DTE Energy 2008 Annual Report Download - page 25

Trust Investments
The trust 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 on actively traded markets. The commingled
funds and institutional mutual funds which hold exchange-traded equity or debt securities are valued using quoted prices in actively traded
markets. Non-exchange-traded fixed income securities are valued based upon quotations available from brokers or pricing services. For non-
exchange traded fixed income securities, the trustees receive prices from pricing services. A primary price source is identified by asset type,
class or issue for each security. The trustees monitor prices supplied by pricing services and may use a supplemental price source or change the
primary price source of a given security if the trustees challenge an assigned price and determine that another price source is considered to be
preferable. MichCon has obtained an understanding of how these prices are derived, including the nature and observability of the inputs used in
deriving such prices. Additionally, MichCon selectively corroborates the fair values of securities by comparison of market-based price sources.
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. As of December 31, 2008, we had approximately
$120 million of taxable securities insured by insurers. 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.
NOTE 10 — FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
We comply with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Under SFAS
No. 133, all derivatives are recognized on the Consolidated Statements of Financial Position at their fair value unless they qualify for certain
scope exceptions, including 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 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.
Commodity Price Risk
We have fixed-priced contracts for portions of our expected gas supply requirements through 2012. These gas supply contracts are designated
and qualify for the normal purchases and sales exemption and are therefore accounted for under the accrual method. We may also sell forward
storage and transportation capacity contracts. Forward firm transportation and storage contracts are not derivatives and are therefore accounted
for under the accrual method.
Credit Risk
We are exposed to credit risk if 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.
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2008 2007
Fair Value Carrying Value Fair Value Carrying Value
Long-Term Deb
t
$865 million $889 million $711 million $715 million