHCA). This change applies to both current and future Medicare eligible non-represented retirees, spouses, surviving spouses or same sex domestic partners; as well as future Medicare eligible represented retirees, spouses, surviving spouses or same sex domestic partners. The 2013 RHCA allowance ranged between $3,250 and $3,500 depending on an employee’s date of hire and will increase each year by the lower of the rate of medical inflation or 2%.

Net other postretirement cost includes the following components:



	2013			2012			2011
	(In millions)
Service cost	$	35		$	51		$	49
Interest cost	67			91			91
Expected return on plan assets	(74		)	(61		)	(62		)
Amortization of:
Net loss	47			58			40
Prior service costs (credit)	(100		)	(16		)	(15		)
Net transition asset	—			2			2
Net other postretirement cost (benefit)	$	(25	)	$	125		$	105



	2013			2012
	(In millions)
Other changes in plan assets and APBO recognized in Regulatory assets (liabilities) and Other comprehensive income
Net actuarial gain	$	(258	)	$	(14	)
Amortization of net actuarial loss	(47		)	(58		)
Prior service credit	(159		)	(207		)
Amortization of prior service credit	100			16
Amortization of transition asset	—			(2		)
Total recognized in Regulatory assets (liabilities) and Other comprehensive income	$	(364	)	$	(265	)
Total recognized in net periodic benefit cost, Regulatory assets (liabilities) and Other comprehensive income	$	(389	)	$	(140	)
Estimated amounts to be amortized from Regulatory assets (liabilities) and Accumulated other comprehensive income into net periodic benefit cost during next fiscal year
Net actuarial loss	$	15		$	50
Prior service credit	$	(109	)	$	(69	)

The following table reconciles the obligations, assets and funded status of the plans including amounts recorded as Accrued postretirement liability - affiliates in the Consolidated Statements of Financial Position at December 31:



	2013			2012
	(In millions)
Change in accumulated postretirement benefit obligation
Accumulated postretirement benefit obligation, beginning of year	$	1,752		$	1,868
Service cost	35			51
Interest cost	67			91
Plan amendments	(159		)	(207		)
Actuarial (gain) loss	(200		)	12
Medicare Part D subsidy	1			5
Benefits paid	(66		)	(68		)
Accumulated postretirement benefit obligation, end of year	$	1,430		$	1,752
Change in plan assets
Plan assets at fair value, beginning of year	$	756		$	651
Actual return on plan assets	131			88
Company contributions	239			95
Benefits paid	(65		)	(78		)
Plan assets at fair value, end of year	$	1,061		$	756
Funded status, end of year	$	(369	)	$	(996	)
Amount recorded as:
Non-current liabilities	$	(369	)	$	(996	)
Amounts recognized in Regulatory assets (liabilities) (see Note 8)
Net actuarial loss	$	255		$	560
Prior service cost	(303		)	(244		)
	$	(48	)	$	316

At December 31, 2013, the benefits expected to be paid, including prescription drug benefits, in each of the next five years and in the aggregate for the five fiscal years thereafter are as follows:



	(In millions)
2014	$	78
2015	83
2016	87
2017	93
2018	98
2019-2023	555
	$	994

Assumptions used in determining the accumulated postretirement benefit obligation and net other postretirement benefit costs are listed below:



	2013		2012		2011
Accumulated postretirement benefit obligation
Discount rate	4.95	%	4.15	%	5.00	%
Health care trend rate pre- and post- 65	7.50	/ 6.50%	7.00	%	7.00	%
Ultimate health care trend rate	4.50	%	5.00	%	5.00	%
Year in which ultimate reached pre- and post- 65	2025 / 2024		2021		2020
Other postretirement benefit costs
Discount rate (prior to interim remeasurement)	4.15	%	5.00	%	5.50	%
Discount rate (post interim remeasurement)	4.30	%	N/A		N/A
Expected long-term rate of return on plan assets	8.25	%	8.25	%	8.75	%
Health care trend rate pre- and post- 65	7.00	%	7.00	%	7.00	%
Ultimate health care trend rate	5.00	%	5.00	%	5.00	%
Year in which ultimate reached	2021		2020		2019

A one percentage-point increase in health care cost trend rates would have increased the total service cost and interest cost components of benefit costs by $6 million in 2013 and increased the accumulated benefit obligation by $79 million at December 31, 2013. A one percentage-point decrease in the health care cost trend rates would have decreased the total service and interest cost components of benefit costs by $5 million in 2013 and would have decreased the accumulated benefit obligation by $70 million at December 31, 2013.

The process used in determining the long-term rate of return for assets and the investment approach for the other postretirement benefits plans is similar to those previously described for its pension plans.

Target allocations for other postretirement benefit plan assets as of December 31, 2013 are listed below:



U.S. Large Cap Equity Securities	17	%
U.S. Small Cap and Mid Cap Equity Securities	4
Non U.S. Equity Securities	20
Fixed Income Securities	25
Hedge Funds and Similar Investments	20
Private Equity and Other	14
	100	%

Fair Value Measurements for other postretirement benefit plan assets at December 31, 2013 and 2012 (a):



	December 31, 2013								December 31, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Asset Category:	(In millions)
Short-term investments (b)	$	3	$	—	$	—	$	3	$	1	$	1	$	—	$	2
Equity securities
U.S. Large Cap (c)	208		—		—		208		122		2		—		124
U.S. Small/Mid Cap (d)	103		—		—		103		70		—		—		70
Non U.S. (e)	197		5		—		202		151		4		—		155
Fixed income securities (f)	12		243		—		255		25		162		—		187
Hedge Funds and Similar Investments (g)	91		17		111		219		68		15		78		161
Private Equity and Other (h)	—		—		71		71		—		—		57		57
Total	$	614	$	265	$	182	$	1,061	$	437	$	184	$	135	$	756

_______________________________________


(a)	See Note 3 — Fair Value for a description of levels within the fair value hierarchy.


(b)	This category predominantly represents certain short-term fixed income securities and money market investments that are managed in separate accounts or commingled funds. Pricing for investments in this category are obtained from quoted prices in actively traded markets or valuations from brokers or pricing services.


(c)	This category comprises both actively and not actively managed portfolios that track the S&P 500 low cost equity index funds. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(d)	This category represents portfolios of small and medium capitalization domestic equities. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(e)	This category primarily consists of portfolios of non-U.S. developed and emerging market equities. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(f)	This category includes corporate bonds from diversified industries, U.S. Treasuries, bank loans and mortgage backed securities. Pricing for investments in this category is obtained from quoted prices in actively traded markets and quotations from broker or pricing services. Non-exchange traded securities and exchange-traded securities held in commingled funds are classified as Level 2 assets.

(g)

(h)

The VEBA trusts 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 hold exchange-traded equity or debt securities and are valued based on net asset values (NAV). Non-exchange traded fixed income securities are valued by the trustee 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 trustee monitors 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 challenge an assigned price and determine that another price source is considered to be preferable. DTE Electric 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 Electric selectively corroborates the fair values of securities by comparison of market-based price sources.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):



	Year Ended December 31, 2013								Year Ended December 31, 2012
	Hedge Funds and Similar Investments		Private Equity and Other			Total			Hedge Funds and Similar Investments			Private Equity and Other			Total
	(In millions)
Beginning Balance at January 1	$	78	$	57		$	135		$	63		$	39		$	102
Total realized/unrealized gains (losses):
Realized gains (losses)	—		2			2			4			(7		)	(3		)
Unrealized gains	10		5			15			—			9			9
Purchases, sales and settlements:
Purchases	23		14			37			56			25			81
Sales	—		(7		)	(7		)	(45		)	(9		)	(54		)
Ending Balance at December 31	$	111	$	71		$	182		$	78		$	57		$	135
The amount of total gains for the period attributable to the change in unrealized gains or losses related to assets still held at the end of the period	$	10	$	6		$	16		$	4		$	1		$	5

There were no transfers between Level 3 and Level 2 and there were no significant transfers between Level 2 and Level 1 in the years ended December 31, 2013 and 2012.

Interim Re-Measurement of Other Postretirement Benefit Obligation

In March 2013, the Company reached an agreement on a new four-year labor contract with certain represented employees. As a term of the agreement, the Company replaced sponsored retiree medical, prescription drug and dental coverage for future Medicare eligible retirees with a Retiree Health Care Allowance (RHCA) account of $3,250 per year. The modification in retiree health coverage will reduce future other postretirement benefit costs.

Based on the impact of such benefit cost savings on the consolidated financial statements, the Company re-measured its retiree health plan as of March 31, 2013. In performing the re-measurement, the Company updated its significant actuarial assumptions, including an adjustment to the discount rate from 4.15% at December 31, 2012 to 4.30% at March 31, 2013. Plan assets were also updated to reflect fair value as of the re-measurement date. Beginning April 2013, net other postretirement benefit costs were recorded based on the updated actuarial assumptions and benefit changes resulting from the new labor contract.

Healthcare Legislation

In December 2003, the Medicare Act was signed into law which provides for a non-taxable federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least “actuarially equivalent” to the benefit established by law. The effects of the subsidy reduced net periodic other postretirement benefit costs by $1 million in 2013, $4 million in 2012 and $5 million in 2011.

Defined Contribution Plans

The Company also sponsors defined contribution retirement savings plans. Participation in one of these plans is available to substantially all represented and non-represented employees. The Company matches employee contributions up to certain predefined limits based upon eligible compensation, the employee’s contribution rate and, in some cases, years of credit service. The cost of these plans was $21 million, $19 million, and $18 million in each of the years ended 2013, 2012, and 2011, respectively.