1: Corporate Structure

CMS Energy Corporation (CMS Energy) is the parent holding company of Consumers Energy Company (Consumers) and CMS Enterprises Company (Enterprises). Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Enterprises is engaged in several domestic and international energy-related businesses including: acquisition, development and operation of independent power production facilities; oil and gas exploration and production; transmission, storage, and processing of natural gas; energy marketing, services and trading; and international energy distribution.

Basis of Presentation: The consolidated financial statements include CMS Energy, Consumers and Enterprises and their majority owned subsidiaries. The financial statements are prepared in conformity with generally accepted accounting principles and use management's estimates where appropriate. Affiliated companies (more than 20 percent but less than a majority ownership interest) are accounted for by the equity method.

Change in Method of Accounting for Investments in Oil and Gas Properties: CMS Oil and Gas Company (CMS Oil and Gas) (formerly CMS NOMECO Oil & Gas Co.) elected to convert, effective January 1, 1998, from the full cost method to the successful efforts method of accounting for its investments in oil and gas properties. CMS Oil and Gas believes this accounting change will more accurately present the results of its exploration and development activities and minimize asset write-offs caused by periodic price swings, which may not be representative of overall or long-term markets. In addition, the Financial Accounting Standards Board has stated a preference for the use of successful efforts accounting. 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. Accordingly, 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.

Change in Method of Accounting for Property Taxes: During the first quarter of 1998, Consumers implemented a change in the method of accounting for property taxes so that such taxes are recognized during the fiscal period of the taxing authority for which the taxes are levied. This change better matches property tax expense with the services provided by the taxing authorities, and is considered the most acceptable basis of recording property taxes. Prior to 1998, Consumers recorded property taxes monthly during the year following the assessment date (December 31). The cumulative effect of this one-time change in accounting increased other income by $66 million, and earnings, net of tax, by $43 million or $.40 per share. The pro forma effect on prior years' consolidated net income of retroactively recording property taxes as if the new method of accounting had been in effect for all periods presented is not material.

Accretion Income and Expense: In 1991, the Michigan Public Service Commission (MPSC) allowed Consumers to recover a portion of its abandoned Midland investment over a 10-year period, but did not allow Consumers to earn a return on that amount. Consumers reduced the recoverable investment to the present value of the future recoveries. During the recovery period, Consumers adjusts the unrecovered asset to its present value. It reflects this adjustment as accretion income. Conversely, Consumers recorded a loss in 1992 for the present value of its estimated future underrecoveries of power costs resulting from purchases from the Midland Cogeneration Venture Limited Partnership (MCV Partnership) (see Note 3). It now recognizes accretion expense annually to reflect the time value of money on the recorded loss.

Gas Inventory: Consumers uses the weighted average cost method for valuing working gas inventory. It records cushion gas, which is gas stored to maintain reservoir pressure for recovery of working gas, in the appropriate gas utility plant account. Consumers stores gas inventory in its underground storage facilities.

Maintenance, Depreciation and Depletion: Consumers charges property repairs and minor property replacements to maintenance expense. Depreciable property retired or sold, plus cost of removal (net of salvage credits), is charged to accumulated depreciation. Consumers bases depreciation provisions for utility plant on straight-line and units-of-production rates approved by the MPSC. The composite depreciation rate for electric utility property was 3.5 percent for 1998, 3.6 percent for 1997 and 3.5 percent for 1996. The composite rate for gas utility plant was 4.2 percent for 1998, 4.1 percent for 1997 and 4.2 percent for 1996. The composite rate for other plant and property was 7.4 percent for 1998, 8.2 percent for 1997 and 5.5 percent for 1996.

CMS Oil and Gas follows the successful efforts method of accounting for its investments in oil and gas properties. CMS Oil and Gas capitalizes the costs of property acquisitions, successful exploratory wells, all development costs, and support equipment and facilities when incurred. It expenses unsuccessful exploratory wells when they are determined to be non-productive. CMS Oil and Gas also charges to expense production costs, overhead, and all exploration costs other than exploratory drilling as incurred. Depreciation, depletion and amortization of proved oil and gas properties is determined on a field-by-field basis using the units-of-production method over the life of the remaining proved reserves.

Other nonutility depreciable property is amortized over its estimated useful life; gains and losses are recognized at the time of sale.

Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense based on the quantity of heat produced for electric generation. Interest on leased nuclear fuel is expensed as incurred. Under current federal law, as confirmed by court decision, the U.S. Department of Energy (DOE) was to begin accepting deliveries of spent nuclear fuel by January 31, 1998 for disposal. For fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers them through electric rates and remits to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983. At December 31, 1998, Consumers had a recorded liability to the DOE of $117 million, including interest, which is payable upon the first delivery of spent nuclear fuel to the DOE. Consumers recovered through electric rates the amount of this liability, excluding a portion of interest. In January 1997, in response to the DOE's declaration that it would not begin to accept spent nuclear fuel deliveries in 1998, Consumers and other utilities filed suit in federal court. A decision was issued by the court in late 1997 affirming the DOE's duty to take delivery of spent fuel, but was not specific as to the relief available for failure of the DOE to comply. Further litigation brought by Consumers and others in 1998 is intended to produce specific monetary relief for the DOE's failure to comply. In January 1999, federal legislation was reintroduced in the House of Representatives to clarify the timing of the DOE's obligation to accept spent nuclear fuel and to direct the DOE to establish an integrated spent fuel management system that includes designing and constructing an interim storage facility in Nevada. Similar legislation is expected to be reintroduced in the Senate.

Nuclear Plant Decommissioning: Consumers collected $51 million in 1998 from its electric customers for decommissioning of its two nuclear plants. Amounts collected from electric retail customers and deposited in trusts (including trust earnings) are credited to accumulated depreciation. In 1996, Consumers received a decommissioning order from the MPSC that estimated decommissioning costs for Big Rock Point nuclear power plant (Big Rock) and Palisades nuclear power plant (Palisades) to be $344 million and $599 million (in 1998 dollars), respectively. Consumers filed with the MPSC in March 1998 site-specific decommissioning cost estimates for Big Rock and Palisades, assuming that each plant site will eventually be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. The revised estimated decommissioning costs for Big Rock and Palisades are $304 million and $541 million (in 1998 dollars), respectively. The decreases in cost from previous estimates are principally due to the Big Rock immediate dismantlement and reductions in decommissioning costs. Consumers has determined that the current decommissioning surcharge will be sufficient to provide for decommissioning of its nuclear plants and anticipates a new MPSC order in early 1999. After retirement of Palisades, Consumers plans to maintain the facility in protective storage if radioactive waste disposal facilities are not available. Consumers will incur most of the Palisades decommissioning costs after the plant's Nuclear Regulatory Commission (NRC) operating license expires. When the Palisades' NRC license expires in 2007, the trust funds are currently estimated to have accumulated $719 million. Consumers estimates that at the time Palisades is fully decommissioned in the year 2046, the trust funds will have provided $1.9 billion, including trust earnings, over this decommissioning period. At December 31, 1998, Consumers had an investment in nuclear decommissioning trust funds of $376 million for Palisades and $181 million for Big Rock.

Big Rock was closed permanently in 1997 because management determined that it would be uneconomical to operate in an increasingly competitive environment. The plant was originally scheduled to close on May 31, 2000, at the end of the plant's operating license. The MPSC has allowed Consumers to continue collecting decommissioning surcharges through December 31, 2000. Plant decommissioning began in 1997 and may take five to ten years to return the site to its original condition. Consumers has spent $75 million for the decommissioning and withdrew $68 million from the Big Rock nuclear decommissioning trust fund.

Reclassifications: CMS Energy has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect consolidated net income for the years presented.

Related-Party Transactions: In 1998, 1997 and 1996, Consumers purchased $51 million, $51 million and $50 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Affiliates of CMS Energy sold, stored and transported natural gas and provided other services to the MCV Partnership totaling $21 million, $21 million and $17 million for 1998, 1997 and 1996. For additional discussion of related-party transactions with the MCV Partnership and the First Midland Limited Partnership (FMLP), see Note 3 and Note 18. Other related-party transactions are immaterial.

Utility Regulation: Consumers accounts for the effects of regulation based on a regulated utility accounting standard Statement of Financial Accounting Standards (SFAS) 71. As a result, the actions of regulators affect when revenues, expenses, assets and liabilities are recognized. SFAS 121 imposes stricter criteria for retention of regulatory-created assets by requiring that such assets be probable of future recovery at each balance sheet date. Management believes these assets will be recovered.

The following regulatory assets (liabilities), which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets. These costs are being recovered through rates over periods of up to 14 years.

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.

Implementation of New Accounting Standards: In 1998 CMS Energy implemented SFAS 130, Reporting Comprehensive Income, SFAS 131, Disclosures about Segments of an Enterprise and Related Information, and SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS 130 establishes standards for reporting and display of comprehensive income and its components. Equity adjustments related to unrealized investment gains and losses (net of tax) and foreign currency translation, along with consolidated net income, comprise comprehensive income. SFAS 131 and 132 require expanded disclosure concerning segments of an enterprise and pension and other postretirement benefits.

Foreign Currency Translation: Foreign currency translation adjustments relating to the operation of CMS Energy's long-term investments in foreign countries are included in common stockholders' equity. For the year ended December 31, 1998, the change in the foreign currency translation adjustment totaled $40 million, net of after-tax hedging proceeds.

Other: For significant accounting policies regarding cash equivalents, see Note 16; for income taxes, see Note 9; for executive incentive compensation, see Note 11; and for pensions and other postretirement benefits, see Note 12.

Electric Environmental Matters: The federal Clean Air Act, as amended (Clean Air Act), limits emissions of sulfur dioxide and nitrogen oxides and requires emissions and air quality monitoring. Consumers currently operates within these limits and meets current emission requirements. The Clean Air Act requires the Environmental Protection Agency (EPA) to periodically review the effectiveness of the national air quality standards in preventing adverse health effects, and in 1997 the EPA revised these standards. It is probable that the 1997 standards will result in further limitations on small particulate-related emissions.

In September 1998, based upon the 1997 standards, the EPA Administrator signed final regulations requiring the State of Michigan to further limit nitrogen oxide emissions. Fossil-fueled emitters, such as Consumers' generating units, can anticipate a reduction in nitrogen oxide emissions by 2003 to only 32 percent of levels allowed for the year 2000. The State of Michigan has one year to submit an implementation plan. The State of Michigan has filed a lawsuit objecting to the extent of the required emission reductions. It is unlikely that the State of Michigan will establish Consumers' nitrogen oxide emissions reduction target until mid-to-late 1999. Until this target is established, the estimated cost of compliance discussed below is subject to revision. If a court were to order the EPA to adopt the State of Michigan's position, compliance costs could be less than the preliminary estimated amounts.

The preliminary estimate of capital expenditures to reduce nitrogen oxide-related emissions for Consumers' fossil-fueled generating units is approximately $290 million, plus $10 million per year for operation and maintenance costs. Consumers anticipates that these capital expenditures will be incurred between 1999 and 2003. Consumers may need an equivalent amount of capital expenditures and operation and maintenance costs to comply with the new small particulate standards.

Consumers' coal-fueled electric generating units burn low-sulfur coal and are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. During the past few years, in order to comply with the Clean Air Act, Consumers incurred capital expenditures totaling $55 million to install equipment at certain generating units. Consumers estimates an additional $16 million of capital expenditures for ongoing and proposed modifications at the remaining coal-fueled units to meet year 2000 requirements. Management believes that these expenditures will not materially affect Consumers' annual operating costs.

Under the Michigan Natural Resources and Environmental Protection Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites. Nevertheless, it believes that these costs are properly recoverable in rates under current ratemaking policies.

Consumers is a so-called potentially responsible party at several contaminated sites administered under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund). Superfund liability is joint and several; along with Consumers, many other creditworthy, potentially responsible parties with substantial assets cooperate with respect to the individual sites. Based upon past negotiations, Consumers estimates that its share of the total liability for the known Superfund sites will be between $3 million and $9 million. At December 31, 1998, Consumers has accrued the minimum amount of the range for its estimated Superfund liability.

While decommissioning Big Rock, Consumers found that some areas of the plant have coatings that contain both metals and polychlorinated biphenyls. Consumers does not believe that any facility in the United States currently accepts the radioactive portion of that waste. The cost of removal and disposal is currently unknown. These costs will constitute part of the cost to decommission the plant, and will be paid from the decommissioning fund. Consumers is studying the extent of the contamination and reviewing options.

Antitrust: In October 1997, two independent power producers sued Consumers in a federal court. The suit alleges antitrust violations relating to contracts which Consumers entered into with some of its customers and claims relating to power facilities. The plaintiffs claim damages of $100 million (which a court can treble in antitrust cases as provided by law). Consumers has filed a motion to dismiss and is awaiting a court ruling on this motion. Consumers believes the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter.

Electric Proceedings: In 1996, the MPSC issued a final order that authorized Consumers to recover costs associated with the purchase of the additional 325 megawatts (MW) of the natural gas-fueled, combined-cycle cogeneration facility (MCV Facility) capacity (see "Power Purchases from the MCV Partnership" in this Note) and to recover its nuclear plant investment by increasing prospective annual nuclear plant depreciation expense by $18 million, with a corresponding decrease in fossil-fueled generating plant depreciation expense. It also established an experimental direct-access program. Customers having a maximum demand of 2 MW or greater are eligible to purchase generation services directly from any eligible third-party power supplier and Consumers will transmit the power for a fee. The direct-access program is limited to 134 MW of load. In accordance with the MPSC order, Consumers held a lottery in April 1997 to select the customers to participate in the direct-access program. Subsequently, direct access for a portion of this 134 MW began in late 1997. The program was substantially filled by mid-January 1999 and Consumers expects the remaining amount to begin by the end of the first quarter of 1999.

In January 1998, the Michigan Court of Appeals (Court of Appeals) affirmed an MPSC conclusion that the MPSC has statutory authority to authorize an experimental electric retail wheeling program. No retail wheeling has yet occurred pursuant to that program. In October 1998, the Michigan Supreme Court issued an order granting Consumers' application for leave to appeal. A decision by the Michigan Supreme Court in this matter may be issued in mid-1999.

Electric Restructuring: As part of ongoing proceedings relating to the restructuring of the electric utility industry in Michigan, the MPSC in June 1997 issued an order proposing that beginning January 1, 1998 Consumers transmit and distribute energy on behalf of competing power suppliers to retail customers. Further restructuring orders issued in late 1997 and early 1998 provide for: (i) recovery of costs incurred by utilities in order to serve their customers in a regulated monopoly environment of $1.755 billion through a charge to all customers purchasing their power from other sources until the end of the transition period in 2007, subject to an adjustment through a true-up mechanism; (ii) commencement of the phase-in of direct access in 1998; (iii) suspension of the power supply cost recovery (PSCR) clause as discussed below; and (iv) all customers to choose their power suppliers on January 1, 2002. The recovery of costs of implementing a direct-access program, preliminarily estimated at an additional $200 million, would be reviewed for prudence and recovered via a charge approved by the MPSC. Nuclear decommissioning costs will also continue to be collected through a separate surcharge to all customers.

In June 1998, Consumers submitted its plan for implementing direct access to the MPSC. The primary issues addressed in the plan are: (i) the implementation schedule; (ii) the direct-access service options available to customers and suppliers; (iii) the process and requirements for customers and others to obtain direct-access service; and (iv) the roles and responsibilities for Consumers, customers and suppliers. In the plan, Consumers proposed to phase in 750 MW of retail customer load to customers purchasing their power from other sources over the 1998-2001 period. Subsequent to year-end, Consumers received MPSC electric restructuring orders which generally supported Consumers' implementation plan. Accordingly, Consumers is now preparing to implement electric customer direct access.

There are numerous appeals pending at the Court of Appeals relating to the MPSC's restructuring orders, including appeals by Consumers. Consumers believes that the MPSC lacks statutory authority to mandate industry restructuring, and its appeal is limited to this jurisdictional issue. CMS Energy cannot predict the outcome of electric restructuring on CMS Energy's financial position, liquidity or results of operations.

In October 1998, Consumers initiated a process for the solicitation of bids to acquire Consumers' rights to 1,240 MW of contract capacity and associated energy being purchased from the MCV Partnership. Subsequent to year-end, Consumers signed a tentative long-term power sales agreement with PECO Energy Company. This transaction is subject to obtaining satisfactory rate-making and accounting treatment and regulatory rulings. In an order issued in 1998, the MPSC delayed its consideration of the bidding process until a definitive agreement was signed (subject to review by the MPSC), but stated that Consumers' approach offers a legitimate way to utilize independent market forces to determine the above-market or stranded portion of Consumers' obligations under the Power Purchase Agreement (PPA) with the MCV Partnership. Consumers anticipates that its regulatory filing will be made with the MPSC for 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. Under this program, customers buying electricity from Consumers as traditional customers will not have their rates adjusted to reflect the actual costs of fuel and purchased and interchanged power during the 1998-2001 period. In prior years, any change in power supply costs was passed through to Consumers' customers. In order to reduce the risk of high energy prices during peak demand periods, Consumers is purchasing energy options and contracting to buy electricity during the months of June through September 1999. Consumers is planning to have sufficient generation and purchased capacity for a 16 percent to 21 percent reserve margin in order to provide reliable service to its electric service customers and to protect itself against unscheduled plant outages. Under certain circumstances, the cost of purchasing capacity and energy on the spot market could be substantial.

The Midland Cogeneration Venture: The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. Consumers, through two wholly owned subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: (i) CMS Midland Inc., a subsidiary of Consumers, owns a 49 percent general partnership interest in the MCV Partnership; and (ii) CMS Midland Holdings Company, a subsidiary of Consumers, holds, through FMLP, a 35 percent lessor interest in the MCV Facility.

Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase capacity from the MCV Partnership is 1,240 MW through the termination of the PPA in 2025. The PPA provides that Consumers is to pay a levelized average capacity charge, based on the MCV Facility's availability, of 3.77 cents per kilowatt-hour (kWh), a fixed energy charge, and a variable energy charge based primarily on Consumers' average cost of coal consumed. Since January 1, 1993, Consumers has been permitted by the MPSC to recover capacity charges averaging 3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and variable energy charges. Since January 1, 1996, Consumers also has been permitted to recover capacity charges for the remaining 325 MW of contract capacity with an initial average charge of 2.86 cents per kWh increasing periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. Because the MPSC has already approved recovery of this capacity, Consumers expects to recover these increases through an adjustment to the currently frozen PSCR level. This adjustment is currently under consideration by the MPSC. After September 2007, under the terms of the PPA, Consumers will only be required to pay the MCV Partnership capacity and energy charges that the MPSC has authorized for recovery from electric customers.

Consumers recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA based on MPSC recovery orders. At December 31, 1998 and December 31, 1997, the remaining after-tax present value of the estimated future PPA liability associated with the 1992 loss totaled $110 million and $117 million, respectively. At December 31, 1998, the undiscounted after-tax amount associated with this liability totaled $164 million. These after-tax cash underrecoveries are based on the assumption that the MCV Facility would be available to generate electricity 91.5 percent of the time over its expected life. Historically the MCV Facility has operated above the 91.5 percent level. Accordingly, in 1998, Consumers increased its PPA liability by $37 million. Because the MCV Facility was available 99.4 percent of the time in 1998, Consumers has an accumulated unrecovered after-tax shortfall of $10 million as of December 31, 1998. If the MCV Facility was to be available to generate electricity at the expected 91.5 percent level during the next five years, Consumers' after-tax cash underrecoveries associated with the PPA would be as follows.

If the MCV Facility operates at availability levels above management's estimate over the remainder of the PPA, Consumers will need to recognize additional losses for future underrecoveries. 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.

In February 1998, the MCV Partnership filed a claim of appeal from the January 1998 and February 1998 MPSC orders in the electric utility industry restructuring. At the same time, the MCV Partnership filed suit in the U.S. District Court seeking a declaration that the MPSC's failure to provide Consumers and the MCV Partnership a certain source of recovery of capacity payments after 2007 deprived the MCV Partnership of its rights under the Public Utilities Regulatory Policies Act of 1978. The MCV Partnership is seeking to prohibit the MPSC from implementing portions of the order.

Nuclear Matters: In January 1997, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report rated all areas as good. The NRC suspended the assessment process for all licensees in 1998.

Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity. Consequently, Consumers is using NRC-approved steel and concrete vaults, commonly known as "dry casks," for temporary on-site storage. As of December 31, 1998 Consumers had loaded 13 dry storage casks with spent nuclear fuel at Palisades and plans to load five additional casks in 1999 pending approval by the NRC. In June 1997, the NRC approved Consumers' process for unloading spent fuel from a cask previously discovered to have minor weld flaws. Consumers intends to transfer the spent fuel to a new transportable cask when one is available.

Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. Consumers also maintains coverage for replacement power costs during prolonged accidental outages at Palisades. Insurance would not cover such costs during the first 17 weeks of any outage, but would cover most of such costs during the next 58 weeks of the outage, followed by reduced coverage to 80 percent for two additional years. If certain covered losses occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of $15 million in any one year to Nuclear Electric Insurance Limited; $88 million per occurrence, limited to a maximum installment payment of $10 million per occurrence in any year; and $6 million if nuclear workers claim bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote.

The NRC requires Consumers to make certain calculations and report on the continuing ability of the Palisades reactor vessel to withstand postulated pressurized thermal shock events during its remaining license life, considering the embrittlement of reactor materials. In December 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003 before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that with fuel management designed to minimize embrittlement, it can operate Palisades to the end of its license life in the year 2007 without annealing the reactor vessel. Nevertheless, Consumers will continue to monitor the matter.

Commitments for Coal Supplies: Consumers has entered into coal supply contracts with various suppliers for its coal-fired generating stations. Under the terms of these agreements, Consumers is obligated to take physical delivery of the coal and make payment based upon the contract terms. Consumers' current contracts have expiration dates that range from 1999 to 2004. Consumers enters into long-term contracts for approximately 50-75 percent of its annual coal requirements. In 1998 coal purchases totaled $246 million of which $161 million (60 percent of the tonnage requirement) was under long-term contract. Consumers supplements its long-term contracts with spot-market purchases.

Gas Environmental Matters: Under the Michigan Natural Resources and Environmental Protection Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. On sites where Consumers has received site-wide study plan approvals, it will continue to implement these plans. It will also work toward closure of environmental issues at sites as studies are completed. Consumers estimates its costs related to investigation and remedial action for all 23 sites between $48 million and $98 million, of which Consumers accrued a liability for $48 million. These estimates are undiscounted 1998 costs. As of December 31, 1998, Consumers has an accrued liability of $48 million and a regulatory asset for approximately the same amount. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination, and legal and regulatory requirements, could affect the estimate of remedial action costs for the sites. Consumers defers and amortizes over a period of ten years, environmental clean-up costs above the amount currently being recovered in rates. Rate recognition of amortization expense will not begin until after a prudence review in a general rate case. Consumers is allowed current recovery of $1 million annually. Consumers has initiated lawsuits against certain insurance companies regarding coverage for some or all of the costs that it may incur for these sites.

Gas Restructuring: In December 1997, the MPSC approved Consumers' application to implement an experimental gas transportation program, which will extend over a three-year period, eventually allowing 300,000 residential, commercial and industrial retail gas sales customers to choose their gas supplier in direct competition with Consumers. The program is voluntary and participating natural gas customers are selected on a first-come, first-served basis, up to a limit of 100,000 per year. As of December 31, 1998, more than 102,000 customers chose alternative gas suppliers, representing approximately 24.1 billion cubic feet (bcf) of gas load. Customers choosing to remain as sales customers of Consumers will not see a rate change in their natural gas rates. This three-year program: (i) suspends Consumers' gas cost recovery clause, effective April 1, 1998, establishing a gas commodity cost at a fixed rate of $2.84 per thousand cubic feet (mcf); (ii) establishes an earnings sharing mechanism with customers if Consumers' earnings exceed certain pre-determined levels; and (iii) establishes a gas transportation code of conduct that addresses the relationship between Consumers and marketers, including its affiliated marketers. In January 1998, the Michigan Attorney General, Association of Businesses Advocating Tariff Equity and other parties filed claims of appeal regarding the program with the Court of Appeals.

Consumers uses gas purchase contracts to limit its risk associated with gas price increases. It is management's intent to take physical delivery of the commodity and failure could result in a significant penalty for nonperformance. At December 31, 1998, Consumers had an exposure to gas price increases if the ultimate cost of gas was to exceed $2.84 per mcf for the following volumes: 15 percent of its 1999 requirements; 45 percent of its 2000 requirements; and 45 percent of its first quarter 2001 requirements. Additional contract coverage is currently under review. The gas purchase contracts currently in place were consummated at prices less than $2.84 per mcf. The gas purchase contracts are being used to protect against gas price increases in a three-year experimental gas program where Consumers is recovering from its customers $2.84 per mcf for gas.

Commitments for Gas Supplies: Consumers entered into gas supply contracts and transportation contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1999 to 2003. Consumers' 1998 gas requirements totaled 210 bcf at a cost of $565 million, 70 percent of which was under long-term contracts for one year or more. As of the end of 1998, Consumers had 85 percent of its 1999 gas requirements under such long-term contracts, and will supplement them with additional long-term contracts and spot-market purchases.

CMS Generation Environmental Matters: CMS Generation Co. (CMS Generation) does not currently expect to incur significant capital costs, if any, at its power facilities to comply with current environmental regulatory standards.

Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries and new lease commitments, of $4.148 billion for 1999, which includes approximately $2.2 billion for the acquisition of the Panhandle Eastern Pipe Line Company, Trunkline Gas Company, Pan Gas Storage Company, Panhandle Storage Company and Trunkline LNG Company (Panhandle Companies), $1.450 billion for 2000, and $1.175 billion for 2001. For further information, see Capital Resources and Liquidity-Capital Expenditures in the Management's Discussion and Analysis.

Other: As of December 31, 1998, CMS Energy and Enterprises have guaranteed up to $433 million in contingent obligations 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 various courts and governmental agencies arising from the ordinary course of business. These lawsuits and proceedings may involve personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters.

CMS Energy has accrued estimated losses for certain contingencies discussed in this Note. Resolution of these contingencies is not expected to have a material adverse impact on CMS Energy's financial position, liquidity or results of operations.

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