DTE Energy 2011 Annual Report Download - page 16

14
Long-Term Debt
December 31, 2011
Fair Value
$1.045 billion
Carrying Value
$889 million
December 31, 2010
Fair Value
$981 million
Carrying Value
$889 million
NOTE 4 — FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
The Company recognizes all derivatives at their fair value on the Consolidated Statements of Financial Position unless they
qualify for certain scope exceptions, including the normal purchases and normal sales exception. Further, derivatives that
qualify and are designated for hedge accounting are classified as either hedges of a forecasted transaction or the variability of
cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), or as hedges of the fair value of a
recognized asset or liability or of an unrecognized firm commitment (fair value hedge). For cash flow hedges, the portion of the
derivative gain or loss that is effective in offsetting the change in the value of the underlying exposure is deferred in
Accumulated other comprehensive income and later reclassified into earnings when the underlying transaction occurs. For fair
value hedges, changes in fair values for the derivative are recognized in earnings each period. Gains and losses from the
ineffective portion of any hedge are recognized in earnings immediately. For derivatives that do not qualify or are not
designated for hedge accounting, changes in the fair value are recognized in earnings each period.
The Company's primary market risk exposure is associated with commodity prices, credit and interest rates. MichCon has risk
management policies to monitor and manage market risks.
Commodity Price Risk
The Company has fixed-priced contracts for portions of its expected gas supply requirements through 2014. Substantially all of
these contracts meet the normal purchases and sales exception and are therefore accounted for under the accrual method. The
Company may also sell forward transportation and storage capacity contracts. Forward transportation and storage contracts are
not derivatives and are therefore accounted for under the accrual method.
Credit Risk
The Company is exposed to credit risk if customers or counterparties do not comply with their contractual obligations.
MichCon maintains 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. The Company generally uses 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, 2011 provision for credit losses, the Company's exposure to counterparty nonperformance is not
expected to have a material adverse effect on the Company's financial statements.
Interest Rate Risk
MichCon occasionally uses treasury locks and other interest rate derivatives to hedge the risk associated with interest rate
market volatility. In 2004, MichCon entered into an interest rate derivative to limit its sensitivity to market interest rate risk
associated with the issuance of long-term debt. Such instrument was designated as a cash flow hedge. The Company
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.