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 March 31, 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.

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of March 31, 2012:



	Level 1			Level 2			Level 3			Netting Adjustments (2)			Net Balance at March 31, 2012
	(In millions)
Assets:
Cash equivalents	$	—		$	68		$	—		$	—		$	68
Nuclear decommissioning trusts	629			375			$	—		$	—		1,004
Other investments (1)	62			41			—			—			103
Derivative assets:
Foreign currency exchange contracts	—			2			—			(2		)	—
Commodity Contracts:
Natural Gas	1,568			102			31			(1,671		)	30
Electricity	—			675			363			(720		)	318
Other	45			2			6			(46		)	7
Total derivative assets	1,613			781			400			(2,439		)	355
Total	$	2,304		$	1,265		$	400		$	(2,439	)	$	1,530

Liabilities:
Derivative liabilities:
Foreign currency exchange contracts	$	—		$	(3	)	$	—		$	2		$	(1	)
Interest rate contracts	—			(1		)	—			—			(1		)
Commodity Contracts:
Natural Gas	(1,681		)	(143		)	(25		)	1,741			(108		)
Electricity	—			(674		)	(338		)	783			(229		)
Other	(37		)	—			—			39			2
Total derivative liabilities	(1,718		)	(821		)	(363		)	2,565			(337		)
Total	$	(1,718	)	$	(821	)	$	(363	)	$	2,565		$	(337	)
Net Assets as of March 31, 2012	$	586		$	444		$	37		$	126		$	1,193
Assets:
Current	$	1,339		$	711		$	327		$	(2,048	)	$	329
Noncurrent (3)	965			554			73			(391		)	1,201
Total Assets	$	2,304		$	1,265		$	400		$	(2,439	)	$	1,530
Liabilities:
Current	$	(1,391	)	$	(687	)	$	(290	)	$	2,130		$	(238	)
Noncurrent	(327		)	(134		)	(73		)	435			(99		)
Total Liabilities	$	(1,718	)	$	(821	)	$	(363	)	$	2,565		$	(337	)
Net Assets as of March 31, 2012	$	586		$	444		$	37		$	126		$	1,193

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2011:



	Level 1			Level 2			Level 3			Netting Adjustments (2)			Net Balance at December 31, 2011
	(In millions)
Assets:
Nuclear decommissioning trusts	$	577		$	360		$	—		$	—		$	937
Other investments (1)	57			54			—			—			111
Derivative assets:
Foreign currency exchange contracts	—			3			—			(3		)	—
Commodity Contracts:
Natural Gas	1,926			78			20			(1,991		)	33
Electricity	—			523			224			(490		)	257
Other	23			2			6			(25		)	6
Total derivative assets	1,949			606			250			(2,509		)	296
Total	$	2,583		$	1,020		$	250		$	(2,509	)	$	1,344

Liabilities:
Derivative liabilities:
Foreign currency exchange contracts	$	—		$	(5	)	$	—		$	3		$	(2	)
Interest rate contracts	—			(1		)	—			—			(1		)
Commodity Contracts:
Natural Gas	(1,940		)	(126		)	(14		)	1,976			(104		)
Electricity	—			(513		)	(192		)	565			(140		)
Other	(19		)	(1		)	—			20			—
Total derivative liabilities	(1,959		)	(646		)	(206		)	2,564			(247		)
Total	$	(1,959	)	$	(646	)	$	(206	)	$	2,564		$	(247	)
Net Assets as of December 31, 2011	$	624		$	374		$	44		$	55		$	1,097
Assets:
Current	$	1,571		$	520		$	181		$	(2,050	)	$	222
Noncurrent (3)	1,012			500			69			(459		)	1,122
Total Assets	$	2,583		$	1,020		$	250		$	(2,509	)	$	1,344
Liabilities:
Current	$	(1,603	)	$	(527	)	$	(152	)	$	2,124		$	(158	)
Noncurrent	(356		)	(119		)	(54		)	440			(89		)
Total Liabilities	$	(1,959	)	$	(646	)	$	(206	)	$	2,564		$	(247	)
Net Assets as of December 31, 2011	$	624		$	374		$	44		$	55		$	1,097


(1)	Excludes cash surrender value of life insurance investments.


(2)	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.


(3)	Includes $103 million and $111 million of other investments that are included in the Consolidated Statements of Financial Position in Other investments at March 31, 2012 and December 31, 2011, respectively.

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 months ended March 31, 2012 and 2011:



	Three Months Ended March 31, 2012
	Natural Gas			Electricity			Other			Total
	(In millions)
Net Assets as of January 1, 2012	$	6		$	32		$	6		$	44
Transfers into Level 3	—			27			—			27
Transfers out of Level 3	(2		)	—			—			(2		)
Total gains:
Included in earnings	6			(14		)	1			(7		)
Recorded in regulatory assets/liabilities	—			—			1			1
Purchases, issuances and settlements:
Settlements	(4		)	(20		)	(2		)	(26		)
Net Assets as of March 31, 2012	$	6		$	25		$	6		$	37
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 March 31, 2012 and reflected in Operating revenues and Fuel, purchased power and gas in the Consolidated Statements of Operations.	$	6		$	1		$	1		$	8



	Three Months Ended March 31, 2011
	Natural Gas			Electricity			Other			Total
	(In millions)
Net Assets as of January 1, 2011	$	1		$	54		$	4		$	59
Transfers into Level 3	—			2			—			2
Transfers out of Level 3	3			(25		)	—			(22		)
Total gains or (losses):
Included in earnings	(4		)	(15		)	2			(17		)
Recorded in regulatory assets/liabilities	—			—			(1		)	(1		)
Purchases, issuances and settlements:
Settlements	3			(8		)	—			(5		)
Net Assets as of March 31, 2011	$	3		$	8		$	5		$	16
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 March 31, 2011 and reflected in Operating revenues and Fuel, purchased power and gas in the Consolidated Statements of Operations.	$	(1	)	$	(8	)	$	2		$	(7	)

Transfers in and transfers out of Level 3 represent existing assets or liabilities that were either previously categorized as a higher level and for which the inputs to the model became unobservable or assets and liabilities that were previously classified as Level 3 for which the lowest significant input became observable during the period. Transfers in and transfers out of Level 3 are reflected as if they had occurred at the beginning of the period. For the three months ended March 31, 2012, $27 million of net assets reflecting inputs related to certain electricity transactions identified as unobservable due to lack of available broker quotes were transferred from Level 2 to Level 3, and $2 million of net assets reflecting inputs related to certain gas transactions identified as observable due to available broker quotes were transferred from Level 3 to Level 2. No transfers between Levels 1 and 2 occurred in the three months ended March 31, 2012. For the three months ended March 31, 2011, $2 million of net assets reflecting inputs related to certain electricity transactions identified as unobservable due to lack of available broker quotes were transferred from Level 2 to Level 3, and $25 million of net assets reflecting inputs related to certain electricity transactions and $3 million of net liabilities reflecting inputs related to certain gas transactions identified as observable due to available broker quotes were transferred from Level 3 to Level 2. No transfers between Levels 1 and 2 occurred in the three months ended March 31, 2011.

The following table presents the unobservable inputs related to Level 3 assets and liabilities for the three months ended March 31, 2012.



	March 31, 2012
Security Type	Derivative Assets		Derivative Liabilities			Valuation Techniques	Unobservable Input	Range
	(In millions)
Natural Gas	$	31	$	(25	)	Discounted Cash Flow	Forward basis price (per MMBtu)	$	(0.16	)	—	$	0.28	/MMBtu
Electricity	363		(338		)	Discounted Cash Flow	Forward market price (per Mwh)	$	9		—	$	27	/Mwh
							Forward basis price (per Mwh)	$	(1	)	—	$	10	/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. Significant increases (decreases) in any of the unobservable inputs in isolation would not result in a significantly lower (higher) fair value measurement.

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. DTE Energy's Risk Management group maintains the Company's valuation policies and procedures for, and verifies pricing and fair value valuation of, commodity derivatives. The Risk Management group reports to the Company's Vice President and Treasurer.

Fair Value of Financial Instruments

The fair value of financial instruments 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 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, dividends payable and short-term borrowings approximates fair value.



	March 31, 2012						December 31, 2011
	Fair Value			Carrying Value			Fair Value			Carrying Value
Long-term debt	$	8.6	billion	$	7.6	billion	$	8.8	billion	$	7.7	billion

The following table presents fair value of financial instruments as of March 31, 2012:



							Total at
	Level 1		Level 2		Level 3		March 31, 2012
	(In millions)
Notes receivable, excluding capital leases	$	—	$	—	$	46	$	46
Dividends payable	100		—		—		100
Short-term borrowings	—		313		—		313
Long-term debt	300		7,700		600		8,600

See Note 4 for further fair value information on financial and 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:



	March 31, 2012		December 31, 2011
	(In millions)
Fermi 2	$	981	$	915
Fermi 1	3		3
Low level radioactive waste	20		19
Total	$	1,004	$	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:



	Three Months Ended March 31
	2012			2011
	(In millions)
Realized gains	$	6		$	14
Realized losses	$	(4	)	$	(8	)
Proceeds from sales of securities	$	11		$	20

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:



	Fair Value		Unrealized Gains
	(In millions)
As of March 31, 2012
Equity securities	$	594	$	116
Debt securities	389		22
Cash and cash equivalents	21		—
	$	1,004	$	138
As of December 31, 2011
Equity securities	$	533	$	80
Debt securities	385		22
Cash and cash equivalents	19		—
	$	937	$	102

The debt securities at both March 31, 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 $47 million and $67 million of unrealized losses as Regulatory assets at March 31, 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 months ended March 31, 2012 and March 31, 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:



	March 31, 2012				December 31, 2011
	Fair Value		Carrying value		Fair Value		Carrying Value
	(In millions)
Cash equivalents (1)	$	68	$	68	$	140	$	140
Equity securities (2)	$	6	$	6	$	5	$	5

(1) Cash equivalents at March 31, 2012 of $53 million and $15 million are included in Restricted cash and Other investments on the Consolidated Statements of Financial Position, respectively. Cash equivalents at December 31, 2011 of $124 million and $16 million are included in Restricted cash and Other investments on the Consolidated Statements of Financial Position, respectively.

(2) Equity securities at March 31, 2012 and December 31, 2011 of $6 million and $5 million are included in Other investments on the Consolidated Statements of Financial Position, respectively.

At March 31, 2012 and 2011, these securities are comprised primarily of money-market and equity securities. During the three months ended March 31, 2012 and March 31, 2011 no amounts of unrealized losses on available-for-sale securities were reclassified out of other comprehensive income into losses for the periods. Gains related to trading securities held at March 31, 2012, and 2011, were $7 million, and $3 million, respectively.