ML20206J241

Submits Corrected Copy of Ltr Forwarding 1998 Consumers Energy Co Annual Rept. Ltr Contains Corrected Docket & License Number for Big Rock Point.With One Oversize Encl

ML20206J241
Person / Time
Site:	Palisades, Big Rock Point  File:Consumers Energy icon.png
Issue date:	04/30/1999
From:	Haskell N CONSUMERS ENERGY CO. (FORMERLY CONSUMERS POWER CO.)
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
NUDOCS 9905120165
Download: ML20206J241 (1)

Text

{{#Wiki_filter:l ComsumersEnergy A CMS Enetgy Conviny Pahsaks Lctear Plant Tel 616 764 2276 27780 Blue Star Memona! Highway fat: 616 764 2490 Nsthan L Naskell Director, Ucensing April 30,1999 CORRECTED COPY U.S. Nuclear Regulatory Commission ATTN: Document Control Desk Washington, DC 20555 I DOCKET 50-155 - LICENSE DPR BIG ROCK POINT DOCKET 50-255 - LICENSE DPR PALISADES PLANT 1998 CONSUMERS ENERGY COMPANY ANNUAL REPORT in accordance with the requirements of 10 CFR 50.71(b), attached is the 1998 Consumers Energy Company's annual financial report, including the certified financial statements.

SUMMARY

OF COMMITMENTS This letter contains no new commitments and no revisions to existing commitments. l/ %0 0 l - 47 x Nathan L. Haskell Director, Licensing

• [., 53 CC Administrator, Region Ill, USNRC Palisades Project Manager, NRR, USNRC Big Rock Point Project Manager, NRR, USNRC NRC Resident inspector - Big Rock Point NRC Resident inspector - Palisades Attachment 9905120165 990430

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1 2. 3. 6. l 24. 33. 60. 61. 62. l 1 i 1 'k ) .J CMS Energy Corporation is a $16 billion (assets), $6 billion (sales), diver-sified international energy company, with operations in 23 countries on. five continents. As a total energy infrastructure company, CMS Energy's capabilitics include: i t.. I j Together, our businesses constitute a premier international energy. company that is dedicated to supporting economic' growth by providing energy to customers around the world. l l h

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Acquisition Positions CMS Atop Midwest Market The single most important development for CMS Energy last year was the agreement to acquire the Panhandle Companies for 52.2 billion-a strategically important group of natural gas pipelines and related facilities. The transaction wasjust completed in March of this year. This purchase establishes CMS Energy as the premier energy company serving the Midwest. The 10,400 miles of gas pipeline connect CMS produe-tion, gathering and processing facilities in the Texas and Oklahoma Panhandle with our Michigan gas distribution and storage operations. The result is a seamless energy network that cosers the entire energy spectrum, from the wellhead to the customer, from the Mid-Continent and South all DIVIDE NDS Pt H the way to the Midwest. sHo. This diversity will give CMS Energy important advantages as the country's utility industry is deregulated. That elrort is already underway in Michigan, where Consumers Energy is midway through a three-year natural m ~ gas pilot program to test customer reaction. Electric deregulation is also progressing in Michigan. In March of l this year, the Michigan Public Service Commission issued a final order that phases in competition beginning this fall, while providing Consumers Energy with full recovery of its stranded costs. The transition culminates in 2002, when all customers will have the opportunity to shop among compet-ing electricity providers. Record Growth for Diversified Energy "a'Ho $ 10(. h P H i t. E CMS Energy's nonutility energy business, of course. is already highly competitive. CMS Energy again in 1998 proved that it is an industry leader. both in the U.S. and abroad. W I New business deselopment reached $6 billion of acquisitions and new ~- projects, including about S3.5 billion of CMS Energy investment. In addition i ~ to the Panhandle acquisition already discussed, these new acquisitions and ? l development projects by CMS Energy or CMS-led consortia include: A S1.6 billion,1,886 megawatt natural gas-fueled power plant and w.a-liquefied natural gas facility to be built in Tamil Nadu, India. A S700 million,710 megawatt natural gas-fueled power plant and 50 million gallons / day desalination project to be built in Abu Dhabi, United Arab Emirates. A S300 million,710 megawatt natural gas-fueled cogeneration plant that will serve all the electric and steam needs of Ford Motor Company and Rouge Steel Company at the Rouge complex in

Dearborn,

Michigan. Excess electricity will be sold in the Midwest market. l

4. CMS ENE HGv CORPOH ATION

i To Our Shareholders: The year 1998 was another good year for CMS Energy. While earnings increased significantly over 1997, they did not meet our expectations, due largely to warm winter weather and low oil prices. Ilowever,1998 was an exceptional year of development for the future as $6 billion of acquisitions and new "greenfield" projects were successfully secured.These projects involve more than 53.5 billion of CMS Energy invest-ment that will contribute greatly to our earnings growth over the next five years. Net income in 1998 increased 17 percent to $285 million, and earnings per share grew 11 percent to $2.65. ~ The common dividend was increased 10 percent to $1.32 annually-the sixth straight year of double-digit / increases. This financial growth reflects strong performances by our utility and diversified energy busi-nesses. Prelax operating income from C ON SOL ID AT E D diversified energy operations Ni,,Ncoua increased 33 percent, even though our exploration and production ras ~ business suffered from the lowest 224 oil prices in 13 years. l In Michigan, where our . [ William E McCormick Jr Ch<nrman and CEO triyhre. Consumers Energy utility operates, .{ l Victor 1. I'r)\\mg 1* resident and COO (lef t) g weather.m 1998 was the warmest m '7 more than 75 years. This dramatically I reduced home heating sales and caused a 14 percent drop in total natural gas deliveries. Ilowever, electricity sales were strong. with deliveries increasing nearly 6 percent and operating earnings up 10 percent. That, and operational improve-f ARNINGS ments in both the gas and electric businesses, helped the utility increase pretax ',,, n s N. i. operating income nearly 3 percent. I 2 77 i I g r t. k M 97 M

3. CMS ENE AGY COAcOR ATION

CMS ENERGY A Diversified Energy Infrastructure Company. cms ENERGY OCCUPIES A UNIQUE PLACE IN THE ENERGY INDUSTRY Our expertise is unmatched. It spans all fuels. It reaches across every stage, from exploration to transportation, production and distribution. It stretches from start to finish-financing, developing and operating. This diverse experience is coupled with a tightly focused strategy: We concentrate our operations in strategic geographic growth regions with the political will and commitment to expand their economies and compete in the global marketplace. The biggest opportunities are in countries that have both a large unmet or fast-growing need for energy and a commitment to the infrastructure necessary to support development. We target projects that provide growth opportunities for a number of our businesses, not just stand-alone projects. .We invest internationally with strong local partners and employ comprehensive risk management techniques. l. f ' MicVa%* I

6. CMS ENERGY CORPORATION

1 l I A $250 million interest in the 860-mile Goldfields Gas Transmission Pipeline in Western Australia. A $400 million methanol production plant in Equatorial Guinea, western Africa, now under construction. The acquisition, for $153 million, of Continental Natural Gas, a Tulsa, Oklahoma-based gatherer and processor of natural gas, as well as lieritage Gas Services, a company specializing in gas gathering and processing. The 563 million acquisition of SENECA, an electric utility serving Venezuela's Margarita Island. It has 90,000 customers and 150 megawatts of generating capacity. The 560 million acquisition of a 50 percent ownership in a 300 megawatt ommmu INGOME coal-fueled cogeneration plant nearing completion in Thailand. mu CMS Energy's success and growth have been widely recognized in the 'a'-"awm' energy industry. The Edison Electric Institute honored CMS Energy last year as j u% the single best performer in terms of total return to shareholders over the past j %p m five years, presenting its 1998 EEI 100 Index of Investor-Owned Utilities Award. .s;y US And Independent Energy magazine honored CMS Energy as one of the Top Ten l Developers of 1998. Outlook The Panhandle, Continental and Goldfields acquisitions will all contribute to earnings during 1999. The Thailand generating plant will begin operating, and we recently finished construction of the GMR Vasavi generating plant in India. ASSETS In addition, the GasAtacama pipeline and power project-one of the ma largest energy projects in the world during the last several years-hasjust been completed. The pipeline transports natural gas from Argentina across the Andes m a v Mountains to Chile's copper mining region. There. it fuels a generating plant that

E;... -.

) 'i i has a crucial price advantage in the energy-intensive copper industry. As a result of all of these activities, we expect 1999 to be another year of us strong growth for CMS Energy. None of the successes I have discussed here would be possible without the hard work of many talented and dedicated employees. We are proud of our 10.000 CMS people and the additional 2,500 partnership employees, and thank them for their contributions. Finally, we thanic our Board of Directors for their wise counsel and continuing strong support. && TsM9 William T. McCormick Jr. Chairman and Chief Executire Oficer March 29. I999

5. C vs E M AGY CORPCH ADON

l l l North America ChtS Energy prosides a breadth of electricity and gas capabilities matched by few others in the United States. The energy chain starts with CN1S Energy's exploration and produe-tion business, CN1S Oil and Gas. Already active in the U.S. Gulf Coast, the company has expanded its drilling focus into the Niid-Continent and the Rocky N1ountain regions, which will provide new gas supplies for the Panhandle and Trunkline pipelines. CNIS oil and Gas is already the largest natural gas producer in northern Alichigan's Antrim shale fields. The company has developed spe- \\ ~ cial production techniques to tap this unconventional gas source. The gas is processed at CN1S-operated facilities that also serve other producers. The plants exceeded design capacity in 1998, peaking at 357 mil-cornumcrv t;ncry* lion cubic feet per day. improwlits opcraturg pcr/orm,mcc The company is using its Antrim expertise with unconsentional gas n hi/c a.ume.s um supplies to develop 500,000 acres in the Powder River Basin in N1ontana m w customers and Wyoming. Natural gas will be produced from fractured coal seams and then will be directed into a new gathering system to be built and owned by CN1S Energy. Strong Transportation Link to Markets CN1S Energy's extensive gathering, processing, storage and transportation network moves natural gas from the Alid-Continent, Gulf Coast and Canada to markets throughout the Niidwest and eastern U.S. Acquisition of the Panhandle Companies is an important addition. Built in part to serve Consumers Energy, its pipeline system is already con-nected to the utility's gas distribution and storage system in Niichigan. Its operations complement CNIS Energy's purchase of Continental Natural Gas and lieritage Gas Senices earlier in 1998. These companies purchase, gather, process and market natural gas and natural gas liquids produced in Texas and oklahoma.

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The proposed Tristate pipeline progressed in 1998, signing long-term transportation agreements 'br about two-thirds of its projected capacity. M b Tristate will connect the Chicago area with Michigan and pipelines moving i natural gas to eastern U.S. markets. x a $c h. Utility Operations The cornerstone of CMS Energy's domestic operations continues to be I>rncn />i a Consumers Energy. The company prosides electricity and natural gas to strong ccamomy. 3.2 million customers throughout the state s Lower Pem.nsula. cornumen 1 ncrur, cicar,, sc/ncries Consumers Energy improved its operating perfbrmance again in 1998. Im rca sed Operating and maintenance expenses ranked among the lowest of the 7,,,c,, cy, nation's large utilities. Gas leak response time- -already an industry bench-mark-improved to an average of 27 minutes. Driven by a strong Michigan economy, electric deliveries rose 6 percent to 40 billion kilowatt-hours. The warmest winter weather since 1921 depressed the heating market and gas sales. Gas deliveries declined 14 percent to 360 billion cubic feet. Consumers Energy successfully completed the first year of a pilot pro-O gram that tests natural gas deregulation. The experiment lets a limited num-ber of customers shop elsewhere ihr their gas supply. Approximately 100.000 customers participated during 1998, the full amount allowed fbr the year. n,cnonuraler in March 1999, the Michigan Public Service Commission issued Xa1 frlin\\nlidion a t, mal order that phases m. electrie deregulation. lleginning this fall, a l Atticm grew a., a rouli o/ limited number of customers will be able to buy electricity from alternate acqulAttlon\\ In suppliers. Ily 2002, all customers will be able to participate. ,,,. g 3 Energy Production Consumers Energy's generating plants had excellent availability in 1998-86 percent at fossil plants and 81 percent at the Palisades nuclear plant. 1 l I

12. CMS E NF HGY COHPOH Af TON

A partnership led by CMS I!nergy's independent power generation business has started building the first large-scale power plant to be located in Michigan since 1990. This 710 megawatt plant will be located in

Dearborn,

at an automotive and steel manufacturing complex operated by Ford Motor and Rouge Steel. lixcess electricity will be sold to industrial customers or utilities. The project includes a peaking turbine, scheduled to begin operating this summer. I!!senhere in the state, CMS linergy plans to add about 250 mega-watts of gas-fired peaking plants. for use primarily in summer months. - g CMS linergy's existing independent power plants perfbrmed well last \\ ~' i year. Its U.S. facilities total about 2,200 megawatts, with the majority of them located in the northeastern part of the country. Four of the plants set lifetime records fbr earnings and three set records lbr availability or capacity. The 1,370 megawatt Midland Cogeneration Venture also marked a afs j;nc,g,, """4 r'i" A' "* record year, setting a lifetime record ihr earnings and averaging 99 percent sishar; wlJ nearh availability on its 1,240 megawatt contract to Consumers linergy. cfgh,,ynesas,nuch clet trhits as the i,rcuvu n ca, Energy Marketing and Services i CMS Marketing, Services and Trading (CMS MST) dramatically increased the volumes of commodities marketed in 1998. The amount of electricity marketed increased eightfold from the previous year to about 7,000 gigawatt-hours, enough to power Boston, Atlanta and Detroit ihr one year. Other volumes included 370 billion cubic feet of natural gas. 22 million barrels of oil and nearly 1.2 million barrels of natural gas liquids. The energy services business grew substantially, with 560 energy services assignments peribrmed. The company also made inroads into new markets in Canada, Pennsylvania and the southeastern U.S. CMS MST has been active in Pennsylvania's deregulated electricity market, and in 1998 acquired the assets of an energy marketing firm that has more than 300 commercial and industrial customers in the western part of the state.

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South America With its aggressive pursuit of energy privatization and important position in the 200 million population Mercosur market. Argentina has been a showcase for CMS Energy. GasAtacama. the S750 million pipeline and power plant project, is the most recent achievement. The pipeline carries, for the first time. nat-9 ural gas from northern Argentina's production fields. 585 miles across the Andes Mountains to the i'acific coast of northern Chile. There, the gas fuels a CMS generating plant that will substantially lower the cost of elec-tricity to the region. The pipeline was built in just 14 months. ~ R The power plant's first unit will produce 355 megawatts; ultimately. the plant will be expanded to 740 megawatts. Customers include electrie dis-l l t I tribution utilities in the north and Minera Escondida, which is expanding { operations to become the world's largest copper mine. Iletween 50 and 60 percent of the pipeline's capacity is already under contract. In addition to the power plant, gas customers include Chilean als lincr0 hnt 'ercenhelat plant distribution company Chilquinta S.A., which is planning to build a natural ,,, 3,,3 g mr,,c,. gas distribution system in the region. nls I:nsena.la. ran ucIl m CMS Energy also is part owner of the 3,100-mile Transportadora de ,,, 3,,,3ff yg, Gas del Norte (TGN), one of Argentina's primary high-pressure pipeline "I "ver"'i"" systems. TGN expanded capacity by 17 percent in 1998 to 1.5 billion cubie feet per day. This spring. TGN will build a 270-mile pipeline connecting Argentina with Ilrazilian markets. It will be the first direct connection between pipeline systems in the two countries. TGN also supplies gas to CMS Energy's Mendoza generating plant. In 1998. CMS completed refurbishing the plant and doubling its capacity to 540 megawatts. Four turbines were converted to natural gas and a high-elliciency combined-cycle gas turbine was installed. I

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Ch1S Energy's other Argentine generating phmts are operating well. Plentiful water helped the El Chocon and Arroyito hydro plants operate at almost full capacity lbr the first half of 1998. CN1S Ensenada completed its first full year of operation, supplying steam and electricity to YPF's largest Argentine refinery. EDEERSA, CN1S Energy's electric distribution company about 300 miles northeast of Buenos Aires, improved its operating perfbrmance. Although a cold summer and warm winter slowed energy sales, operating etliciencies reduced the impact of weather. EDEERSA saved Si million by reducing purchased power costs. f CN1S Energy also completed its first full year of on nership interest o in Brazilian electric distiibution companies Cataguazes and Energipe. Their operating and maintenance cost per customer outperfbrmed the aver-age Brazilian utility's cost by 38 percent. i Catagua/es was named " Utility of the Year" by Modern E/cctricity n,c nainco,radora in recognition of commercial and technical performance and low energy j de Gas Jcl.Yvrte losses. Energipe president N1arcelo Silveira da Rocha was named the state p,ps,yc,,, . t recni,na I,as of Sergipe's " Outstanding Executive of the Year" by a leading Brazilian busi-gron n l!\\ ll pctt c,Il y,,,, g ness magazme. CN1S Energy also purchased the Venezuelan electrie distribution company, SENECA. It serves over 90,000 customers on N1argarita Island, which has a tourism-based economy. The utility acquisition included a 150 megawatt power plant. Venezuela holds promise ihr the company's oil and gas exploration and production activities. Three newly completed wells in the Colon Block in western Venezuela helped push gross production in the block to more than 12,000 barrels of oil per day. Performance in the Oriente Block in Ecuador was also outstanding. Production increased to 50,000 barrels of oil per day. limited by a lack of pipeline capacity, while production costs were held to S2.36 per barrel. ,s. u.m ww umean

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Africa / Middle East CMS Energy became the leader in Middle East power development in 1998 when it won a bid to finance, build and operate the first major energy privati-zation project in the United Arab Emirates (UAE). Called Al Taweelah A-2, the project includes a 710 megawatt, natural gas-fueled plant, and a water desalination plant capable of producing 50 mil-tion imperial gallons of water per day. The first unit is expected to generate electricity in 2000. The project will help fill the UAE's soaring demand for water and electric power. CMS Energy already has built a reputation in the region for energy privatization with its success at the Jorf Laslitr power plant in Morocco, in ,.. _ _f x. its first full year of operating the plant, CMS Energy has improved availability, etliciency, coal unloading, environmental compliance and safety. Plant availability exceeded 91 percent. Construction to more than double generating capacity is ahead of schedule and under budget. When the new units enter commercial operation in 2000, the 1,356 megawatt Jorf Lasfar The o>mp/crion "' " /"P'#*# plant will provide about one-third of the country's total electricity supply. m ikmisia prosidul CMS Energy also completed a strategically important pipeline in o is Incruriiiih southern Tunisia. The 100-mile pipeline provides, for the first time, an eco-means to transport nomical way to market production from CMS Energy-operated natural gas namral va4 a"J w"- and condensate fields in the Sahara Desert. With a capacity of 45 million cubic feet per day, the pipeline can handle more than three times current production levels. Late in 1998, CMS Energy successfully tested one new well in the region, and is drilling a second.

19. CMS E Nf HGV CORPC A ATION

\\ l l CMS Energy's principal oil production in Africa is from an area otTshore of the Republic of Congo. The oil is pumped directly into a self-contained prodtiction vessel anchored at the site. The ship can store over i i i million barrels of oil, and onloads directly onto other ships for trans-portation to market. In 1998 Congo production totaled 1.5 million net barrels of oil equivalent, an increase of 2 percent; proved reserves totaled 18 million net barrels of oil equivalent. CMS began building a $400 million methanol plant in Equatorial Guinea; it is expected to begin operation in 2001. The plant will produce 2,500 nietric tons of methanol per day, using existing natural gas reserves that are part of the Alba field operated by CMS Energy. Net production f rom the Alba field in 1998 grew to I million barrels of oil equivalent and 200,000 barrels of liquefied petroleum gas. i Asia / Australia CMS Energy is the largest foreign energy developer in india, with two generating plants operating and two more in development. ars I:ncru The potential is enormous. India is already the world's sixth-largest iall co-on n ons energy consumer, and this market continues to expand despite the economic co-operats the 33o n,cranan sluggishness alTecting other parts of the region. Electric supply is about lkthoraill Illcrnlat 30 percent below the country's steadily growing needs. pon cr plan, y, chana. npcocato The GVK Industries gas-fired plant, which CMS Energy completed begin n vnuncrc tal in 1997, was India's first ir.ternationally-owned and operated power plant. op< ra""n in 1999 The CMS-operated plant finished its first full year of operation in 1998. At year-end, CMS Energy began generating electricity ahead of schedule from its second plant, GMR Vasavi, in southeast India. Together, these plants total 435 megawatts of generating capacity.

20. C M5 E NE RJY CunPOR ATION 1

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\\ Construction will begin this year at the 250 megawatt Neyveli plant in southern India. CMS will operate the lignite coal-fueled plant when it begins I commercial operation in 2001. And at year-end, a CMS Energy-led consortium won a bid to build a $1.6 billion power and LNG gasification facility on India's east coast. It is the largest energy infrastructure project in the state of Tamil Nadu. It includes an 1,886 megawatt gas-fueled plant and 2.5 million tons per year j liquefied natural gas facility. Elsewhere in Asia, the 300 megawatt National Power Supply plant in Thailand will be completed this spring. Located in an industrial park east of p_ M~ s,f Bangkok. 60 percent of the plant's capacity will be sold to the Electrie { Generating Authority of Thailand under long-term contract. The remainder, 4 as well as process steam, will be sold to industrial park tenants. CMS also formed a partnership that purchased 88 percent of the 860-ne lo3 ning plant mile Goldfields pipeline system in western Australia. The pipeline can deliver on.f urtralia aducs esi u orisinla n operanne per/orinance mining region. With production costs that are among the lowest in the world, in IVYX l these mines are expected to provide a steady gas market. The Goldfields sys-tem complements CMS Energy's 260-mile Parmelia pipeline, which was the lirst to bring natural gas to the Perth metropolitan area. j The 2,000 megawatt Loy Yang plant completed a year of world-class perfbrmance. The plant established new lifetime standards in availability, capacity, Ibreed outage rate and plant emissions. The Australian Environ-mental Protection Agency honored Loy Yang's environmental program with its highest recognition. And for the second straight year, the Australian National Safety Council gave the plant its highest rating.

22. CMS FNE W CCMOR Ah0N

Selected Unaudited Proportionate Data i in Millions Years Ended December 31 IWH 1997 1996 Operating revenue 5 6,35N $ 5,672 $ 4,809 Operating expenses 5.23N 4,746 4,005 Pretax operating income 1,120 926 8G4 Fixed charges (d> 63x 538 427 Other income (expenses), net (24) (7) 1 Income before income taxes 458 381 378 Income taxes 173 137 154 Net income s 285 5 244 5 224 Operating cash tiow M/ 51,724 $ 1,505 51,319 (a) Enediharges include interest on long-term debt. preferred duidends, and Tnist Preferred Securities' distributions less capitali:ed interest. (b) Preta r operating income plus depreciation and amorti:ation. Ilecause significant 50 percent or less ou ned investments of international energy investments and $100 million (20 per-CMS Energy are not consolidated, CMS Energy believes that cent) associated with increases in cost related to the 1997 l the discussion below of certain proportionate data enhances investments previously described. The $100 million increase j an understanding and assessment of its results of operations. in fixed charges includes $33 million (33 percent) of interest i The table above sets forth the major components of CMS charges associated with new international energy invest-l Energy's net income for each of the last three years on a ments and an increase of $45 million (45 percent)in inter-proportionate accounting basis. Proportionate accounting est charges relating to Loy Yang and Jorf Lasfar, reflects CMS Energy's pro rata ownership interest in its energy Of the $863 million increase in 1997 operating revenue, projects and investments. Except for certain industries, pro- $350 million (40 percent)is attributable to operating resenue i portionate accounting is not in accordance with generally from investments in 1997 (Loy Yang, Jorf Lasfar and Texon). accepted accounting principles. The $741 million increase in operating expenses includes a Of the $686 million increase in 1998 operating revenue, $271 million (36 percent) increase in expenses for these same i $169 million (25 percent)is attributable to operating revenue three 1997 investments. The $111 million increase in fixed from 1998 investments by the international energy distribution charges includes $60 million (54 percent) of interest charges segment, and an increase of $16l million (23 percent)in rev-associated with Loy Yang and Jorf Lasfar. enue associated with investments made in 1997 (CMS Gener-For further information, refer to the Management's ation's Loy Yang and Jorf Lasfar projects, and CMS MST's Discussion and Analysis. Texon acquisition). The $492 million increase in operating expenses includes $123 million (25 percent) related to 1998

23. CMS ENERGY CORPORATION

Management's Discussion and Analysis CMS Energy Corporation (CMS Energy)is the parent holding company of Consumers Energy Company (Consumers) and CMS Enterprises Company (Enterprises). Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan and is the principal subsidiary of CMS Energy. Enterprises is engaged in several domestie and international energy-related businesses including: acquisition, development and opera-tion of independent power production facilities; oil and gas exploration and production: transmission, storage and processing of natural gas: energy marketing, services and trad-ing; and international energy distribution. This Annual Report contains forward-looking statements, as The increase in consolidated net incorne for 1998 over 1997 defined by the Private Securities Litigation Reform Act of 1995. resulted from increased earnings from the electric utility; inde-t Where any such forward looking statements include a statement pendent power production; natural gas transmission, storage of the assumptions underlying forward-looking statements, and processing; and marketing, ser ices and trading businesses. CMS Energy cautions that, while such assumptions are believed Partially offsetting these increases were lower carnings from the ] to be reasonable and are made in good faith, assumed results gas utility, exploration and production and international energy almost always vary from actual results and ddTerences between distribution businesses, the recognition of a $37 million loss assumed and actual results can be material. The type of ($24 million after-tax) for the underracovery of power costs assumptions that could materially alTect the actual results are under the power purchase agreement between Consumers and discussed in the Forward Looking Statements section in this the Midland Cogeneration Venture Limited Partnership (MCV Management's Discussion and Analysis. More specific risk Partnership), and higher interest expen,e. factors are contained in various public filings made by CMS The increase in consolidated net income for 1997 over 1996 Energy with the Securities and Exchange Commission (SEC). resulted from increased income from the electric utility; inde-This Annual Report also describes material contingencies in the pendent power production; and natural gas transmission, stor-Notes to Consolidated Financial Statements and the readers are age and processing businesses. Partially otTsetting these increases encouraged to read such Notes. were lower incomes from the gas utility and exploration and production businesses, coupled with higher interest expense. For further information, see the individual results of Results of Operations operations for each CMS Energy business segment in this Management's Discussion and Analysis. CMS ENERGY CONSOLIDATED E ARNINGS in Aldhons, Except Per Share Amounts CONSUMERS' ELECTRIC UTILITY Years Ended December 31 1998' 1997 Change RESULTS OF OPER ATIONS Consohdated Net income s 285 $244 $ 41 Electric Pretax Operating income: Net lneome Attributable to Common Stocks: In A/illions CMS Energy 272 229 43 Change Compared to Prior Year 1998 w 1997 1997 vs 1996 Class G 13 15 (2) Earnings Per A erage Common Share: 54n 55 a pown g $ w pa h N liasic 2.65 2.39 .26 Rate increases and other Diluted 2.62 2.37 .25 n n-c mm dity revenue (4) iI Class G opaasn and maintenana W N Itasic and Diluted 1.56 1.84 (.28) General taxes, depreciation and other (10) (19) (aI inchtdes the cwnulative el]ect of an accounting changefor property Total inerease (deercase)in pcetax tares nhich increased net income by $43 million or $40 per share - basic

• P"*'"*

and dthaed-for one of two clasves of common stock of CSIS Energy, par value $ 01 per share (CSIS Energy Common Stock) and $12 mdhon or $ 36 per share-basic anddduled-Jor one of two classes of common stock of CAIS Energv. no par vahic (Class G Common Stack J.

24. CMS ENERGY CORPOR ATION

Electric Deliveries: Total electric deliseries in 1998 were 40 bil-ship; and (viii) liig Rock Point nuclear power plant decommis-lion kilowatt-hours (LWh), an increase of 6 percent oser 1997. sioning issues and ongoing issues relating to the storage of spent The increase is primarily attributable to an increase in sales fuel and the operating life of Palisades nuclear power plant (Pal-between utility systems and a 3 percent increase in deliveries to isades). For detailed information about these trends or uncertain-ultimate customers. Total electric deliseries in 1997 were 38 bil-ties see Note 3. " Uncertainties," incorporated by reference herein. lion LWh an increase of 2 percent over 1996 deliseries. The increase in 1997 was the result of continued economic growth in CONSUMERS GAS GROUP Michigan and a i percent increase in deliveries to ultimate cus-RESULTS OF OPERATIONS tomers, primarily within the industrial class. Gar Pretav Operating Income: Pourr Supply Costs: Cost increases in both 1998 and 1997 I" Aldli""3 oser the prior periods reflect increased power purchases fmm Change Compared to prior Year 1998 u 1997 1997 ss 1996 es W 6) $03) outside sources to meet increased sales demand. In addition, the Reduced gas cost per thousand cubic feet 19 i 1998 cost increase reflects higher internal kWh generation to Gas wholesale and retail meet the increased demand for electricity. The following table seruces acuvities I (9) quantifies the changes in electric power costs: Operation and maintenance d) 24 General taxes, depreciation and other (lu) (7) Years I:nded in Ald/mns Total increase (decrease)in pretax I)ccember 31 199M 1997 Change 1997 1996 Change operating income s(27) 5 (5) 51,175 51.139 $36 $1,139 51.087 552 Gas Delircrics: System deliveries in 1998, including miscella-Consumers purchased $5 million of energy options to ensure a neous transportation, totaled 360 billion cubic feet (bef), reliable source of capacity during the summer months of 1998. a decrease of 60 ber or 14 percent compared to 1997.The As a result of weather conditions and fluctuations in the price decreased deliveries for 1998 compared to 1997 reflect warmer of electricity, some options were sold totaling S t I million dur, temperatures in 1998. System deliveries in 1997, including ing June. July, and August 1998. All of the remaining options miscellaneous transportation, totaled 420 bef, a decrease of have expired. The costs relating to the expired options and 28 bef or 6 percent compared to 1996. The decreased deliveries income received from the sale of options were reflected as f r 1997 e mpared to 1996 reflect warmer temperatures in 1997 purchased power costs. and the loss of an extra day for the 1996 leap year. Uncertainties: CMS Energy's financial pasition may be Co"/ Gd3 Sol'l: The cost decrease for 1998 was the result of alTected by a number of trends or uncertainties that have, or decreased sales and decreased gas prices. The cost decrease for CMS Energy reasonably expects could hase, a material impact 1997 also was the result of decreased sales and lower gas prices. on net sales, resenues, or income from continuing electric opera. Ended In 3/illions tions. Such uncertainties are: (i) environmental liabihties arismg I)ecember 31 199M 1997 Change 1997 1996 Change from compliance with sarious federal, state and local environ- $564 5694 $(130 5694 $750 $(56) l mental laws and regulations, including potential liability or expenses relating to the Michigan Natural Resources and Envi-ronmental Protection Act and Comprehensne Ensironmental Ununainties: CMS Energy's financial position may be alTected by a number of trends or uncertainties that have, or CMS Response, Compensation and Liability Act;(ii) capital expendi-tures for compliance with the federal Clean Air Act, as Energy reasonably expects could have, a matenalimpact on net ""I'* I**""#* II"'"

• I" * " "I""I"EE"5 P""U "*'

amended (Clean Air Act);(iii) suits by two independent power producers alleging antitrust violations and economic losses due Such uncertainties are: (i) potential environmental costs at a to special electric contracts signed by Consumers:(iv) cost number of sites. including sites formerly housing manufactured recovery relating to the natural gas-fueled, combined cycle gas pl nt fachs; @ a state @ expuimmal gas transpona-cogeneration facility (MCV Facility) and nuclear plant invest-U " P"8'"*!"".d (iii) implementation of a frozen gas cost ments and an experimental direct-access program; (v) electric remvery and imtiatives undertaken to protect against gas price increases. F r detailed information about these uncertainties see industr> restructuring;(si) implementation of a frozen power supply cost recovery and initiatives to be undertaken to reduce Note 3, "Uncertamties, mcorporated by reference herein. exposure to high energy prices;(vii) after-tax cash underrecov-eries associated with power purchases from the MCV Partner-

25. CMS ENERGY CORPOR ATION

Management's Discussion Continued INDEPENDENT POWER PRODUCTION CMS Oil and Gas' net plant and property and deferred tax liability RESULT $ OF OPER ATIONs of 5270 million and 595 million, respectively, and a $15 million Pretax Operating Income: Pretax operating income for 1998 decrease in CMS Gas Transmission's equity investment in Nitrotec. increased 548 million (50 percent) from the comparable period in ] 1997. This increase primarily reflects increased operating income N ATUR AL GAS TR ANSMISSION, STOR AGE AND PROCESSING 1 from international plant earnings and fees, a $26 million gain on RESULTS OF OPER ATIONS the sale of two biomass project power purchase agreements, and Pretax Operating Income: Pretax operating income for 1998 a 59 million gain on the sale of two biomass plants, partially otT. increased $6 million (22 percent) from the comparable period in set by higher net operating expenses and a scheduled reduction 1997. The increase primarily reflects a gain on the sale of Petal in the industry expertise service fee income earned in connection Gas Storage Company, a gain on the sale of Australian gas with the 2,000 megawatt (MW) brown coal fueled Loy Yang A reserves, and lower operating expenses, partially o!Tset by a power plant and an associated coal mine in Victoria, Australia decrease in earnings from international operations. Pretax operat. i (Loy Yang). Pretax operating income for 1997 increased $28 mil-ing income for 1997 increased $10 million (59 percent) from 1996, lion (41 percent) from 1996, primarily reflecting increased inter. The increase primarily reflects income attributable to an Aus-national earnings, higher electricity sales by the MCV Facility, tralian pipeline acquired in 1997, higher income from domestic and the industry expertise service fee income earned in connec-and international operations, a larger restated loss from Nitrotec tion with Loy Yang in 1997. These increases were partially otTset in 1996 subsequent to converting to the successful etTorts method ) by the absence of certain 1996 nonrecurring gains, including the of accounting. and a gain on the sale of a portion of the Crescent gain on the sale of a power purchase agreement, and Ames gas gathering systems and processing plant in Okla-homa. These increases were partially oliset by the 1996 gain OIL AND GAS EXPLORATION AND PRODUCTION resulting from the dissolution of the Moss Blut! Gas Storage RESULTS OF OPER ATIONS Systems and Grand Lacs Limited Partnerships. Pretax Operating Income: Pretax operating income for 1998 decreased $20 million (77 percent) from the comparable period MARKETING, SERVICES AND TR ADING in 1997. This decrease is the result of lower oil prices and a gain RESULTS OF OPERATIONS in the prior period from the sale of CMS Oil and Gas Com. Pretax Operating Income: Pretax operating income for 1998 pany's (CMS Oil and Gas)(formerly CMS NOMECO Oil & increased 59 million from the comparable period in 1997. This Gas Co.) entire interest in oil and gas properties in Yemen, par. increase is the result of improved margins on electricity and gas tially otTset by increased oil production, decreased exploration sales combined with increased electric and gas sales volumes, expenses, and decreased depreciation, depletion and amortiza-partially ofTset by additional operating costs relating to growth tion expenses. Pretax operating income for 1997 decreased objectives. Pretax operating income for 1997 decreased 57 mil-57 million (21 percent) from 1996 as a result of lower oil and lion from the 1996 period. The decrease is a result of substan-gas prices, decreased gas production and higher operating tially higher than expected natural gas prices that severely expenses. The decrease is partially ofTset by a gain on the sale restricted CMS Marketing, Services and Trading Company's of the entire interest in oil and gas properties in Yemen and ability to achieve positive margins on fixed price sales, and 33 percent higher oil production. higher than expected start-up costs. Electric marketing volumes CMS Oil and Gas changed its method of accounting, effective reached 6.9 million MW for the year ended December 31,1998 January 1,1998, for oil and gas operations from the full cost compared to 900,000 MW for the comparable period in 1997, method to the successful etTorts method. CMS Oil and Gas Gas managed and marketed for end users totaled 366 bef, beheves that the successful etTorts method will minimize asset 243 bef and 108 bef for the years ended December 31,1998, write-otTs caused by periodic price swings, which may not be repre-1997 and 1996, respectively. sentatise of overall or long-term markets, and will allow its results MARKET AlSK INFORMATION of operations to be more easily compared to other oil and gas companies Nitrotec Corporation (Nitrotec),in which CMS Gas CMS Energy is exposed to market risk including, but not limited Transmission and Storage Company (CMS Gas Transmission) has to, changes in interest rates, currency exchange rates, and certain an equity investment, also elected to convert, etTective January 1, commodity and equity prices. Derisative instruments including, ] 1998, from the full cost method of accounting to the successful but not limited to, futures contracts, swaps, options and forward j cfibrts method of accounting. All prior period financial statements contracts may be used to manage these exposures. Derivatives are { presented have been restated to conform with successful etTorts principally used to hedge market risks. accounting. The effect, after tax, of the change in accounting method as of December 31,1997, was a reduction to retained earnings of $175 million for CMS Oil and Gas and $15 million for CMS Gas Transmission, primarily attributable to a decrease in

26. CMS ENERGY CORPORATION

l Management uses commodity futures contracts, options and Capital Resources and Liquidity swaps (which require a net cash payment for the difference between a fixed and variable price) and oil swaps to manage CASH POSITION, INVESTING AND FIN ANCING commodity price risk. They also use forward exchange contracts CMS Energy's primary ongoing source of operating to hedge certain receivables, payables and long-term debt relat-cash is dividends and distributions from subsidiaries. In 1998, ing to foreign investments. Management also uses equity invest-Consumers paid $241 million in common dividends. In Decem-ments in which CMS Energy or its subsidiaries hold less than a ber 1998. CMS Energy contributed $100 million of paid-in cap-20 percent interest. These commodity, financial and equity ital to Consumers. During 1998, Enterprises paid common instruments do not expose CMS Energy to material market risk. dividends and other distributions of $122 milhon to CMS During 1998, derivative trading activities were immaterial. Energy. CMS Energy's consolidated operating cash require-Management believes that any losses incurred on derivative ments are met by its operating and financing activities. instruments used as a hedge would be offset by the opposite Operating Activities: CMS Energy's consolidated net cash movement of the underlying hedged item. provided by operating activities is derived rnainly from the Interest Rate Risk: Management uses a combination of processing, storage, transportation and sale of natural gas; the fixed-rate and variable-rate debt to reduce interest rate expo-generation, transmission and sale of electricity; and the sale of sure. Interest rate swaps and rate locks may be used to adjust oil. Consolidated cash from operations totaled $516 million and exposure when deemed appropriate, based upon market condi- $624 million for 1998 and 1997, respectively. The $108 million tions. These strategies attempt to provide and maintain the low-decrease resulted from cash outflows related to increases in est cost of capital. The carrying amount of long-term debt was accounts receivable from and adsances to affiliates, partially off- $4.7 billion at December 31,1998 with a fair value of $4.7 bil-set by an increase in consolidated net income. CMS Energy uses lion. The fair value of CMS Energy's financial derivative instru-its operating cash primarily to expand its international busi. ments at December 31,1998, with a notional amount of nesses, to maintain and expand electric and gas systems of Con- $579 million, was $15 million, representing the amount that sumers, to pay interest on and retire portions of its long term CMS Energy would have paid to terminate these agreements on debt, and to pay dividends. December 31,1998. Investing Activities: CMS Energy's consolidated net cash Sensitivity Analysis: In accordance with SEC disclosure used in investing activities totaled $1.634 billion and $1.551 bil-l requirements, CMS Energy performed a sensitivity analysis. The lion for 1998 and 1997, respectively. The increase of $83 million analysis assesses the potential loss in fair value, cash flows and primarily reflects increased capital expenditures for acquisitions, carnings based upon hypotheticalincreases and decreases in partially offset by decreased investments in partnerships and market interest rates. A hypothetical 10 percent adverse shift in unconsolidated subsidiaries (1997 included an approximately market rates in the near term would not have a materialimpact $500 million investment in Loy Yang). CMS Energy's 1998 on CMS Energy's consolidated financial position, results of expenditures for its utility and international businesses were operations or cash flows as of December 31,1998, Management $429 million and $1.271 billion, respectively, compared to does not believe that a ser.sitisity analysis alone provides an $371 million and $1.148 billion, respectively, during 1997. accurate or reliable method for monitoring and controlling risk. Financing Activities: CMS Energy's net cash provided by Therefore, CMS Energy and its subsidiaries rely on the experi-financing activities totaled $1.150 billion and $938 million for ence and judgment of senior management and traders to revise 1998 and 1997, respectively. The increase of $212 million in net strategies and adjust positions as they deem necessary. Losses in cash provided by financing activities resulted from an increase excess of the amounts determined in the sensitivity analysis of $848 million in the issuance of new securities, partially could occur if market rates or prices exceed the 10 percent shift otTset by increases in the retirement of bonds and other long-used for the analysis. The analysis assumes that the maximum term debt ($140 million) and the repayment of bank loans exposure associated with purchased options is limited to premi-($545 million). The following is a listing of new securities issued ums paid. The analysis assumes that the CMS Energy Trust Pre-during 1998. l ferred Securities are not converted into CMS Energy Common Stock, if the conversion occurred, the $173 million of CMS Energy Trust Preferred Securities would be discharged through j the issuance of 4.2 million shares of CMS Energy Common Stock. The analysis also does not quantify short-term exposure to hypothetically adverse price fluctuations in inventories. For a discussion of accounting policies related to derivative transactions, see Note 8. { l l t

27. CMS ENERGY CORPOR ATION l

Management's Discussion Continued in Millions Distribution / Principal Month Issued Maturity Interest Rate Amount Use of Proceeds CMS Energy GTNs Series D ui u> 6.8%"> $ 122 General corporate purposes d Series E d' tt> 6.9% ' 34 General corporate purposes Estendible Tenor Rate Adjusted Securities'h January 2005 7M 180 Pay down borrowings Common Stock November N/A 4.5 shares 208 General corporate purposes $44 Consumers Senior Notes"' February 2008 6.375 % 250 Pay down First Mortgage Bonds and general corporate purposes Senior Notes"' March 2018 6.875 % 225 Pay down First Mortgage ) Bonds and borrowings under credit facilities Senior Notes"# May 2008 6.2%* 250 Pay down First Mortgage Bonds, long-term bank debt and general corporate purposes Senior Notes"' June 2018 6.5%"> 200 Pay down First Mortgage Bonds and general corporate purposes Long-Term Bank Debt May 2001-2003 6.05W O 225 Pay down long-term bank debt Senior Notes"' October 2028 6.5% 150 Pay down long-term bank debt and general f corporate purposes j l Total $1,844 (I) CMS Energy General Term Notes * { GTNs) are issuedfrom time to time nith varying maturity 1 dates The rate shoun herein is a weighted average interest rate. (2) May be extendedfor an adduiomd scren years (3) The Senior Notes are secured by Consumers' nrst Mortgage Bonds issued contemporaneously in a similar amount. (4) The interest rate reay be reset in May 2003 )

15) The interest rate will be reset in June 24W15.

(6I The interest rate is sariable; weighted average interest rate upon originalisswmce w 6 05 percent. In 1998, CMS Energy paid $129 million in cash dividends to in January 1998, a Delaware statutory business trust estab-holders of CMS Energy Common Stock and $11 million lished by CMS Energy sold $180 million of certificates due in cash dividends to holders of Class G Common Stock. In January 15,2005 in a public offering. In exchange for those January 1999, the Board of Directors of CMS Energy declared proceeds, CMS Energy sold to the trust $180 million aggregate a quarterly dividend of $.33 per share on CMS Energy Com-principal amount of 7 percent Extendible Tenor Rate Adjusted mon Stock and 5.325 per share on Class G Common Stock, Securities due January 15,2005, which may be extended for an payable in February 1999. additional seven years. Net proceeds to CMS Energy from the in August 1998, CMS Energy fded a shelf registration state-sale totaled $176 million. ment for the issuance of $400 million of GTNs Series E. As of December 31,1998, CMS Energy had an aggregate In December 1998, CMS Energy filed two shelf registration $2.3 billion in securities registered for future issuance, including statements for the issuance of $1.5 billion of CMS Energy securities to be issued to permanently finance the acquisition, Common Stock and $400 million of senior and subordinated as described below, of Panhandle Eastern Pipe Line Company, debt securities. Trunkline Gas Company, Pan Gas Storage Company, Panhan-In January 1999, CMS Energy received net proceeds of die Storage Company and Trunkline LNG Company (Panhan-approximately $473 million from the sale of $480 million of die Companies). CMS Energy also has $725 million senior senior notes. In February 1999, CMS Energy received net pro-credit facilities (Senior Credit Facilities), unsecured lines of ceeds of approximately $296 million from the sale of $300 mil-credit and letters of credit as sources of funds needed to lion of senior notes. Proceeds from these otTerings were used to fulfill, in whole or in part, material commitments for capital repay debt and for general corporate purposes. expenditures. For detailed information, see "Short-Term Other Investing and Financing Matters: At December 31,1998, Financings" and " Capitalization"in Notes 4 and 6, respectively, the book value per share of CMS Energy Common Stock and incorporated by reference herein. Class G Common Stock was $19.61 and $11.46, respectively.

28. CMS ENERGY CORPORATION

1 CMS Energy's Senior Credit Facihties consist of a Nevertheless, CMS Energy will continue to evaluate capital mar- $600 million three-year revolving credit facility and a five-year Lets in 1999 as a potential source of financing its subsidiaries' $125 million term loan facility. Additionally, CMS Energy has investing activities. I unsecured lines of credit and letters of credit in an aggregate CMS Energy estimates capital expenditures by business seg-amount of $216 million. These credit facilities are a ailable to ment over the next three years as ibilows: finance working capital requirements and to pay for capital in Villions expenditures between long term financings At December 31. Years Ended December 31 19W 200n 2001 1998, the total amount utilized under the Senior Credit f acili. Consumers ciectric operations ** 5 380 5 385 5 385 ties was $725 million, including $57 million of contingent oblig. Consumers gas operations'"' 123 125 120 ations, and under the unsecured lines of credit and letters of h" P {"odch P credit was $147 million. Natural gas transmission and storage 2.412 " 225 143 Consumers has Federal Energy Regulatory Commission International energy distribution 359 100 126 (FERC) authorization to issue securities and guarantees. Con. Marketing, nenices and trading 5 15 12 sumers has a credit facility, lines of credit and a trade receivable Other 10 sale program in place as anticipated sources of funds needed to 54,148 51,450 51,175 fulfill, in whole or in part, material commitments for capital (a) These amounn include an attributedportion of Consumers' antici-enpenditures as of December 31, l498. For detailed intbrma-twed capaal capenJauresfor plant and equipment common to both the tion, see "Short-Term Financings" and " Capitalization"in [$,","f,,j"[,"[f[,^"j,'l$ prel,iinnary numatafor capital npen. Notes 4 and 6, respectisely,incorpotated by reference herein. Jaures possibly required to comply wah recently revised natiorud aur qual. CMS Energy and its subsidiaries must redeem or retire inanda'Js under the Clean Air Act. nrfurther information, see Note I $762 million of long-term debt oser the three-year period end- /,j,['"["f} {((y['"'####~ ^""# '**V"#"#"" "UN' ing December 2001. In addition, at December 31,1998, Con-sumers had a recorded liability to the U.S. Department of CMS Energy currently plans investments from 1999 to 2001: Energy (DOE) of $117 mdlion, which Consumers must pay (i)lbr oil and gas exploration and production operations, pri-upon the first delivery of spent nuclear fuel to the DOE. marily in North and South America, olTshore West Africa and Current federallaw originally scheduled delivery of the fuel to . North Africa;(ii) lbr independent power productioa operations occur in 1998; lbr additional information, see " Nuclear Fuel to pursue acquisitions and deselopment of electric generating Cost"in Note 2. plants in the United States, Latin America, Asia, Australia, the On Nosember 2,1998, CMS Energy announced an agree-Pacific Rim region, North Africa and the Middle East;(iii) to ment to acquire the Panhandle Companies from Duke Energy continue deselopment of nonutility natural gas storage, gather-Corporation for a cash payment of $1.9 billion and existing ing and pipeline operations of CMS Gas Transmission, both Panhandle Companies debt of $300 million. The transaction domestie and international; (iv) to acquire, deselop and expand was completed in March 1999, and will be accounted for under international energy distribution businesses; and (v) to provide the purchase method of accounting. gas, electric, oil and coal marketing, risk management and The acquisition of the Panhandle Companies initially was fm-energy management services throughout the United States and anced in part with bridge loan facilities negotiated with domestic eventually worldwide. banks and in part with approximately $800 million of debt securities issued by the Panhandle Companies. CMS Energy expects to permanently finance the acquisition with existing Outlook arrangements as well as the sale of approximately $600 million of CMS Energy Common Stock and other CMS Energy securities. As the deregulation and privatization of the energy industry takes place in the United States and internationally, CMS Energy CAPITAL EXPENDITURES g g gg g CMS Energy estimates that capital expenditures, meludmg new energy company acquiring, developing and operating energy lease commitments and insestments in partnerships and uncon-facih.. ties and prosiding energy services in major world growth solidated subsid.ianes, wd. l total $6.8 billion over the next three l markets. C,MS Energy provides a complete range of international years.1.hese estimates are prepared for planning purposes and energy expertise f. rom energy production to consumption. are subject to revision. T his total m. eludes approximately $2.2 billion for the acquisition of the Panhandle Companies as described abose. A substantial portion of the remaining capital expenditures is expected to be satisfied by cash from operations. l 4

29. CMS ENERGY CORPORATION l

)

. Management's Discussion Continued INTERNATION AL OPER ATIONS OUTLOOK orders which among other things identified the terms and tim-CMS Energy will continue to grow internationally by investing ing for implementing electric restructuring in Michigan. Con-in multiple projects in several countries as well as by deseloping sumers anticipates that it will discontinue application of SFAS 71 synergistic projects across its lines of business. CMS Energy for the generation segment of its business in the first quarter of believes these integrated projects will create more opportunities 1999 as Consumers is now preparing to implement electric cus-and greater value than individualinvestments. Also, CMS tomer direct access. According to current accounting standards, Energy will achieve this growth through strategic partnering Consumers can continue to carry its generation related regula-where appropriate. tory assets or liabilities for the part of the business being dereg-CMS Energy seeks to minimize operational and financial ulated if deregulatory legis'ation or an MPSC rate order allows risks when operating internationally by working with local part-the collection of cash flows from its regulated transmission and ners, utilizing multilateral financing institutions, procuring distnbution customers to recover these specific costs or settle political risk insurance and hedging foreign currency exposure obligations. A February 1998 MPSC order allows Consumers to where appropriate. fully recover its costs incurred by utilities in order to serve their customers in a regulated monopoly environment (Transition CONSUMERS' ELECTRIC UTIUTY OUTLOOK Costs). At December 31,1998, Consumers had $259 million of Growth: Consumers expects average annual growth of generation-related net regulatory assets recorded on its balance 2A percent per year in electric system deliveries oser the next sheet, and a net investment in generation facilities of $1.3 billion five years, absent the impact of restructuring on the industry included in electric plant and property. and its regulation in Michigan. Abnormal weather, changing economic conditions, or the developing competitive market for CONSUMERS GAS GROUP OUTLOOK electricity may atreet actual electric sales in future periods. Growth Consumers currently anticipates gas deliveries,includ-Restructuring: Consumers' retail electric business is affected ing gas customer choice deliveries (excluding transportation to by competition. To meet its challenges, Consumers entered into the MCV Facility and off system deliveries), to grow at an aver-i multi-year contracts with some of its largest industrial cus-age annual rate of between one and two percent over the next I tomers to serve certain facilities. The Michigan Public Service five years based primarily on a steadily growing customer base. Commission (M PSC) has approsed these contracts as part of Actual gas deliseries in future periods may be alTected by its phased introduction to competition. Certain customers have abnormal weather, alternative energy prices, changes in compet-the option of terminating their contracts early, itive conditions, and the level of natural gas consumption. Con-FERC final rules issued on April 24,1996 (Orders 888 and sumers also otters a variety of energy-related services to its 889), as amended, require utilities to provide direct access to the customers focused upon appliance maintenance, home safety, interstate transmission grid Ibr wholesale transactions. Con-commodity choice and assistance to customers purchasing heat-sumers and The Detroit Edison Company (Detroit Edison) dis-ing, ventilation and air conditioning equipment. agree on the etTect of the orders on the Michigan Electric Power Restructuring: In December 1997, the M PSC approved Con-Coordination Center pool. Consumcts proposes to maintain the sumers' application to implement a statewide three year experi-benefi s of the pool through at least December 2000, while mental gas transportation program, eventually allowing 300,000 t Detroit Edison contends that the pool agreement should be ter-residential, commercial and industrial retail gas sales customers minated immediately. Among Consumers' alternatives in the to choose their gas supplier. For further information regarding event of the pool being terminated would be joining an inde-restructuring of the gas distribution, storage and transportation pendent system operator. FERC has indicated this preference businesses currently conducted by Consumers and Mbhigan for structuring the operations of the electric transmission grid. Gas Storage Company (Consumers Gas Group), see "Uncer. For material changes relating to the restructuring of the tainties-Consumers Gas Group Matters-Gas Restructuring" electric utility industry, see " Consumers' Electric Utility Rate in Note 3, incorporated by reference herein. Matters--Electric Restructuring"in Note 3, incorporated by Other EITective January 1,1999, Consumers was allowed to reference herein. solicit Michigan Consolidated Gas Company (MichCon) and l Electric Application of SFAS 71: Consumers applies utility SEMCO Energy Gas Company customers due to a three-year accounting standard, Statement of Financial Accounting Stan-experimental program ordered by the MPSC allowing cus-dards (SFAS) 71. At December 31,1998. Consumers beliesed tomers a choice of gas suppliers. As of February 8,1999, Con-that the generation segment of its business was still subject to sumers has signed up 650 of MichCon's customers and 300 of cost-based rate regulation due to legislative and regulatory SEMCO Energy Gas Company's customers, uncertainty about the status of Consumers' continuing obliga. I tion to provide generation service to customers. Subsequent to year-end, Consumers received MPSC electric restructuring l

30. CMS ENERGY CORPOR A%

l i l Other Matters The impact analysis phase includes the analysis,imentory, prioritiration and remediation plan development for all technol-NEW ACCOUNTING RULES ogy ewential to core business processes. The remediation phase In 1998, the American Institute of Certified Pubbe Accountants imolves testing and implementation of remediated technology issued Statement of Position 98-l, Accmmtingfor the Cmts of A mainframe test environment was established in 1997 and a Computer Softnare Dctcloped or Obtainedfor Internal U3c, and test emironment for network servers and stand-alone personal { Statement of Position 98-5, Rcrorting on the Costs of Start {p computers was estabbshed in mid 1998. All essential corporate f Actintic3. These statements uill be elTective in 1999. CMS business systems base been, or will be, tested in these test emi-Energy does not expect the application of these standards to ronments. The compliance resiew phase includes the assembling materially afTect its financial position, liquidity or results of of compliance documentation for each technology component ] operations Also in 1998, the Financial Accounting Standards as remediation elTorts are completed, and additional serification floard issued SFAS 133, Anwmtingfor Deritative Instn<ments testing of essential technology where necessary. The monitor- <md //cdging Actitirics, which will be etTective in 2(XX), and the ing/ contingency planning phase includes comphance monitor. ( Emerging issues Task Force published Issue 98-10, Anwmting ing to ensure that year 2000 problems are not reintroduced into for Energy Tradmg <md Rid Management Activiticx, which will remediated technology, as well as the deselopment of contin- ) be elTective in 1999. CMS Energy is currently studying these new gency plans to aJdress reasonably likely risk scenarios standards and has not yet quantified the impacts of adopting State of Readine3x: CMS Energy is managing traditional SFAS 133 or issue 98,10 on its financial statements and has not information technology (IT), which consists of essential busi-determined the timing of or method of adoption. Ilowever, ness systems such as payroll, billing and purchasing; and infra. SFAS 133 and issue 98-10 will inercase solaulity in earnings and structure, including mainframe, wide area network, local area other comprehensive income, networks, personal computers, radios and telephone systems CMS Energy is also managing process control computers and YF An 2000 COMPUTER MODWICATIONS embedded systems contained in buildings, equipment and CMS Energy uses software and related technologies throughout energy supply and delivery systems its domestic and international businesses that the year 2000 date Essential goods and sersiees for CMS Energy are electric change could alTect and, if uncorrected, could cause CMS fuel supply, gas fuel supply, independent electric power supplies, Energy to, among other things, delay issuance of bills or facilities, electronic commerce. telecommunications network reports, issue inaccurate bilh, report inaccurate data, incur gen-carriers, financialinstitutions, purchasing vendors, and software crating plant outaces, or create energy delisery uncertainties in and hardware technology sendors. CMS Energy is addressing { 1995, CMS Energy established a Year 2(HK) Program to ensure the preparedness of these businesses and their risk through the continued operation of its businesses at the turn of the cen-readiness assessment questionnaires. tury. CMS EnerFy's elTorts included dividing the programs The status of CMS Energy's Year 2000 Program by phase, requiring modification between critical and noneritical pro-with target dates for completion and current percentage com-grams. A formal methodology was established to identify criti-plete based upon software and hardware imentory counts as of cal business functions and risk scenarios, to correct problems December 31,1998, is as follows: identified, to develop test plans and expected results, and to test the corrections made. CMS Energy's Year 2000 Program imohes an aggressive, comprehensisc four-phase approach, including impact analysis, remediation, compliance resiew, and monitoring / contingency planning. Monitoring / Impact Compliance Contingency Analysis Remediation Resiew Planning (a) (b/ (a) th) (al (b) (a) (b) Electric utility 3/98

loom, 6/99 78 %

6/99 66 % 6/99 50% Gas utihty 3/98 100 % 6/99 73 % 6/99 38 % 6/99 10% Independent power production 1/99 66 % 9/99 44 % 9/99 30 % 9/99 Ry% Oil and gas I/99 97% 9/99 8(ra 9/99 20 % 9/99 2(rW Natural gas transmission 1/99 50 % 9/99 75 % 9/99 25% 9/99 5"4, Marketing, sersices and trading 1/99 77% 9/99 50 % 9/99 Strs 9/99 1(rs Essential goods and sersices 6Ko 56 % N/A N/A (c) (al larget date for complenon. (b) Current pt rcentage con.plete. (c) Conungemy plannmgjor essennalgoods and sersiccs is mcorporated mto runnnevncy plannmgjor each segment presented

31. CMS E NE RGY CORPOR ATION

Management's Discussion Continued Cost of Remediation: ChtS Energy expenses spending for FOREIGN CURRENCY TR ANSL ATION software modifications as incurred, and capitalizes and amor. ChtS Energy adjusts common stockholders' equity to reflect for- .tizes the cost for new software and equipment over its useful eign currency translation adjustments for the operation of long-life. 'I he total estimated cost of the Year 200() Program is term investments in foreign countries The adjustment is approximately 530 million. Costs incurred through December primarily due to the exchange rate fluctuations between the U.S. 31,1998 were approximately 516 million. CMS Energy's dollar and each of the Australian dollar and Brazilian real. From annual Year 2000 Program costs have represented approxi-imuary 1,1998 through December 31,1998, the change in the mately 2 percent to 10 percent of CMS Energy's annual IT foreign currency translation adjustment totaled $40 million, net budget through 1998 and are expected to represent approxi-of af ter-tax hedging proceeds. Although management currently mately 25 percent of CMS Energy's annual IT budget in 1999. believes that the currency exchange rate fluctuations over the long Year 200() compliance work is being funded primarily from term will not materially adversely affect CMS Energy's fmancial operations To date, the commitment of CMS Energy resources position, liquidity or results of operations, CMS Energy has to the year 200t) issue has not deferred any material IT projects hedged its exposure to the Australian dollar and the Brazilian which could have a material adverse affect on CMS Energy's real. CMS Energy uses forward exchange contracts and collared fmancial position, liquidity or results of operations, options to hedge certain receivables, payables, long-term debt and Risk Asses 3 ment: CMS Energy considers the most reason-equity value relating to foreign investments The notional amount ably likely worst-case scenarios to be:(i) a lack of communi-of the outstanding foreign exchange contracts was 5736 million cations to dispatch crews to electric or gas emergencies;(ii) a at December 31,1998, which includes $450 million and $250 mil-lack of communications to generating units to balance electri-tion for Australian and Brazilian foreign exchange contracts, cal load; (iii) power shortages due to the lack of stability of respectively. Subsequent to December 31,1998, the fair value of the electric grid; and (iv) a failure of fuel suppliers to deliver the tirazilian foreign exchange contracts increased significantly, as fuel to generating facilities. These scenarios could result in the Brazilian real weakened against the U.S. dollar. CMS Energy not being able to generate or distribute enough energy to meet customer demand for a period of time, which could result in lost sales and profits, as well as legal liability. Forward-Looking Statements Year 2000 remediation and testing elTorts are concentrating on these risk areas and will continue through the end of 1999. This Annual Report contains forward-looking statements as Contingency plans will be revised and executed to further mit-defmed by the Private Securities Litigation Reform Act of 1995. igate the risks associated with these scenarios. The words " anticipates " " believes " " estimates," " expects " Contingemy Plans: Contingency planning efforts are " intends," and " plans," as well as variations of such words and currently underway for all business systems and providers of similar expressions, are intended to identify forward-looking state-essential goods and services. Extensive contingency plans are ments that involve risk and uncertainty. These statements are nec-already m place in many locations and are currently being essarily based upon various assumptions involvingjudgments with revised for reasonably likely worst-case scenarios related to year respect to the future including, among others, the ability to achieve 2mM) issues. In many cases, Consumers already has arrangements operating synergies and revenue enhimcements; international, with multiple vendors of similar goods and services so that in national, regional and local economic, competitive and regulatory the event that one cannot meet its commitments, others may be conditions and developments; capital and fmancial market condi-able to. Current contingency plans provide for manual dispatch-tions, including currency exchange controls and interest rates; ing of crews and manual coordination of electrical load balanc-weather conditions; adverse regulatory or legal decisions, including ing and are being revised to provide for radio or satellite emironmental laws and regulations; the pace of deregulation of communications. Coordinated contingency planning efibrts are the natural gas and electric industries: energy markets, including in progress with third parties to minimize risk to electric the timing and extent of changes in commodity prices for oil, coal, generation, transmission and distribution systems. natural gas, natural gas liquids, electricity and certain related prod-Eapectations: CMS Energy does not expect that the cost of ucts; the timing and success of business development etTorts; these modifications will materially alrect its financial position, potential disruption, expropriation or interruption of facilities or liquidity or results of operations. There can be no guarantee, operations due to accidents or political events; nuclear power and however, that these costs, plans or time estimates will be other technological developments; and other uncertainties, all of achieved, and actual results could ditTer materially, which are difficult to predict and many of which are beyond the Ilecause of the integrated nature of CMS Energy's business control of CMS Energy. Accordingly, while CMS Energy believes with other energy companies, utilities, jointly owned facilities that the assumed results are reasonable, there can be no assurance operated by other entities, and business conducted with suppli-that they will approximate actual results CMS Energy disclaims ers and large customers, CMS Energy may be indirectly any obligation to update or revise forward-kioking statements, alTected by year 2000 compliance complications. At this time, whether as a result of new information, future events or otherwise. CMS Energy is unable to anticipate the magnitude of the oper. Certain risk factors an: detailed from time to time in various public ational or financialimpact of year 2000 issues on CMS Energy. filings made by CMS Energy with the SEC. j

32. CMS ENERGY CORPORATION 1

Consolidated Statements of Income in MJliant Euert Per share Anwunts Years Ended December 31 1998 1997 1996 operating Revenue Electric utihty 52/46 $2,515 $2.446 Gas utihty 1,051 1,204 1,282 Independent power production'd' 277 168 140 Natural gas transmission, storage and processing ' 160 96 53 d Oil and gas exploration and production 63 93 130 N1arketing, sersices and trading " 939 692 258 Other 45 13 15 5,141 4.781 4,324 Operating Expense. Operation Fuel for electric generation 359 319 312 Purchased power-related parties 573 599 589 Purchased and interchange power 584 265 202 Cost of gas sold 1,212 1,311 997 Other 763 719 742 3,491 3,213 2,842 hiaintenance 176 174 178 Depreciation, depletion and amortization 484 467 427 General taxes 215 211 201 4,366 4.065 3,648 Protax operating Electric utility 475 432 411 Income (Loss) Gas utility 126 153 158 independent power production 144 96 68 Natural gas transmission, storage and processing 33 27 17 Oil and gas exploration and production 6 26 33 N1arketing, services and trading 4 (5) 2 Other (13) (13) (13) 775 7I6 676 Other income Loss on N1CV power purchases (37) (Deductions) Accretion income 6 8 10 Accretion expense (16) (17) (22) Other, net 1 (3) 1 (46) (12) (11) Fixed Charges interest on long-term debt 318 273 230 Other interest 47 49 43 Capitalized interest (29) (13) (5) Preferred dividends 19 25 28 Trust Preferred Securities distributions 32 18 8 387 352 304 incorne nefore income Taxes 342 352 361 Income Taxes 1(H) 108 137 Consohdated Net income before Cumulative Ef fect of Change in Accounting Principle 242 244 224 Cumulative Ef fect of Change in Accounting for Property Taxes, Net of $23 Tax 43 Conschdated t4et income $ 285 $ 244 $ 224 Net income Attributable to Common Stocks Ch1S Energy 5 272 $ 229 $ 210 Class G $ 13 $ 15 $ 14 Basic Earnings Per Average Common Share CN1S Energy S 2.65 $2.39 $ 2.27 Class G $ 1.56 $ 1.84 $ l.82 DHuted Earnings Per Average Common Share Chis Energy S 2.62 $ 2.37 5 2.26 Class G S 1.56 $ l.84 5 1.82 j Dividends Declared Par Common Share Ch1S Energy S 1.26 $ 1.14 $ 1.02 Class G S 1.27 $1.21 5 1.15 (a) Does not inchade revenue associated with CMS' interests in unconsolidatedpartnerships li>r 1998,1997 and 1996, that revenue totaled $76I n,illion. $621 mdhon and $493 mdlion. respectively. for independent p<m er pn>Juction, and $67 mdlion. $5I milhon and $42 milhon, respectively for natural gas transmusion, storage and processing; and $198 mdlion. $39 million and $22 million, respet tirely for internatwnal energy Justribution, uhich is reported in Other. For 1998 and 1997, that revenue totaled $291 milhon and $202 milhon, respectively, for marisering, services and tra<hng I'lw accompanying notes are an integr<dpart of these statements.

33. CMS ENERGY CORPORATION l

Consolidated Balance Sheets in Milhons December 31 1998 1997 ASSETS Plant and Properiy Electric 5 6,720 $ 6.491 tat cost) Gas 2,701 2,528 Oil and gas properties (successful elforts method) 670 545 Independent power production SIM 122 Other 373 46 J 10,9H2 9,732 Less accumulated depreciation, depletion and amortization 5,213 4,849 ) 5.769 4,883 Construction work-in-progress 271 261 6.040 5.144 l investments Independent power production M88 792 { Natural gas transmission, storage and processing 494 24l International energy distribution 209 255 l'irst hiidland Limited Partnership 240 242 Niidland Cogeneration Venture Limited Partnership 209 171 Other 33 45 2,073 1,746 current Assets Cash and temporary cash investments at cost, which approximates market 101 69 Accounts receivable and accrued revenue, less allowances of $13 in 1998 and 57 in 1997 720 495 inventories at aserage cost Gas in underground storage 219 197 I N1aterials and supplies 99 87 Generating plant fuel stock 43 35 Deferred income taxes 38 i Prepay ments and other 225 235 I,407 1,156 Non current Assets Nuclear decommissioning trust funds 557 486 Postretirement benefits 373 404 Abandoned hiidland project 71 93 Other 789 479 1,790 1.462 Total Assets s11.310 5 9,508 The accompanyme owles are an integralpart of these statenwnis. 34, CMS ENERGY CORPORATION

l In Aldlwns December 31 1998 1997 STOCKliOLDERS' INVESTMENT AND LIA131LITIES capitalisation Common stockholders

• equity S 2,216

$ 1,787 Preferred stock of subsidiary 23M 238 Company-obligated mandatorily redeemable Trust Preferred Securities of; Consumers Power Company Financing 1* 100 100 Consumers Energy Company Financing 11

• 120 120 Company-obligated convertible Trust Preferred Securities of CMS Energy Trust l'h' 173 173 Long term debt 4,726 3,272 Non current portion of capitalleases 105 75 4

7,67H 5,765 current Liabilities Current portion of long-term debt and capital leases 293 643 Notes payable 328 382 4 Accounts payable 501 398 Accrued taxes 272 272 Accounts payable--related parties 79 80 Accrued interest 65 51 Power purchases 47 47 Accrued refunds 11 12 Other 214 190 4 1,810 2,075 Non-current Liabilities Deferred income taxes 649 648 Postretirement benefits 489 514 Deferred investment tax credit 135 I5I Power purchases 121 133 Regulatory liabilities for income taxes, net 87 54 Other 341 168 1,822 1.668 Commitments and Contingencies (Notes 2,3 and 13) Total Stockholders' investment and Liabilities $ 11,310 $ 9,508 (a) The primary auer of Consumers Power Company financing t is $103 mdlion principal amount of 8.36 percent subordinated deferrable interest notes due 20l$pom Consumert The primary asset of Consumers Energy Company Financing 11is $124 million principal amount of 8.20 percent sub-ordinated deferrable interest notes duc 2027] rom Consumers. Forfurther discussion. see Note 6 to the Consohdated Financial Statement.t (b) As described in Note 6. the primary asset of CMS Energy Trust Iis 3178 million principal amount of 7.73 percent convertible subordinated deben-tures due 2027from CAIS Energy.

35. CMS ENERGY CORPORATION 1

1 Consolidated Statements of Cash Flows in.ttillwm Years Ended December 31 1998 1997 1996 Cash Flows From Consolidated net income $ 285 $ 244 5 224 Operating Activities Adjustments to reconcile net income to net cash prosided by operating actisities Depreciation, depletion and amortization (includes nuclear decommissioning of $51, $50 and $49. respectively) 484 467 427 Deferred income taxes and investment tax credit 54 24 45 Capital lease and debt discount amortization 51 44 41 Loss on MCV power purchases 37 Accretion expense 16 17 22 Accretion income-abandoned Midland project (6) (8) (10) Undistributed earnings of related parties (95) (58) (55) Cumulative effect of accounting change for property taxes (66) MCV power purchases (64) (62) (63) Other 6 (9) 27 I Changes in other assets and liabilities (186) (35) (11) Net cash prosided by operating activities 516 624 647 Cash riows from Capital expenditures (excludes capital lease additions of j investing Activilles $60,511 and $31, respectively and DSM) (1,295) (678) (643) investmenu in partnerships and unconsolidated subsidiaries (345) (830) (163) l Cost to retire property, net (83) (46) (31) Other 32 (46) (47) { Acquisition of companies, net of cash acquired (20) Proceeds from sale of property 57 49 79 Nel cash used in investing activities (1,634) (1,551) (825) Casn riown rrom Proceeds from bank loans, notes and bonds 2,348 1,214 433 ] rinancing ActMties issuance of Common Stock 269 224 95 Proceeds from Trust Preferred Securities 286 97 1 Retirement of bonds and other long-term debt (661) (521) (37) Repayment of bank loans (574) (29) (256) Payment of Common Stock dividends (140) (119) (103) Increase (decrease) in notes payable, net (53) 49 (8) Payment of capitallease obligations (36) (44) (40) Retirement of Common Stock (3) (2) (1) Retirement of preferred stock (120) Net cash provided by financing activities 1.150 938 180 i Net increase in Cash and Temporary Cash investments 32 Il 2 Cash and temporary cash investments lleginning of year 69 58 56 End of year S 101 5 69 5 58 The accompanring notes are an mtceralpart of these statementt il I

36. CMS ENERGY CORPORATION

Consolidated Statements of Preferred Stock Optional Redemption Number of shara in Aldtwns December 31 Series Price 1998 1997 1998 1997 Consumers' Preferred Stock Cumulative, $100 par salue, authorized 7,500,000 shares, with no mandatory redemption $4.16 $103.25 68,441 68,451 5 7 5 7 4.50 liO OO 373,148 373,148 37 37 Consumers' Class A Pref erred Stock Cumulative, no par 5alue, authorized 16,(KK),000 shares, with no mandatory redemption 2.08 25.00

• N.0003HHI 8JK)0,000 194 194 Total Preferred Stoc k 523x 5238 la) Redeemable beginning April 1,19YY.

The accompanying notes are an integralpart of these statements. Consolidated Statements of Common Stockholders' Equity Number of Share.t in Thousands In Afillions Years Ended December 31 1998 1997 1996 199N 1997 1996 Common Stock At beginning and end of period I 1 5 1 Other Paid.in Capital-CMS Energy At beginning of period IIHI,792 94,813 91,594 2.131 1,916 1,827 Common stock reacquired (72) (54) (32) (3) (2) (1) Common stock issued 7,383 6,031 3,248 324 217 90 l Common stock reissued 1 2 3 j At end of period 1118,1 0 4 100,792 94.813 2,452 2,131 1,916 Other Paid in Capital-Class G At beginning of period N.219 7,877 7,619 136 129 124 Common stock reacquired (1) (1) Common stock issued 235 343 258 6 7 5 At end of period N,453 8,219 7,877 142 136 129 Revaluation Capital At beginning of period (6) (6) (8) Change in unrealized investment-gain (loss) * (3) 2 At end of period (9) (6) (6) Foreign Currency Translation At beginning of period (96) Change in foreign currency translation w (40) (96) At end of period (136) (96) Flet ained Earning s (Deficit) At beginning of period (379) (504) (625) Consolidated net incomed 285 244 224 Common stock dividends declared: CMS Energy (129) (109) (94) Class G (11) (10) (9) At end of period (234) (379) (504) Total Common Stockholders' Equity S 2.216 5 1,787 $1,536 (a) Disclosure of Comprehensive income: Revaluation capital unreah:cd investment-gain (loss), net of tas of $2, 30 and $0, respectively 50) $ 2 1oreign curremy translation 1JH) (96) Consohdated net income 289 244 224 Total Consolidated Comprehensive income 8 242 $ 148 $226 The accompanying notes are an integralpart of these statements.

37. CMS ENERGY CORPORATION

1 l Notes to Consolidated Financial Statements 1: Conron ATE sinuCrunE Change in Afethodof Accountingfor Property Taxes During CMS Energy Corporation (CMS Energy)is the parent holding the first quarter of 1998, Consumers implemented a change in company of Consumers Energy Company (Consumers) and the method of accounting for property taxes so that such taxes CMS Enterprises Company (Enterprises). Consumers, a combi-are recognized during the fiscal period of the taxing authority nation electric and gas utility company serving the Lower for which the taxes are levied. This change better matches Peninsula of Michigan,is the principal subsidiary of CMS property tax expense with the services provided by the taxing Energy. Enterprises is engaged in several domestic and interna-authorities, and is considered the most acceptable basis of tional energy related businesses including: acquisition, deselop-recording property taxes. Prior to 1998, Consumers recorded ment and operation of independent power production facilities; property taxes monthly during the year following the assessment oil and gas exploration and production; transmission, storage, date (December 31). The cumulative elTect of this one-time and processing of natural gas; energy marketing, ser ices and change in accounting increased other income by $66 million, trading; and international energy distribution. and earnings, net of tax, by 543 million or $.40 per share. The pro forma efTect on prior years' consolidated net income of 2:

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES retroactively recording property taxes as if the new method of AND OTHER MATTERS accounting had been in etTect for all periods presented is not Basis of Prc3cntation: The consolidated financial statements material. include CMS Energy, Consumers and Enterprises and their Accretion Income and Expense: In 1991, the Michigan Public majority ow ned subsidiaries. The financial statements are Service Commission (MPSC) allowed Consumers to recoser a prepared in contbrmity with generally accepted accounting prin-portion of its abandoned Midland investment over a 10-year ciples and use management's estimates where appropriate. Allili-period, but did not allow Consumers to earn a return on that ated companies (more than 20 percent but less than a majority amount. Consumers reduced the recoverable imestment to the ownership interest) are accounted Ibr by the equity method present salue of the future recoveries. During the recovery i Change in 3/ethod of Acca:miingfhr Inrestmeni.s in Oli and period, Consumers adjusts the unrecovered asset to its present Gas Properties: CMS Oil and Gas Company (CMS Oil anc Gas) value. It reflects this adjustment as accretion income. Con-(formerly CMS NOMECO Oil & Gas Co.) elected to con.ert, versely, Consumers recorded a loss in 1992 for the present value etTective January 1,1998, from the full cost method to the suc-of its estimated future underrecoveries of poter costs resulting cessful elTorts method of accounting (br its investments in oil from purchases from the Midland Cogeneration Venture Lim-and gas properties CMS Oil and Gas belieses this accounting ited Partnership (MCV Partnership)(see Note 3). It now recog-change will more accurately present the results of its expi - nizes accretion expense annually to reflect the time value of ration and development activities and minimize asset write-offs money on the recorded loss. caused by periodic price swings, which may not be representa-Gas /mrntory: Consumers uses the weighted average cost tive of overall or long term markets. In addition, the Financial method for valuing working gas inventory. It records cushion Accounting Standards lloard has stated a preference for the use gas, which is gas stored to maintain reservoir pressure for recov-of successful etTorts accounting. Nitrotec Corporation cry of working gas,in the appropriate gas utility plant account. (Nitrotec),in which CMS Gas Transmission and Storage Com-Consumers stores gas inventory in its underground storage pany (CMS Gas Transmission) has an equity imestment, also ryiijg;es elected to convert, effectise January 1,1998, from the full cost 3/aintenance, Depreciation and Dep/ction: Consumers method of accounting to the successful etTorts method of charges property repairs and minor property replacements accounting. Accordingly, all prior period financial statements to maintenance expense. Depreciable property retired or sold, presented have been restated to conform with successful ellorts plus cost of removal (net of salvage credits). is charged to accu-accounting. The etTect, after tan of the change in accanting mulated depreciation. Consumers bases depreciation prmisions method as of December 31,1997, was a reduction to n lined for utility plant on straight line and units-of-production rates carnings of $175 million for CMS Oil and Gas and $15 million approved by the MPSC. The composite depreciation rate Ibr for CMS Gas Transmission, primarily attributable to a decrease electrie utility property was 3.5 percent Ibr 1998,3.6 percent in CMS Oil and Gas' net plant and property and deferred tax for 1997 and 3.5 percent for 1996. The composite rate for gas liability of $270 million and $95 million, respectisely, and a $15 million decrease in CMS Gas Transmission's equity imest-ment in Nitrotec,

38. CMS ENERGY CORPOR ATION l

J

I' l l l utility plant was 4.2 percent for 1998,4.1 percent for 1997 and Nudear Plant Decommasmumg: Consumers collected 551 mil-4.2 percent for 1996. The composite rate for other plant and lion in 1998 from its electric customers for decommissioning of property was 7.4 percent for 1998, 8.2 percent for 1997 and its two nuclear plants. Amounts collected from electric retail I 5.5 percent for 1996. customers and deposited in trusts (including trust earnings) l CMS Od and Gas follows the successful efTorts method are credited to accumulated depreciation. In 1996, Consumers of accounting for its insestments in oil and gas properties, receised a decommissioning order from the A1PSC that estimated CMS Oil and Gas capitalizes the costs of property acquisitions, decommissioning costs for liig Rock Point nuclear power plant successful exploratory wells, all development costs, and support (Ilig Rock) and Palisades nuclear power plant (Palisades) to be j equipment and facilities when incurred. it expenses unsuccessful 5344 million and 5599 million (in 1998 dollarsh respectively. exploratory wells when they are determined to be non-productive. Consumers filed with the MPSC in March 1998 site-specific CMS Oil and Gas also charges to expense production costs, decommissioning cost estimates for flig Rock and Palisades, overhead, and all exploration costs other than exploratory assuming that each plant site will eventually be restored to con-drilling as incurred. Depreciation, depletion and amortization of form with the adjacent landscape, and that all contaminated prosed oil and gas properties is determined on a field-by-field equipment will be disassembled and di3 posed of in a licensed basis using the units-of-production method oser the life of the burial facility. The resised estimated decommissioning costs for remaining proved reserves. Big Rock and Palisades are $304 milhon and $541 million (in Other nonutility depreciable property is amortized oser its 1998 dollars). respectisely. The decreases in cost from previous estimated useful life; gains and losses are recognized at the time estimates are principally due to the Big Rock immediate disman-of sale. tiement and reductions in decommissioning costs. Con 3umers Nudcar Fud Cost: Consumers amortizes nuclear fuel cost has determined that the current decommissioning surcharge will to fuel expense based on the quantity of heat produced for be sutlicient to provide for decommissioning of its nuclear plants I clectric generation. Interest on leased nuclear fuel is expensed and anticipates a new MPSC order in early 1999. After retire-as incurred. Under current federal law, as confirmed by court ment of Palisades, Consumers plans to maintain the facility in decision, the U.S. Department of Energy (DOE) was to begin protectise storage if radioactise waste disposal facilities are not accepting deliveries of spent nuclear fuel by January 31,1998 available. Consumers willincur most of the Palisades decommis-for disposal For fuel used after April 6,1983 Consumers sioning costs after the plant's Nuclear Regulatory Commission l charges disposal costs to nuclear fuel expense, recovers them (NRC) operating license expires. When the Palisades' NRC l through electric rates and remits to the DOE quarterly. Con-license expires in 2007, the trust funds are currently estimated l sumers elected to defer payment for disposal of spent nuclear to hase accumulated 5719 million. Consumeri estimates that at fuel burned before April 7,1983. At December 31,1998. Con-the time Palisades is fully decommissioned in the year 2046, the sumers had a recorded hability to the DOE of $117 million, trust funds will hase provided $1.9 billion, including trust earn-includmg interest, which is payable upon the first delisery of ings, oser this decommissioning period. At December 31,1998, spent nuclear fuel to the DOE. Consumers recosered through Consumers had an investment in nuclear decommissioning t ust electric rates the amount of this liability, excluding a portion of funds of $376 million for Pahsades and S181 million for Big Koek. interest. In January 1997,in response to the DOE's declaration Big Rock was closed permanently in 1997 hecause manage. that it would not begin to accept spent nuclear fuel deliveries ment determined that it would be uneconomical to operate in in 1998, Consumers and other utilities filed suit in federal court. an increasingly competitise emironment. The plant was origi-A decision was issued by the court in late 1997 anirming the nally scheduled to close on May 31,2000, at the end of the DOE's duty to take delisery of spent fuel, but uas not specific plant's operating license. The MPSC has allowed Consumers to as to the relief available for failure of the DOE to comply. continue collecting decommissioning surcharges through Further litigation brought by Consumers and others in 1998 December 31,2000 Plant decommissioning began in 1997 and is intended to produce specifie monetar) relief for the DOE's may take fne to ten years to return the site to its original condi-failure to comply, in January 1999, federal legislation was rein-tion. Consumers has spent $75 million fbr the decommissioning troduced in the llouse of Representatises to clarify the timing and withdrew $68 million from the Big Rock nuclear decommis-of the DOE's obligation to accept spent nuclear fuel and to sioning trust fund. direct the DOE to establish an integrated spent fuel manage-Reda3ubcations: CMS Energy has reclassified certain prior ment system that includes designing and constructing an year amounts for comparatise purposes. These reclassifications interim storage facility in Nevada. Similar legislation is did not alrect consolidated net income for the years presented. expected to be reintroduced in the Senate.

39. CMS ENERGY CORPORATION

Notes Continued Related Party Transactions: In 1998, I997 and 1996, Con-Ibreign Currency Translation: Foreign currency translation sumers purchased $51 million, $51 million and $50 million, adjustments relating to the operation of CMS Energy's long-I respectively, of electric generating capacity and energy from term investments in foreign countries are included in common athliates of Enterprises. Affiliates of CMS Energy sold, stored stockholders' equity. For the year ended December 31,1998, the and transported natural gas and prmided other services to the change in the foreign currency translation adjustment totaled MCV Partnership totaling $21 million, $21 million and $17 mil- $40 nullion, net of after-tax hedging proceeds. lion for 1998,1997 and 1996. For additional discussion of other: For significant accounting policies regarding cash related party transactions with the MCV Partnership and the equivalents, see Note 16; for income taxes, see Note 9; for exec-First Midland Limited Partnership (FM LP), see Notes 3 and utive incentive compensation, see Note 11; and for pensions and la. Other related-party transactions are immaterial. other postretirement benefits, see Note 12. Utility Regulation: Consumers accounts for the etTects of regulation based on a regulated utility accounting standard 3; UNCERTAINTIES Statemem of Financial Accounting Standards (Sl%S) 71. As a Consumers' Electric Utility Contingencies result, the actions of regulators alTect when resenues, expenses, Electric Environmental Matters: The federal Clean Air Act, as assets and liabilities are recognized. Si%S 121 imposes stricter amended (Clean Air Act), limits emissions of sulfur dioxide and criteria for retention of regulatory-created assets by requiring nitrogen oxides and requires emissions and air quality monitor-that such assets be probable of future reemery at each balance ing. Consumers currently operates within these limits and meets sheet date. Management believes these assets will be recovered. current emission requirements. The Clean Air Act requires The Ibilowing regulatory assets (liabilities), which include the Emironmental Protection Agency (EPA) to periodically both current and non-current amounts, are reflected in the Con. review the clTectiveness of the national air quality standards in solidated llalance Sheets. These costs are being recovered preventing adverse health clTects. and in 1997 the EPA revised through rates mer periods of up to 14 years. these standards. It is probable that the 1997 standards will result f /n Atillmn3 in further limitations on small particulate-related emissions. December 31 IwN 1997 in September 1998, based upon the 1997 standards, the EPA fwtretirement benefits (Note 12) s 397 5429 Administrator signed final regulations requiring the State of Income taxes (Note 9) 148 172 Michigan to further limit nitrogen oxide emissions. Fossil fueled

1. "' " a nsumers' generating units, can anticipate a tan tured g plan t n(Note 3) trducuon m m.trogen oxide emissions by 2003 to only 32 percent of DSM-deferred costs 32 46 Uranium enrichment facility 2n 22 levels allowed fbr the > car 2000. The State of Michigan has one Other

, 3x 28 year to submit an implementation plan. The State of Michigan has Total regulatory assets s 754 5837 filed a lawsuit objecting to the extent of the required emission income taxes (Note 9) 923N $(226) reductions it is unlikely that the State of Michigan will establish DSM-deferred revenue 124) (24) Consumers' nitrogen oxide emissions reduction target until mid-to-Total regulatory habihties 9259) 5(250) late 1999. Until this target is established, the estimated cost of compliance discussed below is subject to revision. If, c 'urt were t rder the EPA to adopt the State of Michigan's position, com-Consumers anticipates that it will discontinue application of SFAS 71 lbr the generation segment of its business in the first phance costs could be less than the prehminary estimated amounts. quarter of 1999 as Consumers is now preparing to implement The preliminary estimate of capital expenditures to reduce electric customer direct access. nitrogen oxide-related emissions for Consumers' fossil-fueled Imp /cmentation of New Accounting Standim/s In 1998 CMS generating units is approximately $290 million, plus $10 million Energy implemented SFAS 130, Reporting Compechen3ive per year for operation and maintenance costs. Consumers antic-Income, SFAS 131, Disclosures about Segments of an Enterpri3e ipates that these capital expenditures will be incurred between and Related lnformation. and SFAS 132, Employers' Disclosurcs 1999 and 2003. Consumers may need an equivalent amount of about Pensions and Other Postretirement Bcmfits Sl%S 130 capital expenditures and operation and maintenance costs to establishes standards for reporting and display of comprehen-comply with the new small particulate standards. sive income and its components. Equity adjustments related to unrealized imestment gains and losses (net of tax) and foreign currency translation, along with consolidated net income, com-prise comprehensive income. SFAS 131 and 132 tequire expanded disclosure concerning segments of an enterprise and pension and other postretirement benefits.

40. CMS ENERGY CORPORATION

Consumers

• coal fueled electric generating units burn low-Consumers' Electrie l'tility Rate Matters sulfur coal and are currently operating at or near the sulfur Dcctric Prmcedingr in 1996, the MPSC issued a final order dioxide emission limits that will be elTective in the year 2000.

that authorized Consumers to recoser costs a3sociated with the During the past few years, in order to comply with the Clean purchase of the additional 325 megawatts (MW) of the natural Air Act, Consumers incurred capital expenditures totaling gas. fueled, combined-cycle cogeneration facility (MCV Facility ) 555 million to install equipment at certain generating units. capacity (see " Power Purchases from the MCV Partnership"in Consumers estimates an additional $16 million of capital this Note) and to recover its nuclear plant imestment by expenditures for ongoing and proposed modifications at the increasing prospective annual nuclear plant depreciation remaining coal-fueled units to meet year 20no requirements. expense by $18 million, with a corresponding decrease in Ibssil-Management beheses that these expenditures will not materially fueled generating plant depreciation expense. It also established alTect Consumers' annual operating costs. an experimental direct-access program. Customers hasing a Under the Michigan Natural Resources and Environmental maximum demand of 2 MW or greater are eligible to purchase Protection Act, Consumers expects that it will ultimately incur generation services directly from any eligible third-party power investigation and remedial action costs at a number of sites. supplier and Consumers will transmit the power for a fee. The Nevertheless, it belieses that these costs are properly recoserable direct-access program is limited to 134 MW of load. In accor. in rates under current ratemaking policies. dance with the MPSC order, Consumers held a lottery in April Consumers is a so-called potentially responsible party at l')97 to select the customers to participate in the direct-access seseral contaminated sites administered under the Comprehensive program. Subsequently, direct access for a portion of this 134 { Emironmental Response, Compensation and Liability Act MW began in late 1997. The program was substantially filled (Supe' fund). Superfund liability is joint and several; along with by mid-January 1999 and Consumers expects the remaining Consumers, many other creditworthy, potentially responsible amount to begin by the end of the first quarter of 1999. parties with substantial assets cooperate with respect to the In January 1998, the Michigan Court of Appeals (Court of indisidual sites. Hased upon past negotiations, Consumers esti-Appeals) affirmed an MPSC conclusion that the MPSC has mates that its share of the total liability fbr the know n Superfund statutory authority to authorize an experimental electric retail sites uill be between $3 million and $9 million. At December 31, wheeling program. No retail wheeling has yet occurred pur-1998. Consumers has accrued the minimum amount of the range suant to that program. In October 1998, the Michigan Supreme ihr its estimated Superfund liability. Court issued an order granting Consumers' application for leave While decommissioning Big Rock, Consumers found that to appeal. A decision by the Michigan Supreme Court in this some areas of the plant have coatings that contain both metals matter may be issued in mid-1999. and polychlorinated biphenyls. Consumers does not beliese that Bectric Restructuring: As part of ongoing proceedings relat-any facility in the United States currently accepts the radioac-ing to the restructuring of the electric utility industry in Michi-tise portion of that waste. The cost of removal and disposal is gan, the MPSC in June 1997 issued an order proposing that currently unknown. These costs will constitute part of the cost beginning January 1,1998 Consumers transmit and distribute to decommission the plant, and will be paid from the decom-energy on behalf of competing power suppliers to retail cus-missioning fund. Consumers is studying the extent of the conta-tomers. Further restructuring orders issued in late 1997 and mination and resiewing options, early 1998 proside for:(i) recovery of costs incurred by utilities Antitrmt; In October 1997, two independent power producers in order to serve their customers in a regulated monopoly envi-sued Consumers in a federal court. The suit alleges antitrust ronment of $1.755 billion through a charge to all customers siolations relating to contracts which Consumers entered into purchasing their power from other sources until the end of the with some of its customers and claims relating to power facili-transition period in 2007, subject to an adjustment through a ties. The plaintilTs claim damages of $100 million (which a true-up mechanism;(ii) commencement of the phase-in of court can treble in antitrust cases as prosided by law). Con-sumers has filed a motion to dismiss and is awaiting a court rul-ing on this motion. Consumers belieses the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter,

41. CMS ENERGY CORPOR ATION

Notes Continued direct access in 1998;(iii) suspension of the power supply cost Under this program, customers buying electricity from recovery (PSCR) clause as discussed below; and (iv) all Consumers as traditional customers will not have their rates customers to choose their power suppliers on January 1,2002. adjusted to reflect the actual costs of fuel and purchased and The recovery of costs of implementing a direct access program, interchanged power during the 1998-2001 period in prior preliminarily estimated at an additional $200 million, would be years, any change in power supply costs was passed through reviewed for prudence and recovered via a charge approved by to Consumers' customers. In order to reduce the risk of high the MPSC. Nuclear decommissioning costs will also continue to energy prices during peak demand periods, Consumers is be collected through a separate surcharge to all customers. purchasint energy options and contracting to buy electricity in June 1998, Consumers submitted its plan for implement. during the months of June through September 1999. Con-ing direct access to the MPSC. The, primary issues addressed in sumers is planning to have sufficient generation and purchased the plan are: (i) the implementation schedule; (ii) the direct-capacity for a 16 percent to 21 percent reserve margin in order access service options available to customers and suppliers; to provide reliable service to its electric service customers and to (iii) the process and requirements for customers and others to protect itself against unscheduled plant outages. Under certain obtain direct-access service; and (iv) the roles and responsibili-circumstances. the cost of purchasing capacity and energy on ties for Consumers, customers and suppliers. In the plan, Con-the spot market could be substantial. sumers proposed to phase in 750 MW of retail customer load to customers purchasing their power from other sources over Other Consumers' Electrie Utility Uncertainties the 1998-2001 period. Subsequent to year-end, Consumers The Midland Cogeneration l'enture: The MCV Partnership, received MPSC electric restructuring orders which generally which leases and operates the MCV Facility, contracted to sell supported Consumers' implementation plan. Accordingly, electricity to Consumers for a 35-year period beginning in 1990 Consumers is now preparing to implement electric customer and to supply electricity and steam to The Dow Chemical Com-direct access. pany. Consumers, through two wholly owned subsidiaries, holds There are numerous appeals pending at the Court of Appeals the following assets related to the MCV Partnership and MCV relating to the MPSC's restructuring orders, including appeals Facility:(i) CMS Midland inc., a subsidiary of Consumers, owns by Consumers. Consumers believes that the MPSC lacks statu. a 49 percent general partnership interest in the MCV Partnership; tory authority to man'date industry restructuring, and its appeal and (ii) CMS Midiand Holdings Company, a subsidiary of is limited to this jurisdictional issue. CMS Energy cannot Consumers. holds, through FM LP, a 35 percent lessor interest predict the outcome of electric restructuring on CMS Energy's in the MCV Facility. financial position, liquidity or results of operations. In October 1998, Consumers initiated a process for the solic. Summarized Statements of Incomefor CMS Midland and CMS itation of bids to acquire Consumers' rights to 1,240 MW of Holdings (unaudited); contract capacity and associated energy being purchased from In 3/illions December 31 1998 1997 1996 the MCV Partnership. Subsequent to year-end, Consumers signed a tentative long-term power sales agreement with PECO Pretax operating income $49 546 540 be a taxes and ther 15 14 11 Energy Company. This transaction is subject to obtaining sat-Net income s34 532 529 isfa: tory rate-making and accounting treatment and regulatory rulings. In an order issued in 1998, the M PSC delayed its con-sideration of the bidding process until a definitive agreement Power Furchasesfrom the MCI' Partner 3 hip Consumers' was signed (subject to review by the MPSC), but stated that annual obligation to purchase capacity from the MCV Partner-Consumers' approach offers a legitimate way to utilize indepen-ship is 1,240 MW through the termination of the PPA in 2025. dent market forces to determine the abose-market or stranded The PPA provides that Consumers is to pay a levelized average portion of Consumers' obligations under the Power Purchase capacity charge, based on the MCV Facility's availability, of Agreement (PPA) with the MCV Partnership. Consumers antic-3.77 cents per kilowatt-hour (kWh), a fixed energy charge, and a ipates that its regulatory filing will be made with the MPSC for variable energy charge based primarily on Consumers' aserage consideration by the end of the first quarter of 1999. As a result of a 1998 MPSC order in connection with the electric restructuring program, Consumers' ability to recover certain costs pursuant to the PSCR process was suspended.

42. CMS ENERGY CORPOR ATION

cost of coal consumed. Since January 1,1993, Consumers has in February 1998, the NiCV Partnership filed a claim of been permitted by the MPSC to recover capacity charges aver-appeal from the January 1998 and February 1998 MPSC orders aging 3.62 cents per kWh for 915 N1W, plus a substantial portion in the electric utility industry restructuring. At the same time, of the fixed and variable energy charges. Since January 1,1996, the MCV Partnership filed suit in the U.S. District Court seek-Consumers also has been permitted to reemer capacity charges ing a declaration that the MPSC's failure to prmide Consumers for the remaining 325 MW of contract capacity with an initial and the MCV Partnership a certain source of recovery of average charge of 2.86 cents per kWh increasing periodically to capacity payments after 2007 deprived the MCV Partnership of an esentual 3.62 cents per kWh by 2004 and thereafter. Because its rights under the Public Utilities Regulatory Policies Act of the MPSC has already approved recosery of this capacity, Con-1978. The MCV Partnership is seeking to prohibit the MPSC sumers expects to recover these increases through an adjustment from implementing portions of the order. to the currently frozen PSCR level. This adjustment is currently Nur/ car 3/ancrs: In January 1997, the NRC issued its under consideration by the MPSC. After September 2007, Systematic Assessment of Licensee Performance report for Pal-under the terms of the PPA. Consumers will only be required to isades. The report rated all areas as good. The NRC suspended pay the MCV Partnership capacity and energy charges that the the assessment process for all licensees in 1998. MPSC has authorized for reemery from electric customers. Palisades' temporary on-site storage pool for spent nuclear Consumers recognized a loss in 1992 for the present value of fuel is at capacity. Consequently, Consumers is using NRC-the estimated future underrecoveries of power costs under the apprmed steel and concrete vaults, commonly know n as " dry PPA based on MPSC reemery orders. At December 31,1998 casks," for temporary on-site storage. As of December 31,1998 and December 31,1997, the remaining after-tax present value Consumers had loaded 13 dry storage casks with spent nuclear of the estimated future PPA liability associated with the 1992 fuel at Palisades and plans to load five additional casks in 1999 loss totaled SI10 million and $117 million, respectisely. At pending approval by the NRC. In June 1997, the NRC approved December 31,1998, the undiscounted after-tax amount associ-Consumers' process for unloading spent fuel from a cask presi-ated with this liability totaled $164 million. These after-tax cash ously discovered to have minor weld tlaws. Consumers intends underrecoveries are based on the assumption that the MCV to transfer the spent fuel to a new transportable cask when one Facility would be available to generate electncity 91.5 percent of is available. the time over its expected life. llistorically the MCV Facility has Consumers maintains insurance emerage against property operated abme the 91.5 percent lesel. Accordingly, in 1998, damage, debris remmal, personal injury liabihty and other risks Consumers increased its PPA liability by 537 million. Because that are present at its nuclear generating facilities. Consumers the MCV Facility was asailable 99,4 percent of the time in also maintains emerage fbr replacement power costs during pro-1998, Consumers has an accumulated unreemered after-tax longed accidental outages at Palisades. Insurance would not shortfall of $10 million as of December 31,1998. If the MCV cmer such costs during the first 17 weeks of any outage, but Facihty was to be available to generate electricity at the would cover most of such costs during the next 58 weeks of the expected 91.5 percent lesel during the next fne years, outage, followed by reduced coserage to 80 percent for two addi-Consumers'after-tax cash underreemeries assoelated with the tional years. If certain emered losses occur at its own or other PPA would be as follows. nuclear plants similarly insured, Consumers could be required to in Aldimm pay maximum assessments of $15 million in any one year to 1999 2000 2001 2002 2003 Nuclear Electric Insurance Limited; $88 million per occurrence, 1:stimated cash under-limited to a maximum installment payment of $10 million per reemeries, net of tax $22 521 520 $19 518 occurrence in any year; and $6 million if nuclear workers claim bodily injury from radiation exposure. Consumers considers the if the MCV Facility operates at availability lesels abose possibility of these assessments to be remote. management's estimate mer the remainder of the PPA, Con-sumers will need to recognize additional losses for future under-recoveries. For further discussion on the impact of the frozen PSCR, see " Electric Restructuring"in this Note. Management will continue to evaluate the adequacy of the contract loss liability considering actual MCV Facility operations and the potential sale of the PPA.

43. CMS ENERGY CORPORATION

Notes Continued The NRC requires Consumers to make certain calculations requirements, could affect the estimate of remedial action costs } and report on the continuing ability of the Palisades reactor for the sites. Consumers defers and amorti/es over a period of vessel to withstand postulated pressurized thermal shock events ten years, environmental clean up costs above the amount cur-during its remaining license life, considering the embrittlement rently being recovered in rates. Rate recognition of amortization of reactor materials. In December 1996, Consumers received an expense will not begin until after a prudence review in a general interim Safety Evaluation Report from the NRC indicating that rate case. Consumers is allowed current recovery of 51 million the reactor vessel can be safely operated through 2003 before annually. Consumers has initiated lawsuits against certain insur-reaching the NRC's screening criteria for reactor embrittlement. ance companies regarding coverage for some or all of the costs Consumers believes that with fuel management designed to that it may incur for these sites. minimize embrittlement, it can operate Palisades to the end of its license life in the year 2007 without annealing the reactor Consumers Gas Group Matters vessel. Nesertheless, Consumers will continue to monitor the Gas Restructuring: In December 1997, the MPSC approved i matter. Consumers' application to implement an experimental gas l Commitmentsfor Coal Supplies: Consumers has entered into transportation program, which will extend oser a three-year coal supply contracts with various suppliers for its coal-fired period, eventually allowing 300,000 residential, commercial and generating stations. Under the terms of these agreements, industrial retail gas sales customers to choose their gas supplier I Consumers is obligated to take physical delivery of the coal in direct competition with Consumers. The program is volun-and make payment based upon the contract terms. Consumers' tary and participating natural gas customers are selected on a current contracts have expiration dates that range from 1999 to first-come, first-served basis, up to a limit of 100,000 per year. 2004. Consumers enters into long-term contracts fbr approxi-As of December 31,1998, more than 102.000 customers chose mately 50-75 percent of its annual coal requirements. In 1998 alternative gas suppliers, representing approximately 24.1 billion coal purchases totaled $246 million of which $161 million cubic feet (bef) of gas load. Customers choosing to remain as (60 percent of the tonnage requirement) was under long-term sales customers of Consumers will not see a rate change in contract. Consumers supplements its long-term contracts with their natural gas rates. This three-year program: (i) suspends spot market purchases. Consumers' gas cost recovery clause, efTective April 1,1998, establishing a gas commodity cost at a fixed rate of $2.84 per Consumers Gas Group Contingencies thousand cubic feet (mcf);(ii) establishes an earnings sharing Gas Dnironmental Matters: Under the Michigan Natural mechanism with customers if Consumers' earnings exceed Resources and Environmental Protection Act, Consumers certain pre-determined levels; and (iii) establishes a gas trans-expects that it will ultimately incur investigation and remedial portation code of conduct that addresses the relationship action costs at a number of sites, including some 23 sites that for-between Consumers and marketers, including its anilired mar. merly housed manufactured gas plant facilities, even those in keters. In January 1998, the Michigan Attorney General, which it has a' partial or no current ownership interest. On sites Association of Businesses Advocating Tariff Equity and other where Consumers has received site-wide study plan approvals,it parties filed claims of appeal regarding the program with the will continue to implement these plana It will also work toward Court of Appeals. closure of environmental issues at sites as studies are completed. Consumers estimates its costs related to imestigation and reme-dial action for all 23 sites between $48 million and $98 million, of which Consumers accrued a liability for $48 raillion. These estimates are undiscounted l998 costs. As of D<cember 31, 1 1998, Consumers has an accrued liability of $4t' million and a regulatory asset for approximately the same amount. Any sig-nificant change in assumptions, such as remediation techniques, nature and extent of contamination, and legal and regulatory i

44. CMS ENERGY CORPORATION

l Consumers uses gas purchase contracts to limit its risk asso-CMS Energy has accrued estimated losses for certain contin-ciated with gas price increases. It is management's intent to take gencies discussed in this Note. Resolution of these contingencies physical delivery of the commodity and failure could result in a is not expected to have a material adverse impact on CMS significant penalty for nonperformance. At December 31,1998, Energy's financial position, liquidity or results of operations. Consumers had an exposure to gas price increases if the ulti-mate cost of gas was to exceed $2.84 per mcf for the fbilowing 4: sHonT-TenM rlNANCINGS volumes: 15 percent of its 1999 requirements: 45 percent of its At December 31,1998. CMS Energy and a subsidiary had 2000 requirements; and 45 percent of its first quarter 2001 bridge loan facilities negotiated with domestic banks in an requirements. Additional contract coverage is currently under aggregate amount of $1.9 billion. These facilities were specifi-review. The gas purchase contracts currently in place were con. cally available to finance CMS Energy's acquisition of the summated at prices less than $2.84 per mcf. The gas purchase Panhandle Companies, and had a term of six months from the contracts are being used to protect against gas price increases in date of acquisition. These facilities had aggregate average com-a three-year experimental gas program where Consumers is mitment and usage fees of approximately 53 basis points on recovering from its customers $2.84 per mcf for gas. amounts committed and/or used. Commitmentsfor Gas Supplics: Consumers entered into gas At February 1,1999, Consumers had Federal Energy supply contracts and transportation contracts with various Regulatory Commission (FERC) authorization to issue or guar. suppliers for its natural gas business. These contracts have expi. antee through June 2000, up to $900 million of short-term ration dates that range from 1999 to 2003. Consumers' 1998 gas securities outstanding at any one time and to guarantee, through requirements totaled 210 bef at a cost of $565 million,70 per. 1999, up to $25 million in loans made by others to residents cent of which was under long-term contracts for one year or of Michigan for making energy-related home improvements, more. As of the end of 1998 Consumers had 85 percent of its Consumers also had remaining FERC authorization to issue 1999 gas requirements under such long term contracts, and will through June 2000, up to 5475 million and $425 million of long-supplement them with additional long-term contracts and spot. term securities with maturities up to 30 years for refinancing market purchases. purposes and for general corporate purposes respectively. Consumers has an unsecured $425 million credit facility and Other l'ncertainties unsecured lines of credit aggregating $130 million. These facili-CMS Generation Environmental Matters: CMS Generation Co. ties are available to finance seasonal working capital require-(CMS Generation) does not currently expect to incur significant merts and to pay for capital expenditures between long-term capital costs, if any, at its power facilities to comply with cur-financings. At December 31,1998, a total of $215 million was rent environmental regulatory standards. outstanding at a weighted average interest rate of 5.8 percent, Ospital Expenditures: CMS Energy estimates capital expen-compared with $377 million outstanding at December 31,1997, ditures, including investments in unconsolidated subsidiaries at a weighted aserage interest rate of 6.5 percent. In January and new lease commitments, of $4.148 billion for 1999, which 1999. Consumers renegotiated a variable-to-fixed interest rate includes approximately 52.2 billion for the acquisition of the swap totaling $175 million in order to reduce the impact of Panhand!c Eastern Pipe Line Company, Trunkline Gas Com-interest rate fluctuations. pany, Pan Gas Storage Company, Panhandle Storage Company Consumers also has in n ' ace a $500 million trade receivables and Trunkline LNG Company (Panhandle Companies), s;de program. At December 11,1998 and 1997, receivables sold $1.450 billion for 2000, and $1.175 billion for 2001. For further under the program totaled $206 million and $335 million, respec-information, see Capital Resources and Liquidity-Capital tively. Accounts receivable and accrued revenue in the Consoli. Expenditures in the Management's Discussion and Analysis, dated 13alance Sheets base been reduced to reflect receivables sold. Other: As of December 31,1998, CMS Energy and Enter-prises have guaranteed up to 5433 million in contingent obliga-tions of unconsolidated affiliates and related parties. In addition to the matters disclosed in this note, Consumers and certain other subsidiaries of CMS Energy are parties to certain lawsuits and administrative proceedings before sarious courts and governmental agencies arising from the ordinary course of business. These lawsuits and proceedings may invohe personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters.

45. CMS ENERGY CORPORATION

Notes Continued i 5: LONG TERM DEDT Long term debt consists of the following: In Afillrns December 31 Maturing / Expiring Interest Rate 1998 1997 First Mortgage Honds 1998 to 2023 6.4% to 8.9% % 628 $1,255 l Long-Term Bank Debt 2003 5.8% 'a> 175 400 l Senior Notes: CMS Energy 2000 to 2004 7.8Wa' 830 830 Consumers 2008 to 2028 6.5% 'a' 1,075 Extendible Tenor Rate Adjusted Securities 2005

• 7.0% 'a>

180 Senior Credit Facilities 2002 6.6Wa' 669 305 General Term Notes

• Series A to E 1999 to 2008 7.5Wai 625 509 Pollution Control Revenue Bonds 2000 to 2018 5.2% 'a' 131 131 Term loan Agreement-CMS Generation 1998 7.4% d' 91 Revolving Line of Credit 2003 5.9% 'ai 168 124 Nuclear Fuel Disposal W

5. lwa>

117 111 Hank Loans and Other 1999 to 2014 7.7 W u' 410 134 Principal Amount Outstanding SM8 3,890 Current Amounts (25N) (609) Net Unamorti/cd Discount (24) (9) Total Long-Term Debt $4,726 $3,272 (a) Represents the neighted arcrage interest rate at December 31.19Y8 (b) Afar be extendedfor an adduionalsesen years (c) Alaturity Jsue um ertain (see Note 2). The scheduled maturities of long term debt and improve-In January 1999, CMS Energy receised net proceeds of ment fund obligations are as follow s: $258 million in 1999, approximately $473 million from the sale of $480 million of $408 million in 2000, $96 million in 2001, $1.306 billion in 2002 senior notes, in February 1999 CMS Energy receised net pro-and $592 million in 2003. ceeds of approximately $296 million from the sale of $300 mil-lion of senior notes. Proceeds from these ofTerings were used to CMS Energy repay debt and for general corporate purposes. CMS Energy has $725 million of senior credit facilities consist-ing of a $600 million three year resolving credit facility and a Consumers five-year $125 milhon term loan facility (Senior Credit Facili-Consumers issued a total of $1.075 billion of senior notes ties). Additionally, CMS Energy has unsecured lines of credit throughout 1998 at varying interest rates between 6.2 percent and letters of credit in an aggregate amount of $216 million. At and 6.875 percent, principal amounts between $150 million and December 31,1998, the total amount utilized under the Senior $250 million, and maturities from 2008 to 2028. The senior notes Credit Facilities was $725 million, including $57 million of con-are secured by Consumers First Mortgage Bonds issued contem-tingent obligations, and under the unsecured lines of credit and poraneously in similar amounts and one series of senior notes letters of credit was $147 million. aho is secured by an insurance policy. Consumers also issued in January 1998. a Delaware statutory business trust estab-long-term bank debt of $225 million in May 1998, maturing in lished by CMS Energ) sold $180 million of certificates due Jan-2001 to 2003, at an initial interest rate of 6.05 percent. Proceeds uary 15,2005 in a public ofTering. In exchange for those from these issuances were used primarily to pay dow n $627 million proceeds, CMS Energy sold to the trust $180 million aggregate of First Mortgage Honds and $450 million of long-term bank principal amount of 7 percent Extendible Tenor Rate Adjusted debt. as well as for general corporate purposes. Securities due January 15,2005, w hich may be extended for an additional seven years. Net proceeds to CMS Energy from the sale totaled $176 million. In August 1998, CMS Energy filed a shelf registration state-ment for the issuance of $400 million of General Term Notes

• Series E,

46. CMS ENERGY CORPORATION

Consumers secures its First Mortgage Honds by a mortgage Consumers has 4.8 million shares of 8.2 percent Trust Preferred and lien on substantially all of its property. Consumers' ability to Securities which were solJ through Consumers Energy Com. issue and sell securities is restricted by certain provisicas in its pany Financing 11, a wholly owned business trust consolidated First Mortgage Hond Indenture,its Articles of Incorporation and with Consumers. Net proceeds from the sale totaled $116 mil-the need for regulatory approvals to meet appropriate federal law. lion. Consumers formed both trusts for the sole purpose of Consumers'long term pollution control revenue bonds are issuing the Trust Preferred Securities. Consumers' obligations secured by irresocable letters of credit or First Mortgage with respect to the Trust Preferred Securities under the related Honds, and an insurance policy. tax-deductible notes, ender the indenture through which Con-sumers issued the notes, under Consumers' guarantee of the CMS Oil and Gas Trust Preferred Securities, and under the declaration by the CMS Oil and Gas has a $225 million resolving credit facility trusts, taken together, constitute a full and unconditional guar-that converts to term loans maturing from March 1999 through antee by Consumers of the trusts' obligations under the Trust March 2003. Preferred Securities. Under the prosisions of its Articles of incorporation, 6: C APirALil ATION Consumers had $300 million of unrestricted retained earnings CMS Energy available to pay common disidends at December 31,1998. The authorized capital stock of CMS Energy consists of 250 in January 1999. Consumers declared and paid a $97 million million shares of CMS Energy Common Stock, one of two common dividend. classes of par value 5.01 per share (CMS Energy Common Stock),60 million shares of Class G Common Stock, one of 7: E ARNINGS PEH SHARE AND DIVIDENDS two classes of no par value (Class G Common Stock), and 10 CMS Energy currently has two classes of common stoek: million shares of CMS Energy Preferred Stock, $.01 par value. CMS Energy Common Stock and Class G Common Stock in November 1998, CMS Energy sold 4.5 million new shares (Common Stock). Earnings per share attributable to Common of CMS Ener3y Common Stock in a block trade. The net pro-Stock for the years ended December 31,1998,1997 and 1996 ceeds of approximately $208 million were used for general cor-include earnings of the gas distribution, storage and transporta-porate purposes. tion businesses etrrently conducted by Consumers and Michi-In December 1998, CMS Energy filed a shelf registration gan Gas Storage Company (Consumers Gas Group). The statement for the issuance of $1.5 billion of CMS Energy Com-allocation of earnings attributable to each class of common mon Stock, trust preferred sceurities and other securities which stock and the related amounts per share are computed by con-could be conserted into CMS Energy Common Stock. sidering the weighted average number of shares outstanding. CMS Energy, through CMS Energy Trust I, a wholly owned Earnings attributable to the outstanding shares of Class G business trust, sold 3.45 million units of 7.75 percent tax Common Stock (Outstanding Shares) are equal to Consumers deductible Trust Preferred Securities. The primary asset of CMS Gas Group net income multiplied by a fraction: the numerator Energy Trust I is $178 million principal amount e t 7.75 percent is the weighted average number of Outstanding Shares during subordinated debentures issued by CMS Energy, which mature the period and the denominator is the weighted a erage number m 2027. These tax deductible Trust Preferred Securities are con-of Outstanding Shares and authorized but unissued shares of vertible into 4.2 million shares of CMS Energy Common Stock Class G Common Stock not held by holders of the Outstanding at a rate equivalent to a conversion price of $40.80 per share of Shares during the period. The earnings attributable to Class G CMS Energy Common Stock. Common Stock on a per share basis for 1998,1997 and 1996 Other Under its most restrictise borrowing arrangement at are based on 25.5 percent,24.5 percent, and 23.8 percent. December 31,1998, none of CMS Energy's consolidated net respectisely, of the income of Consumers Gas Group. income was restricted for payment of common disidends. CMS Energy could pay 5800 million in common disidends under its most restrictise debt cosenant. Consumers Consumers has 4 million shares of 8.36 percent Trust Preferred Securities which were sold through Consumers Power Company Financing 1, a wholly owned business trust consolidated with Consumers. Net proceeds from the sale touled 597 million.

47. CMS ENERGY CORPORATION 1

s

Notes Continued I 1998, CMS Energy paid dividends of 5.33 per share on CMS Computation of Earnings Per Share Energy Common Stock and 5.325 per share on Class G Common In Million Except Per Share Amounts Stock. In January 1999, the Board of Directors declared a quar-199M 1997 1996 terly dividend of 5.33 per share on CMS Energy Common Stock n e t no m 4 pnc e na e-and 5.325 per share on Class G Common Stock, which were paid and o%te cornmys per s"" in February 1999. Consohdated Net income s 285 5244 5224 Net income Attributable to k NSE MAN AGtMLNi AcTlWTLES ANu Conanon Stocks: ot nmmt s in An uc rions CMS Energy-Basic Income s 272 $229 5 210 CMS Energy and its subsidiaries use a sariety of derivative Add conversion of 7.75% Trust Preferred Securities (net of tax) 9 5 - instruments (derivatives), m, cluding futures contracts, swaps, j p ns ad forwaM nuacts, to manage exposm to Ductua-CMS Energy-Diluted Income 5 2x1 5234 $ 210 Class G-Basic and Diluted Income 5 13 $ 15 $ 14 rates. To qualify for hedge accounting, derivatives must meet the j ~ ollowing criteria: (i) the item to be hedged exposes the enterprise i A mup Cmnrnon Shms Out modmy A p a ts t a am m a O N t o., to price, interest or exchange rate risk; and (ii) the derivative E em Per he reduces that exposure and is designated as a hedge. CMS Energy: Derivative instruments contain credit risk if the counter par-Aserage Shares-Basic 102.4 96.1 92.5 ties, including financial institutions and energy marketers, fail to ) cf re S e ri i 4.3 2.3 - perform under the agreements. CMS Energy minimizes such risk Options-Treasury Shares 0.5 0.3 0.2 by performing financial credit reviews using, among other things, Average Shares-Diluted 107.2 98.7 92.7 publicly available credit ratings of such counter parties. Nonper-formance by counter parties is not expected to have a material gg,, g. Average Shares adserse impact on CMS Energy's financial position, liquidity or Basic and Diluted N.3 8.0 7.7 results of operations. rm ..m p A m. Commodity Price #cdges: CMS Energy accounts for its com-conm an 5um modity price derivatives as hedges, as defined above, and as such, CMS Energy: defers any changes in market value and gains and losses resulting i ed fr m settlements until the hedged transaction is complete. If Class G: there was a loss of correlation between the changes Basic and Diluted 1.56 1.84 1.82 in (i) the market value of the commodity price contracts and (ii) the market price ultimately received for the hedged item, and floiders of Class G Common Stock have no direct rights in the impact was material, the open commodity price contracts the equity or assets of Consumers Gas Group, but rather have w uld be marked to market and gains and losses would be recog-rights in the equity and assets of CMS Energy as a whole. In nized m the income statement currently. the sole discretion of the CMS Energy Board of Directors C nsumers has entered into and will enter into electric option (Board of Directors), CMS Energy may pay dividends exclu-connacts to ensure a reliable source of capacity to meet its sively to the holders of Class G Common Stock, exclusively to cust mers, electric requirements and to hmit its nsk associated j the holders of CMS Energy Common Stock, or to the holders with electricity price increases. It is management s intent to take of both classes in equal or unequal amounts. The Board of physical delisery of the commodity. Consumers continuously Directors has stated its intention to declare and pay dividends evaluates its daily capacity needs and sells the option contracts, if on the CMS Energy Common Stock based primarily on the madetaW, wb n has excess dah capac onsunus' mas earnings and financial condition of CMS Energy. Dividends on mum exp sure ass ciated with these options is hmited to premi-Class G Common Stock are paid at the discretion of the Board ums pa d. of Directors based primarily upon the earnings and financial CMS Oil and Gas has one arrangement which is used to fix condition of Consumers Gas Group, and to a lesser extent, the prices that CMS Oil and Gas will pay for gas supplied to the CMS Energy as a whole. MCV Facility for the years 2001 through 2006 by purchasing the In February and May 1998, CMS Energy paid dividends of ec n mic equivalent f 10,000 million British thermal units $.30 per share on CMS Energy Common Stock and 5.31 per (MMBtu) per day at a fixed price, escalating at 8 percent per year share on Class G Common Stock, in August and November

48. CMS ENERGY CORPORATION

thereafter, starting at $2.82 per M MBlu in 2001. The settlement o w:om m s periods are each a one-year period ending December 31,2001 CMS Energy and its subsidiaries file a consolidated federal through 2006 on 3.65 million MMBtu. If the floating price, income tax return. Income taxes are generally allocated based essentially the then-current Gulf Coast spot price, for a period on each company's separate taxable income. CMS Energy and is higher than the fixed price, the seller pays CMS Oil and Gas Consumers practice full deferred tax accounting for temporary the difference, and vice versa. If a party's exposure at any time differences, but federal income taxes have not been recorded on exceeds $5 million, that party is required to obtain a letter of the undistributed earnings of international subsidiaries where credit in favor of the other party for the excess over $5 million CMS Energy intends to permanently reinvest those earnings. and up to $10 mi!! ion. At December 31, !?M, m letter of Upon distribution, those earnings may be subject to both U.S. credit was posted by either party to the agreement. As of income taxes (adjusted for foreign tax credits or deductions) and December 31,1998, the fair value of this contract reflected withholding taxes payable to various foreign countri.s. It is not payment due from CMS Oil and Gas of $14.5 million. practical to estimate the amount of unrecognized deferred A subsidiary of CMS Gas Transmission uses natural gas income taxes or withholding taxes on undistributed earnings. future contracts and CMS Marketing, Sersices and Trading CMS Energy used investment tax credit (lTC) to reduce cur-Company uses natural gas and oil futures contracts, options rent income taxes payable, and amortizes ITC over the life of and swaps (which require a net cash payment for the difTerence the related property. Any alternative minimum tax (AMT) paid between a fixed and variable priec). generally becomes a tax credit that CMS Energy can carry for-Interest Rate // edges: CMS Energy and some of its sub. ward indefinitely to reduce regular tax liabilities in future peri-sidiaries enter into interest rate swap agreements to exchange ods when regular taxes paid exceed the tax calculated for AMT. variable rate interest payment obligations to fixed rate obliga. The significant components of income tax expense (benefit) tions without exchanging the underlying notional amounts. consisted of: These agreements convert variable rate debt to fixed rate debt In Afillions to reduce the impact of interest rate fluctuations. The notional Years Ended December 31 199M 1997 1996 amounts parallel the underlying debt levels and are used to current income taxes measure interest to be paid or received and do not represent Federal and other $ 61 $ 76 5 86 state and local 5 3 4 the exposure to credit loss. The notional amount of CMS Energy's and its subsidiaries' interest rate swaps was $579 mil-lion at December 31,1998. The difference between the Deferred income taxes amounts paid and received under the swaps is accrued and Federal 77 " 41 54 recorded as an adjustment to interest expense over the life of Foreign (7) (7) the hedged agreement. 70 34 54 lbreign Exchange 1/ edges: CMS Energy uses forward exchange contracts and collared options to hedge certain Deferred ITC, net (16) (10) (10) receivables, payables, long-term debt and equity value relating st23 5108 $137 j to forcign investments. The purpose o( CMS Energy's forcign (a) includes $23 millionfor i998 change in property ta r accounting currency hedging activities is to protect the company from the risk that U.S. dollar net cash flows resulting from sales to for-eign customers and purchases from foreign suppliers and the repayment of non U.S. dollar borrowings as weu as equity reported on the company's balance sheet, may be adversely alTected by changes in exchange rates. These contracts do not subject CMS Energy to risk from exchange rate mosements because gains and losses on such contracts olTset losses and gains, respectively, on assets and liabilities being hedged. The notional amount of the outstanding foreign exchange contracts was $736 million at December 31,1998, which includes $450 mil-lion and $250 million for Australian and Brazilian foreign exchange contracts, respectively. Subsequent to December 31, 1998, the fair value of the Brazilian foreign exchange contracts increased significantly, as the Brazilian real weakened against the U.S. dollar.

49. CMS ENERGY CORPORATION

Notes Continued The principal components of CN1S Energy's deferred tax 10: FIN ANCI AL INSTRUMENTS assets (liabilities) recognized in the balance sheet are as follows: The carrying amounts of cash, short-term investments and cur-In 3/illions rent liabilities approximate their fair values due to their short. December 31 1998 1997 term nature. The estimated fair values of long-term investments Property 5 (574) $ (558) are based on quoted market prices or, in the absence of specific Unconsolidated investments (2MS) (263) market prices, on quoted market prices of similar investments I or other valuation techniques. The carrying amounts of all long. A id n d ti n roject Employee benetit obligations term investments in financialinstruments approximate fair value. (includes postretirement benefits The carrying amount and fair values of long-term debt were of 5141 and $155) 182 195 $4.7 billion at December 31,1998 and $3.3 billion at Decem-A M T carr> forward 134 147 ber 31,1997. Although the current fair value of the long-term Po er purchases debt may ditTer from the current carrying amount, settlement of the reported debt is generally not expeced until maturity. The j s (u9) 5 (610) I carrying amount of preferred stock and Trust Preferred Securi-tb was M mMon at kener 31, M8 and M mMon at t set I December 31,1997, and the fair value was $631 million and 5 (649) 5 (610) $632 million, respectively. The fair values of CN1S Energy's olT balance-sheet fmancial The actual income tax expense ditTers from the amount com-instruments are based on the amounts estimated to terminate puted by applying the statutory federal tax rate of 35% to or settle the instruments. At December 31,1998, the fair value income before income taxes as follows: of CNIS Energy's interest rate swap agreements, with a notional /n 3/illion3 amount of $579 million was $15 million, representing the Years Ended December 31 1998 1997 1996 amount that CNIS Energy would base to pay to terminate the Consolidated net income before agreements. The settlement of the interest rate swap agreements in P'# 'y}*d d 1998 did not materially alTeet interest expense. At December 31,

1. "d*

s247 5:22 $230 Foreign 57 47 22 1997, CN1S Energy would have paid $13 million to terminate 304 269 252 the agreements. Also refer to Note 8 for a discussion of CN1S income tax expense 123'd' 108 137 Oil and Gas' price hedging arrangements and their fair values. 427 377 3g9 Guarantees were $433 m!!! ion and $543 million at Ncember 31, Statutory federalincome tax rate s 35",, x 35% x 35% 1998 and l997, respectisely. Expected income tax expense 149 132 136 The amortized cost of Consumers' nuclear decommissioning increase (decrease)in taxes from; investments, which are considered available-for-sale securities in Capitalized oserheads previously accordance with SFAS 115, Accounting for Certain /nrestments 1 flowed through 5 5 5 jy pg, g g. g,mritics. was $425 million and $405 million Ditrerences in book and tax depreciation not presiously deferred 14 14 13 as of December 31,1998 and 1997, respectively. The unrealized Impact of foreign taxes, tax rates gain, which is classified in accumulated depreciation, was and credits (5) 1 8 $132 million and $81 million as of December 31,1998 and Undistributed earnings of 1997, respectisely. international subsidiaries (13) (10) (2) ITC amortization / adjustments (16) (10) (10) Section 29 Fuel Tax Credits (13) (13) (13) Other. net 2 (11) $123 $108 $137 1 frective tax rate 28.Ma. 28E% 35.4 % (a) Includes $23 millionfor 1998 change in property tar accounting

60. CMS ENERGY CORPORATION

1 11: EXECUTIVE INCENTIVE COMPENSATION restricted CMS Energy Common Stock outstanding are subject Under CMS Energy's Performance incentise Stock Plan, to performance objectives. At December 31,1998 all of the restricted shares of Common Stock as well as stock options and 30,490 restricted shares of Class G Common Stock outstanding stock appreciation rights relating to Common Stock may be are subject to performance objectives. granted to key employees based on their contributions to the Under the plan, stock options and stock appreciation rights successful management of CMS Energy and its subsidiaries. relating to Common Stock are granted with an exercise price Awards under the plan may consist of any class of Common equal to the closing market price on each grant date. Options are Stock. Certain plan awards are subject to performance-based exercisable upon grant and expire up to ten years and one month business criteria. The plan reserves for award not more than from date of grant. three percent of Common Stock outstanding on January I each The weighted average fair value of options granted for CMS year, less (i) the number of shares of restricted Common Stock Energy Common Stock was $6.43 in 1998, $6.38 in 1997, and awarded and (ii) Common Stock subject to options granted $6.94 in 1996. The weighted average fair value of options under the plan during the immediately preceding four calendar granted for Class G Common Stock was $3.03 in 1998, $1.87 in years. Any forfeitures of shares previously awarded willincrease 1997 and $1.59 in 1996. Fair value is estimated using the Black-the number of shares available to be awarded under the plan. Scholes model, a mathematical formula used to value options At December 31,1998, awards of up to 681,603 shares of CMS traded on securities exchanges, with the following assumptions: Energy Common Stock and 138,780 shares of Class G Com-mon Stock may be issued. Years Ended December 31 1998 1997 1996 Restricted shares of Common Stock are outstanding shares cms Energy common stock options with full voting and dividend rights. These awards vest over five Risk-free interest rate 5.4% 6.06 % 6.63 % Expected stock-price solatihty ( 5.9 W 17.43 % 24.08 % 3 ears at the rate of 25 percent per year al.ter two years. The Expected disidend rate s.33 5.30 $.27 restricted shares are subject to achiesement of specified levels of Expected option hre (years) 4 5 5 total shareholder return and are subject to forfeiture if employ-class o common stock options ment terminates before vesting. If perfbrmance objectives are Risk-free interest rate 5.44% 6.06 % 6.63 % exceeded, the plan provides additional awards. Restricted shares Expected stock price volatihty 20 n2% 18.05 % 16.17 % Expected dividend rate s.325 5.31 $.295 vest fully if control of CMS Energy changes, as delined by the n ea 5 5 plan. At December 31,1998,658,494 of the 861,744 shares of CMS Energy applies Accounting Principles Board Opinion 25 and related interpretations in accounting for the Performance incentive Stock Plan. Since stock options are granted at market price, no compensation cost has been recognized for stock options granted under the plan. The compensation cost charged against income fbr restricted stock was $9 million in 1998, $6 million in 1997, and $2 million in 1996. If compensation cost for stock options had been determined in accordance with SFAS 123, Account-ingfor StorbBased Compensation, CMS Energy's consolidated net income and earnings per share would have been as follows: In Millions Except Per Share Amounts Pro Forma As Reported Years Ended December 31 1998 1997 1998 1997 Consolidated Net income 5283 $242 5285 $244 Net income Attributable to Common Stocks CMS Energy 270 228 272 229 Class G 13 14 13 15 Earnings Per Average Common Share CMS Energy Basic 2.64 2.37 2.65 2.39 Diluted 2.61 2.35 2.62 2.37 Class G Basic and Diluted 1.54 1.81 1.56 1.84

51. CMS ENERGY CORPORATION

Notes Continued The status of the restricted stock granted to CMS Energy's key employees under the Performance Incentive Stock Plan and options granted under the plan follows. Restricted Stock Options Number Number Weighted-Average of Shares of Shares Exercise Price CMS Energy comnu s?xk: Outstanding at January 1,1996 517,447 1,592,000 $24.50 Granted 222,000 368,176 $30.55 Exercised or issued. (92,533) (231,550) $20.79 Forfeited (46,076) Expired (12,000) 532.88 Outstanding at December 31,1996 600,838 1,716,626 $26.24 Granted 366,360 431,500 $35.91 Exercised or Issued (159,405) (479,422) $26.54 Forfeited (59,582) Expired (2,987) $30.13 Outstanding at December 31,1997 748,211 1,665,717 $28.65 j Granted 304,750 376,000 $43.38 Exercised or issued (185.217) (331,925) 527.69 Forfeited (6.000) Outstanding at DecenA r 31.1998 861.744 1,709.792 $32.07 Class G Common Stock; Outstanding at January 1,1996 6,924 10,000 $17.88 Granted 9.423 11,000 $17.88 Outstanding at December 31,1996 16,347 21,000 $17.88 Granted 8,784 12,000 $20.24 Exercised or Issued (1,385) (5,000) $17.88 Forfeited (3,955) Outstanding at December 31,1997 19,79I 28,000 $18.89 Granted 14,720 45,900 $24.50 Exercised or issued (4,021) 1 I Outstanding at December 31,1998 30,490 73,900 $22.37 The following table summarizes information about stock options outstanding at December 31,1998: Number Weighted. Weighted. Range of of Shares Average Average Exercise Prices Outstanding Remaining Life Exercise Price ces Enem< common sace $17.13-$26.25 576,000 4.45 years $22.92 i $27.25 -$35.94 755,292 6.I1 years $33.40 $38.00-$44.06 378.500 9.64 years $43.34 $17.13-$44 06 1,709,792 6.33 years $32.07 Cim G Common Stxk: $17.38-$ 19.44 25,500 7.62 years $18.46 $23.31 -$24.50 48,400 9.60 years $24.44 $17.88-$24.50 73,900 8.92 years $22.37

52. CMS ENERGY CORPORATION

12 H E r m L M i.' N T U E N E r t T S CMS Energy and its subsidiaries provide retirement benefits under a number of ditTerent plans, including certain health care and life insurance benefits under its postretirement benefit plans other than pensions for retired employees (OPEB), benefits to certain man-agement employees under its Supplemental Executive Retirement Plan (SERP), and benefits to substantially all its employees under a trusteed, non-contributory, defined benefit pension plan of Consumers and CMS Energy (Pension Plan), and a defined contribution 401(k) plan. Amounts presented below for the Pension Plan include amounts for employees of CMS Energy and nonutility alliliates which were not distinguishable from the plan's total assets. If'eighted-Average Assumptions: Pension & SERP OPEB Years Ended December 31 1998 1997 1996 1998 1997 1996 Discount rate 7.tm, 7.50 % 7.75 % 7.0W6 7.50K 7.75 % Expected long-term rate of return on plan assets 9.25 % 9.25 % 9.25 % 7.00 % 7.00 % 7.00 % Rate of compensation increase: Pension-to age 45 5.25 % 5.25 % 5.50 % -age 45 to assumed retirement 3.75 % 3.75 % 4.00W SERP 5.5w% 5.50 4 5.50 % Retiree health care costs at December 31,1998 are based on the assumption that costs would increase 6.5 percent in 1999, then decrease gradually to 5.5 percent in 2005 and thereafter. Net Pension Plan, SERP and OPEB costs consist of: In Afilli<ms Pension & SERP OPEB Years Ended December 31 1998 1997 1996 1998 1997 1996 Service cost S 27 5 26 5 26 5 11 5 10 5 13 Interest expense M 61 58 43 41 42 Expected return on plan assets (73) (70) (69) (18) (13) (6) Amortization of unrecognized transition (asset) (5) (5) (5) Amortization of prior service cost 4 4 5 Net periodic pension and postretirement benefit cost s 17 5 16 5 15 5 36 5 38 5 49 The health care cost trend rate assumption significantly alTects the amounts reported. A one percentage point change in the assumed health care cost trend assumption would have the following elTects: In AIillions One Percentage One Percentage Ibint increase Point Decrease E!Tect on total sersiee and interest cost compenents 59 5 (8) EfTect on postretirement bene'it obligation $92 5(76)

53. CMS ENERGY CORPORATION

Notes Continued The funded status of CMS Energy's Pension Plan, SERP and OPEB plans is reconciled with the liability recorded at December 31 as follows: In Millwns Pension Plan SERP OPEB 1993 1997 1998 1997 1998 1997 Benefit obligation, January 1 $792 $734 5 41 $ 37 5 582 $ 585 Service cost 25 24 2 2 11 10 Interest cost 60 59 3 3 43 41 Plan amendments (7) Actuarialloss (gain) 76 36 5 47 (21) Benefits paid (79) (61) (1) (1) (28) (26) Benefit obligation, December 31 874 792 50 41 655 582 Plan assets at fair value, January 1 882 779 224 138 Actual return on plan assets 167 164 54 37 Company contribution 1 1 49 49 Actual benefits paid (79) (61) (t) (1) Plan assets at fair value, December 3l 970'"' 882 '"' 327 224 Benefit obligation less than (in excess of) plan assets 96 90 (50) (41) (328) (358) Unrecognized net (gain) loss from experience ditTerent than assumed (176) (157) 10 5 (72) (83) Unrecognized prior service cost 31 35 1 Unrecognized net transition (asset) obligation (16) (22) Recorded liability s(65) $(54) s(39) $(34) S(400) $(441) (a) Primarily stosks and bonds, including $168 million in 1998 and $133 million in 1997 of CMS Energy Common Stock. SERP benefits are paid from a trust established in 1988. recovery in utility rates (see Note 2. Utility Regulation). The SERP is not a qualified plan under the Internal Revenue Code, MPSC authorized recovery of the electric utility portion of and as such, earnings of the trust are taxable and trust assets these costs in 1994 over 18 years and the gas utility portion in are included in consolidated assets. At December 31,1998 and 1996 over 16 years. At December 31,1998, Consumers had a 1997, trust assets were $53 million and $44 million, respectively, recorded FERC regulatory asset and liability of $6 million. The and were classified as other noncurrent assets. The accumulated FERC has authorized recovery of these costs. benefit obligation for SERP was $31 million in 1998 and $25 mil-tion in 1997. 13: LEASES Contributions to the 401(k) plan are invested in CMS Energy CMS Energy, Consumers, and Enterprises lease various assets, Common Stock. Amounts charged to expense for this plan were including vehicles, rail cars, aircraft, construction equipment, $18 million in 1998, $20 million in 1997, and $18 million in 1996. computer equipment, nuclear fuel and buildings. Consumers' Beginning January 1,1986, the amortization period for the nuclear fuel capital leasing arrangement expires in Nosember Pension Plan's unrecognized net transition asset is 16 > cars and 2000, yet prosides for additional one-year extensions upon 11 years for the SERP's unrecognized net transition obligation. mutual agreement by the parties. Upon termination of the lease, Prior service costs are amortized on a straight-line basis over the lessor would be entitled to a cash payment equal to its the average remaining senice period of actise employees. remaining investment, which was $72 million as of December 31, CMS Energy and its subsidiaries adopted SFAS 106, 1998. Consumers is responsible for payment of taxes, mainte-Employers'itccountingfor Postretirement Benefits Other Than nance, operating costs, and insurance. Pensions, elTective as of the beginning of 1992 and Consumers recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated H. CMS ENERGY CORPORATION l f t.

\\ Minimum rental commitments under CMS Energy's non-development and management of electric, gas and other energy. cancelable leases at December 31,1998 were: related projects in the United States and internationally,includ-In Afillions ing energy trading and marketing. CMS Energy's reportable Capital Operatin8 segments are strategic business units organized and managed by l'" l'"S the nature of the products and services each provides. The 1999 5 46 5 20 accounting policies of each reportable segment are the same as '000 71 19 those described in the summary of significant accounting policies. 200t 18 16 2002 17 15 CMS Energy's management evaluates performance based on 2003 12 12 pretax operating income. Intersegment sales and transfers are 2004 and thereafter 9 89 accounted for at current market prices and are eliminated in Total minimum lease payments 173 53 consolidated pretax operating income by segment. Less imputed interest _ 33 The Consolidated Statements of Income show operating Present value of net minimum lease payments 140 revenue and pretax operating income by reportable segment. Less current portion _,3,,5 Revenues from an international energy distribution business Noncurrent portion 5105 and a land development business fall below the quantitative thresholds for reporting. Neither of these segments has ever met Consumers recovers lease charges from customers and any of the quantitative thresholds for determining reportable accordingly charges payments for its capital and operating segments. Other financial data for reportable segments and geo-leases to operating expense. Operating lease charges, including graphic area are as follows: charges to clearing and other accounts for the years ended December 31,1998,1997 and 1996, were $19 million, $10 mil-Reportable Segments lion and $8 million, respecthely. In Atutions Years Ended December 31 1998 1997 1996 Capital lease expenses for the years ended December 31, 1998,1997 and 1996 were $42 million, $43 million and $46 mil-Depreciati n. Depletion and Amortization Electric utility $ 3n4 5 296 5 282 lion, respectively. Included in these amounts for the years ended Gas utility 97 93 87 1998,1997 and 1996 are nuclear fuel lease expenses of $23 mil-Independent power production 22 13 8 lion, $31 million and $25 million, respectively. Oil and gas exploration and production 38 48 42 Natural gas transmission, storage E 14: JOINTLY OWNED UTILITY FACILITIES g g Consumers is responsible for providing its share of financing Other 7 2 i for the jointly owned utility facilities. The direct expenses of the 5 484 5 467 5 427 joint plants are included in Consumers' operating expenses The Identifiable Assets following table indicates the extent of Consumers' investment in Electrie utility * $ 4.640 54,472 54,505 jointly owned utility facilities: Gas utility 4 1,726 1.644 1,709 independent power production 2,252 1,710 1,053 In 3/dlions E** #'I '" "" E Natural gas transmission," storage Net Accumulated investment Depreciation and processing 971 508 388 December 31 1998 1997 1998 1997 Marketing, services and trading 152 191 52 Campbell Unit 3-93.3 percent s299 $314 $279 5265 Other 1,n22 527 180 Ludmgton pumped storaFe plant- $11.310 59.508 58.363 51 percent 106 112 94 88 Ca ital Expenditures

• Transmission lines-various 33 34 15 14 Electric utility 5 331 5 255 5 310 Gas utility 114 116 137 15: REPORTABLE SECMENTS Independent power prmluetion 462 704 142 Oil and gas exploration and production 143 99 72 C M S E.nergy operates principally m. the follow.mg six reportable Natural gas transmission, storage segments: electric utility; gas utility; independent power produc-and processing 573 115 136 tion; oil and gas exploration and production; natural gas trans-Marketing, services and tradmg 1

28 Other 76 202 66 mission, storage and processing; and energy marketing, services stM 51,519 5 863 and trading. The electric utility segment consists of regulated activities associated with the generation, transmission and distribution of electricity in the State of Michigan. The gas utility segment consists of regulated activities associated with the production, transportation, storage and distribution of natural gas in the State of Michigan. The other reportable segments consist of the

56. CMS EDilGY CORPORATION

Notes Continued in AIJ/ ions Changes in other assets and liabilities as snown on the Con. Years Ended December 31 199N 1997 1996 solidated Statements of Cash Flows are described below: Investments in Equity Method hvesteos in 3fillions Independent power production $ 1,337 $1,205 $ 683 Years Ended December 31 1998 1997 1996 Natural gas transmission, storage and processmg 494 341 225 Sale of receivables, net s (29) $ 17 $ 23 Marketing, services and trading 25 26 - Acc unts receivable (1M3) (160) (28) Other 217 274 85 Accrued revenue (5) 64 d2) Inventones $ 2.073 $1.746 $ 993 Accounts payable 104 67 55 Earnings from Equity Method Investees* Accrued refunds (1) 4 (14) Independent power production s 158 $ 89 5 91 Other current assets and liabilities, net 126 (6) 25 Natural gas transmission, storage Noncurrent deferred amounts, net (156) (6) 10 and processing 9 4 3 Marketing, services and trading 2 2 s(186) $(35) $(11) Other ? 8 8 s 171 $ 103 $ 102 17: EQUlT Y ME THOD INVE STMENTS Certain of CMS Energy's investments in companies, partner. Geographic Areas @ ships and joint ventures, where CMS Energy's ownership in its Preta afliliates is more than 20 percent but less than a majority, are Operating Operating Identifiable accounted for by the equity method. Consolidated net income Revenue income Assets includes undistributed equity earnings of $95 mi.llion in 1998, IW $58 million in 1997, and $55 million in 1996 from these invest-United States s4.N67 s 702 $8,M2 ments. The more significant of these investments are CMS International 274 73 2.468 1997 Energy's 50 percent interest m Loy Yang, a 2,000 MW brown l United States $4,576 5 665 $7,872 coal-fueled power plant and coal mine in Australia, and CMS j international 205 51 1,636 Energy's 50 percent interest in Jorf Lasfar, a 1,356 MW coal-1996 fueled power plant in Africa. Summarized combined financial United States $4.211 $ 651 $7,668 nformation of CMS Energy's equity method investees follows, International 113 25 695 except for the MCV Partnership, which is disclosed separately (a) Anwunts include an attributedportion of Consumers' other common in Note 18. assets to both the electric andgas utility businesses (h) includes electric restructuring implementation plan capitalleasesfor nuclearfuel and other assets and electric Jemand-side management costs income Statement Data (unaudited) (DSAi) (see Consolidated Statements of Cash FlowsL Amounts also in Afdlions include an attributedportion of Consumers' capitalexpemhturesfor plant Years Ended December 3l 1998 1997 l996 and equipment common to both the electra andgas utility businesses. (c) These amounts are included m operating revenue in the Consohdated Operating revenue 8 2.255 $ l.603 $ 769 Statements of Income. Operating expenses 1,93 1.154 532 (J) Revenues are attributed to countries based on location of customers. Operating income 75: 449 237 Other expense, net 409 271 91 16: SUPPLEMENTAL C ASH FLOW INFORM ATION For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow Balance Sheet Data (unaudited) I" Aldho"' activities and noncash investing and financing activities were: December 31 1998 1997 in Afillions Years Ended December 31 1998 1997 1996 A s set s Current assets s 646 $ 642 Cash Transactions Property, plant and equipment, net 6.7x3 6,304 Interest paid (net of amounts capitalized) $313 $293 $240 Other assets 2.694 2,052 Income taxes paid (net of refunds) 64 67 32 Noncash Transactions M UA 23 38'998 l Nuclear fuel placed under capital leases $ 46 $ 4 5 28 uatstes and tqwty l Other assets placed under capital leases 14 7 3 Current liabihties s 804 5 688 j Common stock issued to acquire companies 61 Long-term debt and other noncurrent liabihties 6.341 5,678 l ) Assumption of debt 88 Equity 2,978 2,632 s Io.123 $8,998 l i l J

56. CMS ENERGY CORPOR ATION

1 I ts 50MM Ant 2LO FIN ANCIAL INronM ATlo4 OF SIGNIFIC ANT 19-SUBSFOUENr EVENr na Air o rne nov cupet nn In 1999. CMS Energy completed the acquisition of the Panhan. Under the PPA with the MCV Partnership discussed in Note 3, die Companies from Duke Energy Corporation for a cash pay-Consumers' 1998 obligation to purchase electric capacity from ment of $1.9 billion and existing Panhandle Companies debt of the MCV Partnership was 15.5 percent of Consumers' owned $300 million. The Panhandle Companies are primarily engaged and contracted capacity. Summarized financial information of in the interstate transportation and storage of natural gas. The the MCV Partnership follows: transaction will be accounted for under the purchase method of accounting. Statements of Income (unaudited) The acquisition of the Panhandle Companies initially was In A/Jhons financed in part with bridge loan facilities negotiated with Years Ended I)ecember 31 199N 1997 1996 domestic banks and in part with approximately $800 million operating revenue * $627 5652 5645 of debt securities issued by the Panhandle Companies. CMS Operating expenses 4n5 435 417 7 g g gg g operating income 222 217 22! existing arrangements as well as the sale of approximately Other expense, net 142 154 16_ $600 million of CMS Energy Common Stock and other CMS Net income bel. ore cumulatise elTect of accountmg change xn 63 66 Energy securities. Cumulative elTeet of change in method The following unaudited pro forma combined selected finan-of accounting for property tas 15 - cial information assumes: (i) various restructuring, realignment Net income 5 kn 5 78 $ 66 and elimination of actiuties between the Panhandle Companies and Duke Energy Corporation prior to closing;(ii) adjustments llalance Sheets (unaudited) resulting from the acquisition; and (iii) Panhandle Companies In Aldhons and CMS Energy financing transactions (except bridge financing December 31 1998 1997 fees) completed to facilitate the acquisition, as if the acquisition Ass + had occurred on January 1,1998. Unaudited pro forma amounts Current assets'^> s 341 5 362 h gny mme meM e be we mg Plant, net 1,773 1,820 per share and total assets were $5.6 billion, $319 million, $2.66 Other as ets 173 169 and $13.8 billion, respectively. s2.2M7 S2.351 L 12 til, t m s.i d E q m t y Current liabilities s 2N $ 285 Noncurrent liabihties 'o 1.725 1,789 Partners' equityM 358 277 52.287 52.351 (a) Revenuefrom Constuners totaled $384 mdhan. $609 million and$398 million for 1998,1997 and 1996. respectively Ib) Ret eivables frum Consumers totaled $49 million and $$4 'nillion. at December 31,1998 and 1997. respectively Ic) FAlLP is the sole beneficiary of an owner trtut that is the lessor in a long-term directfinance lease with the lessee. SICV Partnership CAls liolJmgs holds a 46 4 percent ownership interest in FAILP At December 31.1998 and 1997, lease obhgations of $L 4I billion and $L32 bilhon. respettisely. were oncJ to the ou ner trust. CAls lloidmgs' share of the mierest andprincipa!portionfor the 1998 lease payments nas $39 million and 549 milhun. respectivcly. andfor the 1997 lease payments was $62 mdhon and $28 million. respectively. The lease payments service $907 mil. lion and$I,016 million in nonrecourse debt outstanding as of December 31.1998 and 1997 respectively, of the ou ner trust. E AllP's debt is secured by the AICV Partnership *s lease vbligattons. assets, and operating revenues. For 1998 and 1997, the onner trust made debt payments (inclushng interest) of $233 million and $192 million. respecthcly. FAlLP's earningsfor 1998.1997 and 1996 were $23 milhon. $20 mdhon and $17 milhon. respec tively. (J) CAIS Alidlands recorded investment in the AICV Partnership meluJes capitali:ed interest, which is being amorti:ed to expense over the hfe ofits investment in the AICV Partnership Covenants contained m finaming agreements prohibit the AICI Partnershipfrom paying distributions untJ certainfmancial rest rcquirements are met. Consumers does not anticipate receiving a cash distribution in the nearfuture.

57. CMS ENERGY CORPOR ATION

Report of Independent Public Accountants I TO CMS ENERGY CORPORATION: We have audited the accompanying consolidated balance sheets and consolidated statements of preferred stock of CMS Energy Corporation (a Michigan corporation) and subsidiaries as of j December 31,1998 and 1997, and the related consolidated state-ments of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance j about whether the financial statements are free of material mis-statement. An audit includes examining, on a test basis, evi-dence supporting the ameunts and disclosures in the financial statements. An audit also inc!udes assessing the accounting principles used and significant estimates made by management, as well as evaluating the oserall financial statement presenta-tion. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all riaterial respects, the financial position of CMS Energy Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1998 in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, elTective January 1,1998, Consumers Energy Company, a wholly owned subsidiary of CMS Energy Corporation, changed its method of accounting for property taxes. i[ m LL9 ARTHL'R ANDERsEN LLp Detroit, Michigan, January 26,1999 (except with respect to the matters disclosed in Note 3," Consumers' Electric Utility Rate Matters,"and Note 19, as to which the date is March 29,1999).

58. CMS ENERGY CORPOR ATION t

Quarterly Financial and Common Stock Information in Afillions, Except Per Share Amounts 1998 (l'naudited) 1997 (Unaudited) Quarters Ended .\\ larch 31 . lune 30 Sept.30 l)ec. 31 hlarch 31 June 30 Sept.30 Dec. 31 Operating revenue /* $1,374 $1.132 51.286 51,349 $1,295 $1,022 $1,030 $1,434 Pretax operating income'* $ 197 5 188 5 222 S 168 $ 204 5 158 $ 178 $ 176 Consolidated net income d S 88 5 65 S 81 $ 51 5 78 5 47 5 60 $ 59 Ilasic earnings (loss) per j average common share:* CNIS Energy /* $.79 $.63 5.81 S.44 5.73 $.48 5.64 5.54 Class G S 1.09 S.12 5 (.16) S.52 5 1.18 $.16 $ (.21) $.70 Diluted earnings (loss) per average common share:" ChtS Energy f* $.77 5.62 S.80 $.44 $.72 $.48 $.63 $.54 Class G S 1.09 $.12 $ (.16) S.52 5 1.18 5.16 $ (.21) $.70 i Dividends declared fier common share: CN1S Energy S.30 $.30 s.33 $.33 $.27 5.27 $.30 $.30 Class G S.31 5.31 S.325 S.325 $.295 5.295 5.31 $.31 Common stock prices

• CN1S Energy:

liigh S 47 % $ 47 6 S 44 % $ 50 % $ 34 % $ 35 % $ 38'A. $ 44 M. Low $ 41 % $ 40 "A. S 38 % S 43 % $ 31 % $ 31 % $ 34 % $ 35"A. Class G: liigh $ 26 % $ 26'6 S 25 % $ 26'A $ 19 % $ 19 % $ 22 $ 27 % Low S 22 W $ 23 % S 21 % S 23 % $ 17 % $ 17 % $ 19 $ 20 % ( ) Amounts in thefirst quarter of 1948 and 1997 nere restatedfor conparative purposes a (b) The sum of the quarters may not equal the annual earnings per share due to changes in shares outstandmg. (c) Basedon New lork Stock Exchange-Composite transactions i

59. CMS ENERGY CORPORATION

1 Selected FinancialInformation i 1998 1997 1996 1995 1994 Operating revenue (in millions) ($) 5,141 4,781 4,324 3,890 3,614 Consolidated net income (in millions) ($) 2H5 244 224 l95 177 Average common shares outstanding (in thousands) CMS Energy 102,446 96,144 92,462 88,810 85,888 Class G 8,333 8,015 7,727 7,5 I I Earnings per average common share CMS Energy-13asic ($) 2.65 2.39 2.27 2.16 2.07 -Diluted ($) 2.62 2.37 2.26 2.16 2.06 Class G -Basic and Diluted ($) 1.56 l.84 1.82 .38 Cash from operations (in millions) ($) 516 624 647 640 603 Capital expenditures, excludes capital lease additions and DSM (in millions) (5) I,295 678 643 508 575 Total assets (in millions) ($) I1,310 9,508 8,363 7,909 7.159 1.ong-term debt, excluding current maturities (in millions) ($) 4.726 3 272 2,842 2,906 2,709 Noncurrent portion of capital leases (in millions) ($) 105 75 103 106 108 Total preferred stock (in millions) ($) 238 238 356 356 356 Total Trust Preferred Securities (in millions) ($) 393 393 100 Cash dividends declared per common share CMS Energy ($) 1.26 1.14 1.02 .90 .78 Class G ($) 1.27 1.21 1.15 .56 Market price of common stock at year-end CMS Energy ($) 48 % 44 W. 33 % 29 % 22 % Class G ($) 25 M 27 % 18 % 18 % Book value per common share at year-end CMS Energy ($) 19.61 16.84 15.24 13.51 11.16 Class G ($) i1.46 10.91 11.38 10.60 Return on aserage common equity (%) 14.2 14.7 15.7 17.1 19.8 Return on assets (%) 5,5 5.6 5.4 5.2 5.0 Number of employees at year-end (full-time equivalents) 9,710 9.682 9,712 10,105 9,972 Electrlc Utihty Statistics Sales (billions of kWh) 40.0 37.9 37.l 35.5 34.5 Customers (in thousands) 1,640 1,617 1,594 1.570 1,547 Average sales rate per kWh (e) 6.50 6.57 6.55 6.36 6.29 Gas Utihty Statistics Sales and transportation deliveries (bef) 360 420 448 404 409 Customers (in thousands)* 1,558 1,533 1,504 1,476 1,448 Average sales rate per mcf ($) 4.56 4.44 4.45 4.42 4.48 International Energy.Related Statistics CMS Energy's share of unconsolidated independent power production revenue (in millions) (5) 761 621 493 497 385 Independent power production sales (millions of kWh) 19,017 13,126 7,823 7,422 6.216 CMS Energy's share of unconsolidated ) natural gas transmission, storage and processing revenue (in millions) ($) 67 51 42 26 7 CMS Energy's share of unconsolidated marketing, services and trading revenue ($) 291 202 Gas rnanaged and marketed for end users (bef) 366 243 108 101 66 Exploration and Production Statistics Sales (millions of net equivalent barrels) 12.1 11.4 10 t 9.0 5.6 Proved reserves (millions of net equivalent barrels) 182.6 152.0 133.5 124.5 108.0 Proved reserves added (millions of net equivalent barrels)* 42.7 29.8 18.7 25.6 29.0 l Finding cost per net equivalent barrel * ($) 3.35 2.38 2.94 5.06 5.92 (a) Exh Jes oJJ. system transportation customers. (b) Certain prior year amounts were restatedfor comparative purposes.

60. CMS ENERGY CORPORATION

Shareholder Information 1999 ANNUAL MEEilNG: Diar rr DEPOSIT AND AUTOM ATIC INVESTMENT: CMS Energy's 1999 annual meeting is scheduled for 10:30 a.m. CMS Energy can deposit your dividends directly into your bank on May 28 at the

Dearborn,

Michigan. Proxy account. We also offer automatic investment from your bank material will be mailed in April. account to purchase CMS Common Stock and Class G Common Stock and keep your investment in CMS Energy growing. Please nEGISTERED SH AREHOLDEHS: contact the investor Senices Department for more information. As of February 19,1999, the number of registered shareholders totaled 65,871 for CMS Energy Common Stock and 5,071 for ELIMINATING DUPLICATE MAILINGS: Class G Common Stock. To maintain more than one account, but ehminate duplicate mail-ings of annual and quarterly reports, send the labels from com-SH AnEHOLDER CONTACTS: pany mailings to the Investor Services Department, indicating the Inquiries about stock ownership, stock purchase, change of names you wish to keep on the mailing list. (Dividend checks and address, dividend payments, dividend reinvestment or the Stock proxy materials will continue to be sent to each account.) Purchase Plan may be directed to: Investor Services Department CONSOLIDATING ACCOUNTS: 212 W. Michigan Ave. To consolidate separate accounts into one account, contact the Jackson, MI 49201 Investor Services Department. (517) 788-1868 or send an E mail to invest @cmsenergy.com OBTAINING REPORTS: For fmancial and operating information, please contact:- Shareholders may obtain without charge and exclusive of Investor Relations Department exhibits: CMS Energy's Form 10-K and an audiocassette 212 W. Michigan Ave. recording of the annual report text. Please address all requests Jackson, MI 49201 to the Investor Senices Department. (517) 788 2590 STOCK EXCHANGE LISTING: srOcK PURCHASE PLAN: CMS Energy Common Stock is listed on the New York Stock Investors can buy shares of CMS Energy Common Stock and Exchange under the symbol CMS. Class G Common Stock is Class G Common Stock directly through the Corporation's listed under the symbol CPG. Stock Purchase Plan, with no brokerage commission or service charge. Other plan features include dividend reinvestment, cer-inANsFER AGENT, REGISTRAR AND PAYING AGENT: tificate safekeeping, direct deposit of dividends, automatic Invest r Services Department,212 W. Michigan Ave., Jackson, investment, sale of shares and gifting of shares. For more infor-Michigan 49201 mation and a plan prospectus, please contact the investor Ser-vices Department or click on the " Invest in CMS Energy" icon Follow CMS Energy on the Internet: at www.cmsenergy.com. http://www.cmsenergy.com STOCK OWNERSHIP: As a CMS Energy shareholder, you have the option of direct stock ownership or indirect stock ownership. Under direct stock ownership, the shares are registered in your name; you can pur-chase additional shares directly from the company with no com-missions or service charge; you enjoy the benefits of direct communication to and from CMS Energy; and you can partici-pate in the CMS Energy stock purchase plan. Under indirect stock ownership, your shares are held in " street name" by a bro-ker, and your dividend payments come through a broker rather than directly from CMS Energy. (For more information on direct and indirect ownership, please contact the Investor Ser-vices Department for the brochure " Stock Ownership: What Every investor Should Know.")

61. CMS ENERGY CORPORATION

Officers I CMS ENEROY John W. Clark,54 CMS OIL AND CAS CMS MARKETING. SERVICES ^" William T. AlcCormick Jr.,54

1. 1. "I"' ".a Pusident.

Victor J. Fr> ting,51 0""*"""'""""# Chairman of the Boardand Chairman of the Board Victor J. Fryling,5l Chief Executive Officer David A.Slikelonis,50 Bradley W. Fischer,52 Victor J. Fryling,51 President and William W. Schi ley,52 Genaal Coumel President and Chief Executive officer Executive l' ice President Chief Operating Officer Robert A. Fenech,5l and Chief Operating 0))icer William IL Stephens Ill,49 Alan St. Wright. 53 Executive 17ce President, David B. Geyer,35 N" '" Senior l' ice President and General Counseland Secretary l' ice President. ) Puadons Chief Financial Officer Paul A. Doyle,47 Rodger A. Kershner,50 17cc President. Engineering Royal P. Lefere Jr.,51 ' '" ?"#" '" Senior lice President and lice President. Energy General Counsel

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3ianagement Services ( '..'" E#'0'" O ".""# P Dennis DaPra,56 John W. Clark,54 Mu Praident and Robert C. Olson,55 CMS ELECTRIC AND GAS Senwr 57ce President

• Controller lice President-Victor J. Fryling. 51 Communications Kenneth C. Emery,5l Exploratum Chairman of the Board James W. Cook, 58 l' ice President.

'\\1 ark E. Stirl,44 Senior l' ice President, ' '" ?" ' jf'" Infbrmation TechnoloKF llce President and Controller Technology and Development and Operations Services International Electric and Preston D. Ilopper,48 Carl L. English,52 Gm Distribution CMS GENERATION Senior l' ice President, lice President. Victor J. Fryling,51 1 Corporate Perfbrmance and Electric Transmission Chairman of the Board h.a Pusuifn"r.' Chief Accounting 0))icer and Distribution Rodney E. Boulanger,58 Distribution Operations John F. Drake,50 Thomas A. NicNish,61 Presic[ent and l' ice President. ITce President and Chief Execmive 0)]icer lNTERN ATl0N AL 0FFiCES Human Resources Secretary Thomas W. Elward,50 Singapore 4ia Thomas A. NicNish,61 Thomas J. Palmisano,48 Senior Ma Prnident. DM E hm 49 1 l' ice President and Site 17ce President' ' i kn Ma Pusident. Deulopnu>nt Secretary Pegisades Asset Afanagement {] Icura L. Slountcastle,42 Paul N. Preketes,49 Narendra K. Bhatia,63 De a r bo r n --- [ t sce President, Planning i1ce President. 'I h' A * I'~ I7a Praident, Engimaing andInvestor Relations Gas Operations and Construction Slcrtin R. Walicki,48 Startin R. Walicki,48 William J. llaener,57 lice President. Corporate l' ice President. Corporate CMS oAS TR ANSMISSION l' ice President, Development Finance and Treasurer Finance and Treasurer AND STOnAoE Victor J. Fryling, $1 17ce President CONSUMERS ENERGY CMS ENTERPRISES Chairman of the Board William T. SicCormick Jr., $4 Doris F. Gabin,44 William J. Ilaener,57 L"" d "" ~~ Chairman of the Board Senior l' ice President. AI'I MIdd I * Prahlent and 6I"h"# * "I"P*'"' Chief Executive Officer Joseph P. Tomasik,44 Victor J. Fr> ting. 51 17ce Chairman of the Board Belinda St. Fosworth. 40 Ma Pusident. Dnelornunt Christopher A. IIelms,45 ' '" ?"#" "' ""0 Paul A. Elbert,49 Executive 17ce President and

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"*'I U"'"*'N'"~ P President of ChfS Pimhamile Executive l' ice President

p e,c and President and Chief hl. Cliiford Lawrenson,38 Pipe Line g

Executive Officer, Gas iTce President. John D. Kobasa,58 Project Finance Francisco A. 31enadri,62 i David W. Joos,45 I,s.ce President. Regional General Afanager Executive l' ice President Theodore J. Yogel,46 Engineering. Operations and President and Chief 17ce President. Taxes and and Construction John 51..\\1cLaughlin Jr. 48 Executive 0))icer. Electric Tax Counsel ""P~'# Thomas L. 51 iller,43 Alan 51. Wright 53 Startin R. Walicki,48 l' ice President. Senior l' ice President and l' ice President. Corporate Business Analysis Chief Financial Officer Finance and Treasurer

62. CMS ENERGY CORPORATION

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s CMS Energy Board of Directors International Advisory 4 Committee John AL Deutch, Institute Professor and former Prosost Mawachusetts institute of Technologt h I ormerly Director of the Central Intelhgence $gency. f .W y

• j l'.S. Deputy Secretar) and Under ecretary of Defense; and Under ecretar

' of UX Department of I nergy f *, k f) I homas L. Donilon, Chairman of the Conunittee, partner with international law hrm of O'Mehen) & Milliam L \\leformick Jr.,54, Victor J.1 ryling, 51. John %1. Deutch, M Myers L LP Iorrnerly Awistant Secretar) of State Ch.urman of the lloard and President and Chief Institute Professor, for Public AITairs, and Chief of StatT to the Secretar) Chief I secutise Ollicer of Operatmg Ollicer of Massachusetts Institute of of State. CMS I:nergy and Chairman CMS I nergy and Technology. Director of of Consumers Energy Vice Ch tirman of Citigroup Inc.. Schlumberger Arnold Kanter, a pnneipal in the Scowcroft Group, an international consulting 6rm, and a Senior i ellow Director of llank One Consumers Energ). Ltd., ARIAD Pharmaceuticals at the RAND Corporahon. Formerly Undersecretary Corporation, Rockwell Director since 1990 Ine Raytheon Company and of State for Pohtical AITairs. U.S. Department of international Corporation Cumnuns I ngine Company State; and Special Assistant to the President for and Schlumberger Ltd. Inc. Director 1986 1993 and Nanonal Secunty Alfan s. 9 g Director smee 1985, since 1997 1 g g. g , pgg. g 7 International flusmess and Director of the Southeast Asia liusinew Program at T he Unisersit) of y Michigan. Iounder and hrst Director of the g g ~' ,M Unisersityi Center for International flusinew Education I ounder and editor of The fournalo/ g chian kinen. r d Moisn Naim, ed; tor of krrn:n Nho, teaches at { hg Johns llopkms and at ILSA. a leadmg South { Amencan businew school and pohey research center. a Jamn J. Duderstadt,56, Kathleen R. Ilaherty,47 Earl D. Ilolton,65. Formerly Semor Awociate at the Carnegie President Ementus and President and Chief Vice Chairman, Meijer Inc., Endowment for International Peace; Senior Adsiser 7 Professor of Science and Operatmg Otheer, WinStar Grand Rapids. Mich to the President of the World llank; Dean of ILSt Q l'ngineering. The Unisersity of Commumcations. Europe. Director of Meijer Inc. and Vene/uela Mmister of Trade and industry. 2 Michigan Ann Arbor, Mich. Director since 1995. and Steelease In Peter larnoff, President of the International Ihrector of Unisys Corporation Director smee 1989 Adusory Corporahon l'ormerly Undersecretar) of Director smce 199.1 State for Political Atlairs, U S Department of State; President of the Council on I oreign Relanons; and l-secutne Director of the World AITairs Council of Northern Cahforma. I rank G. Wisner, Vice Chairman. L sternal AITairs v i q j. of Amencan International Group, Inc. Iormerly g Undersecretary of State for international Secunty g' Affairs, UX Department of State; and UX f"

• (

Ambawador to Zambia, Eg> pt. the Phihrpmes and [ India, retiring from the latter post in 1997 with the d d [ Milliam U. Parfer, $2. Percy A. Pierre,60 Kenneth L. Way,59, rank of Career Ambawador. Co-chairman. M PI Research, Professor of I lectneal Chairman and Chief f Mattawan, Mich. Director Engineering. Michigan State Esecutne Otlicer. Lear e of Pharmacia & Upjohn ine., Unnersity, I ast Lansing, Corporanon. Director of E Stry ker Corporation, Mich Director of Old Kent Lear Corporation. ChnTnals Research Inc. I mancial Corporanon. the Comerica Inc. anJ WLSCO and S)bron international Whitman Education Group International Inc. Director Corporation. Duector smee and Aerospace Corporation. since 1998. 1991. Director smee 1990. p g e Y Kenneth % hipple,64. John il Vasinsk),59 Retired Liecutne Vice Chairman. Chief President, I ord Motor Executne Otlicer and Company. Chairman of Ford President. GenCorp, Motor Credit and President, I airlaw n. Ohio. Director 1 ord l'inancial Senices Group, of GenCorp Director

Dearborn,

Mich. Director of since 1994. Associates l'irst Capital Corp. and Gableo International. Inc. Ihrector unce 1991

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