DTE Energy 2007 Annual Report Download - page 23

both the derivative and the underlying hedged exposure are recognized in earnings each period. Gains and losses from the ineffective
portion of any hedge are recognized in earnings immediately. For derivatives that do not qualify or are not designated for hedge
accounting, changes in the fair value are recognized in earnings each period.
Our primary market risk exposure is associated with commodity prices, credit and interest rates. We have risk management policies to
monitor and decrease market risks. We use derivative instruments to manage some of the exposure.
Commodity Price Risk
We have fixed-priced contracts for portions of our expected gas supply requirements through 2011. We may also sell forward storage
and transportation capacity contracts. These gas supply, firm transportation and storage contracts are designated and qualify for the
normal purchases and sales exemption and are therefore accounted for under the accrual method. Our commodity price risk is limited
due to the GCR mechanism. See Note 1.
Credit Risk
We are exposed to credit risk if our customers or counterparties do not comply with their contractual obligations. We maintain credit
policies that significantly minimize overall credit risk. These policies include an evaluation of potential customers’ and counterparties’
financial condition, credit rating, collateral requirements or other credit enhancements such as letters of credit or guarantees. We
generally use standardized agreements that allow the netting of positive and negative transactions associated with a single
counterparty.
The Company maintains a provision for credit losses based on factors surrounding the credit risk of its customers, historical trends,
and other information. Based on the Company’ s credit policies and its December 31, 2007 provision for credit losses, the Company’ s
exposure to counterparty nonperformance is not expected to result in material effects on the Company’ s financial statements.
Interest Rate Risk
We occasionally use treasury locks and other interest rate derivatives to hedge the risk associated with interest rate market volatility.
In 2004, we entered into an interest rate derivative to limit our sensitivity to market interest rate risk associated with the issuance of
long-term debt. Such instrument was designated as a cash flow hedge. We subsequently issued long-term debt and terminated the
hedge at a cost that is included in accumulated other comprehensive loss. Amounts recorded in other comprehensive loss will be
reclassified to interest expense as the related interest affects earnings through 2033.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by using various market data and other valuation techniques. The table below
shows the fair value relative to the carrying value for long-term debt securities. The carrying value of certain other financial
instruments, such as notes payable, customer deposits and notes receivable approximate fair value and are not shown. At December
31, 2007, we had approximately $120 million of securities insured by insurers. Since December 31, 2007, overall credit market
conditions have resulted in credit rating downgrades and may result in future credit rating downgrades for these insurers. The
Company does not expect the impact on interest rates or fair value to be material.
2007 2006
Fair Value Carrying Value Fair Value Carrying Value
Long-Term Debt $711 million $715 million $747 million $745 million
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Environmental Matters
Contaminated Sites — Prior to the construction of major interstate natural gas pipelines, gas for heating and other uses was
manufactured locally from processes involving coal, coke or oil. We own, or previously owned, 14 such former manufactured gas
plant (MGP) sites. Investigations have revealed contamination related to the by-products of gas manufacturing at each site. In addition
to the MGP sites, we are also in the process of cleaning up other contaminated sites. Cleanup activities associated with these sites will
be conducted over the next several years.
The MPSC has established a cost deferral and rate recovery mechanism for investigation and remediation costs incurred at former
MGP sites. Accordingly, we recognize a liability and corresponding regulatory asset for estimated investigation and remediation costs
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