RETIREMENT BENEFITS AND TRUSTEED ASSETS

Pension Plan Benefits

Detroit Edison participates in various plans that provide pension and other postretirement benefits for DTE Energy and its affiliates. The plans are sponsored by DTE Energy Corporate Services, LLC (LLC), a subsidiary of DTE Energy. Detroit Edison is allocated net periodic benefit costs for its share of the amounts of the combined plans.

The Company’s policy is to fund pension costs by contributing amounts consistent with the Pension Protection Act of 2006 provisions and additional amounts when it deems appropriate. The Company contributed $200 million to its pension plans in 2011. At the discretion of management, and depending upon financial market conditions, we anticipate making up to a $200 million contribution to the pension plans in 2012.

Net pension cost includes the following components:



(in Millions)	2011			2010			2009
Service cost	$	55		$	52		$	43
Interest cost	154			153			158
Expected return on plan assets	(168		)	(171		)	(165		)
Amortization of:
Net actuarial loss	99			70			38
Prior service cost	4			5			7
Special termination benefits	2			—			—
Net pension cost	$	146		$	109		$	81



(in Millions)	2011			2010
Other changes in plan assets and benefit obligations recognized in Regulatory assets and Other comprehensive income
Net actuarial loss	$	437		$	145
Amortization of net actuarial loss	(99		)	(70		)
Amortization of prior service cost	(4		)	(5		)
Total recognized in Regulatory assets and Other comprehensive income	$	334		$	70
Total recognized in net periodic pension cost, Regulatory assets and Other comprehensive income	$	480		$	178
Estimated amounts to be amortized from Regulatory assets and Accumulated other comprehensive income into net periodic benefit cost during next fiscal year
Net actuarial loss	$	120		$	93
Prior service cost	1			4

The following table reconciles the obligations, assets and funded status of the plan as well as the amount recognized as prepaid pension cost or pension liability in the Consolidated Statements of Financial Position at December 31:



(in Millions)	2011			2010
Accumulated benefit obligation, end of year	$	2,963		$	2,697
Change in projected benefit obligation
Projected benefit obligation, beginning of year	$	2,899		$	2,677
Service cost	55			52
Interest cost	154			153
Actuarial loss	251			180
Special termination benefits	2			—
Benefits paid	(165		)	(163		)
Projected benefit obligation, end of year	$	3,196		$	2,899
Change in plan assets
Plan assets at fair value, beginning of year	$	1,936		$	1,687
Actual return on plan assets	(18		)	207
Company contributions	204			205
Benefits paid	(165		)	(163		)
Plan assets at fair value, end of year	$	1,957		$	1,936
Funded status of the plan	$	(1,239	)	$	(963	)
Amount recorded as:
Current liabilities	$	(8	)	$	(3	)
Noncurrent liabilities	(1,231		)	(960		)
	$	(1,239	)	$	(963	)
Amounts recognized in Regulatory assets (see Note 9)
Net actuarial loss	$	1,645		$	1,314
Prior service cost	11			15
	$	1,656		$	1,329

Assumptions used in determining the projected benefit obligation and net pension costs are listed below:



	2011	2010	2009
Projected benefit obligation
Discount rate	5.00%	5.50%	5.90%
Rate of compensation increase	4.20%	4.00%	4.00%
Net pension costs
Discount rate	5.50%	5.90%	6.90%
Rate of compensation increase	4.00%	4.00%	4.00%
Expected long-term rate of return on plan assets	8.50%	8.75%	8.75%

The Company employs a formal process in determining the long-term rate of return for various asset classes. Management reviews historic financial market risks and returns and long-term historic relationships between the asset classes of equities, fixed income and other assets, consistent with the widely accepted capital market principle that asset classes with higher volatility generate a greater return over the long-term. Current market factors such as inflation, interest rates, asset class risks and asset class returns are evaluated and considered before long-term capital market assumptions are determined. The long-term portfolio return is also established employing a consistent formal process, with due consideration of diversification, active investment management and rebalancing. Peer data is reviewed to check for reasonableness. As a result of this process, the Company is lowering its long-term rate of return assumptions for its pension and OPEB plans to 8.25% for 2012. The Company believes this rate is a reasonable assumption for the long-term rate of return on its plan assets for 2012 given its investment strategy.

At December 31, 2011, the benefits related to the Company’s qualified and nonqualified pension plans expected to be paid in each of the next five years and in the aggregate for the five fiscal years thereafter are as follows:



(in Millions)
2012	$	179
2013	182
2014	186
2015	193
2016	199
2017 - 2021	1,107
Total	$	2,046

The Company employs a total return investment approach whereby a mix of equities, fixed income and other investments are used to maximize the long-term return on plan assets consistent with prudent levels of risk, with consideration given to the liquidity needs of the plan. Risk tolerance is established through consideration of future plan cash flows, plan funded status, and corporate financial considerations. The investment portfolio contains a diversified blend of equity, fixed income and other investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, growth and value investment styles, and large and small market capitalizations. Fixed income securities generally include corporate bonds of companies from diversified industries, mortgage-backed securities, and U.S. Treasuries. Other assets such as private equity and hedge funds are used to enhance long-term returns while improving portfolio diversification. Derivatives may be utilized in a risk controlled manner, to potentially increase the portfolio beyond the market value of invested assets and reduce portfolio investment risk. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews.

Target allocations for plan assets as of December 31, 2011 are listed below:



U.S. Large Cap Equity Securities	22	%
U.S. Small Cap and Mid Cap Equity Securities	5
Non U.S. Equity Securities	20
Fixed Income Securities	25
Hedge Funds and Similar Investments	20
Private Equity and Other	8
	100	%

Fair Value Measurements at December 31, 2011(a)



							Balance at
(in Millions)	Level 1		Level 2		Level 3		December 31, 2011
Asset Category:
Short-term investments(b)	$	—	$	23	$	—	$	23
Equity securities
U.S. Large Cap(c)	440		27		—		467
U.S. Small/Mid Cap(d)	110		4		—		114
Non U.S(e)	272		79		—		351
Fixed income securities(f)	61		448		—		509
Other types of investments
Hedge Funds and Similar Investments(g)	132		40		205		377
Private Equity and Other(h)	—		—		116		116
Total	$	1,015	$	621	$	321	$	1,957

Fair Value Measurements at December 31, 2010(a)



							Balance at
(in Millions)	Level 1		Level 2		Level 3		December 31, 2010
Asset Category:
Short-term investments (b)	$	—	$	23	$	—	$	23
Equity securities
U.S. Large Cap(c)	461		26		—		487
U.S. Small/Mid Cap(d)	123		5		—		128
Non U.S(e)	194		151		—		345
Fixed income securities(f)	42		409		—		451
Other types of investments
Hedge Funds and Similar Investments(g)	128		50		206		384
Private Equity and Other(h)	—		—		118		118
Total	$	948	$	664	$	324	$	1,936

_________________________________


(a)	See Note 3 — Fair Value for a description of levels within the fair value hierarchy.


(b)	This category predominantly represents certain short-term fixed income securities and money market investments that are managed in separate accounts or commingled funds. Pricing for investments in this category are obtained from quoted prices in actively traded markets or valuations from brokers or pricing services.


(c)	This category comprises both actively and not actively managed portfolios that track the S&P 500 low cost equity index funds. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(d)	This category represents portfolios of small and medium capitalization domestic equities. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(e)	This category primarily consists of portfolios of non-U.S. developed and emerging market equities. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(f)	This category includes corporate bonds from diversified industries, U.S. Treasuries, and mortgage-backed securities. Pricing for investments in this category is obtained from quoted prices in actively traded markets and quotations from broker or pricing services. Non-exchange traded securities and exchange-traded securities held in commingled funds are classified as Level 2 assets.

(g)

This category utilizes a diversified group of strategies that attempt to capture financial market inefficiencies and includes publicly traded debt and equity, publicly traded mutual funds, commingled and limited partnership funds and non-exchange traded securities. Pricing for Level 1 and level 2 assets in this category is obtained from quoted prices in actively traded markets and quoted prices from broker or pricing services. Non-exchange traded securities held in commingled funds are classified as Level 2 assets. Valuations for some Level 3 assets in this category may be based on limited observable inputs as there may be little, if any, publicly available pricing.

(h)

This category includes a diversified group of funds and strategies that primarily invests in private equity partnerships. This category also includes investments in timber and private mezzanine debt. Pricing for investments in this category is based on limited observable inputs as there is little, if any, publicly available pricing. Valuations for assets in this category may be based on discounted cash flow analyses, relevant publicly-traded comparables and comparable transactions.

The pension trust holds 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 in actively traded markets. The commingled funds and institutional mutual funds which hold exchange-traded equity or debt securities are valued based on underlying securities, using quoted prices in actively traded markets. Non-exchange traded fixed income securities are valued by the trustee based upon quotations available from brokers or 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. Detroit Edison has obtained an understanding of how these prices are derived, including the nature and observability of the inputs used in deriving such prices. Additionally, Detroit Edison selectively corroborates the fair values of securities by comparison of market-based price sources.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):



	Hedge Funds and Similar			Private Equity
(in Millions)	Investments			and Other			Total
Beginning Balance at January 1, 2011	$	206		$	118		$	324
Total realized/unrealized gains (losses):
Realized gains (losses)	(3		)	4			1
Unrealized gains (losses)	1			(21		)	(20		)
Purchases, sales and settlements:
Purchases	44			16			60
Sales	(43		)	(1		)	(44		)
Settlements
Ending Balance at December 31, 2011	$	205		$	116		$	321
The amount of total gains (losses) for the period attributable to the change in unrealized gains or losses related to assets still held at the end of the period	$	3		$	(20	)	$	(17	)



	Hedge Funds and Similar			Private Equity
(in Millions)	Investments			and Other			Total
Beginning Balance at January 1, 2010	$	320		$	106		$	426
Total realized/unrealized gains (losses)	34			16			50
Purchases, sales and settlements	(148		)	(4		)	(152		)
Ending Balance at December 31, 2010	$	206		$	118		$	324
The amount of total gains (losses) for the period attributable to the change in unrealized gains or losses related to assets still held at the end of the period	$	20		$	9		$	29

There were no transfers between Level 3 and Level 2 and there were no significant transfers between Level 2 and Level 1 in the years ended December 31, 2011 and 2010.

The Company also sponsors defined contribution retirement savings plans. Participation in one of these plans is available to substantially all represented and non-represented employees. The Company matches employee contributions up to certain predefined limits based upon eligible compensation, the employee’s contribution rate and, in some cases, years of credit service. The cost of these plans was $18 million, $17 million, and $16 million in each of the years ended 2011, 2010, and 2009, respectively.

Other Postretirement Benefits

The Company participates in plans sponsored by LLC that provide certain postretirement health care and life insurance benefits for employees who are eligible for these benefits. The Company’s policy is to fund certain trusts to meet our postretirement benefit obligations. Separate qualified Voluntary Employees Beneficiary Association (VEBA) trusts exist for represented and non-represented employees. The Company contributed $66 million to its postretirement medical and life insurance benefit plans during 2011.

In January 2012, the Company contributed $95 million to its other postretirement benefit plans. At the discretion of management, the Company may make up to an additional $120 million contribution to its VEBA trusts in 2012.

Net postretirement cost includes the following components:



(in Millions)	2011			2010			2009
Service cost	$	49		$	47		$	45
Interest cost	91			95			102
Expected return on plan assets	(62		)	(52		)	(42		)
Amortization of:
Net loss	40			38			53
Prior service costs (credit)	(15		)	2			2
Net transition obligation	2			2			2
Net postretirement cost	$	105		$	132		$	162



(in Millions)	2011			2010
Other changes in plan assets and APBO recognized in Regulatory assets
Net actuarial loss (gain)	$	139		$	62
Amortization of net actuarial loss	(40		)	(38		)
Prior service cost (credit)	(3		)	(63		)
Amortization of prior service credit	15			(2		)
Amortization of transition (asset)	(2		)	(2		)
Total recognized in regulatory assets	$	109		$	(43	)
Total recognized in net periodic pension cost and Regulatory assets	$	214		$	89

Estimated amounts to be amortized from Regulatory assets into net periodic benefit cost during next fiscal year



	2011			2010
Net actuarial loss	$	55		$	42
Prior service cost (credit)	(16		)	(16		)
Net transition obligation	2			2

The following table reconciles the obligations, assets and funded status of the plans including amounts recorded as accrued postretirement cost in the Consolidated Statements of Financial Position at December 31:



(in Millions)	2011			2010
Change in accumulated postretirement benefit obligation
Accumulated postretirement benefit obligation, beginning of year	$	1,742		$	1,650
Service cost	49			47
Interest cost	91			95
Plan amendments	(3		)	(62		)
Actuarial loss	60			86
Medicare Part D subsidy	4			5
Benefits paid	(75		)	(79		)
Accumulated postretirement benefit obligation, end of year	$	1,868		$	1,742
Change in plan assets
Plan assets at fair value, beginning of year	$	682		$	593
Actual return on plan assets	(17		)	76
Company contributions	66			90
Benefits paid	(80		)	(77		)
Plan assets at fair value, end of year	$	651		$	682
Funded status, end of year	$	(1,217	)	$	(1,060	)
Amount recorded as:
Non-current liabilities	$	(1,217	)	$	(1,060	)
Amounts recognized in Regulatory assets (see Note 9)
Net actuarial loss	$	633		$	534
Prior service cost	(53		)	(66		)
Net transition obligation	2			4
	$	582		$	472

Assumptions used in determining the projected benefit obligation and net benefit costs are listed below:



	2011		2010		2009
Projected benefit obligation
Discount rate	5.00	%	5.50	%	5.90	%
Net benefit costs
Discount rate	5.50	%	5.90	%	6.90	%
Expected long-term rate of return on plan assets	8.75	%	8.75	%	8.75	%
Health care trend rate pre- and post- 65	7.00	%	7.00	%	7.00	%
Ultimate health care trend rate	5.00	%	5.00	%	5.00	%
Year in which ultimate reached	2019		2016		2016

A one-percentage-point increase in health care cost trend rates would have increased the total service cost and interest cost components of benefit costs by $28 million and increased the accumulated benefit obligation by $247 million at December 31, 2011. A one-percentage-point decrease in the health care cost trend rates would have decreased the total service and interest cost components of benefit costs by $17 million and would have decreased the accumulated benefit obligation by $208 million at December 31, 2011.

At December 31, 2011, the benefits expected to be paid, including prescription drug benefits, in each of the next five years and in the aggregate for the five fiscal years thereafter are as follows:



(in Millions)
2012	$	82
2013	87
2014	93
2015	99
2016	106
2017-2021	636
	$	1,103

The process used in determining the long-term rate of return for assets and the investment approach for the other postretirement benefits plans is similar to those previously described for its pension plans.

Target allocations for plan assets as of December 31, 2011 are listed below:



U.S. Equity Securities	22	%
Non U.S. Equity Securities	20
Fixed Income Securities	25
Hedge Funds and Similar Investments	20
Private Equity and Other	13
	100	%

Fair Value Measurements at December 31, 2011(a)



							Balance at
(in Millions)	Level 1		Level 2		Level 3		December 31, 2011
Asset Category:
Short-term investments(b)	$	1	$	8	$	—	$	9
Equity securities
U.S. Large Cap(c)	116		10		—		126
U.S. Small/Mid Cap(d)	46		4		—		50
Non U.S(e)	116		10		—		126
Fixed income securities(f)	15		156		—		171
Other types of investments
Hedge Funds and Similar Investments(g)	53		14		63		130
Private Equity and Other(h)	—		—		39		39
Total	$	347	$	202	$	102	$	651

Fair Value Measurements at December 31, 2010(a)



							Balance at
(in Millions)	Level 1		Level 2		Level 3		December 31, 2010
Asset Category:
Short-term investments(b)	$	—	$	5	$	—	$	5
Equity securities
U.S. Large Cap(c)	83		41		—		124
U.S. Small/Mid Cap(d)	40		39		—		79
Non U.S(e)	52		81		—		133
Fixed income securities(f)	3		167		—		170
Other types of investments
Hedge Funds and Similar Investments(g)	51		32		52		135
Private Equity and Other(h)	—		—		36		36
Total	$	229	$	365	$	88	$	682

_________________________________


(a)	See Note 3 — Fair Value for a description of levels within the fair value hierarchy.


(b)	This category predominantly represents certain short-term fixed income securities and money market investments that are managed in separate accounts or commingled funds. Pricing for investments in this category are obtained from quoted prices in actively traded markets or valuations from brokers or pricing services.


(c)	This category comprises both actively and not actively managed portfolios that track the S&P 500 low cost equity index funds. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(d)	This category represents portfolios of small and medium capitalization domestic equities. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(e)	This category primarily consists of portfolios of non-U.S. developed and emerging market equities. Investments in this category are exchange-traded securities whereby unadjusted quote prices can be obtained. Exchange-traded securities held in a commingled fund are classified as Level 2 assets.


(f)	This category includes corporate bonds from diversified industries, U.S. Treasuries, and mortgage backed securities. Pricing for investments in this category is obtained from quoted prices in actively traded markets and quotations from broker or pricing services. Non-exchange traded securities and exchange-traded securities held in commingled funds are classified as Level 2 assets.

(g)

(h)

The VEBA trusts 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 in actively traded markets. The commingled funds and institutional mutual funds which hold exchange-traded equity or debt securities are valued based on underlying securities, using quoted prices in actively traded markets. Non-exchange traded fixed income securities are valued by the trustee based upon quotations available from brokers or 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. Detroit Edison has obtained an understanding of how these prices are derived, including the nature and observability of the inputs used in deriving such prices. Additionally, Detroit Edison selectively corroborates the fair values of securities by comparison of market-based price sources.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):



(in Millions)	Hedge Funds and Similar Investments			Private Equity and Other			Total
Beginning Balance at January 1, 2011	$	52		$	36		$	88
Total realized/unrealized gains (losses):
Realized gains (losses)	(1		)	1			—
Unrealized gains (losses)	2			(14		)	(12		)
Purchases, sales and settlements:							—
Purchases	45			31			76
Sales	(35		)	(15		)	(50		)
Settlements	—			—			—
Ending Balance at December 31, 2011	$	63		$	39		$	102
The amount of total gains (losses) for the period attributable to the change in unrealized gains or losses related to assets still held at the end of the period	$	3		$	(11	)	$	(8	)



(in Millions)	Hedge Funds and Similar Investments			Private Equity and Other			Total
Beginning Balance at January 1, 2010	$	63		$	32		$	95
Total realized/unrealized gains (losses)	7			6			13
Purchases, sales and settlements	(18		)	(2		)	(20		)
Ending Balance at December 31, 2010	$	52		$	36		$	88
The amount of total gains (losses) for the period attributable to the change in unrealized gains or losses related to assets still held at the end of the period	$	4		$	5		$	9

There were no transfers between Level 3 and Level 2 and there were no significant transfers between Level 2 and Level 1 in the years ended December 31, 2011 and 2010.

Healthcare Legislation

In March 2010, the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 were enacted into law (collectively, the “Act”). The Act is a comprehensive health care reform bill. A provision of the Act repeals the current rule permitting deduction of the portion of the drug coverage expense that is offset by the Medicare Part D subsidy, effective for taxable years beginning after December 31, 2012.

Detroit Edison’s retiree healthcare plan includes the provision of postretirement prescription drug coverage (“coverage”) which is included in the calculation of the recorded other postemployment benefit (OPEB) obligation. Because the Company’s coverage meets certain criteria, Detroit Edison is eligible to receive the Medicare Part D subsidy. With the enactment of the Act, the subsidy will continue to not be subject to tax, but an equal amount of prescription drug coverage expenditures will not be deductible. Income tax accounting rules require the impact of a change in tax law be recognized in continuing operations in the Consolidated Statements of Operations in the period that the tax law change is enacted.

This change in tax law required a remeasurement of the Deferred tax asset related to the OPEB obligation and the Deferred tax liability related to the OPEB Regulatory asset in 2010. The net impact of the remeasurement was $18 million and has been deferred as a Regulatory asset as the traditional rate setting process allows for the recovery of income tax costs.

In December 2003, the Medicare Act was signed into law which provides for a non-taxable federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least “actuarially equivalent” to the benefit established by law. The effects of the subsidy reduced net periodic postretirement benefit costs by $5 million in 2011, $5 million in 2010 and $17 million in 2009. At December 31, 2011, the gross amount of federal subsidies expected to be received is estimated to be $5 million in 2012.