At December 31, 1998, CMS Energy and a subsidiary had bridge loan facilities negotiated with domestic banks in an aggregate amount of $1.9 billion. These facilities were specifically available to finance CMS Energy's acquisition of the Panhandle Companies, and had a term of six months from the date of acquisition. These facilities had aggregate average commitment and usage fees of approximately 53 basis points on amounts committed and/or used.

At February 1, 1999, Consumers had Federal Energy Regulatory Commission (FERC) authorization to issue or guarantee through June 2000, up to $900 million of short-term securities outstanding at any one time and to guarantee, through 1999, up to $25 million in loans made by others to residents of Michigan for making energy-related home improvements. Consumers also had remaining FERC authorization to issue through June 2000, up to $475 million and $425 million of long-term securities with maturities up to 30 years for refinancing purposes and for general corporate purposes respectively.

Consumers has an unsecured $425 million credit facility and unsecured lines of credit aggregating $130 million. These facilities are available to finance seasonal working capital requirements and to pay for capital expenditures between long-term financings. At December 31, 1998, a total of $215 million was outstanding at a weighted average interest rate of 5.8 percent, compared with $377 million outstanding at December 31, 1997, at a weighted average interest rate of 6.5 percent. In January 1999, Consumers renegotiated a variable-to-fixed interest rate swap totaling $175 million in order to reduce the impact of interest rate fluctuations.

Consumers also has in place a $500 million trade receivables sale program. At December 31, 1998 and 1997, receivables sold under the program totaled $306 million and $335 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold.

Long-term debt consists of the following:

The scheduled maturities of long-term debt and improvement fund obligations are as follows: $258 million in 1999, $408 million in 2000, $96 million in 2001, $1.306 billion in 2002 and $592 million in 2003.

CMS Energy has $725 million of senior credit facilities consisting of a $600 million three-year revolving credit facility and a five-year $125 million term loan facility (Senior Credit Facilities). Additionally, CMS Energy has unsecured lines of credit and letters of credit in an aggregate amount of $216 million. 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.

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.

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

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.

Consumers issued a total of $1.075 billion of senior notes throughout 1998 at varying interest rates between 6.2 percent and 6.875 percent, principal amounts between $150 million and $250 million, and maturities from 2008 to 2028. The senior notes are secured by Consumers First Mortgage Bonds issued contemporaneously in similar amounts and one series of senior notes also is secured by an insurance policy. Consumers also issued long-term bank debt of $225 million in May 1998, maturing in 2001 to 2003, at an initial interest rate of 6.05 percent. Proceeds from these issuances were used primarily to pay down $627 million of First Mortgage Bonds and $450 million of long-term bank debt, as well as for general corporate purposes.

Consumers secures its First Mortgage Bonds by a mortgage and lien on substantially all of its property. Consumers' ability to issue and sell securities is restricted by certain provisions in its First Mortgage Bond Indenture, its Articles of Incorporation and the need for regulatory approvals to meet appropriate federal law.

Consumers' long-term pollution control revenue bonds are secured by irrevocable letters of credit or First Mortgage Bonds, and an insurance policy.

CMS Oil and Gas has a $225 million revolving credit facility that converts to term loans maturing from March 1999 through March 2003.

The authorized capital stock of CMS Energy consists of 250 million shares of CMS Energy Common Stock, one of two classes of par value $.01 per share (CMS Energy Common Stock), 60 million shares of Class G Common Stock, one of two classes of no par value (Class G Common Stock), and 10 million shares of CMS Energy Preferred Stock, $.01 par value.

In November 1998, CMS Energy sold 4.5 million new shares of CMS Energy Common Stock in a block trade. The net proceeds of approximately $208 million were used for general corporate purposes.

In December 1998, CMS Energy filed a shelf registration statement for the issuance of $1.5 billion of CMS Energy Common Stock, trust preferred securities and other securities which could be converted into CMS Energy Common Stock.

CMS Energy, through CMS Energy Trust I, a wholly owned business trust, sold 3.45 million units of 7.75 percent tax deductible Trust Preferred Securities. The primary asset of CMS Energy Trust I is $178 million principal amount of 7.75 percent subordinated debentures issued by CMS Energy, which mature in 2027. These tax deductible Trust Preferred Securities are convertible into 4.2 million shares of CMS Energy Common Stock at a rate equivalent to a conversion price of $40.80 per share of CMS Energy Common Stock.

Other: Under its most restrictive borrowing arrangement at December 31, 1998, none of CMS Energy's consolidated net income was restricted for payment of common dividends. CMS Energy could pay $800 million in common dividends under its most restrictive debt covenant.

Consumers has 4 million shares of 8.36 percent Trust Preferred Securities which were sold through Consumers Power Company Financing I, a wholly owned business trust consolidated with Consumers. Net proceeds from the sale totaled $97 million. Consumers has 4.8 million shares of 8.2 percent Trust Preferred Securities which were sold through Consumers Energy Company Financing II, a wholly owned business trust consolidated with Consumers. Net proceeds from the sale totaled $116 million. Consumers formed both trusts for the sole purpose of issuing the Trust Preferred Securities. Consumers' obligations with respect to the Trust Preferred Securities under the related tax-deductible notes, under the indenture through which Consumers issued the notes, under Consumers' guarantee of the Trust Preferred Securities, and under the declaration by the trusts, taken together, constitute a full and unconditional guarantee by Consumers of the trusts' obligations under the Trust Preferred Securities.

Under the provisions of its Articles of Incorporation, Consumers had $300 million of unrestricted retained earnings available to pay common dividends at December 31, 1998. In January 1999, Consumers declared and paid a $97 million common dividend.

CMS Energy currently has two classes of common stock: CMS Energy Common Stock and Class G Common Stock (Common Stock). Earnings per share attributable to Common Stock for the years ended December 31, 1998, 1997 and 1996 include earnings of the gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage Company (Consumers Gas Group). The allocation of earnings attributable to each class of common stock and the related amounts per share are computed by considering the weighted average number of shares outstanding.

Earnings attributable to the outstanding shares of Class G Common Stock (Outstanding Shares) are equal to Consumers Gas Group net income multiplied by a fraction; the numerator is the weighted average number of Outstanding Shares during the period and the denominator is the weighted average number of Outstanding Shares and authorized but unissued shares of Class G Common Stock not held by holders of the Outstanding Shares during the period. The earnings attributable to Class G Common Stock on a per share basis for 1998, 1997 and 1996 are based on 25.5 percent, 24.5 percent, and 23.8 percent, respectively, of the income of Consumers Gas Group.

Holders of Class G Common Stock have no direct rights in the equity or assets of Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy as a whole. In the sole discretion of the CMS Energy Board of Directors (Board of Directors), CMS Energy may pay dividends exclusively to the holders of Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or to the holders of both classes in equal or unequal amounts. The Board of Directors has stated its intention to declare and pay dividends on the CMS Energy Common Stock based primarily on the earnings and financial condition of CMS Energy. Dividends on Class G Common Stock are paid at the discretion of the Board of Directors based primarily upon the earnings and financial condition of Consumers Gas Group, and to a lesser extent, CMS Energy as a whole.

In February and May 1998, CMS Energy paid dividends of $.30 per share on CMS Energy Common Stock and $.31 per share on Class G Common Stock. In August and November 1998, CMS Energy paid dividends of $.33 per share on CMS Energy Common Stock and $.325 per share on Class G Common Stock. In January 1999, the Board of Directors declared a quarterly dividend of $.33 per share on CMS Energy Common Stock and $.325 per share on Class G Common Stock, which were paid in February 1999.

CMS Energy and its subsidiaries use a variety of derivative instruments (derivatives), including futures contracts, swaps, options and forward contracts, to manage exposure to fluctuations in commodity prices, interest rates and foreign exchange rates. To qualify for hedge accounting, derivatives must meet the following criteria: (i) the item to be hedged exposes the enterprise to price, interest or exchange rate risk; and (ii) the derivative reduces that exposure and is designated as a hedge.

Derivative instruments contain credit risk if the counter parties, including financial institutions and energy marketers, fail to perform under the agreements. CMS Energy minimizes such risk by performing financial credit reviews using, among other things, publicly available credit ratings of such counter parties. Nonperformance by counter parties is not expected to have a material adverse impact on CMS Energy's financial position, liquidity or results of operations.

Commodity Price Hedges: CMS Energy accounts for its commodity price derivatives as hedges, as defined above, and as such, defers any changes in market value and gains and losses resulting from settlements until the hedged transaction is complete. If there was a loss of correlation between the changes in (i) the market value of the commodity price contracts and (ii) the market price ultimately received for the hedged item, and the impact was material, the open commodity price contracts would be marked to market and gains and losses would be recognized in the income statement currently.

Consumers has entered into and will enter into electric option contracts to ensure a reliable source of capacity to meet its customers' electric requirements and to limit its risk associated with electricity price increases. It is management's intent to take physical delivery of the commodity. Consumers continuously evaluates its daily capacity needs and sells the option contracts, if marketable, when it has excess daily capacity. Consumers' maximum exposure associated with these options is limited to premiums paid.

CMS Oil and Gas has one arrangement which is used to fix the prices that CMS Oil and Gas will pay for gas supplied to the MCV Facility for the years 2001 through 2006 by purchasing the economic equivalent of 10,000 million British thermal units (MMBtu) per day at a fixed price, escalating at 8 percent per year thereafter, starting at $2.82 per MMBtu in 2001. The settlement periods are each a one-year period ending December 31, 2001 through 2006 on 3.65 million MMBtu. If the floating price, essentially the then-current Gulf Coast spot price, for a period is higher than the fixed price, the seller pays CMS Oil and Gas the difference, and vice versa. If a party's exposure at any time exceeds $5 million, that party is required to obtain a letter of credit in favor of the other party for the excess over $5 million and up to $10 million. At December 31, 1998, no letter of credit was posted by either party to the agreement. As of December 31, 1998, the fair value of this contract reflected payment due from CMS Oil and Gas of $14.5 million.

A subsidiary of CMS Gas Transmission uses natural gas future contracts and CMS Marketing, Services and Trading Company uses natural gas and oil futures contracts, options and swaps (which require a net cash payment for the difference between a fixed and variable price).

Interest Rate Hedges: CMS Energy and some of its subsidiaries enter into interest rate swap agreements to exchange variable rate interest payment obligations to fixed rate obligations without exchanging the underlying notional amounts. These agreements convert variable rate debt to fixed rate debt to reduce the impact of interest rate fluctuations. The notional amounts parallel the underlying debt levels and are used to measure interest to be paid or received and do not represent the exposure to credit loss. The notional amount of CMS Energy's and its subsidiaries' interest rate swaps was $579 million at December 31, 1998. The difference between the amounts paid and received under the swaps is accrued and recorded as an adjustment to interest expense over the life of the hedged agreement.

Foreign Exchange Hedges: 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 purpose of CMS Energy's foreign currency hedging activities is to protect the company from the risk that U.S. dollar net cash flows resulting from sales to foreign customers and purchases from foreign suppliers and the repayment of non-U.S. dollar borrowings as well as equity reported on the company's balance sheet, may be adversely affected by changes in exchange rates. These contracts do not subject CMS Energy to risk from exchange rate movements because gains and losses on such contracts offset 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 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.

CMS Energy and its subsidiaries file a consolidated federal income tax return. Income taxes are generally allocated based on each company's separate taxable income. CMS Energy and Consumers practice full deferred tax accounting for temporary differences, but federal income taxes have not been recorded on the undistributed earnings of international subsidiaries where CMS Energy intends to permanently reinvest those earnings. Upon distribution, those earnings may be subject to both U.S. income taxes (adjusted for foreign tax credits or deductions) and withholding taxes payable to various foreign countries. It is not practical to estimate the amount of unrecognized deferred income taxes or withholding taxes on undistributed earnings.

CMS Energy used investment tax credit (ITC) to reduce current income taxes payable, and amortizes ITC over the life of the related property. Any alternative minimum tax (AMT) paid generally becomes a tax credit that CMS Energy can carry forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT. The significant components of income tax expense (benefit) consisted of:

The principal components of CMS Energy's deferred tax assets (liabilities) recognized in the balance sheet are as follows:

The actual income tax expense differs from the amount computed by applying the statutory federal tax rate of 35% to income before income taxes as follows:

The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments in financial instruments approximate fair value.

The carrying amount and fair values of long-term debt were $4.7 billion at December 31, 1998 and $3.3 billion at December 31, 1997. Although the current fair value of the long-term debt may differ from the current carrying amount, settlement of the reported debt is generally not expected until maturity. The carrying amount of preferred stock and Trust Preferred Securities was $631 million at December 31, 1998 and $631 million at December 31, 1997, and the fair value was $631 million and $632 million, respectively.

The fair values of CMS Energy's off balance-sheet financial instruments are based on the amounts estimated to terminate or settle the instruments. At December 31, 1998, the fair value of CMS Energy's interest rate swap agreements, with a notional amount of $579 million, was $15 million, representing the amount that CMS Energy would have to pay to terminate the agreements. The settlement of the interest rate swap agreements in 1998 did not materially affect interest expense. At December 31, 1997, CMS Energy would have paid $13 million to terminate the agreements. Also refer to Note 8 for a discussion of CMS Oil and Gas' price hedging arrangements and their fair values. Guarantees were $433 million and $543 million at December 31, 1998 and 1997, respectively.

The amortized cost of Consumers' nuclear decommissioning investments, which are considered available-for-sale securities in accordance with SFAS 115, Accounting For Certain Investments in Debt and Equity Securities, was $425 million and $405 million as of December 31, 1998 and 1997, respectively. The unrealized gain, which is classified in accumulated depreciation, was $132 million and $81 million as of December 31, 1998 and 1997, respectively.

Under CMS Energy's Performance Incentive Stock Plan, restricted shares of Common Stock as well as stock options and stock appreciation rights relating to Common Stock may be granted to key employees based on their contributions to the successful management of CMS Energy and its subsidiaries. Awards under the plan may consist of any class of Common Stock. Certain plan awards are subject to performance-based business criteria. The plan reserves for award not more than three percent of Common Stock outstanding on January 1 each year, less (i) the number of shares of restricted Common Stock awarded and (ii) Common Stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures of shares previously awarded will increase the number of shares available to be awarded under the plan. At December 31, 1998, awards of up to 681,603 shares of CMS Energy Common Stock and 138,780 shares of Class G Common Stock may be issued.

Restricted shares of Common Stock are outstanding shares with full voting and dividend rights. These awards vest over five years at the rate of 25 percent per year after two years. The restricted shares are subject to achievement of specified levels of total shareholder return and are subject to forfeiture if employment terminates before vesting. If performance objectives are exceeded, the plan provides additional awards. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. At December 31, 1998, 658,494 of the 861,744 shares of restricted CMS Energy Common Stock outstanding are subject to performance objectives. At December 31, 1998 all of the 30,490 restricted shares of Class G Common Stock outstanding are subject to performance objectives.

Under the plan, stock options and stock appreciation rights relating to Common Stock are granted with an exercise price equal to the closing market price on each grant date. Options are exercisable upon grant and expire up to ten years and one month from date of grant.

The weighted average fair value of options granted for CMS Energy Common Stock was $6.43 in 1998, $6.38 in 1997, and $6.94 in 1996. The weighted average fair value of options granted for Class G Common Stock was $3.03 in 1998, $1.87 in 1997 and $1.59 in 1996. Fair value is estimated using the Black-Scholes model, a mathematical formula used to value options traded on securities exchanges, with the following assumptions:

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 for 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, Accounting for Stock-Based Compensation, CMS Energy's consolidated net income and earnings per share would have been as follows:

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.

The following table summarizes information about stock options outstanding at December 31, 1998:

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