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,June 30, 2011 and December 31, 2010. The Company believes it uses valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.
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,June 30, 2011:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net Balance at | |
| (in Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | March 31, 2011 | |
Assets: | | | | | | | | | | | | | | | | |
| Nuclear decommissioning trusts | | $ | 624 | | | $ | 337 | | | $ | — | | | $ | 961 | |
| Other investments | | | 52 | | | | 53 | | | | — | | | | 105 | |
| Derivative assets — FTRs | | | — | | | | — | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | |
| Total | | $ | 676 | | | $ | 390 | | | $ | 1 | | | $ | 1,067 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| Derivative liabilities — Emissions | | | — | | | | (3 | ) | | | — | | | | (3 | ) |
| | | | | | | | | | | | | |
| Total | | $ | — | | | $ | (3 | ) | | $ | — | | | $ | (3 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net Assets at March 31, 2011 | | $ | 676 | | | $ | 387 | | | $ | 1 | | | $ | 1,064 | |
| | | | | | | | | | | | | |
12
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net Balance at | |
| (in Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | March 31, 2011 | |
Assets: | | | | | | | | | | | | | | | | |
| Current | | $ | — | | | $ | — | | | $ | 1 | | | $ | 1 | |
| Noncurrent | | | 676 | | | | 390 | | | | — | | | | 1,066 | |
| | | | | | | | | | | | | |
| Total Assets | | $ | 676 | | | $ | 390 | | | $ | 1 | | | $ | 1,067 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| Current | | $ | — | | | $ | (3 | ) | | $ | — | | | $ | (3 | ) |
| Noncurrent | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total Liabilities | | $ | — | | | $ | (3 | ) | | $ | — | | | $ | (3 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net Assets at March 31, 2011 | | $ | 676 | | | $ | 387 | | | $ | 1 | | | $ | 1,064 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| (in Millions) | Level 1 | | Level 2 | | Level 3 | | Net Balance at June 30, 2011 |
| Assets: | | | | | | | |
| Nuclear decommissioning trusts | $ | 626 |
| | $ | 349 |
| | $ | — |
| | $ | 975 |
|
| Other investments | 53 |
| | 53 |
| | — |
| | 106 |
|
| Derivative assets - FTRs | — |
| | — |
| | 3 |
| | 3 |
|
| Total | $ | 679 |
| | $ | 402 |
| | $ | 3 |
| | $ | 1,084 |
|
| Liabilities: | | | | | | | |
| Derivative liabilities - Emissions | — |
| | (1 | ) | | — |
| | (1 | ) |
| Total | $ | — |
| | (1 | ) | | $ | — |
| | $ | (1 | ) |
| | | | | | | | |
| Net Assets at June 30, 2011 | $ | 679 |
| | 401 |
| | $ | 3 |
| | $ | 1,083 |
|
|
| | | | | | | | | | | | | | | |
| (in Millions) | Level 1 | | Level 2 | | Level 3 | | Net Balance at June 30, 2011 |
| Assets: | | | | | | | |
| Current | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | 3 |
|
| Noncurrent | 679 |
| | 402 |
| | — |
| | 1,081 |
|
| Total Assets | $ | 679 |
| | $ | 402 |
| | $ | 3 |
| | $ | 1,084 |
|
| Liabilities: | | | | | | | |
| Current | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) |
| Noncurrent | — |
| | — |
| | — |
| | — |
|
| Total Liabilities | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) |
| | | | | | | | |
| Net Assets at June 30, 2011 | $ | 679 |
| | $ | 401 |
| | $ | 3 |
| | $ | 1,083 |
|
The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2010:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net Balance at | |
| (in Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | December 31, 2010 | |
Assets: | | | | | | | | | | | | | | | | |
| Nuclear decommissioning trusts | | $ | 599 | | | $ | 340 | | | $ | — | | | $ | 939 | |
| Other investments | | | 52 | | | | 55 | | | | — | | | | 107 | |
| Derivative assets — FTRs | | | — | | | | — | | | | 2 | | | | 2 | |
| | | | | | | | | | | | | |
| Total | | $ | 651 | | | $ | 395 | | | $ | 2 | | | $ | 1,048 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| Derivative liabilities — Emissions | | | — | | | | (3 | ) | | | — | | | | (3 | ) |
| | | | | | | | | | | | | |
| Total | | $ | — | | | $ | (3 | ) | | $ | — | | | $ | (3 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net Assets at December 31, 2010 | | $ | 651 | | | $ | 392 | | | $ | 2 | | | $ | 1,045 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net Balance at | |
| (in Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | December 31, 2010 | |
Assets: | | | | | | | | | | | | | | | | |
| Current | | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | |
| Noncurrent | | | 651 | | | | 395 | | | | — | | | | 1,046 | |
| | | | | | | | | | | | | |
| Total Assets | | $ | 651 | | | $ | 395 | | | $ | 2 | | | $ | 1,048 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| Current | | $ | — | | | $ | (3 | ) | | $ | — | | | $ | (3 | ) |
| Noncurrent | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total Liabilities | | $ | — | | | $ | (3 | ) | | $ | — | | | $ | (3 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net Assets at December 31, 2010 | | $ | 651 | | | $ | 392 | | | $ | 2 | | | $ | 1,045 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| (in Millions) | Level 1 | | Level 2 | | Level 3 | | Net Balance at December 31, 2010 |
| Assets: | | | | | | | |
| Nuclear decommissioning trusts | $ | 599 |
| | $ | 340 |
| | — |
| | $ | 939 |
|
| Other investments | 52 |
| | 55 |
| | — |
| | 107 |
|
| Derivative assets - FTRs | — |
| | — |
| | 2 |
| | 2 |
|
| Total | $ | 651 |
| | $ | 395 |
| | $ | 2 |
| | $ | 1,048 |
|
| Liabilities: | | | | | | | |
| Derivative liabilities - Emissions | — |
| | (3 | ) | | — |
| | (3 | ) |
| Total | — |
| | $ | (3 | ) | | — |
| | $ | (3 | ) |
| | | | | | | | |
| Net Assets at December 31, 2010 | $ | 651 |
| | $ | 392 |
| | $ | 2 |
| | $ | 1,045 |
|
|
| | | | | | | | | | | | | | | |
| (in Millions) | Level 1 | | Level 2 | | Level 3 | | Net Balance at December 31, 2010 |
| Assets: | | | | | | | |
| Current | — |
| | — |
| | $ | 2 |
| | $ | 2 |
|
| Noncurrent | 651 |
| | 395 |
| | — |
| | 1,046 |
|
| Total Assets | $ | 651 |
| | $ | 395 |
| | $ | 2 |
| | $ | 1,048 |
|
| Liabilities: | | | | | | | |
| Current | — |
| | $ | (3 | ) | | — |
| | $ | (3 | ) |
| Noncurrent | — |
| | — |
| | — |
| | — |
|
| Total Liabilities | — |
| | $ | (3 | ) | | — |
| | $ | (3 | ) |
| | | | | | | | |
| Net Assets at December 31, 2010 | $ | 651 |
| | $ | 392 |
| | $ | 2 |
| | $ | 1,045 |
|
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 March 31,June 30, 2011 and 2010:
| | | | | | | | | |
| | | Three Months Ended | |
| | | March 31 | |
| (in Millions) | | 2011 | | | 2010 | |
| Asset balance as of beginning of the period | | $ | 2 | | | $ | 2 | |
| Changes in fair value recorded in regulatory assets/liabilities | | | (1 | ) | | | (1 | ) |
| | | | | | | |
| Asset balance as of March 31 | | $ | 1 | | | $ | 1 | |
| | | | | | | |
| The amount of total gains (losses) included in regulatory assets and liabilities attributed to the change in unrealized gains (losses) related to regulatory assets and liabilities held at March 31, 2011 and 2010 | | $ | — | | | $ | — | |
| | | | | | | |
13
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (in Millions) | 2011 | | 2010 | | 2011 | | 2010 |
| Asset balance as of beginning of the period | $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 2 |
|
| Changes in fair value recorded in regulatory assets/liabilities | 4 |
| | 4 |
| | 3 |
| | 3 |
|
| Purchases, issuances and settlements: | | | | | | | |
| Settlements | (2 | ) | | (2 | ) | | (2 | ) | | (2 | ) |
| Asset balance as of June 30 | $ | 3 |
| | $ | 3 |
| | $ | 3 |
| | $ | 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, 2011 and 2010 | $ | 3 |
| | $ | 3 |
| | $ | 3 |
| | $ | 3 |
|
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. No significant transfers between Levels 1, 2 or 3 occurred in the three and six months ended March 31,June 30, 2011 and March 31,June 30, 2010.
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.
Fair Value of Financial Instruments
The fair value of long-term debt is determined by using quoted market prices when available and a discounted cash flow analysis based upon estimated current borrowing rates when quoted market prices are not available. The table below shows the
fair value and the carrying value for long-term debt securities. Certain other financial instruments, such as notes payable, customer deposits and notes receivable are not shown as carrying value approximates fair value. See Note 5 for further fair value information on financial and derivative instruments.
|
| | | | | | | | | | | | | | | | |
| | | March 31,June 30, 2011 | | December 31, 2010 |
| | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| Long-Term Debt | | $5.25.5 billion | | $4.95.1 billion | | $5.3 billion | | $5.0 billion |
14
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. See Note 6.5.
The NRC has jurisdiction over the decommissioning of nuclear power plants and requires decommissioning funding based upon a formula. The MPSC and FERC regulate the recovery of costs of decommissioning nuclear power plants and both require the use of external trust funds to finance the decommissioning of Fermi 2. 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. The Company believes the MPSC and FERC collections will be adequate to fund the estimated cost of decommissioning using the NRC formula. The decommissioning assets, anticipated earnings thereon and future revenues from decommissioning collections will be used to decommission Fermi 2. The Company expects the liabilities to be reduced to zero at the conclusion of the decommissioning activities. If amounts remain in the trust funds for Fermi 2 following the completion of the decommissioning activities, those amounts will be disbursed based on rulings by the MPSC and FERC. See Note 7.
The decommissioning of Fermi 1 is funded by Detroit Edison. Contributions to the Fermi 1 trust are discretionary.
The following table summarizes the fair value of the nuclear decommissioning trust fund assets:
| | | | | | | | | |
| | | March 31 | | | December 31 | |
| (in Millions) | | 2011 | | | 2010 | |
| Fermi 2 | | $ | 930 | | | $ | 910 | |
| Fermi 1 | | | 3 | | | | 3 | |
| Low level radioactive waste | | | 28 | | | | 26 | |
| | | | | | | |
| Total | | $ | 961 | | | $ | 939 | |
| | | | | | | |
|
| | | | | | | |
| (in Millions) | June 30 2011 | | December 31 2010 |
| Fermi 2 | $ | 942 |
| | $ | 910 |
|
| Fermi 1 | 3 |
| | 3 |
|
| Low level radioactive waste | 30 |
| | 26 |
|
| Total | $ | 975 |
| | $ | 939 |
|
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 |
| (in Millions) | | 2011 | | 2010 |
| Realized gains | | $ | 14 | | | $ | 9 | |
| Realized losses | | | (8 | ) | | | (8 | ) |
| Proceeds from sales of securities | | | 20 | | | | 59 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (in Millions) | 2011 | | 2010 | | 2011 | | 2010 |
| Realized gains | $ | 12 |
| | $ | 12 |
| | $ | 26 |
| | $ | 21 |
|
| Realized losses | (9 | ) | | (11 | ) | | (17 | ) | | (19 | ) |
| Proceeds from sales of securities | 39 |
| | 69 |
| | 59 |
| | 128 |
|
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 | | | Unrealized | |
| (in Millions) | | Value | | | Gains | |
| As of March 31, 2011 | | | | | | | | |
| Equity securities | | $ | 590 | | | $ | 100 | |
| Debt securities | | | 359 | | | | 10 | |
| Cash and cash equivalents | | | 12 | | | | — | |
| | | | | | | |
| | | $ | 961 | | | $ | 110 | |
| | | | | | | |
| | | | | | | | | | |
| | | Fair | | Unrealized | | | | | | |
| (in Millions) | | Value | | Gains | | Fair Value | | Unrealized Gains |
| As of December 31, 2010 | | |
| As of June 30, 2011 | | | | |
| Equity securities | | $ | 572 | | $ | 77 | | $ | 589 |
| | $ | 100 |
|
| Debt securities | | 361 | | 11 | | 381 |
| | 14 |
|
| Cash and cash equivalents | | 6 | | — | | 5 |
| | — |
|
| | | | | | | 975 |
| | 114 |
|
| | | $ | 939 | | $ | 88 | | |
| | | | | | | |
15
|
| | | | | | | |
| (in Millions) | Fair Value | | Unrealized Gains |
| As of December 31, 2010 | $ | 572 |
| | $ | 77 |
|
| Equity securities | | | |
| Debt securities | 361 |
| | 11 |
|
| Cash and cash equivalents | 6 |
| | — |
|
| | $ | 939 |
| | $ | 88 |
|
The debt securities at March 31,June 30, 2011 and December 31, 2010 had an average maturity of approximately 78 and 6 years, respectively. 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 $27$32 million and $26 million of unrealized losses as Regulatory assets at March 31,June 30, 2011 and December 31, 2010, 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 March 31,June 30, 2011 and March 31,June 30, 2010 for Fermi 1 trust assets.
Other Available-For-Sale Securities
The following table summarizes the fair value of the Company’sCompany's investment in available-for-sale debt and equity securities, excluding nuclear decommissioning trust fund assets:
| | | | | | | | | | | | | | | | | |
| | | March 31, 2011 | | December 31, 2010 |
| (in Millions) | | Fair Value | | Carrying value | | Fair Value | | Carrying Value |
| Cash equivalents | | $ | 71 | | | $ | 71 | | | $ | 125 | | | $ | 125 | |
| Equity securities | | | 5 | | | | 5 | | | | 4 | | | | 4 | |
|
| | | | | | | | | | | | | | | |
| | June 30, 2011 | | December 31, 2010 |
| (in Millions) | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| Cash equivalents | $ | 122 |
| | $ | 122 |
| | $ | 125 |
| | $ | 125 |
|
| Equity securities | 5 |
| | 5 |
| | 4 |
| | 4 |
|
As of March 31,June 30, 2011, these securities arewere comprised primarily of money-market funds and equity securities. Gains (losses) related to trading securities held at March 31,June 30, 2011 and March 31,June 30, 2010 were $3$4 million and $2$(2) million, respectively.
NOTE 54 —FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
The Company recognizes all derivatives at their fair value on the Consolidated Statements of Financial Position unless they qualify for certain scope exceptions, including the normal purchases and normal sales exception. Further, derivatives that qualify and are designated for hedge accounting are classified as either hedges of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), or as hedges of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge). For cash flow hedges, the portion of the derivative gain or loss that is effective in offsetting the change in the value of the underlying exposure is deferred in Accumulated other comprehensive income and later reclassified into earnings when the underlying transaction occurs. For fair value hedges, changes in fair values for the derivative are recognized in earnings each period. Gains and losses from the ineffective portion of any hedge are recognized in earnings immediately. For derivatives that do not qualify or are not designated for hedge accounting, changes in the fair value are recognized in earnings each period.
Detroit Edison’sEdison's primary market risk exposure is associated with commodity prices, credit and interest rates. The Company has risk management policies to monitor and manage market risks. The Company uses derivative instruments to manage some of the exposure. Detroit Edison generates, purchases, distributes and sells electricity. Detroit Edison uses forward energy and capacity contracts to manage changes in the price of electricity and fuel. Substantially all of these contracts meet the normal purchases and sales exemption and are therefore accounted for under the accrual method. Other derivative contracts are recoverable through the PSCR mechanism when settled. This results in the deferral of unrealized gains and losses as Regulatory assets or liabilities until realized.
The following represents the fair value of derivative instruments as of March 31,June 30, 2011 and December 31, 2010:
| | | | | | | | | |
| | | March 31 | | | December 31 | |
| (in Millions) | | 2011 | | | 2010 | |
| FTRs — Other current assets | | $ | 1 | | | $ | 2 | |
| Emissions — Other current liabilities | | | (3 | ) | | | (3 | ) |
| | | | | | | |
| Total derivatives not designated as hedging instrument | | $ | (2 | ) | | $ | (1 | ) |
| | | | | | | |
16
|
| | | | | | | |
| (in Millions) | June 30 2011 | | December 31 2010 |
| FTRs - Other current assets | $ | 3 |
| | $ | 2 |
|
| Emissions - Other current liabilities | (1 | ) | | (3 | ) |
| Total derivatives not designated as hedging instruments | $ | 2 |
| | $ | (1 | ) |
The effects of derivative instruments recoverable through the PSCR mechanism when realized on the Consolidated Statements of Financial Position were immaterial$4 million and $3 million in gains related to both Regulatory assets andFTRs recognized in Regulatory liabilities for the three and six months ended March 31, 2011.June 30, 2011, respectively.
The following represents the cumulative gross volume of derivative contracts outstanding as of March 31,June 30, 2011:
|
| | | | |
| Commodity | | Number of Units |
| Emissions (Tons) | | 1,700 | 2,250 |
|
| FTRs (MW) | | 76,228 | 21,562 |
|
NOTE 65 —ASSET RETIREMENT OBLIGATIONS
A reconciliation of the asset retirement obligations for the threesix months ended March 31,June 30, 2011 follows:
| | | | | |
| (in Millions) | | | | |
| Asset retirement obligations at December 31, 2010 | | $ | 1,366 | |
| Accretion | | | 21 | |
| Revision in estimated cash flows | | | 19 | |
| Liabilities settled | | | (2 | ) |
| | | | |
| Asset retirement obligations at March 31, 2011 | | | 1,404 | |
| Less amount included in current liabilities | | | (15 | ) |
| | | | |
| | | $ | 1,389 | |
| | | | |
|
| | | |
| (in Millions) | |
| Asset retirement obligations at December 31, 2010 | $ | 1,366 |
|
| Accretion | 42 |
|
| Revision in estimated cash flows | (1 | ) |
| Liabilities incurred | 1 |
|
| Liabilities settled | (7 | ) |
| Asset retirement obligations at June 30, 2011 | 1,401 |
|
| Less amount included in current liabilities | (11 | ) |
| | $ | 1,390 |
|
In 2001, Detroit Edison began the final decommissioning of Fermi 1, with the goal of removing the remaining radioactive material and terminating the Fermi 1 license. In the first quarter of 2011, based on management decisions revising the timing and estimate of cash flows, Detroit Edison accrued an additional $19 million with respect to the decommissioning of Fermi 1. Subject to NRC notification, management intends to suspend decommissioning activities and place the facility in safe storage status. The expense amount has been recorded in Asset (gains) and losses, reservesnet on the Consolidated Statements of Operations. In the second quarter of 2011, based on updated studies revising the timing and impairments,estimate of cash flows, a reduction of approximately $20 million was made to the Detroit Edison asset retirement obligation for asbestos removal with approximately $5.7 million of the decrease associated with Fermi 1 recorded in Asset (gains) and losses, net on the Consolidated Statements of Operations.
NOTE 76 — REGULATORY MATTERS
2010 Electric Rate Case Filing
Detroit Edison filed a rate case on October 29, 2010 based on a projected twelve-month12-month period ending March 31, 2012. The filing with the MPSC requested a $443 million increase in base rates that is required to recover higher costs associated with environmental compliance, operation and maintenance of the Company’sCompany's electric distribution system and generation plants, inflation, the capital costs of plant additions, the reduction in territory sales, the impact from the expiration of certain wholesale for resale contracts and the increased migration of customers to the electric Customer Choice program. Detroit Edison also proposed certain adjustments which could reduce the net impact on the required increase in rates by approximately $190 million. These adjustments relate to electric Customer Choice migration, pension and other postretirement benefits expenses and the Nuclear Decommissioning surcharge. On April 28, 2011, Detroit Edison self-implemented a rate increase of $107 million. This increase, which is collected subject to refund, will remain in place until a final order is issued.
Detroit Edison Restoration Expense Tracker Mechanism (RETM) and Line ClearanceTracker (LCT) Reconciliation
In March 2011,2010, Detroit Edison filed an application with the MPSC for approval of the reconciliation of its 20102009 RETM and LCT. The Company’s 2010Company's 2009 restoration and line clearance expenses were higherless than the amount provided in rates. Accordingly, Detroit Edison has requested recoveryproposed a refund of approximately $19.5 million.
$16 million, including interest. On May 10, 2011 the MPSC issued an order approving the proposed refund and Detroit Edison Uncollectible Expense True-Up Mechanism (UETM)began applying credits to customer bills in July 2011.
Detroit Edison Choice Implementation Surcharge (CIS)
In MarchJune 2011, Detroit Edison filed an application with the MPSC for approval of its UETMCIS reconciliation and proposed refund of $2.4 million.
2009 Detroit Edison Depreciation Filing
In compliance with an MPSC order, Detroit Edison filed a depreciation case in November 2009. On June 16, 2011, the MPSC issued an order reducing Detroit Edison's composite depreciation rates from 3.33% to 3.06%, effective for accounting purposes, the day after the issuance of the MPSC order in the 2010 rate case expected in October 2011.
Renewable Energy Plan
In June 2011, Detroit Edison filed an amended Renewable Energy Plan with the MPSC requesting authority to refundcontinue to recover approximately $7.2$100 million consisting of costs relatedsurcharge revenues. The proposed revenues are necessary in order to 2010 uncollectible expense.continue to properly implement Detroit Edison's 20-year renewable energy plan, to deliver cleaner, renewable electric generation to its customers, to further diversify Detroit Edison's and the State of Michigan's sources of electric supply, and to address the state and national goals of increasing energy independence.
17
Detroit Edison Choice IncentiveRevenue Decoupling Mechanism (CIM)(RDM)
In MarchMay 2011, Detroit Edison filed an application with the MPSC for approval of its CIMRDM reconciliation for the period February 2010 through January 2011 requesting recovery ofauthority to refund approximately $105.2 million.$55.8 million, plus interest.
Energy Optimization (EO) Plans
In April 2011, Detroit Edison filed an application for approval of its reconciliation of its 2010 EO plan expenses. Detroit Edison’s EO reconciliation includes a cumulative $21 million net over-recovery at year end 2010 for the 2010 EO plan.
Power Supply Cost Recovery (PSCR) Proceedings
The PSCR process is designed to allow Detroit Edison to recover all of its power supply costs if incurred under reasonable and prudent policies and practices. Detroit Edison’sEdison's power supply costs include fuel costs, purchased and net interchange power costs, nitrogen oxide and sulfur dioxide emission allowances costs, urea costs, transmission costs and MISO costs. The MPSC reviews these costs, policies and practices for prudence in annual plan and reconciliation filings.
The following table summarizes Detroit Edison’sEdison's PSCR reconciliation filing currently pending with the MPSC:
| | | | | | |
| | | | Net Over/(Under)-Recovery, | | PSCR Cost of |
| PSCR Year | | Date Filed | | Net Over/(Under)-Recovery, Including Interest | | PSCR Cost of Power Sold |
| 2009 | | March 2010 | | $15.6 million | | $1.2 billion |
| 2010 | | March 2011 | | $(52.6) million | | $1.2 billion |
2010 PSCR Year—- The 2010 PSCR reconciliation includes $15.6 million net over-recovery for the 2009 PSCR year. In addition to the net under-recovery of $52.6 million, the 2010 PSCR reconciliation includes an under-recovery of $7.1 million for the reconciliation of the 2007-2008 Pension Equalization Mechanism and an over-refund of $3.8 million for the 2011 refund of the self-implemented rate increase related to the 2009 electric rate case filing.
2011 Plan Year—- In September 2010, Detroit Edison filed its 2011 PSCR plan case seeking approval of a levelized PSCR factor of 2.98 mills/kWh below the amount included in base rates for all PSCR customers. The filing supports a total power supply expense forecast of $1.2 billion. The plan also includes approximately $36 million for the recovery of its projected 2010 PSCR under-recovery.
Other
The Company is unable to predict the outcome of the unresolved regulatory matters discussed herein. Resolution of these matters is dependent upon future MPSC orders and appeals, which may materially impact the financial position, results of operations and cash flows of the Company.
NOTE 87 — LONG-TERM DEBT
Debt Issuances
In April 2011, Detroit Edisonthe Company has remarketed $31 million of Tax-Exempt Revenue Bondsor issued the following long-term debt:
(in Millions)
|
| | | | | | | |
| Month Issued | Type | Interest Rate | Maturity | Amount |
| April | Tax-Exempt Revenue Bonds(1)(2) | 2.35 | % | 2024 | $ | 31 |
|
| May | Mortgage Bonds(3) | 3.90 | % | 2021 | 250 |
|
| | | | | $ | 281 |
|
(1) These bonds were remarketed in a long-term rate mode at 2.35% forwith a three-year term.term ending April 1, 2014. The final maturity of the issue is October 1, 2024.
(2) Detroit Edison Tax Exempt Revenue Bonds are issued by a public body that loans the proceeds to Detroit Edison on terms substantially mirroring the Revenue Bonds.
(3) Proceeds were used for general corporate purposes.
In June 2011, Detroit Edison agreed to issue and sell $225 million of general and refunding mortgage bonds, with an average rate of 4.6% and an average maturity of 17 years, to a group of institutional investors in a private placement transaction. The bonds are expected to close and fund on September 1, 2011.
Debt Retirements and Redemptions
In 2011, the following debt was retired:
(in Millions)
|
| | | | | | |
| Month Retired | Type | Interest Rate | Maturity | Amount |
| May | Tax-Exempt Revenue Bonds | 6.95% | 2011 | $ | 26 |
|
NOTE 98 —SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
In August 2010, Detroit Edison entered into an amended and restated $212 million two-year unsecured revolving credit agreement and a new $63 million three-year unsecured revolving credit agreement with a syndicate of 23 banks that may be used for general corporate borrowings, but are intended to provide liquidity support for the Company’sCompany's commercial paper
program. No one bank provides more than 8.25% of the commitment in any facility. Borrowings under the facilities are available at prevailing short-term interest rates.
The above agreements require the Company to maintain a total funded debt to capitalization ratio of no more than 0.65 to 1. In the agreements, “total funded debt” means all indebtedness of the Company and its consolidated
18
subsidiaries, including capital lease obligations, hedge agreements and guarantees of third parties’parties' debt, but excluding contingent obligations and nonrecourse and junior subordinated debt. “Capitalization” means the sum of (a) total funded debt plus (b) “consolidated net worth,” which is equal to consolidated total stockholders’stockholders' equity of the Company and its consolidated subsidiaries (excluding pension effects under certain FASB statements), as determined in accordance with accounting principles generally accepted in the United States of America. At March 31,June 30, 2011, the total funded debt to total capitalization ratio for Detroit Edison was 0.510.53 to 1. Should Detroit Edison have delinquent obligations of at least $50 million to any creditor, such delinquency will be considered a default under its credit agreements. Detroit Edison had no$107 million in outstanding short-term borrowings at March 31,June 30, 2011.
NOTE 109 —COMMITMENTS AND CONTINGENCIES
Environmental
Environmental
Air—- Detroit Edison is subject to the EPA ozone transport and acid rain regulations that limit power plant emissions of sulfur dioxide and nitrogen oxides. Since 2005, the EPA and the State of Michigan have issued additional emission reduction regulations relating to ozone, fine particulate, regional haze and mercury air pollution. The new rules will lead to additional controls on fossil-fueled power plants to reduce nitrogen oxide, sulfur dioxide and mercury emissions. To comply with these requirements, Detroit Edison has spent approximately $1.5 billion through 2010. The Company estimates Detroit Edison will make capital expenditures of over $230$205 million in 2011 and up to $2.1$2.0 billion of additional capital expenditures through 2020 based on current regulations. Further, additional rulemakings are expected over the next few years which could require additional controls for sulfur dioxide, nitrogen oxides and hazardous air pollutants. The EPA’sEPA's proposed National Emission Standards for Hazardous Air Pollutants from Coal and Oil-Fired Electric Utility Steam Generating Units rule (covering mercury and other air pollutants) was issued on March 16, 2011 for review and comment. DTE Energy is reviewing potential impacts of the proposed rule. The EPA will be accepting input on the proposal and may modify it prior to finalization, scheduled for November 2011. ItAlso, on July 6, 2011, the EPA finalized the Cross-State Air Pollution Rule (CSAPR) which replaces the Clean Air Interstate Rule (CAIR), requiring further reductions of sulfur dioxides and nitrogen oxides. Detroit Edison is reviewing potential impacts of the proposed and recently finalized rules, but is not possibleable to quantify the financial impact of thisthese and other expected rulemakings at this time.
In July 2009, DTE Energy received a Notice of Violation/Finding of Violation (NOV/FOV) from the EPA alleging, among other things, that five of Detroit Edison’sEdison power plants violated New Source Performance standards, Prevention of Significant Deterioration requirements, and operating permit requirements under the Clean Air Act. InAn additional NOV/FOV was received in June 2010 the EPA issued a NOV/FOV making similar allegations related to a recent project and outage at Unit 2 of the Monroe Power Plant.
On August 5, 2010, the United States Department of Justice, at the request of the EPA, brought a civil suit in the U.S. District Court for the Eastern District of Michigan against DTE Energy and Detroit Edison, related to the June 2010 NOV/FOV and the outage work performed at Unit 2 of the Monroe Power Plant, but not relating to the July 2009 NOV/FOV. Among other relief, the EPA is requestingrequested the court to require Detroit Edison to install and operate the best available control technology at Unit 2 of the Monroe Power Plant. Further, the EPA is requestingrequested the court to issue a preliminary injunction to require Detroit Edison to (i) begin the process of obtaining the necessary permits for the Monroe Unit 2 modification and (ii) offset the pollution from Monroe Unit 2 through emissions reductions from Detroit Edison’sEdison's fleet of coal-fired power plants until the new control equipment is operating. In January 2011, the EPA’sEPA's motion for preliminary injunction was denied and the liability phase of the civil suit has been scheduled for trial in September 2011.
DTE Energy and Detroit Edison believe that the plants identified by the EPA, including Unit 2 of the Monroe Power Plant, have complied with all applicable federal environmental regulations. Depending upon the outcome of discussions with the EPA regarding the NOV/FOV and the result of the civil action, Detroit Edison could also be required to install additional pollution control equipment at some or all of the power plants in question, implement early retirement of facilities where control equipment is not economical, engage in supplemental environmental programs, and/or pay fines. DTE Energy and Detroit Edison cannot predict the financial impact or outcome of this matter, or the timing of its resolution.
Water—- In response to an EPA regulation, Detroit Edison is required to examine alternatives for reducing the environmental impacts of the cooling water intake structures at several of its facilities. Based on the results of completed studies and expected future studies, Detroit Edison may be required to install additional control technologies to reduce the impacts of the water intakes. Initially, it was estimated that Detroit Edison could incur up
19
to approximately $55$80 million in additional capital
expenditures over the four to six years subsequent to 2008 to comply with these requirements. However, a January 2007 circuit court decision remanded back to the EPA several provisions of the federal regulation that has resulted in a delay in compliance dates. The decision also raised the possibility that Detroit Edison may have to install cooling towers at some facilities at a cost substantially greater than was initially estimated for other mitigative technologies. In 2008, the Supreme Court agreed to review the remanded cost-benefit analysis provision of the rule and in April 2009 upheld the EPA’sEPA's use of this provision in determining best technology available for reducing environmental impacts. On March 28, 2011, the EPA issued a revised rule, which is currently under review.proposed rule. A final rule is scheduled to be issued in mid-2012. The EPA has also issued an information collection request to begin a review of steam electric effluent guidelines. It is not possible at this time to quantify the financial impacts of these developing requirements.
Contaminated Sites—- Prior to the construction of major interstate natural gas pipelines, gas for heating and other uses was manufactured locally from processes involving coal, coke or oil. The facilities, which produced gas, have been designated as manufactured gas plant (MGP) sites. Detroit Edison conducted remedial investigations at contaminated sites, including three former MGP sites. The investigations have revealed contamination related to the by-products of gas manufacturing at each site. In addition to the MGP sites, the Company is also in the process of cleaning up other contaminated sites, including the area surrounding an ash landfill, electrical distribution substations, and underground and aboveground storage tank locations. The findings of these investigations indicated that the estimated cost to remediate these sites is expected to be incurred over the next several years. At March 31,June 30, 2011 and December 31, 2010, the Company had $9 million accrued for remediation. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites and affect the Company’sCompany's financial position and cash flows.
Landfill—- Detroit Edison owns and operates a permitted engineered ash storage facility at the Monroe Power Plant to dispose of fly ash from the coal fired power plant. Detroit Edison performed an engineering analysis in 2009 and identified the need for embankment side slope repairs and reconstruction.
The EPA has published proposed rules to regulate coal ash under the authority of the Resources Conservation and Recovery Act (RCRA). The proposed rule published on June 21, 2010 contains two primary regulatory options to regulate coal ash residue. The EPA is currently considering either designating coal ash as a “Hazardous Waste” as defined by RCRA or regulating coal ash as non-hazardous waste under RCRA. Agencies and legislatures have urged the EPA to regulate coal ash as a non-hazardous waste. If the EPA designates coal ash as a hazardous waste, the agency could apply some, or all, of the disposal and reuse standards that have been applied to other existing hazardous wastes to disposal and reuse of coal ash. Some of the regulatory actions currently being contemplated could have a significant impact on our operations and financial position and the rates we charge our customers. It is not possible to quantify the financial impact of those expected rulemakingsproposed rules at this time.
Other
In 2011, the EPA finalized a new set of regulations regarding the identification of non-hazardous secondary materials that are considered solid waste, industrial boiler and process heater maximum achievable control technologies (MACT) for major and area sources, and commercial/industrial solid waste incinerator new source performance standard and emission guidelines. This new set of regulations may impact our existing operations and may require us, in certain instances, to install new air pollution control devices. The new MACT regulations for industrial boilers provide three years for compliance with the major and area source standards. The Company is currently assessing the impact on current operations to determine the financial impact, if any, to comply with the new standards.
Nuclear Operations
Property Insurance
Detroit Edison maintains property insurance policies specifically for the Fermi 2 plant. These policies cover such items as replacement power and property damage. The Nuclear Electric Insurance Limited (NEIL) is the primary supplier of the insurance policies.
20
Detroit Edison maintains a policy for extra expenses, including replacement power costs necessitated by Fermi 2’s2's unavailability due to an insured event. This policy has a 12-week waiting period and provides an aggregate $490 million of coverage over a three-year period.
Detroit Edison has $500 million in primary coverage and $2.25 billion of excess coverage for stabilization, decontamination, debris removal, repair and/or replacement of property and decommissioning. The combined coverage limit for total property damage is $2.75 billion.
In 2007, the Terrorism Risk Insurance Extension Act of 2005 (TRIA) was extended through December 31, 2014. A major change in the extension is the inclusion of “domestic” acts of terrorism in the definition of covered or “certified” acts. For multiple terrorism losses caused by acts of terrorism not covered under the TRIA occurring within one year after the first loss from terrorism, the NEIL policies would make available to all insured entities up to $3.2 billion, plus any amounts recovered from reinsurance, government indemnity, or other sources to cover losses.
Under the NEIL policies, Detroit Edison could be liable for maximum assessments of up to approximately $28$29 million per event if the loss associated with any one event at any nuclear plant in the United States should exceed the accumulated funds available to NEIL.
Public Liability Insurance
As of January 1, 2011, as required by federal law, Detroit Edison maintains $375 million of public liability insurance for a nuclear incident. For liabilities arising from a terrorist act outside the scope of TRIA, the policy is subject to one industry aggregate limit of $300 million. Further, under the Price-Anderson Amendments Act of 2005, deferred premium charges up to $117.5 million could be levied against each licensed nuclear facility, but not more than $17.5 million per year per facility. Thus, deferred premium charges could be levied against all owners of licensed nuclear facilities in the event of a nuclear incident at any of these facilities.
Nuclear Fuel Disposal Costs
In accordance with the Federal Nuclear Waste Policy Act of 1982, Detroit Edison has a contract with the U.S. Department of Energy (DOE) for the future storage and disposal of spent nuclear fuel from Fermi 2. Detroit Edison is obligated to pay the DOE a fee of 1 mill per kWh of Fermi 2 electricity generated and sold. The fee is accounted for as a component of nuclear fuel expense. Delays have occurred in the DOE’sDOE's program for the acceptance and disposal of spent nuclear fuel at a permanent repository and the proposed fiscal year 2011 federal budget recommends termination of funding for completion of the government’sgovernment's long-term storage facility. Detroit Edison is a party in the litigation against the DOE for both past and future costs associated with the DOE’sDOE's failure to accept spent nuclear fuel under the timetable set forth in the Federal Nuclear Waste Policy Act of 1982. Detroit Edison currently employs a spent nuclear fuel storage strategy utilizing a fuel pool. In 2011, the Company expects to begin loading spent nuclear fuel into an on-site dry cask storage facility which is expected to provide sufficient storage capability for the life of the plant as defined by the original operating license. Issues relating to long-term waste disposal policy and to the disposition of funds contributed by Detroit Edison ratepayers to the federal waste fund await future governmental action.
Guarantees
In certain limited circumstances, the Company enters into contractual guarantees. The Company may guarantee another entity’sentity's obligation in the event it fails to perform. The Company may provide guarantees in certain indemnification agreements. Finally, the Company may provide indirect guarantees for the indebtedness of others.
Labor Contracts
There are several bargaining units for the Company’sCompany's approximately 2,700 represented employees. In the 2010 third quarter, a new three-year agreement was ratified covering approximately 2,400 represented employees. The remaining represented employees are under a contract that expires in August 2012.
21
Purchase Commitments
As of March 31,June 30, 2011, the Company was party to numerous long-term purchase commitments relating to a variety of goods and services required for the Company’sCompany's business. These agreements primarily consist of fuel supply commitments. The Company estimates that these commitments will be approximately $2.6$1.4 billion from 2011 through 2026. Certain of these commitments are with variable interest entities where the Company determined it was not the primary beneficiary as it does not have significant exposure to losses.
The Company also estimates that 2011 capital expenditures will be approximately $1.3 billion. The Company has made certain commitments in connection with expected capital expenditures.
Bankruptcies
The Company purchases and sells electricity from and to numerous companies operating in the steel, automotive, energy, retail and other industries. Certain of its customers have filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The Company regularly reviews contingent matters relating to these customers and its purchase and sale contracts and records provisions for amounts considered at risk of probable loss. The Company believes its accrued amounts are adequate for probable loss. The final resolution of these matters may have a material effect on its consolidated financial statements.
Other Contingencies
The Company is involved in certain other legal, regulatory, administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning claims arising in the ordinary course of business. These proceedings include certain contract disputes, additional environmental reviews and investigations, audits, inquiries from various regulators, and pending judicial matters. The Company cannot predict the final disposition of such proceedings. The Company regularly reviews legal matters and records provisions for claims that it can estimate and are considered probable of loss. The resolution of these pending proceedings is not expected to have a material effect on the Company’sCompany's operations or financial statements in the periods they are resolved.
See Notes 54 and 76 for a discussion of contingencies related to derivatives and regulatory matters.
NOTE 1110 —RETIREMENT BENEFITS AND TRUSTEED ASSETS
The following details the components of net periodic benefit costs for pension benefits and other postretirement benefits:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Other Postretirement | |
| (in Millions) | | Pension Benefits | | | Benefits | |
| Three Months Ended March 31 | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Service cost | | $ | 15 | | | $ | 13 | | | $ | 13 | | | $ | 13 | |
| Interest cost | | | 39 | | | | 38 | | | | 23 | | | | 24 | |
| Expected return on plan assets | | | (42 | ) | | | (43 | ) | | | (16 | ) | | | (13 | ) |
| Amortization of: | | | | | | | | | | | | | | | | |
| Net actuarial loss | | | 23 | | | | 18 | | | | 11 | | | | 9 | |
| Prior service cost | | | 1 | | | | 1 | | | | (4 | ) | | | — | |
| Net transition liability | | | — | | | | — | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | |
| Net periodic benefit cost | | $ | 36 | | | $ | 27 | | | $ | 28 | | | $ | 34 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Postretirement Benefits |
| (in Millions) | 2011 | | 2010 | | 2011 | | 2010 |
| Three Months Ended June 30 | | | | | | | |
| Service cost | $ | 15 |
| | $ | 13 |
| | $ | 13 |
| | $ | 11 |
|
| Interest cost | 38 |
| | 38 |
| | 24 |
| | 24 |
|
| Expected return on plan assets | (42 | ) | | (43 | ) | | (15 | ) | | (13 | ) |
| Amortization of: | | | | | | | |
| Net actuarial loss | 24 |
| | 18 |
| | 10 |
| | 9 |
|
| Prior service cost | 1 |
| | 1 |
| | (4 | ) | | — |
|
| Net transition liability | — |
| | — |
| | — |
| | 1 |
|
| Special termination benefits | 2 |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost | $ | 38 |
| | $ | 27 |
| | $ | 28 |
| | $ | 32 |
|
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Postretirement Benefits |
| (in Millions) | 2011 | | 2010 | | 2011 | | 2010 |
| Six Months Ended June 30 | | | | | | | |
| Service cost | $ | 30 |
| | $ | 26 |
| | $ | 26 |
| | $ | 23 |
|
| Interest cost | 77 |
| | 76 |
| | 47 |
| | 48 |
|
| Expected return on plan assets | (84 | ) | | (86 | ) | | (31 | ) | | (26 | ) |
| Amortization of: | | | | | | | |
| Net actuarial loss | 47 |
| | 35 |
| | 21 |
| | 19 |
|
| Prior service cost | 2 |
| | 3 |
| | (8 | ) | | 1 |
|
| Net transition liability | — |
| | — |
| | 1 |
| | 1 |
|
| Special termination benefits | 2 |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost | $ | 74 |
| | $ | 54 |
| | $ | 56 |
| | $ | 66 |
|
Pension and Other Postretirement Contributions
In January 2011, the Company contributed $200 million to its pension plans.
In January 2011, the Company contributed $36 million to its other postretirement benefit plans. At the discretion of management, the Company may make up to an additional $90 million contribution to its other postretirement benefit plans by the end of 2011.2011.
22
NOTE 1211 —SUPPLEMENTAL CASH FLOW INFORMATION
The following provides detail of the changes in assets and liabilities that are reported in the Consolidated Statements of Cash Flows:
| | | | | | | | | |
| | | Three Months Ended
March 31 | |
| (in Millions) | | 2011 | | | 2010 | |
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately | | | | | | | | |
| Accounts receivable, net | | $ | 55 | | | $ | 75 | |
| Inventories | | | 18 | | | | — | |
Accrued pension liability— affiliates | | | (190 | ) | | | (93 | ) |
| Accounts payable | | | (15 | ) | | | 21 | |
| Accrued PSCR refund | | | (4 | ) | | | (3 | ) |
| Income taxes receivable/payable | | | 26 | | | | 77 | |
Postretirement obligation— affiliates | | | (32 | ) | | | 6 | |
| Other assets | | | (18 | ) | | | (9 | ) |
| Other liabilities | | | (65 | ) | | | 2 | |
| | | | | | | |
| | | $ | (225 | ) | | $ | 76 | |
| | | | | | | |
23
|
| | | | | | | |
| | Six Months Ended |
| | June 30 |
| (in Millions) | 2011 | | 2010 |
| Changes in Assets and Liabilities, Exclusive of Changes Shown Separately | | | |
| Accounts receivable, net | $ | (35 | ) | | $ | (37 | ) |
| Inventories | (21 | ) | | (53 | ) |
Accrued pension liability - affiliates | (178 | ) | | (186 | ) |
| Accounts payable | (1 | ) | | 59 |
|
| Accrued PSCR refund | (33 | ) | | (23 | ) |
| Income taxes receivable/payable | 66 |
| | 100 |
|
Postretirement obligation - affiliates | (31 | ) | | 10 |
|
| Other assets | 85 |
| | 47 |
|
| Other liabilities | (72 | ) | | 16 |
|
| | $ | (220 | ) | | $ | (67 | ) |
Part I1 —Item 2.
The Detroit Edison Company
Management’sManagement's Narrative Analysis of Results of Operations
The Management’sManagement's Narrative Analysis of Results of Operations discussion for Detroit Edison is presented in accordance with General Instruction H(2) (a) of Form 10-Q.
Detroit Edison’sEdison's results for the three and six months ended March 31,June 30, 2011 as compared to the comparable 2010 period are discussed below:
| | | | | | | | | |
| | | Three Months Ended | |
| | | March 31 | |
| (in Millions) | | 2011 | | | 2010 | |
| Operating Revenues | | $ | 1,192 | | | $ | 1,146 | |
| Fuel and Purchased Power | | | 378 | | | | 343 | |
| | | | | | | |
| Gross Margin | | | 814 | | | | 803 | |
| Operation and Maintenance | | | 329 | | | | 309 | |
| Depreciation and Amortization | | | 202 | | | | 204 | |
| Taxes Other Than Income | | | 59 | | | | 65 | |
| Asset (Gains) and Losses, Net | | | 19 | | | | (1 | ) |
| | | | | | | |
| Operating Income | | | 205 | | | | 226 | |
| Other (Income) and Deductions | | | 67 | | | | 79 | |
| Income Tax Provision | | | 53 | | | | 56 | |
| | | | | | | |
| Net Income | | $ | 85 | | | $ | 91 | |
| | | | | | | |
| | | | | | | | | |
| Operating Income as a Percentage of Operating Revenues | | | 17 | % | | | 20 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (in Millions) | 2011 | | 2010 | | 2011 | | 2010 |
| Operating Revenues | $ | 1,240 |
| | $ | 1,208 |
| | $ | 2,432 |
| | $ | 2,354 |
|
| Fuel and Purchased Power | 417 |
| | 390 |
| | 795 |
| | 733 |
|
| Gross Margin | 823 |
| | 818 |
| | 1,637 |
| | 1,621 |
|
| Operation and Maintenance | 331 |
| | 326 |
| | 660 |
| | 635 |
|
| Depreciation and Amortization | 202 |
| | 210 |
| | 404 |
| | 414 |
|
| Taxes Other Than Income | 60 |
| | 61 |
| | 119 |
| | 126 |
|
| Asset (Gains) and Losses, Net | (5 | ) | | — |
| | 14 |
| | (1 | ) |
| Operating Income | 235 |
| | 221 |
| | 440 |
| | 447 |
|
| Other (Income) and Deductions | 68 |
| | 79 |
| | 135 |
| | 158 |
|
| Income Tax Provision | 63 |
| | 55 |
| | 116 |
| | 111 |
|
| Net Income | $ | 104 |
| | $ | 87 |
| | $ | 189 |
| | $ | 178 |
|
| Operating Income as a Percentage of Operating Revenues | 19 | % | | 18 | % | | 18 | % | | 19 | % |
Gross marginincreased $11$5 million in the firstsecond quarter of 2011 and $16 million in the six-month period ended June 30, 2011. Revenues associated with certain tracking mechanisms and surcharges are offset by related expenses elsewhere in the Statement of Operations. The following table details changes in various gross margin components relative to the comparable prior period:
| | | | | |
| (in Millions) | | Three Months | |
| Base sales, net of RDM and CIM | | $ | 7 | |
| Energy optimization incentive | | | 9 | |
| Restoration tracker | | | 5 | |
| Electric Choice implementation surcharge elimination | | | (6 | ) |
| Securitization bond and tax surcharge | | | (3 | ) |
| Other | | | (1 | ) |
| | | | |
| Increase in gross margin | | $ | 11 | |
| | | | |
24
| | | | | | | | | |
| | | Three Months Ended |
| | | March 31 |
| (in Thousands of MWh) | | 2011 | | 2010 |
Electric Sales | | | | | | | | |
| Residential | | | 3,889 | | | | 3,665 | |
| Commercial | | | 3,993 | | | | 3,942 | |
| Industrial | | | 2,341 | | | | 2,475 | |
| Other | | | 798 | | | | 802 | |
| | | | | | | | | |
| | | | 11,021 | | | | 10,884 | |
| Interconnection sales (1) | | | 306 | | | | 1,310 | |
| | | | | | | | | |
| Total Electric Sales | | | 11,327 | | | | 12,194 | |
| | | | | | | | | |
| | | | | | | | | |
Electric Deliveries | | | | | | | | |
| Retail and Wholesale | | | 11,021 | | | | 10,884 | |
| Electric Customer Choice, including self generators(2) | | | 1,302 | | | | 1,103 | |
| | | | | | | | | |
| Total Electric Sales and Deliveries | | | 12,323 | | | | 11,987 | |
| | | | | | | | | |
| | |
(1) | | Represents power that is not distributed by Detroit Edison. |
|
(2) | | Includes deliveries for self generators who have purchased power from alternative energy suppliers to supplement their power requirements. |
| | | | | | | | | |
| | | Three Months Ended | |
| Power Generated and Purchased | | March 31 | |
| (in Thousands of MWh) | | 2011 | | | 2010 | |
| Power Plant Generation | | | | | | | | |
| Fossil | | | 8,058 | | | | 9,520 | |
| Nuclear | | | 1,706 | | | | 2,200 | |
| | | | | | | |
| | | | 9,764 | | | | 11,720 | |
| Purchased Power | | | 2,477 | | | | 1,322 | |
| | | | | | | |
| System Output | | | 12,241 | | | | 13,042 | |
| Less Line Loss and Internal Use | | | (914 | ) | | | (848 | ) |
| | | | | | | |
| Net System Output | | | 11,327 | | | | 12,194 | |
| | | | | | | |
| | | | | | | | | |
Average Unit Cost ($/MWh) | | | | | | | | |
| Generation (1) | | $ | 20.80 | | | $ | 18.78 | |
| | | | | | | |
| Purchased Power | | $ | 40.79 | | | $ | 32.30 | |
| | | | | | | |
| Overall Average Unit Cost | | $ | 24.84 | | | $ | 20.15 | |
| | | | | | | |
|
| | | | | | | |
| (in Millions) | Three Months | | Six Months |
| Base sales, net of RDM and CIM | $ | 20 |
| | $ | 30 |
|
| Securitization bond and tax surcharge | (13 | ) | | (15 | ) |
| Electric Choice implementation surcharge elimnation | (6 | ) | | (11 | ) |
| Energy optimization incentive | — |
| | 9 |
|
| Restoration tracker | 1 |
| | 6 |
|
| Other | 3 |
| | (3 | ) |
| Increase in gross margin | $ | 5 |
| | $ | 16 |
|
|
| | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (in Thousands of MWh) | 2011 | | 2010 | | 2011 | | 2010 |
| Electric Sales | | | | | | | |
| Residential | 3,607 |
| | 3,602 |
| | 7,495 |
| | 7,267 |
|
| Commercial | 3,998 |
| | 3,988 |
| | 7,991 |
| | 7,930 |
|
| Industrial | 2,405 |
| | 2,605 |
| | 4,747 |
| | 5,081 |
|
| Other | 763 |
| | 799 |
| | 1,560 |
| | 1,600 |
|
| | 10,773 |
| | 10,994 |
| | 21,793 |
| | 21,878 |
|
| Interconnection sales (1) | 1,156 |
| | 1,450 |
| | 1,461 |
| | 2,760 |
|
| Total Electric Sales | 11,929 |
| | 12,444 |
| | 23,254 |
| | 24,638 |
|
| | | | | | | | |
| Electric Deliveries | | | | | | | |
| Retail and Wholesale | 10,773 |
| | 10,994 |
| | 21,793 |
| | 21,878 |
|
| Electric Customer Choice, including self generators (2) | 1,409 |
| | 1,283 |
| | 2,711 |
| | 2,386 |
|
| Total Electric Sales and Deliveries | 12,182 |
| | 12,277 |
| | 24,504 |
| | 24,264 |
|
____________
(1) Represents power that is not distributed by Detroit Edison.
(2) Includes deliveries for self generators who have purchased power from alternative energy suppliers to supplement their power requirements.
Power Generated and Purchased
| | |
(1) | | Represents fuel costs associated with power plants. |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (in Thousands of MWh) | 2011 | | 2010 | | 2011 | | 2010 |
| Power Plant Generation | | | | | | | |
| Fossil | 8,807 |
| | 9,595 |
| | 16,864 |
| | 19,115 |
|
| Nuclear | 2,408 |
| | 2,087 |
| | 4,114 |
| | 4,287 |
|
| | 11,215 |
| | 11,682 |
| | 20,978 |
| | 23,402 |
|
| Purchased Power | 1,573 |
| | 1,474 |
| | 4,050 |
| | 2,796 |
|
| System Output | 12,788 |
| | 13,156 |
| | 25,028 |
| | 26,198 |
|
| Less Line Loss and Internal Use | (859 | ) | | (712 | ) | | (1,774 | ) | | (1,560 | ) |
| Net System Output | 11,929 |
| | 12,444 |
| | 23,254 |
| | 24,638 |
|
| | | | | | | | |
| Average Unit Cost ($/MWh) | | | | | | | |
| Generation (1) | $ | 21.85 |
| | $ | 18.96 |
| | $ | 21.36 |
| | $ | 18.87 |
|
| Purchased Power | $ | 44.65 |
| | $ | 45.60 |
| | $ | 42.29 |
| | $ | 39.31 |
|
| Overall Average Unit Cost | $ | 24.66 |
| | $ | 21.95 |
| | $ | 24.75 |
| | $ | 21.05 |
|
____________
(1) Represents fuel costs associated with power plants.
Operation and maintenanceexpense increased $20$5 million and $25 million in the firstthree and six months ended June 30, 2011, respectively. The increase for the 2011 second quarter is primarily due to higher energy optimization and renewable energy expenses of $5 million, partially offset by lower restoration and line clearance expenses of $2 million. The increase for the 2011 due primarilysix-month period is attributable to increased power plant generation outagesexpenses of $15 million, higher energy optimization and renewable energy expenses of $9 million and higher employee benefit related expenses of $8 million, higher storm and line clearance expenses of $6 million and higher energy optimization and renewable energy expenses of $4 million, partially offset by
reduced uncollectible expenses of $6$5 million.
Asset (gains) and losses, netincreased $5 million and decreased $20$15 million duein the three and six months ended June 30, 2011, respectively. The changes in the six month periods are primarily attributable to an accrual of $19 million in the first quarter of 2011 resulting from management’smanagement's revisions of the timing and estimate of cash flows for the decommissioning of Fermi 1.1, partially offset by second quarter 2011 revisions in the timing and estimate of cash flows for the Fermi 1 asbestos removal obligation. See Note 65 of the Notes to the Consolidated Financial Statements.
Outlook—- We continue to move forward in our efforts to improve the operating performance and cash flow of Detroit Edison. The 2010 MPSC order provided for an uncollectible expense tracking mechanism which financially assists in mitigating the impacts of economic conditions in our service territory and a revenue decoupling mechanism that addresses changes in average customer usage due to general economic conditions, weather and conservation. These and other tracking mechanisms and surcharges are expected to result in lower earnings volatility.
25
We expect that our planned significant environmental and renewableenergy investments will result in earnings growth. Looking forward, additionalfactors may impact earnings such as volatility in prices for coalthe outcome of the 2010 electric rate case and other commodities, increased transportation costs,regulatory proceedings, investment returns and changes indiscount rate assumptions in benefit plans and health care costs, lower levelsof wholesale sales due to contract expirations, and uncertainty of legislativeor regulatory actions regarding climate change. We expect to continue ourefforts to improve productivity and decrease our costs while improving customersatisfaction with consideration of customer rate affordability.
In July 2011, Detroit Edison filed a rate case on October 29, 2010 based on a projected twelve-month period ending March 31, 2012.notified the NRC that it intends to apply for renewal of the operating license for the Fermi 2 nuclear power plant. The filingcurrent license expires in 2025 and NRC approval of the application would permit the plant to operate an additional 20 years. The application is expected to be filed with the MPSC requested a $443 million increaseNRC in base rates. Detroit Edison also proposed certain adjustments which could reduce the net impact on the required increase in rates by approximately $190 million. Detroit Edison plans to self-implement $107 million of its requested annual increase on April 28, 2011. This increase will remain in place until a final order is issued by the MPSC, which is expected by October 2011. If the final rate case order does not support the self-implemented rate increase, Detroit Edison must refund the difference with interest.2014.
Environmental Matters
Global Climate Change
The EPA has promulgated the Greenhouse Gas Tailoring rule that regulates greenhouse gases as pollutants under the EPA’sEPA's new source permitting and major source operating permit programs, and that requires a Best Available Control Technology (BACT) determination for new and modified major sources of GHG.greenhouse gas (GHG). In addition, the EPA will be issuing proposed GHG performance standards for new and modified electric generating units in Julylate 2011. Comprehensive climate change and energy legislation was passed out of the U.S. House in 2009, but the Senate was unable to agree on passage of a climate bill. In the current U.S. Congress, efforts are focused on delaying the EPA’sEPA's regulation of GHGs with no expectation of enacting a comprehensive national climate program. Pending or future regulatory or legislative actions could have a material impact on our operations and financial position and the rates we charge our customers. Impacts include expenditures for environmental equipment beyond what is currently planned, financing costs related to additional capital expenditures, the purchase of emission offsets from market sources and the retirement of facilities where control equipment is not economical. We would seek to recover these incremental costs through increased rates charged to our utility customers. Increased costs for energy produced from traditional sources could also increase the economic viability of energy produced from renewable and/or nuclear sources and energy efficiency initiatives and the development of market-based trading of carbon offsets providing business opportunities for our utility and non-utility segments. It is not possible to quantify these impacts on Detroit Edison or its customers at this time.
See Note 109 of the Notes to Consolidated Financial Statements for additional information regarding environmental matters.
26
Part I—Item 4.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Management of the Company carried out an evaluation, under the supervision and with the participation of Detroit Edison’sEdison's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’sCompany's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31,June 30, 2011, which is the end of the period covered by this report. Based on this evaluation, the CEO and CFO have concluded that such disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC's rules and forms and (ii) is accumulated and communicated to the Company’sCompany's management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Due to the inherent limitations in the effectiveness of any disclosure controls and procedures, management cannot provide absolute assurance that the objectives of its disclosure controls and procedures will be attained.
(b) Changes in internal control over financial reporting
There have been no changes in the Company’sCompany's internal control over financial reporting during the quarter ended March 31,June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’sCompany's internal control over financial reporting.
Part II— Other Information
| | |
Item 1. | | —Legal Proceedings |
The Company is involved in certain legal, regulatory, administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning matters arising in the ordinary course of business. These proceedings include certain contract disputes, environmental reviews and investigations, audits, inquiries from various regulators, and pending judicial matters. The Company cannot predict the final disposition of such proceedings. The Company regularly reviews legal matters and records provisions for claims that are considered probable of loss. The resolution of pending proceedings is not expected to have a material effect on its operations or financial statements in the periods they are resolved.Item 1A. —Risk Factors
In July 2009, DTE Energy received a Notice of Violation/Finding of Violation (NOV/FOV) from the EPA alleging, among other things, that five of Detroit Edison’s power plants violated New Source Performance standards, Prevention of Significant Deterioration requirements, and operating permit requirements under the Clean Air Act. In June 2010, the EPA issued a NOV/FOV making similar allegations related to a recent project and outage at Unit 2 of the Monroe Power Plant.
On August 5, 2010, the United States Department of Justice, at the request of the EPA, brought a civil suit in the U.S. District Court for the Eastern District of Michigan against DTE Energy and Detroit Edison, related to the June 2010 NOV/FOV and the outage work performed at Unit 2 of the Monroe Power Plant, but not relating to the July 2009 NOV/FOV. Among other relief, the EPA requested the court to require Detroit Edison to install and operate the best available control technology at Unit 2 of the Monroe Power Plant. Further, the EPA requested the court to issue a preliminary injunction to require Detroit Edison to (i) begin the process of obtaining the necessary permits for the Monroe Unit 2 modification and (ii) offset the pollution from Monroe Unit 2 through emissions reductions from Detroit Edison’s fleet of coal-fired power plants until the new control equipment is operating. In January 2011, the EPA’s motion for preliminary injunction was denied and the liability phase of the civil suit has been scheduled for trial in September 2011.
DTE Energy and Detroit Edison believe that the plants identified by the EPA, including Unit 2 of the Monroe Power Plant, have complied with all applicable federal environmental regulations. Depending upon the outcome of discussions with the EPA regarding the NOV/FOV and the result of the civil action, Detroit Edison could also be required to install additional pollution control equipment at some or all of the power plants in question, implement early retirement of facilities where control equipment is not economical, engage in supplemental environmental programs, and/or pay fines. DTE Energy and Detroit Edison cannot predict the financial impact or outcome of this matter, or the timing of its resolution.
For additional discussion on legal matters, see Note 10 of the Notes to Consolidated Financial Statements
There are various risks associated with the operations of Detroit Edison. To provide a framework to understand the operating environment of Detroit Edison, we have provided a brief explanation of the more significant risks associated with our businesses in Part 1, Item 1A. Risk Factors in the Company’sCompany's 2010 Form 10-K. Although we have tried to identify and discuss key risk factors, others could emerge in the future. In addition to the risk factors set forth in our 10-K, the following updated risks could affect our performance.
Operation of a nuclear facility subjects us to risk.Ownership of an operating nuclear generating plant subjects us to significant additional risks. These risks include, among others, plant security, environmental regulation and remediation, changes in federal nuclear regulation and operational factors that can significantly impact the performance and cost of operating a nuclear facility. While we maintain insurance for various nuclear-related risks, there can be no assurances that such insurance will be sufficient to cover our costs in the event of an accident or business interruption at our nuclear generating plant, which may affect our financial performance.
Construction and capital improvements to our power facilities subject us torisk.We are managing ongoing and planning future significant construction and capital improvement projects at multiple power generation and
28
distribution facilities. Many factors that could cause delay or increased prices for these complex projects are beyond our control, including the cost of materials and labor, subcontractor performance, timing and issuance of necessary permits, construction disputes and weather conditions. Failure to complete these projects on schedule and on budget for any reason could adversely affect our financial performance and operations at the affected facilities.
29
Item 6. — Exhibits
Exhibit
| | |
Exhibit | | |
| Number | | Description |
| | |
| Exhibits filed herewith: |
| | | |
4-2744-275 | | Supplemental Indenture, dated as of March 1,May15, 2011, to theMortgage and Deed of Trust, dated as of October 1, 1924, by andbetween The Detroit Edison Company and The Bank of New YorkMellon Trust Company, N.A. as successor trustee (2011 Series AT)B) |
| | | |
12-4012-41 | | Computation of Ratio of Earnings to Fixed Charges |
| | | |
31-6331-65 | | Chief Executive Officer Section 302 Form 10-Q Certification |
| | | |
31-6431-66 | | Chief Financial Officer Section 302 Form 10-Q Certification |
| | | |
| Exhibits furnished herewith: |
| | | |
32-6332-65 | | Chief Executive Officer Section 906 Form 10-Q Certification |
| | | |
32-6432-66 | | Chief Financial Officer Section 906 Form 10-Q Certification |
| | |
| 101.INS | | XBRL Instance Document |
| | |
| 101.SCH | | XBRL Taxonomy Extension Schema |
| | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | |
| 101.DEF | | XBRL Taxonomy Extension Definition Database |
| | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| | |
| | | THE DETROIT EDISON COMPANY | | |
| | | (Registrant) | | |
| | | | |
Date: April 27, | July 28, 2011 | | /S/ PETER B. OLEKSIAK | | |
| | | Peter B. Oleksiak | | |
| | | Vice President and Controller and | | |
| | | Chief Accounting Officer | | |
31