filings.toolsItem 7A. Quantitative and Qualitative Disclosures About Market Risk
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Price Risk
The Electric and Gas businesses have commodity price risk, primarily related to the purchases of coal, natural gas, uranium, and electricity. However, the Registrants do not bear significant exposure to earnings risk, as such changes are included in the PSCR and GCR regulatory rate-recovery mechanisms. In addition, changes in the price of natural gas can impact the valuation of lost and stolen gas, storage sales, and transportation services revenue at the Gas segment. The Gas segment manages its market price risk related to storage sales revenue primarily through the sale of long-term storage contracts. The Registrants are exposed to short-term cash flow or liquidity risk as a result of the time differential between actual cash settlements and regulatory rate recovery.
DTE Energy's Gas Storage and Pipelines segment has exposure to natural gas price fluctuations which impact the pricing for natural gas storage, gathering, and transportation. DTE Energy manages its exposure through the use of short, medium, and long-term storage, gathering, and transportation contracts.
DTE Energy's Power and Industrial Projects business segment is subject to electricity, natural gas, and coal product price risk. DTE Energy manages its exposure to commodity price risk through the use of long-term contracts.
DTE Energy's Energy Trading business segment has exposure to electricity, natural gas, coal, crude oil, heating oil, and foreign currency exchange price fluctuations. These risks are managed by the energy marketing and trading operations through the use of forward energy, capacity, storage, options, and futures contracts, within pre-determined risk parameters.
Credit Risk
The Registrants regularly review contingent matters relating to customers and their contracts and record provisions for amounts considered at risk of probable loss in the allowance for doubtful accounts. The Registrants believe their accrued amounts are adequate for probable loss.
Trading Activities
DTE Energy is exposed to credit risk through trading activities. Credit risk is the potential loss that may result if the trading counterparties fail to meet their contractual obligations. DTE Energy utilizes both external and internal credit assessments when determining the credit quality of trading counterparties.
The following table displays the credit quality of DTE Energy's trading counterparties as of December 31, 2017:
| Credit Exposure Before Cash Collateral | Cash Collateral | Net Credit Exposure | |||||||||
| (In millions) | |||||||||||
| Investment Grade(a) | |||||||||||
| A- and Greater | $ | 226 | $ | — | $ | 226 | |||||
| BBB+ and BBB | 265 | — | 265 | ||||||||
| BBB- | 65 | — | 65 | ||||||||
| Total Investment Grade | 556 | — | 556 | ||||||||
| Non-investment grade(b) | 6 | — | 6 | ||||||||
| Internally Rated — investment grade(c) | 295 | (1 | ) | 294 | |||||||
| Internally Rated — non-investment grade(d) | 20 | (2 | ) | 18 | |||||||
| Total | $ | 877 | $ | (3 | ) | $ | 874 |
| (a) | This category includes counterparties with minimum credit ratings of Baa3 assigned by Moody’s Investors Service (Moody’s) or BBB- assigned by Standard & Poor’s Rating Group, a division of McGraw-Hill Companies, Inc. (Standard & Poor’s). The five largest counterparty exposures, combined, for this category represented approximately 15% of the total gross credit exposure. |
| (b) | This category includes counterparties with credit ratings that are below investment grade. The five largest counterparty exposures, combined, for this category represented approximately 1% of the total gross credit exposure. |
| (c) | This category includes counterparties that have not been rated by Moody’s or Standard & Poor’s, but are considered investment grade based on DTE Energy’s evaluation of the counterparty’s creditworthiness. The five largest counterparty exposures, combined, for this category represented approximately 12% of the total gross credit exposure. |
| (d) | This category includes counterparties that have not been rated by Moody’s or Standard & Poor’s, and are considered non-investment grade based on DTE Energy’s evaluation of the counterparty’s creditworthiness. The five largest counterparty exposures, combined, for this category represented approximately 2% of the total gross credit exposure. |
Other
The Registrants engage in business with customers that are non-investment grade. The Registrants closely monitor the credit ratings of these customers and, when deemed necessary and permitted under the tariffs, request collateral or guarantees from such customers to secure their obligations.
Interest Rate Risk
DTE Energy is subject to interest rate risk in connection with the issuance of debt. In order to manage interest costs, DTE Energy may use treasury locks and interest rate swap agreements. DTE Energy's exposure to interest rate risk arises primarily from changes in U.S. Treasury rates, commercial paper rates, and LIBOR. As of December 31, 2017, DTE Energy had a floating rate debt-to-total debt ratio of approximately 4.8%.
Foreign Currency Exchange Risk
DTE Energy has foreign currency exchange risk arising from market price fluctuations associated with fixed priced contracts. These contracts are denominated in Canadian dollars and are primarily for the purchase and sale of natural gas and power, as well as for long-term transportation capacity. To limit DTE Energy's exposure to foreign currency exchange fluctuations, DTE Energy has entered into a series of foreign currency exchange forward contracts through June 2022.
Summary of Sensitivity Analyses
The Registrants performed sensitivity analyses on the fair values of commodity contracts and long-term debt obligations. The commodity contracts listed below principally relate to energy marketing and trading activities. The sensitivity analyses involved increasing and decreasing forward prices and rates at December 31, 2017 and 2016 by a hypothetical 10% and calculating the resulting change in the fair values.
The results of the sensitivity analyses:
| Assuming a 10% Increase in Prices/Rates | Assuming a 10% Decrease in Prices/Rates | |||||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||||
| Activity | 2017 | 2016 | 2017 | 2016 | Change in the Fair Value of | |||||||||||||
| (In millions) | ||||||||||||||||||
| Gas contracts | $ | — | $ | 14 | $ | — | $ | (14 | ) | Commodity contracts | ||||||||
| Power contracts | $ | 5 | $ | 18 | $ | (7 | ) | $ | (18 | ) | Commodity contracts | |||||||
| Interest rate risk — DTE Energy | $ | (576 | ) | $ | (529 | ) | $ | 581 | $ | 510 | Long-term debt | |||||||
| Interest rate risk — DTE Electric | $ | (246 | ) | $ | (235 | ) | $ | 263 | $ | 252 | Long-term debt |
For further discussion of market risk, see Management's Discussion and Analysis in Item 7 of this Report and Note 13 to the Consolidated Financial Statements in Item 8 of this Report, "Financial and Other Derivative Instruments."
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