News Column

DTE ENERGY CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 25, 2014

OVERVIEW

DTE Energy is a diversified energy company and is the parent company of DTE Electric and DTE Gas, regulated electric and natural gas utilities engaged primarily in the business of providing electricity and natural gas sales, distribution and storage services throughout Michigan. We operate three energy-related non-utility segments with operations throughout the United States.

Net income attributable to DTE Energy in the second quarter of 2014 was $124 million, or $0.70 per diluted share, compared to net income attributable to DTE Energy of $105 million, or $0.60 per diluted share, in the second quarter of 2013. Net income attributable to DTE Energy in the six months ended June 30, 2014 was $450 million, or $2.54 per diluted share, compared to net income attributable to DTE Energy of $339 million, or $1.94 per diluted share, in the six months ended June 30, 2013. The increase in net income in the second quarter is primarily due to higher earnings in the Electric segment, partially offset by lower earnings in the Gas and Energy Trading segments. The increase in net income for the six months ended June 30, 2014 is primarily due to higher earnings in the Electric, Gas and Energy Trading segments.



Please see detailed explanations of segment performance in the following Results of Operations section.

DTE Energy's strategy is to achieve long-term earnings growth, a strong balance sheet and an attractive dividend yield.

Our utilities' growth will be driven by base infrastructure, environmental and renewable investments. We are focused on executing plans to achieve operational excellence and customer satisfaction with a focus on customer affordability. We operate in a constructive regulatory environment and have solid relationships with our regulators. We have significant investments in our non-utility businesses. We employ disciplined investment criteria when assessing growth opportunities that leverage our assets, skills and expertise and provide diversity in earnings and geography. Specifically, we invest in targeted energy markets with attractive competitive dynamics where meaningful scale is in alignment with our risk profile. We expect growth opportunities in the Gas Storage and Pipelines and Power and Industrial Projects segments. A key priority for DTE Energy is to maintain a strong balance sheet which facilitates access to capital markets and reasonably priced short-term and long-term financing. Near-term growth will be funded through internally generated cash flows and the issuance of debt. We have an enterprise risk management program that, among other things, is designed to monitor and manage our exposure to earnings and cash flow volatility related to commodity price changes, interest rates and counterparty credit risk.



CAPITAL INVESTMENTS

Our utility businesses require significant base capital investments each year in order to maintain and improve the reliability of asset bases, including power generation plants, distribution systems, storage fields and other facilities and fleets. DTE Electric's capital investments over the 2014-2018 period are estimated at $5.6 billion for base infrastructure, $700 million for environmental compliance requirements and $400 million for renewable energy and energy efficiency expenditures. DTE Electric plans to seek regulatory approval in general rate case filings and renewable energy plan filings for capital expenditures consistent with prior ratemaking treatment. DTE Gas's capital investments over the 2014-2018 period are estimated at $700 million for base infrastructure and $500 million for gas main renewal and meter move out and pipeline integrity programs. In April 2013, the MPSC issued an order approving an infrastructure recovery mechanism (IRM) for DTE Gas and authorized the recovery of the cost of service related to $77 million of annual investment in its gas main renewal and meter move out and pipeline integrity programs. DTE Gas plans to seek regulatory approval in general rate case filings for base infrastructure capital expenditures consistent with prior ratemaking treatment. 38

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ENVIRONMENTAL MATTERS

We are subject to extensive environmental regulation. Additional costs may result as the effects of various substances on the environment are studied and governmental regulations are developed and implemented. Actual costs to comply could vary substantially. We expect to continue recovering environmental costs related to utility operations through rates charged to our customers. DTE Electric is subject to the EPA ozone and fine particulate transport and acid rain regulations that limit power plant emissions of sulfur dioxide and nitrogen oxides. Since 2005, the EPA and the State of Michigan have issued additional emission reduction regulations relating to ozone, fine particulate, regional haze and mercury air pollution. These rules will lead to additional emission controls on fossil-fueled power plants to reduce nitrogen oxide, sulfur dioxide, acid gases, particulate matter and mercury emissions. To comply with these requirements, DTE Electric spent approximately $2 billion through 2013. It is estimated that DTE Electric will make capital expenditures of approximately $280 million in 2014 and up to approximately $1.2 billion of additional capital expenditures through 2021 based on current regulations. Climate regulation and/or legislation has been proposed and discussed within the U.S. Congress and the EPA. The EPA is implementing regulatory actions under the Clean Air Act to address emissions of greenhouse gases (GHGs). EPA regulation of GHGs requires the best available control technology (BACT) for new major sources or modifications to existing major sources that cause significant increases in GHG emissions. In June 2012, the EPA proposed new source performance standards for carbon dioxide emissions from new fossil-fueled power plants. These new source performance standards were re-proposed on September 20, 2013, under a presidential directive issued on June 25, 2013. Under the same presidential directive, the EPA proposed performance standards for carbon dioxide emissions from existing, reconstructed and modified plants on June 2, 2014 and plans to issue a final standard by July 2015. DTE Energy is an active participant in working with the EPA and other stakeholders to shape the final performance standards for new and existing power plants. The standards for new sources are not expected to have a material impact on the Company. It is not possible to determine the potential impact of future regulations on existing sources at this time. Pending or future legislation or other regulatory actions could have a material impact on our operations and financial position and the rates we charge our customers. Impacts include expenditures for environmental equipment beyond what is currently planned, financing costs related to additional capital expenditures, the purchase of emission credits from market sources and the retirement of facilities where control equipment is not economical. We would seek to recover these incremental costs through increased rates charged to our utility customers as authorized by the MPSC. Increased costs for energy produced from traditional coal-based sources could also increase the economic viability of energy produced from renewable and/or nuclear sources, from energy efficiency initiatives, and from the potential development of market-based trading of carbon offsets which could provide new business opportunities for our utility and non-utility segments. A June 23, 2014U.S. Supreme Court decision on the EPA's authority to regulate greenhouse gas emissions under permitting programs of the Clean Air Act is expected to have little effect on DTE Energy since the Supreme Court's decision upholds the EPA's authority to regulate GHGs at sources that are already subject to permitting due to emissions of conventional pollutants. In addition, the Supreme Court's ruling does not affect the EPA's current proposed carbon performance standards at new or existing power plants. At the present time, it is not possible to quantify the financial impacts of these climate related legislative or regulatory initiatives on DTE Energy or its customers.



See Note 11 of the Notes to the Consolidated Financial Statements.

OUTLOOK

The next few years will be a period of rapid change for DTE Energy and for the energy industry. Our strong utility base, combined with our integrated non-utility operations, position us well for long-term growth.

Looking forward, we will focus on several areas that we expect will improve future performance:

electric and gas customer satisfaction;

electric reliability;



rate competitiveness and affordability;

regulatory stability and investment recovery for our utilities;

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growth of our utility asset base;

employee engagement;



cost structure optimization across all business segments;

cash, capital and liquidity to maintain or improve our financial strength; and

investments that integrate our assets and leverage our skills and expertise.

We will continue to pursue opportunities to grow our businesses in a disciplined manner if we can secure opportunities that meet our strategic, financial and risk criteria. RESULTS OF OPERATIONS



The following sections provide a detailed discussion of the operating performance and future outlook of our segments.

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Net Income (Loss) Attributable to DTE Energy by Segment: Electric $ 129$ 89$ 265$ 204 Gas (4 ) 8 125 104 Gas Storage and Pipelines 18 16 39 33 Power and Industrial Projects 13 7 28 19 Energy Trading (14 ) (2 ) 28 5 Corporate and Other (18 ) (13 ) (35 ) (26 ) Net Income Attributable to DTE Energy Company $ 124$ 105$ 450$ 339 ELECTRIC



Our Electric segment consists principally of DTE Electric.

Electric results are discussed below:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Operating Revenues $ 1,279$ 1,265$ 2,691$ 2,484 Fuel and Purchased Power 400 435 898 807 Gross Margin 879 830 1,793 1,677 Operation and Maintenance 328 343 671 674 Depreciation and Amortization 230 221 460 435 Taxes Other Than Income 65 64 136 134 Asset (Gains) and Losses, Reserves and Impairments, Net (1 ) 1 (1 ) - Operating Income 257 201 527 434 Other (Income) and Deductions 51 65 109 122 Income Tax Expense 77 47 153 108 Net Income Attributable to DTE Energy Company $ 129$ 89$ 265$ 204 Operating Income as a Percent of Operating Revenues 20 % 16 % 20 % 17 % Gross margin increased $49 million and $116 million in the three and six months ended June 30, 2014, respectively. Revenues associated with certain tracking mechanisms and surcharges are offset by related expenses elsewhere in the Consolidated Statements of Operations. 40 --------------------------------------------------------------------------------



The following table details changes in various gross margin components relative to the comparable prior period:

Three Months



Six Months

(In



millions)

Amortization of refundable revenue decoupling/deferred gain $ 32

$ 63 Base sales, inclusive of weather effect 10 26 Securitization bond and tax surcharge - 8 Renewable energy program 6 11 Low income energy assistance surcharge 6 13 Regulatory mechanisms and other (5 ) (5 ) Increase in gross margin $ 49 $ 116 Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In thousands of MWh) Electric Sales Residential 3,452 3,345 7,430 7,199 Commercial 4,168 4,158 8,216 8,081 Industrial 2,554 2,675 5,055 5,111 Other 171 216 376 468 10,345 10,394 21,077 20,859 Interconnection sales (a) 479 792 1,097 1,565 Total Electric Sales 10,824 11,186 22,174 22,424 Electric Deliveries Retail and Wholesale 10,345 10,394 21,077 20,859 Electric Customer Choice, including self generators (b) 1,237 1,287 2,504 2,547 Total Electric Sales and Deliveries 11,582 11,681



23,581 23,406

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(a) Represents power that is not distributed by DTE Electric.

(b) Represents deliveries for self generators who have purchased power from

alternative energy suppliers to supplement their power requirements.

Operation and maintenance expense decreased $15 million and $3 million in the three and six months ended June 30, 2014, respectively. The decrease in the second quarter was due primarily to lower employee benefit expenses of $24 million and $12 million of reinvestment expenses in 2013, partially offset by higher storm restoration expenses of $9 million, increased low income energy assistance of $7 million and higher power plant generation expenses for planned outages of $5 million. The decrease in the six-month period was primarily due to lower employee benefit expenses of $46 million and $12 million of reinvestment expenses in 2013, partially offset by higher power plant generation expenses of $35 million, increased low income energy assistance of $13 million, higher storm restoration expenses of $4 million and higher energy optimization and renewable energy expenses of $4 million. Depreciation and amortization expense increased $9 million and $25 million in the three and six months ended June 30, 2014, respectively. The increase in the second quarter was due to higher amortization of regulatory assets of $5 million, primarily related to Securitization, and $4 million of increased expense due to a higher depreciable base. The increase in the six-month period was due to higher amortization of regulatory assets of $16 million, primarily related to Securitization, and $9 million of increased expense due to a higher depreciable base. Other (income) and deductions were lower by $14 million and $13 million in the three and six months ended June 30, 2014, respectively. The decrease in the second quarter was due primarily to lower interest expense and higher investment earnings, while the decrease in the six-month period was due primarily to lower interest expense. 41

-------------------------------------------------------------------------------- Outlook - We continue to move forward in our efforts to achieve operational excellence, sustained strong cash flows and earn our authorized return on equity. We expect that our planned significant capital investments will result in earnings growth. Looking forward, additional factors may impact earnings such as weather, the outcome of regulatory proceedings, benefit plan design changes, investment returns and changes in discount rate assumptions in benefit plans and health care costs, and uncertainty of legislative or regulatory actions regarding climate change and electric customer choice. We expect to continue our efforts to improve productivity and decrease our costs while improving customer satisfaction with consideration of customer rate affordability. In May 2014, the Company filed an application with the NRC requesting a renewal of the license for its Fermi 2 nuclear power plant. The Company has requested a 20-year extension of its original license due to expire in 2025.



GAS

Our Gas segment consists of DTE Gas and Citizens.

Gas results are discussed below:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Operating Revenues $ 229$ 248$ 1,033$ 852 Cost of Gas 69 80 508 379 Gross Margin 160 168 525 473 Operation and Maintenance 115 105 225 211 Depreciation and Amortization 23 24 48 47 Taxes Other Than Income 16 15 33 31 Operating Income 6 24 219 184 Other (Income) and Deductions 11 11 23 23 Income Tax Expense (Benefit) (1 ) 5 71 57 Net Income (Loss) Attributable to DTE Energy Company $ (4 ) $ 8 $ 125$ 104 Operating Income as a Percent of Operating Revenues 3 % 10 % 21 % 22 % Gross margin decreased $8 million and increased $52 million in the three and six months ended June 30, 2014, respectively. Revenues associated with certain tracking mechanisms and surcharges are offset by related expenses elsewhere in the Consolidated Statements of Operations.



The following table details changes in various gross margin components relative to the comparable prior period:

Three Months Six Months (In millions) Weather $ (5 )$ 41 Midstream storage and transportation services (3 ) 13 Energy optimization revenue (2 ) (8 ) Other 2 6 Increase (decrease) in gross margin $ (8 )$ 52 Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Gas Markets (in Bcf) Gas sales 17 18 88 76 End user transportation 32 32 94 87 49 50 182 163 Intermediate transportation 75 76 174 152 124 126 356 315 42

-------------------------------------------------------------------------------- Operation and maintenance expense increased $10 million and $14 million in the three and six months ended June 30, 2014, respectively. The increase in the second quarter was due primarily to the timing of gas operations expenses of $8 million, increased uncollectible expenses of $3 million, higher corporate administrative expenses of $2 million and $1 million of reinvestment expenses, partially offset by lower employee benefit expenses of $5 million. The increase in the six-month period was primarily due to higher weather-related gas operations expenses of $20 million, increased uncollectible expenses of $4 million, higher corporate administrative expenses of $3 million and $1 million of reinvestment expenses, partially offset by lower employee benefit expenses of $8 million and lower energy optimization expenses of $7 million. Outlook - We continue to move forward in our efforts to achieve operational excellence, sustained strong cash flows and earn our authorized return on equity. We expect that our planned significant capital investments will result in earnings growth. Looking forward, additional factors may impact earnings such as weather, the outcome of regulatory proceedings, benefit plan design changes, and investment returns and changes in discount rate assumptions in benefit plans and health care costs. We expect to continue our efforts to improve productivity and decrease our costs while improving customer satisfaction with consideration of customer rate affordability.



GAS STORAGE AND PIPELINES

Our Gas Storage and Pipelines segment consists of our non-utility gas pipelines and storage businesses.

Gas Storage and Pipelines results are discussed below:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Operating Revenues $ 45$ 31$ 97$ 58 Operation and Maintenance 10 7 21 12 Depreciation and Amortization 9 4 16 8 Taxes Other Than Income 1 1 2 2 Operating Income 25 19 58 36 Other (Income) and Deductions (6 ) (8 ) (8 ) (19 ) Income Tax Expense 12 10 26 21 Net Income Attributable to DTE Energy Company 19 17 40 34 Noncontrolling interest 1 1 1 1



Net Income Attributable to DTE Energy$ 18$ 16 $

39 $ 33

Operating revenues increased $14 million and $39 million in the three and six months ended June 30, 2014, respectively. The increases were due primarily to higher volumes on the Bluestone pipeline, additional segments placed in service in the Susquehanna gathering system and higher storage revenue. Operation and maintenance expenses increased $3 million and $9 million in the three and six months ended June 30, 2014, respectively. The increases were due primarily to the operation of the Bluestone and Susquehanna projects. Depreciation and amortization expenses increased $5 million and $8 million in the three and six months ended June 30, 2014, respectively. The increases were due to the operation of the Bluestone and Susquehanna projects. Other (income) and deductions decreased by $2 million and $11 million in the three and six months ended June 30, 2014, respectively. The decreases were due to lower earnings from a pipeline investment and higher intercompany interest expense. Outlook - Our Gas Storage and Pipelines business expects to maintain its steady growth by developing an asset portfolio with multiple growth platforms through investment in new projects and expansions. We will continue to look for additional investment opportunities and other storage and pipeline projects at favorable prices. Millennium Pipeline completed its Phase Two expansion which was placed in service at the end of March 2014. We have begun to expand the capacity of Bluestone, a 44-mile lateral pipeline in Susquehanna County, Pennsylvania and Broome County, New York, by constructing additional compression facilities, meter upgrades, and other initiatives to accommodate increased shipper demand. Through our agreement with Southwestern Energy Services Company and affiliates, we believe Bluestone lateral and Susquehanna gathering system are strategically positioned for future growth of the Marcellus shale. Progress continues on preliminary development activities on the proposed Nexus pipeline. The Nexus pipeline will serve as a transportation path for natural gas from the Utica shale in Ohio to Michigan and Ontario. We are planning to have a partnership interest in the pipeline. 43 --------------------------------------------------------------------------------



POWER AND INDUSTRIAL PROJECTS

Power and Industrial Projects is comprised primarily of projects that deliver energy and utility-type products and services to industrial, commercial and institutional customers; produce reduced emissions fuel (REF) and sell electricity from biomass-fired energy projects.

Power and Industrial Projects results are discussed below:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Operating Revenues $ 523$ 429$ 1,098$ 919 Operation and Maintenance 528 422 1,104 903 Depreciation and Amortization 19 17 37 35 Taxes other than Income 3 3 8 8 Asset (Gains) and Losses, Reserves and Impairments, Net (6 ) 4 (7 ) 1 Operating Income (Loss) (21 ) (17 ) (44 ) (28 ) Other (Income) and Deductions (8 ) (16 ) (21 ) (25 ) Income Taxes Expense (6 ) (1 ) (10 ) (1 ) Production Tax Credits (21 ) (8 ) (43 ) (23 ) (27 ) (9 ) (53 ) (24 ) Net Income 14 8 30 21 Noncontrolling interest 1 1 2 2 Net Income Attributable to DTE Energy Company $ 13 $ 7 $ 28$ 19 Operating revenues increased $94 million and $179 million in the three months and six months ended June 30, 2014, respectively. The increase in the second quarter was due primarily to a $100 million increase associated with higher volumes from REF projects, and an $8 million increase associated with start-up of a biomass-fired power project, partially offset by a $13 million decrease from lower coal prices associated with the steel business. The increase in the six-month period was due primarily to a $206 million increase associated with higher volumes from REF projects, and a $12 million increase associated with start-up of a biomass-fired power project, partially offset by a $38 million decrease from lower coal prices associated with the steel business. Operation and maintenance expense increased $106 million and $201 million in the three months and six months ended June 30, 2014, respectively. The increase in the second quarter was due primarily to a $102 million increase associated with higher volumes from REF projects, a $9 million increase for higher maintenance expenses associated with the steel business, and an $8 million increase associated with start-up of a biomass-fired power project, partially offset by a $13 million decrease from lower coal prices associated with the steel business. The increase in the six-month period was due primarily to a $210 million increase associated with higher volumes from REF projects, a $16 million increase for higher maintenance expenses associated with the steel business, and a $14 million increase associated with start-up of a biomass-fired power project, partially offset by a $38 million decrease from lower coal prices associated with the steel business. Asset (gains) losses, reserves and impairments, net were higher by $10 million and $8 million in the three and six months ended June 30, 2014, respectively. The increases were due primarily to a gain associated with a sale of an on-site project in 2014 and an asset impairment recorded in the prior year. Other (income) and deductions decreased by $8 million and $4 million in the three and six months ended June 30, 2014, respectively. The decrease in the second quarter was due primarily to $4 million in lower volumes of refined coal produced at sites with investors and a $5 million decrease related to lower equity earnings at various projects. The decrease in the six-month period was due primarily to $3 million in lower volumes of refined coal produced at sites with investors. Production tax credits increased by $13 million and $20 million in the three and six months ended June 30, 2014, respectively. The increases were due primarily due to tax credits earned from REF projects. 44 -------------------------------------------------------------------------------- Outlook - The Company has constructed and placed in service nine REF facilities including five facilities located at third party owned coal-fired power plants. The Company has sold membership interests in four of the facilities. We continue to optimize these facilities by seeking investors for facilities operating at DTE Electric and other utility sites. We intend to relocate the remaining underutilized facility, located at a DTE Electric site, to an alternative coal-fired power plant which may provide increased production and emission reduction opportunities in future years. We expect sustained production levels of metallurgical coke and pulverized coal supplied to steel industry customers for 2014. Substantially all of the metallurgical coke margin is maintained under long-term contracts. We have five biomass-fired power generation facilities in operation. Our on-site energy services will continue to be delivered in accordance with the terms of long-term contracts. We have begun construction on a new natural gas-fired cogeneration facility and two landfill gas to energy projects which are expected to be completed in 2014. We will continue to look for additional investment opportunities and other energy projects at favorable prices.



Power and Industrial Projects will continue to leverage its extensive energy-related operating experience and project management capability to develop additional energy projects to serve energy intensive industrial customers.

ENERGY TRADING

Energy Trading focuses on physical and financial power, natural gas and coal marketing and trading, structured transactions, enhancement of returns from DTE Energy's asset portfolio, and optimization of contracted natural gas pipeline transportation and storage, and generating capacity positions. Energy Trading also provides natural gas, power and related services, which may include the management of associated storage and transportation contracts on the customers' behalf, and the supply or purchase of renewable energy credits to various customers.



Energy Trading results are discussed below:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Operating Revenues $ 819$ 451$ 2,133$ 844 Fuel, Purchased Power and Gas 823 432 2,049 789 Gross Margin (4 ) 19 84 55 Operation and Maintenance 16 19 32 40 Depreciation and Amortization - 1 - 1 Taxes Other Than Income 2 - 3 2 Operating Income (Loss) (22 ) (1 ) 49 12 Other (Income) and Deductions 2 2 4 4 Income Tax Expense (Benefit) (10 ) (1 ) 17 3 Net Income (Loss) Attributable to DTE Energy Company $ (14 )$ (2 )$ 28$ 5



Operating revenues and Fuel, purchased power and gas were impacted by an increase in gas prices and volumes, primarily in our gas structured and gas transportation strategies for both the three and six months ended June 30, 2014.

Gross margin decreased $23 million and increased $29 million for the three and six months ended June 30, 2014, respectively. The second quarter decrease in gross margin of $23 million represents a $7 million decrease in realized margins and a $16 million decrease in unrealized margins. The $7 million decrease in realized margins is due to $23 million of unfavorable results, primarily in our power trading and power full requirements strategies, offset by $16 million of favorable results, primarily in our gas structured strategy. The $16 million decrease in unrealized margins is due to $29 million of unfavorable results, primarily in our gas structured and power trading strategies, offset by $13 million of favorable results, primarily in our power full requirements strategy. The $29 million increase in gross margin for the six months ended June 30, 2014 represents a $43 million increase in realized margins and a $14 million decrease in unrealized margins. The $43 million increase in realized margins is due to $127 million of favorable results, primarily in our gas structured and gas transportation strategies, offset by $84 million of unfavorable results, primarily in our power full requirements strategy. The $14 million decrease in unrealized margins is due to $44 million of unfavorable results, primarily in our gas structured, power trading, and gas storage strategies, offset by $30 million of favorable results, primarily in our gas trading and power full requirements strategies. 45 -------------------------------------------------------------------------------- In the first quarter of 2014, extreme weather conditions occurred in the Midwest and Northeast gas and power markets we serve. Consequently, this led to favorable results in our gas asset optimization strategies due to higher gas prices and volumes which were partially offset by realized losses from our power full requirements strategy due to higher than expected loads, energy prices, and ancillary charges to serve our customers. Natural gas structured transactions typically involve a physical purchase or sale of natural gas in the future and/or natural gas basis financial instruments which are derivatives and a related non-derivative pipeline transportation contract. These gas structured transactions can result in significant earnings volatility as the derivative components are marked-to-market without revaluing the related non-derivative contracts. During the fourth quarter of 2013, we saw significant increases in gas prices which led to the volatility in the accounting earnings due to the physical component being marked-to-market without an offsetting mark on the transportation component. Included in the $127 million of favorable results for the six months ended June 30, 2014 in our gas strategies is $58 million of timing related losses recognized in the fourth quarter of 2013 that reversed primarily during the first three months of 2014 as the underlying contracts were settled. Outlook - In the near-term, we expect market conditions to remain challenging and the profitability of this segment may be impacted by the volatility in commodity prices in the markets we participate in and the uncertainty of impacts associated with financial reform, regulatory changes and changes in operating rules of regional transmission organizations. The Energy Trading portfolio includes financial instruments, physical commodity contracts and natural gas inventory, as well as contracted natural gas pipeline transportation and storage, and generation capacity positions. Energy Trading also provides natural gas, power and related services, which may include the management of associated storage and transportation contracts on the customers' behalf under FERC Asset Management Arrangements, and the supply or purchase of renewable energy credits to various customers. Significant portions of the Energy Trading portfolio are economically hedged. Most financial instruments and physical power and natural gas contracts are deemed derivatives, whereas natural gas inventory, pipeline transportation, renewable energy credits, and storage assets are not derivatives. As a result, we will experience earnings volatility as derivatives are marked-to-market without revaluing the underlying non-derivative contracts and assets. Our strategy is to economically manage the price risk of these underlying non-derivative contracts and assets with futures, forwards, swaps and options. This results in gains and losses that are recognized in different interim and annual accounting periods.



See Notes 4 and 5 of the Notes to Consolidated Financial Statements.

CORPORATE AND OTHER

Corporate and Other includes various holding company activities and holds certain non-utility debt and energy-related investments. The net loss of $18 million and $35 million in the three and six months ended June 30, 2014, respectively, represents an increase of $5 million and $9 million, respectively, from the losses of $13 million and $26 million in the comparable 2013 periods. The increased loss in the six month period was due primarily to higher deferred tax expense related to New York state income tax reform enacted on March 31, 2014.



CAPITAL RESOURCES AND LIQUIDITY

Cash Requirements

We use cash to maintain and expand our electric and natural gas utilities and to grow our non-utility businesses, retire and pay interest on long-term debt and pay dividends. We believe that we will have sufficient internal and external capital resources to fund anticipated capital and operating requirements. We expect that cash from operations in 2014 will be approximately $1.6 billion, or approximately $500 million lower than 2013, due primarily to lower surcharge collections and higher cash contributions to employee benefit plans. We anticipate base level utility capital investments, environmental, renewable and energy optimization expenditures and expenditures for non-utility businesses in 2014 of approximately $2.3 billion. We plan to seek regulatory approval to include utility capital expenditures in our regulatory rate base consistent with prior treatment. Capital spending for growth of existing or new non-utility businesses will depend on the existence of opportunities that meet our strict risk-return and value creation criteria. 46



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