DTE Energy 2008 Annual Report Download - page 24

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 is immaterial for the year ended December 31, 2008. The Company believes it
uses valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.
SFAS No. 157 establishes a fair value hierarchy, which 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. SFAS No. 157 requires that assets and liabilities 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 by SFAS No.157 as follows:
The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2008:
The following table presents the fair value reconciliation of Level 3 derivative assets and liabilities measured at fair value on a recurring basis
for 2008:
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.
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• 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.
(in Millions) Level 1 Level 2 Level 3 Net Balance
Assets:
Cash equivalents $ 3 $ — $ — $ 3
Trust investments (1) 20 — — 20
Net Assets at December 31, 2008 $ 23 $ — $ — $ 23
(1) Excludes cash surrender value of life insurance investments.
(in Millions) Derivatives
Net asset balance as of January 1, 2008 $
—
Changes in fair value recorded in income 5
Purchases, issuances and settlements (5)
Net asset balance as of December 31, 2008 $
—
The amount of total gains (losses) included in net income attributed to the change in unrealized gains (losses) related to assets
and liabilities held at December 31, 2008 $ —