corresp
[DTE Energy Letterhead]
September
13, 2006
VIA ELECTRONIC TRANSMISSION (EDGAR)
Jim Allegretto
Senior Assistant Chief Accountant
Securities and Exchange Commission
100 F. Street, NE — Mail Stop 3561
Washington, D.C. 20549
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Re: |
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DTE Energy Company
Form 10-K for the fiscal year ended December 31, 2005
Filed on March 8, 2006
File No. 1-11607 |
Dear Mr. Allegretto:
Set forth below are the responses of DTE Energy Company to the comments of the staff of the
Securities and Exchange Commission (“SEC” or the “Commission”) contained in its letter to the
Company, dated August 24, 2006 (the “Comment Letter”). References to “DTE”, “we”, “us”, “our”, or
the “Company” in this document mean the DTE Energy Company and its consolidated subsidiaries.
For convenience of reference, each SEC staff comment is reprinted in italics, numbered to
correspond with the paragraph numbers assigned in the Comment Letter and is followed by the
corresponding response.
Comment Letter dated August 24, 2006
DTE ENERGY COMPANY FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005 (“2005 FORM 10-K”)
The following discussion provides details regarding the accounting for our synfuel operations,
which serves as additional background information to supplement the Company’s Responses to Comments
1, 2, 3 and 7 discussed subsequently in this letter.
The purchase price for the sale of membership interests in synfuel properties is based upon
the initial payment and a negotiated rate per tax credit generated and allocated to the
membership interests. The purchaser of the membership interests is obligated to make
quarterly payments equal to the estimated tax credits allocable to the purchaser for the
applicable quarter multiplied by the negotiated rate per tax credit. This amount is paid by
the purchaser first in the form of fixed payments on a note, second,
in the form of capital contributions to the project company, and lastly any remaining amounts are paid
September 13, 2006
Page 2 of 19
as
variable payments. In conjunction with the sale of membership interests in synfuel
properties, DTE provided certain guarantees and tax indemnities to the purchasers of these
interests. The components of the amounts paid and DTE’s guarantees and indemnities are
described more fully as follows:
Fixed Payments — The fixed payments are obligations of the purchaser to pay principal and
interest under a note, and are non-recourse to the purchaser’s parent. In general, these
payments are not dependent on the generation of tax credits and once paid are nonrefundable.
Fixed payments under the notes may be deferred at the purchaser’s option (i) in any quarter
that synfuel production levels fall below a specified tonnage; and/or (ii) upon the
occurrence of certain tax events. The number of times the purchaser can defer is limited.
The note principal is designed to recover DTE’s cost basis in the membership interest sold
and provide for a minimum gain on the sale. DTE deferred the minimum gain at the time of
the sale and records gains related to these payments when earned and collectibility is
assured. The fixed gains are calculated as the difference between the original principal
balance of the note and the book value of the membership interest sold by DTE. Fixed gains
are recognized proportionately (principal payment / fixed note * deferred gain) as the fixed
payments generally become due. If the purchasers cease making fixed payments, DTE
discontinues gain recognition and the collectibility of the remaining note balance is
evaluated based on the facts and circumstances.
In response to potential tax credit phase-out in 2006 and 2007 due to rising oil prices and
in an effort to reduce their risk regarding fixed payments they are scheduled to make to DTE
during 2006 and 2007, two of the purchasers entered into Indemnity Agreements with DTE,
whereby DTE provided an indemnity to these purchasers in exchange for payment of an
additional quarterly amount per tax credit. Under the Indemnity Agreements, DTE will make a
payment to the purchasers in the event that fixed payments cause the purchaser to overpay
due to an oil price phase-out of the tax credit. Where an Indemnity Agreement exists, fixed
note recognition is dependent upon a sufficient level of tax credits resulting from synfuel
production levels and the reference price of oil throughout the year.
DTE must have the ability to assert that the fixed payment amounts are either fixed or
determinable prior to recognizing those amounts as gains. For those fixed payments subject
to an Indemnity Agreement, DTE recognizes gains on fixed payments, provided it deems the
likelihood of an indemnity payment as remote. In order to assess the probability of an
indemnity payment, DTE uses a valuation model that calculates the probability of surpassing
the level of the phase-out range that would create an obligation to make an indemnity
payment. Using this model, DTE will consider the probability of an indemnity payment on a
facts and circumstances basis. DTE has assessed the probability of an indemnity payment to
be greater than remote and, therefore, the gains are deferred and a liability related to the
indemnity was recorded.
Capital Contribution Payments — These quarterly payments are designed to fund the
purchaser’s share of operating losses in arrears. Amounts are
payable directly to the synfuel partnership and are guaranteed by the purchaser’s parent. The partnership in turn
September 13, 2006
Page 3 of 19
repays a working capital loan made by DTE that funds operations during the preceding
quarter. These payments reimburse DTE for funding the operating losses of the partnership.
The payments are dependent on a sufficient level of estimated tax credits resulting from
synfuel production levels and the reference price of oil and are subject to refund. The
collectibility or refunding of losses allocated to the purchasers’ capital accounts is
evaluated on a facts and circumstances basis. DTE assesses the likelihood of future refunds
of amounts previously paid by the purchasers and determines the amount of unfunded losses
that DTE will likely have to absorb, due to the lack of sufficient value in the tax credits,
using a SFAS No. 5 approach for probable losses.
Variable Payments — Variable payments are a “true-up” mechanism. Variable payments
represent an amount equal to (x) less (y), where (x) is the purchaser’s share of estimated
tax credits times the negotiated rate per tax credit, and (y) is the sum of (i) fixed
payments made in the quarter, and (ii) capital contributions made by the purchaser for the
quarter. Amounts are payable entirely to DTE and are guaranteed by the purchaser’s parent.
Variable payments are refundable and dependent on a sufficient level of tax credits
resulting from synfuel production levels and the reference price of oil. The availability
of tax credits phases-out when the average annual domestic wellhead price of oil for each
year, as published annually by the Internal Revenue Service (“IRS”) each April for the
preceding year, rises above a certain level. The reference price of a barrel of oil is an
estimate of the annual average wellhead price per barrel for domestic crude oil. The
phase-out of production tax credits, based on the reference price, occurs within a range
(lower and upper band) of oil prices. The bounds of the range increase each year by an
inflation factor. The phase-out occurs on a linear basis. DTE recognizes the related gains
as they become recognizable pursuant to the criteria of SAB No. 101 provided that DTE
concludes that recovery of the cost of the properties sold continues to be reasonably
assured. Under this approach, gains are not recognized until they have been earned.
However, before DTE recognizes as gains any variable payments made by the purchasers, DTE
must have the ability to assert that these variable amounts are determinable in such a
fashion as to render the possibility of refund as remote. DTE assesses this probability on
an on-going basis.
In order to assess the probability of refund for the variable payment component, DTE has
developed a management review process. This process involves reviewing data points from
various sources that include an internal pricing model, historical and forward prices,
independent market viewpoints, and market forward price surveys. The internal pricing
model and independent market viewpoints are used to estimate the probability of the
reference price surpassing the estimated lower band of the phase-out range. The review of
historical and forward prices and forward market surveys provides management with another
set of data points in which to view and assess the likelihood of refund. The combination of
the above data points allows DTE to assess the probability of refund on a facts and
circumstances basis. DTE uses a similar process to determine the appropriate level of
synfuel production.
Guarantees and Indemnities — The guarantees DTE provided in conjunction with the sale of
membership interests support our synfuel payment and performance
obligations and tax indemnities provided under the various agreements. Also, in conjunction with the
September
13, 2006
Page 4 of 19
sale
of membership interests, DTE provided tax indemnities only to the extent that the
information we have provided to the purchasers and the IRS in conjunction with obtaining the
Private Letter Rulings (“PLRs”) is incorrect and for our operating performance of the plant
in a manner consistent with Section 29 of the Internal Revenue Code (the “Code”).
Originally, the production and sale of synfuel was intended to generate tax credits under
Section 29 (now Section 45K). On January 1, 2006, these tax credits became general business
credits under Section 45K. PLRs were received on all related facilities in response to the
application of Section 45K. Additional PLRs were received subsequent to the sales of the
membership interests. To the extent the purchaser suffers a loss due to an IRS change in
tax law or other external change outside of our control, an indemnity has not been provided.
Subsequent to the sales, DTE continues as the managing member of the synfuel properties and
directs the business and affairs of the properties. DTE has a controlling interest in the
properties and continues to consolidate the properties. Changes in the purchasers’
interests are recorded in minority interest.
Power and Industrial Projects, page 31
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1. |
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We note your discussion in your Form 10-K of the potential phase-out of the
production tax credits and the possible impact on future earnings and cash flow. We
also note your impairment charge in the second quarter of 2006 relating to assets used
in synfuel operations. In this regard, please show us the details of your impairment
analysis [that]led to the $123 million charge including any estimates of possible
future section 29 tax credits cash inflow. Specifically show us how you calculated the
amount of impairment in notes receivable and why your evaluation of creditworthiness of
the counter-party changed as of the second quarter of 2006 as opposed to some sooner
date. Provide us an understanding of the obligator(s) on the notes receivable. We note
in recording such notes receivable and sales proceeds, one of your revenue recognition
criteria is that collectibility is assured. Also show us how the impairment was
allocated to the individual minority interest holders and whether there was any book
value of long-lived assets after the charge and whether any remaining book value of
notes receivable is at risk of non-collection and/or impairment. If so, please
quantify. |
Response:
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The $123 million charge we incurred in the second quarter of 2006 consists of the
following components: |
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SFAS 144 Fixed Asset Impairment |
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$ |
77 |
million |
Fixed Note Reserves |
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$ |
43 |
million |
Inventory Reserves |
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$ |
3 |
million |
Total |
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$ |
123 |
million |
September 13, 2006
Page 5 of 19
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Fixed Asset Impairment — Due to the production shutdown of the synfuel
facilities in May 2006, coupled with the increasing likelihood that all or a portion
of the synfuel tax credits will be phased-out in 2006 and 2007, DTE had reason to
believe that the carrying amount of the synfuel assets was impaired and might not be
recoverable. As such, per the guidance in FASB Statement No. 144, an impairment
analysis was performed as of June 30, 2006. The net book value of the affected
synfuel-related fixed assets was $77 million. |
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In order to test the recoverability of the carrying amount of the synfuel assets, we
compared an estimate of the undiscounted cash flows from synfuel operations to the
carrying amount of the assets as of June 30, 2006. We used the NYMEX oil forward
price strip as of that date for purposes of calculating the undiscounted cash flows,
which represented management’s best estimate of existing conditions as of June 30,
2006. |
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The results of the test indicated negative undiscounted cash flows that are not
sufficient to recover any of the carrying amounts of the synfuel assets. The total
of the estimated undiscounted cash flows was a net cash outflow of $45 million,
which did not include any cash inflows associated with possible future Section 45K
tax credits, as our analysis assumed no additional synfuel production for the
remainder of 2006 and 2007. As the undiscounted cash flows are negative,
inherently, the fair value of the assets is zero. As a result, DTE recorded an
impairment charge of $77 million, of which $70 million was absorbed by the
purchasers and recorded in minority interest, based on their respective ownership
percentages, resulting in a $7 million impairment expense attributable to DTE’s
ownership interest as of June 30, 2006. Subsequent to recording the impairment
charge, the book value of the synfuel-related long-lived assets is zero. |
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Fixed Note Reserves — DTE had total notes receivable of $151 million (net of an
allowance for uncollectible accounts) as of June 30, 2006 from the purchasers to
whom we sold interests in the synfuel plants. As previously described in the “Fixed
Payments” discussion, the principal notes balance is designed to recover DTE’s cost
basis in the membership interests sold and provide for a minimum gain on the sale of
such interests. All gains associated with the notes receivable have been deferred
until the gain recognition criteria under SAB No. 101 are met. |
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Our evaluation of the creditworthiness of our counterparties changed in the second
quarter due to the production shutdown of all our synfuel facilities in May 2006,
coupled with the increasing risk of a tax credit phase-out due to the continuing
rise of oil prices from year-end 2005 through the second quarter of 2006. Although
we do not have detailed financial information on our counterparties, we believe that
their only asset is typically the membership interest in the project company and its
synfuel facility (an exception being those purchasers that have entered into an oil
price hedge as subsequently discussed). The value of the synfuel facility, in turn,
depends on the value of the synfuel tax credit. Therefore, because of the
increasing likelihood of a tax credit phase-out, |
September 13, 2006
Page 6 of 19
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the value of the synfuel facilities has decreased and the creditworthiness of our
counterparties has deteriorated. Accordingly, DTE performed an analysis of the
collectibility of the notes from the eight counterparties which were segregated into
two categories, hedged counterparties and unhedged counterparties. |
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Hedged — Three of the synfuel partners have entered into oil hedging contracts in
order to economically hedge against the possibility of a tax credit phase-out.
Based on signed agreements, these hedges serve as credit support for the purchaser’s
obligation to make fixed payments. Thus, DTE expects to receive fixed payments
supported by the hedge proceeds. The value of hedging contracts at June 30, 2006,
coupled with the value of the tax credits (based on June 30, 2006 oil prices)
allocated to the hedged partner’s account, provided DTE with reasonable certainty
its outstanding notes receivable is collectible. Accordingly, DTE did not establish
a reserve related to the hedged counterparties. |
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Unhedged — In general, fixed note payments from the five unhedged counterparties are
not dependent on the generation of tax credits and once paid are nonrefundable. As
such, DTE records gains related to these payments as long as the fixed payments are
recognizable pursuant to SAB No. 101. If the purchasers cease making payments, gain
recognition is discontinued and the collectibility of the remaining note balance is
evaluated based on the facts and circumstances surrounding the lack of payment.
Based on our evaluation of the deterioration in value of the
collateral securing the fixed note payments from the unhedged
counterparties, DTE concluded it probable the unhedged counterparties
would not make their fixed note payments. As further evidence,
certain of the unhedged counterparties deferred making fixed note
payments. Accordingly, DTE
fully reserved the outstanding notes receivable balance related to
these counterparties as
of June 30, 2006, which reduced earnings by $43 million, net of the reduction in
deferred gains. |
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Inventory Reserves — DTE performed a review of the synfuel inventory, the general
ledger account balances, and the estimated utility of the products manufactured. DTE
determined that an inventory valuation reserve was required. DTE recorded a reserve
of $3 million during the second quarter to adjust the inventory down to its net
realizable value based upon management’s estimate of the market value of the
inventory. |
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2. |
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Show us how your purchased and written call strategy on crude oil acts as a
hedge on the synfuel sales proceeds. In this regard, you may also want to quantify the
extent of your hedging activities associated with reducing your exposure to increases
in oil prices by providing some quantification of the extent to which synfuel sales
proceeds are hedged. |
Response:
September
13, 2006
Page 7 of 19
The following discussion outlines how DTE’s oil hedges economically protect our
synfuel exposure, how we calculate our hedge percentage disclosed in the 2005 Form
10-K, and why we account for the oil hedges on the mark-to-market basis.
Economic
Hedges — The payout diagrams in this Response explain how the oil hedges
work to mitigate DTE’s exposure to oil prices. The following excerpts from the 2005
Form 10-K provide context background and describe the nature of our hedging
strategy.
“We have entered into derivative and other contracts to economically hedge a
portion of our 2006 and 2007 synfuel cash flow exposure related to the risk
of oil prices increasing.” (emphasis added) (page 33, 2005 Form 10-K)
“The value of a production tax credit can vary each year and is adjusted
annually by an inflation factor as published by the IRS in April of the
following year. The value of the production tax credit in a given year is
reduced if the Reference Price of oil within the year exceeds a threshold
price and is eliminated entirely if the Reference Price exceeds a phase-out
price. The Reference Price of a barrel of oil is an estimate of the annual
average wellhead price per barrel for domestic crude oil.” (emphasis added)
(page 32, 2005 Form 10-K)
“To manage our exposure in 2006 and 2007 to the risk of an increase in
oil prices that could reduce or eliminate synfuel sales proceeds, we
entered into a series of derivative contracts covering a specified number
of barrels of oil. The derivative contracts involve purchased and written
call options that provide for net cash settlement at expiration based on
the full years’ 2006 and 2007 average New York Mercantile Exchange
(NYMEX) trading prices for light, sweet crude oil in relation to the
strike prices of each option. If the average NYMEX prices of oil in 2006
and 2007 are less than approximately $58, and $60, per barrel,
respectively, the derivatives will yield no payment. If the average NYMEX
prices of oil exceed approximately $58, and $60, per barrel,
respectively, the derivatives will yield a payment equal to the excess of
the average NYMEX price over these initial strike prices, multiplied by
the number of barrels covered, up to a maximum price of approximately
$73, and $71 per barrel, respectively.” (emphasis added) (page 103, 2005
Form 10-K)
As discussed on page 32 of the 2005 Form 10-K, the phase-out range for the reference
price increases each year with an inflation factor. The phase-out occurs on a
linear basis and our estimate of this range as of December 31, 2005 is as follows:
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Year |
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Lower Band |
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Upper Band |
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2006 |
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$ |
53 |
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$ |
67 |
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2007 |
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$ |
54 |
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$ |
68 |
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September 13, 2006
Page 8 of 19
To determine if the risk of phase-out is economically hedgeable, the following
payout diagrams should be considered for synfuel cash flow exposure. The phase-out
range varies by year.
September 13,
2006
Page 9 of 19
The diagrams above demonstrate how the Section 45K tax credits (and therefore
the synfuel cash flows) will decline if the average annual price of crude oil at the
wellhead is greater than the low end of the phase-out range. The decline will be
linear until the cash flows are completely phased-out by the end of the range. The
diagram also demonstrates that this exposure is similar to that of a combination of
average annual rate crude oil options (a.k.a. Asian options) — short call option at
the lower bound (i.e. $58) and a long call option at the upper bound (i.e. $73).
This position is also known as a “bear call spread.”
Knowing that the exposure mimics that of a bear call spread, buying and selling the
offsetting options (a.k.a. “bull call spread”) — buying a call option at $58 and
selling a call option at $73 — will effectively mitigate the price risk.
DTE believes that the reference price is highly correlated to the domestic NYMEX
contract and that by executing a bull call spread strategy, it would be able to
manage its synfuel cash flow exposure.
The next diagram adds the expected payout profile of the offsetting oil
option hedges executed by DTE. (The phase-out reference price has been adjusted up
by the estimated $6 differential to the NYMEX equivalent in order to line up with
the actual oil option hedges purchased and sold. The diagram also excludes option
premiums.)
The 2006 hedges at $73 will provide $165 million of after-tax proceeds and the 2007
hedges at $74 will provide $70 million of after-tax proceeds. As is shown in the
diagrams below, DTE’s management used cost benefit analysis to decide the level of
hedges to put in place.
September 13, 2006
Page 10 of 19
September 13,
2006
Page 11 of 19
Percentage Hedged Calculations — As discussed on page 33 of the 2005 Form 10-K,
“These contracts, and other actions we can take and have taken, will protect
approximately 53% of our 2006 cash flow and 31% of our 2007 cash flow.”
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Form
10-K % Hedged Calculations |
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2006 |
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2007 |
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Projected cash flow at risk |
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541 |
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554 |
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Hedged cash flow |
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289 |
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174 |
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% Hedged |
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0.53 |
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0.31 |
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As
referenced on page 33, 2005 Form 10-K |
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53 |
% |
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31 |
% |
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Synfuel Cash Disclosure — As discussed in the Form 10-Q for the Quarterly
period ended June 30, 2006 (“2nd Quarter 2006 Form 10-Q”) on page 22,
“Assuming that there is a significant synfuel tax credit phase-out and/or that
legislation is not passed, we anticipate approximately $1.0 billion of
synfuel-related cash impacts from 2006 through 2009, which consists of cash from
operations and proceeds from option hedges, and approximately $600 million of tax
credit carryforward utilization and other tax benefits that are expected to reduce
future tax payments.”
The following table outlines the components of the $1 billion of synfuel cash:
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Pre-tax hedge
proceeds |
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273 |
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Tax rate |
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20 |
% |
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After-tax hedge proceeds |
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218 |
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Tax benefits (see page 22,
2nd Qtr. 2006 Form 10-Q) |
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600 |
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Minimum partner fixed
payments |
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190 |
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Total |
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$ |
1,008 |
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September
13, 2006
Page 12 of 19
Mark-to-Market Accounting Basis – DTE interpreted paragraph 29(f) of SFAS No.
133 (as noted below) to scope out hedge accounting, since the Company defined the
forecasted transaction as the receipt of proceeds from the sale of interests in the
synfuel facilities that DTE consolidates. As such, DTE is accounting for the oil
options on the mark-to-market basis of accounting.
SFAS No. 133, paragraph 29 (f) states:
“The forecasted transaction does not involve a business combination subject
to the provisions of Statement 141 and is not a transaction (such as a
forecasted purchase, sale, or dividend) involving (1) a parent company’s
interests in consolidated subsidiaries, (2) a minority interest in a
consolidated subsidiary, (3) an equity-method investment, or (4) an entity’s
own equity instruments.”
3. |
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Please tell us whether the second quarter $218 million reserve for guarantees
represents a reserve for the variable component of any recorded contingent gain
discussed on page 77. If so, help us understand why your valuation and analyst models
that calculated the probability of refund, indicated it was probable such gain would be
realized. If the guarantee relates to some other contingency, please explain. In any
event, please explain in detail your rationale for booking contingent gains given the
guidance in paragraph 17 of SFAS
no. 5. |
Response:
“[W]e have reserved $218 million of our maximum potential liability for the possible
refund of certain payments made by our synfuel partners and reserves on partner
capital contributions related to tax credits generated during
2006.” (Page 38, 2nd Quarter 2006 Form
10-Q). As of June 30, 2006, this reserve consisted of the following:
September
13, 2006
Page 13 of 19
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1Q 2006 |
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2Q 2006 |
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YTD 2006 |
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Comments |
Indemnity
Agreements Reserve
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$9 million
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$11 million
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$20 million
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Reserves related to
probable refund of
partner payments
subject to
indemnity
agreements. No
gains have been
recognized for
these amounts. |
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Capital
Contribution
Reserve
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$40 million
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$85 million
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$125 million
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Reserve to record
the probable
uncollectibility of
losses allocated to
the partners’
accounts that have
not yet been
funded.
Additionally,
reserve includes
losses allocated to
and funded by
partners that are
potentially
refundable. |
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Variable Payment
Refund Reserve
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$58 million
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$15 million
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$73 million
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Reserves related to
probable refund of
variable portion of
partner payments.
No gains are
recorded for these
amounts, until it
is highly
improbable that any
phase-out of tax
credits will occur. |
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Total
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$107 million
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$111 million
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$218 million |
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DTE utilized the management review process, as described on pages 2 and 3 of
this letter, to calculate the $218 million reserve recorded as
of the quarter ended June 30, 2006, as shown above. We have not recorded any contingent gains associated
with 2006 payments during the first and second quarters of 2006. For clarification
purposes, we did record $9 million in gains related to the true-up of 2005 payments
in 2006, which are not subject to refund, when we received the cash, in accordance
with our gain recognition policy. This accounting is in accordance with paragraph
17 of FASB Statement No. 5, as we did not record any contingent gains associated
with 2006 payments through the second quarter of 2006 due to the lack of resolution
of the related uncertainty.
September
13, 2006
Page 14 of 19
Once the final reference price for a particular year is known, all prior payments
are trued-up with the purchasers. Therefore, the amounts included in the above
reserve relate only to 2006 payments and beyond.
Refer to Response 7 for further clarification regarding guarantees.
Results of Operations, page 36
Electric Utility, page 37
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4. |
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You enumerate reasons for changes in the various line items of your statements
of operations. However, in circumstances where there is more than one business reason
for the change, you should quantify the impact of each individual reason cited on the
overall change in the line item. For example, you indicate that operation and
maintenance expense decreased in 2005, however you do not quantify the extent to which
income was affected by each of these reasons you provided. Please refer to Item
303(a)(3) of Regulation S-K, Financial Reporting Codification 501.04, and SEC Release
No. 33-8350. |
Response:
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In future filings, beginning with the 2006 3rd Quarter Form 10-Q, in circumstances
in which there is more than one business reason for a change in a line item in the
Company’s statements of operations, the Company will quantify the impact of each
individual reason cited on the overall change in the line item. |
Consolidated Statements of Financial Position, page 72
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5. |
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Prospectively, please classify your intangible assets separately on the face of
your consolidated statement of financial position pursuant to paragraphs 42 of SFAS no.
142. In this regard, we note disclosure in note one regarding net intangible assets of
$364 million as of December 31, 2005. Please also tell us where such intangible assets
are currently classified. |
Response:
In
future filings, beginning with the 2006 3rd Quarter Form 10-Q, the Company will
classify its intangible assets separately on the face of the consolidated statement
of financial position pursuant to paragraph 42 of SFAS No. 142. Intangible assets
relating to capitalized software totaling $364 million are currently classified as
property, plant and equipment and the related amortization is classified as
accumulated depreciation and depletion on the consolidated statement of financial
position.
Note 1 — Significant Accounting Policies, page 76
September 13, 2006
Page 15 of 19
Net Property, Plant and Equipment, page 78
|
6. |
|
Prospectively, please provide the useful lives for any property, plant and
equipment that are not being recovered in regulated gas or electric tariffs. We
presume this type of property is what you term “non utility property”. If otherwise,
please explain. |
Response:
|
|
|
In future filings, beginning with the 2006 Form 10-K, the Company will provide the
useful lives for any property, plant and equipment, costs for which are not being
recovered in regulated gas or electric tariffs. Your presumption is correct, this
type of property is “non utility property”.
|
Note 13 — Commitments and Contingencies, page 106
Sale of Interest in Synfuel Facilities, page 108
|
7. |
|
We note you reserved $218 million related to tax credits generated during 2006.
We further note your disclosure here and on page 38 of the June 30, 2006 10Q your
maximum exposure of $2.2 billion. We presume you made no accrual prior to the second
quarter charge. If otherwise, please advise. If so, please show us your FIN 45
analysis, in particular your consideration of paragraph 9(b) which discusses the
initial measurement of a liability in connection with a guarantee associated with the
sale of an asset. Tell us why the provision only relates to tax credits generated
during 2006, if this was an additional concession granted, please explain. |
Response:
|
|
|
“We have reserved $218 million of our maximum potential liability for the possible
refund of certain payments made by our synfuel partners and reserves on partner
capital contributions related to tax credits generated during 2006.” (Page 38,
2nd Quarter 2006 Form 10-Q). And, as stated in the table within our
Response to Comment 3, DTE accrued $107 million of the $218 million in the first
quarter 2006. |
|
|
|
|
In conjunction with the sale of membership interests in synfuel properties, DTE
provided certain guarantees and indemnities to the purchasers of these interests.
Specifically, the $2.2 billion maximum potential exposure relates to tax information
provided to the purchasers, information provided to the IRS in conjunction with
obtaining PLRs and performance of the synfuel facilities that affect their
qualification for earning tax credits. PLRs were received on all related facilities
in response to the application of Section 45K of the
Code. |
September
13, 2006
Page 16 of 19
Indemnifications or guarantees of an entity’s own performance are not within the
scope of FIN 45.
Paragraph 3 of FIN 45 describes the nature of guarantee contracts that are subject
to the accounting measurement provisions of FIN 45. However, our guarantees and
indemnities do not contingently require payments based on changes in an underlying
related to an asset, liability or equity security on the purchasers’ books.
Paragraph 3(a) specifically relates to existing assets or liabilities on the
guaranteed party’s financial statements. In our situation, there are no recorded
assets or liabilities on the purchasers’ books that are being guaranteed by DTE and,
consequently, the indemnification is not considered a guarantee pursuant to this
paragraph. As a result, paragraph 9(b) of FIN 45 is not applicable to our
situation.
June 30, 2006 Form 10-Q
Utility Operations, page 5
|
8. |
|
We note your extensive disclosure regarding the increase in high levels of past
due receivables on page five and elsewhere. Please show us the analysis you performed
to assure that the allowance at quarter-end was reasonable. We may have further
comment. |
Response:
We establish an allowance for doubtful accounts in accordance with DTE policy. The
allowance is based upon factors surrounding the credit risk of specific customers,
historical trends, economic conditions, age of receivables and other information.
Balances are reviewed based on their aging in increments of 30 days from current
status through balances that are 365 days old. Each of these categories has a
specific reserve percentage value that is derived from annual studies that are based
on prior years’ history. Once a year, these studies are reviewed and changes are
made to reserve rates based on this actual data. The reserve rates are updated on a
rolling monthly basis so current trends are recognized in the reserves made for
accounts that are deemed uncollectible. Items that fluctuate over time such as cost
of commodities, low income funding receipts, customer rate changes, general economic trends and conditions are reflected in the
monthly rolling average. In addition, items that are specific to a company or an
individual such as bankruptcy proceedings or death will be addressed in the month
that information becomes known.
Allowance amounts are reviewed by management monthly and are discussed quarterly
with the Audit Committee of the Board of Directors.
Please see the summary of the analysis supporting the June 30, 2006 allowance for
doubtful utility accounts:
September 13, 2006
Page 17 of 19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in Millions) |
|
|
2Q 2006 |
|
1Q 2006 |
|
Y/E 2005 |
Gross A/R |
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
$ |
451.1 |
|
|
$ |
435.5 |
|
|
$ |
357.7 |
|
Gas |
|
|
351.3 |
|
|
|
576.2 |
|
|
|
396.5 |
|
|
|
|
Total |
|
$ |
802.4 |
|
|
$ |
1,011.7 |
|
|
$ |
754.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve |
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
$ |
56.6 |
|
|
$ |
55.2 |
|
|
$ |
54.3 |
|
Gas |
|
|
101.8 |
|
|
|
97.9 |
|
|
|
74.9 |
|
|
|
|
Total |
|
$ |
158.4 |
|
|
$ |
153.1 |
|
|
$ |
129.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrears (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
$ |
125.3 |
|
|
$ |
108.0 |
|
|
$ |
102.1 |
|
Final (2) |
|
|
60.4 |
|
|
|
56.9 |
|
|
|
56.9 |
|
|
|
|
Subtotal |
|
$ |
185.7 |
|
|
$ |
164.9 |
|
|
$ |
159.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas |
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
$ |
176.9 |
|
|
$ |
202.1 |
|
|
$ |
107.8 |
|
Final (2) |
|
|
100.0 |
|
|
|
87.5 |
|
|
|
78.2 |
|
|
|
|
Subtotal |
|
$ |
276.9 |
|
|
$ |
289.6 |
|
|
$ |
186.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
462.6 |
|
|
$ |
454.5 |
|
|
$ |
345.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve as % of Arrears (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Electric |
|
|
30% |
|
|
|
33% |
|
|
|
34% |
|
Gas |
|
|
37% |
|
|
|
34% |
|
|
|
40% |
|
|
|
|
Total |
|
|
34% |
|
|
|
34% |
|
|
|
37% |
|
|
|
|
(1) |
|
“Arrears” represents past due receivables.
|
|
(2) |
|
“Final” represents customers whose service has been terminated. |
The above analysis indicates a reserve as a percent of arrears of 34% at June
30, 2006. Our accounts receivable reflect the seasonality of our electric and gas
businesses. Our electric business usage peaks in the summer months, with payments
against those receivables continuing into the Fall. Our gas usage
peaks in the winter months, with payments against those receivables continuing into the
Fall until the beginning of the next heating season. Of our June 30, 2006 balance
in arrears of approximately $463 million, approximately $297 million remains in
arrears as of August 31, 2006. The June 30, 2006 reserve amount of approximately
$158 million is approximately 53% of the August 31, 2006 arrears balance. We expect
our arrears balance to continue to decrease into the Fall. Amounts in arrears
greater than 365 days are fully reserved for in accordance with our policy
referenced above.
September 13, 2006
Page 18 of 19
Critical Accounting Policies — Goodwill, page 23
|
9. |
|
Your disclosure on page 23 suggests the goodwill associated with Power and
Industrial Projects is being evaluated based on the cash flows associated with this
segment. If otherwise, please explain. If so, quantify how the absence or reduction of
tax credits impacts the impairment evaluation. In this regard, we note such segment
also contains other non-synfuel projects. Please provide us a gauge of the relative
importance of synfuels to the overall cash flows of the segment. Finally, tell us how
the $41 million of goodwill arose. |
Response:
Goodwill associated with the Power and Industrial Projects (the “PIP”) reporting
segment is evaluated based on estimates of discounted cash flows associated with the
underlying operations. The objective of the PIP segment is to generate energy or
alternative forms of energy that are derived from a natural source like coal, coke,
methane gas or some other by-product for the benefit of a third-party end user.
Synfuel projects are included as an element of the cash flows attributable to the
PIP reporting segment as a whole. While a reduction in the synfuel tax credits
negatively impacts the cash flows and, therefore, the value of the synfuel projects
and the overall PIP reporting segment, the on-going cash flows of the non-synfuel
projects within PIP are largely unchanged due to the short remaining life of the
synfuel projects and continue to contribute substantial value in excess of the
carrying value of the PIP reporting segment and allocated goodwill. Synfuels
contributed 15% of the total projected cash flows, on a present value basis,
of the PIP reporting segment as of June 30, 2006.
The $41 million of goodwill consists of $25 million of assigned goodwill related to
our 2001 merger with MCN Energy Group Inc. and $16 million of goodwill related to
our 1997 acquisition of a coke battery facility.
As requested in the Comment Letter, the DTE Energy Company acknowledges that:
|
• |
|
The Company is responsible for the adequacy and accuracy of the disclosure in the
filing; |
|
• |
|
Staff comments or changes to disclosure in response to staff comments do not foreclose
the Commission from taking any action with respect to the filing; and |
|
|
• |
|
The Company may not assert staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the United States. |
We appreciate your assistance in this matter and will be pleased to provide any additional
information you may need. We hope this letter responds adequately to your comments, but
September 13, 2006
Page 19 of 19
please
direct any further questions or comments you may have regarding this letter to the undersigned at
(313) 235-7134.
|
|
|
|
|
Very truly yours, |
|
|
|
/s/ Peter B. Oleksiak |
|
|
Peter B. Oleksiak |
|
|
Controller |