STOCK-BASED COMPENSATION

The Company’s stock incentive program permits the grant of incentive stock options, non-qualifying stock options, stock awards, performance shares and performance units to employees and members of its Board of Directors. Key provisions of the stock incentive program are:


•	Authorized limit is 9,000,000 shares of common stock;


•	Prohibits the grant of a stock option with an exercise price that is less than the fair market value of the Company’s stock on the date of the grant; and

•

Imposes the following award limits to a single participant in a single calendar year, (1) options for more than 500,000 shares of common stock; (2) stock awards for more than 150,000 shares of common stock; (3) performance share awards for more than 300,000 shares of common stock (based on the maximum payout under the award); or (4) more than 1,000,000 performance units, which have a face amount of $1.00 each.

The Company records compensation expense at fair value over the vesting period for all awards it grants.

Stock-based compensation for the reporting periods is as follows:



	2011		2010		2009
	(In millions)
Stock-based compensation expense	$	66	$	52	$	56
Tax benefit	25		20		22
Stock-based compensation cost capitalized in property, plant and equipment	4		3		3

Options

Options are exercisable according to the terms of the individual stock option award agreements and expire 10 years after the date of the grant. The option exercise price equals the fair value of the stock on the date that the option was granted. Stock options vest ratably over a three-year period.

Stock option activity was as follows:



					(In millions)
	Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2011	4,827,457		$	41.09
Granted	—		$	—
Exercised	(2,040,229	)	$	40.83
Forfeited or expired	(22,558	)	$	43.44
Options outstanding at December 31, 2011	2,764,670		$	41.25	$	29
Options exercisable at December 31, 2011	2,098,184		$	42.42	$	19

As of December 31, 2011, the weighted average remaining contractual life for the exercisable shares is 4.25 years. As of December 31, 2011, 666,486 options were non-vested. During 2011, 687,061 options vested.

The weighted average grant date fair value of options granted during 2010, and 2009 was $5.62 and $4.41, respectively. The intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 was $20 million, $9 million, and $3 million, respectively. Total option expense recognized during 2011, 2010 and 2009 was $2 million, $4 million and $3 million, respectively.

The number, weighted average exercise price and weighted average remaining contractual life of options outstanding were as follows:



						Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
					Number of Options
Range of Exercise Prices					Number of Options
$	27.00	—	$	38.00	417,633	$	27.80	7.16
$	38.01	—	$	42.00	723,662	$	41.04	3.11
$	42.01	—	$	45.00	1,272,117	$	44.04	5.64
$	45.01	—	$	50.00	351,258	$	47.60	4.81
					2,764,670	$	41.25	5.10

The Company determined the fair value for these options at the date of grant using a Black-Scholes based option pricing model and the following assumptions:



	December 31
	2010		2009
Risk-free interest rate	2.91	%	2.04	%
Dividend yield	5.08	%	4.98	%
Expected volatility	22.96	%	27.88	%
Expected life	6	years	6	years

The Company includes both historical and implied share-price volatility in option volatility. Implied volatility is derived from exchange traded options on DTE Energy common stock. The Company’s expected life estimate is based on historical data.

Stock Awards

Stock awards granted under the plan are restricted for varying periods, generally for three years. Participants have all rights of a shareholder with respect to a stock award, including the right to receive dividends and vote the shares. Prior to vesting in stock awards, the participant: (i) may not sell, transfer, pledge, exchange or otherwise dispose of shares; (ii) shall not retain custody of the share certificates; and (iii) will deliver to the Company a stock power with respect to each stock award.

The stock awards are recorded at cost that approximates fair value on the date of grant. The cost is amortized to compensation expense over the vesting period.

Stock award activity for the periods ended December 31 was:



	2011		2010		2009
Fair value of awards vested (in millions)	$	13	$	19	$	18
Restricted common shares awarded	381,840		238,405		523,660
Weighted average market price of shares awarded	$	47.98	$	44.08	$	28.73
Compensation cost charged against income (in millions)	$	12	$	12	$	18

The following table summarizes the Company’s stock awards activity for the period ended December 31, 2011:



	Restricted Stock		Weighted Average Grant Date Fair Value
Balance at January 1, 2011	757,414		$	37.32
Grants	381,840		$	47.98
Forfeitures	(66,675	)	$	40.92
Vested and issued	(346,355	)	$	38.25
Balance at December 31, 2011	726,224		$	42.25

Performance Share Awards

Performance shares awarded under the plan are for a specified number of shares of common stock that entitle the holder to receive a cash payment, shares of common stock or a combination thereof. The final value of the award is determined by the achievement of certain performance objectives and market conditions. The awards vest at the end of a specified period, usually three years. The Company accounts for performance share awards by accruing compensation expense over the vesting period based on: (i) the number of shares expected to be paid which is based on the probable achievement of performance objectives; and (ii) the closing stock price market value. The settlement of the award is based on the closing price at the settlement date.

The Company recorded compensation expense as follows:



	2011		2010		2009
	(In millions)
Compensation expense	$	53	$	36	$	35
Cash settlements (1)	$	3	$	3	$	1
Stock settlements (1)	$	25	$	23	$	8

_______________________________________


(1)	Sum of cash and stock settlements approximates the intrinsic value of the liability.

During the vesting period, the recipient of a performance share award has no shareholder rights. However, for performance shares granted before 2010, recipients will be paid an amount equal to the dividend equivalent on such shares. Performance shares granted in 2010 or later will not be entitled to dividend equivalent payments before the performance shares granted are earned and vested. During the period beginning on the date the post-2009 performance shares are awarded and ending on the certification date of the performance objectives, the number of performance shares awarded will be increased, assuming full dividend reinvestment at the fair market value on the dividend payment date. The cumulative number of performance shares will be adjusted to determine the final payment bases on the performance objectives achieved. Performance share awards are nontransferable and are subject to risk of forfeiture.

The following table summarizes the Company’s performance share activity for the period ended December 31, 2011:



	Performance Shares
Balance at January 1, 2011	1,527,253
Grants	621,114
Forfeitures	(71,946	)
Payouts	(467,688	)
Balance at December 31, 2011	1,608,733

Unrecognized Compensation Costs

As of December 31, 2011, there was $50 million of total unrecognized compensation cost related to non-vested stock incentive plan arrangements. That cost is expected to be recognized over a weighted-average period of 1.36 years.



	Unrecognized Compensation Cost		Weighted Average to be Recognized
	(In millions)		(In years)
Options	$	1	0.76
Stock awards	15		1.12
Performance shares	34		1.48
	$	50	1.36