UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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CMS Energy Corporation
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SEC 1913 (02-02)
[CMS ENERGY LOGO]
CMS ENERGY CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 20, 2005
To Fellow Shareholders of CMS Energy Corporation:
Our annual meeting of shareholders of CMS Energy Corporation (the "Corporation")
will be held on Friday, the 20th day of May 2005, at 9:00 A.M., Eastern Daylight
Saving Time, at our corporate headquarters located at One Energy Plaza, Jackson,
Michigan 49201. The purposes of the annual meeting are to:
(1) Elect twelve members to the Corporation's Board of Directors;
(2) Consider a proposal to ratify the appointment of an independent
registered public accounting firm to audit the Corporation's
consolidated financial statements for the year ending December 31, 2005;
and
(3) Transact such other business as may properly come before the annual
meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1 AND 2. The proxy
holders will use their discretion on other matters that may arise at the annual
meeting.
Our annual report to the shareholders for the year 2004, including the Form 10-K
with our consolidated financial statements, previously has been furnished to
you.
All shareholders are invited to attend our annual meeting. If you were a
shareholder of record at the close of business on March 31, 2005, you are
entitled to vote. Every vote is important. Please vote using a touch-tone
telephone, the Internet, or by signing and returning the enclosed proxy card.
You can help minimize our costs by promptly voting via telephone or the
Internet.
By Order of the Board of Directors
Michael D. VanHemert
Corporate Secretary
CMS Energy Corporation
One Energy Plaza
Jackson, Michigan 49201
April 18, 2005
PROXY STATEMENT
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TABLE OF CONTENTS
INTRODUCTION
General................................................... Page 1
Proposals Subject To Shareholder Vote..................... Page 1
Ways To Vote Your Proxy................................... Page 1
Proxy Voting Confidentiality Policy....................... Page 2
CORPORATE GOVERNANCE
Background................................................ Page 2
Director Communication Process............................ Page 3
Shareholder Recommendation Process........................ Page 4
Director Independence..................................... Page 4
Code Of Ethics............................................ Page 5
Board And Committee Information........................... Page 5
PROPOSAL 1: ELECT TWELVE MEMBERS TO THE CORPORATION'S BOARD
OF DIRECTORS.............................................. Page 11
VOTING SECURITY OWNERSHIP................................... Page 14
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..... Page 15
BUSINESS RELATIONSHIPS...................................... Page 15
COMPENSATION OF DIRECTORS................................... Page 16
COMPENSATION AND HUMAN RESOURCES COMMITTEE REPORT........... Page 17
EXECUTIVE COMPENSATION...................................... Page 21
AUDIT COMMITTEE REPORT...................................... Page 25
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM............... Page 26
AUDITOR FEES................................................ Page 26
PROPOSAL 2: RATIFY THE APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM.................................... Page 27
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG CMS,
S&P 500 INDEX & DOW JONES UTILITY INDEX................... Page 28
2006 PROXY STATEMENT INFORMATION............................ Page 28
OTHER MATTERS............................................... Page 29
APPENDIX A.................................................. Page A-1
PROXY STATEMENT
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INTRODUCTION
GENERAL
The Board of Directors of CMS Energy Corporation ("CMS" or the "Corporation")
solicits your proxy for our annual meeting of shareholders. Your shares will be
voted as you request if your proxy voting instructions are received prior to the
annual meeting. You may revoke your proxy at any time before it is voted at the
annual meeting.
As of December 31, 2004, the Corporation's only outstanding securities entitled
to vote at the annual meeting consisted of a total of 194,996,785 shares of
Common Stock ($.01 par value). Each outstanding share is entitled to one vote on
all matters that come before the annual meeting. All shares represented by valid
proxies will be voted at the annual meeting.
The presence of the holders of a majority of the shares of CMS Common Stock in
person or by proxy at the annual meeting will constitute a quorum, which is
needed to transact any business. The determination of approval of corporate
action by the shareholders is based on votes "for" and "against". In general,
abstentions are not counted as "against" votes but are counted in the
determination of a quorum.
With respect to Proposal 1 below, the election of each director requires
approval from a plurality of the shares voted. On Proposal 2, approval requires
votes "for" by a majority of the shares voted.
The terms "we" and "our" as used in this proxy statement generally refer to CMS
Energy Corporation and its collective affiliates, including its principal
subsidiary Consumers Energy Company ("Consumers"). While established, operated
and regulated as separate legal entities and publicly traded companies, CMS and
Consumers historically have had parallel Boards of Directors, Committees of the
Board, director and executive compensation arrangements and plans, auditing
relationships, as well as significant overlap in executive management. Thus, in
certain contexts in this proxy statement, the terms "our" and "we" refer to each
of CMS and Consumers and satisfy their respective disclosure obligations. In
addition, the disclosures frequently reference "Boards" and "Committees" and
similar plural presentations to reflect these parallel structures of CMS and
Consumers.
PROPOSALS SUBJECT TO SHAREHOLDER VOTE
1) Elect twelve members to the Corporation's Board of Directors; and
2) Ratify the appointment of an independent registered public accounting firm to
audit the Corporation's consolidated financial statements for the year ending
December 31, 2005.
Detailed descriptions of each of these proposals can be found later in this
proxy statement.
WAYS TO VOTE YOUR PROXY
PLEASE VOTE USING A TOUCH-TONE TELEPHONE, THE INTERNET, OR BY SIGNING AND
RETURNING THE ENCLOSED PROXY CARD. YOU CAN HELP MINIMIZE OUR COSTS BY PROMPTLY
VOTING VIA TELEPHONE OR THE INTERNET.
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PROXY VOTING CONFIDENTIALITY POLICY
CMS shareholder voting is confidential (except as may become necessary to meet
applicable legal requirements or in the event a proxy solicitation in opposition
to the election of the Corporation's Board nominees is initiated). This is true
for all beneficial holders, including employees and retirees who are
shareholders through participation in the Employee Savings Plan (our 401(k)
plan). Confidentiality of the proxy voting process means:
- Anyone who has access to voting information will not discuss how any
individual shareholder votes;
- Proxy cards and proxy forms are to be kept in a secure area so that no one has
access to them except for the persons assigned to handle and tabulate the
proxies;
- Whether a shareholder has or has not voted is confidential, just as is how a
shareholder votes;
- Any comments provided by shareholders are confidential. Certain specific
comments and summaries of comments are provided to management, but there is no
disclosure of who made the comments;
- Proxy voting tabulations will be provided to management and to others as
appropriate, but the results provided will be only totals and meaningful
subtotals; and
- The confidentiality policy discussed above relates to all beneficial holders,
although banks and brokers who hold shares on behalf of others will continue
to be subject to proxy solicitation rules as is standard in the industry.
CORPORATE GOVERNANCE
BACKGROUND
In March of 2003, the CMS and Consumers Boards of Directors adopted Corporate
Governance Principles (the "Principles") that generally formalized long-standing
corporate and Board practices, although with various updated aspects reflecting
developing best practices and Securities and Exchange Commission ("SEC") and New
York Stock Exchange ("NYSE") standards. The Principles detail the role of the
Boards and their Committees, the selection and role of the Chief Executive
Officer, the composition and meeting procedures of the Boards and their
Committees, as well as Board and Committee compensation and self-evaluation
guidelines. At the same time, the Boards adopted, upon the recommendations of
their Governance and Public Responsibility Committees as well as the applicable
Committees, Charters for each of their standing Committees that detailed their
purposes and duties, composition, meetings, performance evaluations, resources
and authority as well as other aspects of Committee activities. These Principles
and the Charters, as they have been amended and restated from time to time, have
been available through our website at www.cmsenergy.com.
Effective October 1, 2004, the Boards accepted the resignation of Kenneth
Whipple as Chief Executive Officer of CMS and Consumers and, upon the
recommendation of the Compensation and Human Resources Committees, elected David
W. Joos to that office. In connection with this management succession, the
Governance and Public Responsibility Committees refined the respective duties of
Mr. Whipple as non-executive Chairman and Mr. Joos as Chief Executive Officer of
both companies, and recommended related amendments to the CMS and Consumers
Bylaws that were adopted by the Boards effective October 1, 2004. Mr. Joos
retained his office as President of CMS but not of Consumers.
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In March of 2005, the Governance and Public Responsibility Committees
recommended to the Boards the nominations of ten continuing and two new
directors to serve on the Boards of CMS and Consumers, effective with their
proposed election by shareholders at the May 20, 2005 annual meeting. The two
new nominees are Richard M. Gabrys and Philip R. Lochner, Jr. Mr. Gabrys, a
recently retired Vice Chairman of Deloitte & Touche's U.S. Global Strategic
Client Group, was recommended to the Committees by the CMS and Consumers
Chairman and Vice Chairman of the Boards. Mr. Lochner, a former member of the
SEC, was recommended to the Committees by the Vice Chairman of the Boards. The
Vice Chairman previously had served on a non-affiliated public company board of
directors with Mr. Lochner, as well as on the board of a separate non-affiliated
public company for which Mr. Gabrys served in a leadership role at Deloitte &
Touche as independent auditor. William U. Parfet, a current member of the
Boards, decided not to seek re-election as a director due to the increasing
demands of his business. Thus, the Boards approved an increase in their size by
one member, for a total of twelve directors, effective with the annual meeting
of shareholders.
The Boards also approved an amendment and restatement of the Principles and
several Committee Charters pursuant to the Governance and Public Responsibility
Committees' recommendations in March of 2005. The changes to the Principles
include a refinement in the respective duties of the separate offices of
non-executive Chairman of the Board and Chief Executive Officer for each of CMS
and Consumers. In addition, the Principles were amended to make mandatory the
companies' recommended director retirement age of 75, as well as to establish
limits on the numbers of public company boards on which CMS and Consumers'
directors can serve, such that our Chief Executive Officer and Vice Chairman
only can serve on two such other boards, and our other directors only can serve
on five such other boards.
The Boards and the Governance and Public Responsibility Committees periodically
evaluate additional changes to the Principles and Charters, and all such
revisions will be reflected in the versions of such documents available through
our website.
DIRECTOR COMMUNICATION PROCESS
CMS and Consumers shareholders, employees or third parties can communicate on
any topic with the Boards of Directors, Committees of the Boards or an
individual director, including Kenneth Whipple, our Chairman of the Boards, or
Earl D. Holton, our presiding director at executive sessions of the Boards, by
sending written communications c/o the Corporate Secretary, CMS Energy
Corporation or Consumers Energy Company, One Energy Plaza, Jackson, MI 49201.
The Corporate Secretary will review and forward such communications to the
Boards or the appropriate Committees or director. Further information regarding
shareholder, employee or other third-party communications with the Boards or
their Committees or individual members can be accessed at the Corporation's
website.
Any shareholder, employee or third party who wishes to submit a compliance
concern to the Boards or applicable Committees, including complaints regarding
accounting, internal accounting controls or auditing matters to the Audit
Committees, may do so by any of the following means:
- send correspondence or materials addressed to the appropriate party c/o the
Chief Compliance Officer, CMS Energy Corporation or Consumers Energy Company,
One Energy Plaza, Jackson, MI 49201;
- send an email or other electronic communication via our external Website
www.ethicspoint.com, again addressed to the appropriate party; or
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- call the CMS and Consumers Compliance Hotlines at either 1-800-CMS-5212 (an
internally monitored line) or 1-866-ETHICSP (monitored by an external vendor).
All such communications initially will be reviewed by the Chief Compliance
Officer (who reports directly to the Boards) prior to being forwarded to the
Boards or applicable Committees or directors.
SHAREHOLDER RECOMMENDATION PROCESS
Shareholders can submit recommendations of nominees for election to the Boards
of Directors. Shareholders' recommendations will be provided to the Governance
and Public Responsibility Committees for consideration. The recommendations
should include (a) the qualifications of the proposed nominee to serve on the
Boards, (b) the principal occupation and employment of the proposed nominee for
the past five years, (c) each directorship, trustee position or similar position
currently held by the proposed nominee, and (d) a statement from the proposed
nominee that he or she has consented to the submission of the recommendation.
Shareholders should send their written recommendations of nominees c/o the
Corporate Secretary, CMS Energy Corporation or Consumers Energy Company, One
Energy Plaza, Jackson, MI 49201.
In January 2005, the Corporate Secretary received a self-nomination
recommendation from an individual shareholder. Although this self-nomination did
not meet all of the foregoing requirements, the Governance and Public
Responsibility Committees considered his recommendation at each of their January
and March meetings. The Committees unanimously determined that this individual
did not meet their criteria for nominees as detailed later in this proxy
statement, and have not nominated him. This same individual has submitted
shareholder proposals for inclusion in each of the 2003 and the 2004 proxy
statement, and in both instances the SEC staff has concurred in the
Corporation's position that these proposals were not appropriate for inclusion
in its proxy material.
DIRECTOR INDEPENDENCE
The Boards undertook their annual review of director and Committee member
independence, including a review of each director's charitable affiliations
vis-a-vis CMS and Consumers charitable contributions, at their March 2005
meetings. The Boards affirmed the "independent" status (in accordance with the
listing standards of NYSE) of all of their non-employee directors (with the
exception of Mr. Whipple who served as the Chief Executive Officer of CMS and
Consumers from May 2002 through his resignation effective at the end of
September 2004) based upon the following:
- No non-employee director has a material relationship with CMS or Consumers
(either directly or as a partner, shareholder or officer of an organization
that has a relationship with CMS or Consumers).
- During the last three years, no non-employee director or his or her family
member:
- received more than $100,000 in direct compensation from CMS or Consumers (in
excess of payments for Board and Committee service);
- was affiliated with or employed by the present or former auditors of CMS or
Consumers;
- was employed as an executive officer by another company that has an
interlocking compensation committee with CMS or Consumers;
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- was an officer or employee of a company to which CMS or Consumers made or
received payments of $1 million, or 2% of the other company's consolidated
gross revenues; and
- has been an employee of CMS or Consumers.
In addition to meeting the independent director standards of NYSE as detailed
above, each of Messrs. Monahan and Paquette has been designated by the Boards of
Directors as an "independent director" in accordance with the explicit
requirements of the Michigan Business Corporation Act. These statutory
requirements are even more stringent than the NYSE "independence" standards.
Independent directors under the Michigan Business Corporation Act are presumed
by law to have a disinterested status that allows the full board of directors to
rely upon their disinterested determinations.
CODE OF ETHICS
CMS has adopted a code of ethics that applies to its Chief Executive Officer,
Chief Financial Officer and Chief Accounting Officer, as well as all other
officers and employees of the Corporation and its affiliates, including
Consumers. The code of ethics is included in our Code of Conduct and Statement
of Ethics Handbook, which can be found on our website at www.cmsenergy.com. Our
Code of Conduct and Statement of Ethics, including the code of ethics, is
administered by the Chief Compliance Officer, who reports directly to the Boards
of Directors.
BOARD AND COMMITTEE INFORMATION
The CMS Board of Directors met 12 times and Consumers' Board of Directors met 11
times during 2004. In addition, the CMS Board took action by written consent in
lieu of additional meetings four times in 2004, and the Consumers Board did so
four times. All incumbent directors attended at least 75% of the CMS Board and
assigned committee meetings during 2004. Our Principles state the expectation
that all Board members attend all scheduled Board and Committee meetings, as
well as the annual meeting of shareholders. All Board members attended the 2004
annual meeting of shareholders.
The various standing committees of the Boards of Directors are listed below.
Each committee is composed entirely of "independent" directors, as that term is
defined by the NYSE listing standards described above, other than the Executive
Committees of which Kenneth Whipple serves as Chair. Employee directors served
on no other committees during 2004.
On a regularly scheduled basis, the independent directors meet in executive
session (that is, with no employee director present) and may invite such members
of management to attend as they determine appropriate. Mr. Whipple is often
invited to attend, especially since he became non-executive Chairman effective
October 1, 2004. At least once each year, the independent directors meet in
executive session without Mr. Whipple present in conformance with the NYSE
listing standards.
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AUDIT COMMITTEES
Members: William U. Parfet (Chair), Michael T. Monahan, Joseph F. Paquette, Jr.,
and Kenneth L. Way
Meetings during 2004: CMS 10; Consumers 10
Each of the members of the Audit Committees is an independent director, and each
qualifies as an "audit committee financial expert" based upon the following
qualifications:
- Educational background;
- Prior service as chief financial officer and/or chief executive officer
actively supervising accounting activities;
- Understanding of generally accepted accounting principles and financial
statements; and
- Membership on various audit committees.
In addition to serving as the Chair of our Audit Committees, Mr. Parfet
presently serves on audit committees of three other public companies. Our Boards
have determined that such simultaneous service will not impair Mr. Parfet's
ability to effectively serve on our Audit Committees through the end of his term
in May 2005.
The primary functions of the Audit Committees are to:
- Assure the integrity of CMS' and Consumers' consolidated financial statements
and financial information, the financial reporting process and the system of
internal accounting and financial controls;
- Assure CMS' and Consumers' compliance with applicable legal requirements,
regulatory requirements, and NYSE rules;
- Appoint, compensate and terminate CMS' and Consumers' independent auditors;
- Pre-approve all audit and non-audit services provided by the independent
auditors;
- Assure the independent auditors' qualifications and independence;
- Review the performance of the internal audit function and independent
auditors;
- Review CMS' and Consumers' risk management policies, controls and exposures;
- Prepare the Audit Committee Report for inclusion in the annual proxy statement
(The Audit Committee Report and related auditor disclosures can be found
beginning on page 25 of this proxy statement.);
- Assure compliance with the Corporation's Code of Conduct and Statement of
Ethics Handbook including approval of any waiver of the provisions applicable
to directors and executive officers and receipt of periodic reports from the
Chief Compliance Officer concerning compliance activities relating to the
Handbook and Statement;
- Make recommendations to the Boards of Directors regarding significant
environmental laws and regulations affecting CMS' and Consumers' operations;
and
- Perform their duties in a manner consistent with the Audit Committee Charter
adopted by the Boards of Directors.*
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*The Charter was amended and restated in each of April 2004 and February 2005.
The amendments and restatements were responsive to the requirements of the
Sarbanes-Oxley Act of 2002, the corresponding subsequently enacted rules and
regulations of the SEC, the 2003 and 2004 revisions to the listing standards of
the NYSE, as well as continuing refinement of the Audit Committees' functions in
response to developments at the Corporation and in corporate governance more
generally. The Audit Committee Charter, as so amended and restated, is available
on our website and attached as Appendix A to this proxy statement.
COMPENSATION AND HUMAN RESOURCES COMMITTEES
Members: John B. Yasinsky (Chair), Earl D. Holton, William U. Parfet, and Percy
A. Pierre
Meetings during 2004: CMS 5; Consumers 5
The primary functions of these committees are to:
- Annually review the Corporation's executive compensation structure and
policies, including the establishment and adjustment of executive officers'
base salaries, annual and long-term incentive targets and incentive payments
consistent with the achievement of such targets as well as produce an annual
report on such compensation to shareholders in accordance with the rules and
regulations of the SEC and other appropriate regulatory agencies (The
Compensation and Human Resources Committee Report and related executive
compensation disclosures can be found beginning on page 17 of this proxy
statement.);
- Review and approve corporate goals and objectives relevant to the Chief
Executive Officer's compensation, evaluate the Chief Executive Officer's
performance in view of those goals and objectives, and set the Chief Executive
Officer's compensation level based on this evaluation;
- Annually determine corporate financial and business goals and target awards
pursuant to the Corporation's incentive plans, and approve the payment of cash
performance bonuses to employees in the aggregate, consistent with achievement
of such goals;
- Approve the grant of stock, stock options and other stock-based awards
pursuant to the Corporation's incentive plans, and the terms thereof,
including the vesting schedule, performance goals, exercisability and term, to
the Corporation's employees, including officers;
- Review and recommend to the Board of Directors incentive compensation plans,
equity-based plans, and tax qualified retirement and investment plans and
amendments thereto, with the exception of certain amendments which are
delegated to specified officers of the Corporation or administrators under the
terms of the plans, including supplemental retirement plans, change-in-control
severance agreements, deferred compensation programs, stock award programs,
employment, separation and management agreements;
- Review and approve management proposals regarding other compensation and
benefit programs, plans and guidelines;
- Annually review and advise the Board of Directors concerning the Corporation's
management succession plan, including long-range plans for development and
selection of key managers and plans for emergency succession in case of
unexpected disability or departure of a senior executive officer;
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- Review organizational and leadership development plans and programs, and
programs designed to identify, attract and retain high potential employees;
- Review and monitor CMS' and Consumers' policies and objectives related to
equal employment opportunity;
- Review CMS' and Consumers' policies to comply with federal and state laws and
regulations affecting personnel matters;
- Perform such other functions as may be allocated to the Committee under the
terms of the Corporation's employee benefit and executive compensation plans;
and
- Carry out additional functions and adopt additional policies and procedures as
may be appropriate in light of changing business, legislative, regulatory,
legal or other conditions.
FINANCE AND PENSION COMMITTEES
Members: Kenneth L. Way (Chair), Merribel S. Ayres, Michael T. Monahan, and
Percy A. Pierre
Meetings during 2004: CMS 3; Consumers 3
The Finance and Pension Committees review and make recommendations to the Boards
concerning the financing and investment plans and policies of the Corporation.
These committees have the authority, acting for and on behalf of the Boards and
consistent with the protection of the interests of investors, to consider and
recommend to the Boards as appropriate:
- Financing plans formulated by management, including those in strategic and
operating plans;
- Financing terms of acquisitions, divestitures, joint ventures, partnerships,
or combinations of business interests;
- Short- and long-term financing plans, including the sales or repurchases of
common and preferred equity and long-term debt;
- Financial policies including cash flow, capital structure, and dividends;
- Make recommendations to the Board of Directors regarding significant capital,
operations and maintenance expenditures relating to environmental matters
affecting CMS and Consumers;
- Risk management policies including foreign exchange management, hedging, and
insurance; and
- Investment performance, funding, and asset allocation policies for employee
benefit plans and nuclear decommissioning trusts.
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GOVERNANCE AND PUBLIC RESPONSIBILITY COMMITTEES
Members: Earl D. Holton (Chair), Merribel S. Ayres, Joseph F. Paquette, Jr., and
John B. Yasinsky
Meetings during 2004: CMS 6; Consumers 6
The primary functions of these committees are to:
- Develop and recommend to the Boards of Directors such corporate and Board
governance principles as may be deemed necessary by the Committees to ensure
that the Corporation effectively protects and enhances shareholder value;
- Monitor the practices of the Boards of Directors to ensure compliance with the
Corporation's Corporate Governance Principles;
- Evaluate and review the performance of the Boards of Directors as a whole in
order to increase the overall effectiveness of the Boards of Directors, and
report the results of their evaluation to the Boards of Directors annually;
- Recommend ways in which the Boards of Directors could improve their
performance;
- Conduct continuing study of the size, structure, composition and compensation
of the Boards and any committees thereof;
- Seek possible candidates to fill Board positions, and aid in attracting
qualified candidates to the Boards;
- Make recommendations to the Boards of Directors regarding significant
environmental matters affecting CMS' and Consumers' operations;
- Advise the Boards on the adoption and evaluation of policies designed to
maintain CMS' and Consumers' position of corporate responsibility; and
- Assess, on a regular basis, the personal characteristics and business
experience needed by the Boards in the context of the current composition of
the Boards:
Personal characteristics of candidates to be considered include: a) integrity;
b) strategic -- visionary; c) global -- international experience; d)
availability -- time (number of other boards served on); e) overall commitment
(energy -- enthusiasm); f) independence (regulatory concept as well as
independence of thought); g) informed judgment; h) high performance standards;
i) crisis response; j) length of available service; k) stock ownership
(willing to align with shareholder interest); and l) diversity.
Business experience of candidates to be considered includes: a) strong
accounting background/knowledge; b) current chief executive officer of public
company; c) former chief executive officer of public company; d) current chief
operating officer or chief financial officer of public company; e)
utility/energy/nuclear power experience; f) financial acumen and experience;
g) unique skills not possessed by other board members; h) regulatory
experience; i) legal experience; and j) investor/government relations
experience.
- Recommend, prior to the solicitation of proxies, a slate of qualified
candidates for election to the Boards at any meeting of shareholders at which
directors are to be elected and, in case of a vacancy on a Board (including a
9
vacancy created by an increase in the size of the Board), a candidate to fill
that vacancy. Such recommendations should consider the above-referenced
characteristics and experience as well as:
- The interplay of the candidate's experience with the experience of other
Board members;
- Attendance at meetings of directors;
- A balanced range of business experiences; and
- Other matters relevant to the appropriate representation of the interests of
the shareholders in carrying out the Corporation's responsibilities to the
public;
- Consider the nomination by any shareholder of a candidate for election as a
director of the Corporation, provided that the shareholder has submitted a
written request and related information to the Secretary of the Corporation at
the required time prior to any meeting of shareholders at which directors are
to be elected, together with the written consent of such person to serve as a
director;
- Review periodically and recommend to the Board modifications, as appropriate,
to the tenure policy; and
- Determine from time to time other criteria for selection and retention of
Board members.
EXECUTIVE COMMITTEES
Members: Kenneth Whipple (Chair), Earl D. Holton, William U. Parfet, Kenneth L.
Way, and John B. Yasinsky
Meetings during 2004: CMS 0; Consumers 0
The primary function of these committees is to:
- Exercise the power and authority of the Boards of Directors as may be
necessary during the intervals between meetings of the Boards, subject to such
limitations as are provided by law or by resolution of the Boards.
SPECIAL COMMITTEES
The standing committees listed above have continuing duties. In addition, the
Boards of Directors have from time to time established special committees to
address specific major issues facing CMS and/or Consumers. Special committees do
not have continuing duties; they exist only until they complete their specified
duties. The most significant current special committee is the Boards' Special
Litigation Committee, as discussed below.
Special Litigation Committee
The CMS Board of Directors established this special committee in December 2002
and confirmed its duties in January 2003. The purpose of the Special Litigation
Committee is to investigate and evaluate the allegations and issues raised by a
shareholder, requesting that the Corporation institute a derivative proceeding
against certain of our directors and officers, and to prepare such reports and
to take such other actions in connection with its reasonable investigation as it
shall deem appropriate to make a good faith determination whether the
maintenance of the derivative proceedings is in the Corporation's best
interests, in accordance with Michigan law.
10
The Special Litigation Committee was granted the full power and authority of the
Board of Directors with respect to investigating, evaluating and taking action
regarding the shareholder demand and the allegations and issues raised therein,
including without limitation the power and authority to assert claims and to
initiate and pursue litigation on the Corporation's behalf relating to such
matters, to settle or compromise any such claim or lawsuit, and to seek
dismissal of any related derivative proceeding pursuant to Michigan law. The
Special Litigation Committee may make such reports of its determinations and
actions to our Board of Directors or shareholders as it shall deem appropriate
from time to time, but making such reports to the Board shall be at the option
of the Special Litigation Committee, and all determinations made by the Special
Litigation Committee pursuant to its authority shall be final, shall not be
subject to review or approval by the Board of Directors and shall in all
respects be binding. The Board determined Michael T. Monahan and Joseph F.
Paquette, Jr. to be "disinterested directors" under Michigan law and they and a
third disinterested director appointed Messrs. Monahan and Paquette to serve as
members of the Special Litigation Committee. The Board also designated Messrs.
Monahan and Paquette as "independent directors" in accordance with Michigan law.
The Special Litigation Committee was authorized to engage such experts and
advisors, including its own independent legal counsel, as it deemed necessary or
desirable in order to assist it in the discharge of its responsibilities. The
Special Litigation Committee selected the law firm of Jenner & Block to help
with its investigation and evaluation. The Special Litigation Committee has not
completed its investigation and evaluation as of the date of this proxy
statement.
Pursuant to the indemnification requirements of the CMS Restated Articles of
Incorporation, as well as applicable Board resolutions and provisions of
Michigan law, the Corporation has paid and will continue to pay the expenses
(including attorney's fees) of certain of its current and former officers and
directors incurred in connection with the investigation described above, as well
as those incurred in other recently completed regulatory investigations and
pending legal proceedings. These investigations and proceedings are further
described in CMS' Annual Report on Form 10-K for the year ended December 31,
2004. Each of these individuals has provided an undertaking to repay all amounts
advanced if it is ultimately determined that he or she is not entitled to be
indemnified under Michigan law. The Corporation maintains directors and officers
insurance coverage that may allow for reimbursement for some or all of these
advanced amounts.
PROPOSAL 1: ELECT TWELVE MEMBERS TO THE CORPORATION'S BOARD OF DIRECTORS
As previously detailed in this proxy statement under the heading "INTRODUCTION",
the nominees for directors are proposed to serve on the parallel Boards of
Directors of each of CMS and Consumers, to hold office until the next annual
meeting or until their successors are elected and qualified. Unless a
shareholder votes to "withhold authority" for the election of directors as
provided in the enclosed proxy card, the returned proxy will be voted for the
listed nominees. The Boards believe that the nominees will be available to
serve, but in the event any nominee is unable to do so, the CMS proxy will be
voted for a substitute nominee designated by the Board, or the number of
directors constituting the full Board will be reduced accordingly.
All of the nominees are presently serving as directors and were previously
elected by shareholders, except for Richard M. Gabrys and Philip R. Lochner, Jr.
who are proposed to be newly elected to the Boards at the annual meeting of
shareholders. Mr. Gabrys, a recently retired Vice Chairman of Deloitte &
Touche's U.S. Global Strategic Client Group, was recommended to the Committees
by the CMS and Consumers Chairman and Vice Chairman of the Boards. Mr. Lochner,
a former member of the SEC, was recommended to the Committees by the Vice
Chairman of the Boards. The Vice Chairman previously had served on a
non-affiliated public company board of directors with Mr. Lochner, as well as on
the board of a separate non-affiliated public company for which Mr. Gabrys
served in a
11
leadership role at Deloitte & Touche as independent auditor. William U. Parfet,
a current member of the Boards, decided not to seek re-election as a director
due to the increasing demands of his business. Thus, the Boards approved an
increase in their size by one member, for a total of twelve directors, effective
with the annual meeting of shareholders.
MERRIBEL S. AYRES, 53, has served since 1996 as President of Lighthouse Energy
Group, LLC, a firm she founded. Lighthouse provides governmental affairs and
communications expertise, as well as management consulting and business
development services, to a broad spectrum of international clients focused on
energy and environmental matters. Ms. Ayres served from 1988 to 1996 as Chief
Executive Officer of the National Independent Energy Producers, a Washington,
D.C., trade association representing the independent power supply industry. She
is a member of the Aspen Institute Energy Policy Forum, the National Advisory
Council of the National Renewable Energy Laboratory, and the Dean's Alumni
Leadership Council of Harvard University's Kennedy School of Government. She has
been a director of CMS and Consumers since May 2004.
RICHARD M. GABRYS, 63, retired in May 2004 as a Vice Chairman in Deloitte &
Touche LLP's U.S. Global Strategic Client Group and as Global and U.S. Leader of
Deloitte & Touche's Manufacturing Practice as well as its Automotive Practice.
Mr. Gabrys served for 42 years with Deloitte & Touche in public accounting
serving a variety of publicly held companies, especially automotive
manufacturing companies, financial services institutions and health care
entities. Mr. Gabrys serves on the boards of Dana Corporation, the Detroit
Institute of Arts, the Karmanos Cancer Institute, the Manufacturing Institute,
Ave Maria College and Ave Maria University.
EARL D. HOLTON, 71, served from 1999 until his retirement in October 2004, as
Vice Chairman of Meijer, Inc., a Grand Rapids, Michigan based operator of food
and general merchandise centers. He served from 1980 to 1999 as President of
Meijer, Inc. He is a director of Meijer, Inc. and Steelcase, Inc. He has been a
director of CMS and of Consumers since 1989 and has served as the presiding
director at the executive sessions of the Boards since his appointment to that
position in 2002.
DAVID W. JOOS, 52, has served since October 2004 as President and Chief
Executive Officer of CMS and Chief Executive Officer of Consumers. He served
from 2001 to 2004 as President and Chief Operating Officer of CMS and Consumers;
2000 to 2001 as Executive Vice President and Chief Operating Officer -- Electric
of CMS; and from 1997 to 2000 as President and Chief Executive
Officer -- Electric of Consumers. He is a director of Steelcase, Inc., the
Michigan Colleges Foundation, the Michigan Economic Development Corporation, the
Association of Edison Illuminating Companies (AEIC) and the Edison Electric
Institute (EEI), as well as a director and Chairman of Nuclear Management Co.
and of the Michigan Manufacturers Association. He has been a director of CMS and
of Consumers since 2001.
PHILIP R. LOCHNER, JR., 62, served from 1991 through 1998 as Senior Vice
President and Chief Administrative Officer of Time Warner Inc. Immediately
preceding that employment, Mr. Lochner served as a commissioner of the SEC. He
is a director of Apria Healthcare Group Inc., GTech Holdings Inc., CLARCOR Inc.,
Solutia Inc., and Adelphia Communications Corporation.
MICHAEL T. MONAHAN, 66, has served since 1999 as President of Monahan
Enterprises, LLC, a Bloomfield Hills, Michigan based consulting firm. He was
Chairman of Munder Capital Management, an investment management company, from
October 1999 to December 2000 and Chairman and Chief Executive Officer of Munder
Capital from October 1999 until January 2000. Prior to that, he was President
and a director of Comerica Bank from 1992 to 1999 and President and a director
of Comerica Inc. from 1993 to 1999. He is a director of The Munder Funds, Inc.,
a director of Engineered Machined Products, Inc., as well as a member of the
Boards of Trustees of Henry Ford Health
12
Systems, Inc. and of the Community Foundation for Southeastern Michigan. He has
been a director of CMS and of Consumers since December 2002.
JOSEPH F. PAQUETTE, JR., 70, served from 1988 to 1995 as Chairman and Chief
Executive Officer and from 1995 until his retirement in 1997 as Chairman of PECO
Energy, formerly the Philadelphia Electric Company, a major supplier of electric
and gas energy. He is a director of USEC, Inc. and Mercy Health Systems. He has
been a director of CMS and of Consumers since December 2002. He had previously
served as a director of CMS and Consumers and as President of CMS from 1987 to
1988.
PERCY A. PIERRE, 66, has served since 1990 as Professor of Electrical
Engineering at Michigan State University, East Lansing, Michigan. He also served
as Vice President for Research and Graduate Studies at Michigan State University
from 1990 to 1995. Dr. Pierre is a former Assistant Secretary of the Army for
Research, Development and Acquisition. He is also a former President of Prairie
View A&M University. He is a director of Fifth Third Bank (Michigan). He also
serves as a member of the Boards of Trustees for the University of Notre Dame
and Hampshire College. He has been a director of CMS and of Consumers since
1990.
S. KINNIE SMITH, JR., 74, has served as Vice Chairman and General Counsel of CMS
and Vice Chairman of Consumers since July of 2002. He served as Senior Counsel
for the law firm Skadden, Arps, Slate, Meagher & Flom from 1996 to 2002. He has
been a director of CMS and of Consumers since August 2002. He had held the
positions of Vice Chairman and President of CMS and Vice Chairman of Consumers
and served as a director of CMS and of Consumers from 1987 to 1996. In May and
June of 2002, he served as Vice Chairman and as a director of Trans-Elect, Inc.,
an owner and operator of interstate electric transmission systems.
KENNETH L. WAY, 65, served from 1988 through 2002 as Chairman of Lear
Corporation, a Southfield, Michigan based supplier of automotive interior
systems to the automotive industry. In addition, he served from 1988 to 2000 as
Chief Executive Officer of Lear Corporation. He is a director of Comerica Inc.,
WESCO International, Inc., and Cooper Standard Automotive. He also serves as a
member of the Board of Trustees for the Henry Ford Health System, Inc. He has
been a director of CMS and of Consumers since 1998.
KENNETH WHIPPLE, 70, Chairman of the Board, served from May of 2002 through
September of 2004 as Chairman and Chief Executive Officer of CMS and Consumers.
He served from 1988 until his retirement in 1999 as Executive Vice President of
Ford Motor Company, Dearborn, Michigan, a world-wide automotive manufacturer,
and President of the Ford Financial Services Group. In addition, he served from
1997 to 1999 as Chairman and Chief Executive Officer of Ford Motor Credit
Company. He is a director of AB Volvo and Korn/Ferry International, as well as a
trustee of certain mutual funds in the JPMorgan family of mutual funds. He has
been a director of CMS and of Consumers since 1993.
JOHN B. YASINSKY, 65, served from 1999 until his retirement in 2000 as Chairman
and Chief Executive Officer and continued as Chairman until February 2001 of
OMNOVA Solutions Inc., a Fairlawn, Ohio based developer, manufacturer, and
marketer of emulsion polymers, specialty chemicals, and building products. He
served from 1995 to 1999 as Chairman, Chief Executive Officer and President of
GenCorp. He is a director of A. Schulman, Inc. He has been a director of CMS and
of Consumers since 1994.
YOUR BOARD RECOMMENDS A VOTE FOR THE ELECTION OF EACH NOMINEE.
13
VOTING SECURITY OWNERSHIP
We have received a copy of a Schedule 13G filed with the SEC by Lord, Abbett &
Co., 90 Hudson Street, Jersey City, New Jersey 07302. This Schedule 13G
indicates their December 31, 2004 holdings of 16,602,485 shares of CMS Common
Stock, representing 8.5% of the then outstanding shares, were acquired in a
fiduciary capacity in the ordinary course of business for investment purposes.
Although we have no evidence of a Schedule 13G filing in this regard, we have
reason to believe that Fidelity Management & Research Co. increased its
beneficial ownership of CMS Common Stock in the Corporation's April 5, 2005 sale
of 23 million of its shares, such that it presently holds more than 5% of the
outstanding shares. To the knowledge of our management, no other person or
entity currently owns beneficially more than 5% of any class of our outstanding
voting securities.
The following chart shows the beneficial ownership of CMS Common Stock by the
directors and named executive officers of both CMS and Consumers:
Shares
Name Beneficially Owned*
---- -------------------
Merribel S. Ayres......................... 3,481
Earl D. Holton............................ 14,839
David W. Joos............................. 287,077
Michael T. Monahan........................ 7,424
Joseph F. Paquette, Jr. .................. 11,724
William U. Parfet......................... 19,281
Percy A. Pierre........................... 21,696
S. Kinnie Smith, Jr. ..................... 193,404
Kenneth L. Way............................ 63,094
Kenneth Whipple........................... 38,204
John B. Yasinsky.......................... 11,031
Thomas J. Webb............................ 138,071
John G. Russell........................... 76,927
Thomas W. Elward.......................... 70,260
Robert A. Fenech.......................... 41,017
All directors and executive officers**.... 1,172,629
* All shares shown above are as of March 31, 2005. In addition to the shares
shown above, Messrs. Joos, Smith, Webb, Russell, Elward and Fenech, as well
as all other executive officers of CMS and Consumers as a group, owned
options to acquire 473,000; 165,000; 150,000; 128,000; 70,000; 66,900; and
578,620 shares, respectively, as of March 31, 2005. Mr. Whipple has not
been granted any options to acquire CMS Common Stock, however, as of March
31, 2005 he held 305,111 phantom stock units payable in cash but valued in
an amount equivalent to the same number of shares of CMS Common Stock. Mr.
Whipple had earned or been awarded these and previously paid-out phantom
stock units pursuant to his employment agreement as further disclosed in
this proxy statement under the section entitled "EXECUTIVE COMPENSATION".
As of March 31, 2005, Messrs. Holton, Paquette and Yasinsky had accrued
balances in the Directors' Deferred Compensation Plan's CMS Common Stock
fund equivalent to 17,523; 22,377; and 8,935 shares, respectively, as
further described in this proxy statement under the section entitled
"COMPENSATION OF DIRECTORS".
14
** All directors and executive officers includes executive officers of both
CMS and Consumers; the directors of CMS and Consumers are the same
individuals, as disclosed earlier in this proxy statement. As of March 31,
2005, the directors and executive officers of CMS and Consumers together
own less than 1% of the outstanding shares of CMS Common Stock.
CMS Common shares shown as beneficially owned include:
- Shares to which a person has or shares voting power and/or investment power.
- The number of shares and share equivalents represented by interests in or
pursuant to the:
- Employee Savings Plan (our 401(k) plan);
- Deferred Salary Savings Plan; and
- Performance Incentive Stock Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the federal securities laws requires our directors and
executive officers to file with the SEC reports of beneficial ownership and
changes in such ownership of any of CMS or Consumers equity securities or
related derivative securities. To management's knowledge, during the year ended
December 31, 2004, our executive officers and directors made all required
Section 16(a) filings on a timely basis except Glenn P. Barba, Vice President
and Controller of CMS and Consumers, who timely reported to the Corporation a
November 2004 transfer out of the CMS Common Stock fund in his Employee Savings
Plan account, which transfer was reported in a Form 5 filed on February 28,
2005.
BUSINESS RELATIONSHIPS
On May 1, 2002, Consumers sold its electric transmission system to Michigan
Transmission Holdings, LLP, a non-affiliated limited partnership whose general
partner is a subsidiary of Trans-Elect, Inc. Michigan Transmission Holdings
purchased the Consumers electric transmission system in a competitive bidding
process for approximately $290 million in cash. Consumers provided no financial
or credit support for the sale. As a result of the sale, Consumers experienced
an after-tax earnings increase of approximately $17 million in 2002 due to the
recognition of a $26 million gain on the sale.
A Trans-Elect, Inc. subsidiary provides interstate electric transmission service
to Consumers pursuant to agreements entered into at the time of the sale. The
Federal Energy Regulatory Commission approved the rates and other terms of the
service prior to the sale and they remain subject to the Commission's
jurisdiction. During the calendar year 2004, Consumers paid a total of $75
million to Trans-Elect, Inc.'s subsidiary for electric transmission services.
From May 15, 2002 until June 30, 2002, S. Kinnie Smith, Jr. served as Vice
Chairman of Trans-Elect, Inc. Mr. Smith had served as a director of Trans-Elect,
Inc. since its organization in 1998. Mr. Smith resigned as Vice Chairman and
director of Trans-Elect, Inc. upon becoming Vice Chairman and a director of CMS
and Consumers, as well as General Counsel of CMS, in July of 2002. Mr. Smith
owns 20,000 shares of Convertible Preferred A Stock of Trans-Elect, Inc., or
approximately 10% of the outstanding voting securities of Trans-Elect, Inc. Mr.
Smith also has an option to acquire an additional 250 shares of this security.
15
COMPENSATION OF DIRECTORS
In 2004, directors who were not CMS or Consumers employees received an annual
retainer fee of $30,000, $1,500 for attendance at each Board meeting, $750 per
meeting for special telephonic meetings of the Board (or one-half the regular
Board meeting rates) and $750 for attendance at each committee meeting.
Committee chairs received $1,000 for attendance at each committee meeting;
however, effective retroactive to January 1, 2004, due to the increasing demands
on the Chair and the members of the Audit Committee as a result of new rules and
regulations of the SEC pursuant to the Sarbanes-Oxley Act of 2002 and revised
NYSE listing standards, the Chair of the Audit Committee received an annual
retainer fee of $7,500 and $1,250 for attendance at each Audit Committee
meeting, and each other Audit Committee member received an annual retainer fee
of $2,000 and $1,250 for attendance at each Audit Committee meeting. Effective
January 1, 2005, the Chairs of the Compensation and Human Resources Committee,
Finance and Pension Committee, and the Governance and Public Responsibility
Committee each receive an annual retainer fee of $5,000, and the attendance fee
for the Chairs and members of all committees was increased to $1,250 per meeting
due to increased demands on their time as a result of expanded corporate
governance responsibilities at CMS and Consumers.
In May 2004, all of the non-employee directors were granted a number of shares
of restricted stock with a fair market value at the time of grant of
approximately $30,000. In 2005, the annual restricted stock award will have a
fair market value at the time of the May grant of $40,000. These restricted
shares must be held for at least three years from the date of grant. Stock
ownership guidelines have been adopted by the Board that will align further the
interests of the directors with the shareholders. Board members are required to
hold CMS Common Stock equivalent in value to five times their annual cash
retainer within five years of becoming a director.
Directors are reimbursed for expenses incurred in attending Board or committee
meetings and other company business. Directors who are CMS or Consumers
employees do not receive retainers or meeting fees for service on the Board or
as a member of any Board committee. Non-employee directors receive a single
retainer fee and restricted share award for service on the CMS and Consumers
Boards and each of their committees, as well as a single meeting attendance fee
for concurrent meetings of the CMS and Consumers Boards or committees.
Pursuant to the Directors' Deferred Compensation Plan, a CMS or Consumers
director who is not an employee may, at any time prior to a calendar year in
which a retainer and fees are to be earned, irrevocably elect to defer payment
for that year, through written notice to CMS or Consumers, of all or a portion
of any of the retainer and fees which would otherwise be paid to the director,
to a time following the director's retirement from the Board of Directors. Any
amount deferred will either, at the director's election, (a) accrue interest at
the prime rate or the rate for 10-year Treasury Notes (whichever is greater),
(b) be treated as if it were invested as an optional cash payment in the CMS
Stock Purchase Plan, or (c) be treated as if it were invested in a Standard &
Poor's 500 stock index fund. Accrued amounts will be distributed after the
director's retirement in a lump sum or in five or ten annual installments in
cash, as specified in the director's prior election.
Effective with the annual meeting in May of 2004, the Board's retirement
payments policy was discontinued. Although certain current and previously
retired directors' accrued benefits under the policy will be preserved, no
further years of service will be accrued nor will future increases in the cash
retainer impact the preserved payments under this policy. Prior to its
discontinuance, the directors' retirement payments policy provided those
directors who retire with five years of service on the Board, with annual
retirement payments equal to the retainer. These payments continue for a period
of time equal to the director's years of service on the Board. All preserved
payments will cease at the death of the retired director.
16
All non-employee directors historically had been offered optional life insurance
coverage, business-related travel accident insurance, and optional health care
insurance, and CMS and Consumers paid the premiums associated with participation
by directors. These insurance coverages will not be provided by the Corporation
to directors that had not elected the optional coverages prior to the annual
meeting in 2004. The imputed income for the life insurance coverage in 2004 was:
Messrs. Holton, $3,165; Monahan, $1,983; Paquette, $2,715; Parfet, $699; Pierre,
$1,983; Whipple, $2,715; and Yasinsky, $726. The imputed income for health
insurance coverage in 2004 was: Messrs. Holton, $7,838; and Yasinsky, $8,367.
In connection with Mr. Whipple's resignation as Chief Executive Officer
effective October 1, 2004, and the termination of his employment agreement and
its ongoing compensatory elements as an employee, each of the Compensation and
Human Resources Committees and the Governance and Public Responsibility
Committees reviewed his new responsibilities as non-executive Chairman of CMS
and Consumers. After review of peer compensation data for such positions and in
consultation with the Board's independent compensation consultant, the
Committees recommended, and the Board approved, that Mr. Whipple receive the
various elements of the regular non-employee director compensation program, as
well as an additional annual cash retainer fee of $120,000 as Chairman of the
Board. It should be noted, however, that Mr. Whipple does not serve on any of
the standing committees of the Board, other than the Executive Committees, and
thus does not receive the committee meeting fees or retainers described above.
COMPENSATION AND HUMAN RESOURCES COMMITTEE REPORT
COMPENSATION PHILOSOPHY
CMS' and Consumers' executive compensation program is directed by our
Compensation and Human Resources Committees (the "Committee"), which is composed
entirely of independent directors. The Committee is responsible for determining
and administering executive compensation policies and plans as well as reviewing
and recommending officer appointments to the Board of Directors. The Committee
also has the responsibility for approving both annual compensation and
compensation awards under long-term incentive stock programs. In doing so, the
Committee relies to a large degree on incentive compensation including
stock-related awards to attract and retain outstanding officers. It is our
philosophy to target salary and long-term incentives at the 50th percentile of
the market, as defined by a Committee-approved seventeen company peer group of
energy companies of comparable business focus and size to CMS, and to also
target annual incentives at the 50th percentile of that same market. The
Committee has implemented stock ownership guidelines for officers of CMS and its
subsidiaries ranging from an amount of CMS Common Stock equivalent to base
salary for more junior officers to several multiples of base salary for more
senior officers. All of these programs seek to enhance the Corporation's
profitability and, hence, its shareholder value by aligning the financial
interests of CMS' officers with those of its shareholders.
Direct compensation for Mr. Joos and the other executive officers consists of
(i) base salary, which is intended to be at the 50th percentile of the amounts
paid to executives with equivalent positions at other energy companies of
comparable size (the aforementioned seventeen company peer group), and (ii)
substantial annual and long-term incentive compensation, also at the 50th
percentile of the seventeen company peer group, that closely ties to our success
in achieving earnings, cash flow, stock appreciation and other performance
goals. The incentive programs are considered variable "at risk" compensation and
are intended to result in above-median compensation only in years when
Committee-approved performance goals are exceeded.
17
ANNUAL COMPENSATION
The Committee reviews the base salary for Mr. Joos and the other officers and
approves annual salaries for them based on industry, peer group, and national
surveys, as well as the Committee's collective judgment as to the past and
expected future contributions of each individual.
The annual incentive compensation (bonus) payment, if any, is based on our
success in meeting challenging CMS ongoing earnings per share and free cash flow
goals set by the Committee before March 31 of each year. Following the end of
each year, the Committee compares the actual CMS results to the prior year's
goals to determine the appropriate awards. The maximum payout of the Officer
Incentive Compensation Plan is 200%. Under the Officer Incentive Compensation
Plan for 2004, CMS' performance exceeded 100% of both of the earnings per share
goal and the free cash flow goal, resulting in bonus payments to all eligible
employees at a level of 129% of their individual target awards. (See the "Bonus"
column in the Summary Compensation Table for the amounts of the 2004 bonuses
paid to the named officers.)
LONG-TERM COMPENSATION
The last direct pay element of executive compensation the Committee considers
during each year is long-term incentive awards in the form of stock options and
restricted awards of CMS Common Stock under our Performance Incentive Stock
Plan, which most recently was approved by shareholders at the 2004 annual
meeting. The Committee believes such awards are desirable in encouraging CMS
Common Stock ownership by executives, thus linking their interests directly to
that of other shareholders. The Committee believes long-term incentive awards
should be made annually on a generally consistent basis. In determining awards,
the Committee weighs a number of factors including prior awards, peer company
comparable award levels and corporate performance. In 2004, the Committee
awarded restricted stock to the officers that will vest in 2007 assuming certain
total shareholder return targets are met. It is the Committee's intent to use
performance-based restricted stock as the primary form of long-term compensation
in the foreseeable future, as it believes such awards will be more effective
than stock options in successful implementation of our back-to-basics,
utility-plus strategy. No stock options were granted in 2004.
OFFICER STOCK OWNERSHIP GUIDELINES
CMS and Consumers have adopted a stock ownership guidelines policy to encourage
CMS Common Stock ownership by our officers. The purpose of this policy is to
align the interests of the officers more closely with those of shareholders by
requiring specific stock ownership levels for each officer grade level. The
Committee recommended, and the Boards approved, guideline amounts that require
the Chief Executive Officer to hold shares of CMS Common Stock equivalent in
value to five times his base salary, the Vice Presidents to hold such shares
equal in value to their respective base salaries, and the intermediate officers
(such as Senior Vice Presidents and subsidiary Presidents) to hold such shares
equivalent in value to multiples of two and three times their respective base
salaries. The determination of compliance with the stock ownership guidelines
will be based on the officer's base salary effective on January 1 of each year,
although the targeted ownership levels are being phased in over a five-year
period that commenced at the end of August 2004.
18
OTHER EXECUTIVE BENEFITS
Executive perquisites such as long-term disability insurance coverage and
financial planning advice are provided to officers. Watson Wyatt Worldwide, LLC
has determined that our executive benefits are limited but appropriate in terms
of scope and compared to industry practice.
CHIEF EXECUTIVE OFFICER COMPENSATION
Under the terms of Mr. Whipple's September 1, 2003 amended and restated
employment agreement, which terminated with his resignation as Chief Executive
Officer on October 1, 2004, he received an annual salary of $400,000 in cash and
$850,000 in phantom stock units. Also under his employment agreement, Mr.
Whipple was eligible for a targeted $1 million annual bonus paid in phantom
stock units, provided CMS met the cash flow and earnings goals of the annual
bonus plan. As discussed above, we exceeded those 2004 goals at a level that
resulted in bonus payments at 129% of target awards, and Mr. Whipple received
his bonus in accordance with this payout level but prorated to reflect his nine
months of employment prior to his October 1, 2004 resignation. In addition, Mr.
Whipple was provided a long-term compensation award of 125,000 restricted
phantom stock units in 2004. This award is contingent on CMS meeting the same
total shareholder return targets applied to the officers' performance-based
restricted stock awards made at the same time, as described in the footnote to
the Long Term Incentive Plan Awards Table that follows this report.
Mr. Joos' annual salary in 2004 was $841,250 and he received an annual incentive
award (bonus) of $665,365 based on CMS' financial performance in 2004. He
received a restricted award of 100,000 shares of CMS Common Stock that will vest
in 2007 contingent upon CMS meeting certain total shareholder return targets
compared to the aforementioned peer group of companies. No additional stock
options, restricted stock or other similar benefits were granted to Mr. Joos at
the time of his election as Chief Executive Officer. Based on a review by the
Committee's compensation consultant, Mr. Joos is below the median of the peer
group market total direct compensation (total direct compensation consists of
salary, target annual incentive and long-term incentives adjusted to 2005). The
comparison assumes that the stock price of each restricted share grant remains
unchanged. Thus, Mr. Joos' actual compensation could be less or greater than the
amounts reflected in the peer group comparison, as well as the Summary
Compensation Table that follows this report.
COMPENSATION DEDUCTIBILITY
Section 162(m) of the Internal Revenue Code limits the tax deductibility of
compensation in excess of $1 million paid to a corporation's chief executive
officer and to the other four highest-paid executive officers unless such
compensation qualifies as "performance-based" and is approved by shareholders.
Approval of the material terms of the performance goals under the Performance
Incentive Stock Plan and the Executive Incentive Compensation Plan (since
renamed the Officer Incentive Compensation Plan) by CMS shareholders in prior
years permitted compensation paid under these plans to be deductible by the
Corporation. Incentive awards under the terms of the Officer Incentive
Compensation Plan and awards of stock options under the Performance Incentive
Stock Plan qualify as performance-based compensation. Awards of restricted stock
may qualify as performance-based, if the grant includes performance-based
vesting criteria, as was the case with the 2004 awards to the named officers.
Generally, the Committee attempts to ensure the deductibility of all
compensation paid; however, the Committee may pay nondeductible compensation if
necessary or desirable to achieve the goals of our compensation philosophy.
19
COMPENSATION CONSULTANT
In connection with its ongoing independent review of executive compensation, the
Committee has over the past year retained Watson Wyatt Worldwide LLC, recognized
compensation and benefit consultants, to assist the Committee in evaluating the
appropriateness and competitiveness of the Corporation's compensation policies
and programs.
Submitted as of March 23, 2005 by the members of the Compensation and Human
Resources Committees: John B. Yasinsky (Chair), Earl D. Holton, William U.
Parfet, and Percy A. Pierre.
20
EXECUTIVE COMPENSATION
The following charts and descriptions contain information concerning annual and
long-term compensation, including the 2005 confirmation of a bonus relating to
the Corporation's 2004 performance under our Officer Incentive Compensation Plan
as well as long-term incentive awards under our Performance Incentive Stock
Plan. Also disclosed in the Summary Compensation Table and applicable footnotes,
as well as in the following subsection entitled Employment Agreements, are the
substantially similar contractual compensation arrangements under Mr. Whipple's
amended and restated employment agreement, which terminated with his resignation
as Chief Executive Officer effective October 1, 2004. The charts include Mr.
Joos as the Chief Executive Officer and the next three most highly compensated
executive officers as of year-end 2004 who are dual officers of CMS and
Consumers, as well as a fifth most highly compensated executive officer for each
of CMS and Consumers.
SUMMARY COMPENSATION TABLE
Long-Term Compensation(1)
--------------------------
Awards
--------------------------
Annual Compensation Restricted Securities
------------------------ Stock Underlying All Other
Name and Principal Position Year Salary(2) Bonus Awards ($) Options Compensation
--------------------------- ---- --------- ----- ---------- ---------- ------------
Current Officers
DAVID W. JOOS......................... 2004 $ 841,250 $ 665,365 $ 0(3) 0 $ 0
President and CEO, CMS; 2003 795,000 734,103(4) 635,000(5) 100,000 0
CEO, Consumers 2002 750,000 0 406,000(5) 165,000 15,000(6)
S. KINNIE SMITH, JR................... 2004 650,000 503,100 0(3) 0 0
Vice Chairman, CMS and Consumers; 2003 630,000 581,742(4) 381,000(5) 100,000 0
General Counsel of CMS 2002 300,000 0 263,900(5) 65,000 3,000(6)
THOMAS J. WEBB........................ 2004 555,000 393,772 0(3) 0 0
Executive Vice President and 2003 535,000 459,351(4) 381,000(5) 100,000 0
CFO, CMS and Consumers 2002 208,333 0 203,000(5) 50,000 0
JOHN G. RUSSELL....................... 2004 364,583 245,566 0(3) 0 0
President and COO, 2003 324,000 257,191(4) 127,000(5) 76,000 0
Consumers 2002 300,000 0 73,080(5) 34,000 6,000(6)
THOMAS W. ELWARD...................... 2004 350,040 225,776 0(3) 0 0
President and COO, 2003 336,000 266,749(4) 127,000(5) 76,000 0
CMS Enterprises 2002 320,040 0 81,200(5) 36,000 6,401(6)
ROBERT A. FENECH...................... 2004 321,000 186,340 0(3) 0 0
Senior Vice President, 2003 315,000 229,635(4) 76,200(5) 51,000 0
Consumers 2002 295,000 0 48,720(5) 26,000 5,900(6)
Former CEO
KENNETH WHIPPLE (7)................... 2004 937,500(a) 967,500 0(3) 0 0
Chairman and CEO, 2003 1,156,431(b) 1,620,000(c) 1,015,000(d) 0 0
CMS and Consumers 2002 639,060(e) 0 0 0 0
21
(1) Aggregate non-performance-based restricted CMS Common Stock held as of
December 31, 2004 by the named officers was: Mr. Joos, 137,500 shares with a
year-end market value of $1,436,875; Mr. Smith, 84,375 shares with a
year-end market value of $881,719; Mr. Webb, 78,750 shares with a year-end
market value of $822,938; Mr. Russell, 26,750 shares with a year-end market
value of $279,538; Mr. Elward, 27,500 shares with a year-end market value of
$287,375: and Mr. Fenech, 16,500 shares with a year-end market value of
$172,425. No dividends were paid on CMS Common Stock during 2004.
(2) A portion of the 2003 salary amounts shown include the 2003 merit increases;
the receipt of those portions was deferred until their pay out in cash in
the first quarter of 2005 pursuant to the Corporation's Salaried Employees'
Merit Plan.
(3) Long-term compensation approved by the Compensation and Human Resources
Committee in 2004 took the form of performance-based restricted awards of
CMS Common Stock and are reported in the Long-Term Incentive Plans - Awards
Table later in this proxy statement.
(4) Bonuses for 2003 for Messrs. Joos, Smith, Webb, Russell and Elward were
deferred and were paid out in the first quarter of 2005 consistent with the
payouts from the Corporation's Salaried Employees' Merit Plan. The 2003
bonus for Mr. Fenech was paid out in the first quarter of 2004.
(5) Messrs. Joos, Smith, Webb, Russell, Elward and Fenech were awarded 50,000,
32,500, 25,000, 9,000, 10,000 and 6,000 restricted shares of CMS Common
Stock, respectively, in 2002 and 100,000, 60,000, 60,000, 20,000, 20,000 and
12,000 restricted shares of CMS Common Stock, respectively, in 2003.
(6) The 2002 amounts represent employer matching contribution to the
Corporation's defined contribution plans. No employer matching contributions
were made in 2003 or 2004.
(7) All of Mr. Whipple's compensation was paid pursuant to the terms of his
employment agreement, although each of his annual and long-term incentive
amounts was administered in conjunction with the applicable provisions of
the Corporation's Officer Incentive Compensation Plan and Performance
Incentive Compensation Plan, respectively.
(a) Mr. Whipple's 2004 salary consisted of $300,000 in cash compensation and
$637,500 in deferred compensation in the form of phantom stock units
payable in cash. The payout value of the deferred salary will be based
on the future price of CMS Common Stock.
(b) Mr. Whipple's 2003 salary consisted of $134,933 in cash compensation and
$1,021,498 in deferred compensation in the form of phantom stock units
payable in cash. The payout value of the deferred salary was based on
the price of CMS Common Stock on the second anniversary date of the
deferral.
(c) Mr. Whipple's 2003 bonus consisted of an amount earned with respect to
2003 but for which payment was deferred in the form of phantom stock
units payable in cash. These phantom stock units were paid out in the
first quarter of 2005 consistent with the payouts of other executive
officers' 2003 deferred bonuses as described in footnote (4) above.
(d) Mr. Whipple's 2003 restricted stock award consisted of 125,000
restricted phantom stock units awarded on October 31, 2003. The 2003
dollar value shown is based on the grant date closing price of CMS
Common Stock of $8.12 per share. These phantom stock units were awarded
pursuant to the terms of Mr. Whipple's employment agreement in lieu of
the restricted stock and options awarded in 2003 to other officers under
our Performance Incentive Stock Plan. These phantom stock units were
paid out in October 2004 pursuant to the terms of his amended and
restated employment agreement.
22
(e) Mr. Whipple's 2002 salary consisted of $2,125 in cash compensation and
$636,935 in deferred compensation in the form of phantom stock units
payable in cash. The payout value of the deferred salary was based on
the price of CMS Common Stock on the second anniversary date of the
deferral.
EMPLOYMENT ARRANGEMENTS
Mr. Whipple entered into an employment agreement with CMS promptly following his
election as Chairman and Chief Executive Officer of CMS and Consumers at the
time of the 2002 annual meeting of shareholders. His compensation under this
original contract was predominantly in the form of phantom stock units in lieu
of base salary (but with no incentive compensation elements), as detailed in
footnote 7 to the Summary Compensation Table above. Effective with the execution
of Mr. Whipple's September 1, 2003 amended and restated employment agreement,
his annual base compensation was adjusted, and annual and long-term incentive
compensation contractual arrangements were added, all as detailed in the
Compensation and Human Resources Committee Report and the Summary Compensation
Table. When Mr. Whipple resigned as Chief Executive Officer effective October 1,
2004, thus terminating this employment agreement, certain elements of his prior
incentive awards were paid out under the terms of his agreement. Payments of the
remaining elements of Mr. Whipple's deferred compensation pursuant to this
employment agreement will continue until 2007.
Agreements with the executive officers named above, other than Mr. Whipple,
provide for payments equal to three times annual cash compensation if there is a
change of control and adverse change of responsibilities (including
termination), as well as payments equal to two times annual cash compensation if
employment is terminated by the company, other than for cause, in the absence of
a change of control. CMS and Consumers also provide long-term disability
insurance policies for all executive officers which would provide payment of up
to 60% of compensation in the event of disability. We do not have a "poison
pill" plan and are not considering the adoption of such a plan.
AGGREGATED OPTION EXERCISES IN 2004 AND YEAR-END OPTIONS VALUES
Number of Securities Value of Unexercised
Shares Acquired Value Underlying Unexercised In-the-Money Options
Name On Exercise Realized Options at Year End at Year End(1)(2)
---- --------------- -------- ---------------------- --------------------
David W. Joos.............. 0 $ 0 473,000 $643,000
S. Kinnie Smith, Jr........ 0 0 165,000 561,450
Thomas J. Webb............. 0 0 150,000 526,500
John G. Russell............ 0 0 128,000 353,540
Thomas W. Elward........... 76,000 238,653 70,000 46,600
Robert A. Fenech........... 51,000 153,000 66,900 27,960
Kenneth Whipple............ 0 0 0 0
(1) All options to acquire CMS Common Stock listed in this table are
exercisable. The named officers have no unexercisable options.
(2) Based on the December 31, 2004 closing price of CMS Common Stock as shown in
the report of the New York Stock Exchange Composite Transactions ($10.45).
23
LONG-TERM INCENTIVE PLANS -- AWARDS IN 2004
Estimated Future Payouts Under
Non-Stock Price Based Plans
(Shares)(1)
-------------------------------
Name Number of Shares Period Until Payout Threshold Target Maximum
---- ---------------- ------------------- --------- ------ -------
David W. Joos................. 100,000 3 Years 50,000 100,000 150,000
S. Kinnie Smith, Jr........... 45,000 3 Years 22,500 45,000 67,500
Thomas J. Webb................ 45,000 3 Years 22,500 45,000 67,500
John G. Russell............... 45,000 3 Years 22,500 45,000 67,500
Thomas W. Elward.............. 35,000 3 Years 17,500 35,000 52,500
Robert A. Fenech.............. 10,000 3 Years 5,000 10,000 15,000
Kenneth Whipple............... 125,000(2) 3 Years 62,500 125,000 187,500
(1) Under CMS' Performance Incentive Stock Plan, these restricted awards of CMS
Common Stock for the above officers vest 100% after three years assuming the
achievement of pre-established total shareholder return ("TSR") goals.
One-half of the award is based on the achievement of an absolute TSR level
and one-half of the award is based on a relative comparison to a utility
industry peer group.
(2) Pursuant to his employment agreement, Mr. Whipple's award was made in the
form of phantom stock units payable in cash rather than restricted shares of
CMS Common Stock. The award is administered consistent with the terms of the
CMS Performance Incentive Stock Plan and the officers' restricted stock
awards, including the TSR goals described above. Mr. Whipple's award
encompasses both his outstanding service as CMS and Consumers Chief
Executive Officer prior to October 1, 2004, and his continuity as
non-executive Chairman thereafter.
PENSION PLAN TABLE
The following table shows the aggregate annual pension benefits at normal
retirement date presented on a straight life annuity basis under our qualified
Pension Plan and non-qualified Supplemental Executive Retirement Plan (offset by
a portion of Social Security benefits).
Years of Service
--------------------------------------------------------
Remuneration 15 20 25 30 35
------------ -- -- -- -- --
$ 500,000 $157,500 $210,000 $247,500 $ 285,000 $ 322,500
800,000 252,000 336,000 396,000 456,000 516,000
1,100,000 346,500 462,000 544,500 627,000 709,500
1,400,000 441,000 588,000 693,000 798,000 903,000
1,700,000 535,500 714,000 891,500 969,000 1,096,500
2,000,000 630,000 840,000 990,000 1,140,000 1,290,000
"Remuneration" in this table is the average of Salary plus Bonus, as shown in
the Summary Compensation Table, for the five years of highest earnings. The
estimated years of service for each named executive is: Mr. Joos, 33.33 years;
Mr. Smith, 21.82 years; Mr. Webb, 4.99 years; Mr. Russell, 24.17 years; Mr.
Elward 35.00 years; and Mr. Fenech, 24.83 years. Under the Supplemental
Executive Retirement Plan, an officer's years of service for purposes of
24
calculating benefits thereunder are earned at double the period of actual
service during the first ten years of service. Effective with Mr. Whipple's
resignation as Chief Executive Officer on October 1, 2004, he receives a monthly
employee pension of less than $400 based on the limited cash component of his
compensation during his employment.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of Securities
Remaining Available for
Number of Securities Future Issuance Under
to be Issued Weighted-Average Equity Compensation
upon Exercise of Exercise Price of Plans (Excluding
Outstanding Options, Outstanding Options, Securities Reflected
Plan Category Warrants and Rights Warrants and Rights in Column (a))
------------- -------------------- -------------------- -----------------------
(a) (b) (c)
--- --- ---
Equity compensation
plans approved by
security holders.... 4,614,026 $22.14 5,472,190
Equity compensation
plans not approved
by security
holders............. 0 0 0
--------- ------ ---------
Total............... 4,614,026 $22.14 5,472,190
========= ====== =========
An amendment to the Performance Incentive Stock Plan was approved by
shareholders on May 28, 2004, with an effective date of June 1, 2004. The
amendment established a 5-year term for the Plan. Under the amended Plan, shares
of CMS Common Stock awarded or subject to options, phantom shares and
performance units may not exceed a total of 6 million shares from June 2004
through May 2009. Shares to which payment or exercise is in cash, as well as
shares or options that are forfeited, may be awarded or granted again under the
Plan. All grants under this amended Plan have been in the form of restricted
shares of CMS Common Stock. At March 31, 2005, awards of up to 5,472,190 shares
of CMS Common Stock could be issued.
AUDIT COMMITTEE REPORT
CMS' and Consumers' audit activities are directed by our Audit Committees, which
are composed entirely of independent directors. The Audit Committees are
responsible for overseeing the preparation of external financial reports, the
adequacy of internal controls, the internal and external audit process, the
independence and performance of the independent auditors, and compliance with
applicable legal and regulatory requirements.
We have reviewed and discussed with management CMS' and Consumers' audited
financial statements as of and for the year ended December 31, 2004.
We have discussed with our independent registered public accounting firm, Ernst
& Young LLP, the matters required to be discussed by Statement on Auditing
Standards No. 61, Communication with Audit Committees, as amended.
25
We have received and reviewed the written disclosures and the letter from the
independent auditors required by Independence Standard No. 1, Independence
Discussions with Audit Committees, as amended, by the Independence Standards
Board, and have discussed with Ernst & Young LLP the auditors' independence.
We have considered the provision of all of Ernst & Young LLP's services to CMS
and Consumers in 2004 and the fees paid for all such services, and have
concluded that all current arrangements are compatible with maintaining the
independence of Ernst & Young LLP.
In addition, we reviewed key initiatives and programs aimed at strengthening the
effectiveness of the CMS and Consumers internal and disclosure control
structure. As part of this process, we continued to monitor the scope and
adequacy of the internal auditing program and the steps taken to implement
recommended improvements in internal procedures and controls.
Based on the reviews and discussions referred to above, we recommended to the
Boards of Directors that the consolidated financial statements referred to above
be included in CMS' and Consumers' Annual Reports on Form 10-K for the year
ended December 31, 2004.
Submitted as of February 28, 2005 by the members of the Audit Committees:
William U. Parfet (Chair), Michael T. Monahan, Joseph F. Paquette, Jr., and
Kenneth L. Way.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Beginning in 2002, Ernst & Young LLP, has served as the independent registered
public accounting firm for CMS and Consumers. There are no disagreements between
Ernst & Young LLP, and CMS or Consumers related to accounting principles or
practices, financial statement disclosures, or auditing scope or procedure, and
Ernst & Young LLP's reports on the consolidated financial statements of CMS and
Consumers have contained no adverse opinions, disclaimers of opinion,
modifications, or qualifications.
AUDITOR FEES
Fees, including expenses, for professional services provided by Ernst & Young
LLP, our independent registered public accounting firm, in each of the last two
fiscal years, in each of the following categories are:
2004 2003
---- ----
Audit Fees.................................................. $9,787,000 $7,052,000
Audit-Related Fees.......................................... 68,000 1,430,000
Tax Fees.................................................... 565,000 216,000
Amounts reported above include fees paid by Consumers.
Fees for audit services include fees associated with the annual audit, the
reviews of our quarterly reports on Form 10-Q, comfort letters, required
statutory audits and, in 2004, fees related to the audit of our internal
controls over financial reporting as required by the Sarbanes-Oxley Act of 2002.
Audit-related fees in 2004 include fees associated with audits of employee
benefit plans. In 2003, audit-related fees were incurred for audits of employee
benefit plans and for work related to the implementation of the Sarbanes-Oxley
Act of 2002. Tax fees include fees for tax compliance, tax advice, and tax
planning.
26
The Audit Committees have adopted a policy that requires advance approval for
all audit, audit-related, tax services, and other services performed by the
independent registered public accounting firm. The policy provides for pre-
approval by the Audit Committees of specifically defined audit and non-audit
services. Unless the specific service has been previously pre-approved with
respect to that year, the Audit Committees must approve the permitted service
before the independent registered public accounting firm is engaged to perform
it. The Audit Committees have delegated to the Chair of the Audit Committees
authority to approve permitted services, provided that the Chair reports any
decisions to the Committees at their next scheduled meeting.
PROPOSAL 2: RATIFY THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Audit Committees of the Corporation's and Consumers' Boards of Directors
have adopted the following policy:
The Audit Committee's selection of the Corporation's independent auditor
shall be submitted to the Corporation's shareholders for their ratification
at the Corporation's Annual Meeting of Shareholders. If a majority of shares
voted do not ratify the Audit Committee's selection, the Audit Committee
will consider the shareholder views when considering its selection of a
different independent auditor for the Corporation or its continued retention
of its existing auditor for that year. This policy will be in effect
commencing with the Corporation's 2004 Annual Meeting of Shareholders.
The Audit Committees have selected Ernst & Young LLP, independent registered
public accounting firm, to audit our consolidated financial statements for the
year 2005. Ernst & Young LLP also served as our registered public accounting
firm for the year 2004. A representative of Ernst & Young LLP will be present at
the annual meeting of shareholders and will have an opportunity to make a
statement and respond to appropriate questions.
The Audit Committee believes it is very important to the Corporation, Consumers
and our shareholders to retain Ernst & Young LLP as independent registered
public accounting firm for the 2005 audit cycle. Ernst & Young LLP has gained a
significant understanding of the Corporation's business processes and issues, as
well as our internal controls over financial reporting.
Approval of this proposal requires the affirmative vote of the holders of a
majority of shares of CMS Common Stock voting on the proposal.
YOUR BOARD RECOMMENDS RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP.
27
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG CMS, S&P 500 INDEX & DOW JONES UTILITY INDEX
[PERFORMANCE GRAPH]
INDEXED RETURN
---------------------------------------
COMPANY/INDEX 1999 2000 2001 2002 2003 2004
------------- ---- ---- ---- ---- ---- ----
CMS 100 109 87 37 33 41
S & P 500 100 91 80 62 80 89
DOW JONES UTILITY 100 151 112 86 111 145
These cumulative total returns assume reinvestment of dividends (except for CMS
in the 24-month period through December 31, 2004 when we have not paid a
dividend on CMS Common Stock). The calculations also assume the value of the
investment in CMS Common Stock and each index was $100 on December 31, 1999.
2006 PROXY STATEMENT INFORMATION
A shareholder who wishes to submit a proposal for consideration at the 2006
annual meeting pursuant to the applicable rules of the SEC must send the
proposal to reach our Corporate Secretary on or before December 19, 2005. In any
event, if we have not received written notice of any matter to be proposed at
that meeting by March 4, 2006, the holders of the proxies may use their
discretionary voting authority on any such matter. The proposals should be
addressed to: Corporate Secretary, CMS Energy Corporation, One Energy Plaza,
Jackson, Michigan 49201.
28
OTHER MATTERS
The Board of Directors knows of no other matters that might be presented to the
meeting except matters incident to the conduct of the meeting. However, if any
other matters (including matters incident to the conduct of the meeting) do come
before the meeting, it is intended that the holders of the proxies will vote
thereon in their discretion.
The cost of solicitation of proxies will be borne by CMS. Proxies may be
solicited by officers and other employees of CMS or its subsidiaries or
affiliates, personally or by telephone, facsimile, Internet, or mail. We have
arranged for Morrow & Co., Inc., 445 Park Avenue, New York, New York 10022, to
solicit proxies in such manner, and it is anticipated that the cost of such
solicitations will not exceed $10,000, plus incidental expenses. We may also
reimburse brokers, dealers, banks, voting trustees or other record holders for
postage and other reasonable expenses of forwarding the proxy material to the
beneficial owners of CMS Common Stock held of record by such brokers, dealers,
banks, voting trustees or other record holders.
In some instances, only one annual report or proxy statement is being delivered
to multiple security holders sharing an address unless we have received contrary
instructions from one or more of the shareholders. A shareholder wishing to
receive a separate annual report or proxy statement can so notify CMS at the
address or telephone number below. Similarly, shareholders currently receiving
multiple copies of these documents can request the elimination of duplicate
documents by contacting our Investor Services Department, One Energy Plaza,
Jackson, Michigan 49201, telephone 517-788-1868.
29
APPENDIX A
AMENDED AND RESTATED CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS OF CMS ENERGY CORPORATION
1. PURPOSE AND DUTIES
The Audit Committee (the "Committee") shall provide assistance to the Board of
Directors (the "Board") of CMS Energy Corporation (the "Corporation") in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to:
- the integrity of the Corporation's financial statements and financial
information, the financial reporting process, and the system of internal
accounting and financial controls;
- the performance of the Corporation's internal audit function and
independent auditors;
- the evaluation of the independent auditor's qualifications and
independence;
- the Corporation's compliance with the review of reports and certifications
prepared by the Chief Executive Officer and Chief Financial Officer as
required by the rules of the Securities and Exchange Commission (the
"SEC").
The Committee, in carrying out its duties and responsibilities, believes its
policies and procedures should remain flexible, in order to best react to
changing conditions and circumstances. The Committee should take appropriate
actions to set the overall corporate "tone" for quality financial reporting,
sound internal controls and business risk practices, and ethical behavior. The
following shall be the principal duties and responsibilities of the Committee.
These are set forth as a guide with the understanding that the Committee may
supplement them as appropriate.
The Committee shall make recommendations to the Board of Directors regarding
significant environmental laws and regulations affecting the Corporation's
operations.
The Committee shall oversee responsibility for compliance with the Corporation's
Code of Conduct and Statement of Ethics Handbook. The Committee shall have the
right to approve any waiver of the Code of Conduct and Statement of Ethics for
directors or executive officers and any such waiver will be promptly disclosed
to shareholders in accordance with applicable legal and regulatory requirements,
as well as the New York Stock Exchange listing rules.
The Committee shall oversee the Corporation's financial reporting process on
behalf of the Board and report the results of their activities to the Board.
While the Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Committee to design internal controls or to
plan or conduct audits or to determine that the Corporation's financial
statements are complete and accurate and are in accordance with generally
accepted accounting principles. Rather, the Committee should maintain a healthy
skepticism and pursue issues until the Committee is satisfied that they have
received adequate information to make an informed judgment. In this regard,
management is responsible for the preparation, presentation, and integrity of
the Corporation's financial information, the design and implementation of an
effective system of internal controls and the appropriateness of the accounting
principles and reporting policies used by the Corporation. The independent
auditor is responsible for auditing the Corporation's annual financial
statements and for reviewing the Corporation's unaudited interim financial
statements.
A-1
The Committee shall be directly responsible for the appointment and termination
(subject, if applicable, to shareholder ratification), compensation, and
oversight of the work of the independent auditors, including resolution of
disagreements between management and the independent auditor regarding financial
reporting. The independent auditors shall report directly to the Committee. The
Committee shall pre-approve all audit and non-audit services provided by the
independent auditors and shall approve all fees for such services and shall not
engage the independent auditors to perform the specific non-audit services
proscribed by law or regulation. The Committee delegates to its Chair authority
to approve permitted services, provided that the Chair reports any such
decisions to the Committee at its next scheduled meeting.
The Committee shall meet with the independent auditor prior to the audit to
review the planning and staffing of the audit as well as compliance with
appropriate audit standards.
The Committee shall receive regular reports from the independent auditor on the
Corporation's critical accounting policies and practices, and all alternative
accounting treatments permitted by generally accepted accounting principles.
At least annually, the Committee shall obtain and review the report by the
independent auditors describing:
- The Corporation's financial reporting and accounting standards and
principles.
- The Corporation's internal quality control procedures and an assessment of
the effectiveness of the internal control structure and procedures for
financial reporting.
- Any material issues raised by the most recent internal quality control
review of the firm, or by any inquiry or investigation by governmental or
professional authorities, within the preceding five years, with respect to
one or more independent audits carried out by the firm, and any steps
taken to deal with any such issues.
- The auditor's independence with respect to the Corporation. The Committee
will discuss such reports with the independent auditor, consider whether
the provision of non-audit services is compatible with maintaining the
auditor's independence and, if so determined by the Committee, recommend
that the Board take appropriate action to satisfy itself of the
independence of the auditor.
- The independent auditor's required communications contained within the
Statement on Auditing Standards No. 61 relating to the conduct of the
audit.
In addition, the Committee shall review the experience and qualifications of the
senior members of the independent auditor's team and set clear hiring policies
for employees or former employees of the independent auditors that meet the SEC
regulations and stock exchange listing standards.
The Committee shall review and approve the organization of the internal audit
function, including the respective responsibilities of any outside auditing firm
performing internal audit functions and of officers and employees of the
Corporation performing such functions (collectively, the "Internal Audit
Function"). Not less than annually, the Committee shall review the effectiveness
of the Internal Audit Function as a whole.
If an outside auditing firm is to perform any Internal Audit Function, the
Committee shall select such outside auditing firm and review and approve the
terms of the engagement with any such firm. As a part of its overall review of
the Internal Audit Function, not less than annually, the Committee shall review
the effectiveness of such firm and determine whether the engagement should be
continued or terminated. Also as part of the Committee's review, it shall review
the effectiveness of the Corporation's auditing and compliance staff and its
budget. An auditing plan for
A-2
a three-year period shall be submitted to the Committee annually, and the
Committee shall approve the plan for at least the current year and periodically
monitor performance under the plan. Additionally, the Chair of the Committee
shall be consulted before the appointment or removal of the supervisor of the
Corporation's employees participating in the Internal Audit Function, if any,
and the Committee shall approve the responsibilities and the reporting
relationship of such supervisor.
The Committee shall review all significant reports of the Internal Audit
Function and summary reports to management and management's responses. The
Committee shall also review any problems or difficulties the Internal Audit
Function may have encountered or any restrictions on the scope of audit
activities.
The Committee shall assess the extent to which the planned audit scopes of the
Internal Audit Function and the independent auditors can be relied on to
identify material or significant internal control weaknesses or fraud. The
Committee shall review management's assessment of the effectiveness of financial
reporting internal controls as of the end of the most recent fiscal year and the
independent auditor's attestation report on management's assertion, all as
required by Section 404 of the Sarbanes-Oxley Act of 2002 and the regulations of
the SEC. Also, the Committee shall discuss with management, the auditors
performing the Internal Audit Function, and the independent auditors the
adequacy and effectiveness of the accounting and financial reporting internal
controls, including the Corporation's policies and procedures to assess,
monitor, and manage financial and business risk, and legal business conduct
standards compliance programs.
Prior to release, the Committee shall review and discuss earnings press
releases, as well as financial information and earnings guidance provided to
analysts and rating agencies.
The Committee shall review with management and the independent auditors the
financial statements and disclosures under Management's Discussion and Analysis
of Financial Condition and Results of Operations to be included in the
Corporation's Annual Report on Form 10-K (and in the annual report to
shareholders, if applicable), including their judgment about the quality, not
just the acceptability, of accounting principles, the reasonableness of
significant judgments, and the clarity of the disclosures in the financial
statements. Also, the Committee shall discuss the results of the annual audit
and any other matters required to be communicated to the committee by the
independent auditors under generally accepted auditing standards.
The Committee shall review the interim financial statements and disclosures
under Management's Discussion and Analysis of Financial Condition and Results of
Operations with management and the independent auditors prior to the filing of
the Corporation's Quarterly Report on Form 10-Q. Also, the Committee shall
discuss the results of the quarterly review and any other matters required to be
communicated to the Committee by the independent auditors under generally
accepted auditing standards.
The Committee shall establish procedures for the receipt, retention and
treatment of complaints received by the Corporation regarding accounting,
internal controls or auditing matters, and for the confidential, anonymous
submission by the Corporation's employees of concerns regarding questionable
accounting or auditing matters.
The Committee shall review and investigate any matters pertaining to the
integrity of management, including conflicts of interest or adherence to
standards of business conduct as required by the policies of the Corporation.
This should include regular reviews of the compliance processes utilized by the
Corporation.
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The Committee shall receive reports on behalf of the Board from the Chief
Compliance Officer concerning the Corporation's compliance and ethics programs
and issues, and provide guidance to, and receive advice and counsel from, as
appropriate, the Chief Compliance Officer relating to such programs and issues.
The Committee shall receive and review corporate attorneys' reports of material
contingent liabilities, evidence of any violation of securities laws or breaches
of fiduciary duty and any other matters that may have a material impact on the
financial statements of the Corporation, its compliance policies and any
material reports or inquiries received from regulators or governmental agencies.
The Committee shall review periodically with management the Corporation's risk
management policies, controls and exposures and advise the Board and management
of its findings and any recommendations.
The Committee shall prepare its report to be included in the Corporation's
annual proxy statement, as required by SEC regulations. The Committee shall
approve, for inclusion in the Corporation's proxy statement, the recommendations
for the appointment of the independent auditor.
2. COMPOSITION
This charter governs the operations of the Committee. The Committee shall review
and reassess the charter at least annually and obtain the approval of the
charter by the Board.
The committee shall be members of, and appointed by, the Board upon the
recommendation of the Governance and Public Responsibility Committee and shall
be comprised of at least three directors, each of whom the Board has determined
has no material relationship with the Corporation and is otherwise independent
of management and the Corporation. Members of the Committee shall be considered
independent as long as they do not accept any consulting, advisory or other
compensatory fee from the Corporation and are not an affiliated person of the
Corporation or its subsidiaries, and meet the independence requirements of the
New York Stock Exchange listing standards, the Sarbanes-Oxley Act of 2002 and
the regulations of the SEC.
All Committee members shall be financially literate, and at least one member
shall be an "audit committee financial expert," as defined by the SEC
regulations. The Committee shall have the authority to provide the proper
educational programs for its members to ensure the financial and accounting
expertise that is expected of each Committee member.
The Chair of the Committee shall designate a person, who need not be a member,
to act as secretary and to record the minutes of its proceedings, which shall be
kept in accordance with the Bylaws of the Corporation. The agenda of each
meeting will be prepared at the direction of the Chair and, whenever reasonably
practicable, delivered to each member before the meeting.
3. MEETINGS
The Committee shall meet at least quarterly and shall have the authority to call
meetings at its discretion and to invite officers and employees of the
Corporation, auditors performing the Internal Audit Function, and independent
auditors to attend.
As part of its responsibility to foster open and frank communications, the
Committee shall meet with management, representatives of the Internal Audit
Function, and the independent auditors in separate private sessions to discuss
any matters, issues or concerns that the Committee or any of these groups
believe should be discussed.
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The Committee shall report on its deliberations, findings and conclusions to the
Board and maintain minutes and any other records relating to the meetings that
are deemed necessary by the Committee. Any member may add relevant matters to
the agenda by timely notice to the Chair.
4. PERFORMANCE EVALUATION
The Committee shall evaluate its performance and produce and provide to the
Board an annual report on its performance in accordance with the requirements of
this charter and set forth the goals and objectives of the Committee for the
upcoming year. The performance evaluation shall also recommend to the Board any
improvements to the Committee's charter deemed necessary or desirable by the
Committee. The performance evaluation by the Committee shall be conducted in
such a manner, as the Committee deems appropriate. The report to the Board may
take the form of an oral report by the Chair of the Committee or any other
member of the Committee designed by the Committee to make this report.
5. RESOURCES AND AUTHORITY
In discharging its oversight role, the Committee shall have the resources and
funding necessary to discharge its duties and responsibilities and is empowered
to investigate any matter brought to its attention with full access to all
books, records, facilities, and personnel of the Corporation. The Committee has
the authority to engage independent counsel and other advisers as it determines
necessary to carry out its duties. The Committee may direct any officer or
employee of the Corporation and request any employee of the Corporation's
independent auditors, outside legal counsel or other consultants or advisors to
attend a Committee meeting or meet with any Committee members.
6. DELEGATION TO SUBCOMMITTEE
The Committee may, in its discretion, delegate all or a portion of its duties
and responsibilities to one or more members of the Committee.
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COMMON STOCK PROXY
SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
The undersigned appoints KENNETH WHIPPLE, DAVID W. JOOS and MICHAEL D.
VANHEMERT, and each of them, proxies with full power of substitution, to vote on
behalf of the undersigned at the annual meeting of shareholders of CMS Energy
Corporation to be held at the corporate headquarters located at One Energy
Plaza, Jackson, Michigan, at 9:00 AM Eastern Daylight Saving Time on May 20,
2005 and at any adjournment(s) thereof. Said proxies, and each of them present
and acting at the meeting, may vote upon authority on all other matters that
come before the meeting, all as more fully set forth in the notice and proxy
statement received by the undersigned. The shares represented hereby will be
voted on the proposals as specified. IF THIS PROXY IS RETURNED SIGNED BUT NOT
COMPLETED, IT WILL BE VOTED AS RECOMMENDED BY THE BOARD OF DIRECTORS ON ALL
ITEMS.
YOU DO NOT NEED TO COMPLETE OR PLEASE VOTE, SIGN AND DATE THIS PROXY
RETURN THIS PROXY IF YOU VOTE USING ON THE REVERSE SIDE. THANK YOU
A TELEPHONE OR THE INTERNET FOR YOUR PROMPT RESPONSE
PLEASE VOTE, SIGN AND DATE BELOW
[ ] TO VOTE AS RECOMMENDED by the Board of Directors on all items, PLEASE
MARK THIS BOX, SIGN, DATE AND RETURN THIS PROXY. (No additional boxes need
to be marked. If additional boxes are marked, this box will take
precedence.)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
(1) ELECTION OF [ ] FOR all nominees listed below (except as indicated below)
DIRECTORS [ ] WITHHOLD AUTHORITY to vote for all nominees listed below
(01) Merribel S. Ayers, (02) Richard M. Gabrys, (03) Earl D. Holton, (04)
David W. Joos, (05) Philip R. Lochner, Jr., (06) Michael T. Monahan, (07)
Joseph F. Paquette, Jr., (08) Percy A. Pierre, (09) S. Kinnie Smith, Jr.,
(10) Kenneth L. Way, (11) Kenneth Whipple, and (12) John B. Yasinsky.
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.)
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For Against Abstain
(2) Ratification of independent [ ] [ ] [ ] PLEASE SIGN, DATE AND RETURN THIS PROXY
registered public accounting firm
Signed --------------------------------
Dated , 2005
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