Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
All of the registrant’s 138,632,324 outstanding shares of common stock, par value $10 per share, are owned by DTE Energy Company.
EMPLOYEES
We had approximately 4,7004,800 employees as of December 31, 2010,2011, of which approximately 2,7002,800 were represented by unions. The majority of our union employees are under contracts that expire in August 2012 and June 2013.
Item 1A. Risk Factors
There are various risks associated with the operations of Detroit Edison. To provide a framework to understand the operating environment of the Company, we are providing a brief explanation of the more significant risks associated with our business. Although we have tried to identify and discuss key risk factors, others could emerge in the future. Each of the following risks could affect our performance.
Regional and national economic conditions can have an unfavorable impact on us.Our business follows the economic cycles of the customers we serve. We provide services to the domestic automotive and steel industries which have undergone considerable financial distress, exacerbating the decline in regional economic conditions. Should national or regional economic conditions further decline, reduced volumes of electricity and collections of accounts receivable could result in decreased earnings and cash flow.
We are exposed to credit risk of counterparties with whom we do business.Adverse economic conditions affecting, or financial difficulties of, counterparties with whom we do business could impair the ability of these counterparties to pay for our services or fulfill their contractual obligations, or cause them to delay such payments or obligations. We depend on these counterparties to remit payments on a timely basis. Any delay or default in payment could adversely affect our cash flows, financial position, or results of operations.
We are subject to rate regulation.regulation. Our electric rates are set by the MPSC and the FERC and cannot be changed without regulatory authorization. We may be negatively impacted by new regulations or interpretations by the MPSC, the FERC or other regulatory bodies. Our ability to recover costs may be impacted by the time lag between the incurrence of costs and the
recovery of the costs in customers’customers' rates. Our regulators also may decide to disallow recovery of certain costs in customers’customers' rates if they determine that those costs do not meet the standards for recovery under our governing laws and regulations. The StateWe typically self-implement base rate changes six months after rate case filings in accordance with Michigan law. However, if the final rates authorized by our regulators in the final rate order are lower than the amounts we collected during the self-implementation period, we must refund the difference with interest. Our regulators may also disagree with our rate calculations under the various tracking and decoupling mechanisms that are intended to mitigate the risk of Michigan elected a new governor and legislature in November 2010 andcertain aspects of our business. If we cannot agree with our regulators on an appropriate reconciliation of those mechanisms, it may impact our ability to recover certain costs through our customer rates. Our regulators may also decide to eliminate more of these mechanisms in future rate cases, which may make it more difficult for us to recover our costs in the rates we charge customers. We cannot predict whether the resulting changeswhat rates an MPSC order will adopt in political conditions will affect the regulations or interpretations affecting Detroit Edison. future rate cases.New legislation, regulations or interpretations could change how our business operates, impact our ability to recover costs through rate increasesrates or require us to incur additional expenses.
We may be requiredChanges to refund amounts we collect under self-implemented rates.Michigan law allows utilities to self-implement rate changes six months after a rate filing, subject to certain limitations. However, if the final rate case order provides for lower rates than we have self-implemented, we must refund the difference, with interest. We have self-implemented rates in the past and have been ordered to make refunds to customers. Our financial performance may be negatively affected if the MPSC sets lower rates in future rate cases than those we have self-implemented, thereby requiring us to issue refunds. We cannot predict what rates an MPSC order will adopt in future rate cases.
Michigan’sMichigan's electric Customer Choice program could negatively impact our financial performance.The electric Customer Choice program, as originally contemplated in Michigan, anticipated an eventual transition to a totally deregulated and competitive environment where customers would be charged market-based rates for their electricity. The State of Michigan currently experiences a hybrid market, where the MPSC continues to regulate electric rates for our customers, while alternative electric suppliers charge market-based rates. In addition, such regulated electric rates for certain groups of our customers exceed the cost of service to those customers. Due to distorted pricing mechanisms during the initial implementation period of electric Customer Choice, many commercial customers chose alternative electric suppliers. MPSC rate orders and 2008 energy legislation enacted by the State of Michigan are phasing out the pricing disparity over five years and have placed a 10 percent cap on the total potential Customer Choice related migration. However, even with the electric Customer Choice-related relief received in recent Detroit Edison rate orders and the legislated 10 percent cap on participation in the electric Customer Choice program, there continues to be legislative and financial risk associated with the electric Customer Choice program. Electric Customer Choice migration is sensitive to market price and full service electric price changes.
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Regional and national economic conditions can have an unfavorable impact on us. Our business follows the economic cycles of the customers we serve and the credit risk of counterparties we do business with. We provide services to the domestic automotive and steel industries which have undergone considerable financial distress, exacerbating the decline in regional economic conditions. Should national or regional economic conditions deteriorate, reduced volumes of electricity, collections of accounts receivable, and reductions in federal and state energy assistance funding could result in decreased earnings and cash flow.
Environmental laws and liability may be costly.We are subject to and affected by numerous environmental regulations. These regulations govern air emissions, water quality, wastewater discharge and disposal of solid and hazardous waste. Compliance with these regulations can significantly increase capital spending, operating expenses and plant down times.times and can negatively affect the affordability of the rates we charge to our customers.
Uncertainty around future environmental regulations creates difficulty planning long-term capital projects in our generation fleet. These laws and regulations require us to seek a variety of environmental licenses, permits, inspections and other regulatory approvals. We could be required to install expensive pollution control measures or limit or cease activities based on these regulations. Additionally, we may become a responsible party for environmental cleanup at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of future expenditures related to environmental matters because of the difficulty of estimating clean up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on potentially responsible parties.
We may also incur liabilities as a result of potential future requirements to address climate change issues. Proposals for voluntary initiatives and mandatory controls are being discussed both in the United States and worldwide to reduce greenhouse gases such as carbon dioxide, a by-product of burning fossil fuels. If increased regulation of greenhouse gas emissions are implemented, the operations of our fossil-fuel generation assets may be significantly impacted. Since there can be no assurances that environmental costs may be recovered through the regulatory process, our financial performance may be negatively impacted as a result of environmental matters.
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.
The supply and/or price of energy commodities and/or related services may impact our financial results. We are dependent on coal for much of our electrical generating capacity. Price fluctuations, fuel supply disruptions and changes in transportation costs could have a negative impact on the amounts we charge our utility customers for electricity. We have hedging strategies and regulatory recovery mechanisms in place to mitigate some of the negative fluctuations in commodity supply prices, but there can be no assurances that our financial performance will not be negatively impacted by price fluctuations.
The supply and/or price of other industrial raw and finished inputs and/or related services may impact our financial results. We are dependent on supplies of certain commodities, such as copper and limestone, among others, and industrial materials and services in order to maintain day-to-day operations and maintenance of our facilities. Price fluctuations or supply interruptions for these commodities and other items could have a negative impact on the amounts we charge our customers for our products.
Adverse changes in our credit ratings may negatively affect us.Regional and national economic conditions,conditions, increased scrutiny of the energy industry and regulatory changes, as well as changes in our economic performance, could result in credit agencies reexamining our credit rating. While credit ratings reflect the opinions of the credit agencies issuing such ratings and may not necessarily reflect actual performance, a downgrade in our credit rating below investment grade could restrict or discontinue our ability to access capital markets and could result in an increase in our borrowing costs, a reduced level of capital expenditures and could impact future earnings and cash flows. In addition, a reduction in credit rating may require us to post collateral related to various physical or financially settled contracts for the purchase of energy-related commodities, products and services, which could impact our liquidity.
Our ability to access capital markets is important.Our ability to access capital markets is important to operate our businesses. In the past, turmoil in credit markets has constrained, and may again in the future constrain, our ability as well as the ability of our subsidiaries to issue new debt, including commercial paper, and refinance existing debt at reasonable interest rates. In addition, the level of borrowing by other energy companies and the market as a whole could limit our access to capital markets. We have substantial amounts ofOur long term revolving credit facilities thatfacility does not expire in 2012until 2015, but we regularly access capital markets to refinance existing debt or fund new projects, and 2013. We intend to seek to renew the facilities on or before the expiration dates. However, we cannot predict the outcome of these efforts, which could result in a decrease in amounts available and/pricing or an increase in our borrowing costs and negatively impact our financial performance.demand for those future transactions.
Poor investment performance of pension and other postretirement benefit plan holdings and other factors impacting benefit plan costs could unfavorably impact our liquidity and results of operations.Detroit Edison participates in various plans that provide pension and other postretirement benefits for DTE Energy and its affiliates. Our costs of providing non-contributory defined benefit pension plans and other postretirement benefit plans are dependent upon a number of factors, such as the rates of return on plan assets, the level of interest rates used to measure the required minimum funding levels of the plans, future government regulation, and our required or voluntary contributions made to the plans. The performance of the debt and equity markets affects the value of assets that are held in trust to satisfy future obligations under our plans. We have significant benefit obligations and hold significant assets in trust to satisfy these obligations. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below our projected return rates. A decline in the market value of the pension and postretirement benefit plan assets will increase the funding requirements under our pension and postretirement benefit plans if the actual asset returns do not recover these declines in the foreseeable future. Additionally, our pension and postretirement benefit plan liabilities are sensitive to changes in interest rates. As interest rates decrease, the liabilities increase, potentiallyresulting in increasing benefit expense and funding requirements. Also, if future increases in pension and postretirement benefit costs as a result of reduced plan assets are not recoverable from Detroit Edison customers, the results of operations and financial position of our company could be negatively affected. Without sustained growth in the plan investments over time to increase the value of our plan assets, we could be required to fund our plans
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with significant amounts of cash. Such cash funding obligations could have a material impact on our cash flows, financial position, or results of operations.
Construction and capital improvements to our power facilities subject us to risk. We are managing ongoing and planning future significant construction and capital improvement projects at multiple power generation and distribution facilities. Many factors that could cause delays 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.
Weather significantly affects operations.operations. Deviations from normal hot and cold weather conditions affect our earnings and cash flow. Mild temperatures can result in decreased utilization of our assets, lowering income and cash flow. Ice storms, tornadoes, or high winds can damage the electric distribution system infrastructure and require us to perform emergency repairs and incur material unplanned expenses. The expenses of storm restoration efforts may not be fully recoverable through the regulatory process.
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, 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 to risk.We are managing ongoing and planning future significant construction and capital improvement projects at multiple power generation and 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.
The supply and/or price of energy commodities and/or related services may impact our financial results.We are dependent on coal for much of our electrical generating capacity. Price fluctuations, fuel supply disruptions and increases in transportation costs could have a negative impact on the amounts we charge our customers for electricity. We have hedging strategies and regulatory recovery mechanisms in place to mitigate negative fluctuations in commodity supply prices, but there can be no assurances that our financial performance will not be negatively impacted by price fluctuations.
The supply and/or price of other industrial raw and finished inputs and/or related services may impact our financial results.We are dependent on supplies of certain commodities, such as copper and limestone, among others, and industrial materials and services in order to maintain day-to-day operations and maintenance of our facilities. Price fluctuations or supply interruptions for these commodities and other items could have a negative impact on the amounts we charge our customers for our products.
Unplanned power plant outages may be costly.Unforeseen maintenance may be required to safely produce electricity or comply with environmental regulations. As a result of unforeseen maintenance, we may be required to
make spot market purchases of electricity that exceed our costs of generation. Our financial performance may be negatively affected if we are unable to recover such increased costs.
Renewable portfolio standards and energy efficiency programs may affect our business.We are subject to existing Michigan and potential future federal legislation and regulation requiring us to secure sources of renewable energy. Under the current Michigan legislation we will be required in the future to provide a specified percentage of our power from Michigan renewable energy sources. We are developing a strategy for complying with the existing state legislation, but we do not know what requirements may be added by federal legislation. In addition, there could be additional state requirements increasing the percentage of power to be provided by renewable energy sources. We are actively engaged in developing renewable energy projects and identifying third party projects in which we can invest. We cannot predict the financial impact or costs associated with these future projects.
We are also required by Michigan legislation to implement energy efficiency measures and provide energy efficiency customer awareness and education programs. These requirements necessitate expenditures and implementation of these programs creates the risk of reducing our revenues as customers decrease their energy usage. We do not know how these programs will impact our business and future operating results.
Threats of terrorism or cyber attacks could affect our business.We may be threatened by problems such as computer viruses or terrorism that may disrupt our operations and could harm our operating results. Our industry requires the continued operation of sophisticated information technology systems and network infrastructure.
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Despite our implementation of security measures, all of our technology systems are vulnerable to disability or failures due to hacking, viruses, acts of war or terrorism and other causes. If our information technology systems were to fail and we were unable to recover in a timely way, we might be unable to fulfill critical business functions, which could have a material adverse effect on our business, operating results, and financial condition.
In addition, our generation plants and electrical distribution facilities in particular may be targets of terrorist activities that could disrupt our ability to produce or distribute some portion of our energy products. We have increased security as a result of past events and we may be required by our regulators or by the future terrorist threat environment to make investments in security that we cannot currently predict.
Failure to maintain the security of personally identifiable information could adversely affect us. In connection with our business we collect and retain personally identifiable information of our customers, shareholders and employees. Our customers, shareholders and employees expect that we will adequately protect their personal information, and the United States regulatory environment surrounding information security and privacy is increasingly demanding. A significant theft, loss or fraudulent use of customer, shareholder, employee or Detroit Edison data by cybercrime or otherwise could adversely impact our reputation and could result in significant costs, fines and litigation.
Failure to retain and attract key executive officers and other skilled professional and technical employees could have an adverse effect on our operations. Our business is dependent on our ability to recruit, retain, and motivate employees. Competition for skilled employees in some areas is high and the inability to retain and attract these employees could adversely affect our business and future operating results.
A work interruption may adversely affect us. Unions represent approximately 2,800 of our employees. Our contract with one union representing about 500 of our electrical linemen is due to expire in August 2012. We cannot predict the outcome of those negotiations. A union choosing to strike would have an impact on our business. We are unable to predict the effect a work stoppage would have on our costs of operation and financial performance.
We may not be fully covered by insurance.We have a comprehensive insurance program in place to provide coverage for various types of risks, including catastrophic damage as a result of acts of God, terrorism or a combination of other significant unforeseen events that could impact our operations. Economic losses might not be covered in full by insurance or our insurers may be unable to meet contractual obligations.
Failure to maintain the security of personally identifiable information could adversely affect us. In connection with our business we collect and retain personally identifiable information of our customers and employees. Our customers and employees expect that we will adequately protect their personal information, and the United States regulatory environment surrounding information security and privacy is increasingly demanding. A significant theft, loss or fraudulent use of customer, employee or Detroit Edison data by cybercrime or otherwise could adversely impact our reputation and could result in significant costs, fines and litigation.
A work interruption may adversely affect us.Unions represent approximately 2,700 of our employees. A union choosing to strike would have an impact on our business. We are unable to predict the effect a work stoppage would have on our costs of operation and financial performance.
Failure to retain and attract key executive officers and other skilled professional and technical employees could have an adverse effect on our operations.Our business is dependent on our ability to recruit, retain, and motivate employees. Competition for skilled employees in some areas is high and the inability to retain and attract these employees could adversely affect our business and future operating results.
Item 1B. Unresolved Staff Comments
None.
Item 3. Legal Proceedings
We are 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. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss. The resolution of pending proceedings is not expected to have a material effect on our operations or financial statements in the periods they are resolved.
In February 2008, DTE Energy was named as one of approximately 24 defendant oil, power and coal companies in a lawsuit filed in a United States District Court. DTE Energy was served with process in March 2008. The plaintiffs, the Native Village of Kivalina and City of Kivalina, which are home to approximately 400 people in Alaska, claim that the defendants’defendants' business activities have contributed to global warming and, as a result, higher temperatures are damaging the local economy and leaving the island more vulnerable to storm activity in the fall and winter. As a result, the plaintiffs are seeking damages of up to $400 million for relocation costs associated with moving the village to a safer location, as well as unspecified attorney’sattorney's fees and expenses. On October 15, 2009, the U.S. District Court granted defendants’defendants' motions dismissing all of plaintiffs’plaintiffs' federal claims in the case on two independent grounds: (1) the court lacks subject matter jurisdiction to hear the claims because of the political question doctrine; and (2) plaintiffs lack standing to bring their claims. The court also dismissed plaintiffs’plaintiffs' state law claims because the court lacked supplemental jurisdiction over them after it dismissed the federal claims; the
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dismissal of the state law claims was without prejudice. The plaintiffs have appealed to the U.S. Court of Appeals for the Ninth Circuit.
In July 2009, DTE Energy received a Notice of Violation/Finding of Violation (NOV/FOV)NOV/FOV from the EPA alleging, among other things, that five of Detroit Edison’sEdison'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
In 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’sEdison's fleet of coal-fired power plants until the new control equipment is operating. In JanuaryOn August 23, 2011, the EPA’sU.S. District Court judge granted DTE Energy's motion for preliminary injunction was denied and the liability phase ofsummary judgment in the civil suit has been scheduledcase, dismissing the case and entering judgment in favor of DTE Energy and Detroit Edison. On October 20, 2011, the EPA caused to be filed a Notice of Appeal to the U.S. Court of Appeals for trial in May 2011.the Sixth Circuit.
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,two NOVs/FOVs, 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,these matters, or the timing of its resolution.
For additional discussion on legal matters, see Notes 109 and 1615 of the Notes to Consolidated Financial Statements in Item 8 of this Report.
| |
| Item 4. | Mine Safety Disclosures |
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
All of the 138,632,324 issued and outstanding shares of common stock of Detroit Edison, par value $10 per share, are owned by DTE Energy, and constitute 100% of the voting securities of Detroit Edison. Therefore, no market exists for our common stock.
We paid cash dividends on our common stock of $305 million in 2011, 2010, 2009, and 2008.2009.
Item 6. Selected Financial Data
Omitted per General Instruction I (2) (a) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).
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Item 7. Management’s Narrative Analysis of Results of Operations
The Management’s Narrative Analysis of Results of Operations discussion for Detroit Edison is presented in accordance with General Instruction I (2) (a) of Form 10-K for wholly-owned subsidiaries (reduced disclosure format).
| | | | | | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | | | 2008 | |
| Operating Revenues | | $ | 4,993 | | | $ | 4,714 | | | $ | 4,874 | |
| Fuel and Purchased Power | | | 1,580 | | | | 1,491 | | | | 1,778 | |
| | | | | | | | | | |
| Gross Margin | | | 3,413 | | | | 3,223 | | | | 3,096 | |
| Operation and Maintenance | | | 1,305 | | | | 1,277 | | | | 1,322 | |
| Depreciation and Amortization | | | 849 | | | | 844 | | | | 743 | |
| Taxes Other Than Income | | | 237 | | | | 205 | | | | 232 | |
| Asset (Gains) Losses, Reserves and Impairments, Net | | | (6 | ) | | | (2 | ) | | | (1 | ) |
| | | | | | | | | | |
| Operating Income | | | 1,028 | | | | 899 | | | | 800 | |
| Other (Income) and Deductions | | | 317 | | | | 295 | | | | 283 | |
| Income Tax Provision | | | 270 | | | | 228 | | | | 186 | |
| | | | | | | | | | |
| Net Income | | $ | 441 | | | $ | 376 | | | $ | 331 | |
| | | | | | | | | | |
|
| | | | | | | | | | | |
| (in Millions) | 2011 | | 2010 | | 2009 |
| Operating Revenues | $ | 5,152 |
| | $ | 4,993 |
| | $ | 4,714 |
|
| Fuel and purchased power | 1,716 |
| | 1,580 |
| | 1,491 |
|
| Gross margin | 3,436 |
| | 3,413 |
| | 3,223 |
|
| Operation and maintenance | 1,369 |
| | 1,305 |
| | 1,277 |
|
| Depreciation and amortization | 813 |
| | 849 |
| | 844 |
|
| Taxes other than income | 240 |
| | 237 |
| | 205 |
|
| Asset (gains) losses and reserves, net | 12 |
| | (6 | ) | | (2 | ) |
| Operating Income | 1,002 |
| | 1,028 |
| | 899 |
|
| Other (Income) and Deductions | 298 |
| | 317 |
| | 295 |
|
| Income Tax Expense | 267 |
| | 270 |
| | 228 |
|
| Net Income | $ | 437 |
| | $ | 441 |
| | $ | 376 |
|
Gross margin increased $23 million in 2011 and increased $190 million in 2010 and increased $127 million in 2009.2010. Revenues associated with certain tracking mechanisms and surcharges are offset by related expenses elsewhere in the Consolidated Statement of Operations. The following table details changes in various gross margin components relative to the comparable prior period:
| | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | |
| Weather, net of RDM | | $ | 84 | | | $ | (66 | ) |
| Energy optimization and renewable surcharge/regulatory offset | | | (10 | ) | | | 54 | |
| Securitization bond and tax surcharge rate increase | | | 40 | | | | 62 | |
| 2010 rate order, surcharges and other | | | 76 | | | | 77 | |
| | | | | | | |
| Increase in gross margin | | $ | 190 | | | $ | 127 | |
| | | | | | | |
| | | | | | | | | | | | | |
| (in Thousands of MWh) | | 2010 | | | 2009 | | | 2008 | |
Electric Sales | | | | | | | | | | | | |
| Residential | | | 15,726 | | | | 14,625 | | | | 15,492 | |
| Commercial | | | 16,570 | | | | 18,200 | | | | 18,920 | |
| Industrial | | | 10,195 | | | | 9,922 | | | | 13,086 | |
| Other | | | 3,210 | | | | 3,229 | | | | 3,218 | |
| | | | | | | | | | | | | |
| | | | 45,701 | | | | 45,976 | | | | 50,716 | |
| Interconnection sales (1) | | | 4,876 | | | | 5,156 | | | | 3,583 | |
| | | | | | | | | | | | | |
| Total Electric Sales | | | 50,577 | | | | 51,132 | | | | 54,299 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Electric Deliveries | | | | | | | | | | | | |
| Retail and Wholesale | | | 45,701 | | | | 45,976 | | | | 50,716 | |
| Electric Customer Choice, including self generators (2) | | | 5,005 | | | | 1,477 | | | | 1,457 | |
| | | | | | | | | | | | | |
| Total Electric Sales and Deliveries | | | 50,706 | | | | 47,453 | | | | 52,173 | |
| | | | | | | | | | | | | |
|
| | | | | | | |
| (in Millions) | 2011 | | 2010 |
| Rate case and Choice Incentive mechanism, net of Revenue Decoupling mechanism and sales volume | $ | 29 |
| | $ | 84 |
|
| Restoration tracker | 27 |
| | 35 |
|
| Securitization bond and tax surcharge | (39 | ) | | 40 |
|
| Low Income Energy Efficiency Fund revenue deferral | (23 | ) | | — |
|
| Energy optimization performance incentive | 17 |
| | — |
|
| Regulatory mechanisms and other | 12 |
| | 31 |
|
| Increase in gross margin | $ | 23 |
| | $ | 190 |
|
|
| | | | | | | | |
| (in Thousands of MWh) | 2011 | | 2010 | | 2009 |
| Electric Sales | | | | | |
| Residential | 15,907 |
| | 15,726 |
| | 14,625 |
|
| Commercial | 16,779 |
| | 16,570 |
| | 18,200 |
|
| Industrial | 9,739 |
| | 10,195 |
| | 9,922 |
|
| Other | 3,136 |
| | 3,210 |
| | 3,229 |
|
| | 45,561 |
| | 45,701 |
| | 45,976 |
|
| Interconnection sales (1) | 3,512 |
| | 4,876 |
| | 5,156 |
|
| Total Electric Sales | 49,073 |
| | 50,577 |
| | 51,132 |
|
| | | | | | |
| Electric Deliveries | | | | | |
| Retail and Wholesale | 45,561 |
| | 45,701 |
| | 45,976 |
|
| Electric Customer Choice, including self generators | 5,445 |
| | 5,005 |
| | 1,477 |
|
| Total Electric Sales and Deliveries | 51,006 |
| | 50,706 |
| | 47,453 |
|
| | |
| (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 requirementsEdison. |
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|
| | | | | | | | | | | | | | | | | | | | |
| (in Thousands of MWh) | 2011 | | 2010 | | 2009 |
| Power Generated and Purchased | | | | | | | | | | | |
| Power Plant Generation | | | | | | | | | | | |
| Fossil | 35,502 |
| | 68 | % | | 39,433 |
| | 73 | % | | 40,595 |
| | 74 | % |
| Nuclear | 8,910 |
| | 17 |
| | 7,738 |
| | 14 |
| | 7,406 |
| | 14 |
|
| | 44,412 |
| | 85 |
| | 47,171 |
| | 87 |
| | 48,001 |
| | 88 |
|
| Purchased Power | 8,028 |
| | 15 |
| | 6,638 |
| | 13 |
| | 6,495 |
| | 12 |
|
| System Output | 52,440 |
| | 100 | % | | 53,809 |
| | 100 | % | | 54,496 |
| | 100 | % |
| Less Line Loss and Internal Use | (3,367 | ) | | | | (3,232 | ) | | | | (3,364 | ) | | |
| Net System Output | 49,073 |
| | | | 50,577 |
| | | | 51,132 |
| | |
| Average Unit Cost ($/MWh) | | | | | | | | | | | |
| Generation (1) | $ | 22.67 |
| | | | $ | 18.94 |
| | | | $ | 18.20 |
| | |
| Purchased Power | $ | 42.78 |
| | | | $ | 42.38 |
| | | | $ | 37.74 |
| | |
| Overall Average Unit Cost | $ | 25.75 |
| | | | $ | 21.83 |
| | | | $ | 20.53 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (in Thousands of MWh) | | 2010 | | | 2009 | | | 2008 | |
Power Generated and Purchased | | | | | | | | | | | | | | | | | | | | | | | | |
| Power Plant Generation | | | | | | | | | | | | | | | | | | | | | | | | |
| Fossil | | | 39,433 | | | | 73 | % | | | 40,595 | | | | 74 | % | | | 41,254 | | | | 71 | % |
| Nuclear | | | 7,738 | | | | 14 | | | | 7,406 | | | | 14 | | | | 9,613 | | | | 17 | |
| | | | | | | | | | | | | | | | | | | |
| | | | 47,171 | | | | 87 | | | | 48,001 | | | | 88 | | | | 50,867 | | | | 88 | |
| Purchased Power | | | 6,638 | | | | 13 | | | | 6,495 | | | | 12 | | | | 6,877 | | | | 12 | |
| | | | | | | | | | | | | | | | | | | |
| System Output | | | 53,809 | | | | 100 | % | | | 54,496 | | | | 100 | % | | | 57,744 | | | | 100 | % |
| Less Line Loss and Internal Use | | | (3,232 | ) | | | | | | | (3,364 | ) | | | | | | | (3,445 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net System Output | | | 50,577 | | | | | | | | 51,132 | | | | | | | | 54,299 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Average Unit Cost ($/MWh) | | | | | | | | | | | | | | | | | | | | | | | | |
| Generation (1) | | $ | 18.94 | | | | | | | $ | 18.20 | | | | | | | $ | 17.93 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Purchased Power | | $ | 42.38 | | | | | | | $ | 37.74 | | | | | | | $ | 69.50 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Overall Average Unit Cost | | $ | 21.83 | | | | | | | $ | 20.53 | | | | | | | $ | 24.07 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Represents fuel costs associated with power plants. |
Operation and maintenanceexpense increased $64 million in 2011 and increased $28 million in 20102010. The increase in
2011 is primarily due to higher restoration and decreased $45line clearance expenses of $41 million, in 2009.higher generation
maintenance and outage expenses of $25 million, higher energy optimization and renewable energy expenses of $19 million,
higher employee benefit expense of $9 million, partially offset by reduced contributions of $23 million to the Low Income
Energy Efficiency Fund due to a court order, and reduced uncollectible expenses of $7 million. The increase in 2010 is
primarily due to higher restoration and line clearance expenses of $40 million, higher energy optimization and renewable
energy expenses of $18 million, higher legal expenses of $15 million, partially offset by reduced uncollectible expenses of $20
$20 million, lower generation expenses of $18 million and lower employee benefit-related expenses of $6 million. The decrease
Depreciation and amortization expense decreased $36 million in 2009 was2011 due primarily due to $71 million from continuous improvement initiatives and other cost reductions resulting in lower contract labor and outside services expense, information technology and other staff expenses, $14 millionreduced amortization of lower employee benefit-related expenses, lower restoration and line clearance expenses of $12 million, $9 million of reduced uncollectible expenses and $6 million of reduced maintenance activities,regulatory assets, partially offset by expense related to higher pension and health care costs of $54 million and $14 million of energy optimization and renewable energy expenses.
depreciable base. Depreciation and amortizationexpense increasedwas $5 million higher in 2010 and $101 million in 2009 due primarily to aexpense related to higher depreciable base and increased amortization of regulatory assets.
Taxes other than incomewere higher by $32 million in 2010 due primarily to a $30 million reduction in property tax expense in 2009 due to refunds received in settlement of appeals of assessments for prior years.
Asset (gains) and losses, reserves and impairments, net increased $18 million in 2011 principally attributable to an accrual of $19 million resulting from management's revisions of the timing and estimate of cash flows for the decommissioning of Fermi 1, partially offset by a revision of $6 million in the timing and estimate of cash flows for the Fermi 1 asbestos removal obligation and other items. See Note 7 of the Notes to the Consolidated Financial Statements.
Outlook— - The base rate and rehearing orders approved by the MPSC in fourth quarter 2011 provide for an annual revenue increase of $188 million and an authorized return on equity of 10.5%. The base rate order terminated Detroit Edison's Restoration, Line Clearance and Uncollectible Expense tracking mechanisms. Termination of these trackers may result in increased volatility in Detroit Edison's results due to weather, the number of storms and uncollectible accounts receivable. The Choice Incentive Mechanism was also terminated in the base rate order. Base rates included electric Customer Choice sales at the capped 10 percent level. See Note 9 of Notes to the Consolidated Financial Statements for further discussion of the rate orders received by Detroit Edison.
We continue to move forward in our efforts to improve the operating performanceachieve operational excellence, sustained strong cash flows 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 inearn 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.authorized return on equity. We expect that our planned significant environmental and renewable expenditures will result in earnings growth. Looking forward, we face additional challenges,factors may impact earnings such as higher levelsthe outcome of capital spending, volatility in prices for coal and other commodities, increased transportation costs,regulatory proceedings, investment returns and changes in discount rate assumptions in benefit plans and health care costs, lower levels of wholesale sales due to contract expirations, and uncertainty of legislative or regulatory actions regarding climate change. We expect to continue our continuous improvement efforts to improve productivity and decrease our costs while improving customer satisfaction with consideration of customer rate affordability.
16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
CommodityMarket Price Risk
We have commodity price risk arising from market price fluctuations. We have risks in conjunction with the anticipated purchases of coal, uranium, electricity, and base metals to meet our service obligations. However, we do not bear significant exposure to earnings risk as such changes are included in the PSCR regulatory rate-recovery mechanism. We are exposed to short-term cash flow or liquidity risk as a result of the time differential between actual cash settlements and regulatory rate recovery.
Credit Risk
Bankruptcies
We purchase and sell electricity from and to governmental entities and numerous companies operating in the steel, automotive, energy, retail and other industries. Certain of our customers have filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. We regularly review contingent matters relating to these customers and our purchase and sale contracts and we record provisions for amounts considered at risk of probable loss. We believe our accrued amounts are adequate for probable loss. The final resolution of these matters may have a material effect on our consolidated financial statements.
Other
We have aDetroit Edison had an uncollectible expense tracking mechanism that enabled it to mitigate a significant amount of losses related to uncollectible accounts receivable. This mechanism is subject to the jurisdictionrecover or refund 80 percent of the MPSCdifference between the actual uncollectible expense each year and is periodically reviewed.the level established in its last rate case. In October 2011, Detroit Edison's electric rate order terminated its uncollectible expense tracking mechanism. See Note 109 of the Notes to Consolidated Financial Statements in Item 8 of this Report.
We engage in business with customers that are non-investment grade. We closely monitor the credit ratings of these customers and, when deemed necessary, we request collateral or guarantees from such customers to secure their obligations.
Interest Rate Risk
Detroit Edison is subject to interest rate risk in connection with the issuance of debt securities. Our exposure to interest rate risk arises primarily from changes in U.S. Treasury rates, commercial paper rates and London Inter-Bank Offered Rates (LIBOR). We estimate that if interest rates were 10% higher or lower, the fair value of long-term debt at December 31, 20102011 would decrease $186$167 million and increase $202$179 million, respectively.
17
Item 8. Financial Statements and Supplementary Data
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19Consolidated Financial Statements | |
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Consolidated Financial Statements
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| | 22 | |
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| | 23 | |
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27Financial Statement Schedule | |
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Financial Statement Schedule
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18
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’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2010,2011, which is the end of the period covered by this report. Based on this evaluation, the Company’s 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’s rules and forms and (ii) is accumulated and communicated to the Company’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) Management’s report on internal control over financial reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Integrated Framework.Based on this assessment, management concluded that, as of December 31, 2010,2011, the Company’s internal control over financial reporting was effective based on those criteria.
This annual report does not include an audit report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to audit by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
(c) Changes in internal control over financial reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 20102011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of The Detroit Edison Company:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Detroit Edison Company and its subsidiaries at December 31, 20102011 and 2009,2010, and the results of their operations and their cash flows for each of the three years thenin the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the years ended December 31, 2010 and 2009 listed in the accompanying indexpresents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 18, 201116, 2012
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM17
We have audited the consolidated statements of operations, cash flows, and changes in shareholder’s equity and comprehensive income of The Detroit Edison Company and subsidiaries (the “Company”) for the year ended December 31, 2008. Our audit also included the 2008 information in the financial statement schedule listed in accompanying index. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of The Detroit Edison Company and subsidiaries for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 2008 financial statement schedule, when considered in relation to the basic consolidated financial statements of the Company taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Detroit, Michigan
February 27, 2009
21
The Detroit Edison Company
Consolidated Statements of Operations
| | | | | | | | | | | | | |
| | | Year Ended December 31 | |
| (in Millions) | | 2010 | | | 2009 | | | 2008 | |
Operating Revenues | | $ | 4,993 | | | $ | 4,714 | | | $ | 4,874 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Fuel and purchased power | | | 1,580 | | | | 1,491 | | | | 1,778 | |
| Operation and maintenance | | | 1,305 | | | | 1,277 | | | | 1,322 | |
| Depreciation and amortization | | | 849 | | | | 844 | | | | 743 | |
| Taxes other than income | | | 237 | | | | 205 | | | | 232 | |
| Asset (gains) losses and reserves, net | | | (6 | ) | | | (2 | ) | | | (1 | ) |
| | | | | | | | | | |
| | | | 3,965 | | | | 3,815 | | | | 4,074 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Operating Income | | | 1,028 | | | | 899 | | | | 800 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Other (Income) and Deductions | | | | | | | | | | | | |
| Interest expense | | | 313 | | | | 325 | | | | 293 | |
| Interest income | | | (1 | ) | | | (2 | ) | | | (6 | ) |
| Other income | | | (39 | ) | | | (39 | ) | | | (51 | ) |
| Other expenses | | | 44 | | | | 11 | | | | 47 | |
| | | | | | | | | | |
| | | | 317 | | | | 295 | | | | 283 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Income Before Income Taxes | | | 711 | | | | 604 | | | | 517 | |
| | | | | | | | | | | | | |
Income Tax Provision | | | 270 | | | | 228 | | | | 186 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net Income | | $ | 441 | | | $ | 376 | | | $ | 331 | |
| | | | | | | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| (in Millions) | 2011 | | 2010 | | 2009 |
| Operating Revenues | $ | 5,152 |
| | $ | 4,993 |
| | $ | 4,714 |
|
| Operating Expenses | | | | | |
| Fuel and purchased power | 1,716 |
| | 1,580 |
| | 1,491 |
|
| Operation and maintenance | 1,369 |
| | 1,305 |
| | 1,277 |
|
| Depreciation and amortization | 813 |
| | 849 |
| | 844 |
|
| Taxes other than income | 240 |
| | 237 |
| | 205 |
|
| Asset (gains) losses and reserves, net | 12 |
| | (6 | ) | | (2 | ) |
| | 4,150 |
| | 3,965 |
| | 3,815 |
|
| Operating Income | 1,002 |
| | 1,028 |
| | 899 |
|
| Other (Income) and Deductions | | | | | |
| Interest expense | 289 |
| | 313 |
| | 325 |
|
| Interest income | — |
| | (1 | ) | | (2 | ) |
| Other income | (47 | ) | | (39 | ) | | (39 | ) |
| Other expenses | 56 |
| | 44 |
| | 11 |
|
| | 298 |
| | 317 |
| | 295 |
|
| Income Before Income Taxes | 704 |
| | 711 |
| | 604 |
|
| Income Tax Expense | 267 |
| | 270 |
| | 228 |
|
| Net Income | $ | 437 |
| | $ | 441 |
| | $ | 376 |
|
See Notes to Consolidated Financial Statements
22
The Detroit Edison Company
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | |
| | | Year Ended December 31 | |
| (in Millions) | | 2010 | | | 2009 | | | 2008 | |
Operating Activities | | | | | | | | | | | | |
| Net income | | $ | 441 | | | $ | 376 | | | $ | 331 | |
| Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 849 | | | | 844 | | | | 743 | |
| Deferred income taxes | | | 322 | | | | 15 | | | | 91 | |
| Asset (gains) losses and reserves, net | | | (6 | ) | | | (2 | ) | | | (2 | ) |
| Changes in assets and liabilities, exclusive of changes shown separately (Note 18) | | | (253 | ) | | | (39 | ) | | | 118 | |
| | | | | | | | | | |
| Net cash from operating activities | | | 1,353 | | | | 1,194 | | | | 1,281 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Investing Activities | | | | | | | | | | | | |
| Plant and equipment expenditures | | | (864 | ) | | | (793 | ) | | | (943 | ) |
| Restricted cash | | | (25 | ) | | | 5 | | | | 50 | |
| Notes receivable from affiliate | | | (21 | ) | | | (42 | ) | | | (41 | ) |
| Proceeds from sale of nuclear decommissioning trust fund assets | | | 377 | | | | 295 | | | | 232 | |
| Investment in nuclear decommissioning trust funds | | | (410 | ) | | | (315 | ) | | | (255 | ) |
| Other investments | | | (60 | ) | | | (46 | ) | | | (54 | ) |
| | | | | | | | | | |
| Net cash used for investing activities | | | (1,003 | ) | | | (896 | ) | | | (1,011 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Financing Activities | | | | | | | | | | | | |
| Issuance of long-term debt | | | 614 | | | | 129 | | | | 862 | |
| Redemption of long-term debt | | | (652 | ) | | | (278 | ) | | | (166 | ) |
| Repurchase of long-term debt | | | — | | | | — | | | | (238 | ) |
| Short-term borrowings, net | | | — | | | | (75 | ) | | | (331 | ) |
| Short-term borrowings from affiliate | | | — | | | | — | | | | (277 | ) |
| Capital contribution by parent company | | | — | | | | 250 | | | | 175 | |
| Dividends on common stock | | | (305 | ) | | | (305 | ) | | | (305 | ) |
| Other | | | (11 | ) | | | (15 | ) | | | (7 | ) |
| | | | | | | | | | |
| Net cash used for financing activities | | | (354 | ) | | | (294 | ) | | | (287 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | (4 | ) | | | 4 | | | | (17 | ) |
Cash and Cash Equivalents at Beginning of the Period | | | 34 | | | | 30 | | | | 47 | |
| | | | | | | | | | |
Cash and Cash Equivalents at End of the Period | | $ | 30 | | | $ | 34 | | | $ | 30 | |
| | | | | | | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| (in Millions) | 2011 | | 2010 | | 2009 |
| Operating Activities | | | | | |
| Net income | $ | 437 |
| | $ | 441 |
| | $ | 376 |
|
| Adjustments to reconcile net income to net cash from operating activities: | | | | | |
| Depreciation and amortization | 813 |
| | 849 |
| | 844 |
|
| Deferred income taxes | 231 |
| | 322 |
| | 15 |
|
| Asset (gains) losses and reserves, net | 13 |
| | (6 | ) | | (2 | ) |
| Changes in assets and liabilities, exclusive of changes shown separately (Note 17) | (141 | ) | | (253 | ) | | (39 | ) |
| Net cash from operating activities | 1,353 |
| | 1,353 |
| | 1,194 |
|
| Investing Activities | | | | | |
| Plant and equipment expenditures | (1,202 | ) | | (864 | ) | | (793 | ) |
| Restricted cash for debt redemption | (3 | ) | | (25 | ) | | 5 |
|
| Notes receivable from affiliate | 77 |
| | (21 | ) | | (42 | ) |
| Proceeds from sale of nuclear decommissioning trust fund assets | 80 |
| | 377 |
| | 295 |
|
| Investment in nuclear decommissioning trust funds | (97 | ) | | (410 | ) | | (315 | ) |
| Other investments | (32 | ) | | (60 | ) | | (46 | ) |
| Net cash used for investing activities | (1,177 | ) | | (1,003 | ) | | (896 | ) |
| Financing Activities | | | | | |
| Issuance of long-term debt | 609 |
| | 614 |
| | 129 |
|
| Redemption of long-term debt | (554 | ) | | (652 | ) | | (278 | ) |
| Short-term borrowings, net | — |
| | — |
| | (75 | ) |
| Short-term borrowings from affiliate | 64 |
| | — |
| | — |
|
| Capital contribution by parent company | — |
| | — |
| | 250 |
|
| Dividends on common stock | (305 | ) | | (305 | ) | | (305 | ) |
| Other | (7 | ) | | (11 | ) | | (15 | ) |
| Net cash used for financing activities | (193 | ) | | (354 | ) | | (294 | ) |
| Net Increase (Decrease) in Cash and Cash Equivalents | (17 | ) | | (4 | ) | | 4 |
|
| Cash and Cash Equivalents at Beginning of the Period | 30 |
| | 34 |
| | 30 |
|
| Cash and Cash Equivalents at End of the Period | $ | 13 |
| | $ | 30 |
| | $ | 34 |
|
See Notes to Consolidated Financial Statements
23
The Detroit Edison Company
Consolidated Statements of Financial Position
| | | | | | | | | |
| | | December 31 | |
| (in Millions) | | 2010 | | | 2009 | |
ASSETS | | | | | | | | |
Current Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 30 | | | $ | 34 | |
| Restricted cash (Note 2) | | | 104 | | | | 79 | |
| Accounts receivable (less allowance for doubtful accounts of $93 and $118, respectively) | | | | | | | | |
| Customer | | | 690 | | | | 696 | |
| Affiliates | | | 8 | | | | 3 | |
| Other | | | 204 | | | | 108 | |
| Inventories | | | | | | | | |
| Fuel | | | 224 | | | | 135 | |
| Materials and supplies | | | 170 | | | | 173 | |
| Notes receivable | | | | | | | | |
| Affiliates | | | 97 | | | | 65 | |
| Other | | | — | | | | 3 | |
| Other | | | 109 | | | | 79 | |
| | | | | | | |
| | | | 1,636 | | | | 1,375 | |
| | | | | | | |
| | | | | | | | | |
Investments | | | | | | | | |
| Nuclear decommissioning trust funds | | | 939 | | | | 817 | |
| Other | | | 118 | | | | 104 | |
| | | | | | | |
| | | | 1,057 | | | | 921 | |
| | | | | | | |
| | | | | | | | | |
Property | | | | | | | | |
| Property, plant and equipment | | | 16,068 | | | | 15,451 | |
| Less accumulated depreciation and amortization | | | (6,418 | ) | | | (6,133 | ) |
| | | | | | | |
| | | | 9,650 | | | | 9,318 | |
| | | | | | | |
| | | | | | | | | |
Other Assets | | | | | | | | |
| Regulatory assets | | | 3,277 | | | | 3,333 | |
| Securitized regulatory assets | | | 729 | | | | 870 | |
| Intangible assets | | | 25 | | | | 9 | |
| Notes receivable — affiliates | | | 6 | | | | 17 | |
| Other | | | 142 | | | | 118 | |
| | | | | | | |
| | | | 4,179 | | | | 4,347 | |
| | | | | | | |
| | | | | | | | | |
Total Assets | | $ | 16,522 | | | $ | 15,961 | |
| | | | | | | |
|
| | | | | | | |
| | December 31 |
| (in Millions) | 2011 | | 2010 |
| ASSETS | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 13 |
| | $ | 30 |
|
| Restricted cash, principally Securitization | 127 |
| | 104 |
|
| Accounts receivable (less allowance for doubtful accounts of $80 and $93, respectively) | | | |
| Customer | 709 |
| | 690 |
|
| Affiliates | 61 |
| | 8 |
|
| Other | 76 |
| | 204 |
|
| Inventories | | | |
| Fuel | 264 |
| | 224 |
|
| Materials and supplies | 183 |
| | 170 |
|
| Notes receivable | | | |
| Affiliates | 26 |
| | 97 |
|
| Other | 2 |
| | — |
|
| Regulatory assets | 272 |
| | 58 |
|
| Other | 63 |
| | 51 |
|
| | 1,796 |
| | 1,636 |
|
| Investments | | | |
| Nuclear decommissioning trust funds | 937 |
| | 939 |
|
| Other | 121 |
| | 118 |
|
| | 1,058 |
| | 1,057 |
|
| Property | | | |
| Property, plant and equipment | 16,788 |
| | 16,068 |
|
| Less accumulated depreciation and amortization | (6,526 | ) | | (6,418 | ) |
| | 10,262 |
| | 9,650 |
|
| Other Assets | | | |
| Regulatory assets | 3,618 |
| | 3,277 |
|
| Securitized regulatory assets | 577 |
| | 729 |
|
| Intangible assets | 36 |
| | 25 |
|
| Notes receivable | | | |
| Affiliates | — |
| | 6 |
|
| Other | 4 |
| | — |
|
| Other | 142 |
| | 142 |
|
| | 4,377 |
| | 4,179 |
|
| Total Assets | $ | 17,493 |
| | $ | 16,522 |
|
See Notes to Consolidated Financial Statements
24
The Detroit Edison Company
Consolidated Statements of Financial Position
| | | | | | | | | |
| | | December 31 | |
| (in Millions, Except Shares) | | 2010 | | | 2009 | |
LIABILITIES AND SHAREHOLDER’S EQUITY | | | | | | | | |
Current Liabilities | | | | | | | | |
| Accounts payable | | | | | | | | |
| Affiliates | | $ | 50 | | | $ | 74 | |
| Other | | | 349 | | | | 251 | |
| Accrued interest | | | 81 | | | | 83 | |
| Current portion long-term debt, including capital leases | | | 308 | | | | 660 | |
| Regulatory liabilities | | | 60 | | | | 27 | |
| Other | | | 279 | | | | 234 | |
| | | | | | | |
| | | | 1,127 | | | | 1,329 | |
| | �� | | | | | |
| | | | | | | | | |
Long-Term Debt (net of current portion) | | | | | | | | |
| Mortgage bonds, notes and other | | | 4,046 | | | | 3,579 | |
| Securitization bonds | | | 643 | | | | 793 | |
| Capital lease obligations | | | 20 | | | | 25 | |
| | | | | | | |
| | | | 4,709 | | | | 4,397 | |
| | | | | | | |
| | | | | | | | | |
Other Liabilities | | | | | | | | |
| Deferred income taxes | | | 2,235 | | | | 1,871 | |
| Regulatory liabilities | | | 714 | | | | 711 | |
| Asset retirement obligations | | | 1,354 | | | | 1,285 | |
| Unamortized investment tax credit | | | 67 | | | | 75 | |
| Nuclear decommissioning | | | 149 | | | | 136 | |
Accrued pension liability—affiliates | | | 960 | | | | 987 | |
Accrued postretirement liability—affiliates | | | 1,060 | | | | 1,058 | |
| Other | | | 138 | | | | 239 | |
| | | | | | | |
| | | | 6,677 | | | | 6,362 | |
| | | | | | | |
| | | | | | | | | |
Commitments and Contingencies (Notes 10 and 16) | | | | | | | | |
| | | | | | | | | |
Shareholder’s Equity | | | | | | | | |
| Common stock, $10 par value, 400,000,000 shares authorized, and 138,632,324 shares issued and outstanding | | | 3,196 | | | | 3,196 | |
| Retained earnings | | | 829 | | | | 693 | |
| Accumulated other comprehensive income (loss) | | | (16 | ) | | | (16 | ) |
| | | | | | | |
| | | | 4,009 | | | | 3,873 | |
| | | | | | | |
| | | | | | | | | |
Total Liabilities and Shareholder’s Equity | | $ | 16,522 | | | $ | 15,961 | |
| | | | | | | |
|
| | | | | | | |
| | December 31 |
| (in Millions, Except Shares) | 2011 | | 2010 |
| LIABILITIES AND SHAREHOLDER’S EQUITY | | | |
| Current Liabilities | | | |
| Accounts payable | | | |
| Affiliates | $ | 67 |
| | $ | 50 |
|
| Other | 421 |
| | 349 |
|
| Accrued interest | 69 |
| | 81 |
|
| Current portion long-term debt, including capital leases | 470 |
| | 308 |
|
| Regulatory liabilities | 27 |
| | 60 |
|
| Short-term borrowing - affiliates | 64 |
| | — |
|
| Other | 283 |
| | 279 |
|
| | 1,401 |
| | 1,127 |
|
| Long-Term Debt (net of current portion) | | | |
| Mortgage bonds, notes and other | 4,105 |
| | 4,046 |
|
| Securitization bonds | 479 |
| | 643 |
|
| Capital lease obligations | 9 |
| | 20 |
|
| | 4,593 |
| | 4,709 |
|
| Other Liabilities | | | |
| Deferred income taxes | 2,701 |
| | 2,235 |
|
| Regulatory liabilities | 454 |
| | 714 |
|
| Asset retirement obligations | 1,440 |
| | 1,354 |
|
| Unamortized investment tax credit | 57 |
| | 67 |
|
| Nuclear decommissioning | 148 |
| | 149 |
|
Accrued pension liability — affiliates | 1,231 |
| | 960 |
|
Accrued postretirement liability — affiliates | 1,217 |
| | 1,060 |
|
| Other | 115 |
| | 138 |
|
| | 7,363 |
| | 6,677 |
|
| | | | |
| Commitments and Contingencies (Notes 9 and 15) | | | |
| | | | |
| Shareholder’s Equity | | | |
| Common stock, $10 par value, 400,000,000 shares authorized, and 138,632,324 shares issued and outstanding | 3,196 |
| | 3,196 |
|
| Retained earnings | 960 |
| | 829 |
|
| Accumulated other comprehensive income (loss) | (20 | ) | | (16 | ) |
| | 4,136 |
| | 4,009 |
|
| Total Liabilities and Shareholder’s Equity | $ | 17,493 |
| | $ | 16,522 |
|
See Notes to Consolidated Financial Statements
25
The Detroit Edison Company
Consolidated Statements of Changes in Shareholder’s Equity and Comprehensive income
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | Additional | | | | | | Other | | |
| | | Common Stock | | Paid in | | Retained | | Comprehensive | | |
| (Dollars in Millions, Shares in Thousands) | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Total |
| Balance, December 31, 2007 | | | 138,632 | | | $ | 1,386 | | | $ | 1,385 | | | $ | 528 | | | $ | 4 | | | $ | 3,303 | |
| |
| Net income | | | — | | | | — | | | | — | | | | 331 | | | | — | | | | 331 | |
| Implementation of ASC 715 (SFAS No. 158) measurement date provision, net of tax | | | — | | | | — | | | | — | | | | (9 | ) | | | — | | | | (9 | ) |
| Dividends declared on common stock | | | — | | | | — | | | | — | | | | (228 | ) | | | — | | | | (228 | ) |
| Net change in unrealized gains on investments, net of tax | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | (2 | ) |
| Benefit obligations, net of tax | | | — | | | | — | | | | — | | | | — | | | | (14 | ) | | | (14 | ) |
| Capital contribution by parent company | | | — | | | | — | | | | 175 | | | | — | | | | — | | | | 175 | |
| |
| Balance, December 31, 2008 | | | 138,632 | | | | 1,386 | | | | 1,560 | | | | 622 | | | | (12 | ) | | | 3,556 | |
| |
| Net income | | | — | | | | — | | | | — | | | | 376 | | | | — | | | | 376 | |
| Dividends declared on common stock | | | — | | | | — | | | | — | | | | (305 | ) | | | — | | | | (305 | ) |
| Net change in unrealized gains on investments, net of tax | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | (2 | ) |
| Benefit obligations, net of tax | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | (2 | ) |
| Capital contribution by parent company | | | — | | | | — | | | | 250 | | | | — | | | | — | | | | 250 | |
| |
| Balance, December 31, 2009 | | | 138,632 | | | | 1,386 | | | | 1,810 | | | | 693 | | | | (16 | ) | | | 3,873 | |
| |
| Net income | | | — | | | | — | | | | — | | | | 441 | | | | — | | | | 441 | |
| Dividends declared on common stock | | | — | | | | — | | | | — | | | | (305 | ) | | | — | | | | (305 | ) |
| |
Balance, December 31, 2010 | | | 138,632 | | | $ | 1,386 | | | $ | 1,810 | | | $ | 829 | | | $ | (16 | ) | | $ | 4,009 | |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Additional | | | | Accumulated Other | | |
| | | Common Stock | | Paid-in | | Retained | | Comprehensive | | |
| (Dollars in Millions, Shares in Thousands) | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Total |
| Balance, December 31, 2008 | | 138,632 |
| | $ | 1,386 |
| | $ | 1,560 |
| | $ | 622 |
| | $ | (12 | ) | | $ | 3,556 |
|
| Net income | | — |
| | — |
| | — |
| | 376 |
| | — |
| | 376 |
|
| Dividends declared on common stock | | — |
| | — |
| | — |
| | (305 | ) | | — |
| | (305 | ) |
| Net change in unrealized gains on investments, net of tax | | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Benefit obligations, net of tax | | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Capital contribution by parent company | | — |
| | — |
| | 250 |
| | — |
| | — |
| | 250 |
|
| Balance, December 31, 2009 | | 138,632 |
| | 1,386 |
| | 1,810 |
| | 693 |
| | (16 | ) | | 3,873 |
|
| Net income | | — |
| | — |
| | — |
| | 441 |
| | — |
| | 441 |
|
| Dividends declared on common stock | | — |
| | — |
| | — |
| | (305 | ) | | — |
| | (305 | ) |
| Balance, December 31, 2010 | | 138,632 |
| | 1,386 |
| | 1,810 |
| | 829 |
| | (16 | ) | | 4,009 |
|
| Net income | | — |
| | — |
| | — |
| | 437 |
| | — |
| | 437 |
|
| Dividends declared on common stock | | — |
| | — |
| | — |
| | (306 | ) | | — |
| | (306 | ) |
| Benefit obligations, net of tax | | | | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| Balance, December 31, 2011 | | 138,632 |
| | $ | 1,386 |
| | $ | 1,810 |
| | $ | 960 |
| | $ | (20 | ) | | $ | 4,136 |
|
The following table displays comprehensive income:
| | | | | | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | | | 2008 | |
| Net income | | $ | 441 | | | $ | 376 | | | $ | 331 | |
| | | | | | | | | | |
| Other comprehensive income: | | | | | | | | | | | | |
Net change in unrealized gain (losses) on investments, net of tax of $—, $(1) and $(1) | | | — | | | | (2 | ) | | | (2 | ) |
Benefit obligations, net of tax of $—, $(1) and $(7) | | | — | | | | (2 | ) | | | (14 | ) |
| | | | | | | | | | |
| Comprehensive income | | $ | 441 | | | $ | 372 | | | $ | 315 | |
| | | | | | | | | | |
|
| | | | | | | | | | | | |
| (in Millions) | | 2011 | | 2010 | | 2009 |
| Net income | | $ | 437 |
| | $ | 441 |
| | $ | 376 |
|
| Other comprehensive income: | | | | | | |
Net change in unrealized gains (losses) on investments, net of tax of $—, $— and $(1) | | — |
| | — |
| | (2 | ) |
| Benefit obligations, net of tax of $(2), $— and $(1) | | (4 | ) | | — |
| | (2 | ) |
| Comprehensive income | | $ | 433 |
| | $ | 441 |
| | $ | 372 |
|
See Notes to Consolidated Financial Statements
26
The Detroit Edison Company
Notes to Consolidated Financial Statements
NOTE 1 — BASIS OF PRESENTATION
Corporate Structure
Detroit Edison is an electric utility engaged in the generation, purchase, distribution and sale of electricity to approximately 2.1 million customers in southeastsoutheastern Michigan. Detroit Edison is regulated by the MPSC and the FERC. In addition, we are regulated by other federal and state regulatory agencies including the NRC, the EPA and the MDNRE.MDEQ.
References in this report to “we,” “us,” “our” or “Company” are to Detroit Edison and its subsidiaries, collectively.
Basis of Presentation
The accompanying Consolidated Financial Statements are prepared using accounting principles generally accepted in the United States of America. These accounting principles require management to use estimates and assumptions that impact reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from the Company’s estimates.
Certain prior year balances were reclassified to match the current year’s financial statement presentation.
Principles of Consolidation—Variable Interest Entity (VIE)
The Company consolidates all majority owned subsidiaries and investments in entities in which it has controlling influence. Non-majority owned investments are accounted for using the equity method when the Company is able to influence the operating policies of the investee. Non-majority owned investments include investments in limited liability companies, partnerships or joint ventures. When the Company does not influence the operating policies of an investee, the cost method is used. These consolidated financial statements also reflect the Company’s proportionate interests in certain jointly owned utility plant. The Company eliminates all intercompany balances and transactions.
Effective January 1, 2010, the Company adopted the provisions of ASU 2009-17,Amendments to FASB Interpretation 46(R). ASU 2009-17 changed the methodology for determining the primary beneficiary of a VIEvariable interest entity (VIE) from a quantitative risk and rewards-based model to a qualitative determination. There is no grandfathering of previous consolidation conclusions. As a result, the Company re-evaluated all prior VIE and primary beneficiary determinations. The requirements of ASU 2009-17 were adopted on a prospective basis.
The Company evaluates whether an entity is a VIE whenever reconsideration events occur. The Company consolidates VIEs for which it is the primary beneficiary. If the Company is not the primary beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of accounting. When assessing the determination of the primary beneficiary, the Company considers all relevant facts and circumstances, including: the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the expected losses and/or the right to receive the expected returns of the VIE. The Company performs ongoing reassessments of all VIEs to determine if the primary beneficiary status has changed.
The Company has variable interests in VIEs through certain of its long-term purchase contracts. As of December 31, 2010,2011, the carrying amount of assets and liabilities in the Consolidated Statement of Financial Position that relate to its variable interests under long-term purchase contracts are predominately related to working capital accounts and generally represent the amounts owed by the Company for the deliveries associated with the current billing cycle under the contracts. The Company has not provided any form of financial support associated with these long-term contracts. There is no significant potential exposure to loss as a result of its variable interests through these long-term purchase contracts.
In 2001, Detroit Edison financed a regulatory asset related to Fermi 2 and certain other regulatory assets through the sale of rate reduction bonds by a wholly-owned special purpose entity, Securitization. Detroit Edison performs
27
servicing activities including billing and collecting surcharge revenue for Securitization. Under ASU 2009-17, thisThis entity is now a VIE, and continues to beis consolidated asby the Company is the primary beneficiary.Company. The maximum risk exposure related to Securitization is reflected on the Company’s Consolidated Statements of Financial Position.
The following table summarizes the major balance sheet items at December 31, 2011 and December 31, 2010 restricted for Securitization that are either (1) assets that can be used only to settle their obligations or (2) liabilities for which creditors do not have recourse to the general credit of the primary beneficiary.
| | | | | |
| | | December 31, | |
| (in Millions) | | 2010 | |
ASSETS | | | | |
| Restricted cash | | $ | 104 | |
| Accounts receivable | | | 42 | |
| Securitized regulatory assets | | | 729 | |
| Other assets | | | 13 | |
| | | | |
| | | $ | 888 | |
| | | | |
| | | | | |
LIABILITIES | | | | |
| Accounts payable and accrued current liabilities | | $ | 17 | |
| Other current liabilities | | | 62 | |
| Current portion long-term debt, including capital leases | | | 150 | |
| Securitization bonds | | | 643 | |
| Other long term liabilities | | | 6 | |
| | | | |
| | | $ | 878 | |
| | | | |
|
| | | | | | |
| | December 31, | December 31, |
| (in Millions) | 2011 | 2010 |
| ASSETS | | |
| Restricted cash | $ | 107 |
| $ | 104 |
|
| Accounts receivable | 34 |
| 42 |
|
| Securitized regulatory assets | 577 |
| 729 |
|
| Other assets | 10 |
| 13 |
|
| | $ | 728 |
| $ | 888 |
|
| | | |
| LIABILITIES | | |
| Accounts payable and accrued current liabilities | $ | 14 |
| $ | 17 |
|
| Other current liabilities | 55 |
| 62 |
|
| Current portion long-term debt, including capital leases | 164 |
| 150 |
|
| Securitization bonds | 479 |
| 643 |
|
| Other long term liabilities | 7 |
| 6 |
|
| | $ | 719 |
| $ | 878 |
|
As of December 31, 2011 and December 31, 2010, Detroit Edison had $4 million and $6 million in Notes receivable, and at December 31, 2009, had a bank loan guarantee of $11 millionrespectively, related to non-consolidated VIEs.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Revenues
Revenues from the sale and delivery of electricity are recognized as services are provided. The Company records revenues for electricelectricity provided but unbilled at the end of each month. Rates for Detroit Edison include provisions to adjust billings for fluctuations in fuel and purchased power costs and certain other costs. Revenues are adjusted for differences between actual costs and the amounts billed in current rates. Under or over recovered revenues related to these cost trackingrecovery mechanisms are recorded on the Consolidated Statement of Financial Position and are recovered or returned to customers through adjustments to the billing factors. See Note 10 for further discussion of cost recovery mechanisms.
Detroit Edison hashad a CIM, which iswas an over/under recovery mechanism that measuresmeasured non-fuel revenues lost or gained as a result of fluctuations in electric Customer Choice sales. If annual electric Customer Choice sales exceedexceeded the baseline amount from Detroit Edison’sEdison's most recent rate case, 90 percent of its lost non-fuel revenues associated with sales above that level may be recovered from full-servicefull service customers. If annual electric Customer Choice sales decreasedecreased below the baseline, the Company must refund 90 percent of its increase in non-fuel revenues associated with sales below that level to full service customers. The CIM was terminated effective with the October 20, 2011 MPSC rate order. On January 17, 2012, Detroit Edison filed an application with the MPSC for approval of its CIM reconciliation for 2011.
Detroit Edison hashad an RDM that isin place in 2011, designed to minimize the impact on revenues of changes in average customer usage of electricity. The January 2010 MPSC order in Detroit Edison’s 2009 rate case provided for, among other items, the implementation of a pilot RDM effective February 1, 2010. The RDM enablesenabled Detroit Edison to recover or refund the change in revenue resulting from the difference between actual average sales per customer compared to the base level of average sales per customer established in the MPSC order. The RDM addresses changes in customer usage due to general economic conditions and conservation, but does not shield Detroit Edison from the impacts of lost customers. In addition, the2011 pilot RDM materially shieldsestablished in Detroit Edison from the impact of weather on customer usage. The RDM is subject to reviewEdison's 2009 rate case was terminated by the MPSC afterin October 2011, but the initial one-year pilot program.Company has requested rehearing on this point asserting the termination should have occurred in April 2011. Detroit Edison will have a newly designed RDM that will be effective in April 2012. See Note 9 for further discussion of the newly designed RDM.
See Note 9 for further discussion of recovery mechanisms authorized by the MPSC.
Accounting for ISO Transactions
Detroit Edison participates in the energy market through MISO. MISO requires that we submit hourly day-ahead, real time and FTR bids and offers for energy at locations across the MISO region. Detroit Edison accounts for MISO
28
transactions on a net hourly basis in each of the day-ahead, real-time and FTR markets and net transactions across all MISO energy market locations. In any single hour Detroit Edison records net purchases in Fuel, and purchased power and gas and net sales in Operating revenues on the Consolidated Statements of Operations. Detroit Edison records net sale billing adjustments when invoices are received. Detroit Edison records expense accruals for future net purchases adjustments based on historical experience, and
reconciles accruals to actual expenses when invoices are received from MISO.
Comprehensive Income
Comprehensive income is the change in Commoncommon shareholder’s equity during a period from transactions and events from non-owner sources, including net income. AmountsAs shown in the following table, amounts recorded to Otheraccumulated other comprehensive loss for the year ended December 31, 2010 included immaterial amounts for2011 reflected changes in benefit obligations and unrealized gains and losses on available for sale securities.obligations.
| | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | |
| | | | | | | | | | | Other | |
| | | Benefit | | | | | | | Comprehensive | |
| (in Millions) | | Obligations | | | Other | | | Loss | |
| Beginning balances | | $ | (16 | ) | | $ | — | | | $ | (16 | ) |
| Current period change | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| Ending balance | | $ | (16 | ) | | $ | — | | | $ | (16 | ) |
| | | | | | | | | | |
|
| | | | | | | | |
| | Benefit | | | Accumulated Other Comprehensive |
| (in Millions) | Obligations | | | Loss |
| Beginning balance | $ | (16 | ) | | | $ | (16 | ) |
| Current period change | (4 | ) | | | (4 | ) |
| Ending balance | $ | (20 | ) | | | $ | (20 | ) |
Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on hand, cash in banks and temporary investments purchased with remaining maturities of three months or less. Restricted cash consists of funds held to satisfy requirements of certain debt agreements, related to Securitization bonds. Restricted cash designated for interest and principal payments within one year is classified as a current asset.
Receivables
Accounts receivable are primarily composed of trade receivables and unbilled revenue. Our accounts receivable are stated at net realizable value.
The allowance for doubtful accounts is generally calculated using the aging approach that utilizes rates developed in reserve studies. Detroit Edison establishes an allowance for uncollectible accounts based on historical losses and management’s assessment of existing economic conditions, customer trends, and other factors. Customer accounts are generally considered delinquent if the amount billed is not received by the due date, which is typically in 21 days, however, factors such as assistance programs may delay aggressive action. We assess late payment fees on trade receivables based on past-due terms with customers. Customer accounts are written off when collection efforts have been exhausted, generally one year after service has been terminated.
Unbilled revenues of $236$264 million and $269$236 million are included in customer accounts receivable at December 31, 20102011 and 2009,2010, respectively.
Notes Receivable
Notes receivable, or financing receivables, are primarily comprised of capital lease receivables and loans and are included in Notes receivable and Other current assets and Notes receivable on the Company’s Consolidated Statements of Financial Position.
Notes receivable are typically considered delinquent when payment is not received for periods ranging from 60 to 120 days. The Company ceases accruing interest (nonaccrual status), considers a note receivable impaired, and establishes an allowance for credit loss when it is probable that all principal and interest amounts due will not be collected in accordance with the contractual terms of the note receivable. Cash payments received on nonaccrual status notes receivable, that do not bring the account contractually current, are first applied to contractually owed past due interest, with any remainder applied to principle.principal. Accrual of interest is generally resumed when the note receivable becomes contractually current.
29
In determining the allowance for credit losses for notes receivable, we consider the historical payment experience and other factors that are expected to have a specific impact on the counterparty’s ability to pay. In addition, the Company monitors the credit ratings of the counterparties from which we have notes receivable.
Inventories
The Company generally values inventory at average cost.
Property, Retirement and Maintenance, and Depreciation, Depletion and Amortization
Property is stated at cost and includes construction-related labor, materials, overheads and an allowance for funds used during construction (AFUDC). The cost of properties retired, including the cost of removal, less salvage value is charged to
accumulated depreciation. Expenditures for maintenance and repairs are charged to expense when incurred, except for Fermi 2.
The Company bases depreciation provisions for utilityUtility property onis depreciated over its estimated useful life using straight-line rates approved by the MPSC.
The Company credits depreciation and amortization expense when we establishit establishes regulatory assets for plant-related costs such as depreciation or plant-related financing costs. The Company charges depreciation and amortization expense when we amortize these regulatory assets. The Company credits interest expense to reflect the accretion income on certain regulatory assets.
Approximately $3$23 million and $13$3 million of expenses related to Fermi 2 refueling outages were accrued at December 31, 20102011 and December 31, 2009,2010, respectively. Amounts are accrued on a pro-rata basis over an 18-month period that coincides with scheduled refueling outages at Fermi 2. This accrual of outage costs matches the regulatory recovery of these costs in rates set by the MPSC.
See Note 6.5.
The cost of nuclear fuel is capitalized. The amortization of nuclear fuel is included within Fuel and purchased power in the Consolidated Statement of Operations and is recorded using the units-of-production method.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of the asset exceeds the expected future cash flows generated by the asset, an impairment loss is recognized resulting in the asset being written down to its estimated fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
Intangible Assets
The Company has certain intangible assets relating to emission allowances and renewable energy credits. Emission allowances and renewable energy credits are charged to expense, using average cost, as the allowances and credits are consumed in the operation of the business. The Company’s intangible assets related to emission allowances were $9 million at December 31, 20102011 and 2009.2010. The Company’s intangible assets related to renewable energy credits were $27 million and $17 million at December 31, 2010. The Company had no renewable energy credits at2011 and December 31, 2009.2010, respectively.
Excise and Sales Taxes
The Company records the billing of excise and sales taxes as a receivable with an offsetting payable to the applicable taxing authority, with no net impact on the Consolidated Statements of Operations.
Deferred Debt Costs
The costs related to the issuance of long-term debt are deferred and amortized over the life of each debt issue. In accordance with MPSC regulations, the unamortized discount, premium and expense related to debt redeemed with a refinancing are amortized over the life of the replacement issue.
Investments in Debt and Equity Securities
The Company generally classifies investments in debt and equity securities as either trading or available-for-sale and has recorded such investments at market value with unrealized gains or losses included in earnings or in other
30
comprehensive income or loss, respectively. Changes in the fair value of Fermi 2 nuclear decommissioning investments are recorded as adjustments to regulatory assets or liabilities, due to a recovery mechanism from customers. The Company’s equity investments are reviewed for impairment each reporting period. If the assessment indicates that the impairment is other than temporary, a loss is recognized resulting in the equity investment being written down to its estimated fair value. See Note 4.3.
Stock-Based Compensation
The Company received an allocation of costs from DTE Energy associated with stock-based compensation. Our allocation for 2011, 2010 2009 and 20082009 for stock-based compensation expense was approximately $30 million, $23 million $24 million and $15$24 million, respectively.
Government Grants
Grants are recognized when there is reasonable assurance that the grant will be received and that any conditions associated with the grant will be met. When grants are received related to Property, Plant and Equipment, the Company reduces the basis of the assets on the Consolidated Statements of Financial Position, resulting in lower depreciation expense over the life of the associated asset. Grants received related to expenses are reflected as a reduction of the associated expense in the period in which the expense is incurred.
Other Accounting Policies
See the following notes for other accounting policies impacting our financial statements:
|
| | | | |
| Note | | | Title |
| | | |
| 3 | | | New Accounting Pronouncements |
| 4 |
| | Fair Value |
| 4 | 5 |
| | Financial and Other Derivative Instruments |
| 7 | 10
| | Asset Retirement Obligations |
| 9 |
| | Regulatory Matters |
| 10 | 11 |
| | Income Taxes |
| 16 | 17 |
| | Retirement Benefits and Trusteed Assets |
NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS
Variable Interest Entity
In June 2009, the FASB issued ASU 2009-17,Amendments to FASB Interpretation 46(R).This standard amends the consolidation guidance that applies to VIEs and affects the overall consolidation analysis under ASC 810-10,Consolidation. The amendments to the consolidation guidance affect all entities and enterprises currently within the scope of ASC 810-10, as well as qualifying special purpose entities that are currently outside the scope of ASC 810-10. Accordingly, the Company reconsidered its previous ASC 810-10 conclusions, including (1) whether an entity is a VIE, (2) whether the enterprise is the VIE’s primary beneficiary, and (3) what type of financial statement disclosures are required. ASU 2009-17 is effective as of the beginning of the first fiscal year that begins after November 15, 2009. The Company adopted the standard as of January 1, 2010. See Note 1.
Fair Value Measurements and Disclosures
In January 2010, the FASB issued ASU 2010-06,Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires details of transfers in and out of Level 1 and 2 fair value measurements and the gross presentation of activity within the Level 3 fair value measurement roll forward. The new disclosures are required of all entities that are required to provide disclosures about recurring and nonrecurring fair value measurements. The Company adopted ASU 2010-06 effective January 1, 2010, except for the gross presentation of the Level 3 fair value measurement roll forward which is effective for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years.
NOTE 4 — FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that
31
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 December 31, 20102011 and December 31, 2009.2010. The Company believes it uses valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.
A fair value hierarchy has been established, whichthat prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. All assets and liabilities are required to be classified in their entirety based on the lowest level of input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The Company classifies fair value balances based on the fair value hierarchy defined as follows:
• | | Level 1 — Consists of unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. |
|
• | | Level 2 — Consists of inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. |
|
• | | Level 3 — Consists of unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints. |
Level 1 — Consists of unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date.Level 2 — Consists of inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
Level 3 — Consists of unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.
The following table presents assets measured and recorded at fair value on a recurring basis as of December 31, 2011:
|
| | | | | | | | | | | | | | | |
| | | | | | | | Net Balance at |
| (in Millions) | Level 1 | | Level 2 | | Level 3 | | December 31, 2011 |
| Assets: | | | | | | | |
| Nuclear decommissioning trusts | $ | 577 |
| | $ | 360 |
| | $ | — |
| | $ | 937 |
|
| Other investments | 55 |
| | 54 |
| | — |
| | 109 |
|
| Derivative assets — FTRs | — |
| | — |
| | 1 |
| | 1 |
|
| Total | $ | 632 |
| | $ | 414 |
| | $ | 1 |
| | $ | 1,047 |
|
|
| | | | | | | | | | | | | | | |
| | | | | | | | Net Balance at |
| (in Millions) | Level 1 | | Level 2 | | Level 3 | | December 31, 2011 |
| Assets: | | | | | | | |
| Current | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
| Noncurrent(1) | 632 |
| | 414 |
| | — |
| | 1,046 |
|
| Total Assets | $ | 632 |
| | $ | 414 |
| | $ | 1 |
| | $ | 1,047 |
|
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(1) | | | 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 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | Net Balance at |
| (in Millions) | Level 1 | | Level 2 | | Level 3 | | December 31, 2010 |
| Assets: | | | | | | | |
| Current | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 2 |
|
| Noncurrent(1) | 651 |
| | 395 |
| | — |
| | 1,046 |
|
| Total Assets | $ | 651 |
| | $ | 395 |
| | $ | 2 |
| | $ | 1,048 |
|
| Liabilities: | | | | | | | |
| Current | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | (3 | ) |
| Total Liabilities | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | (3 | ) |
| Net Assets at December 31, 2010 | $ | 651 |
| | $ | 392 |
| | $ | 2 |
| | $ | 1,045 |
|
32
The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2009:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net Balance at | |
| (in Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | December 31, 2009 | |
Assets: | | | | | | | | | | | | | | | | |
| Cash equivalents | | $ | 15 | | | $ | — | | | $ | — | | | $ | 15 | |
| Nuclear decommissioning trusts | | | 549 | | | | 268 | | | | — | | | | 817 | |
| Other investments | | | 40 | | | | 57 | | | | — | | | | 97 | |
| Derivative assets | | | — | | | | — | | | | 2 | | | | 2 | |
| | | | | | | | | | | | | |
| Total | | $ | 604 | | | $ | 325 | | | $ | 2 | | | $ | 931 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| Derivative liabilities | | | — | | | | (8 | ) | | | — | | | | (8 | ) |
| | | | | | | | | | | | | |
| Total | | $ | — | | | $ | (8 | ) | | $ | — | | | $ | (8 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net Assets at December 31, 2009 | | $ | 604 | | | $ | 317 | | | $ | 2 | | | $ | 923 | |
| | | | | | | | | | | | | |
| | |
| (1) | | Includes $109 and $107 million of other investments that are included in the Consolidated Statements of Financial Position in Other Investments at December 31, 2010.2011 and December 31, 2010, respectively. |
The following table presents the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 20102011 and 2009:2010:
| | | | | | | | | |
| | | Year Ended | |
| | | December 31 | |
| (in Millions) | | 2010 | | | 2009 | |
| Asset balance as of January 1 | | $ | 2 | | | | 4 | |
| Change in fair value recorded in regulatory assets/liabilities | | | 6 | | | | — | |
| Purchases, issuances and settlements | | | (6 | ) | | | — | |
| Transfers in/out of Level 3 | | | — | | | | (2 | ) |
| | | | | | | |
| Asset balance as of December 31 | | $ | 2 | | | $ | 2 | |
| | | | | | | |
| 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 December 31, 2010 and 2009 | | $ | 2 | | | $ | 2 | |
| | | | | | | |
|
| | | | | | | |
| | Year Ended December 31 |
| (in Millions) | 2011 | | 2010 |
| Net Assets as of January 1 | $ | 2 |
| | 2 |
|
| Change in fair value recorded in regulatory assets/liabilities | 2 |
| | 6 |
|
| Purchases, issuances and settlements: | | | |
| Settlements | (3 | ) | | (6 | ) |
| Net Assets as of December 31 | $ | 1 |
| | $ | 2 |
|
| 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 December 31, 2011 and 2010 | $ | 1 |
| | $ | 2 |
|
Transfers in/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/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 yearyears ended December 31, 2011 and December 31, 2010. Transfers out of Level 3 in 2009 reflect increased reliance on broker quotes for certain transactions.
Cash Equivalents
Cash equivalents include investments with maturities of three months or less when purchased. The cash equivalents shown in the fair value table are comprised of investments in money market funds. The fair values of the shares of these funds are based on observable market prices and, therefore, have been categorized as Level 1 in the fair value hierarchy.
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
33
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 EdisonThe Company 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 Edisonthe Company 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 54 for further fair value information on financial and derivative instruments.
|
| | | | | | | |
| | | | | | | | | |
| December 31, 2011 | | December 31, 2010 | | December 31, 2009 |
| | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| Long-Term Debt | $5.7 billion | | $5.1 billion | | $5.3 billion | | $5.0 billion | | $5.2 billion | | $5.0 billion |
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 9 for additional information.
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. The decommissioning of Fermi 1 is funded by Detroit Edison. Contributions to the Fermi 1 trust are discretionary.See Note 7.
34
The following table summarizes the fair value of the nuclear decommissioning trust fund assets:
| | | | | | | | | |
| | | December 31 | | | December 31 | |
| (in Millions) | | 2010 | | | 2009 | |
| Fermi 2 | | $ | 910 | | | $ | 790 | |
| Fermi 1 | | | 3 | | | | 3 | |
| Low level radioactive waste | | | 26 | | | | 24 | |
| | | | | | | |
| Total | | $ | 939 | | | $ | 817 | |
| | | | | | | |
|
| | | | | | | |
| | December 31 | | December 31 |
| (in Millions) | 2011 | | 2010 |
| Fermi 2 | $ | 915 |
| | $ | 910 |
|
| Fermi 1 | 3 |
| | 3 |
|
| Low level radioactive waste | 19 |
| | 26 |
|
| Total | $ | 937 |
| | $ | 939 |
|
At December 31, 2011, investments in the nuclear decommissioning trust funds consisted of approximately 57% in publicly traded equity securities, 41% in fixed debt instruments and 2% in cash equivalents. At December 31, 2010, investments in the nuclear decommissioning trust funds consisted of approximately 61% in publicly traded equity securities, 38% in fixed debt instruments and 1% in cash equivalents. At December 31, 2009, investments in the nuclear decommissioning trust funds consisted of approximately 51% in publicly traded equity securities, 48% in fixed debt instruments and 1% in cash equivalents. The debt securities at both December 31, 20102011 and December 31, 20092010 had an average maturity of approximately 67 and 56 years, respectively.
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:
| | | | | | | | | | | | | |
| | | Year Ended |
| | | December 31 |
| (in Millions) | | 2010 | | | 2009 | | | 2008 | |
| Realized gains | | $ | 192 | | | $ | 37 | | | $ | 34 | |
| Realized losses | | $ | (83 | ) | | $ | (55 | ) | | $ | (49 | ) |
| Proceeds from sales of securities | | $ | 377 | | | $ | 295 | | | $ | 232 | |
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| (in Millions) | 2011 | | 2010 | | 2009 |
| Realized gains | $ | 46 |
| | $ | 192 |
| | $ | 37 |
|
| Realized losses | $ | (38 | ) | | $ | (83 | ) | | $ | (55 | ) |
| Proceeds from sales of securities | $ | 80 |
| | $ | 377 |
| | $ | 295 |
|
Realized gains and losses from the sale of securities for the Fermi 2 trust 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 December 31, 2010 | | | | | | | | |
| Equity securities | | $ | 572 | | | $ | 77 | |
| Debt securities | | | 361 | | | | 11 | |
| Cash and cash equivalents | | | 6 | | | | — | |
| | | | | | | |
| | | $ | 939 | | | $ | 88 | |
| | | | | | | |
| | | | | | | | | |
| As of December 31, 2009 | | | | | | | | |
| Equity securities | | $ | 420 | | | $ | 135 | |
| Debt securities | | | 388 | | | | 17 | |
| Cash and cash equivalents | | | 9 | | | | — | |
| | | | | | | |
| | | $ | 817 | | | $ | 152 | |
| | | | | | | |
|
| | | | | | | |
| | Fair | | Unrealized |
| (in Millions) | Value | | Gains |
| As of December 31, 2011 | | | |
| Equity securities | $ | 533 |
| | $ | 80 |
|
| Debt securities | 385 |
| | 22 |
|
| Cash and cash equivalents | 19 |
| | — |
|
| | $ | 937 |
| | $ | 102 |
|
| As of December 31, 2010 | | | |
| Equity securities | $ | 572 |
| | $ | 77 |
|
| Debt securities | 361 |
| | 11 |
|
| Cash and cash equivalents | 6 |
| | — |
|
| | $ | 939 |
| | $ | 88 |
|
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.
Impairment charges for unrealizedUnrealized losses incurred by the Fermi 2 trust are recognized as a Regulatory asset. Detroit Edison recognized $26$67 million and $48$26 million of unrealized losses as Regulatory assets at December 31, 20102011 and 2009,2010, 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, impairment charges for unrealized losses incurred by the Fermi 1 trust are recognized in earnings immediately. There were no impairment chargesunrealized losses recognized in 2011, 2010 2009 and 20082009 for Fermi 1.
35
Other Available-For-Sale Securities
The following table summarizes the fair value of the Company’s investment in available-for-sale debt and equity securities, excluding nuclear decommissioning trust fund assets:
| | | | | | | | | | | | | | | | | |
| | | December 31, 2010 | | December 31, 2009 |
| (in Millions) | | Fair Value | | Carrying value | | Fair Value | | Carrying Value |
| Cash equivalents | | $ | 125 | | | $ | 125 | | | $ | 105 | | | $ | 105 | |
| Equity securities | | | 4 | | | | 4 | | | | 4 | | | | 4 | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2011 | | December 31, 2010 |
| (in Millions) | Fair Value | | Carrying value | | Fair Value | | Carrying Value |
| Cash equivalents | $ | 129 |
| | $ | 129 |
| | $ | 125 |
| | $ | 125 |
|
| Equity securities | 4 |
| | 4 |
| | 4 |
| | 4 |
|
As of December 31, 2011 and 2010, these securities are comprised primarily of money-market and equity securities. Gains (losses) related to trading securities held at December 31, 2011, 2010 and 2009 and 2008 were $3 million, $7 million and $8 million, and $(14) 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 fair value are recognized in earnings each period.
Detroit Edison’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 December 31, 20102011 and 2009:2010:
| | | | | | | | | |
| | | Year Ended | |
| | | December 31 | |
| (in Millions) | | 2010 | | | 2009 | |
| FTRs — Other current assets | | $ | 2 | | | $ | 2 | |
| Emissions — Other current liabilities | | | (3 | ) | | | (5 | ) |
| Emissions — Other non-current liabilities | | | — | | | | (3 | ) |
| | | | | | | |
| Total derivatives not designated as hedging instrument | | $ | (1 | ) | | $ | (6 | ) |
| | | | | | | |
|
| | | | | | | |
| | Year Ended December 31 |
| (in Millions) | 2011 | | 2010 |
| FTRs — Other current assets | $ | 1 |
| | $ | 2 |
|
| Emissions — Other current liabilities | — |
| | (3 | ) |
| Total derivatives not designated as hedging instrument | $ | 1 |
| | $ | (1 | ) |
The effect of derivative instruments recoverable through the PSCR mechanism when realized on the Consolidated Statements of Financial Position arewere $3 million in gains related to FTRs recognized in Regulatory Liabilities for the year ended December 31, 2011, and $1 million in losses related to Emissions recognized in Regulatory assets and $6 million in gains related to FTRs recognized in Regulatory liabilities for the year ended December 31, 2010, and $14 million and $2 million in losses related to Emissions recognized in Regulatory assets and Regulatory liabilities, respectively, for the year ended December 31, 2009.2010.
36
The following represents the cumulative gross volume of derivative contracts outstanding as of December 31, 2010:2011:
|
| | | | |
| Commodity | | Number of Units |
Emissions (Tons) | | | 1,750 | |
| FTRs (MW) | 36,219 | | 53,753 |
|
NOTE 65 — PROPERTY, PLANT AND EQUIPMENT
Summary of property by classification as of December 31:
| | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | |
Property, Plant and Equipment | | | | | | | | |
| Generation | | $ | 9,268 | | | $ | 8,833 | |
| Distribution | | | 6,800 | | | | 6,618 | |
| | | | | | | |
| Total | | | 16,068 | | | | 15,451 | |
| | | | | | | |
| | | | | | | | | |
Less Accumulated Depreciation and Amortization | | | | | | | | |
| Generation | | | (3,850 | ) | | | (3,890 | ) |
| Distribution | | | (2,568 | ) | | | (2,243 | ) |
| | | | | | | |
| Total | | | (6,418 | ) | | | (6,133 | ) |
| | | | | | | |
Net Property, Plant and Equipment | | $ | 9,650 | | | $ | 9,318 | |
| | | | | | | |
|
| | | | | | | |
| (in Millions) | 2011 | | 2010 |
| Property, Plant and Equipment | | | |
| Generation | $ | 9,785 |
| | $ | 9,268 |
|
| Distribution | 7,003 |
| | 6,800 |
|
| Total | 16,788 |
| | 16,068 |
|
| Less Accumulated Depreciation and Amortization | | | |
| Generation | (3,946 | ) | | (3,850 | ) |
| Distribution | (2,580 | ) | | (2,568 | ) |
| Total | (6,526 | ) | | (6,418 | ) |
| Net Property, Plant and Equipment | $ | 10,262 |
| | $ | 9,650 |
|
AFUDC capitalized during 20102011 and 20092010 was approximately $10$9 million and $12$10 million, respectively.
The composite depreciation rate for Detroit Edison was approximately 3.3% in 2011, 2010 2009 and 2008.2009.
The average estimated useful life for our generation and distribution property was 4046 years and 3743 years, respectively, at December 31, 2010.2011.
Capitalized software costs are classified as Property, plant and equipment and the related amortization is included in Accumulated depreciation and amortization on the Consolidated Statements of Financial Position. The Company capitalizes the costs associated with computer software it develops or obtains for use in its business. The Company amortizes capitalized software costs on a straight-line basis over the expected period of benefit, ranging from 5 to 15 years.
Capitalized software costs amortization expense was $58 million in 2011, $55 million in 2010 $55and 2009. The gross carrying amount and accumulated amortization of capitalized software costs at December 31, 2011 were $501 million in 2009, and $45$218 million, in 2008.respectively. The gross carrying amount and accumulated amortization of capitalized software costs at December 31, 2010 were $479 million and $175 million, respectively. The gross carrying amount and accumulated amortization of capitalized software costs at December 31, 2009 were $488 million and $161 million, respectively. Amortization expense of capitalized software costs is estimated to be approximately $55 million annually for 20112012 through 2015.2016.
Gross property under capital leases was $26 million and $121 million at December 31, 20102011 and December 31, 2009.2010, respectively. Accumulated amortization of property under capital leases was $96$14 million and $88$96 million at December 31, 20102011 and December 31, 2009,2010, respectively.
NOTE 76 — JOINTLY OWNED UTILITY PLANT
Detroit Edison has joint ownership interest in two power plants, Belle River and Ludington Hydroelectric Pumped Storage. Detroit Edison’s share of direct expenses of the jointly owned plants are included in Fuel and purchased power and Operation and maintenance expenses in the Consolidated Statements of Operations. Ownership information of the two utility plants as of December 31, 20102011 was as follows:
37
| | | | | | | | | |
| | | | | | | Ludington |
| | | | | | | Hydroelectric |
| | | Belle River | | Pumped Storage |
| In-service date | | | 1984-1985 | | | | 1973 | |
| Total plant capacity | | 1,270 | MW | | 1,872 | MW |
| Ownership interest | | | | * | | | 49 | % |
| Investment (in millions) | | $ | 1,635 | | | $ | 199 | |
| Accumulated depreciation (in millions) | | $ | 923 | | | $ | 117 | |
|
| | | | | | | | | |
| | | | | Ludington Hydroelectric |
| | Belle River | | Pumped Storage |
| In-service date | 1984-1985 |
| | | 1973 |
| |
| Total plant capacity | 1,270 |
| MW | | 1,872 |
| MW |
| Ownership interest | | * | | 49 | % | |
| Investment (in millions) | $ | 1,645 |
| | | $ | 199 |
| |
| Accumulated depreciation (in millions) | $ | 943 |
| | | $ | 158 |
| |
|
| |
| * | | Detroit Edison’s ownership interest is 63% in Unit No. 1, 81% of the facilities applicable to Belle River used jointly by the Belle River and St. Clair Power Plants and 75% in common facilities used at Unit No. 2. |
Belle River
The Michigan Public Power Agency (MPPA) has an ownership interest in Belle River Unit No. 1 and other related facilities. The MPPA is entitled to 19% of the total capacity and energy of the plant and is responsible for the same percentage of the plant’s operation, maintenance and capital improvement costs.
Ludington Hydroelectric Pumped Storage
Consumers Energy Company has an ownership interest in the Ludington Hydroelectric Pumped Storage Plant. Consumers Energy is entitled to 51% of the total capacity and energy of the plant and is responsible for the same percentage of the plant’s operation, maintenance and capital improvement costs.
NOTE 87 — ASSET RETIREMENT OBLIGATIONS
The Company has a legal retirement obligation for the decommissioning costs for its Fermi 1 and Fermi 2 nuclear plants. The Company has conditional retirement obligations for disposal of asbestos at certain of its power plants. To a lesser extent, the Company has conditional retirement obligations atplants, certain service centers and disposal costs for PCB contained within transformers and circuit breakers. The Company recognizes such obligations as liabilities at fair market value when they are incurred, which generally is at the time the associated assets are placed in service. Fair value is measured using expected future cash outflows discounted at our credit-adjusted risk-free rate. The Company defers timing differences that arise in the expense recognition of legal asset retirement costs that are currently recovered in rates.
No liability has been recorded with respect to lead-based paint, as the quantities of lead-based paint in the Company’s facilities are unknown. In addition, there is no incremental cost to demolitions of lead-based paint facilities vs. non-lead-based paint facilities and no regulations currently exist requiring any type of special disposal of items containing lead-based paint.
The Ludington Hydroelectric Power Plant (a jointly owned plant) has an indeterminate life and no legal obligation currently exists to decommission the plant at some future date. Substations, manholes and certain other distribution assets within Detroit Edison have an indeterminate life. Therefore, no liability has been recorded for these assets.
A reconciliation of the asset retirement obligations for 20102011 follows:
| | | | | |
| (in Millions) | | | | |
| Asset retirement obligations at January 1, 2010 | | $ | 1,300 | |
| Accretion | | | 84 | |
| Liabilities incurred | | | 10 | |
| Liabilities settled | | | (6 | ) |
| Revision in estimated cash flows | | | (22 | ) |
| | | | |
| Asset retirement obligations at December 31, 2010 | | | 1,366 | |
| Less amount included in current liabilities | | | (12 | ) |
| | | | |
| | | $ | 1,354 | |
| | | | |
|
| | | |
| (in Millions) | |
| Asset retirement obligations at January 1, 2011 | $ | 1,366 |
|
| Accretion | 84 |
|
| Liabilities incurred | 8 |
|
| Liabilities settled | (16 | ) |
| Asset retirement obligations at December 31, 2011 | 1,442 |
|
| Less amount included in current liabilities | (2 | ) |
| | $ | 1,440 |
|
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 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. 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, reserves and impairments, net on the Consolidated Statements of Operations. In addition, based on updated studies revising the timing and estimate of cash flows, a reduction of approximately $20 million was made to the Detroit Edison asset retirement obligation for asbestos removal with approximately $6 million of the decrease associated with Fermi 1 recorded in Asset (gains) and losses, reserves and impairments, net on the Consolidated Statements of Operations.
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. In 2010, Detroit Edison filed a rate case withOctober 2011, the MPSC proposingapproved Detroit Edison's request for a reduction to the nuclear
38
decommissioning surcharge under the assumption that it would request an extension of the Fermi 2 license for an additional 20 years beyond the term of the existing license which expires in 2025. Detroit Edison expects to request the license extension in 2014. This proposed extension of the license, including the associated impact on spent nuclear fuel, resulted in a revision in estimated cash flows for the Fermi 2 asset retirement obligation of approximately $22 million. It is estimated that the cost of decommissioning Fermi 2 is $1.3$1.4 billion in 20102011 dollars and $10 billion in 2045 dollars, using a 6% inflation rate. In 2001, Detroit Edison began the decommissioning of Fermi 1, with the goal of removing the radioactive material and terminating the Fermi 1 license. The decommissioning of Fermi 1 is expected to be completed by 2012. Approximately $1.3$1.4 billion of the asset retirement obligations represent nuclear decommissioning liabilities that are funded through a surcharge to electric customers over the life of the Fermi 2 nuclear plant.
The NRC has jurisdiction over the decommissioning of nuclear power plants and requires minimum 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. 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.
A portion of the funds recovered through the Fermi 2 decommissioning surcharge and deposited in external trust accounts is designated for the removal of non-radioactive assets and the clean-up of the Fermi site. This removal and clean-up is not considered a legal liability. Therefore, it is not included in the asset retirement obligation, but is reflected as the nuclear decommissioning liability. The decommissioning of Fermi 1 is funded by Detroit Edison. Contributions to the Fermi 1 trust are discretionary. See Note 43 for additional discussion of Nuclear Decommissioning Trust Fund Assets.
NOTE 98 — RESTRUCTURING
Performance Excellence ProcessRestructuring Costs
In 2005, the Company initiated a company-wide review of its operations called the Performance Excellence Process. The Company incurred costs to achieve (CTA)CTA restructuring expense for employee severance, early retirement programs and other costs which include project management and consultant support.expense. In September 2006, the MPSC issued an order approving a settlement agreement that allowed Detroit Edison, commencing in 2006, to defer the incremental CTA. Further, the order provided for Detroit Edison to amortize the CTA deferrals over a ten-year period beginning with the year subsequent to the year the CTA was deferred. Detroit Edison deferred approximately $24 million of CTA in 2008 as a regulatory asset and capitalized $2 million. The recovery of these costs was provided for by the MPSC in the order approving the settlement in the show cause proceeding and in the December 23, 2008 MPSC rate order. Detroit Edison amortized prior year deferred CTA costs of $18 million in 2011, 2010 $18 million in 2009 and $16 million in 2008.2009. Amounts expensed are
recorded in Operation and maintenance expense on the Consolidated Statements of Operations. Deferred amounts are recorded in Regulatory assets on the Consolidated Statements of Financial Position.
NOTE 109 — REGULATORY MATTERS
Regulation
Detroit Edison is subject to the regulatory jurisdiction of the MPSC, which issues orders pertaining to rates, recovery of certain costs, including the costs of generating facilities and regulatory assets, conditions of service, accounting and operating-related matters. Detroit Edison is also regulated by the FERC with respect to financing authorization and wholesale electric activities. Regulation results in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses.
39
Regulatory Assets and Liabilities
Detroit Edison is required to record regulatory assets and liabilities for certain transactions that would have been treated as revenue or expense in non-regulated businesses. Continued applicability of regulatory accounting treatment requires that rates be designed to recover specific costs of providing regulated services and be charged to and collected from customers. Future regulatory changes or changes in the competitive environment could result in the discontinuance of this accounting treatment for regulatory assets and liabilities for some or all of our businesses and may require the write-off of the portion of any regulatory asset or liability that was no longer probable of recovery through regulated rates. Management believes that currently available facts support the continued use of regulatory assets and liabilities and that all regulatory assets and liabilities are recoverable or refundable in the current rate environment.
The following are balances and a brief description of the regulatory assets and liabilities at December 31:
| | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | |
Assets | | | | | | | | |
| Recoverable pension and postretirement costs: | | | | | | | | |
| Pension | | $ | 1,329 | | | $ | 1,261 | |
| Postretirement costs | | | 472 | | | | 515 | |
| Asset retirement obligation | | | 336 | | | | 415 | |
| Recoverable income taxes related to securitized regulatory assets | | | 400 | | | | 476 | |
| Deferred income taxes — Michigan Business Tax | | | 319 | | | | 343 | |
| Costs to achieve Performance Excellence Process | | | 118 | | | | 136 | |
| Choice incentive mechanism | | | 105 | | | | — | |
| Other recoverable income taxes | | | 85 | | | | 89 | |
| Unamortized loss on reacquired debt | | | 35 | | | | 38 | |
| Accrued PSCR revenue | | | 52 | | | | — | |
| Enterprise Business Systems costs | | | 21 | | | | 24 | |
| Recoverable restoration expense | | | 19 | | | | — | |
| Electric Customer Choice implementation costs | | | — | | | | 18 | |
| Other | | | 44 | | | | 18 | |
| | | | | | | |
| | | | 3,335 | | | | 3,333 | |
| Less amount included in current assets | | | (58 | ) | | | — | |
| | | | | | | |
| | | $ | 3,277 | | | $ | 3,333 | |
| | | | | | | |
| | | | | | | | | |
| Securitized regulatory assets | | $ | 729 | | | $ | 870 | |
| | | | | | | |
| | | | | | | | | |
Liabilities | | | | | | | | |
| Asset removal costs | | $ | 132 | | | $ | 157 | |
| Deferred income taxes — Michigan Business Tax | | | 362 | | | | 367 | |
| Renewable energy | | | 125 | | | | 32 | |
| Refundable self implemented rates | | | 27 | | | | 27 | |
| Refundable revenue decoupling | | | 47 | | | | — | |
| Refundable costs under PA 141 | | | 33 | | | | 27 | |
| Refundable restoration expense | | | 15 | | | | 15 | |
| Accrued PSCR refund | | | — | | | | 14 | |
| Fermi 2 refueling outage | | | 3 | | | | 13 | |
| Pension equalization mechanism | | | — | | | | 75 | |
| Other | | | 30 | | | | 11 | |
| | | | | | | |
| | | | 774 | | | | 738 | |
| Less amount included in current liabilities | | | (60 | ) | | | (27 | ) |
| | | | | | | |
| | | $ | 714 | | | $ | 711 | |
| | | | | | | |
|
| | | | | | | |
| (in Millions) | 2011 | | 2010 |
| Assets | | | |
| Recoverable pension and postretirement costs: | | | |
| Pension | $ | 1,656 |
| | $ | 1,329 |
|
| Postretirement costs | 582 |
| | 472 |
|
| Asset retirement obligation | 420 |
| | 336 |
|
| Recoverable income taxes related to securitized regulatory assets | 316 |
| | 400 |
|
| Recoverable Michigan income taxes | 270 |
| | 319 |
|
| Choice incentive mechanism | 166 |
| | 105 |
|
| Accrued PSCR revenue | 147 |
| | 52 |
|
| Cost to achieve Performance Excellence Process | 100 |
| | 118 |
|
| Other recoverable income taxes | 81 |
| | 85 |
|
| Recoverable restoration expense | 58 |
| | 19 |
|
| Unamortized loss on reacquired debt | 36 |
| | 35 |
|
| Enterprise Business Systems costs | 18 |
| | 21 |
|
| Other | 40 |
| | 44 |
|
| | 3,890 |
| | 3,335 |
|
| Less amount included in current assets | (272 | ) | | (58 | ) |
| | $ | 3,618 |
| | $ | 3,277 |
|
| Securitized regulatory assets | $ | 577 |
| | $ | 729 |
|
| Liabilities | | | |
| Renewable energy | $ | 192 |
| | $ | 125 |
|
| Refundable revenue decoupling | 127 |
| | 47 |
|
| Asset removal costs | 73 |
| | 132 |
|
| Energy Optimization | 24 |
| | 21 |
|
| Low Income Energy Efficiency Fund | 23 |
| | — |
|
| Fermi 2 refueling outage | 23 |
| | 3 |
|
| Refundable uncollectible expense | 13 |
| | — |
|
| Refundable Michigan income taxes | — |
| | 362 |
|
| Refundable costs under PA 141 | — |
| | 33 |
|
| Refundable self implemented rates | — |
| | 27 |
|
| Refundable restoration expense | — |
| | 15 |
|
| Other | 6 |
| | 9 |
|
| | 481 |
| | 774 |
|
| Less amount included in current liabilities | (27 | ) | | (60 | ) |
| | $ | 454 |
| | $ | 714 |
|
As noted below, regulatory assets for which costs have been incurred have been included (or are expected to be included, for costs incurred subsequent to the most recently approved rate case) in Detroit Edison’s rate base, thereby providing a return on invested costs. Certain regulatory assets do not result from cash expenditures and therefore do not represent investments included in rate base or have offsetting liabilities that reduce rate base.
40
ASSETS
• | | Recoverable pension and postretirement costs— In 2007, the Company adopted ASC 715 (SFAS No. 158) which required, among other things, the recognition in other comprehensive income of the actuarial gains or losses and the prior service costs that arise during the period but that are not immediately recognized as components of net periodic benefit costs. The Company records the charge related to the additional liability as a regulatory asset since the traditional rate setting process allows for the recovery of pension and postretirement costs. The asset will reverse as the deferred items are recognized as benefit expenses in net income. (1) |
|
• | | Asset retirement obligation— This obligation is primarily for Fermi 2 decommissioning costs. The asset captures the timing differences between expense recognition and current recovery in rates and will reverse over the remaining life of the related plant. (1) |
|
• | | Recoverable income taxes related to securitized regulatory assets— Receivable for the recovery of income taxes to be paid on the non-bypassable securitization bond surcharge. A non-bypassable securitization tax surcharge recovers the income tax over a fourteen-year period ending 2015. |
|
• | | Deferred income taxes — Michigan Business Tax (MBT)— In July 2007, the MBT was enacted by the State of Michigan. State deferred tax liabilities were established for the Company’s utilities, and offsetting regulatory assets were recorded as the impacts of the deferred tax liabilities will be reflected in rates as the related taxable temporary differences reverse and flow through current income tax expense. (1) |
|
• | | Cost to achieve Performance Excellence Process (PEP)— The MPSC authorized the deferral of costs to implement the PEP. These costs consist of employee severance, project management and consultant support. These costs will be amortized over a ten-year period beginning with the year subsequent to the year the costs were deferred. |
|
• | | Choice incentive mechanism— Receivable for non-fuel revenues lost as a result of fluctuations in electric Customer Choice sales. |
|
• | | Other recoverable income taxes— Income taxes receivable from Detroit Edison’s customers representing the difference in property-related deferred income taxes and amounts previously reflected in Detroit Edison’s rates. This asset will reverse over the remaining life of the related plant. (1) |
|
• | | Unamortized loss on reacquired debt— The unamortized discount, premium and expense related to debt redeemed with a refinancing are deferred, amortized and recovered over the life of the replacement issue. |
|
• | | Accrued PSCR revenue— Receivable for the temporary under-recovery of and a return on fuel and purchased power costs incurred by Detroit Edison which are recoverable through the PSCR mechanism. |
|
• | | Enterprise Business Systems (EBS) costs— The MPSC approved the deferral and amortization over 10 years beginning in January 2009 of EBS costs that would otherwise be expensed. |
|
• | | Recoverable restoration expense— Receivable for the MPSC approved restoration expenses tracking mechanism that tracks the difference between actual restoration expense and the amount provided for in base rates, recognized pursuant to MPSC authorization. |
|
• | | Electric Customer Choice implementation costs— PA 141 permits, after MPSC authorization, the recovery of and a return on costs incurred associated with the implementation of the electric Customer Choice program. |
|
• | | Securitized regulatory assets— The net book balance of the Fermi 2 nuclear plant was written off in 1998 and an equivalent regulatory asset was established. In 2001, the Fermi 2 regulatory asset and certain other regulatory assets were securitized pursuant to PA 142 and an MPSC order. A non-bypassable securitization bond surcharge recovers the securitized regulatory asset over a fourteen-year period ending in 2015. |
Recoverable pension and postretirement costs — Accounting rules for pension and postretirement benefit costs require, among other things, the recognition in other comprehensive income of the actuarial gains or losses and the prior service costs that arise during the period but that are not immediately recognized as components of net periodic benefit costs. The Company records the impact of actuarial gains and losses and prior service costs as a Regulatory asset since the traditional rate setting process allows for the recovery of pension and postretirement costs. The asset will reverse as the deferred items are amortized and recognized as components of net periodic benefit costs. (1)
Asset retirement obligation — This obligation is primarily for Fermi 2 decommissioning costs. The asset captures the timing differences between expense recognition and current recovery in rates and will reverse over the remaining life of the related plant.(1)
Recoverable income taxes related to securitized regulatory assets — Receivable for the recovery of income taxes to be paid on the non-bypassable securitization bond surcharge. A non-bypassable securitization tax surcharge recovers the income tax over a fourteen-year period ending 2015.
Recoverable Michigan income taxes —In July 2007, the MBT was enacted by the State of Michigan. A State deferred tax liability was established, and an offsetting regulatory asset was recorded as the impact of the deferred tax liability will be reflected in rates as the related taxable temporary difference reverses and flows through current income tax expense. In May 2011, the MBT was repealed and the MCIT was enacted. The regulatory asset was remeasured to reflect the impact of the MCIT tax rate.(1)
Choice incentive mechanism (CIM) — Receivable for non-fuel revenues lost as a result of fluctuations in electric Customer Choice sales. The CIM was terminated in the October 20, 2011 MPSC order issued to Detroit Edison.
Accrued PSCR revenue — Receivable for the temporary under-recovery of and a return on fuel and purchased power costs incurred by Detroit Edison which are recoverable through the PSCR mechanism.
Cost to achieve Performance Excellence Process (PEP) — The MPSC authorized the deferral of costs to implement the PEP. These costs consist of employee severance, project management and consultant support. These costs are amortized over a ten-year period beginning with the year subsequent to the year the costs were deferred.
Other recoverable income taxes — Income taxes receivable from Detroit Edison’s customers representing the difference in property-related deferred income taxes and amounts previously reflected in Detroit Edison’s rates. This asset will reverse over the remaining life of the related plant.(1)
Recoverable restoration expense — Receivable for the MPSC approved restoration expense tracking mechanism that tracks the difference between actual restoration expense and the amount provided for in base rates, recognized pursuant to MPSC authorization. The restoration expense tracking mechanism was terminated in the October 20, 2011 MPSC order issued to Detroit Edison.
Unamortized loss on reacquired debt — The unamortized discount, premium and expense related to debt redeemed with a refinancing are deferred, amortized and recovered over the life of the replacement issue.
Enterprise Business Systems (EBS) costs — The MPSC approved the deferral and amortization over 10 years beginning in January 2009 of EBS costs that would otherwise be expensed.
Securitized regulatory assets — The net book balance of the Fermi 2 nuclear plant was written off in 1998 and an equivalent regulatory asset was established. In 2001, the Fermi 2 regulatory asset and certain other regulatory assets were securitized pursuant to PA 142 and an MPSC order. A non-bypassable securitization bond surcharge recovers the securitized regulatory asset over a fourteen-year period ending in 2015.
| | |
| (1) | | Regulatory assets not earning a return. |
41
LIABILITIES
LIABILITIESRenewable energy — Amounts collected in rates in excess of renewable energy expenditures.
• | | Asset removal costs— The amount collected from customers for the funding of future asset removal activities. |
|
• | | Deferred income taxes — Michigan Business Tax —In July 2007, the MBT was enacted by the State of Michigan. State deferred tax assets were established for the Company’s utilities, and offsetting regulatory liabilities were recorded as the impacts of the deferred tax assets will be reflected in rates. |
|
• | | Renewable energy —Amounts collected in rates in excess of renewable energy expenditures. |
|
• | | Refundable self implemented rates —Amounts refundable to customers for base rates implemented in excess of amounts provided for in January 2010 Detroit Edison MPSC order. |
|
• | | Refundable revenue decoupling —Amounts refundable to Detroit Edison customers for the change in revenue resulting from the difference between actual average sales per customer compared to the base level of average sales per customer established by the MPSC. |
|
• | | Refundable costs under PA 141 —Detroit Edison’s 2007 CIM reconciliation and allocation resulted in the elimination of Regulatory Asset Recovery Surcharge (RARS) balances for commercial and industrial customers. RARS revenues received that exceed the regulatory asset balances are required to be refunded to the affected classes. |
|
• | | Refundable restoration expense —Amounts refundable for the MPSC approved restoration expenses tracking mechanism that tracks the difference between actual restoration expense and the amount provided for in base rates, recognized pursuant to the MPSC authorization. |
|
• | | Accrued PSCR refund— Liability for the temporary over-recovery of and a return on power supply costs and transmission costs incurred by Detroit Edison which are recoverable through the PSCR mechanism. |
|
• | | Fermi 2 refueling outage— Accrued liability for refueling outage at Fermi 2 pursuant to MPSC authorization. |
|
• | | Pension equalization mechanism— Pension expense refundable to customers representing the difference created from volatility in the pension obligation and amounts recognized pursuant to MPSC authorization. |
Refundable revenue decoupling — Amounts refundable to Detroit Edison customers for the change in revenue resulting from the difference between actual average sales per customer compared to the base level of average sales per customer established by the MPSC.
Asset removal costs — The amount collected from customers for the funding of future asset removal activities.
Energy Optimization (EO) - The EO plan application is designed to help each customer class reduce their electric usage by: 1) building customer awareness of energy efficiency options and 2) offering a diverse set of programs and participation options that result in energy savings for each customer class.
Low Income Energy Efficiency Fund(LIEEF) — Escrow of LIEEF funds collected as ordered by the MPSC pursuant to July 2011 Michigan Court of Appeals decision.
Fermi 2 refueling outage — Accrued liability for refueling outage at Fermi 2 pursuant to MPSC authorization.
Refundable uncollectible expense(UETM) —Liability for the MPSC approved uncollectible expense tracking mechanism that tracks the difference in the fluctuation in uncollectible accounts and amounts recognized pursuant to the MPSC authorization. The UETM was terminated in the October 20, 2011 MPSC order issued to Detroit Edison.
Refundable Michigan income taxes — In July 2007, the MBT was enacted by the State of Michigan. State deferred tax assets were established for the Company's utilities, and offsetting regulatory liabilities were recorded as the impacts of the deferred tax assets will be reflected in rates. In May 2011, the MBT was repealed and the MCIT was enacted. The state deferred tax assets were eliminated under the MCIT and related regulatory liabilities were remeasured to zero.
Refundable costs under PA 141 — Detroit Edison’s 2007 CIM reconciliation and allocation resulted in the elimination of Regulatory Asset Recovery Surcharge (RARS) balances for commercial and industrial customers. RARS revenues received that exceed the regulatory asset balances are required to be refunded to the affected classes.
Refundable self implemented rates — Amounts refundable to customers for base rates implemented in excess of amounts authorized in MPSC orders.
Refundable restoration expense — Amounts refundable for the MPSC approved restoration expense tracking mechanism that tracks the difference between actual restoration expense and the amount provided for in base rates, recognized pursuant to the MPSC authorization. The restoration expense tracking mechanism was terminated in the October 20, 2011 MPSC order issued to Detroit Edison.
2010 Electric Rate Case Filing
Detroit Edison filed a rate case on October 29, 2010 based on a projected twelve-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’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.
2009 Electric Rate Case Filing
On January 11, 2010,October 20, 2011, the MPSC issued an order in Detroit Edison’s January 26, 2009Edison's October 29, 2010 rate case filing. The MPSC approved an annual revenue increase of $217 million or a 4.8% increase in Detroit Edison’s annual revenue requirement for 2010.$ 175 million. Included in the approved increase in revenues was a return on equity of 11%10.5% on an expected permanent capital structure of 49% equity and 51% debt capital structure. In addition, the order provided for continued application of adjustment mechanisms for electric Customer Choice sales and expenses associated with restoration costs (storm and non-storm) and line clearance expenses and implementation of RDM and UETM mechanisms.
Since the final rate relief ordered was less than the Company’sdebt. Detroit Edison self-implemented a rate increase of $280$107 million effective on July 26, 2009,April 28, 2011. The MPSC stated the net revenue collected due to self-implementation be credited to the 2011 Choice Incentive Mechanism (CIM) regulatory asset, but the order did not define "net revenue." The company credited the CIM Regulatory Asset for its estimate of the net revenue from self-implementation of approximately $37 million. Detroit Edison petitioned the MPSC ordered refunds for a rehearing and clarification of several issues in the period the self-implemented rates were in effect.October 2011 MPSC order. On December 21, 2010,20, 2011, the MPSC issued a rehearing order on selected issues, revising the annual revenue increase to $188 million. The rehearing order also affirmed the MPSC's decision to terminate the uncollectible expense tracker mechanism, but deferred ruling on other matters included in Detroit Edison's petition.
Other key aspects of the October 20, 2011 MPSC order include the following:
adopt a new Revenue Decoupling Mechanism (RDM) effective April 1, 2012, that will compare actual revenue (excluding the impacts of weather) by rate class with the base established in this rate case. The RDM has an annual collar of 1.5% in the first year and 3% in the second and subsequent years. The RDM established in the previous rate case, which considered the impact of weather, was terminated effective October 31, 2011. Therefore, there will be no RDM in place from November 2011 through March 2012;
recognition of the expiration of a wholesale contract. Since the expiration of the wholesale contract was not until December 31, 2011, the MPSC required Detroit Edison to calculate a customer credit for each kWh sold under the wholesale contract from October 29, 2011 through December 31, 2011, with the credit to be applied in its next PSCR reconciliation;
the Restoration Expense Tracking Mechanism, Line Clearance Recovery Mechanism, Uncollectible Expense Tracking Mechanism and CIM are terminated as of the date of the order;
due to uncertainty resulting from the Michigan Court of Appeals overturning collection of the Low Income Energy Efficiency Fund (LIEEF), the MPSC required the continued collection of LIEEF amounts in base rates and placement into escrow pending further orders by the MPSC;
approval of Detroit Edison's proposal to reduce the Nuclear Decommissioning Surcharge by approximately $20 million annually; and
implementation of lower depreciation rates previously approved in a June 2011 MPSC order.
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 authorizing this refund to be applied as credits to customer bills
42
during the January 2011 billing period.reducing Detroit Edison has a refund liability of approximately $27 million, including interest, at December 31, 2010 representing the refund due customers.
2009 Detroit Edison Depreciation Filing
In 2007, the MPSC ordered Michigan utilities to file depreciation studies using the current method, an approach that considers the time value of money and an inflation adjusted method proposed by the Company that removes excess escalation. In compliance with the MPSC order, Detroit Edison filed its ordered depreciation studies in November 2009. The various required depreciation studies indicateEdison's composite depreciation rates from 3.05%3.33% to 3.54%. The Company has proposed no change to its current composite depreciation rate3.06%, effective for accounting and ratemaking purposes, the day after the issuance of 3.33%. Anthe MPSC order is expected in the second quarter of 2011.2010 rate case.
Renewable Energy Plan
In March 2009, Detroit Edison filed its Renewable Energy Plan with the MPSC as required under Michigan Public Act 295 of 2008. The Renewable Energy Plan application requests authority to recover approximately $35 million of additional revenue in 2009. The proposed revenue increase is necessary in order 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. An MPSC order was issued in June 2009 approving the renewable energy plan and customer surcharges. The Renewable Energy Plan surcharges became effective in September 2009. (REP)
In August 2010, Detroit Edison filed its reconciliation for the 2009 plan year indicating that the 2009 actual renewable plan revenues and costs approximated the related surcharge revenues and cost of the filed plan. An MPSC order is expected in the first quarter of 2012.
In June 2011, Detroit Edison filed an amended REP with the MPSC requesting authority to continue to recover approximately $100 million of surcharge revenues. The proposed revenues are necessary in order to continue to properly implement Detroit Edison's 20-year REP, 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. On December 20, 2011, the MPSC issued an order approving the amended REP and authorizing the continuation of the surcharges.
In August 2011, Detroit Edison filed its reconciliation for the 2010 plan year indicating that the 2010 actual renewable plan revenues and costs approximated the related surcharge revenues and cost of the filed plan. An MPSC order is expected in the third quarter of 2011.2012.
Energy Optimization (EO) Plans
In March 2009,April 2011, Detroit Edison filed an application for approval of its reconciliation for 2010 EO plan expenses. Specifically, Detroit Edison's EO reconciliation includes a cumulative $21 million net over-recovery at year end 2010 for the 2010 EO plan. In November 2011, the MPSC approved a settlement agreement for Detroit Edison which authorized the over-recovery balances be included in the 2011 reconciliations.
In September 2011, Detroit Edison filed a biennial EO Plan with the MPSC as required under Michigan Public Act 295 of 2008. The EO Plan application is designed to help each customer class reduce their electric usage by: (1) building customer awareness of energy efficiency options and (2) offering a diverse set of programs and participation options that result in energy savings for each customer class. In March 2010,required. Detroit Edison filed an amended EO Plan with the MPSC. Detroit Edison’s amendedEdison's EO Plan application proposed the recovery of EO expenditures for the period 2010-20152012-2015 of $406$294 million and further requested approval of surcharges to recover these costs, including a financial incentive mechanism. The MPSC approved the amended EO Plan and the surcharge and tariff sheets reflecting the exclusion of the financial incentive mechanism. The disposition of the financial incentive mechanism is expected to be addressed in the EO reconciliation cases. In April 2010, Detroit Edison filed a reconciliation for the 2009 plan year. The Detroit Edison reconciliation included $3.2 million in overrecovery, net of $3 million in incentives. On February 8, 2011, the MPSC issued an order approving the 2009 EO reconciliation filing, including financial incentives.costs.
Detroit Edison Restoration Expense Tracker Mechanism (RETM) and Line Clearance Tracker (LCT) Reconciliation
In March 2010, Detroit Edison filed an application with the MPSC for approval of the reconciliation of its 2009 RETM and LCT. The Company’sCompany's 2009 restoration and line clearance expenses arewere less than the amount provided in rates. Accordingly, Detroit Edison has proposed a refund in the amount of approximately $16 million, including interest. On May 10, 2011, the MPSC issued an order approving the proposed refund and Detroit Edison began applying credits to customer bills in July 2011.
In March 2011, Detroit Edison filed an application with the MPSC for approval of the reconciliation of its 2010 RETM and LCT. The Company's 2010 restoration expenses were higher than the amount provided in rates. Accordingly, Detroit Edison requested recovery of $19.5 million. In October 2011, the MPSC approved a settlement agreement reconciling the RETM and approving the LCT report. The MPSC authorized surcharges to recover $19.5 million over a three-month period beginning November 1, 2011.
In January 2012, Detroit Edison filed an application with the MPSC for approval of the reconciliation of its 2011 RETM and LCT. The Company's 2011 restoration expenses were higher than the amount provided in rates. Accordingly, Detroit Edison requested net recovery of approximately $44 million.
Detroit Edison Revenue Decoupling Mechanism (RDM)
In May 2011, Detroit Edison filed an application with the MPSC for approval of its initial pilot RDM reconciliation for the period February 2010 through January 2011, requesting authority to refund to customers approximately $56 million, plus interest. This amount was accrued by Detroit Edison at December 31, 2011. There are various interpretations and alternative calculation methodologies relating to the pilot RDM refund calculation that could ultimately be adopted by the MPSC which may result in a range of customer refund amounts from $56 million to $140 million for this initial reconciliation filing under the pilot RDM.
In addition, Detroit Edison has accrued a pilot RDM liability for February 2011 through October 2011 of approximately $71 million, plus interest. Detroit Edison terminated the pilot RDM effective October 2011, and has requested a rehearing on this
issue asserting that for reconciliation purposes, the pilot RDM should have been considered terminated in April 2011, when Detroit Edison self-implemented rates, consistent with prior MPSC orders. An April 2011 termination would result in a decrease to the liability. However, there can be no assurance that Detroit Edison will prevail in this matter. Similar to the initial reconciliation case, there are various interpretations and alternative calculation methodologies that could be adopted which may result in a range of refund obligations in excess of the amount accrued. Considering these variables, the potential customer refund amount could range from $10 million to $130 million for the second and final pilot RDM period.
The primary uncertainties involved in the calculation methodologies of the pilot RDM for both reconciliation periods include customer class groupings and treatment of fixed customer charges. The Company believes that the calculation methodology used and the resulting refund estimates recorded follow the requirements and intent of the MPSC orders and represent the most probable amount of Detroit Edison's pilot RDM refund liability as of December 31, 2011. An MPSC order on the initial filing is expected in the second quarterfirst half of 2011.2012. Detroit Edison is required to file an application with the MPSC for approval of its RDM reconciliation for the period February 2011 through October 2011 by May 2012. A newly designed RDM will be in effect beginning April 2012.
Detroit Edison Uncollectible Expense True-Up Mechanism (UETM)
In March 2010,2011, Detroit Edison filed an application with the MPSC for approval of its UETM for 20092010 requesting recovery ofauthority to refund approximately $4.5$7 million consisting of costs related to 20092010 uncollectible expense and associated carrying charges.expense. In August 2010,2011, the MPSC determined thatapproved a settlement agreement for the 2010 UETM was effective with its January 2010 order in Detroit Edison’s rate case and dismissed the request for UETM expenses for 2009.authorizing a refund of approximately $7 million to be applied as credits to customer bills beginning September 1, 2011.
43
Detroit Edison Regulatory Asset Recovery Surcharge (RARS) ReconciliationChoice Incentive Mechanism (CIM)
In April 2010,March 2011, Detroit Edison filed an application with the MPSC for approval of the finalits CIM reconciliation for 2010 requesting recovery of its RARS.approximately $105 million. On January 20,December 6, 2011, the MPSC issued an orderapproved a settlement agreement for the 2010 CIM authorizing a refundsurcharges of approximately $28$105 million including interest,effective on a service rendered basis for the 12-month period beginning January 1, 2012.
On January 17, 2012, Detroit Edison filed an application with the MPSC for approval of its CIM reconciliation for the period from January 1, 2011 through October 28, 2011. The termination date of the CIM pursuant to bethe October 20, 2011 MPSC rate order is October 20, 2011. Detroit Edison requested recovery of approximately $73 million, net of the self implementation credit applied as credits to customer bills during the February 2011 billing period.per MPSC order.
Power Supply Cost Recovery 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 and related transportation 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
2010 PSCR Year - In March 2011, Detroit Edison’sEdison filed the 2010 PSCR reconciliation filing currently pending withcalculating a net under-recovery of $52.6 million that includes an over-recovery of $15.6 million for the MPSC:
| | | | | | |
| | | | Net Over-recovery, | | PSCR Cost of |
PSCR Year | | Date Filed | | including interest | | Power Sold |
2009 | | March 2010 | | $15.6 million | | $1.1 billion |
2010 Plan Year—2009 PSCR year. In September 2009, Detroit Edison submitted itsaddition, the 2010 PSCR plan case seeking approvalreconciliation includes an under-recovery of a levelized PSCR factor of 5.64 mills/kWh below$7.1 million for the amount included in base rates for all PSCR customers. The filing supports a 2010 power supply expense forecast of $1.2 billion. Also included in the filing is a request for approvalreconciliation of the Company’s expense associated with2007-2008 Pension Equalization Mechanism, and an over-refund of $3.8 million for the use2011 refund of urea in the selective catalytic reduction units at Monroe power plant as well as a request for approval of a contract for capacity and energy associated with a wind energy project. The Company has also requested authorityself-implemented rate increase related to recover transfer prices for renewable energy, coke oven gas expense and other potential expenses.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. An MPSC order was issued on December 6, 2011 approving the 2011 PSCR plan case as filed.
2012 Plan Year - In September 2011, Detroit Edison filed its 2012 PSCR plan case seeking approval of a levelized PSCR factor of 4.18 mills/kWh above the amount included in base rates for all PSCR customers. The filing supports a total power supply expense forecast of $1.4 billion. The plan also includes approximately $158 million for the recovery of its projected 2011 PSCR under-recovery.
Low Income Energy Efficiency Fund
The Customer Choice and Electricity Reliability Act of 2000 authorized the creation of the LIEEF administered by the MPSC. The purpose of the fund is to provide shut-off and other protection for low income customers and to promote energy efficiency by all customer classes. Detroit Edison collects funding for the LIEEF as part of its base rates and remits the funds to the State of Michigan monthly. In July 2011, the Michigan Court of Appeals issued a decision reversing the portion of MichCon's June 2010 MPSC rate order that permitted MichCon to recover funding for the LIEEF in base rates. In response to the Court of Appeals decision, Detroit Edison ceased remitting payments for LIEEF funding to the State of Michigan. In October 2011, the MPSC issued an order directing Detroit Edison to continue collecting funds for LIEEF in rates and to escrow the collected funds pending further order by the MPSC. On January 26, 2012, the MPSC issued an order directing Detroit Edison to file a comprehensive plan by March 1, 2012 for refunding previously escrowed LIEEF funds of $23 million. On December 20, 2011, The Vulnerable Household Warmth Fund (VHWF) was created under Michigan law. The purpose of the fund is to provide payment or partial payment of bills for electricity, natural gas, propane, heating oil, or any other type of fuel used to heat the primary residence of a vulnerable customer during the 2011-2012 heating season. Effective with the new law, Detroit Edison is to contribute the amount collected in its base rates, previously remitted for the LIEEF, to the new VHWF. The monthly payments into the VHWF will cease on the earlier of September 30, 2012 or when $48 million has been is accumulated in the fund from payments by major Michigan electric and gas utilities.
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 1110 — INCOME TAXES
Income Tax Summary
We are part of the consolidated federal income tax return of DTE Energy. The federal income tax expense for Detroit Edison is determined on an individual company basis with no allocation of tax benefits or expenses from other affiliates of DTE Energy. We had an income tax receivable of $48 million at December 31, 2011 and $152 million at December 31, 2010 and $75 million at December 31, 2009 due from DTE Energy.
44
Total income tax expense varied from the statutory federal income tax rate for the following reasons:
| | | | | | | | | | | | | |
| (Dollars in Millions) | | 2010 | | | 2009 | | | 2008 | |
| Income tax expense at 35% statutory rate | | $ | 249 | | | $ | 211 | | | $ | 181 | |
| | | | | | | | | | | | | |
| Investment tax credits | | | (6 | ) | | | (6 | ) | | | (6 | ) |
| Depreciation | | | 3 | | | | 3 | | | | 3 | |
| Employee Stock Ownership Plan dividends | | | (3 | ) | | | (4 | ) | | | (2 | ) |
| Medicare Part D subsidy | | | — | | | | (5 | ) | | | (4 | ) |
| Domestic production activities deduction | | | (6 | ) | | | (5 | ) | | | (2 | ) |
| State and other income taxes, net of federal benefit | | | 40 | | | | 36 | | | | 19 | |
| Other, net | | | (7 | ) | | | (2 | ) | | | (3 | ) |
| | | | | | | | | | |
| Total | | $ | 270 | | | $ | 228 | | | $ | 186 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Effective income tax rate | | | 38.0 | % | | | 37.7 | % | | | 36.0 | % |
| | | | | | | | | | |
|
| | | | | | | | | | | |
| (Dollars in Millions) | 2011 | | 2010 | | 2009 |
| Income tax expense at 35% statutory rate | $ | 246 |
| | $ | 249 |
| | $ | 211 |
|
| Investment tax credits | (6 | ) | | (6 | ) | | (6 | ) |
| Depreciation | 3 |
| | 3 |
| | 3 |
|
| Employee Stock Ownership Plan dividends | (3 | ) | | (3 | ) | | (4 | ) |
| Medicare Part D subsidy | — |
| | — |
| | (5 | ) |
| Domestic production activities deduction | (6 | ) | | (6 | ) | | (5 | ) |
| State and other income taxes, net of federal benefit | 39 |
| | 40 |
| | 36 |
|
| Other, net | (6 | ) | | (7 | ) | | (2 | ) |
| Income Tax Expense | $ | 267 |
| | $ | 270 |
| | $ | 228 |
|
| Effective income tax rate | 38.0 | % | | 38.0 | % | | 37.7 | % |
Components of income tax expense (benefits) were as follows:
| | | | | | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | | | 2008 | |
| Current income taxes Federal | | $ | (89 | ) | | $ | 168 | | | $ | 66 | |
| State and other income tax expense | | | 37 | | | | 45 | | | | 30 | |
| | | | | | | | | | |
| Total current income taxes | | | (52 | ) | | | 213 | | | | 96 | |
| | | | | | | | | | |
| Deferred income taxes Federal | | | 297 | | | | 4 | | | | 91 | |
| State and other income tax expense | | | 25 | | | | 11 | | | | (1 | ) |
| | | | | | | | | | |
| Total deferred income taxes | | | 322 | | | | 15 | | | | 90 | |
| | | | | | | | | | |
| Total | | $ | 270 | | | $ | 228 | | | $ | 186 | |
| | | | | | | | | | |
|
| | | | | | | | | | | |
| (in Millions) | 2011 | | 2010 | | 2009 |
| Current income tax expense (benefit) | | | | | |
| Federal | $ | 15 |
| | $ | (89 | ) | | $ | 168 |
|
| State and other income tax | 21 |
| | 37 |
| | 45 |
|
| Total current income taxes | 36 |
| | (52 | ) | | 213 |
|
| Deferred income tax expense (benefit) | | | | | |
| Federal | 193 |
| | 297 |
| | 4 |
|
| State and other income tax | 38 |
| | 25 |
| | 11 |
|
| Total deferred income taxes | 231 |
| | 322 |
| | 15 |
|
| Total | $ | 267 |
| | $ | 270 |
| | $ | 228 |
|
Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts in the financial statements. Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related assets or liabilities. Deferred tax assets and liabilities not related to assets or liabilities are classified according to the expected reversal date of the temporary differences. Consistent with rate making treatment, deferred taxes are offset in the table below for temporary differences which have related regulatory assets and liabilities.
Deferred tax assets (liabilities) were comprised of the following at December 31:
| | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | |
| Property, plant and equipment | | $ | (1,819 | ) | | $ | (1,409 | ) |
| Securitized regulatory assets | | | (396 | ) | | | (474 | ) |
| Pension and benefits | | | 57 | | | | 103 | |
| Other comprehensive income | | | 10 | | | | 9 | |
| Other, net | | | (112 | ) | | | (76 | ) |
| | | | | | | |
| | | $ | (2,260 | ) | | $ | (1,847 | ) |
| | | | | | | |
| | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | |
| Deferred income tax liabilities | | $ | (3,175 | ) | | $ | (2,832 | ) |
| Deferred income tax assets | | | 915 | | | | 985 | |
| | | | | | | |
| | | $ | (2,260 | ) | | $ | (1,847 | ) |
| | | | | | | |
| | | | | | | | | |
| Current deferred income tax asset (included in Current Assets — Other) | | $ | — | | | $ | 24 | |
| Current deferred income tax liability (included in Current Liabilities — Other) | | | (25 | ) | | | — | |
| Long -term deferred income tax liabilities | | | (2,235 | ) | | | (1,871 | ) |
| | | | | | | |
| | | $ | (2,260 | ) | | $ | (1,847 | ) |
| | | | | | | |
|
| | | | | | | |
| (in Millions) | 2011 | | 2010 |
| Property, plant and equipment | $ | (2,285 | ) | | $ | (1,819 | ) |
| Securitized regulatory assets | (384 | ) | | (396 | ) |
| Pension and benefits | 67 |
| | 57 |
|
| Other comprehensive income | 15 |
| | 10 |
|
| Other, net | (182 | ) | | (112 | ) |
| | $ | (2,769 | ) | | $ | (2,260 | ) |
|
| | | | | | | |
| (in Millions) | 2011 | | 2010 |
| Deferred income tax liabilities | $ | (3,377 | ) | | $ | (3,175 | ) |
| Deferred income tax assets | 608 |
| | 915 |
|
| | $ | (2,769 | ) | | $ | (2,260 | ) |
| Current deferred income tax liability (included in Current Liabilities — Other) | $ | (68 | ) | | $ | (25 | ) |
| Long-term deferred income tax liabilities | (2,701 | ) | | (2,235 | ) |
| | $ | (2,769 | ) | | $ | (2,260 | ) |
The above table excludes deferred tax liabilities associated with unamortized investment tax credits that are shown separately on the Consolidated Statements of Financial Position. Investment tax credits are deferred and amortized to income over the average life of the related property.
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Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | | | 2008 | |
| Balance at January 1 | | $ | 96 | | | $ | 70 | | | $ | 7 | |
| Additions for tax positions of current years | | | 6 | | | | 10 | | | | 72 | |
| Additions for tax positions of prior years | | | 1 | | | | 24 | | | | (9 | ) |
| Reductions for tax positions of prior years | | | — | | | | (8 | ) | | | — | |
| Settlements | | | (85 | ) | | | — | | | | — | |
| | | | | | | | | | |
| Balance at December 31 | | $ | 18 | | | $ | 96 | | | $ | 70 | |
| | | | | | | | | | |
Unrecognized |
| | | | | | | | | | | |
| (in Millions) | 2011 | | 2010 | | 2009 |
| Balance at January 1 | $ | 18 |
| | $ | 96 |
| | $ | 70 |
|
| Additions for tax positions of current years | 1 |
| | 6 |
| | 10 |
|
| Additions for tax positions of prior years | 45 |
| | 1 |
| | 24 |
|
| Reductions for tax positions of prior years | (5 | ) | | — |
| | (8 | ) |
| Settlements | — |
| | (85 | ) | | — |
|
| Balance at December 31 | $ | 59 |
| | $ | 18 |
| | $ | 96 |
|
The Company had $4 million and $3 million of unrecognized tax benefits at December 31, 2011 and at December 31, 2010, respectively, that, if recognized, would favorably impact our effective tax rate by $3 million.rate. During the next twelve months, it is reasonably possible that the Company will settle certain federal and state tax examinations and audits. As a result, the Company believes that it is possible that there will be a decrease in unrecognized tax benefits of up to $54 million within the next twelve months.
The Company recognizes interest and penalties pertaining to income taxes in Interest expense and Other expenses, respectively, on its Consolidated Statements of Operations. Accrued interest pertaining to income taxes totaled $1$2 million and $6$1 million at December 31, 20102011 and December 31, 2009,2010, respectively. The Company had no accrued penalties pertaining to income taxes. The Company recognized $1 million for interest expense related to income taxes during 20102011 and $5 million for interest expense related to income taxes during 2009.2010.
In 2009, DTE Energy and its subsidiaries settled a federal tax audit for the 2004 through 2006 tax years. The resulting change to unrecognized tax benefits was not significant. In 2010, DTE Energy and its subsidiaries settled a federal tax audit for the 2007 and 2008 tax years, which resulted in the recognition of $85 million of unrecognized tax benefits by Detroit Edison. The Company’s U.S.Company's federal income tax returns for years 2009 and subsequent years remain subject to examination by the IRS. The Company’sCompany's Michigan Business Tax for the year 2008 and subsequent years is subject to examination by the State of Michigan. The Company also files tax returns in numerous state and local jurisdictions with varying statutes of limitation.
Michigan BusinessCorporate Income Tax (MCIT)
In July 2007,
On May 25, 2011, the Michigan Business Tax (MBT) was enacted by the State of Michigan to replacerepealed and the Michigan Single BusinessCorporate Income Tax (MSBT)was enacted effective January 1, 2008.2012. The MBT is comprised ofnew MCIT subjects corporations with business activity in Michigan to a 6 percent tax rate on an apportioned income tax base and eliminates the modified gross receipts tax and nearly all credits available under the old MBT. The MCIT also eliminated the future deductions allowed under MBT that enabled companies to establish a one-time deferred tax asset upon enactment of 0.8 percent and an apportioned business incomethe MBT to offset deferred tax liabilities that resulted from enactment of 4.95 percent. The MBT provides credits for Michigan business investment, compensation, and research and development. Legislation was also enacted, in 2007, by the StateMBT.
As a result of Michigan creating a deduction for businesses that realize an increase in theirthe enactment of the MCIT, the net state deferred tax liability duewas remeasured to reflect the impact of the new MCIT tax rate on cumulative temporary differences expected to reverse after the effective date. The net impact of this remeasurement was a decrease in deferred income tax liabilities of $30 million. The $30 million decrease in deferred tax liabilities was offset against the regulatory asset established upon the enactment of the MBT. The MBT is accounted for as an income tax.
The MBT consolidated deferred tax liability balance is $354 million as of December 31, 2010 and is reported netDue to the elimination of the related federalfuture tax benefit. Thedeductions allowed under the MBT, the one-time MBT deferred tax asset balance is $362 million as of December 31, 2010 and is reported netthat was established upon the enactment of the related federalMBT has been remeasured to zero. The net impact of this remeasurement is a reduction of net deferred tax liability.assets of $342 million. The regulated asset balance is $319$342 million anddecrease in deferred tax assets was offset against the regulated liability balance is $362 million asregulatory liabilities established upon enactment of December 31, 2010 and is further discussedthe MBT
Consistent with the original establishment of these deferred tax assets (liabilities), no recognition of these non-cash transactions have been reflected in Note 10.the Consolidated Statements of Cash Flows.
NOTE 1211 — LONG-TERM DEBT
OurThe Company's long-term debt outstanding and weighted average interest rates(1) of debt outstanding at December 31 were:
| | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | |
Taxable Debt, Principally Secured | | | | | | | | |
| 5.5% due 2011 to 2038 | | $ | 2,915 | | | $ | 2,829 | |
Tax- Exempt Revenue Bonds (2) | | | | | | | | |
| 5.5% due 2011 to 2038 | | | 1,283 | | | | 1,263 | |
| | | | | | | |
| | | | 4,198 | | | | 4,092 | |
| Less amount due within one year | | | (152 | ) | | | (513 | ) |
| | | | | | | |
| | | $ | 4,046 | | | $ | 3,579 | |
| | | | | | | |
|
| | | | | | | |
| (in Millions) | 2011 | | 2010 |
| Taxable Debt, Principally Secured | | | |
| 5.3% due 2012 to 2041 | $ | 3,515 |
| | $ | 2,915 |
|
| Tax- Exempt Revenue Bonds (2) | | | |
| 5.1% due 2012 to 2038 | 893 |
| | 1,283 |
|
| | 4,408 |
| | 4,198 |
|
| Less amount due within one year | (303 | ) | | (152 | ) |
| | $ | 4,105 |
| | $ | 4,046 |
|
| | | | |
| Securitization Bonds | |
| | |
|
| 6.5% due 2012 to 2015 | $ | 643 |
| | $ | 793 |
|
| Less amount due within one year | $ | (164 | ) | | $ | (150 | ) |
| | $ | 479 |
| | $ | 643 |
|
46
| | | | | | | | | |
| (in Millions) | | 2010 | | | 2009 | |
Securitization Bonds | | | | | | | | |
| 6.5% due 2010 to 2015 | | $ | 793 | | | $ | 933 | |
| Less amount due within one year | | | (150 | ) | | | (140 | ) |
| | | | | | | |
| | | $ | 643 | | | $ | 793 | |
| | | | | | | |
| | |
| (1) | | Weighted average interest rates as of December 31, 20102011 are shown below the description of each category of debt. |
| |
| (2) | | Tax-Exempt Revenue Bonds are issued by a public body that loans the proceeds to Detroit Edison on terms substantially mirroring the Revenue Bonds. |
Debt Issuances
In 2010,2011, the Company issued or remarketed the following long-term debt:
(in Millions)
| | | | | | | | | | | | | | | | | |
| Month Issued | | Type | | | Interest Rate | | | Maturity | | Amount | |
| |
| August | | Senior Notes(1) | | | 3.45 | % | | | 2020 | | | $ | 300 | |
| September | | Senior Notes(1)(2) | | | 4.89 | % | | | 2020 | | | | 300 | |
| December | | Tax-Exempt Revenue Bonds(3) | | | 5.00 | % | | | 2030 | | | | 20 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | $ | 620 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | |
| Month Issued | Type | | Interest Rate |
| | Maturity | | Amount |
|
| April | Tax-Exempt Revenue Bonds (1) | | 2.35 | % | | 2024 |
| | $ | 31 |
|
| May | Mortgage Bonds (2) | | 3.90 | % | | 2021 |
| | 250 |
|
| September | Mortgage Bonds (3) | | 4.31 | % | | 2023 |
| | 102 |
|
| September | Mortgage Bonds (3) | | 4.46 | % | | 2026 |
| | 77 |
|
| September | Mortgage Bonds (3) | | 5.67 | % | | 2041 |
| | 46 |
|
| September | Tax-Exempt Revenue Bonds (4) | | 2.13 | % | | 2030 |
| | 82 |
|
| September | Mortgage Bonds (5) | | 4.50 | % | | 2041 |
| | 140 |
|
| | | | | | | | $ | 728 |
|
(1) These bonds were remarketed for a three-year term ending April 1, 2014. The final maturity of the issue is October 1, 2024.
(2) Proceeds were used for general corporate purposes.
| | |
(1) | | Proceeds were used to repay a portion of Detroit Edison’s $500 million 6.125% Senior Notes due October 1, 2010 and for general corporate purposes. |
|
(2) | | These bonds were priced in March 2010 in a private placement transaction which was closed and funded in September 2010. |
|
(3) | | Proceeds were used to finance the acquisition and construction of improvements to certain electrical generating facilities and pollution control equipment at Detroit Edison’s Monroe Power Plant. |
(3) Proceeds were used to retire callable tax-exempt revenue bonds and for general corporate purposes.
(4) These bonds were remarketed for a five year term ending September 1, 2016. The final maturity of the issue is September 1, 2030.
(5) Proceeds were used to retire approximately $140 million of callable tax-exempt revenue bonds and for general corporate purposes.
Debt Retirements and Redemptions
In 2010,2011, the following debt was retired:retired, through optional redemption or payment at maturity:
(in Millions)
| | | | | | | | | | | | | | | | | |
| Month Retired | | Type | | | Interest Rate | | | Maturity | | | Amount | |
| September | | Senior Notes(1) | | | 6.125 | % | | | 2010 | | | $ | 500 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | |
| Month Retired | Type | | Interest Rate | | Maturity | | Amount |
| May | Tax-Exempt Revenue Bonds | | 6.95 | % | | 2011 | | $ | 26 |
|
| September | Tax-Exempt Revenue Bonds | | 5.55 | % | | 2029 | | 118 |
|
| September | Tax-Exempt Revenue Bonds | | 5.65 | % | | 2029 | | 67 |
|
| September | Tax-Exempt Revenue Bonds | | 5.65 | % | | 2029 | | 40 |
|
| September | Tax-Exempt Revenue Bonds | | 5.45 | % | | 2029 | | 140 |
|
| | | | | | | | $ | 391 |
|
| | |
(1) | | These Senior Notes, maturing October 1, 2010, were optionally redeemed on September 30, 2010. |
The following table shows the scheduled debt maturities, excluding any unamortized discount or premium on debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | 2016 & | | |
| (in Millions) | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | thereafter | | Total |
| Amount to mature | | $ | 302 | | | $ | 467 | | | $ | 440 | | | $ | 470 | | | $ | 315 | | | $ | 3,003 | | | $ | 4,997 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2017 & | | |
| (in Millions) | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | thereafter | | Total |
| Amount to mature | $ | 303 |
| | $ | 263 |
| | $ | 304 |
| | $ | 210 |
| | $ | 151 |
| | $ | 3,185 |
| | $ | 4,416 |
|
Cross Default Provisions
Substantially all of the net properties of Detroit Edison are subject to the lien of its mortgage. Should Detroit Edison fail to timely pay its indebtedness under this mortgage, such failure may create cross defaults in the indebtedness of DTE Energy.
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NOTE 1312 — PREFERRED AND PREFERENCE SECURITIES
At December 31, 2010,2011, Detroit Edison had approximately 6.75 million shares of preferred stock with a par value of $100 per share and 30 million shares of preference stock with a par value of $1 per share authorized, with no shares issued.
NOTE 1413 — SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
In August 2010,October 2011, Detroit Edison, entered into an amended and restated $212$300 million two-year unsecured revolving credit agreement and a new $63 million three-yearfive-year unsecured revolving credit agreement with a syndicate of 2320 banks that may be used for general corporate borrowings, but areis intended to provide liquidity support for the Company’scompany's commercial paper program. No one bank provides more than 8.25%8.5% of the commitment in any facility. Borrowings under the facilitiesfacility are available at prevailing short-term interest rates.
Detroit Edison entered into a one year $40 million letter of credit facility in December 2011. The facility was terminated early in January 2012 following cancellation of the letter of credit that it supported.
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 subsidiaries, including capital lease obligations, hedge agreements and guarantees of third 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’ 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 December 31, 2010,2011, the total funded debt to total capitalization ratio for Detroit Edison was 0.52 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 outstanding short-term borrowings at December 31, 20102011 and 2009.2010.
NOTE 1514 — CAPITAL AND OPERATING LEASES
Lessee— The Company leases various assets under capital and operating leases, including coal cars,railcars, computers, vehicles and other equipment. The lease arrangements expire at various dates through 2023.
Future minimum lease payments under non-cancelable leases at December 31, 20102011 were:
| | | | | | | | | |
| | | Capital | | | Operating | |
| (in Millions) | | Leases | | | Leases | |
| 2011 | | $ | 7 | | | $ | 25 | |
| 2012 | | | 5 | | | | 23 | |
| 2013 | | | 5 | | | | 19 | |
| 2014 | | | 5 | | | | 15 | |
| 2015 | | | 5 | | | | 13 | |
| Thereafter | | | 3 | | | | 64 | |
| | | | | | | |
| Total minimum lease payments | | | 30 | | | $ | 159 | |
| | | | | | | | |
| Less imputed interest | | | 4 | | | | | |
| | | | | | | | |
| Present value of net minimum lease payments | | | 26 | | | | | |
| Less current portion | | | 6 | | | | | |
| | | | | | | | |
| Non-current portion | | $ | 20 | | | | | |
| | | | | | | | |
|
| | | | | | | |
| | Capital | | Operating |
| (in Millions) | Leases | | Leases |
| 2012 | $ | 4 |
| | $ | 28 |
|
| 2013 | 2 |
| | 23 |
|
| 2014 | 5 |
| | 18 |
|
| 2015 | 2 |
| | 17 |
|
| 2016 | — |
| | 16 |
|
| Thereafter | — |
| | 52 |
|
| Total minimum lease payments | 13 |
| | $ | 154 |
|
| Less imputed interest | 1 |
| | |
| Present value of net minimum lease payments | 12 |
| | |
| Less current portion | (3 | ) | | |
| Non-current portion | $ | 9 |
| | |
Rental expense for operating leases was $57 million in 2011, $44 million in 2010, and $48 million in 2009, and $39 million in 2008.2009.
NOTE 1615 — COMMITMENTS AND CONTINGENCIES
Environmental
Air— - Detroit Edison is subject to the EPA ozone and fine particulate 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, mercury, and mercuryother air pollution. The newThese rules will leadhave led to additional controls on fossil-fueled power plants to reduce nitrogen oxide, sulfur dioxide, mercury and mercuryother emissions. To comply with these requirements, Detroit Edison has spent approximately $1.5$1.7 billion through 2011. The
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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
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 onin 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
In certain limited circumstances, the Company enters into contractual guarantees. The Company may guarantee another entity’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.
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’s operations or financial statements in the periodperiods they are resolved.
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:
Assumptions used in determining the projected benefit obligation and net benefit costs are listed below:
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 $25$28 million and increased the accumulated benefit obligation by $242$247 million at December 31, 2010.2011. 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 $20$17 million and would have decreased the accumulated benefit obligation by $204$208 million at December 31, 2010.2011.
The process used in determining the long-term rate of return for assets and the investment approach for the other postretirement benefits plans is similar to those previously described for theits pension plans.
A detailed analysis of the changes in assets and liabilities that are reported in the Consolidated Statements of Cash Flows follows:
Supplementary cash and non-cash information for the years ended December 31 were as follows:
The Company has agreements with affiliated companies to sell energy for resale, purchase power, provide fuel supply services, and provide power plant operation and maintenance services. The Company has agreements with certain DTE Energy affiliates where we charge them for their use of the shared capital assets of the Company. A shared services company accumulates various corporate support services expenses and charges various subsidiaries of DTE Energy, including Detroit Edison.
Our accounts receivable from affiliated companies and accounts payable to affiliated companies are payable upon demand and are generally settled in cash within a monthly business cycle.
None.
See Item 8. Financial Statements and Supplementary Data for management’s evaluation of disclosure controls and procedures, its report on internal control over financial reporting, and its conclusion on changes in internal control over financial reporting.
None.