DTE Energy 2012 Annual Report Download - page 45

Table of Contents
Legal Reserves
We are involved in various legal proceedings, claims and litigation arising in the ordinary course of business. We regularly assess our liabilities and
contingencies in connection with asserted or potential matters, and establish reserves when appropriate. Legal reserves are based upon management’s
assessment of pending and threatened legal proceedings and claims against us.
Insured and Uninsured Risks
Our comprehensive insurance program provides coverage for various types of risks. Our insurance policies cover risk of loss including property
damage, general liability, workers’ compensation, auto liability, and directors’ and officers’ liability. Under our risk management policy, we self-insure
portions of certain risks up to specified limits, depending on the type of exposure. The maximum self-insured retention for various risks is as follows:
property damage- $10 million, general liability- $7 million, workers’ compensation- $9 million, and auto liability-$7 million. We have an actuarially
determined estimate of our incurred but not reported (IBNR) liability prepared annually and we adjust our reserves for self-insured risks as appropriate. As of
December 31, 2012, this IBNR liability was approximately $37 million.
Accounting for Tax Obligations
We are required to make judgments regarding the potential tax effects of various financial transactions and results of operations in order to estimate our
obligations to taxing authorities. We account for uncertain income tax positions using a benefit recognition model with a two-step approach, a more-likely-than-
not recognition criterion and a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate settlement. If the benefit does not meet the more likely than not criteria for being sustained on its technical merits, no benefit will be
recorded. Uncertain tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. We
also have non-income tax obligations related to property, sales and use and employment-related taxes and ongoing appeals related to these tax matters.
Accounting for tax obligations requires judgments, including assessing whether tax benefits are more likely than not to be sustained, and estimating
reserves for potential adverse outcomes regarding tax positions that have been taken. We also assess our ability to utilize tax attributes, including those in the
form of carry-forwards, for which the benefits have already been reflected in the financial statements. We believe the resulting tax reserve balances as of
December 31, 2012 and December 31, 2011 are appropriately accounted. The ultimate outcome of such matters could result in favorable or unfavorable
adjustments to our consolidated financial statements and such adjustments could be material.
See Note 12 of the Notes to Consolidated Financial Statements in Item 8 of this Report.
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Derivatives are generally recorded at fair value and shown as Derivative Assets or Liabilities. Contracts we typically classify as derivative instruments
include power, gas, oil and certain coal forwards, futures, options and swaps, and foreign currency exchange contracts. Items we do not generally account for
as derivatives include natural gas inventory, pipeline transportation, renewable energy credits and storage assets. See Notes 3 and 4 of the Notes to
Consolidated Financial Statements in Item 8 of this Report.
The tables below do not include the expected earnings impact of non-derivative gas storage, transportation, certain power contracts and renewable energy
credits which are subject to accrual accounting. Consequently, gains and losses from these positions may not match with the related physical and financial
hedging instruments in some reporting periods, resulting in volatility in DTE Energy’s reported period-by-period earnings; however, the financial impact of the
timing differences will reverse at the time of physical delivery and/or settlement.
The Company manages its mark-to-market (MTM) risk on a portfolio basis based upon the delivery period of its contracts and the individual
components of the risks within each contract. Accordingly, it records and manages the energy purchase and sale obligations under its contracts in separate
components based on the commodity (e.g. electricity or gas), the product (e.g. electricity for delivery during peak or off-peak hours), the delivery location (e.g.
by region), the risk profile (e.g. forward or option), and the delivery period (e.g. by month and year).
The Company has established a fair value hierarchy that 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
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