Stock-Based Compensation

12 Months Ended

Dec. 31, 2012

Stock-Based Compensation

13:STOCK-BASED COMPENSATION

CMS Energy and Consumers provide a PISP to key employees and non-employee directors based on their contributions to the successful management of the company.  The PISP has a five-year term, expiring in May 2014.

All grants under the PISP for 2012, 2011, and 2010 were in the form of TSR restricted stock and time-lapse restricted stock.  Restricted stock recipients receive shares of CMS Energy common stock.  Restricted stock shares granted prior to August 1, 2010 have full dividend and voting rights.  The TSR restricted stock shares granted after August 1, 2010 continue to have full voting rights.  In lieu of cash dividend payments, however, the TSR restricted stock shares granted after August 1, 2010 receive additional restricted shares equal to the value of the dividend.  These additional restricted shares are subject to the same vesting conditions as the underlying restricted stock shares.

TSR restricted stock vesting is contingent on meeting a three-year service requirement and a specific market condition.  The market condition is based entirely on a comparison of CMS Energy’s TSR with the median TSR of a peer group over the same three-year period.  Depending on the outcome of the market condition, a recipient may earn a total award ranging from zero to 200 percent of the initial grant.  Time-lapse restricted stock vests after a service period of three years.

Restricted stock awards granted to officers in 2012 and 2011 were 75 percent TSR restricted stock and 25 percent time-lapse restricted stock.  Awards granted to officers in 2010 were 67 percent TSR restricted stock and 33 percent time-lapse restricted stock.

For awards granted prior to August 1, 2010, restricted shares may vest fully upon retirement, disability, or change of control of CMS Energy if certain minimum service requirements are met or are waived by action of the C&HR Committees.  If employment terminates for any other reason (other than death) or the minimum service requirements are not met or waived, the restricted shares will be fully forfeited.  For awards granted after August 1, 2010, a pro-rata portion of the award equal to the portion of the service period served between the award grant date and the employee’s termination date will vest upon termination of an employee due to retirement, disability, or change of control of CMS Energy.  For TSR awards, this vesting is contingent upon the outcome of the market condition.  The remaining portion of the award will be forfeited.  All awards vest fully upon death.

The PISP also allows for stock options, stock appreciation rights, phantom shares, performance units, and incentive options, none of which was granted in 2012, 2011, or 2010.

Shares awarded or subject to stock options, phantom shares, or performance units may not exceed 6 million shares from June 2009 through May 2014, nor may such awards to any recipient exceed 500,000 shares in any fiscal year.  CMS Energy and Consumers may issue awards of up to 2,972,977 shares of common stock under the PISP at December 31, 2012.  Shares for which payment or exercise is in cash, as well as shares or stock options forfeited for any reason other than failure to meet a market condition, may be awarded or granted again under the PISP.

Presented in the following table is restricted stock activity under the PISP:

Year Ended December 31, 2012	Number of Shares	Weighted-Average Grant Date  Fair Value per Share
CMS Energy, including Consumers
Nonvested at beginning of period	1,848,068		$	16.29
Granted1	929,127			12.32
Vested	(1,104,225)			8.61
Forfeited	(18,194)			19.79
Nonvested at end of period	1,654,776		$	19.15
Consumers
Nonvested at beginning of period	1,689,997		$	16.36
Granted1	889,070			12.28
Vested	(1,014,450)			8.36
Forfeited	(17,494)			19.94
Nonvested at end of period	1,547,123		$	19.22

¹ During 2012, CMS Energy granted 306,917 TSR shares, 176,809 time-lapse shares, 38,401 shares from dividends paid on TSR shares, and 407,000 shares granted as a result of the outcome of the TSR awards’ market condition.  During 2012, Consumers granted 291,722 TSR shares, 169,754 time-lapse shares, 37,109 shares from dividends paid on TSR shares, and 390,485 shares granted as a result of the outcome of the TSR awards’ market condition.

CMS Energy and Consumers charge the fair value of the awards to expense over the required service period.  As a result, for awards granted prior to August 1, 2010, CMS Energy and Consumers recognize all compensation expense for share-based awards that have accelerated service provisions upon retirement by the period in which the employee becomes eligible to retire.  TSR restricted stock awards granted after August 1, 2010 have graded vesting features, and CMS Energy and Consumers recognize expense for those awards on a graded vesting schedule over the required service period.  Expense for time-lapse awards is recognized on a straight-line basis over the required service period.  CMS Energy and Consumers calculate the fair value of time-lapse restricted stock based on the price of CMS Energy’s common stock on the grant date.  CMS Energy and Consumers calculate the fair value of TSR restricted stock awards on the grant date using a Monte Carlo simulation.  CMS Energy and Consumers base expected volatilities on the historical volatility of the price of CMS Energy common stock.

The risk-free rate for each valuation was based on the three-year U.S. Treasury yield at the award grant date.  Presented in the following table are the significant assumptions used to estimate the fair value of the TSR restricted stock awards:

	2012			2011			2010
Expected volatility		20.3	%		29.6	%		30.1	%
Expected dividend yield		4.1			4.6			2.4
Risk-free rate		0.3			1.0			0.9

Presented in the following table is the weighted-average grant-date fair value of awards under the PISP:

Years Ended December 31	2012			2011			2010
CMS Energy, including Consumers
Weighted-average grant-date fair value per share
Restricted stock granted		$	12.32		$	13.89		$	16.22
Consumers
Weighted-average grant-date fair value per share
Restricted stock granted		$	12.28		$	14.17		$	16.27

Presented in the following table are amounts related to restricted stock awards:

In Millions
Years Ended December 31	2012			2011			2010
CMS Energy, including Consumers
Fair value of shares that vested during the year		$	10		$	7		$	7
Compensation expense recognized			12			10			9
Income tax benefit recognized			5			4			4
Consumers
Fair value of shares that vested during the year		$	8		$	7		$	6
Compensation expense recognized			11			10			9
Income tax benefit recognized			4			4			3

At December 31, 2012, $10 million of total unrecognized compensation cost was related to restricted stock for CMS Energy, including Consumers, and $9 million of total unrecognized compensation cost was related to restricted stock for Consumers.  CMS Energy and Consumers expect to recognize this cost over a weighted-average period of 1.7 years.

Presented in the following table is stock option activity under the PISP:

Year Ended December 31, 2012	Options Outstanding,  Fully Vested, and  Exercisable	Weighted-Average Exercise  Price per Share
CMS Energy, including Consumers
Outstanding at beginning of period	65,580		$	22.20
Cancelled or expired	(65,580)			22.20
Outstanding at end of period	-		$	-
Consumers
Outstanding at beginning of period	61,500		$	22.20
Cancelled or expired	(61,500)			22.20
Outstanding at end of period	-		$	-

Stock options give the holder the right to purchase common stock at the market price on the grant date.  Stock options are exercisable upon grant, and expire up to ten years and one month from the grant date.  CMS Energy and Consumers issue new shares when recipients exercise stock options.  No stock options were exercised for CMS Energy or Consumers during 2012.  The total intrinsic value of stock options exercised for CMS Energy and Consumers was $1 million for each of the years ended December 31, 2011 and 2010.  Neither CMS Energy nor Consumers has any stock options outstanding at December 31, 2012.

Since CMS Energy has utilized tax loss carryforwards, CMS Energy was unable to realize excess tax benefits upon exercise of stock options and vesting of restricted stock.  Therefore, CMS Energy did not recognize the related excess tax benefits in equity.  As of December 31, 2012, CMS Energy has $49 million of unrealized excess tax benefits.

Consumers Energy Company [Member]

Stock-Based Compensation

13:STOCK-BASED COMPENSATION

CMS Energy and Consumers provide a PISP to key employees and non-employee directors based on their contributions to the successful management of the company.  The PISP has a five-year term, expiring in May 2014.

All grants under the PISP for 2012, 2011, and 2010 were in the form of TSR restricted stock and time-lapse restricted stock.  Restricted stock recipients receive shares of CMS Energy common stock.  Restricted stock shares granted prior to August 1, 2010 have full dividend and voting rights.  The TSR restricted stock shares granted after August 1, 2010 continue to have full voting rights.  In lieu of cash dividend payments, however, the TSR restricted stock shares granted after August 1, 2010 receive additional restricted shares equal to the value of the dividend.  These additional restricted shares are subject to the same vesting conditions as the underlying restricted stock shares.

TSR restricted stock vesting is contingent on meeting a three-year service requirement and a specific market condition.  The market condition is based entirely on a comparison of CMS Energy’s TSR with the median TSR of a peer group over the same three-year period.  Depending on the outcome of the market condition, a recipient may earn a total award ranging from zero to 200 percent of the initial grant.  Time-lapse restricted stock vests after a service period of three years.

Restricted stock awards granted to officers in 2012 and 2011 were 75 percent TSR restricted stock and 25 percent time-lapse restricted stock.  Awards granted to officers in 2010 were 67 percent TSR restricted stock and 33 percent time-lapse restricted stock.

For awards granted prior to August 1, 2010, restricted shares may vest fully upon retirement, disability, or change of control of CMS Energy if certain minimum service requirements are met or are waived by action of the C&HR Committees.  If employment terminates for any other reason (other than death) or the minimum service requirements are not met or waived, the restricted shares will be fully forfeited.  For awards granted after August 1, 2010, a pro-rata portion of the award equal to the portion of the service period served between the award grant date and the employee’s termination date will vest upon termination of an employee due to retirement, disability, or change of control of CMS Energy.  For TSR awards, this vesting is contingent upon the outcome of the market condition.  The remaining portion of the award will be forfeited.  All awards vest fully upon death.

The PISP also allows for stock options, stock appreciation rights, phantom shares, performance units, and incentive options, none of which was granted in 2012, 2011, or 2010.

Shares awarded or subject to stock options, phantom shares, or performance units may not exceed 6 million shares from June 2009 through May 2014, nor may such awards to any recipient exceed 500,000 shares in any fiscal year.  CMS Energy and Consumers may issue awards of up to 2,972,977 shares of common stock under the PISP at December 31, 2012.  Shares for which payment or exercise is in cash, as well as shares or stock options forfeited for any reason other than failure to meet a market condition, may be awarded or granted again under the PISP.

Presented in the following table is restricted stock activity under the PISP:

Year Ended December 31, 2012	Number of Shares	Weighted-Average Grant Date  Fair Value per Share
CMS Energy, including Consumers
Nonvested at beginning of period	1,848,068		$	16.29
Granted1	929,127			12.32
Vested	(1,104,225)			8.61
Forfeited	(18,194)			19.79
Nonvested at end of period	1,654,776		$	19.15
Consumers
Nonvested at beginning of period	1,689,997		$	16.36
Granted1	889,070			12.28
Vested	(1,014,450)			8.36
Forfeited	(17,494)			19.94
Nonvested at end of period	1,547,123		$	19.22

¹ During 2012, CMS Energy granted 306,917 TSR shares, 176,809 time-lapse shares, 38,401 shares from dividends paid on TSR shares, and 407,000 shares granted as a result of the outcome of the TSR awards’ market condition.  During 2012, Consumers granted 291,722 TSR shares, 169,754 time-lapse shares, 37,109 shares from dividends paid on TSR shares, and 390,485 shares granted as a result of the outcome of the TSR awards’ market condition.

CMS Energy and Consumers charge the fair value of the awards to expense over the required service period.  As a result, for awards granted prior to August 1, 2010, CMS Energy and Consumers recognize all compensation expense for share-based awards that have accelerated service provisions upon retirement by the period in which the employee becomes eligible to retire.  TSR restricted stock awards granted after August 1, 2010 have graded vesting features, and CMS Energy and Consumers recognize expense for those awards on a graded vesting schedule over the required service period.  Expense for time-lapse awards is recognized on a straight-line basis over the required service period.  CMS Energy and Consumers calculate the fair value of time-lapse restricted stock based on the price of CMS Energy’s common stock on the grant date.  CMS Energy and Consumers calculate the fair value of TSR restricted stock awards on the grant date using a Monte Carlo simulation.  CMS Energy and Consumers base expected volatilities on the historical volatility of the price of CMS Energy common stock.

The risk-free rate for each valuation was based on the three-year U.S. Treasury yield at the award grant date.  Presented in the following table are the significant assumptions used to estimate the fair value of the TSR restricted stock awards:

	2012			2011			2010
Expected volatility		20.3	%		29.6	%		30.1	%
Expected dividend yield		4.1			4.6			2.4
Risk-free rate		0.3			1.0			0.9

Presented in the following table is the weighted-average grant-date fair value of awards under the PISP:

Years Ended December 31	2012			2011			2010
CMS Energy, including Consumers
Weighted-average grant-date fair value per share
Restricted stock granted		$	12.32		$	13.89		$	16.22
Consumers
Weighted-average grant-date fair value per share
Restricted stock granted		$	12.28		$	14.17		$	16.27

Presented in the following table are amounts related to restricted stock awards:

In Millions
Years Ended December 31	2012			2011			2010
CMS Energy, including Consumers
Fair value of shares that vested during the year		$	10		$	7		$	7
Compensation expense recognized			12			10			9
Income tax benefit recognized			5			4			4
Consumers
Fair value of shares that vested during the year		$	8		$	7		$	6
Compensation expense recognized			11			10			9
Income tax benefit recognized			4			4			3

At December 31, 2012, $10 million of total unrecognized compensation cost was related to restricted stock for CMS Energy, including Consumers, and $9 million of total unrecognized compensation cost was related to restricted stock for Consumers.  CMS Energy and Consumers expect to recognize this cost over a weighted-average period of 1.7 years.

Presented in the following table is stock option activity under the PISP:

Year Ended December 31, 2012	Options Outstanding,  Fully Vested, and  Exercisable	Weighted-Average Exercise  Price per Share
CMS Energy, including Consumers
Outstanding at beginning of period	65,580		$	22.20
Cancelled or expired	(65,580)			22.20
Outstanding at end of period	-		$	-
Consumers
Outstanding at beginning of period	61,500		$	22.20
Cancelled or expired	(61,500)			22.20
Outstanding at end of period	-		$	-

Stock options give the holder the right to purchase common stock at the market price on the grant date.  Stock options are exercisable upon grant, and expire up to ten years and one month from the grant date.  CMS Energy and Consumers issue new shares when recipients exercise stock options.  No stock options were exercised for CMS Energy or Consumers during 2012.  The total intrinsic value of stock options exercised for CMS Energy and Consumers was $1 million for each of the years ended December 31, 2011 and 2010.  Neither CMS Energy nor Consumers has any stock options outstanding at December 31, 2012.

Since CMS Energy has utilized tax loss carryforwards, CMS Energy was unable to realize excess tax benefits upon exercise of stock options and vesting of restricted stock.  Therefore, CMS Energy did not recognize the related excess tax benefits in equity.  As of December 31, 2012, CMS Energy has $49 million of unrealized excess tax benefits.