RETIREMENT BENEFITS AND TRUSTEED ASSETS

Pension Plan Benefits

The Company has qualified defined benefit retirement plans for eligible represented and non-represented employees. The plans are noncontributory and cover substantially all employees. The plans provide traditional retirement benefits based on the employees’ years of benefit service, average final compensation and age at retirement. In addition, certain represented and non-represented employees are covered under cash balance provisions that determine benefits on annual employer contributions and interest credits. The Company also maintains supplemental nonqualified, noncontributory, retirement benefit plans for selected management employees. These plans provide for benefits that supplement those provided by DTE Energy’s other retirement plans.

Effective January 1, 2012, the Company discontinued offering future non-represented employees a cash balance retirement plan benefit. In its place, the Company will annually contribute an amount equivalent to four percent 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 Pension Protection Act of 2006 provisions and additional amounts when it deems appropriate. The Company contributed $229 million to its pension plans in 2012. At the discretion of management, and depending upon financial market conditions, we anticipate making up to a $315 million contribution to the pension plans in 2013.

Net pension cost includes the following components:



	2012			2011			2010
	(In millions)
Service cost	$	82		$	69		$	64
Interest cost	204			202			202
Expected return on plan assets	(244		)	(246		)	(258		)
Amortization of:
Net loss	176			142			100
Prior service cost	—			3			4
Special termination benefits	2			2			—
Net pension cost	$	220		$	172		$	112



	2012			2011
	(In millions)
Other changes in plan assets and benefit obligations recognized in Regulatory assets and Other comprehensive income
Net actuarial loss	$	395		$	619
Amortization of net actuarial loss	(178		)	(142		)
Amortization of prior service cost	—			(3		)
Total recognized Regulatory assets and Other comprehensive income	$	217		$	474
Total recognized in net periodic pension cost, Regulatory assets and Other comprehensive income	$	437		$	646
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	$	202		$	171

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



	2012			2011
	(In millions)
Accumulated benefit obligation, end of year	$	4,349		$	3,881
Change in projected benefit obligation
Projected benefit obligation, beginning of year	$	4,195		$	3,785
Service cost	82			69
Interest cost	204			202
Actuarial loss	474			355
Special termination benefits	2			2
Benefits paid	(228		)	(218		)
Projected benefit obligation, end of year	$	4,729		$	4,195
Change in plan assets
Plan assets at fair value, beginning of year	$	2,886		$	2,913
Actual return on plan assets	325			(18		)
Company contributions	240			209
Benefits paid	(228		)	(218		)
Plan assets at fair value, end of year	$	3,223		$	2,886
Funded status of the plans	$	(1,506	)	$	(1,309	)
Amount recorded as:
Current liabilities	$	(8	)	$	(11	)
Noncurrent liabilities	(1,498		)	(1,298		)
	$	(1,506	)	$	(1,309	)
Amounts recognized in Accumulated other comprehensive loss, pre-tax
Net actuarial loss	$	205		$	202
Prior service (credit)	(2		)	(3		)
	$	203		$	199
Amounts recognized in Regulatory assets (see Note 11)
Net actuarial loss	$	2,413		$	2,201
Prior service cost	7			7
	$	2,420		$	2,208

At December 31, 2012, 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)
2013	$	236
2014	242
2015	252
2016	260
2017	269
2018-2022	1,485
	$	2,744

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



	2012		2011		2010
Projected benefit obligation
Discount rate	4.15	%	5.00	%	5.50	%
Rate of compensation increase	4.20	%	4.20	%	4.00	%
Net pension costs
Discount rate	5.00	%	5.50	%	5.90	%
Rate of compensation increase	4.20	%	4.00	%	4.00	%
Expected long-term rate of return on plan assets	8.25	%	8.50	%	8.75	%

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.

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 investment styles, and large and small market capitalizations. Fixed income securities generally include corporate bonds of companies from diversified industries, mortgage-backed securities, and U.S. Treasuries. Other assets such as private equity 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 plan assets as of December 31, 2012 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 at December 31, 2012 and 2011 (a):



	December 31, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Net Balance		Level 1		Level 2		Level 3		Net Balance
	(In millions)
Asset Category:
Short-term investments (b)	$	—	$	24	$	—	$	24	$	—	$	33	$	—	$	33
Equity securities															—
U.S. Large Cap (c)	688		44		—		732		640		40		—		680
U.S. Small/Mid Cap (d)	153		5		—		158		159		5		—		164
Non U.S (e)	530		120		—		650		392		114		—		506
Fixed income securities (f)	87		765		—		852		88		703		—		791
Hedge Funds and Similar Investments (g)	209		80		339		628		190		58		296		544
Private Equity and Other (h)	—		—		179		179		—		—		168		168
Total	$	1,667	$	1,038	$	518	$	3,223	$	1,469	$	953	$	464	$	2,886

_______________________________________


(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 which hold exchange-traded equity or debt securities are valued based on underlying securities, using quoted prices in actively traded markets. 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 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 challenge an assigned price and 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.

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



	Year Ended December 31, 2012									Year Ended December 31, 2011
	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	$	296		$	168		$	464		$	304		$	174		$	478
Total realized/unrealized gains (losses):
Realized gains (losses)	18			(6		)	12			(4		)	6			2
Unrealized gains (losses)	(5		)	12			7			1			(30		)	(29		)
Purchases, sales and settlements:
Purchases	250			33			283			64			23			87
Sales	(220		)	(28		)	(248		)	(69		)	(5		)	(74		)
Ending Balance at December 31	$	339		$	179		$	518		$	296		$	168		$	464
The amount of total gains (losses) for the period attributable to the change in unrealized gains or losses related to assets still held at the end of the period	$	16		$	6		$	22		$	4		$	(28	)	$	(24	)

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, 2012 and 2011.

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 credited service. The cost of these plans was $37 million, $35 million, and $34 million in each of the years 2012, 2011, and 2010, respectively.

Other Postretirement Benefits

The Company provides certain 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 its postretirement benefit obligations. Separate qualified Voluntary Employees Beneficiary Association (VEBA) and 401(h) trusts exist for represented and non-represented employees. The Company contributed $140 million to its postretirement medical and life insurance benefit plans during 2012.

Effective January 1, 2012, in lieu of offering future non-represented employees post-employment health care and life insurance benefits, the Company will allocate $4,000 per year to an account in a tax-exempt trust for each employee. The accumulated balance and earnings in an employee's account will vest when the employee has ten years of service, regardless of age. These funds will be available to the employee to use for health care expenses after the employee leaves the Company.

Effective January 1, 2013, the Company replaced sponsored retiree medical, prescription drug and dental coverage for current and future Medicare eligible non-represented retirees, spouses, surviving spouses, or same sex domestic partners with a Retiree Health Care Allowance (RHCA) account of $3,500 or $3,250 per year depending on their date of hire. Local 17 employees hired after September 24, 2012 will receive a $4,000 per year allocation to an account in a tax-exempt trust for each employee, in lieu of offering post-employment health care and life insurance benefits. Current Local 17 employees, spouses, surviving spouse, or same sex domestic partners, who retired after November 6, 2012 will receive a RHCA of $3,250 per year upon becoming eligible for Medicare.

In January 2013, the Company contributed $145 million to its other postretirement benefit plans. At the discretion of management, the Company may make up to an additional $120 million contribution to its VEBA trusts in 2013.

Net postretirement cost includes the following components:



	2012			2011			2010
	(In millions)
Service cost	$	68		$	64		$	61
Interest cost	120			121			125
Expected return on plan assets	(92		)	(94		)	(74		)
Amortization of:
Net loss	80			55			54
Prior service credit	(27		)	(26		)	(4		)
Net transition asset	2			2			2
Net postretirement cost	$	151		$	122		$	164



	2012			2011
	(In millions)
Other changes in plan assets and APBO recognized in Regulatory assets and Other comprehensive income (in millions)
Net actuarial (gain) loss	$	(34	)	$	195
Amortization of net actuarial loss	(80		)	(55		)
Prior service credit	(264		)	(4		)
Amortization of prior service credit	27			26
Amortization of transition asset	(2		)	(2		)
Total recognized in Regulatory assets and Other comprehensive income	$	(353	)	$	160
Total recognized in net periodic pension cost, Regulatory assets and Other comprehensive income	$	(202	)	$	282
Estimated amounts to be amortized from Regulatory assets and Accumulated other comprehensive income into net periodic benefit cost during next fiscal year (in millions)
Net actuarial loss	$	69		$	78
Prior service credit	$	(91	)	$	(27	)
Net transition obligation	$	—		$	2

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



	2012			2011
	(In millions)
Change in accumulated postretirement benefit obligation
Accumulated postretirement benefit obligation, beginning of year	$	2,470		$	2,305
Service cost	68			64
Interest cost	120			121
Plan amendments	(264		)	(4		)
Actuarial loss	5			80
Medicare Part D subsidy	6			6
Benefits paid	(90		)	(102		)
Accumulated postretirement benefit obligation, end of year	$	2,315		$	2,470
Change in plan assets
Plan assets at fair value, beginning of year	$	985		$	1,029
Actual return on plan assets	131			(22		)
Company contributions	140			111
Benefits paid	(103		)	(133		)
Plan assets at fair value, end of year	$	1,153		$	985
Funded status, end of year	$	(1,162	)	$	(1,485	)
Amount recorded as:
Current liabilities	$	(2	)	$	(1	)
Noncurrent liabilities	$	(1,160	)	$	(1,484	)
	$	(1,162	)	$	(1,485	)
Amounts recognized in Accumulated other comprehensive loss, pre-tax
Net actuarial loss	$	40		$	47
Prior service credit	(14		)	(20		)
Net transition asset	(1		)	(1		)
	$	25		$	26
Amounts recognized in Regulatory assets (See Note 11)
Net actuarial loss	$	727		$	835
Prior service cost	(302		)	(60		)
Net transition obligation	1			3
	$	426		$	778

At December 31, 2012, 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)
2013	$	103
2014	109
2015	115
2016	120
2017	127
2018 — 2022	726
	$	1,300

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



	2012		2011		2010
Projected benefit obligation
Discount rate	4.15	%	5.00	%	5.50	%
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	2019		2016		2016
Net benefit costs
Discount rate	5.00	%	5.50	%	5.90	%
Expected long-term rate of return on plan assets	8.25	%	8.75	%	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	2020		2019		2016

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 $28 million and increased the accumulated benefit obligation by $279 million at December 31, 2012. 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 $19 million and would have decreased the accumulated benefit obligation by $264 million at December 31, 2012.

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

Target allocations for plan assets as of December 31, 2012 are listed below:



U.S. Domestic Equity Securities	21	%
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 at December 31, 2012 and 2011(a):



	December 31, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Net Balance		Level 1		Level 2		Level 3		Net Balance
Asset Category:	(In millions)
Short-term investments (b)	$	1	$	2	$	—	$	3	$	—	$	13	$	—	$	13
Equity securities:
U.S. Large Cap (c)	189		3		—		192		175		15		—		190
U.S. Small/Mid Cap (d)	105		—		—		105		70		6		—		76
Non U.S (e)	230		7		—		237		176		14		—		190
Fixed income securities (f)	38		247		—		285		24		236		—		260
Hedge Funds and Similar Investments (g)	102		24		119		245		80		21		95		196
Private Equity and Other (h)	—		—		86		86		—		—		60		60
Total	$	665	$	283	$	205	$	1,153	$	525	$	305	$	155	$	985

_______________________________________


(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)

(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 which hold exchange-traded equity or debt securities are valued based on underlying securities, using quoted prices in actively traded markets. 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 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 challenge an assigned price and 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.

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



	Year Ended December 31, 2012									Year Ended December 31, 2011
	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	$	95		$	60		$	155		$	79		$	55		$	134
Total realized/unrealized gains (losses):
Realized gains (losses)	6			(11		)	(5		)	(1		)	2			1
Unrealized gains (losses)	—			14			14			2			(22		)	(20		)
Purchases, sales and settlements:
Purchases	86			36			122			68			48			116
Sales	(68		)	(13		)	(81		)	(53		)	(23		)	(76		)
Ending Balance at December 31	$	119		$	86		$	205		$	95		$	60		$	155
The amount of total gains (losses) for the period attributable to the change in unrealized gains or losses related to assets still held at the end of the period	$	6		$	2		$	8		$	5		$	(16	)	$	(11	)

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, 2012 and 2011.

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 postretirement benefit costs by $6 million in 2012, $6 million in 2011 and $7 million in 2010.

Grantor Trust

DTE Gas maintains a Grantor Trust to fund other postretirement benefit obligations that invests in life insurance contracts and income securities. Employees and retirees have no right, title or interest in the assets of the Grantor Trust, and DTE Gas can revoke the trust subject to providing the MPSC with prior notification. The Company accounts for its investment at fair value, approximately $14 million at December 31, 2012, with unrealized gains and losses recorded to earnings. The Grantor Trust investment is included in Other investments on the Consolidated Statements of Financial Position.