This Annual Report contains forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995. Where any such forward-looking statements include a statement of the assumptions underlying forward-looking statements, CMS Energy cautions that, while such assumptions are believed to be reasonable and are made in good faith, assumed results almost always vary from actual results and differences between assumed and actual results can be material. The type of assumptions that could materially affect the actual results are discussed in the Forward-Looking Statements section in this Management's Discussion and Analysis. More specific risk factors are contained in various public filings made by CMS Energy with the Securities and Exchange Commission (SEC). This Annual Report also describes material contingencies in the Notes to Consolidated Financial Statements and the readers are encouraged to read such Notes.

The increase in consolidated net income for 1998 over 1997 resulted from increased earnings from the electric utility; independent power production; natural gas transmission, storage and processing; and marketing, services and trading businesses. Partially offsetting these increases were lower earnings from the gas utility, exploration and production and international energy distribution businesses, the recognition of a $37 million loss ($24 million after-tax) for the underrecovery of power costs under the power purchase agreement between Consumers and the Midland Cogeneration Venture Limited Partnership (MCV Partnership), and higher interest expense.

The increase in consolidated net income for 1997 over 1996 resulted from increased income from the electric utility; independent power production; and natural gas transmission, storage and processing businesses. Partially offsetting these increases 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 operations for each CMS Energy business segment in this Management's Discussion and Analysis.

Electric Pretax Operating Income:

Electric Deliveries: Total electric deliveries in 1998 were 40 billion kilowatt-hours (kWh), an increase of 6 percent over 1997. The increase is primarily attributable to an increase in sales between utility systems and a 3 percent increase in deliveries to ultimate customers. Total electric deliveries in 1997 were 38 billion kWh, an increase of 2 percent over 1996 deliveries. The increase in 1997 was the result of continued economic growth in Michigan and a 1 percent increase in deliveries to ultimate customers, primarily within the industrial class.

Power Supply Costs: Cost increases in both 1998 and 1997 over the prior periods reflect increased power purchases from outside sources to meet increased sales demand. In addition, the 1998 cost increase reflects higher internal kWh generation to meet the increased demand for electricity. The following table quantifies the changes in electric power costs:

Consumers purchased $5 million of energy options to ensure a reliable source of capacity during the summer months of 1998. As a result of weather conditions and fluctuations in the price of electricity, some options were sold totaling $11 million during June, July, and August 1998. All of the remaining options have expired. The costs relating to the expired options and income received from the sale of options were reflected as purchased power costs.

Uncertainties: CMS Energy's financial position may be affected by a number of trends or uncertainties that have, or CMS Energy reasonably expects could have, a material impact on net sales, revenues, or income from continuing electric operations. Such uncertainties are: (i) environmental liabilities arising from compliance with various federal, state and local environmental laws and regulations, including potential liability or expenses relating to the Michigan Natural Resources and Environmental Protection Act and Comprehensive Environmental Response, Compensation and Liability Act; (ii) capital expenditures for compliance with the federal Clean Air Act, as amended (Clean Air Act); (iii) suits by two independent power producers alleging antitrust violations and economic losses due to special electric contracts signed by Consumers; (iv) cost recovery relating to the natural gas-fueled, combined-cycle cogeneration facility (MCV Facility) and nuclear plant investments and an experimental direct-access program; (v) electric industry restructuring; (vi) implementation of a frozen power supply cost recovery and initiatives to be undertaken to reduce exposure to high energy prices; (vii) after-tax cash underrecoveries associated with power purchases from the MCV Partnership; and (viii) Big Rock Point nuclear power plant decommissioning issues and ongoing issues relating to the storage of spent fuel and the operating life of Palisades nuclear power plant (Palisades). For detailed information about these trends or uncertainties see Note 3, "Uncertainties," incorporated by reference herein.

Gas Pretax Operating Income:

Gas Deliveries: System deliveries in 1998, including miscellaneous transportation, totaled 360 billion cubic feet (bcf), a decrease of 60 bcf or 14 percent compared to 1997. The decreased deliveries for 1998 compared to 1997 reflect warmer temperatures in 1998. System deliveries in 1997, including miscellaneous transportation, totaled 420 bcf, a decrease of 28 bcf or 6 percent compared to 1996. The decreased deliveries for 1997 compared to 1996 reflect warmer temperatures in 1997 and the loss of an extra day for the 1996 leap year.

Cost of Gas Sold: The cost decrease for 1998 was the result of decreased sales and decreased gas prices. The cost decrease for 1997 also was the result of decreased sales and lower gas prices.

Uncertainties: CMS Energy's financial position may be affected by a number of trends or uncertainties that have, or CMS Energy reasonably expects could have, a material impact on net sales or revenues or income from continuing gas operations. Such uncertainties are: (i) potential environmental costs at a number of sites, including sites formerly housing manufactured gas plant facilities; (ii) a statewide experimental gas transportation program; and (iii) implementation of a frozen gas cost recovery and initiatives undertaken to protect against gas price increases. For detailed information about these uncertainties see Note 3, "Uncertainties," incorporated by reference herein.

Pretax Operating Income: Pretax operating income for 1998 increased $48 million (50 percent) from the comparable period in 1997. This increase primarily reflects increased operating income from international plant earnings and fees, a $26 million gain on the sale of two biomass project power purchase agreements, and a $9 million gain on the sale of two biomass plants, partially offset by higher net operating expenses and a scheduled reduction in the industry expertise service fee income earned in connection with the 2,000 megawatt (MW) brown coal-fueled Loy Yang A power plant and an associated coal mine in Victoria, Australia (Loy Yang). Pretax operating income for 1997 increased $28 million (41 percent) from 1996, primarily reflecting increased international earnings, higher electricity sales by the MCV Facility, and the industry expertise service fee income earned in connection with Loy Yang in 1997. These increases were partially offset by the absence of certain 1996 nonrecurring gains, including the gain on the sale of a power purchase agreement.

Pretax Operating Income: Pretax operating income for 1998 decreased $20 million (77 percent) from the comparable period in 1997. This decrease is the result of lower oil prices and a gain in the prior period from the sale of CMS Oil and Gas Company's (CMS Oil and Gas) (formerly CMS NOMECO Oil & Gas Co.) entire interest in oil and gas properties in Yemen, partially offset by increased oil production, decreased exploration expenses, and decreased depreciation, depletion and amortization expenses. Pretax operating income for 1997 decreased $7 million (21 percent) from 1996 as a result of lower oil and gas prices, decreased gas production and higher operating expenses. The decrease is partially offset by a gain on the sale of the entire interest in oil and gas properties in Yemen and 33 percent higher oil production.

CMS Oil and Gas changed its method of accounting, effective January 1, 1998, for oil and gas operations from the full cost method to the successful efforts method. CMS Oil and Gas believes that the successful efforts method will minimize asset write-offs caused by periodic price swings, which may not be representative of overall or long-term markets, and will allow its results of operations to be more easily compared to other oil and gas companies. Nitrotec Corporation (Nitrotec), in which CMS Gas Transmission and Storage Company (CMS Gas Transmission) has an equity investment, also elected to convert, effective January 1, 1998, from the full cost method of accounting to the successful efforts method of accounting. All prior period financial statements presented have been restated to conform with successful efforts 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 CMS Oil and Gas' net plant and property and deferred tax liability of $270 million and $95 million, respectively, and a $15 million decrease in CMS Gas Transmission's equity investment in Nitrotec.

Pretax Operating Income: Pretax operating income for 1998 increased $6 million (22 percent) from the comparable period in 1997. The increase primarily reflects a gain on the sale of Petal Gas Storage Company, a gain on the sale of Australian gas reserves, and lower operating expenses, partially offset by a decrease in earnings from international operations. Pretax operating income for 1997 increased $10 million (59 percent) from 1996. The increase primarily reflects income attributable to an Australian pipeline acquired in 1997, higher income from domestic and international operations, a larger restated loss from Nitrotec in 1996 subsequent to converting to the successful efforts method of accounting, and a gain on the sale of a portion of the Crescent and Ames gas gathering systems and processing plant in Oklahoma. These increases were partially offset by the 1996 gain resulting from the dissolution of the Moss Bluff Gas Storage Systems and Grand Lacs Limited Partnerships.

Pretax Operating Income: Pretax operating income for 1998 increased $9 million from the comparable period in 1997. This increase is the result of improved margins on electricity and gas sales combined with increased electric and gas sales volumes, partially offset by additional operating costs relating to growth objectives. Pretax operating income for 1997 decreased $7 million from the 1996 period. The decrease is a result of substantially higher than expected natural gas prices that severely restricted CMS Marketing, Services and Trading Company's ability to achieve positive margins on fixed price sales, and higher than expected start-up costs. Electric marketing volumes reached 6.9 million MW for the year ended December 31, 1998 compared to 900,000 MW for the comparable period in 1997. Gas managed and marketed for end users totaled 366 bcf, 243 bcf and 108 bcf for the years ended December 31, 1998, 1997 and 1996, respectively.

CMS Energy is exposed to market risk including, but not limited to, changes in interest rates, currency exchange rates, and certain commodity and equity prices. Derivative instruments including, but not limited to, futures contracts, swaps, options and forward contracts may be used to manage these exposures. Derivatives are principally used to hedge market risks.

Management uses commodity futures contracts, options and swaps (which require a net cash payment for the difference between a fixed and variable price) and oil swaps to manage commodity price risk. They also use forward exchange contracts to hedge certain receivables, payables and long-term debt relating to foreign investments. Management also uses equity investments in which CMS Energy or its subsidiaries hold less than a 20 percent interest. These commodity, financial and equity instruments do not expose CMS Energy to material market risk.

During 1998, derivative trading activities were immaterial. Management believes that any losses incurred on derivative instruments used as a hedge would be offset by the opposite movement of the underlying hedged item.

Interest Rate Risk: Management uses a combination of fixed-rate and variable-rate debt to reduce interest rate exposure. Interest rate swaps and rate locks may be used to adjust exposure when deemed appropriate, based upon market conditions. These strategies attempt to provide and maintain the lowest cost of capital. The carrying amount of long-term debt was $4.7 billion at December 31, 1998 with a fair value of $4.7 billion. The fair value of CMS Energy's financial derivative instruments at December 31, 1998, with a notional amount of $579 million, was $15 million, representing the amount that CMS Energy would have paid to terminate these agreements on December 31, 1998.

Sensitivity Analysis: In accordance with SEC disclosure requirements, CMS Energy performed a sensitivity analysis. The analysis assesses the potential loss in fair value, cash flows and earnings based upon hypothetical increases and decreases in market interest rates. A hypothetical 10 percent adverse shift in market rates in the near term would not have a material impact on CMS Energy's consolidated financial position, results of operations or cash flows as of December 31, 1998. Management does not believe that a sensitivity analysis alone provides an accurate or reliable method for monitoring and controlling risk. Therefore, CMS Energy and its subsidiaries rely on the experience and judgment of senior management and traders to revise strategies and adjust positions as they deem necessary. Losses in excess of the amounts determined in the sensitivity analysis could occur if market rates or prices exceed the 10 percent shift used for the analysis. The analysis assumes that the maximum exposure associated with purchased options is limited to premiums paid. The analysis assumes that the CMS Energy Trust Preferred 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 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.

CMS Energy's primary ongoing source of operating cash is dividends and distributions from subsidiaries. In 1998, Consumers paid $241 million in common dividends. In December 1998, CMS Energy contributed $100 million of paid-in capital to Consumers. During 1998, Enterprises paid common dividends and other distributions of $122 million to CMS Energy. CMS Energy's consolidated operating cash requirements are met by its operating and financing activities.

Operating Activities: CMS Energy's consolidated net cash provided by operating activities is derived mainly from the processing, storage, transportation and sale of natural gas; the generation, transmission and sale of electricity; and the sale of oil. Consolidated cash from operations totaled $516 million and $624 million for 1998 and 1997, respectively. The $108 million decrease resulted from cash outflows related to increases in accounts receivable from and advances to affiliates, partially offset by an increase in consolidated net income. CMS Energy uses its operating cash primarily to expand its international businesses, to maintain and expand electric and gas systems of Consumers, to pay interest on and retire portions of its long-term debt, and to pay dividends.

Investing Activities: CMS Energy's consolidated net cash used in investing activities totaled $1.634 billion and $1.551 billion for 1998 and 1997, respectively. The increase of $83 million primarily reflects increased capital expenditures for acquisitions, partially offset by decreased investments in partnerships and unconsolidated subsidiaries (1997 included an approximately $500 million investment in Loy Yang). CMS Energy's 1998 expenditures for its utility and international businesses were $429 million and $1.271 billion, respectively, compared to $371 million and $1.148 billion, respectively, during 1997.

Financing Activities: CMS Energy's net cash provided by financing activities totaled $1.150 billion and $938 million for 1998 and 1997, respectively. The increase of $212 million in net cash provided by financing activities resulted from an increase of $848 million in the issuance of new securities, partially offset by increases in the retirement of bonds and other long-term debt ($140 million) and the repayment of bank loans ($545 million). The following is a listing of new securities issued during 1998.

In 1998, CMS Energy paid $129 million in cash dividends to holders of CMS Energy Common Stock and $11 million in cash dividends to holders of Class G Common Stock. In January 1999, the Board of Directors of CMS Energy declared a quarterly dividend of $.33 per share on CMS Energy Common Stock and $.325 per share on Class G Common Stock, payable in February 1999.

In August 1998, CMS Energy filed a shelf registration statement for the issuance of $400 million of GTNs Series E.

In December 1998, CMS Energy filed two shelf registration statements for the issuance of $1.5 billion of CMS Energy Common Stock and $400 million of senior and subordinated debt securities.

In January 1999, CMS Energy received net proceeds of approximately $473 million from the sale of $480 million of senior notes. In February 1999, CMS Energy received net proceeds of approximately $296 million from the sale of $300 million of senior notes. Proceeds from these offerings were used to repay debt and for general corporate purposes.

Other Investing and Financing Matters: At December 31, 1998, the book value per share of CMS Energy Common Stock and Class G Common Stock was $19.61 and $11.46, respectively.

In January 1998, a Delaware statutory business trust established by CMS Energy sold $180 million of certificates due January 15, 2005 in a public offering. In exchange for those proceeds, CMS Energy sold to the trust $180 million aggregate principal amount of 7 percent Extendible Tenor Rate Adjusted Securities due January 15, 2005, which may be extended for an additional seven years. Net proceeds to CMS Energy from the sale totaled $176 million.

As of December 31, 1998, CMS Energy had an aggregate $2.3 billion in securities registered for future issuance, including securities to be issued to permanently finance the acquisition, as described below, of Panhandle Eastern Pipe Line Company, Trunkline Gas Company, Pan Gas Storage Company, Panhandle Storage Company and Trunkline LNG Company (Panhandle Companies). CMS Energy also has $725 million senior credit facilities (Senior Credit Facilities), unsecured lines of credit and letters of credit as sources of funds needed to fulfill, in whole or in part, material commitments for capital expenditures. For detailed information, see "Short-Term Financings" and "Capitalization" in Note 4 and Note 6, respectively, incorporated by reference herein.

CMS Energy's Senior Credit Facilities consist of a $600 million three-year revolving credit facility and a five-year $125 million term loan facility. Additionally, CMS Energy has unsecured lines of credit and letters of credit in an aggregate amount of $216 million. These credit facilities are available to finance working capital requirements and to pay for capital expenditures between long-term financings. At December 31, 1998, the total amount utilized under the Senior Credit Facilities was $725 million, including $57 million of contingent obligations, and under the unsecured lines of credit and letters of credit was $147 million.

Consumers has Federal Energy Regulatory Commission (FERC) authorization to issue securities and guarantees. Consumers has a credit facility, lines of credit and a trade receivable sale program in place as anticipated sources of funds needed to fulfill, in whole or in part, material commitments for capital expenditures as of December 31, 1998. For detailed information, see "Short-Term Financings" and "Capitalization" in Note 4 and Note 6, respectively, incorporated by reference herein.

CMS Energy and its subsidiaries must redeem or retire $762 million of long-term debt over the three-year period ending December 2001. In addition, at December 31, 1998, Consumers had a recorded liability to the U.S. Department of Energy (DOE) of $117 million, which Consumers must pay upon the first delivery of spent nuclear fuel to the DOE. Current federal law originally scheduled delivery of the fuel to occur in 1998; for additional information, see "Nuclear Fuel Cost" in Note 2.

On November 2, 1998, CMS Energy announced an agreement to acquire the Panhandle Companies from Duke Energy Corporation for a cash payment of $1.9 billion and existing Panhandle Companies debt of $300 million. The transaction was completed in March 1999, and will be accounted for under the purchase method of accounting.

The acquisition of the Panhandle Companies initially was financed in part with bridge loan facilities negotiated with domestic 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 arrangements as well as the sale of approximately $600 million of CMS Energy Common Stock and other CMS Energy securities.

CMS Energy estimates that capital expenditures, including new lease commitments and investments in partnerships and unconsolidated subsidiaries, will total $6.8 billion over the next three years. These estimates are prepared for planning purposes and are subject to revision. This total includes approximately $2.2 billion for the acquisition of the Panhandle Companies as described above. A substantial portion of the remaining capital expenditures is expected to be satisfied by cash from operations. Nevertheless, CMS Energy will continue to evaluate capital markets in 1999 as a potential source of financing its subsidiaries' investing activities.

CMS Energy estimates capital expenditures by business segment over the next three years as follows:

CMS Energy currently plans investments from 1999 to 2001: (i) for oil and gas exploration and production operations, primarily in North and South America, offshore West Africa and North Africa; (ii) for independent power production operations to pursue acquisitions and development of electric generating plants in the United States, Latin America, Asia, Australia, the Pacific Rim region, North Africa and the Middle East; (iii) to continue development of nonutility natural gas storage, gathering and pipeline operations of CMS Gas Transmission, both domestic and international; (iv) to acquire, develop and expand international energy distribution businesses; and (v) to provide gas, electric, oil and coal marketing, risk management and energy management services throughout the United States and eventually worldwide.

As the deregulation and privatization of the energy industry takes place in the United States and internationally, CMS Energy has positioned itself to be a leading international diversified energy company acquiring, developing and operating energy facilities and providing energy services in major world growth markets. CMS Energy provides a complete range of international energy expertise from energy production to consumption.

CMS Energy will continue to grow internationally by investing in multiple projects in several countries as well as by developing synergistic projects across its lines of business. CMS Energy believes these integrated projects will create more opportunities and greater value than individual investments. Also, CMS Energy will achieve this growth through strategic partnering where appropriate.

CMS Energy seeks to minimize operational and financial risks when operating internationally by working with local partners, utilizing multilateral financing institutions, procuring political risk insurance and hedging foreign currency exposure where appropriate.

Growth: Consumers expects average annual growth of 2.4 percent per year in electric system deliveries over the next five years, absent the impact of restructuring on the industry and its regulation in Michigan. Abnormal weather, changing economic conditions, or the developing competitive market for electricity may affect actual electric sales in future periods.

Restructuring: Consumers' retail electric business is affected by competition. To meet its challenges, Consumers entered into multi-year contracts with some of its largest industrial customers to serve certain facilities. The Michigan Public Service Commission (MPSC) has approved these contracts as part of its phased introduction to competition. Certain customers have the option of terminating their contracts early.

FERC final rules issued on April 24, 1996 (Orders 888 and 889), as amended, require utilities to provide direct access to the interstate transmission grid for wholesale transactions. Consumers and The Detroit Edison Company (Detroit Edison) disagree on the effect of the orders on the Michigan Electric Power Coordination Center pool. Consumers proposes to maintain the benefits of the pool through at least December 2000, while Detroit Edison contends that the pool agreement should be terminated immediately. Among Consumers' alternatives in the event of the pool being terminated would be joining an independent system operator. FERC has indicated this preference for structuring the operations of the electric transmission grid.

For material changes relating to the restructuring of the electric utility industry, see "Consumers' Electric Utility Rate Matters-Electric Restructuring" in Note 3, incorporated by reference herein.

Electric Application of SFAS 71: Consumers applies utility accounting standard, Statement of Financial Accounting Standards (SFAS) 71. At December 31, 1998, Consumers believed that the generation segment of its business was still subject to cost-based rate regulation due to legislative and regulatory uncertainty about the status of Consumers' continuing obligation to provide generation service to customers. Subsequent to year-end, Consumers received MPSC electric restructuring orders which among other things identified the terms and timing for implementing electric restructuring in Michigan. Consumers anticipates that it will discontinue application of SFAS 71 for the generation segment of its business in the first quarter of 1999 as Consumers is now preparing to implement electric customer direct access. According to current accounting standards, Consumers can continue to carry its generation-related regulatory assets or liabilities for the part of the business being deregulated if deregulatory legislation or an MPSC rate order allows the collection of cash flows from its regulated transmission and distribution customers to recover these specific costs or settle obligations. A February 1998 MPSC order allows Consumers to fully recover its costs incurred by utilities in order to serve their customers in a regulated monopoly environment (Transition Costs). At December 31, 1998, Consumers had $259 million of generation-related net regulatory assets recorded on its balance sheet, and a net investment in generation facilities of $1.3 billion included in electric plant and property.

Growth: Consumers currently anticipates gas deliveries, including gas customer choice deliveries (excluding transportation to the MCV Facility and off-system deliveries), to grow at an average annual rate of between one and two percent over the next five years based primarily on a steadily growing customer base. Actual gas deliveries in future periods may be affected by abnormal weather, alternative energy prices, changes in competitive conditions, and the level of natural gas consumption. Consumers also offers a variety of energy-related services to its customers focused upon appliance maintenance, home safety, commodity choice and assistance to customers purchasing heating, ventilation and air conditioning equipment.

Restructuring: In December 1997, the MPSC approved Consumers' application to implement a statewide three-year experimental gas transportation program, eventually allowing 300,000 residential, commercial and industrial retail gas sales customers to choose their gas supplier. For further information regarding restructuring of the gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage Company (Consumers Gas Group), see "Uncertainties-Consumers Gas Group Matters-Gas Restructuring" in Note 3, incorporated by reference herein.

Other: Effective January 1, 1999, Consumers was allowed to solicit Michigan Consolidated Gas Company (MichCon) and SEMCO Energy Gas Company customers due to a three-year experimental program ordered by the MPSC allowing customers a choice of gas suppliers. As of February 8, 1999, Consumers has signed up 650 of MichCon's customers and 300 of SEMCO Energy Gas Company's customers.

In 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. These statements will be effective in 1999. CMS Energy does not expect the application of these standards to materially affect its financial position, liquidity or results of operations. Also in 1998, the Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which will be effective in 2000, and the Emerging Issues Task Force published Issue 98-10, Accounting for Energy Trading and Risk Management Activities, which will be effective in 1999. CMS Energy is currently studying these new standards and has not yet quantified the impacts of adopting SFAS 133 or Issue 98-10 on its financial statements and has not determined the timing of or method of adoption. However, SFAS 133 and Issue 98-10 will increase volatility in earnings and other comprehensive income.

CMS Energy uses software and related technologies throughout its domestic and international businesses that the year 2000 date change could affect and, if uncorrected, could cause CMS Energy to, among other things, delay issuance of bills or reports, issue inaccurate bills, report inaccurate data, incur generating plant outages, or create energy delivery uncertainties. In 1995, CMS Energy established a Year 2000 Program to ensure the continued operation of its businesses at the turn of the century. CMS Energy's efforts included dividing the programs requiring modification between critical and noncritical programs. A formal methodology was established to identify critical business functions and risk scenarios, to correct problems identified, to develop test plans and expected results, and to test the corrections made. CMS Energy's Year 2000 Program involves an aggressive, comprehensive four-phase approach, including impact analysis, remediation, compliance review, and monitoring/contingency planning.

The impact analysis phase includes the analysis, inventory, prioritization and remediation plan development for all technology essential to core business processes. The remediation phase involves testing and implementation of remediated technology. A mainframe test environment was established in 1997 and a test environment for network servers and stand-alone personal computers was established in mid-1998. All essential corporate business systems have been, or will be, tested in these test environments. The compliance review phase includes the assembling of compliance documentation for each technology component as remediation efforts are completed, and additional verification testing of essential technology where necessary. The monitoring/contingency planning phase includes compliance monitoring to ensure that year 2000 problems are not reintroduced into remediated technology, as well as the development of contingency plans to address reasonably likely risk scenarios.

State of Readiness: CMS Energy is managing traditional information technology (IT), which consists of essential business systems such as payroll, billing and purchasing; and infrastructure, including mainframe, wide area network, local area networks, personal computers, radios and telephone systems. CMS Energy is also managing process control computers and embedded systems contained in buildings, equipment and energy supply and delivery systems.

Essential goods and services for CMS Energy are electric fuel supply, gas fuel supply, independent electric power supplies, facilities, electronic commerce, telecommunications network carriers, financial institutions, purchasing vendors, and software and hardware technology vendors. CMS Energy is addressing the preparedness of these businesses and their risk through readiness assessment questionnaires.

The status of CMS Energy's Year 2000 Program by phase, with target dates for completion and current percentage complete based upon software and hardware inventory counts as of December 31, 1998, is as follows:

Cost of Remediation: CMS Energy expenses spending for software modifications as incurred, and capitalizes and amortizes the cost for new software and equipment over its useful life. The total estimated cost of the Year 2000 Program is approximately $30 million. Costs incurred through December 31, 1998 were approximately $16 million. CMS Energy's annual Year 2000 Program costs have represented approximately 2 percent to 10 percent of CMS Energy's annual IT budget through 1998 and are expected to represent approximately 25 percent of CMS Energy's annual IT budget in 1999. Year 2000 compliance work is being funded primarily from operations. To date, the commitment of CMS Energy resources to the year 2000 issue has not deferred any material IT projects which could have a material adverse affect on CMS Energy's financial position, liquidity or results of operations.

Risk Assessment: CMS Energy considers the most reasonably likely worst-case scenarios to be: (i) a lack of communications to dispatch crews to electric or gas emergencies; (ii) a lack of communications to generating units to balance electrical load; (iii) power shortages due to the lack of stability of the electric grid; and (iv) a failure of fuel suppliers to deliver fuel to generating facilities. These scenarios could result in 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. Year 2000 remediation and testing efforts are concentrating on these risk areas and will continue through the end of 1999. Contingency plans will be revised and executed to further mitigate the risks associated with these scenarios.

Contingency Plans: Contingency planning efforts are currently underway for all business systems and providers of essential goods and services. Extensive contingency plans are already in place in many locations and are currently being revised for reasonably likely worst-case scenarios related to year 2000 issues. In many cases, Consumers already has arrangements with multiple vendors of similar goods and services so that in the event that one cannot meet its commitments, others may be able to. Current contingency plans provide for manual dispatching of crews and manual coordination of electrical load balancing and are being revised to provide for radio or satellite communications. Coordinated contingency planning efforts are in progress with third parties to minimize risk to electric generation, transmission and distribution systems.

Expectations: CMS Energy does not expect that the cost of these modifications will materially affect its financial position, liquidity or results of operations. There can be no guarantee, however, that these costs, plans or time estimates will be achieved, and actual results could differ materially.

Because of the integrated nature of CMS Energy's business with other energy companies, utilities, jointly owned facilities operated by other entities, and business conducted with suppliers and large customers, CMS Energy may be indirectly affected by year 2000 compliance complications. At this time, CMS Energy is unable to anticipate the magnitude of the operational or financial impact of year 2000 issues on CMS Energy.

CMS Energy adjusts common stockholders' equity to reflect foreign currency translation adjustments for the operation of long-term investments in foreign countries. The adjustment is primarily due to the exchange rate fluctuations between the U.S. dollar and each of the Australian dollar and Brazilian real. From January 1, 1998 through December 31, 1998, the change in the foreign currency translation adjustment totaled $40 million, net of after-tax hedging proceeds. Although management currently believes that the currency exchange rate fluctuations over the long term will not materially adversely affect CMS Energy's financial position, liquidity or results of operations, CMS Energy has hedged its exposure to the Australian dollar and the Brazilian real. CMS Energy uses forward exchange contracts and collared options to hedge certain receivables, payables, long-term debt and equity value relating to foreign investments. The notional amount of the outstanding foreign exchange contracts was $736 million at December 31, 1998, which includes $450 million 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.

This Annual Report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The words "anticipates," "believes," "estimates," "expects," "intends," and "plans," as well as variations of such words and similar expressions, are intended to identify forward-looking statements that involve risk and uncertainty. These statements are necessarily based upon various assumptions involving judgments with respect to the future including, among others, the ability to achieve operating synergies and revenue enhancements; international, national, regional and local economic, competitive and regulatory conditions and developments; capital and financial market conditions, including currency exchange controls and interest rates; weather conditions; adverse regulatory or legal decisions, including environmental laws and regulations; the pace of deregulation of the natural gas and electric industries; energy markets, including the timing and extent of changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity and certain related products; the timing and success of business development efforts; potential disruption, expropriation or interruption of facilities or operations due to accidents or political events; nuclear power and other technological developments; and other uncertainties, all of which are difficult to predict and many of which are beyond the control of CMS Energy. Accordingly, while CMS Energy believes that the assumed results are reasonable, there can be no assurance that they will approximate actual results. CMS Energy disclaims any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Certain risk factors are detailed from time to time in various public filings made by CMS Energy with the SEC.

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