2000 2nd Avenue

Detroit, Michigan 48226-1279

 

2007 Notice of Annual Meeting of Shareholders and Proxy Statement

 

 

We invite you to attend the annual meeting of DTE Energy Company (“DTE,” “Company,” “we,” “us” or “our”) to:

 

 

The record date for this annual meeting is March 9, 2007. Only shareholders of record at the close of business on that date can vote at the meeting.

 

For more information, please read the accompanying 2007 Proxy Statement.

 

This 2007 Notice of Annual Meeting, as well as the accompanying Proxy Statement and proxy card, will be first sent or given to our shareholders on or about March 26, 2007.

 

It is important that your shares be represented at the meeting. Shareholders may vote their shares (1) in person at the annual meeting, (2) by telephone, (3) via the Internet, or (4) by completing and mailing the enclosed proxy card in the return envelope. Specific instructions for voting by telephone or via the Internet are attached to the proxy card. If you attend the meeting and vote at it, your vote at the meeting will replace any earlier vote by telephone, Internet or proxy. If your shares are directly held in your name as a shareholder of record, an admission ticket to the meeting is attached to your proxy card. Please vote your proxy, and bring the admission ticket with you to the meeting. If your shares are registered in the name of a bank, brokerage firm, or other nominee and you plan to attend the meeting, bring your statement of account showing evidence of ownership as of the record date. All shareholders who plan to attend the meeting must present a government-issued photo identification card, such as your driver’s license, state identification card, or passport.

 

 

March 26, 2007

 

TABLE OF CONTENTS

 

 

IF YOUR SHARES ARE DIRECTLY HELD IN YOUR NAME AS A SHAREHOLDER OF RECORD, AN ADMISSION TICKET TO THE MEETING IS ATTACHED TO YOUR PROXY CARD. PLEASE VOTE YOUR PROXY, AND BRING THE ADMISSION TICKET WITH YOU TO THE MEETING. IF YOUR SHARES ARE REGISTERED IN THE NAME OF A BANK, BROKERAGE FIRM, OR OTHER NOMINEE AND YOU PLAN TO ATTEND THE MEETING, BRING YOUR STATEMENT OF ACCOUNT SHOWING EVIDENCE OF OWNERSHIP AS OF THE RECORD DATE. ALL SHAREHOLDERS WHO PLAN TO ATTEND THE MEETING MUST PRESENT A GOVERNMENT-ISSUED PHOTO IDENTIFICATION CARD, SUCH AS YOUR DRIVER’S LICENSE, STATE IDENTIFICATION CARD, OR PASSPORT.

 

 

Governance Guidelines

 

At DTE, we are committed to operating in an ethical, legal, environmentally sensitive, and socially responsible manner, while creating long-term value for our shareholders. The foundation of our governance practices begins at the top, with the DTE Energy Board of Directors Mission and Guidelines (“Governance Guidelines”). The Governance Guidelines set forth the practices the Board follows with respect to Board composition and selection, Board meetings, the performance evaluation and succession planning for the Chief Executive Officer (“CEO” or “Chief Executive Officer”) of DTE, Board committees, Board compensation, and communicating with the Board, among other things. The Governance Guidelines are also intended to align the interests of directors and management with those of our shareholders. The following is a summary of the Governance Guidelines, along with other governance practices at DTE.

 

Election of Directors and Vacancies

 

Our Bylaws provide that the Board be divided into three classes, each class being as nearly equal in number as possible. One class of directors is elected each year for a three-year term. Under the Governance Guidelines, the Corporate Governance Committee periodically assesses the skills, characteristics and composition of the Board, along with the need for expertise and other relevant factors as it deems appropriate. In light of these assessments, and in light of the standards set forth in the Governance Guidelines, the Corporate Governance Committee may seek candidates with specific qualifications and candidates who satisfy other requirements set by the Board. The Corporate Governance Committee considers candidates who have been properly nominated by shareholders, as well as candidates who have been identified by Board members and Company personnel. In addition, the Corporate Governance Committee may use a search firm to assist in the search for candidates and nominees and to evaluate the nominees’ skills against the Board’s criteria. Based on its review of all nominations, the Corporate Governance Committee recommends a slate of director nominees for election at the annual meeting of shareholders. The slate of nominees may include both incumbent and new nominees.

 

Potential candidates are reviewed and evaluated by the Corporate Governance Committee, and certain candidates are interviewed by one or more Corporate Governance Committee members. An invitation to join the Board is extended by the Board itself, through the Chairman and the Chair of the Corporate Governance Committee. If a Board vacancy occurs between annual shareholder meetings, the vacancy may be filled by a majority vote of the directors then in office, and such person will be subject to election by a vote of the shareholders at the next annual shareholder meeting.

 

During 2006, the Corporate Governance Committee retained a third-party search firm to assist in identifying, evaluating and recruiting potential director candidates. The Corporate Governance Committee screened the candidates and recommended James H. Vandenberghe. The Board subsequently elected Mr. Vandenberghe to the Board on June 29, 2006. See “Proposal No. 1 Election of Directors” on page 17.

 

Composition of the Board and Categorical Standards

 

Our Governance Guidelines state that the exact size of the Board will be determined by the Board from time to time. Currently, our Governance Guidelines set the size of the Board at no less than 10 and no more than 18 directors. As a matter of policy, in accordance with NYSE listing standards, we believe that the Board should consist of a majority of independent directors. The Board must affirmatively determine that a director has no material relationship with the Company, either directly or indirectly, or as a partner, shareholder or officer of an organization that has a relationship with the Company. The Board has established the following categorical standards for director independence:

 

A director for whom any of the following is true will not be considered independent:

 

 

 

Contributions to a tax exempt organization will not be considered to be a material relationship that would impair a director’s independence if a director serves as an executive officer of a tax exempt organization and, within the preceding three years, contributions by the Company in any single fiscal year were less than $1 million or 2% (whichever is greater) of such tax exempt organization’s consolidated gross revenues.

 

Applying these standards, the Board has affirmatively determined that a majority of our directors qualify as independent and have no material relationship with the Company. The independent directors are Lillian Bauder, Allan D. Gilmour, Frank M. Hennessey, Gail J. McGovern, Eugene A. Miller, Charles W. Pryor, Jr., General Josue Robles, Jr. and James H. Vandenberghe (the “Independent Directors”). The Board has also determined that Anthony F. Earley, Jr., Alfred R. Glancy III and John E. Lobbia are not Independent Directors and may be deemed to be affiliates of the Company under the categorical standards due, in Mr. Earley’s case, to his current employment as CEO; in Mr. Lobbia’s case, to his prior employment as Chairman and CEO; and, in Mr. Glancy’s case, to his prior employment as Chairman and Chief Executive Officer of MCN Energy Group, Inc. (“MCN”). (For more information about our relationship with Mr. Glancy, see “Certain Relationships and Related Transactions” on page 16.)

 

Board Committees

 

The Board has standing committees for Audit, Corporate Governance, Finance, Nuclear Review, Organization and Compensation and Public Responsibility. The Board committees act in an advisory capacity to the full Board, except that the Organization and Compensation Committee has direct responsibility for the CEO’s goals, performance and compensation along with compensation of other executives and the Audit Committee has direct responsibility for the independent registered public accounting firm. Each committee has adopted a charter that clearly establishes the committee’s respective roles and responsibilities. In addition, each committee has authority to retain independent outside professional advisors or experts as it deems advisable or necessary, including the sole authority to retain and terminate any such advisors, to carry out its duties. The Board has determined that each member of the Audit, Corporate Governance, and Organization and Compensation Committees is independent under our categorical standards and that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment. The Board has also determined that each member of the Audit Committee meets the independence requirements under the SEC rules and NYSE listing standards applicable to Audit Committee members.

 

Selection of the Chairman and the CEO; Presiding Director

 

Our Bylaws currently provide that the Chairman may simultaneously serve as the CEO of the Company and shall preside at all meetings of the Board. In addition, if the Chairman and CEO positions are held by the same individual, the Board may elect another independent director as Presiding Director who would serve until the next annual meeting. The Presiding Director’s duties include presiding at executive sessions. On April 27, 2006, the Board unanimously elected Mr. Gilmour as the Presiding Director.

 

Board Meetings and Attendance

 

The Board met 8 times in 2006. A portion of each Board meeting is spent with the Chairman and CEO and no other management members. All of the incumbent directors attended at least 90% of the Board meetings and the meetings of the committees on which they served. It is our policy that directors attend annual meetings of shareholders. All of the 12 directors then in office attended last year’s annual meeting.

 

Term of Office

 

The Board has not established term limits other than the current three-year terms of office. However, our Governance Guidelines provide that a director is prohibited from being elected after attaining the age of 72, unless the Board waives this provision when circumstances exist which make it prudent to continue the service of a particular director. Mr. Gilmour reached DTE’s mandatory retirement age of 72 during his last term. However, the Board has determined that it is in the best interests of the Company that Mr. Gilmour serve for another term, so Mr. Gilmour will stand for re-election in 2007. Howard F. Sims retired from the Board effective March 8, 2007. Mr. Sims, Chairman and Chief Executive Officer of Sims Design Group Inc., had served as a DTE director since 2001 and served as an MCN director from 1988 until the time of the DTE/MCN merger. We thank Mr. Sims for all of the contributions he made to the Company and appreciate his dedicated service.

 

Executive Sessions

 

It is the Board’s practice that non-management directors meet in executive sessions at every Board meeting and meet in executive session at other times whenever they believe it would be appropriate. The non-management directors met in executive sessions (sessions without the CEO or any representatives of management present) at each of the meetings in 2006. At least once per year, the non-management directors meet in executive session to review the Organization and Compensation Committee’s performance review of the CEO and the President. The Presiding Director chairs the executive sessions of non-management directors.

 

Assessment of Board and Committee Performance

 

The Board evaluates its performance annually. In addition, each Board committee performs an annual self-assessment to determine its effectiveness. The results of these self-assessments are discussed with each committee and the Board.

 

Board Compensation and Stock Ownership

 

The Company has established a Board compensation structure intended to provide compensation of approximately one-half cash and one-half equity. The Board has stock ownership guidelines that set specific Company stock ownership requirements based on the director’s years of service on the Board. (See “Director Stock Ownership” on page 13.)

 

Codes of Business Conduct and Ethics

 

The DTE Energy Board of Directors Code of Business Conduct and Ethics, the Officer Code of Business Conduct and Ethics and The DTE Energy Way are the standards of behavior for Company directors, officers, and employees. Any waiver of, or amendments to, the Board of Directors Code of Business Conduct and Ethics and the Officer Code of Business Conduct and Ethics as it pertains to the CEO, the Chief Financial

Officer, senior financial officers and other Executive Officers, as defined in the “Security Ownership of Directors and Officers” section on page 14, will be disclosed promptly by posting such waivers or amendments on the Company Web site, www.dteenergy.com. There were no waivers or amendments during 2006.

 

Communications with the Board

 

The Company has established several methods for shareholders or other non-affiliated persons to communicate their concerns to the directors.

 

Concerns regarding auditing, accounting practices, internal controls, or other business ethics issues may be submitted to the Audit Committee through its reporting channel:

 

 

Any other concern may be submitted to the Corporate Secretary by mail for prompt delivery to the Presiding Director at:

 

 

Periodically, we revise our governance information in response to changing regulatory requirements and evolving corporate governance developments. Current copies of the Governance Guidelines, committee charters, categorical standards and the codes of ethics referred to above are available on our Web site at www.dteenergy.com, in the “Investor Information — Corporate Governance” section. You can also request a copy of any or all of these documents by mailing your request to the Corporate Secretary, DTE Energy Company, 2000 Second Avenue, Room 2057 WCB, Detroit, Michigan 48226-1279.

 

The information on the Company’s Web site is not, and shall not be deemed to be, a part of this Proxy Statement or incorporated into any other filings the Company makes with the SEC.

 

The table below reflects the membership and the number of meetings held by each Board committee during 2006.

 

 

 

Following is a summary of the terms of each committee’s charter and the responsibilities of its members:

 

Audit Committee

 

 

The Board has determined that each member of the Audit Committee is financially literate. The Board has reviewed the qualifications and experience of each of the Audit Committee members and determined that Mr. Hennessey, Mr. Vandenberghe, and General Robles all qualify as “audit committee financial experts” as that term has been defined by the SEC.

 

Corporate Governance Committee

 

 

Finance Committee

 

 

Nuclear Review Committee

 

 

Organization and Compensation Committee

 

 

Public Responsibility Committee

 

 

As a part of its oversight function, the Board monitors how management operates the Company. When granting authority to management, approving strategies, and receiving management reports, the Board must understand and consider, among other things, the risks and vulnerabilities we face. The committees facilitate this oversight function. The Audit Committee considers risk issues associated with our overall financial reporting and disclosure process. To achieve that goal, the Audit Committee meets with the Chief Financial Officer, the General Auditor, the Chief Risk Officer, and the independent registered public accounting firm in executive sessions at least quarterly, and with the General Counsel as determined from time to time by the Audit Committee. The Audit Committee also reviews policies on risk assessment and accounting risk exposure. The Finance Committee oversees insurance and business risk. The Nuclear Review Committee reviews risk relating to the operation of our nuclear power facilities. Other committees, such as the Public Responsibility Committee, deal with other matters of risk associated with our electric and gas operations, including environmental risk. We also have an internal Risk Management Committee, chaired by the CEO and comprised of senior officers, that, among other things, directs the development and maintenance of comprehensive risk management policies and procedures, reviews and monitors enterprise risk exposure, reviews and approves counter-party credit, and establishes risk limits.

 

Elements of Director Compensation

 

Employee directors receive no payment for service as directors. The goal of our compensation policies for non-employee directors is to tie their compensation to your interests as shareholders. Accordingly, approximately 50% of a director’s annual compensation is in the form of equity-based compensation, including phantom shares of our common stock. The compensation program for non-employee directors is reviewed on an annual basis by the Board. This review includes a review of benchmark data using a comparative group of companies that is identical to the comparative group used to review executive compensation (See “Executive Compensation — Compensation Discussion and Analysis” beginning on page 23). Based on the review completed in December 2006, there were no changes to the non-employee director compensation program for 2007. For total compensation paid to each director during 2006, see the “2006 Director Compensation Table” on page 43. The compensation program is described below.

 

 

Payment of Non-Employee Director Fees and Expenses

 

We maintain an unfunded deferred compensation plan that permits non-employee directors to defer receipt of up to 100% of their annual retainer and meeting fees. Retainers and all meeting fees for non-employee directors are either (i) payable in cash or, (ii) at the election of the Director deferred into an account pursuant to the DTE Energy Company Plan for Deferring the Payment of Directors’ Fees. Deferred fees may accrue for future payment, with interest accrued monthly at the 5-year U.S. Treasury Bond rate as of the last business day of each month or, at the election of the director, they may be invested in phantom shares of our common stock with all imputed dividends reinvested.

 

In addition to the retainers and fees, non-employee directors are reimbursed for their travel expenses incurred in attending Board and committee meetings, along with reimbursement for fees and expenses incurred when attending director education seminars.

 

Additional payments are provided to Mr. Glancy in connection with the DTE/MCN merger in 2001. See page 16 for a description of the terms of Mr. Glancy’s agreement with the Company.

 

Directors’ Retirement Plan

 

Benefits under the DTE Energy Company Retirement Plan for Non-Employee Directors were frozen as of December 31, 1998, and all non-employee directors were deemed vested on that date. No further benefits will accrue. Messrs. Gilmour and Miller and Dr. Bauder are the only current directors covered by this plan and, upon their retirement from the Board, they will each receive $3,415 per month for 45, 111, and 152 months, respectively.

 

Director Life Insurance

 

The Company provides each non-employee director with group-term life insurance in the amount of $20,000 and travel accident insurance in the amount of $100,000.

 

Director Stock Ownership

 

We have established stock ownership guidelines for directors to more closely tie their interests to those of shareholders. Under these guidelines, the Board requires that each director own shares of the Company’s common stock beginning no later than 30 days after election to the Board. In addition, directors are required to own, within five years after initial election to the Board, shares of Company stock having a value equal to two times their annual cash and phantom stock compensation. Common stock, time-based restricted stock, and phantom shares held by a director are counted toward fulfillment of this ownership requirement. As of January 3, 2007, all directors met the initial common stock ownership requirement and those directors who have served as a director for at least five years after their initial election have fulfilled the five-year requirement.

 

Indemnification

 

The Company has entered into indemnification agreements with each of its directors. These agreements require the Company to indemnify such individuals for certain liabilities to which they may become subject as a result of their affiliation with the Company.

 

The following table sets forth information as of January 3, 2007 with respect to beneficial ownership of common stock, phantom stock, performance shares, and options exercisable within 60 days for (i) each of our directors and nominees for director, (ii) our CEO, chief financial officer, and the three other highest paid executives whose salary and bonus for the 2006 fiscal year were in excess of $100,000 (the “Named Executive Officers” or “NEOs”), and (iii) all executives and directors as a group. Executive Officers for this purpose are those individuals defined as Executive Officers under Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Unless otherwise indicated, each of the named individuals has sole voting and/or investment power. Stephen E. Ewing retired from the Company effective January 1, 2007, after 35 years of service with the Company and its subsidiaries. In addition, Mr. Sims retired from the Board effective March 8, 2007 and Mr. Laymon resigned from the Board effective September 25, 2006. To our knowledge, no member of our management team or director was a beneficial owner of one percent or more of the outstanding shares of common stock as of January 3, 2007.

 

Amount and Nature of Beneficial Ownership as of January 3, 2007

 

 

 

 

 

Section 16(a) of the Exchange Act requires our directors, officers and 10% shareholders (if any) to file reports of ownership and changes in ownership with respect to our securities with the SEC and to furnish copies of these reports to us. Based on a review of these reports and written representations from our directors and officers (to our knowledge, we do not have any 10% shareholders) regarding the necessity of filing reports, the sale of Company shares by Mr. Meador in November 2006 and his sale of shares in January 2007 in connection with a dividend pass-through were not reported in a timely manner due to an administrative oversight. In addition, in February 2007 a Form 5 was filed that corrected an inadvertent omission of charitable donations of stock in prior years by Mr. Earley.

 

The following table sets forth information regarding the only persons or groups known to the Company to be beneficial owners of more than 5% of our outstanding common stock.

 

 

 

 

Related-person transactions have the potential to create actual or perceived conflicts of interest. The Company has policies in place to address related-party transactions. In general, employees and directors may not be involved in a business transaction where there is a conflict of interest with the Company. The DTE Energy Way requires non-officer employees to report conflicts of interest or potential conflicts of interest to their respective superiors; the Officer Code of Conduct and Ethics requires officers to report conflicts of interest or potential conflicts of interest to the Company’s General Counsel or to the Company’s Board of Directors; and the Board of Directors Code of Business Conduct and Ethics requires directors to disclose conflicts of interest or potential conflicts of interest to the Company’s Corporate Governance Committee or the Chairman of the Board. For directors and officers, any waivers of the Company’s conflict of interest policy must be approved by the Board or a Board committee, as required under the Officer Code of Conduct and Ethics or Board of Directors Code of Business Conduct and Ethics.

 

Mr. Glancy was the Chairman and Chief Executive Officer of MCN at the time of the DTE/MCN merger in 2001. In connection with the merger, we entered into an agreement with Mr. Glancy which, among other things, states that (a) we agreed to nominate Mr. Glancy to the Board in accordance with our normal procedures until he reaches the mandatory retirement age for Board members; (b) Mr. Glancy will receive personal secretarial services for three days a week until he attains the age of 70; (c) for as long as Mr. Glancy remains a member of our Board, we will provide him with a home security system; (d) in the event that the Internal Revenue Service determines or claims that any payments or benefits provided to Mr. Glancy constitute “excess parachute payments,” we will make a tax reimbursement payment to him in accordance with the agreement; and (e) we will indemnify Mr. Glancy from any actions, suits or proceedings in connection with the agreement. Mr. Glancy is responsible for paying taxes on the imputed income relating to the secretarial services and home security system.

 

In addition, Mr. Hennessey and Mr. Sims were directors of MCN at the time of the merger. The shares each director owned under the MCN Energy Group Inc. Nonemployee Directors’ Compensation Plan were converted to cash at the time of the merger and placed in cash balance accounts for each director in the DTE Energy Company Plan for Deferring the Payment of Directors’ Fees. The cash balance accounts are managed by the Company, with interest accumulating at a 10-year Treasury rate, with a 10-year payout beginning in 2001. During 2006, Mr. Hennessey received $74,590 and Mr. Sims received $65,865.

 

The Board is divided into three classes by our Bylaws. One class of directors is elected each year for a three-year term. The terms of five directors expire in 2007. Four directors are nominated for election for terms expiring in 2010. Mr. Gilmour, one of the directors in this class, reached DTE’s mandatory retirement age of 72 during his recent term. However, in accordance with the Company’s Governance Guidelines, the Board determined that it was in the best interests of the Company that Mr. Gilmour serve for another term. The other director, Mr. Vandenberghe, has been nominated for the term expiring in 2008. The Board elected Mr. Vandenberghe to the Board in June 2006. All of the nominees have consented to serve if elected.

 

Proxies cannot be voted for more than five persons. If any nominee becomes unable or unwilling to serve at the time of the meeting, the persons named in the enclosed proxy card have discretionary authority to vote for a substitute nominee or nominees. It is anticipated that all nominees will be available for election.

 

Brief biographies of each nominee for election at this meeting and each director continuing in office are provided below. The information includes each person’s principal occupation(s) and business experience for at least the past five years. The dates shown for service as a director of DTE include service as a director of The Detroit Edison Company (“Detroit Edison”), our former corporate parent and, as a result of a share exchange in 2001, now our wholly-owned subsidiary.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE NOMINEES FOR ELECTION AT THIS MEETING.

 

 

 

 

 

Subject to ratification by the shareholders, the Audit Committee has appointed Deloitte & Touche LLP as our independent registered public accounting firm for the year 2007. Deloitte & Touche LLP has performed this function since 1995. For the years ended December 31, 2006 and 2005, professional services were performed by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte”).

 

Representatives of Deloitte will be present at the annual meeting and will be afforded an opportunity to make a statement, if they desire, and to respond to appropriate questions from shareholders.

 

 

The following table presents fees for professional services rendered by Deloitte for the audit of the Company’s annual financial statements for the years ended December 31, 2005 and December 31, 2006, and fees billed for other services rendered by Deloitte during those periods.

 

 

 

 

 

Consistent with SEC policies regarding the independence of the registered public accounting firm, the Audit Committee is responsible for appointing, approving professional service fees of, and overseeing the work of the independent registered public accounting firm. The Audit Committee has established a policy regarding pre-approval of all audit and permissible non-audit services provided by the independent registered public accounting firm.

 

Prior to engaging the independent registered public accounting firm, the Audit Committee pre-approves these services by category of service. The Audit Committee may delegate to the Chair of the Audit Committee, or to one or more other designated members of the Audit Committee, the authority to grant pre-approvals of all permitted services or classes of these permitted services to be provided by the independent registered public accounting firm up to, but not exceeding, a pre-defined limit. The decisions of the designated member to pre-approve a permitted service is reported to the Audit Committee at each scheduled meeting. At least quarterly, the Audit Committee reviews:

 

 

 

For the year 2006, all audit, audit-related, tax and other services performed by Deloitte were pre-approved by the Audit Committee in accordance with the regulations of the SEC. The Audit Committee considered and determined that the provision of the non-audit services by Deloitte during 2006 were compatible with maintaining independence of the registered public accounting firm.

 

The purpose of the Audit Committee is to assist the Board’s oversight of the integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, the Company’s independent registered public accounting firm’s qualifications and independence and the performance of the Company’s internal audit function. All members of the Audit Committee meet the criteria for independence as defined in our categorical standards and the audit committee independence requirements under the SEC rules. The Audit Committee Charter also complies with requirements of the NYSE.

 

Management is responsible for the financial reporting process, including the system of internal controls, and for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management is also responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. The independent registered public accounting firm is responsible for auditing these financial statements and expressing an opinion as to their conformity to GAAP. The independent registered public accounting firm is also responsible for expressing an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting. The Audit Committee’s responsibility is to monitor and review these processes, acting in an oversight capacity, and the Audit Committee does not certify the financial statements or internal control over financial reporting or guarantee the independent registered public accounting firm’s reports. The Audit Committee relies, without independent verification, on the information provided to it including representations made by management and the report of the independent registered public accounting firm.

 

The Audit Committee discussed with Deloitte the matters required to be discussed by audit standards, SEC regulations and NYSE requirements. Disclosures were received from Deloitte regarding its independence as required by Independence Standards Board Statement No. 1 and discussed with them. The Audit Committee has considered whether the services provided by Deloitte other than those services relating to audit services are compatible with maintaining Deloitte’s independence. The Audit Committee has concluded that such services have not impaired Deloitte’s independence. The Audit Committee reviewed and discussed the audited financial statements for the year ended December 31, 2006 with management and Deloitte. Based on the review and discussions noted above, the Audit Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2006. The Audit Committee reviewed and discussed Management’s Report on Internal Control over Financial Reporting as of December 31, 2006 with management and Deloitte. Based on the review and discussions noted above, the Audit Committee recommended to the Board that Management’s Report on Internal Control over Financial Reporting as of December 31, 2006 be included in the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2006.

 

Audit Committee

 

Frank M. Hennessey, Chair

Josue Robles, Jr.

James H. Vandenberghe

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL TO RATIFY THE APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.

 

 

Our management does not intend to bring any other business before the meeting for action and has not been notified of any other business proposed to be brought before the meeting. However, if any other business should be properly presented for action, it is the intention of the persons named on the enclosed proxy card to vote in accordance with their judgment on such business.

 

Overview

 

Your understanding of our executive compensation program is important to us. The goal of the Compensation Discussion and Analysis is to explain our compensation philosophy, policies, and procedures, primarily for our Named Executive Officers (defined for you below). In this section, we discuss the following topics, among others:

 

 

Throughout this Proxy Statement, the term “executive” includes individuals who are at or above the level of corporate vice president (or equivalent), the General Auditor, and other individuals whose base annual pay is at or above $225,000, and includes Executive Officers as defined by the Exchange Act. In this Proxy Statement, the term “Named Executive Officers” or “NEOs” include: (1) our Chairman and CEO, Anthony F. Earley, Jr.; (2) our Chief Financial Officer, David E. Meador; (3) our Chief Operating Officer, Gerard M. Anderson; (4) the Group President of our electric utility subsidiary, Detroit Edison, Robert J. Buckler; and (5) the former Vice-Chairman and Group President of our gas utility, Michigan Consolidated Gas Company (“MichCon”), Stephen E. Ewing. Mr. Ewing retired from the Company effective January 1, 2007.

 

Our Philosophy and Objectives Focus on Attracting, Retaining, and Motivating Top Executives

 

Our executive compensation program is designed to attract and retain talented executives leading to the success of the Company. The program is intended to motivate and reward executives who achieve corporate and financial goals and encourage short-term results along with successful long-term achievements. We believe this approach ties executive interests to shareholder interests. The main objectives underlying this philosophy are:

 

 

 

We will continue emphasizing pay-for-performance and equity-based incentives that reward executives for results that are consistent with shareholder interests.

 

The Board Oversees and has Delegated Responsibility of the Executive Compensation Program to its Organization and Compensation Committee

 

The Board has a long-standing process for determining executive compensation that is performance-based, objective, and transparent. The process is designed to serve the purpose of attracting, retaining, and motivating executives for the benefit of shareholders. The Board-designed governance process expressly delegates to the Organization and Compensation Committee (the “O&C Committee”) the responsibility to determine and approve the CEO’s compensation as well as the compensation of other executives. Although the responsibilities have been delegated, the entire Board maintains oversight and receives direct reports after each O&C Committee meeting.

 

The O&C Committee is composed entirely of independent directors, none of whom derives a personal benefit from the compensation decisions the O&C Committee makes. Generally, the O&C Committee is responsible for our executive compensation program throughout the enterprise (including affiliates and subsidiaries). The responsibilities of the O&C Committee for executive compensation are more fully detailed in its charter at http://www.dteenergy.com/corporateGovernance/organization.html and include, but are not limited to, approving base salaries, short- and long-term incentives, benefit plans and perquisites. The O&C Committee continually monitors the executive compensation program and adopts changes to reflect the dynamic marketplace in which we compete for talent. To the extent necessary, the O&C Committee also works with other Board Committees to review or approve reports, awards, and other matters relating to compensation. For example, the Finance Committee reviews the financial components of performance targets and measures and the Corporate Governance Committee assists in the review of this Compensation Discussion and Analysis.

 

The O&C Committee uses information from several external sources in order to monitor and achieve an executive compensation program that supports our business goals and attracts executives whose performance will be measured against those goals. Independent outside consultants and external information enable the O&C Committee to maintain impartial decision-making regarding performance and pay. The O&C Committee annually reviews each component of the NEOs’ compensation and is advised directly by the outside compensation consulting firm, discussed in further detail below, in connection with such review. The O&C Committee, based on input from its consultant and management and a review of competitive benchmark data, believes that the current structure is appropriately balanced and competitive to accomplish the important tasks of recruiting, retaining, and motivating talented executives in the energy industry in which we compete.

 

Independent Review of Compensation Program — As mentioned earlier, the O&C Committee employs an outside consulting firm, Mercer Human Resources Consulting LLC (“Mercer HR”), a subsidiary of Marsh & McClennan Companies, Inc. (“Marsh”), to advise the O&C Committee on executive compensation matters. Use of the outside consultant is an important component of the compensation setting process which enables the O&C Committee to make informed decisions based on market data and practices. A representative of Mercer HR attends O&C Committee meetings and consults with the members as required. Mercer HR has served as the O&C Committee’s outside consultant since 2002. At that time, the O&C Committee interviewed two compensation consulting firms before selecting Mercer HR. In 2006, we paid Mercer HR approximately $67,500 for advising the O&C Committee on executive compensation. Mercer HR is directly responsible for providing executive compensation consulting to the O&C Committee and has no affiliations with any of the NEOs or members of the Board other than in its role as an outside consultant.

 

In addition to the executive compensation consulting services provided to the O&C Committee, in 2006 Mercer HR provided health and welfare consulting services to the Company, and provided pension administration services until the end of 2006. Mercer Management Consulting Inc. (“Mercer Management”), another subsidiary of Marsh, provided an organizational analysis of potential cost savings for MichCon as part of our Performance Excellence Process (“PEP”). Marsh USA Inc., another subsidiary of Marsh, provides insurance

brokering and loss prevention services to the Company. The O&C Committee was informed of additional services provided by Mercer HR prior to their engagement. The representative of Mercer HR that provides executive compensation consulting services to the O&C Committee does not provide any other services to the Company. For 2007, Mercer HR was replaced with another service provider for pension administration. In addition to outside consulting services to the O&C Committee, Mercer HR was paid approximately $1.5 million for health and welfare consulting services and pension administration services in 2006. Mercer Management was paid approximately $2.2 million for our Performance Excellence Process consulting. In early 2007, the O&C Committee adopted a policy that requires pre-approval of any work by the outside consulting firm for services that are $25,000 or greater, excluding advice provided to the O&C Committee on executive compensation matters.

 

Compensation Benchmarks — To ensure that the executive compensation programs achieve our objectives, each element of executive compensation is benchmarked and evaluated against a peer group. The O&C Committee approves the peer group and periodically reviews and updates the companies included in that group. The peer group consists primarily of utilities (including utility holding companies), broad-based energy companies, and significant non-energy companies selected on the basis of revenues, financial strength, geographic location, and availability of compensation information. Hewitt Associates, another external consulting firm, conducts a market study every two years covering compensation practices for similar positions in the peer group. The most recent study was completed in September 2005.

 

The peer group for Hewitt’s study, as approved by the O&C Committee, consisted of the following companies:

 

 

Management Makes Recommendations to the O&C Committee and Provides Information for the Committee’s Review

 

Our management works closely with the O&C Committee in the executive compensation process. Excluding the CEO’s compensation, management’s responsibilities include:

 

 

 

The Vice President of Human Resources and the Corporate Secretary work with the O&C Committee to establish the agenda for Committee meetings. Other members of management provide various reports for O&C Committee review to permit the members to exercise their duties and obligations as delegated by the Board.

 

Key Components of Our Executive Compensation Program

 

The key components of the compensation program include base salary, annual incentives, and long-term incentives. In addition, executives are eligible for certain post-employment benefits and certain benefits generally not available to other employees. These additional benefits are consistent with our assessment of market practices and our overall compensation philosophy to attract, retain, and motivate talented executives responsible for leading the Company.

 

Our executives, other than Messrs. Earley and Anderson, are assigned to one of five group levels based on job responsibilities, with a Group 1 executive at a higher level of responsibility than a Group 2 executive. The group level generally determines each executive’s Annual Incentive Plan target, Long-Term Incentive Plan target, and benefits package. Mr. Buckler is included in Group 1 and Mr. Meador is included in Group 2. Mr. Ewing was included in Group 1 until his retirement effective January 1, 2007. Occasionally within this Proxy Statement, these group levels are used to distinguish compensation and benefit awards.

 

In addition to base salary, we have two primary incentive plans that reward executives for performance. The plans are consistent with our objectives of tying compensation to performance and encouraging executives to associate their interests with those of the Company. The DTE Energy Company Annual Incentive Plan (the “Annual Incentive Plan”) allows us to reward executives with annual cash bonuses for performance against pre-established objectives based on work performed in the prior year. The DTE Energy Company 2006 Long-Term Incentive Plan allows us to grant executives long-term equity incentives to encourage continued employment with DTE, to accomplish pre-defined long-term performance objectives and create shareholder alignment. Long-term grants made to executives in February 2006 were from the DTE Energy Company 2001 Stock Incentive Plan. On April 27, 2006, the Company’s shareholders approved the 2006 Long-Term Incentive Plan, which replaced the 2001 Stock Incentive Plan (the two plans are referred to collectively as the “Long-Term Incentive Plan”).

 

Over the last several years, the weight given to the incentive programs, especially in the area of long-term incentives, has gradually been increased to more closely align us with practices in the peer group. We believe the current mix among base salary, the Annual Incentive Plan, and the Long-Term Incentive Plan is appropriately set to provide market-competitive compensation when Company performance warrants. The mix is more heavily weighted toward incentive compensation at higher executive levels within DTE. The interplay between the Annual Incentive Plan and the Long-Term Incentive Plan provides a balance of short- and long-term incentives to motivate executives to achieve our business goals and objectives and to properly reward executives for the achievement of such goals and objectives.

 

The following is a more detailed discussion of the elements of the Company’s executive compensation program:

 

Base Salary — When setting individual base salary levels, we consider several factors, including (i) the market reference point for the executive’s position, (ii) the responsibilities of the executive’s position, (iii) the experience and performance of the individual, and (iv) retention issues. Market reference points target the median for most positions, adjusted to take into account differences in company size within the peer group. In addition, we establish midpoints for each Executive Group level for determining base salary for those executives whose jobs cannot be easily matched in the marketplace. These midpoints are consistent with the market reference points for other executives in the same Executive Group. Annually, we review these midpoints to ensure they are consistent with the market.

 

Annual Incentive Plan — Participating executives and select other employees may receive cash awards under the Annual Incentive Plan based on performance compared against pre-established Company and functional/departmental objectives. The purpose of providing cash awards under the Annual Incentive Plan is to tie compensation to near-term performance and associate the executive’s interests with those of the Company. Objectives that management proposes are reviewed and approved or revised by the O&C Committee, with financial goal recommendations reviewed by the Finance Committee of the Board, no later than 90 days after the beginning of the performance period. The objectives include performance measures in several categories that are critical to our success. When setting these objectives, management and the O&C Committee determine the elements of our business that require the focused attention of the executives to achieve its ultimate goals. Several objectives are set and, for each objective, (i) a threshold or minimum level of achievement is set, (ii) a target level is set, and (iii) a maximum level is set. Annual Incentive Plan awards to executives are determined as follows:

 

 

The final awards, if any, are paid after the O&C Committee certifies the final results of each objective.

 

The performance payout percentage is based upon performance objectives, each of which is weighted to reflect its importance to the total calculation. For 2006, the performance objectives (and related weighting) for Messrs. Earley, Meador, Anderson and Ewing were: earnings per share-core (25%), earnings per share-synfuel (10%), cash flow (35%), safety (10%), customer satisfaction (10%) and diversity placement (10%). The performance objectives for Mr. Buckler were earnings per share-core (10%), earnings per share-synfuel (5%), cash flow (15%), Detroit Edison earnings per share (20%), PEP cost savings (8%), PEP initiatives (12%), Detroit Edison safety (10%), customer satisfaction (5%), diversity placement (10%), and equipment availability (5%). (PEP is a performance improvement and cost reduction process begun by the Company in 2006 and will continue in 2007 and 2008.) The Company must attain a minimum level of achievement for each objective before any compensation is payable with respect to that objective. The minimum established level of each objective will result in a payout of 25% of target, and the maximum established for each level (or better) will result in a payment of 175% of target.

 

For the fiscal year 2006, the performance targets were met or exceeded for earnings per share-core, cash flow, safety, diversity placement, Detroit Edison earnings per share, PEP cost savings, diversity placement, Detroit Edison safety, and equipment availability. Performance targets for earnings per share-synfuel, customer satisfactions and PEP initiatives were not met. The aggregate weighted payment percentage was 139.69% for Messrs. Earley, Meador, Anderson and Ewing and 145.43% for Mr. Buckler. The final awards for the 2006 plan year, were paid to each of the Named Executive Officers in early 2007 and are reported in the Non-Equity Incentive Plan Compensation column of the “Summary Compensation Table” on page 32.

 

Long-Term Incentive Plan — We use the Long-Term Incentive Plan to reward long-term growth and profitability by providing a vehicle through which executives and other employees may receive stock-based compensation. Under the Long-Term Incentive Plan, participants may receive stock options, restricted stock, performance shares, performance units or a combination of these awards. To date, we have granted only time-based restricted stock, performance shares, and non-qualified stock options. The Long-Term Incentive Plan provides a mix of performance shares (approximately 40%), restricted stock (approximately 40%), and stock options (approximately 20%). This mix is designed to provide a balance of incentives to executives for increasing stock price, maintaining or increasing dividend payments, and continuing strong financial and operating performance.

 

The Long-Term Incentive Plan provides the O&C Committee the ability to design programs that focus on our long-term performance over a three-year period and provides executives an opportunity to increase their equity stake in the Company and align their interests with those of our shareholders. Our principles for ownership of stock by the executives and other employees, discussed on page 30, provide an excellent incentive to have a vested interest in the financial health, management, and success of the Company.

 

The grants made during 2006 were based on targets of 275% of base salary for Mr. Earley, 175% of base salary for Mr. Anderson, 140% of base salary for Messrs. Buckler and Ewing, and 110% for Mr. Meador. In addition to the targeted award levels, the O&C Committee also considers previous years’ grants, career potential, and retention issues in determining the final number of units granted.

 

 

The performance shares granted in 2003 were paid in early 2006. The vesting amounts were based upon performance measures, each of which was weighted to reflect its importance to the total calculation. The Company had to attain a minimum level for each measure before any compensation was payable with respect to that measure. The minimum established level of each measure would have resulted in a payout of 50% of target, and an established maximum (or better) for each level would have resulted in a payment of 200% of target. The payout amount was based upon the following performance measures (and related weighting): total shareholder return relative to the S&P Electric Utility Index (50%), earnings per share growth (35%), and employee satisfaction (15%). We exceeded the threshold level of performance for employee satisfaction. The 2006 payout level of 12.75% was based on the final results as certified by the O&C Committee and was limited primarily because the total shareholder return and earnings per share growth measures did not meet threshold levels. See footnote 2 to the “Option Exercises and Stock Vested in 2006” table on page 37. Over the past three years, the payout level has ranged from 56.9% to 27.6%.

 

 

Executive Benefits — We provide executives with certain benefits generally not available to our other employees as a matter of competitive practice and as a retention tool. The O&C Committee periodically reviews the level of executive benefits provided to executives against a peer group to assure they are reasonable and consistent with our overall compensation objectives.

 

During 2006, we provided various benefits that included the following:

 

 

Other benefits provided to executives during 2006 were reimbursement of certain financial planning and income tax return preparation expenses, certain club memberships, car washing and minor maintenance services, and limited use of corporate event tickets when available.

 

Effective January 1, 2007, we discontinued income deferrals under the Deferred Compensation Plan, reimbursement of financial planning and tax return preparation expenses, and club memberships benefits. Also effective January 1, 2007, to partially replace the discontinued benefits, we instituted an executive benefit allowance. This allowance is not considered as compensation for any Company incentive or benefit program.

 

Our Stock Ownership Policy

 

To be more closely linked with the interests of our shareholders, we expect most executives and certain other employees to own, within five years of their appointment to such position, shares of our stock having a value equal to a multiple of their annual base salary. Common stock, time-based restricted stock, phantom stock, and unvested performance shares (assuming achievement of target levels of performance) are counted toward the fulfillment of this ownership requirement. The following are the requirements for the Named Executive Officers: (i) for Mr. Earley and Mr. Anderson, five times their respective base salary; (ii) for Mr. Buckler, four times his base salary, and (iii) for Mr. Meador, three times his base salary. Mr. Ewing, who retired from the Company effective January 1, 2007, was required to own four times his base salary. Other executives and employees may be required to hold from one to three times their base salaries as determined by their Executive Group (see page 26) within the Company. As of January 3, 2007, 100% of the executives met the stock ownership guidelines.

 

Our Stock Option Granting Practices

 

We have granted non-qualified stock options to executives and other employees since 1997 to enable these individuals to participate in our future success and to associate their interests with ours and with our shareholders’. The granting of options is administered by the O&C Committee under the terms of the Long-Term Incentive Plan. The Long-Term Incentive Plan provided that the option exercise price is to be based on the average of the highest and lowest trading prices on the date the option is granted. In February 2007, the Board authorized an amendment to the Long-Term Incentive Plan that changed the option exercise price to be based on the closing price on the date the option is granted.

 

Stock option grants for all executives are approved by the O&C Committee as required by the Long-Term Incentive Plan and the O&C Committee charter. Under the terms of the Long-Term Incentive Plan, beginning in 1999 the O&C Committee delegated specific authority for the CEO to approve other grants to key employees other than executives. The annual grants are generally approved by the O&C Committee in the first quarter of the year, shortly after the public release of fiscal year-end earnings results.

 

In addition to the annual grants, we occasionally make special grants of non-qualified stock options to newly hired employees as part of the offer of employment, or to existing employees for retention or other incentive purposes. Special grants to an executive are made by the O&C Committee. Special grants to non-executives are approved by the CEO under his delegated authority from the O&C Committee, on the first business day of each quarterly period.

 

The backdating of stock option grants at various public companies generated considerable attention recently. In the second half of 2006, the Board requested an internal review of our historic stock option granting practices. This internal review did not identify any fraudulent or abusive activity or patterns of questionable activity related to stock option grants by the Company, nor did it find any evidence of intentional manipulation by the Company’s management of the value of options through backdating at the time of grant.

 

Internal Revenue Code Limits on Deductibility of Compensation

 

Under IRC Section 162(m), we cannot deduct compensation paid to a “covered employee” in excess of $1 million on our federal income tax return unless it is (i) based on performance and (ii) paid under a program that meets IRC requirements. In general, “covered employees” for this purpose are our CEO, CFO, and the three other highest paid executive officers named in the “Summary Compensation Table” on page 32. The Annual Incentive Plan and the Long-Term Incentive Plan, previously approved by the shareholders, are designed to provide the opportunity for use of the performance-based compensation exception. The Long-Term Incentive Plan permits various types of awards, some of which qualify for exemption under IRC Section 162(m) and some of which do not. We expect to continue to emphasize performance-based compensation programs designed to fulfill future corporate business objectives at all levels. Although these programs are generally designed to satisfy the requirements of IRC Section 162(m), we believe it is important to preserve flexibility in designing compensation programs and it may be appropriate in certain circumstances to grant

compensation that may not meet all of the IRC requirements for deducting compensation in excess of $1 million and, therefore, will not be tax deductible for the Company.

 

The O&C Committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on that review and discussion, we recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s 2007 Proxy Statement.

 

Organization and Compensation Committee

 

Eugene A. Miller, Chair

Frank M. Hennessey

Allan D. Gilmour

 

Mr. Laymon, who resigned from the Board effective September 25, 2006, was a member of the O&C Committee at the time the 2006 performance measures and targets for executive officers under the Company’s Annual Incentive Plan and Long-Term Incentive Plan were approved.

 

The table below summarizes the total compensation paid or earned by each of the Named Executive Officers for the fiscal year ended December 31, 2006.

 

 

 

 

(6) The following table provides a breakdown of the 2006 amounts reported in this column.