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Dte Energy Co (DTE) SEC Filing 8-K Material Event for the period ending Monday, May 4, 2020

Dte Energy Co

CIK: 936340 Ticker: DTE
Exhibit 99.1

DTE Gas Company

Unaudited Consolidated Financial Statements as of and for the Three Months Ended March 31, 2020






TABLE OF CONTENTS






DEFINITIONS

AFUDC
 
Allowance for Funds Used During Construction
 
 
 
ASU
 
Accounting Standards Update issued by the FASB
 
 
 
Company
 
DTE Gas Company and any subsidiary companies
 
 
 
COVID-19
 
Coronavirus disease of 2019
 
 
 
Customer Choice
 
Michigan legislation giving customers the option of retail access to alternative suppliers for natural gas
 
 
 
DTE Energy
 
DTE Energy Company, directly or indirectly the parent of DTE Electric Company, DTE Gas Company, and numerous non-utility subsidiaries
 
 
 
DTE Gas
 
DTE Gas Company (an indirect wholly-owned subsidiary of DTE Energy) and subsidiary companies
 
 
 
EGLE
 
Michigan Department of Environment, Great Lakes, and Energy, formerly known as Michigan Department of Environmental Quality
 
 
 
EPA
 
U.S. Environmental Protection Agency
 
 
 
FASB
 
Financial Accounting Standards Board
 
 
 
FERC
 
Federal Energy Regulatory Commission
 
 
 
LLC
 
DTE Energy Corporate Services, LLC, a subsidiary of DTE Energy
 
 
 
MGP
 
Manufactured Gas Plant
 
 
 
MPSC
 
Michigan Public Service Commission
 
 
 
NEXUS
 
NEXUS Gas Transmission, LLC, a joint venture in which a subsidiary of DTE Energy owns a 50% partnership interest
 
 
 
Represented
 
Employees of DTE Gas covered by collective bargaining agreements
 
 
 
TCJA
 
Tax Cuts and Jobs Act of 2017
 
 
 
Topic 606
 
FASB issued ASU No. 2014-09, Revenue From Contracts with Customers, as amended
 
 
 
VIE
 
Variable Interest Entity


1


DTE Gas Company

Consolidated Statements of Operations (Unaudited)

 
Three Months Ended
 
March 31,

2020
 
2019
 
(In millions)
Operating Revenues
$
533

 
$
637

 
 
 
 
Operating Expenses
 
 
 
Cost of gas
174

 
236

Operation and maintenance
121

 
127

Depreciation and amortization
37

 
34

Taxes other than income
24

 
24

 
356

 
421

Operating Income
177

 
216

 
 
 
 
Other (Income) and Deductions
 
 
 
Interest expense
20

 
19

Interest income
(1
)
 
(1
)
Other income
(1
)
 
(3
)
Other expenses
3

 

 
21

 
15

Income Before Income Taxes
156

 
201

 
 
 
 
Income Tax Expense
36

 
50

 
 
 
 
Net Income
$
120

 
$
151


See Notes to Consolidated Financial Statements (Unaudited)


2


DTE Gas Company

Consolidated Statements of Comprehensive Income (Unaudited)

 
Three Months Ended
 
March 31,
 
2020
 
2019
 
(In millions)
Net Income
$
120

 
$
151

Other comprehensive income

 

Comprehensive Income
$
120

 
$
151


See Notes to Consolidated Financial Statements (Unaudited)


3


DTE Gas Company

Consolidated Statements of Financial Position (Unaudited)

 
March 31,
 
December 31,
 
2020
 
2019
 
(In millions)
ASSETS
Current Assets
 
 
 
Cash and cash equivalents
$
44

 
$
1

Accounts receivable (less allowance for doubtful accounts of $37 and $32, respectively)
 
 
 
Customer
321

 
312

Affiliates
39

 
31

Other
3

 
1

Inventories
 
 
 
Gas
11

 
40

Materials and supplies
20

 
16

Gas customer choice deferred asset
29

 
47

Notes receivable


 


Affiliates
1

 
1

Other
5

 
6

Regulatory assets
4

 

Other
27

 
21

 
504

 
476

 
 
 
 
Investments
33

 
37

 
 
 
 
Property
 
 
 
Property, plant, and equipment
6,061

 
5,978

Accumulated depreciation and amortization
(1,938
)
 
(1,915
)
 
4,123

 
4,063

Other Assets
 
 
 
Regulatory assets
685

 
706

Net investment in lease
39

 
39

Prepaid pension costs — affiliates
171

 
165

Prepaid postretirement costs — affiliates
194

 
188

Other
13

 
14

 
1,102

 
1,112

Total Assets
$
5,762

 
$
5,688


See Notes to Consolidated Financial Statements (Unaudited)

4


DTE Gas Company

Consolidated Statements of Financial Position (Unaudited) - Continued

 
March 31,
 
December 31,
 
2020
 
2019
 
(In millions, except shares)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
 
 
 
Accounts payable
 
 
 
Affiliates
$
15

 
$
21

Other
159

 
184

Short-term borrowings
 
 
 
Other
153

 
194

Current portion of long-term debt
50

 
50

Gas inventory equalization
62

 

Regulatory liabilities
3

 
25

Other
60

 
68

 
502

 
542

 
 
 
 
Long-Term Debt (net of current portion)
1,652

 
1,652

 
 
 
 
Other Liabilities
 
 
 
Deferred income taxes
673

 
640

Regulatory liabilities
705

 
712

Asset retirement obligations
165

 
163

Accrued pension liability — affiliates
90

 
90

Accrued postretirement liability — affiliates
4

 
4

Other
32

 
33

 
1,669

 
1,642

Commitments and Contingencies (Note 9)
 
 
 
 
 
 
 
Shareholder's Equity
 
 
 
Common stock ($1 par value, 15,100,000 shares authorized, and 10,300,000 shares issued and outstanding for both periods)
989

 
989

Retained earnings
950

 
863

Total Shareholder's Equity
1,939

 
1,852

Total Liabilities and Shareholder's Equity
$
5,762

 
$
5,688


See Notes to Consolidated Financial Statements (Unaudited)


5


DTE Gas Company

Consolidated Statements of Cash Flows (Unaudited)

 
Three Months Ended
 
March 31,
 
2020
 
2019
 
(In millions)
Operating Activities
 
 
 
Net Income
$
120

 
$
151

Adjustments to reconcile Net Income to Net cash from operating activities:
 
 
 
Depreciation and amortization
37

 
34

Deferred income taxes
30

 
3

Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(19
)
 
(45
)
Inventories
28

 
40

Prepaid pension costs — affiliates
(6
)
 
(5
)
Prepaid postretirement benefit costs — affiliates
(6
)
 
(12
)
Accounts payable
(16
)
 
(24
)
Gas inventory equalization
62

 
88

Accrued pension liability — affiliates

 
1

Regulatory assets and liabilities
2

 
(18
)
Other current and noncurrent assets and liabilities
8

 
36

Net cash from operating activities
240

 
249

Investing Activities
 
 
 
Plant and equipment expenditures
(123
)
 
(110
)
Notes receivable and other
1

 
2

Net cash used for investing activities
(122
)
 
(108
)
Financing Activities
 
 
 
Short-term borrowings, net — other
(41
)
 
(110
)
Dividends paid on common stock
(33
)
 
(31
)
Other
(1
)
 

Net cash used for financing activities
(75
)
 
(141
)
Net Increase in Cash and Cash Equivalents
43

 

Cash and Cash Equivalents at Beginning of Period
1

 

Cash and Cash Equivalents at End of Period
$
44

 
$

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities
 
 
 
Plant and equipment expenditures in accounts payable
$
42

 
$
35


See Notes to Consolidated Financial Statements (Unaudited)


6


DTE Gas Company

Consolidated Statements of Changes in Shareholder's Equity (Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
 
 
Shares
 
Amount
 
 
 
Total
 
(Dollars in millions, shares in thousands)
Balance, December 31, 2019
10,300

 
$
10

 
$
979

 
$
863

 
$
1,852

Net Income

 

 

 
120

 
120

Dividends declared on common stock

 

 

 
(33
)
 
(33
)
Balance, March 31, 2020
10,300

 
10

 
979

 
950

 
1,939


 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
 
 
Shares
 
Amount
 
 
 
Total
 
(Dollars in millions, shares in thousands)
Balance, December 31, 2018
10,300

 
$
10

 
$
859

 
$
799

 
$
1,668

Net Income

 

 

 
151

 
151

Dividends declared on common stock

 

 

 
(31
)
 
(31
)
Balance, March 31, 2019
10,300

 
10

 
859

 
919

 
1,788


See Notes to Consolidated Financial Statements (Unaudited)


7


DTE Gas Company
Notes to Consolidated Financial Statements (Unaudited)


NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
Corporate Structure
DTE Gas is a public utility engaged in the purchase, storage, transportation, distribution, and sale of natural gas to approximately 1.3 million customers throughout Michigan and the sale of storage and transportation capacity. The Company is regulated by the MPSC and certain activities are regulated by the FERC. In addition, the Company is regulated by other federal and state regulatory agencies including the EPA and EGLE.
Basis of Presentation
The Consolidated Financial Statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's 2019 Consolidated Financial Statements furnished on Form 8-K.
The accompanying Consolidated Financial Statements are prepared using accounting principles generally accepted in the United States of America. These accounting principles require management to use estimates and assumptions that impact reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from the Company's estimates.
The Consolidated Financial Statements are unaudited but, in the Company's opinion include all adjustments necessary to present a fair statement of the results for the interim periods. All adjustments are of a normal recurring nature, except as otherwise disclosed in these Consolidated Financial Statements and Notes to Consolidated Financial Statements. Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending December 31, 2020.
Certain prior year balances were reclassified to match the current year's Consolidated Financial Statements presentation.
Principles of Consolidation
The Company consolidates all majority-owned subsidiaries and investments in entities in which it has controlling influence. Non-majority owned investments are accounted for using the equity method when the Company is able to significantly influence the operating policies of the investee. When the Company does not influence the operating policies of an investee, the cost method is used. The Company eliminates all intercompany balances and transactions.
The Company evaluates whether an entity is a VIE whenever reconsideration events occur. The Company consolidates VIEs for which it is the primary beneficiary. If the Company is not the primary beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of accounting. When assessing the determination of the primary beneficiary, the Company considers all relevant facts and circumstances, including: the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb the expected losses and/or the right to receive the expected returns of the VIE. The Company performs ongoing reassessments of all VIEs to determine if the primary beneficiary status has changed.
The Company holds a variable interest in NEXUS through purchases under a long-term transportation capacity contract. NEXUS, a joint venture with a subsidiary of DTE Energy, owns a 256-mile pipeline to transport Utica and Marcellus shale gas to Ohio, Michigan, and Ontario market centers. NEXUS is a VIE as it has insufficient equity at risk to finance its activities. The Company is not the primary beneficiary, as the power to direct significant activities is shared between the owners of the equity interests.
As of March 31, 2020, the carrying amount of liabilities in the Company's Consolidated Statements of Financial Position that relate to its variable interest under the long-term contract are primarily related to working capital accounts and generally represent the amounts owed by the Company for transportation associated with the current billing cycle under the contract. The Company has not provided any significant form of financial support associated with the long-term contract. There is no material potential exposure to loss as a result of the Company's variable interest through the long-term contract.


8


DTE Gas Company
Notes to Consolidated Financial Statements (Unaudited) - (Continued)

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The interim effective tax rates of DTE Gas are as follows:
 
Effective Tax Rate
 
Three Months Ended March 31,
 
2020
 
2019
DTE Gas
23
%
 
25
%
The tax rates are affected by estimated annual permanent items, including AFUDC equity and other flow-through items, as well as discrete items that may occur in any given period, but are not consistent from period to period.
The 2% decrease in the effective tax rate for the three months ended March 31, 2020 was primarily due to higher amortization of the TCJA regulatory liability in 2020.
The Company had income tax receivables with DTE Energy of $25 million at March 31, 2020 and $30 million at December 31, 2019.
In March 2020, the "Coronavirus Aid, Relief, and Economic Security Act" (CARES Act) was signed into law and included several significant changes to the Internal Revenue Code. The CARES Act includes certain tax relief provisions applicable to the Company including delayed payment of employer payroll taxes and the employee retention credit. The Company implemented the deferral of employee payroll taxes in April 2020 and is evaluating the impact of the employee retention credit.
Allocated Stock-Based Compensation
The Company received an allocation of costs from DTE Energy associated with stock-based compensation of $2 million and $3 million for the three months ended March 31, 2020 and 2019, respectively.
Financing Receivables
The Company monitors the credit quality of financing receivables on a regular basis by reviewing credit quality indicators and monitoring for trigger events, such as a credit rating downgrade or bankruptcy. Credit quality indicators include, but are not limited to, ratings by credit agencies where available, collection history, collateral, counterparty financial statements and other internal metrics. Utilizing such data, the Company has determined three internal grades of credit quality. Internal grade 1 includes financing receivables for counterparties where credit rating agencies have ranked the counterparty as investment grade. To the extent credit ratings are not available, the Company utilizes other credit quality indicators to determine the level of risk associated with the financing receivable. Internal grade 1 may include financing receivables for counterparties for which credit rating agencies have ranked the counterparty as below investment grade, however, due to favorable information on other credit quality indicators, the Company has determined the risk level to be similar to that of an investment grade counterparty. Internal grade 2 includes financing receivables for counterparties with limited credit information and those with a higher risk profile based upon credit quality indicators. Internal grade 3 reflects financing receivables for which the counterparties have the greatest level of risk, including those in bankruptcy status.

9


DTE Gas Company
Notes to Consolidated Financial Statements (Unaudited) - (Continued)

The following represents the Company's financing receivables by year of origination, classified by internal grade of credit risk. The related credit quality indicators and risk ratings utilized to develop the internal grades have been updated through March 2020.
 
Year of origination
 
2020
 
2019
 
2018 and prior
 
Total
 
(In millions)
Notes receivable
 
 
 
 
 
 
 
Internal grade 2
1

 
3

 
5

 
9

Total notes receivable
$
1

 
$
3

 
$
5

 
$
9

 
 
 
 
 
 
 
 
Net investment in leases
 
 
 
 
 
 
 
Net investment in leases, internal grade 1
$

 
$

 
$
43

 
$
43

Total net investment in leases
$

 
$

 
$
43

 
$
43

The allowance for doubtful accounts on accounts receivable for the Company is generally calculated using the aging approach that utilizes rates developed in reserve studies. The Company establishes an allowance for uncollectible accounts based on historical losses and management's assessment of existing and future economic conditions, customer trends and other factors. Customer accounts are generally considered delinquent if the amount billed is not received by the due date, which is typically in 21 days, however, factors such as assistance programs may delay aggressive action. The Company generally assesses late payment fees on trade receivables based on past-due terms with customers. Customer accounts are written off when collection efforts have been exhausted. The time period for write-off is 150 days after service has been terminated.
Notes receivable, or financing receivables, are primarily comprised of finance lease receivables and loans that are included in Notes Receivable and Other current assets on the Consolidated Statements of Financial Position.
Notes receivable are typically considered delinquent when payment is not received for periods ranging from 60 to 120 days. The Company ceases accruing interest (nonaccrual status), considers a note receivable impaired, and establishes an allowance for credit loss when it is probable that all principal and interest amounts due will not be collected in accordance with the contractual terms of the note receivable. In determining the allowance for credit losses for notes receivable, the Company considers the historical payment experience and other factors that are expected to have a specific impact on the counterparty's ability to pay including existing and future economic conditions.
The following table presents a roll-forward of the activity for the Company's financing receivables credit loss reserves as of March 31, 2020.
 
Trade accounts receivable
 
Other receivables
 
Total
 
(In millions)
Beginning reserve balance at 1/1/2020
$
29

 
$
3

 
$
32

Current period provision
15

 

 
15

Write-offs charged against allowance
(15
)
 

 
(15
)
Recoveries of amounts previously written off
5

 

 
5

Ending reserve balance at 3/31/2020
$
34

 
$
3

 
$
37

Bad debt expense for the Company for the three months ended March 31, 2019 was $13 million.
The Company is monitoring the impacts from the COVID-19 pandemic on our customers and various counterparties. During the three months ended March 31, 2020, the allowance for doubtful accounts was increased to account for additional risk related to the pandemic. However, this adjustment was not material.
In April 2020, the MPSC issued an order in response to the COVID-19 pandemic and authorized the deferral of certain uncollectible expense that is in excess of the amount used to set current rates. The Company is still evaluating this order for any potential impact to the allowance for doubtful accounts. Refer to Note 5 to the Consolidated Financial Statements, "Regulatory Matters," for further information regarding the order.

10


DTE Gas Company
Notes to Consolidated Financial Statements (Unaudited) - (Continued)

There are no material amounts of past due financing receivables for the Company as of March 31, 2020.

NOTE 3NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended. The amendments in this update have replaced the previous incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasts, to develop credit loss estimates. The ASU requires entities to use the new methodology to measure impairment of financial instruments, including accounts receivable, and may result in earlier recognition of credit losses than under previous generally accepted accounting principles. Entities must apply the new guidance as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company adopted the standard effective January 1, 2020. The adoption of the ASU did not have an impact on the Company's financial position or results of operations. Additional required disclosures have been included in Note 2 to the Consolidated Financial Statements, “Significant Accounting Policies”.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820. The Company adopted the ASU effective January 1, 2020; however, no disclosure changes were deemed necessary for the three months ended March 31, 2020.  To the extent any disclosure changes required by the ASU are applicable for future periods, they will be incorporated into Note 6 to the Consolidated Financial Statements, "Fair Value".
In August 2018, the FASB issued ASU No. 2018-15, Intangibles Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The Company adopted the standard effective January 1, 2020 using the prospective approach. The adoption of the ASU did not have an impact on the Company's Consolidated Financial Statements. On a prospective basis, costs within the scope of this amendment will be accounted for consistent with any underlying service contracts. Capitalized implementation costs will be reflected in Other noncurrent assets on the Consolidated Statements of Financial Position and amortization of these costs will be reflected in Operation and maintenance within the Consolidated Statements of Operations. Cash flow activity will be reflected in the Other current and noncurrent assets and liabilities line within the Operating Activities section of the Consolidated Statements of Cash Flows.
In August 2018, the FASB issued ASU No. 2018-14, Compensation Retirement Benefits Defined Benefit Plans (Subtopic 715-20): Disclosure Framework Changes to the Disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The Company adopted the ASU effective January 1, 2020. The required disclosures for this ASU will be reflected in the 2020 year-end financial statements.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The amendments in this update modify the requirements for determining whether fees paid to a decision maker or service provider are variable interests and require reporting entities to consider indirect interests held through related parties under common control on a proportional basis. The Company adopted the ASU effective January 1, 2020. The adoption of the ASU did not have a significant impact on the Company's Consolidated Financial Statements.
Recently Issued Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions, and clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses, and annual effective tax rate calculations. The ASU is effective for the Company for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact of this standard on its Consolidated Financial Statements.

11


DTE Gas Company
Notes to Consolidated Financial Statements (Unaudited) - (Continued)

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
. The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The ASU is effective for the Company beginning March 12, 2020 through December 31, 2022. The Company is currently assessing the impact of this standard on its Consolidated Financial Statements.

NOTE 4REVENUE
Disaggregation of Revenue
The following is a summary of disaggregated revenues for the Company:
 
Three Months Ended March 31,
 
2020
 
2019
 
(In millions)
Gas sales
$
387

 
$
469

End User Transportation
77

 
81

Intermediate Transportation
26

 
26

Other(a)
43

 
61

Total Gas operating revenues(b)
$
533

 
$
637

_______________________________________
(a)
Includes revenue adjustments related to various regulatory mechanisms.
(b)
Includes $2 million under Alternative Revenue Programs for the three months ended March 31, 2020 and $2 million of other revenues for the three months ended March 31, 2020 and 2019, which are both outside the scope of Topic 606.
Transaction Price Allocated to the Remaining Performance Obligations
In accordance with optional exemptions available under Topic 606, the Company did not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less, (2) with the exception of fixed consideration, contracts for which revenue is recognized at the amount to which the Company has the right to invoice for goods provided and services performed, and (3) contracts for which variable consideration relates entirely to an unsatisfied performance obligation.
Such contracts consist of varying types of performance obligations, including the supply and delivery of energy related products and services. Contracts with variable volumes and/or variable pricing have also been excluded as the related consideration under the contract is variable at inception of the contract. Contract lengths vary from cancelable to multi-year.
The Company expects to recognize revenue for the following amounts related to fixed consideration associated with remaining performance obligations in each of the future periods noted:
 
(In millions)
2020
$
74

2021
94

2022
82

2023
63

2024
56

2025 and thereafter
388


$
757



12


DTE Gas Company
Notes to Consolidated Financial Statements (Unaudited) - (Continued)

NOTE 5REGULATORY MATTERS
2020 COVID-19 Response
In response to the COVID-19 pandemic, the MPSC issued an order on April 15, 2020 to provide guidance and direction to utilities and other stakeholders on topics including customer protections and affordability, utility accounting, regulatory activities, energy assistance, and energy waste reduction and demand response continuity.  The order authorizes the deferral of uncollectible expense that is in excess of the amount used to set current rates effective March 24, 2020, the date of Michigan's executive order to "Stay Home, Stay Safe".  The Company is currently evaluating the impact of this order for potential change in accounting treatment, and will continue to monitor MPSC activities for further guidance on COVID-19 and any other pandemic related costs.
2019 Rate Case Filing
DTE Gas filed a rate case with the MPSC on November 25, 2019 requesting an increase in base rates of $204 million based on a projected twelve-month period ending September 30, 2021.  The requested increase in base rates is primarily due to an increase in net plant resulting from infrastructure investments and operating and maintenance expenses.  The rate filing also requests an increase in return on equity from 10.0% to 10.5% and includes projected changes in sales and working capital.  A final MPSC order in this case is expected by September 2020.

NOTE 6 FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company makes certain assumptions it believes that market participants would use in pricing assets or liabilities, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. Credit risk of the Company and its counterparties is incorporated in the valuation of assets and liabilities through the use of credit reserves, the impact of which was immaterial at March 31, 2020 and December 31, 2019. The Company believes it uses valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.
A fair value hierarchy has been established 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 markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. All assets and liabilities are required to be classified in their entirety based on the lowest level of input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The Company classifies fair value balances based on the fair value hierarchy defined as follows:
Level 1 — Consists of unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date.
Level 2 — Consists of inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
Level 3 — Consists of unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.

13


DTE Gas Company
Notes to Consolidated Financial Statements (Unaudited) - (Continued)

The following table presents the carrying amount and fair value of financial instruments:
 
March 31, 2020
 
December 31, 2019
 
Carrying
 
Fair Value
 
Carrying
 
Fair Value
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
(In millions)
Notes receivable — affiliates
$
1

 
$

 
$

 
$
1

 
$
1

 
$

 
$

 
$
1

Notes receivable  other(a), excluding lessor finance leases
$
9

 
$

 
$

 
$
9

 
$
9

 
$

 
$

 
$
9

Short-term borrowings — other
$
153

 
$

 
$
153

 
$

 
$
194

 
$

 
$
194

 
$

Long-term debt(b)
$
1,702

 
$

 
$
479

 
$
1,208

 
$
1,702

 
$

 
$
734

 
$
939

_______________________________________
(a)
Noncurrent portion included in Other Assets Other on the Consolidated Statements of Financial Position.
(b)
Includes debt due within one year, unamortized debt discounts, and issuance costs.
For further fair value information on financial and derivative instruments, see Note 7 to the Consolidated Financial Statements, "Financial and Other Derivative Instruments."

NOTE 7FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
The Company recognizes all derivatives at their fair value as Derivative assets or liabilities 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 derivative gain or loss is deferred in Accumulated other comprehensive income (loss) and later reclassified into earnings when the underlying transaction occurs. For fair value hedges, changes in fair values for the derivative and hedged item are recognized in earnings each period. For derivatives that do not qualify or are not designated for hedge accounting, changes in fair value are recognized in earnings each period.
The Company's primary market risk exposure is associated with commodity prices, credit, and interest rates. The Company has risk management policies to monitor and manage market risks. The Company purchases, stores, transports, distributes, and sells natural gas, buys and sells transportation capacity and storage capacity. The Company has fixed-priced contracts for portions of its expected natural gas supply requirements through March 2023. Substantially all of these contracts meet the normal purchases and normal sales exception and are therefore accounted for under the accrual method. Forward transportation and storage contracts are generally not derivatives and are therefore accounted for under the accrual method.

NOTE 8 SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
The Company has a $300 million unsecured revolving credit agreement that can be used for general corporate borrowings but is intended to provide liquidity support for the Company's commercial paper program. Borrowings under the revolver are available at prevailing short-term interest rates. The facility will expire in April 2024. The Company had $153 million outstanding against the revolver at March 31, 2020.
The agreement requires the Company to maintain a total funded debt to capitalization ratio of no more than 0.65 to 1. In the agreement, "total funded debt" means all indebtedness of the Company and its consolidated subsidiaries, including finance lease obligations, hedge agreements, and guarantees of third parties' debt, but excluding contingent obligations, nonrecourse and junior subordinated debt, and, except for calculations at the end of the second quarter, certain short-term debt. "Capitalization" means the sum of (a) total funded debt plus (b) "consolidated net worth," which is equal to consolidated total equity of the Company and its consolidated subsidiaries (excluding pension effects under certain FASB statements), as determined in accordance with accounting principles generally accepted in the United States of America. At March 31, 2020, the total funded debt to total capitalization ratio for the Company was 0.47 to 1 and was in compliance with this financial covenant.

14


DTE Gas Company
Notes to Consolidated Financial Statements (Unaudited) - (Continued)

In April 2020, the Company entered into a $100 million unsecured term loan, of which the Company has drawn the full $100 million available. The term loan expires in April 2021 and has terms consistent with the unsecured revolving credit agreement.

NOTE 9 COMMITMENTS AND CONTINGENCIES
Environmental
Contaminated and Other Sites — Prior to the construction of major interstate natural gas pipelines, gas for heating and other uses was manufactured locally from processes involving coal, coke, or oil. The facilities, which produced gas, have been designated as MGP sites. The Company owns or previously owned, 14 former MGP sites. Investigations have revealed contamination related to the by-products of gas manufacturing at each site. Cleanup of eight of the MGP sites is complete, and the sites are closed. The Company has also completed partial closure of four additional sites. Cleanup activities associated with the remaining sites will continue over the next several years. The MPSC has established a cost deferral and rate recovery mechanism for investigation and remediation costs incurred at former MGP sites. In addition to the MGP sites, the Company is also in the process of cleaning up other contaminated sites, including gate stations, gas pipeline releases, and underground storage tank locations. As of March 31, 2020 and December 31, 2019, the Company had $24 million and $25 million, respectively, accrued for remediation. Any change in assumptions, such as remediation techniques, nature and extent of contamination, and regulatory requirements, could impact the estimate of remedial action costs for the sites and affect the Company's financial position and cash flows. The Company anticipates the cost amortization methodology approved by the MPSC, which allows for amortization of the MGP costs over a ten-year period beginning with the year subsequent to the year the MGP costs were incurred, will prevent the associated investigation and remediation costs from having a material adverse impact on the Company's results of operations.
Guarantees
In certain limited circumstances, the Company enters into contractual guarantees. The Company may guarantee another entity’s obligation in the event it fails to perform and may provide guarantees in certain indemnification agreements. The Company may also provide indirect guarantees for the indebtedness of others.
Labor Contracts
There are several bargaining units for the Company's approximate 1,200 represented employees. The majority of the represented employees are under contracts that expire in 2021.
Purchase Commitments
The Company has made certain commitments in connection with 2020 annual capital expenditures that are expected to be approximately $570 million.
COVID-19 Pandemic
During the first quarter 2020, the COVID-19 pandemic began impacting Michigan and other neighboring service territories. The spread of COVID-19 and efforts to contain the virus resulted in closures and reduced operations of businesses, governmental agencies, and other institutions. Any resulting impacts from the pandemic were not material to the Company's financial results for the three months ended March 31, 2020.
The Company will continue to monitor the impact of the COVID-19 pandemic on supply chains, markets, counterparties, and customers, and any related impacts on operating costs, customer demand, and recoverability of assets that could materially impact the Company's financial results. At this time, the Company cannot predict the ultimate impact of these factors to its Consolidated Financial Statements, as future developments involving the severity of COVID-19, actions to contain or treat its impact, and the extent to which normal economic and operating conditions can resume are highly uncertain.

15


DTE Gas Company
Notes to Consolidated Financial Statements (Unaudited) - (Continued)

Other Contingencies
The Company is involved in certain other legal, regulatory, administrative, and environmental proceedings before various courts, arbitration panels, and governmental agencies concerning claims arising in the ordinary course of business. These proceedings include certain contract disputes, additional environmental reviews and investigations, audits, inquiries from various regulators, and pending judicial matters. The Company cannot predict the final disposition of such proceedings. The Company regularly reviews legal matters and records provisions for claims that it can estimate and are considered probable of loss. The resolution of these pending proceedings is not expected to have a material effect on the Consolidated Financial Statements in the periods they are resolved.
For a discussion of contingencies related to regulatory matters, see Note 5 to the Consolidated Financial Statements, "Regulatory Matters."

NOTE 10 RETIREMENT BENEFITS AND TRUSTEED ASSETS
The Company participates in various plans that provide defined benefit pension and other postretirement benefits for DTE Energy and its affiliates. The plans are sponsored by the LLC and cover substantially all employees of the Company. The Company accounts for its participation in the represented qualified pension plan by applying single-employer accounting. Non-represented participation in qualified and non-qualified pension plans is accounted for by applying multiemployer accounting. Participation in other postretirement benefit plans is accounted for by applying multiple-employer accounting. Within multiemployer and multiple-employer plans, participants pool plan assets for investment purposes and to reduce the cost of plan administration. The primary difference between plan types is assets contributed in multiemployer plans can be used to provide benefits for all participating employers, while assets contributed within a multiple-employer plan are restricted for use by the contributing employer. Plan participants of all plans are solely DTE Energy and affiliate participants.
The following table details the components of net periodic benefit costs (credits) for represented pension benefits and other postretirement benefits:
 
Pension Benefits
 
Other Postretirement Benefits
 
2020
 
2019
 
2020
 
2019
 
(In millions)
Three Months Ended March 31,
 
 
 
 
 
 
 
Service cost
$
4

 
$
3

 
$
2

 
$
1

Interest cost
6

 
6

 
3

 
4

Expected return on plan assets
(10
)
 
(9
)
 
(10
)
 
(10
)
Amortization of:
 
 
 
 
 
 
 
Net actuarial loss
4

 
3

 
1

 

Prior service credit

 

 
(2
)
 

Net periodic benefit cost (credit)
$
4

 
$
3

 
$
(6
)
 
$
(5
)
DTE Energy's subsidiaries accounted for under multiemployer guidance are responsible for their share of qualified and nonqualified pension benefit costs. The Company's allocated portion of pension benefit costs for non-represented plans included in capital expenditures and regulatory liabilities were nominal for the three months ended March 31, 2020 and 2019. These amounts include recognized contractual termination benefit charges, curtailment gains, and settlement charges.
Pension and Other Postretirement Contributions
At the discretion of management, and depending upon economic and financial market conditions, the Company anticipates making up to $22 million in contributions to the pension plans during 2020. The Company does not anticipate making contributions to the other postretirement benefit plans in 2020.


16

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Ticker: DTE
CIK: 936340
Form Type: 8-K Corporate News
Accession Number: 0000936340-20-000173
Submitted to the SEC: Mon May 04 2020 4:18:18 PM EST
Accepted by the SEC: Mon May 04 2020
Period: Monday, May 4, 2020
Industry: Electric Services
Events:
  1. Earnings Release
  2. Financial Exhibit

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