CMS ENERGY CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

Securities registered pursuant to Section 12(b) of the Act:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No [ ]

The aggregate market value of CMS Energy voting and non-voting common equity
held by non-affiliates was $1.305 billion for the 135,104,392 CMS Energy Common
Stock shares outstanding on June 28, 2002 based on the closing sale price of
$10.92 for CMS Energy Common Stock, as reported by the New York Stock Exchange
on such date. There were 144,078,509 Shares of CMS Energy Common Stock
outstanding as of March 15, 2003.

Documents incorporated by reference: CMS Energy's proxy statement and Consumers,
information statement relating to the 2003 annual meeting of shareholders to be
held May 23, 2003, are incorporated by reference in Part III, except for the
organization and compensation committee report, performance graph and audit
committee report contained therein.
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CMS ENERGY CORPORATION
EXPLANATORY NOTE

THE CERTIFICATIONS OF THE PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL OFFICER OF CMS ENERGY WILL NOT BE PROVIDED BECAUSE CMS ENERGY IS IN
THE PROCESS OF RESTATING 2001 FOR EACH QUARTER AND INTENDS TO AMEND THIS FORM
10-K AND PROVIDE THE REQUIRED CERTIFICATIONS AT THAT TIME.

CMS Energy Corporation

Annual Report on Form 10-K to the Securities and Exchange Commission
for the Year Ended December 31, 2002

TABLE OF CONTENTS

2

GLOSSARY

Certain terms used in the text and financial statements are defined below.

ABATE..................................... Association of Businesses Advocating Tariff Equity
Accumulated Benefit Obligation............ The liabilities of a pension plan based on service and
pay to date. This differs from the Projected Benefit
Obligation that is typically disclosed in that it does
not reflect expected future salary increases
AEP....................................... American Electric Power Co.
ALJ....................................... Administrative Law Judge
Alliance.................................. Alliance Regional Transmission Organization
AMT....................................... Alternative minimum tax
APB....................................... Accounting Principles Board
APB Opinion No. 18. ...................... APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock"
APB Opinion No. 25. ...................... APB Opinion No. 25, "Accounting for Stock Issued to
Employees"
APB Opinion No. 30. ...................... APB Opinion No. 30, "Reporting Results of Operations --
Reporting the Effects of Disposal of a Segment of a
Business"
Arthur Andersen........................... Arthur Andersen, LLP
Attorney General.......................... Michigan Attorney General
bcf....................................... Billion cubic feet
Big Rock.................................. Big Rock Point nuclear power plant, owned by Consumers
Board of Directors........................ Board of Directors of CMS Energy
Bookouts.................................. Unplanned netting of transactions from multiple
contracts
Btu....................................... British thermal unit
CEO....................................... Chief Executive Officer
CFO....................................... Chief Financial Officer
Clean Air Act............................. Federal Clean Air Act, as amended
CMS Electric and Gas...................... CMS Electric and Gas Company, a subsidiary of
Enterprises
CMS Energy................................ CMS Energy Corporation, the parent of Consumers and
Enterprises
CMS Energy Common Stock................... Common stock of CMS Energy, par value $.01 per share
CMS Gas Transmission...................... CMS Gas Transmission Company, a subsidiary of
Enterprises
CMS Generation............................ CMS Generation Co., a subsidiary of Enterprises
CMS Holdings.............................. CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland............................... CMS Midland Inc., a subsidiary of Consumers
CMS MST................................... CMS Marketing, Services and Trading Company, a
subsidiary of Enterprises
CMS Oil and Gas........................... CMS Oil and Gas Company, a subsidiary of Enterprises
CMS Panhandle............................. Panhandle Eastern Pipeline Company, including its
subsidiaries Trunkline, Pan Storage, Panhandle Storage,
and Trunkline LNG. Panhandle is a wholly owned
subsidiary of CMS Gas Transmission
Common Stock.............................. All classes of Common Stock of CMS Energy and each of
its subsidiaries, or any of them individually, at the
time of an award or grant under the Performance
Incentive Stock Plan
Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy
Consumers Campus Holdings................. Consumers Campus Holdings, L.L.C., a wholly owned
subsidiary of Consumers
Consumers Receivables Funding............. Consumers Receivables Funding L.L.C., a wholly-owned
subsidiary of Consumers

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Court of Appeals.......................... Michigan Court of Appeals
Customer Choice Act....................... Customer Choice and Electricity Reliability Act, a
Michigan statute enacted in June 2000 that allows all
retail customers choice of alternative electric
suppliers no later than January 1, 2002, provides for
full recovery of net stranded costs and implementation
costs, establishes a five percent reduction in
residential rates, establishes rate freeze and rate cap,
and allows for Securitization
Detroit Edison............................ The Detroit Edison Company, a non-affiliated company
DIG....................................... Dearborn Industrial Generation, L.L.C., a wholly owned
subsidiary of CMS Generation
DOE....................................... U.S. Department of Energy
Dow....................................... The Dow Chemical Company, a non-affiliated company
DSM....................................... Demand-side management
Duke Energy............................... Duke Energy Corporation, a non-affiliated company
EISP...................................... Executive Incentive Separation Plan
EITF...................................... Emerging Issues Task Force
El Chocon................................. Hidroelectrica El Chocon S.A.
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
EPA....................................... U.S. Environmental Protection Agency
EPS....................................... Earnings per share
ERISA..................................... Employee Retirement Income Security Act
Ernst & Young............................. Ernst & Young LLP
FASB...................................... Financial Accounting Standards Board
FERC...................................... Federal Energy Regulatory Commission
FMLP...................................... First Midland Limited Partnership, a partnership which
holds a lessor interest in the MCV facility
FTC....................................... Federal Trade Commission
GCR....................................... Gas cost recovery
GTNs...................................... CMS Energy General Term Notes(R), $200 million Series D,
$400 million Series E and $300 million Series F
GWh....................................... Gigawatt-hour
Health Care Plan.......................... The medical, dental, and prescription drug programs
offered to eligible employees of Panhandle, Consumers
and CMS Energy
IPP....................................... Independent Power Producer
ISO....................................... Independent System Operator
ITC....................................... Investment tax credit
Jorf Lasfar............................... The 1,356 MW coal-fueled power plant in Morocco, jointly
owned by CMS Generation and ABB Energy Venture, Inc.
kWh....................................... Kilowatt-hour
LIBOR..................................... London Inter-Bank Offered Rate
Loy Yang.................................. The 2,000 MW brown coal fueled Loy Yang A power plant
and an associated coal mine in Victoria, Australia, in
which CMS Generation holds a 50 percent ownership
interest
LNG....................................... Liquefied natural gas
LNG Holdings.............................. CMS Trunkline LNG Holdings, LLC, jointly owned by CMS
Panhandle Holdings, LLC and Dekatherm Investor Trust
Ludington................................. Ludington pumped storage plant, jointly owned by
Consumers and Detroit Edison
mcf....................................... Thousand cubic feet
MCV Facility.............................. A natural gas-fueled, combined-cycle cogeneration
facility operated by the MCV Partnership

7

PART I

ITEM 1. BUSINESS

GENERAL

CMS ENERGY

CMS Energy, formed in Michigan in 1987, is an energy holding company
operating through subsidiaries in the United States and in selected markets
around the world. Its two principal subsidiaries are Consumers and Enterprises.
Consumers is a public utility that provides natural gas and/or electricity to
almost 6 million of Michigan's 10 million residents and serves customers in all
68 of the state's Lower Peninsula counties. Enterprises, through subsidiaries,
is engaged in several energy businesses in the United States and in selected
international markets.

In 2002, CMS Energy's consolidated operating revenue was approximately $8.7
billion. See BUSINESS SEGMENTS later in this Item 1 for further discussion of
each segment.

CONSUMERS

Consumers, formed in Michigan in 1968, is the successor to a corporation
organized in Maine in 1910 that conducted business in Michigan from 1915 to
1968. In 1997, Consumers, formerly named Consumers Power Company, changed its
name to Consumers Energy Company to better reflect its integrated electricity
and gas businesses.

Consumers' service areas include automotive, metal, chemical, food and wood
products and a diversified group of other industries. Consumers' consolidated
operations account for a majority of CMS Energy's total assets and income, as
well as a substantial portion of its operating revenue. At year-end 2002,
Consumers' customer base and operating revenues were as follows:

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(a) Primarily represents earnings attributable to Consumers' interest in the MCV
Partnership and MCV Facility, the earnings of which are reported within CMS
Energy's independent power production business segment.

Consumers' rates and certain other aspects of its business are subject to
the jurisdiction of the MPSC and FERC, as described in CMS ENERGY, CONSUMERS AND
PANHANDLE REGULATION later in this Item 1.

CONSUMERS PROPERTIES -- GENERAL: The principal properties of Consumers and
its subsidiaries are owned in fee, except that most electric lines and gas mains
are located, pursuant to easements and other rights, in public roads or on land
owned by others. Substantially all of Consumers' properties are subject to the
lien of its First Mortgage Bond Indenture. For additional information on
Consumers' properties see BUSINESS SEGMENTS -- Consumers Electric Utility
Operations -- Electric Utility Properties, and -- Consumers Gas Utility
Operations -- Gas Utility Properties, below.

8

BUSINESS SEGMENTS

CMS ENERGY FINANCIAL INFORMATION

For information with respect to operating revenue, net operating income,
identifiable assets and liabilities attributable to all of CMS Energy's business
segments and international and domestic operations, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- SELECTED FINANCIAL INFORMATION AND CMS
ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.

CONSUMERS' ELECTRIC UTILITY OPERATIONS

Based on the average number of customers, Consumers' electric utility
operations, if independent, would be the thirteenth largest electric utility
company in the United States. Consumers' electric utility operations include the
generation, purchase, distribution and sale of electricity. At year-end 2002, it
served customers in 61 of the 68 counties of Michigan's lower peninsula.
Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson,
Kalamazoo, Midland, Muskegon and Saginaw. Consumers' electric utility customer
base includes a mix of residential, commercial and diversified industrial
customers, the largest segment of which is the automotive industry. Consumers'
electric utility operations are not dependent upon a single customer, or even a
few customers, and the loss of any one or even a few of such customers is not
reasonably likely to have a material adverse effect on its financial condition.

Consumers' electric utility operations are seasonal. The summer months
usually increase demand for electric energy, principally due to the use of air
conditioners and other cooling equipment, thereby affecting revenues. In 2002
and 2001, total electric deliveries were 39 billion kWh and 40 billion kWh,
respectively. In 2002, electric sales totaled 37 billion kWh and retail open
access deliveries totaled 2 billion kWh. In 2001, electric sales totaled 39
billion kWh and retail open access deliveries totaled 1 billion kWh.

Excluding retail open access loads, Consumers experienced a 2002 summer
peak demand of 7,697 MW. In 2002, the winter peak demand was 5,573 MW for the
winter 2001-02 period and 5,862 MW for the winter 2002-03 period. In 2002, based
on the actual summer peak, Consumers' power reserve, also called a reserve
margin, was 20.6 percent compared to 11.1 percent in 2001. Based on its summer
2002 forecast, Consumers carried a 15.0 percent reserve margin. In recent years,
Consumers has planned for a reserve margin of approximately 15 percent from a
combination of its owned electric generating plants and electricity purchase
contracts or options, as well as other arrangements. However, in light of
various factors, including the addition of new generating capacity in Michigan
and throughout the Midwest region and additional transmission import capability,
Consumers is continuing to evaluate the appropriate reserve margin for 2003 and
beyond. Currently, Consumers has a reserve margin of approximately 11 percent
for summer 2003. The ultimate use of the reserve margin needed will depend
primarily on summer weather conditions, the level of retail open access
requirements being served by others during the summer, and any unscheduled plant
outages.

Including retail open access loads, Consumers experienced a 2002 summer
peak demand of 7,984 MW. Winter peak demand for 2002, including retail open
access loads, was 5,694 MW for the winter 2001-02 period and 6,140 MW for the
winter 2002-03 period.

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ELECTRIC UTILITY PROPERTIES: At December 31, 2002, Consumers' electric
generating system consists of the following:

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(a) Represents Consumers' share of the capacity of the J H Campbell 3, net of
6.69 percent (ownership interests of the Michigan Public Power Agency and
Wolverine Power Supply Cooperative, Inc.).

(b) Represents Consumers' share of the capacity of Ludington. Consumers and
Detroit Edison have 51 percent and 49 percent undivided ownership,
respectively, in the plant.

(c) Represents Consumers' share of net pumped storage generation. This facility
electrically pumps water during off-peak hours for storage to later
generate electricity during peak-demand hours.

(d) Includes 1.8 MW of distributed diesel generation.

(e) Includes 1,240 MW of purchased contract capacity from the MCV Facility.

In 2002, Consumers purchased, through long-term purchase contracts,
options, spot market and other seasonal purchases, up to 2,683 MW of net
capacity from other power producers, which amounted to 34.9 percent of
Consumers' total system requirements, the largest of which was the MCV
Partnership.

A high voltage transmission system interconnects Consumers' electric
generating plants at many locations with transmission facilities of unaffiliated
systems including those of other utilities in Michigan and Indiana. The
interconnections permit a sharing of the reserve capacity of the connected
systems. This allows mutual assistance during emergencies and substantially
reduces investment in utility plant facilities. Consumers owns: a) 338 miles of
high voltage distribution radial lines operating at 120 kilovolts and above; b)
4,159 miles of high voltage distribution overhead lines operating at 23
kilovolts and 46 kilovolts; c) 16 subsurface miles of high voltage

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distribution underground lines operating at 23 kilovolts and 46 kilovolts; d)
54,681 miles of electric distribution overhead lines; e) 8,201 subsurface miles
of underground distribution lines and f) substations having an aggregate
transformer capacity of 20,596,240 kilovoltamperes.

On April 1, 2001, Consumers transferred its investment in electric
transmission lines and substations to a wholly owned subsidiary, Michigan
Electric Transmission Company (METC). On May 1, 2002, Consumers transferred its
interest in METC to a third party, Michigan Transco Holdings, LLC (MTH), and
Consumers no longer owns or controls transmission facilities either directly or
indirectly. MTH owns the former Consumers transmission assets through a new
transmission company called Michigan Electric Transmission Company, LLC. For
additional information on the sale of the transmission assets, see ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- ELECTRIC RATE MATTERS -- TRANSMISSION.

FUEL SUPPLY: Consumers has four generating plant sites that use coal as a
fuel source and that constitute 73.6 percent of its baseload supply, the
capacity used to serve a constant level of customer demand. In 2002, these
plants produced a combined total of 19,361 million kWhs of electricity and
required 9.7 million tons of coal. On December 31, 2002, Consumers' coal
inventory amounted to approximately 30 days' supply. For additional information
on future sources of coal, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- OTHER
ELECTRIC UNCERTAINTIES -- COAL SUPPLY.

Consumers owns two nuclear power plants, Big Rock, located near Charlevoix,
Michigan and Palisades, located near South Haven, Michigan. In 1997, Consumers
ceased operating Big Rock. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to the Nuclear Management Company
(NMC). The Palisades nuclear fuel supply responsibilities are under the control
of NMC acting as agent for Consumers. During 2002, Palisades' net generation was
6,358 million kWhs, constituting 24.2 percent of Consumers' baseload supply. New
fuel contracts are being written as NMC Agreements. Consumers/NMC currently have
sufficient contracts for uranium concentrates to provide up to 100 percent of
its fuel supply requirements for the 2003 and 2004 period. Consumers/NMC also
have contracts for conversion services and enrichment services with quantity
flexibility ranging up to 100 percent. If spot market prices are below the
contract price, NMC will purchase only the minimum amount of nuclear fuel
required by the contracts. Conversely, if spot market prices are above the
contract prices, Consumers will purchase the maximum amount of nuclear fuel
allowed by the contracts to meet its requirements.

For the spring 2003 refueling outage, Consumers has purchased all of its
fuel supply requirements. NMC also has contracts for nuclear fuel services and
for fabrication of nuclear fuel assemblies. The fabrication contract for
Palisades remains in effect for the next two reloads with options to extend the
contract for an additional two reloads. The fuel contracts are with major
private industrial suppliers of nuclear fuel and related services and with
uranium producers, converters and enrichers who participate in the world nuclear
fuel marketplace.

As shown below, Consumers generates electricity principally from coal and
nuclear fuel.

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(a) On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. The defective
components were replaced and the plant returned to service on January 21,
2002.

11

The cost of all fuels consumed, shown below, fluctuates with the mix of
fuel burned.

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(a) Weighted average fuel costs.

Pursuant to the Nuclear Waste Policy Act of 1982, the federal government
became responsible for the permanent disposal of spent nuclear fuel and
high-level radioactive waste by 1998. To date, the DOE has been unable to
arrange for storage facilities to meet this obligation and it does not expect
that in 2003 it will be able to receive spent nuclear fuel for storage. For
additional information on disposal of nuclear fuel see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. The amount of spent nuclear fuel discharged
from the reactor to date exceeds Palisades' temporary on-site storage pool
capacity, and Consumers is currently storing spent nuclear fuel in NRC-approved
steel and concrete vaults, known as "dry casks". Currently, three dry casks are
available for future storage. For a discussion relating to the NRC approval of
dry casks and Consumers' use of the dry casks, see ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- UNCERTAINTIES -- OTHER CONSUMERS ELECTRIC UTILITY UNCERTAINTIES.

CONSUMERS' GAS UTILITY OPERATIONS

Based on the average number of customers, Consumers' gas utility
operations, if independent, would be the 6th largest gas utility company in the
United States. Consumers' gas utility operations purchase, transport, store,
distribute and sell natural gas. As of December 31, 2002, it was authorized to
provide service in 54 of the 68 counties in Michigan's lower peninsula.
Principal cities served include Bay City, Flint, Jackson, Kalamazoo, Lansing,
Pontiac and Saginaw, as well as the suburban Detroit area, where nearly 900,000
of the gas customers are located. Consumers' gas utility operations are not
dependent upon a single customer, or even a few customers, and the loss of any
one or even a few of such customers is not reasonably likely to have a material
adverse effect on its financial condition.

Consumers' gas utility operations are seasonal. Consumers injects natural
gas into storage during the summer months of the year for use during the winter
months when the demand for natural gas is higher. Peak demand usually occurs in
the winter due to colder temperatures and the resulting increased demand for
heating fuels. In 2002, total deliveries of natural gas sold by Consumers and by
other sellers who deliver natural gas through Consumers' pipeline and
distribution network to ultimate customers, including the MCV Partnership,
totaled 376.4 bcf.

Due to prolonged colder than normal weather during the winter months of
2002-2003, Consumers' gas storage fields were drawn down to unexpected and
unusually low levels. This caused withdrawal of the entire amount of working
storage gas from some fields. As a result, some salt water has entered
Consumers' pipelines and distribution lines that may increase future maintenance
problems and costs resulting from pipe corrosion.

GAS UTILITY PROPERTIES: Consumers' gas distribution and transmission system
consists of 25,218 miles of distribution mains and 1,624 miles of transmission
lines throughout Michigan's lower peninsula. It owns and operates seven
compressor stations with a total of 162,000 installed horsepower. Consumers has
14 gas storage fields located across Michigan with an aggregate storage capacity
of 330.8 bcf.

In February 2002, the FERC approved Michigan Gas Storage's application for
a declaration of exemption from provisions of the National Gas Act. This allowed
Consumers to file with the MPSC for approval to merge with Michigan Gas Storage.
The merger was approved and completed in November 2002.

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GAS SUPPLY: Total 2002 purchases included 58 percent from United States
producers outside Michigan, 22 percent from Canadian producers and 6 percent
from Michigan producers. Authorized suppliers in the permanent gas customer
choice pilot program, which started in April 2001, supplied the remaining 14
percent of gas delivered by Consumers.

Consumers' firm transportation agreements are with ANR Pipeline Company,
Great Lakes Gas Transmission, L.P., Trunkline and Panhandle Eastern Pipe Line.
Consumers uses these agreements to deliver gas to Michigan for ultimate
deliveries to market. In total, Consumers' firm transportation and city gate
arrangements are capable of delivering over 95 percent of Consumers' total gas
supply requirements. As of December 31, 2002, Consumers' portfolio of firm
transportation from pipelines to Michigan is as follows:

Consumers purchases the balance of its required gas supply under firm city
gate contracts and as needed, interruptible contracts. The amount of
interruptible transportation service and its use varies primarily with the price
for such service and the availability and price of the spot supplies being
purchased and transported. Consumers' use of interruptible transportation is
generally in off-peak summer months and after Consumers has fully utilized the
services under the firm transportation agreements.

NATURAL GAS TRANSMISSION

CMS Gas Transmission, formed in 1988, owns, develops and manages domestic
and international natural gas facilities. In 2002, CMS Gas Transmission's
operating revenue was $50 million. In 1999, CMS Energy acquired Panhandle.

PANHANDLE: On December 21, 2002, CMS Energy reached a definitive agreement
to sell the Panhandle companies to Southern Union Panhandle Corp. The agreement
calls for Southern Union Panhandle Corp., a newly formed entity owned by
Southern Union Company and AIG Highstar Capital, L.P. to pay $662 million in
cash and assume $1.166 billion in debt. Under terms of the agreement, CMS Energy
will retain Panhandle's ownership in the Centennial and Guardian pipeline
projects, as well as certain of Panhandle's net deferred tax assets, all tax
liabilities, and pension assets and liabilities. Panhandle has since sold its
interest in Centennial and the Guardian interest and the related cash collateral
has been transferred to Panhandle's direct parent, CMS Gas Transmission. The
sale of Panhandle has been approved by the board of directors of each company
and is subject to customary closing conditions and action by the Federal Trade
Commission under the Hart-Scott-Rodino Act.

On February 10, 2003, Panhandle sold its one-third equity interest in
Centennial Pipeline, LLC for $40 million to Centennial's two other partners,
Marathon Ashland Petroleum, LLC (MAPL) and TE Products Pipeline Company, Limited
Partnership, through its general partner, Texas Eastern Products Pipeline
Company, LLC (TEPPCO). Panhandle has been released by MAPL, TEPPCO and the
lenders for any liabilities, including credit fees, related to Panhandle's $50
million parent guaranty of the project debt. In December 2002, Panhandle
recorded a $26 million pre-tax ($16 million after-tax) writedown of its
investment in Centennial to $40 million.

On March 10, 2003, Panhandle's ownership interest in Guardian and $63
million of cash collateral was transferred to CMS Gas Transmission. Panhandle
was also released from its guarantee obligations associated with the Guardian
non-recourse guaranty as of March 10, 2003, by the partners, Prudential and the
other noteholders.

Panhandle Eastern Pipe Line, formed in Delaware in 1929, is a wholly owned
subsidiary of CMS Gas Transmission. In March 1999, CMS Energy acquired Panhandle
Eastern Pipe Line and its principal subsidiaries, Trunkline and Pan Gas Storage,
as well as Panhandle Eastern Pipe Line's affiliates, Trunkline LNG and Panhandle
Storage, from subsidiaries of Duke Energy. Immediately following the
acquisition, Trunkline LNG

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and Panhandle Storage became wholly owned subsidiaries of Panhandle Eastern Pipe
Line. In December 2001, Panhandle monetized the value of its Trunkline LNG
business and the value created by long-term contracts for capacity at the
Trunkline LNG Lake Charles terminal. The transaction included the formation of
CMS Trunkline LNG Holdings LLC which now owns 100 percent of Trunkline LNG. At
December 31, 2001, LNG Holdings was jointly owned by a subsidiary of Panhandle
Eastern Pipe Line and Dekatherm Investor Trust, an unaffiliated entity. In
November 2002, Panhandle acquired Dekatherm Investor Trust's interest for
approximately $41 million and now owns 100% of LNG Holdings, which has $282
million of non-recourse secured debt at December 31, 2002.

Panhandle is primarily engaged in the interstate transmission and storage
of natural gas and also provides LNG terminalling and regasification services.
Panhandle operates a large natural gas pipeline network, which provides
customers in the Midwest and Southwest with a comprehensive array of
transportation services. Panhandle's major customers include 25 utilities
located primarily in the United States Midwest market area, which encompasses
large portions of Illinois, Indiana, Michigan, Missouri, Ohio and Tennessee.

In 2002, Panhandle's consolidated operating revenue was $484 million. Of
Panhandle's operating revenue, 77 percent was generated from transportation
services, 12 percent from LNG terminalling services, 9 percent from storage
services and 3 percent from other services. During 2002, sales to Proliance
Energy, LLC, a nonaffiliated gas marketer, accounted for 16 percent of
Panhandle's consolidated revenues. Also during 2002, sales to BG LNG Services, a
nonaffiliated gas marketer, accounted for 13 percent of Panhandle's consolidated
revenue. Sales to subsidiaries of CMS Energy, primarily Consumers, accounted for
12 percent of Panhandle's consolidated revenues during 2002; 15 percent during
2001; and 12 percent during 2000. No other customer accounted for 10 percent or
more of Panhandle's consolidated revenues during 2002, 2001 or 2000. Aggregate
sales to Panhandle's top ten customers accounted for 67%, 60% and 53% during
2002, 2001 and 2000, respectively.

For the years 1998 to 2002, Panhandle's combined throughput was 1,141 TBtu,
1,139 TBtu, 1,374 TBtu, 1,335 TBtu and 1,259 TBtu, respectively. Beginning in
March 2000, the combined throughput includes Sea Robin's throughput. A majority
of Panhandle's revenue comes from long-term service agreements with local
distribution company customers. Panhandle also provides firm transportation
services under contract to gas marketers, producers, other pipelines, electric
power generators and a variety of end-users. In addition, the pipelines offer
both firm and interruptible transportation to customers on a short-term or
seasonal basis. Demand for gas transmission on Panhandle's pipeline systems is
seasonal, with the highest throughput and a higher portion of revenues occurring
during the colder period in the first and fourth quarters.

NATURAL GAS TRANSMISSION PROPERTIES: Domestic -- CMS Gas Transmission has a
total of 15,460 miles of pipeline in the United States, with a daily capacity of
approximately 8 bcf. Panhandle Eastern Pipe Line's portion of CMS Gas
Transmission's natural gas transmission system consists of four large diameter
pipelines extending approximately 1,300 miles from producing areas in the
Anadarko Basin of Texas, Oklahoma and Kansas through the states of Missouri,
Illinois, Indiana, Ohio and into Michigan. Trunkline's transmission system now
includes 2 large diameter pipelines which extend approximately 1,400 miles from
the Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border.

At December 31, 2002, CMS Gas Transmission had processing capabilities of
approximately 700 MMcf per day of natural gas at eight locations in Michigan,
Oklahoma and Texas. In addition, CMS Gas Transmission has a hydrocarbon
fractionation plant in Michigan with a capacity of 30,000 barrels per day.
Through Panhandle, CMS Gas Transmission owns and operates 47 compressor
stations. It also has five gas storage fields located in Illinois, Kansas,
Louisiana, Michigan and Oklahoma with an aggregate storage capacity of 70 bcf.
CMS Gas Transmission has a 51 percent ownership interest in underground storage
caverns capable of storing 7 million barrels of natural gas liquids.

At December 31, 2002, CMS Gas Transmission operated 3,826 miles of gas
gathering systems with total capacity of approximately 1 bcf per day in
Michigan, Oklahoma, Texas and Wyoming.

14

During 2002, CMS Gas Transmission, through Panhandle, had a one-third
interest in Guardian Pipeline LLC, which constructed a 141 mile, 36 inch
pipeline from Illinois to southeastern Wisconsin for the transportation of
natural gas. The Guardian Pipeline was placed into service on December 7, 2002.
On March 10, 2003, Panhandle's ownership interest in Guardian was transferred to
CMS Gas Transmission, Panhandle's direct parent company. Panhandle was also
released from its guarantee obligations associated with the Guardian non-
recourse guaranty as of March 10, 2003 by the partners, Prudential and the other
note holders.

International -- At December 31, 2002, CMS Gas Transmission has ownership
interests in the following pipelines:

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(a) CMS Gas Transmission has a 45 percent interest in a consortium that acquired
an 88 percent interest in the pipeline.

In January 2002, CMS Gas Transmission completed the previously announced
sale of all of its ownership interest in the Atlantic Methanol Production
Company located in Equatorial Guinea.

Properties of certain CMS Gas Transmission subsidiaries are subject to
liens of creditors of the respective subsidiaries.

INDEPENDENT POWER PRODUCTION

CMS Generation, formed in 1986, invests in, acquires, develops, constructs
and operates non-utility power generation plants in the United States and
abroad. In 2002, the independent power production business segment's operating
revenue, which includes revenues from CMS Generation, CMS Operating, S.A., the
MCV Facility and the MCV Partnership, was $382.5 million. For additional
information, see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS.

INDEPENDENT POWER PRODUCTION PROPERTIES: As of December 31, 2002, CMS
Generation had ownership interests in operating power plants totaling 8,745
gross MW (4,140 net MW) throughout the United States and abroad. At December 31,
2002, additional plants totaling approximately 1,789 gross MW (421 net MW) were
under construction or advanced development. In 2003, CMS Generation plans to
complete the restructuring of its operations by narrowing the scope of its
existing operations and commitments from four to two regions: the U.S. and the
Middle East/North Africa. In addition, it plans to sell designated assets and
investments that are under-performing, non-region focused and non-synergistic
with other CMS Energy business units. For additional information on CMS
Generation's restructuring see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK -- DIVERSIFIED ENERGY OUTLOOK -- INDEPENDENT POWER
PRODUCTION OUTLOOK.

15

The following table details CMS Generation's interest in independent power
plants in the United States as well as abroad as of year-end 2002 (excluding the
plants owned by CMS Operating S.A. and CMS Electric and Gas and the MCV
facility, discussed further below):

CMS Enterprises, CMS Gas Transmission and CMS Generation, through a CMS
International Ventures subsidiary, CMS Operating, SRL, have 100 percent
ownership interest in a 128 MW natural gas power plant and a 92.6 percent
ownership interest in a 540 MW natural gas power plant, each in Argentina.

CMS Enterprises, through CMS Electric and Gas, have a 70 percent ownership
interest in a 150 MW diesel plant in Venezuela.

CMS Midland owns 49 percent interest in the MCV Partnership, which was
formed to construct and operate the MCV Facility. The MCV Facility was sold to
five owner trusts and leased back to the MCV Partnership. CMS Holdings is a
limited partner in the FMLP, which is a beneficiary of one of these trusts. CMS
Holdings' indirect beneficial interest in the MCV Facility is 49 percent. The
MCV Facility has a net electrical generating capacity of approximately 1,500 MW.

CMS Generation has ownership interests in certain facilities such as Loy
Yang, Jorf Lasfar and El Chocon. The Loy Yang assets are owned in fee, but are
subject to the security interests of its lenders. CMS Energy is actively working
to sell its interest in the Loy Yang facility. The Jorf Lasfar facility is held
pursuant to a right of possession agreement with the Moroccan state-owned Office
National de l'Electricite. The El Chocon facility is held pursuant to a 30-year
possession agreement.

For information on capital expenditures, see ITEM 7. CMS ENERGY'S
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CAPITAL RESOURCES AND LIQUIDITY AND ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.

16

OIL AND GAS EXPLORATION AND PRODUCTION

CMS Oil and Gas, formed in 1967, conducted oil and gas exploration and
development operations in the United States, primarily the Permian Basin in
Texas and the Powder River Basin in Wyoming, and in the countries of Cameroon,
Congo, Colombia, Eritrea, Tunisia and Venezuela. In January 2002, CMS Energy
completed the sale of its ownership interests in Equatorial Guinea to Marathon
Oil Company for approximately $993 million. Proceeds from this transaction were
used primarily to retire existing debt. Included in the sale were all of CMS Oil
and Gas' oil and gas reserves in Equatorial Guinea. In September 2002, CMS
Energy closed on the sale of the stock of CMS Oil and Gas and the stock of a
subsidiary of CMS Oil and Gas that holds property in Venezuela. In October 2002,
CMS Energy completed its exit from the oil and gas exploration and production
business.

MARKETING, SERVICES AND TRADING

CMS MST, provides or has provided gas, oil, and electric marketing, risk
management and energy management services to industrial, commercial, utility and
municipal energy users throughout the United States and abroad. CMS Energy has
decided to phase out CMS MST's wholesale energy trading business. On January 16,
2003, CMS MST closed the sale on a major portion of its wholesale natural gas
trading book to Sempra Energy Trading. The sale price was approximately $18
million. On February 13, 2003, CMS MST signed a definitive agreement with
Constellation Power Source, Inc. to sell its wholesale electric power business.
The sale has been approved by the FERC and closing is expected within the second
quarter of 2003. On February 20, 2003, CMS MST signed a definitive agreement
with Chevron Energy Solutions Company, a division of Chevron U.S.A., to sell the
non-federal business of CMS Viron, its energy management services provider
subsidiary. On February 26, 2003 CMS MST signed a definitive agreement with
Pepco Energy Services, Inc. to sell CMS Viron's federal energy management
services business. The sale is subject to federal government novation which the
parties are not permitted to seek until closing has occurred. CMS MST will
continue to focus its business on the retail sector, specifically in the state
of Michigan. CMS MST has announced plans to move its headquarters from Houston,
Texas to Jackson, Michigan. In 2002, CMS MST marketed approximately 601 bcf of
natural gas, 62,004 GWh of electricity, 34 million barrels of crude oil and 10
million barrels of natural gas liquids. From 1997 through 2002, CMS MST also
performed over 300 energy management services projects. At December 31, 2002,
CMS MST had more than 1,200 wholesale and retail customers, transported gas on
more than 40 gas pipelines and was active in 50 states and Canada. In 2002, CMS
MST's operating revenue was $4.2 billion. For additional information, see ITEM
7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- MARKETING, SERVICES AND
TRADING RESULTS OF OPERATIONS.

INTERNATIONAL ENERGY DISTRIBUTION

In October 2001, CMS discontinued the operations of its international
energy distribution business. CMS also discontinued all new development outside
North America, which includes closing all non-US development offices. However,
CMS will continue to honor prior commitments in the Middle East. For additional
information, see ITEM 7 -- CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK.

CMS ENERGY REGULATION

CMS Energy is a public utility holding company that is exempt from
registration under PUHCA. CMS Energy, Consumers, Panhandle and their
subsidiaries are subject to regulation by various federal, state, local and
foreign governmental agencies, including those specifically described below.

MICHIGAN PUBLIC SERVICE COMMISSION

Consumers is subject to the MPSC's jurisdiction, which regulates public
utilities in Michigan with respect to retail utility rates, accounting, utility
services, certain facilities and various other matters. The MPSC also has, or
will have, rate jurisdiction over several limited partnerships in which CMS Gas
Transmission has ownership interests. These partnerships own, or will own, and
operate intrastate gas transmission pipelines.

17

The Attorney General, ABATE, and the MPSC staff typically intervene in MPSC
electric and gas related proceedings concerning Consumers. For many years,
almost every significant MPSC order affecting Consumers has been appealed.
Certain appeals from the MPSC orders are pending in the Court of Appeals.

RATE PROCEEDINGS: In 1996, the MPSC issued an order that established the
electric authorized rate of return on common equity at 12.25 percent. In 2002,
the MPSC issued an order that established the gas authorized rate of return on
common equity at 11.4 percent.

MPSC REGULATORY AND MICHIGAN LEGISLATIVE CHANGES: State regulation of the
retail electric and gas utility businesses is in the process of undergoing
significant changes. In 2000, the Michigan Legislature enacted the Customer
Choice Act. Pursuant to the Customer Choice Act, as of January 2002, all
electric customers have their choice of buying generation service from an
alternative electric supplier. The Customer Choice Act also imposes rate
reductions, rate freezes and rate caps. For a description and additional
information regarding the Customer Choice Act, see ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.

As a result of regulatory changes in the natural gas industry, Consumers
transports the natural gas commodity that is sold to some customers by
competitors like gas producers, marketers and others. From April 1, 1998, to
March 31, 2001, Consumers' implemented a statewide experimental gas customer
choice pilot program that allowed up to 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier and froze the
rates Consumers was permitted to charge for the service of distributing gas to
its customers.

Beginning April 1, 2001, Consumers established a permanent gas customer
choice program that allows up to 600,000 of Consumers' gas customers to select
an alternative gas commodity supplier. By April 2003, all of Consumers' gas
customers will be eligible to select an alternative gas commodity supplier. As
of December 31, 2002, 178,000 of Consumers' gas customers had elected an
alternate gas commodity supplier. Also on April 1, 2001, pursuant to the
permanent gas customer choice program, Consumers returned to a GCR mechanism
that allows it to recover from its customers all prudently incurred costs to
purchase the natural gas commodity and transport it to Consumers' facilities.
For additional information on gas customer choice programs see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.

FEDERAL ENERGY REGULATORY COMMISSION

FERC has exercised limited jurisdiction over several independent power
plants in which CMS Generation has ownership interests, as well as over CMS MST.
FERC also has more comprehensive jurisdiction over Panhandle Eastern Pipe Line,
Pan Gas Storage, Trunkline, Trunkline LNG and Sea Robin as natural gas companies
within the meaning of the Natural Gas Act. FERC jurisdiction relates, among
other things, to the acquisition, operation and disposal of assets and
facilities and to the service provided and rates charged. Some of Consumers' gas
business is also subject to regulation by FERC, including a blanket
transportation tariff pursuant to which Consumers can transport gas in
interstate commerce.

FERC has authority to regulate rates and charges for transportation or
storage of natural gas in interstate commerce, as well as those for gas, sold by
a natural gas company in interstate commerce for resale. FERC also has authority
over the construction and operation of pipeline and related facilities utilized
in the transportation and sale of natural gas in interstate commerce, including
the extension, enlargement or abandonment of service using such facilities.
Panhandle Eastern Pipe Line, Trunkline Gas Company, Sea Robin, Trunkline LNG,
and Pan Gas Storage hold certificates of public convenience and necessity issued
by the FERC, authorizing them to construct and operate the pipelines, facilities
and properties now in operation for which such certificates are required, and to
transport and store natural gas in interstate commerce.

FERC also regulates certain aspects of Consumers' electric operations
including: compliance with FERC accounting rules; wholesale rates; transfers of
certain facilities; and corporate mergers and issuance of securities. FERC is
currently soliciting comments on whether it should exercise jurisdiction over
power marketers like CMS

18

MST and require them to follow FERC's uniform system of accounts and seek
authorization for issuance of securities and assumption of liabilities. These
issues are pending before the agency.

For a discussion of the effect of certain FERC orders on Consumers, see
ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK -- CONSUMERS' ELECTRIC BUSINESS OUTLOOK.

NUCLEAR REGULATORY COMMISSION

Under the Atomic Energy Act of 1954, as amended, and the Energy
Reorganization Act of 1974, Consumers is subject to the jurisdiction of the NRC
with respect to the design, construction, operation and decommissioning of its
nuclear power plants. Consumers is also subject to NRC jurisdiction with respect
to certain other uses of nuclear material. These and other matters concerning
Consumers' nuclear plants are more fully discussed in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTES 2 AND 5 OF CMS ENERGY'S CONSOLIDATED
FINANCIAL STATEMENTS.

OTHER REGULATION

The Secretary of Energy regulates the importation and exportation of
natural gas and has delegated various aspects of this jurisdiction to FERC and
the DOE's Office of Fossil Fuels.

Pipelines owned by system companies are also subject to the Natural Gas
Pipeline Safety Act of 1968 and the Pipeline Safety Improvement Act of 2002,
which regulates the safety of gas pipelines. Consumers and Panhandle are also
subject to the Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil
and petroleum pipelines.

CMS ENERGY ENVIRONMENTAL COMPLIANCE

CMS Energy, Consumers and Panhandle and their subsidiaries are subject to
various federal, state and local regulations for environmental quality,
including air and water quality, waste management, zoning and other matters. For
additional information concerning environmental matters, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- UNCERTAINTIES -- CONSUMERS' ELECTRIC
UTILITY CONTINGENCIES.

Consumers has installed and is currently installing modern emission
controls at its electric generating plants and has converted and is converting
electric generating units to burn cleaner fuels. Consumers expects that the cost
of future environmental compliance, especially compliance with clean air laws,
will be significant because of EPA regulations regarding nitrogen oxide and
particulate-related emissions. These regulations will require Consumers to make
significant capital expenditures. For the preliminary estimates of these capital
expenditures to reduce nitrogen oxide-related emissions see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS UNCERTAINTIES -- CONSUMERS ELECTRIC UTILITY
CONTINGENCIES.

Consumers is in the process of closing older ash disposal areas at two
plants. Construction, operation, and closure of a modern solid waste disposal
area for ash can be expensive, because of strict federal and state requirements.
In order to significantly reduce ash field closure costs, Consumers has worked
with others to use bottom ash and fly ash as part of temporary and final cover
for ash disposal areas instead of native materials in cases where such use of
bottom ash and fly ash is compatible with environmental standards. To reduce
disposal volumes, Consumers sells coal ash for use as a filler for asphalt, for
incorporation into concrete products and for other environmentally compatible
uses. The EPA has announced its intention to develop new nationwide standards
for ash disposal areas. Consumers intends to work through industry groups to
help ensure that any such regulations require only the minimum cost necessary to
adhere to standards that are consistent with protection of the environment.

Consumers has PCB in some of its electrical equipment, as do most electric
utilities. During routine maintenance activities, Consumers identified PCB as a
component in certain paint, grout and sealant materials at

19

the Ludington Pumped Storage facility. Consumers removed and replaced part of
the PCB material. Consumers has proposed a plan to the EPA to deal with the
remaining materials and is waiting on a response from the EPA.

Certain environmental regulations affecting CMS Energy, Consumers and
Panhandle include, but are not limited to, the Clean Air Act Amendments of 1990
and Superfund. Superfund can require any individual or entity that may have
owned or operated a disposal site, as well as transporters or generators of
hazardous substances that were sent to such site, to share in remediation costs
for the site.

Consumers', CMS Energy's and Panhandle's current insurance coverages do not
extend to certain environmental clean-up costs, such as claims for air
pollution, some past PCB contamination and for some long-term storage or
disposal of pollutants.

Panhandle does not anticipate that compliance with federal, state and local
provisions regulating the discharge of materials into the environment, or
otherwise protecting the environment will have a material adverse effect on the
competitive position, consolidated results of operations or financial position
of Panhandle.

CMS ENERGY COMPETITION

ELECTRIC COMPETITION

Consumers' electric utility business experiences competition, actual and
potential, from many sources, both in the wholesale and retail markets, and in
electric generation, electric delivery, and retail services.

In the wholesale electricity markets, Consumers competes with other
wholesale suppliers, marketers and brokers. Electric competition in the
wholesale markets increased significantly since 1996 due to FERC Order 888.
Whereas Consumers is still active in wholesale electricity markets, wholesale
for retail transactions by Consumers generated an immaterial amount of
Consumers' 2002 revenues from electric utility operations. Consumers does not
believe future loss of wholesale for retail sales to be significant.

A significant increase in retail electric competition is now possible with
the passage of the Customer Choice Act and the availability of retail open
access. The Customer Choice Act of June 2000 required Consumers to open
progressive tiers of its electric customer power supply requirement such that a
total of 750 MW was open to competition in 2001. As of January 1, 2002, the
Consumer Choice Act also gave all electric customers the right to buy generation
service from an alternative electric supplier. The Michigan Public Service
Commission has adopted a mechanism pursuant to the Customer Choice Act to
provide for recovery of stranded costs. The company cannot predict the total
amount of electric supply load that may be lost to competitor suppliers, nor
whether the stranded cost recovery method adopted by the MPSC will be applied in
a manner that will fully offset any associated margin loss.

In addition to retail electric customer choice, Consumers also has
competition or potential competition from: 1) the threat of customers relocating
outside Consumers' service territory; 2) the possibility of municipalities
owning or operating competing electric delivery systems; 3) customer
self-generation; and 4) adjacent municipal utilities that extend lines to
customers near service territory boundaries. Consumers addresses this
competition primarily through offering rate discounts, providing additional
services and insistence upon compliance with MPSC and FERC rules.

Consumers offers non-commodity retail services to electric customers in an
effort to offset costs. Consumers faces competition from many sources, including
energy management services companies, other utilities, contractors, and retail
merchandisers.

CMS MST, which is a non-utility electric subsidiary, faced competition from
marketers, brokers, financial management firms, energy management firms and
other utilities. CMS Energy's independent power production business segment,
another non-utility electric subsidiary, faces competition from generators,
marketers and brokers, as well as lower power prices on the wholesale market.

For additional information concerning electric competition, see ITEM 7. CMS
ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- CONSUMERS' ELECTRIC
UTILITY BUSINESS OUTLOOK.

20

GAS COMPETITION

Competition has existed for the past decade, and is likely to increase, in
various aspects of Consumers' gas utility business. Competition traditionally
comes from alternate fuels and energy sources, such as propane, oil, and
electricity. Competition has also been introduced through the gas customer
choice program which allows residential, commercial and industrial retail gas
sales customers to choose an alternative gas commodity supplier in direct
competition with Consumers. Consumers would continue to transport and distribute
gas to these customers.

CMS Energy's non-utility gas subsidiaries face significant competition from
other gas pipeline companies, gas producers, gas storage companies, brokers and
marketers and competition from other fuels such as oil and coal.

For additional information concerning gas competition, see Panhandle
Competition below, ITEM 7. CMS ENERGY'S MANAGEMENT DISCUSSION AND
ANALYSIS -- OUTLOOK.

PANHANDLE COMPETITION

Panhandle's interstate pipelines compete with other interstate and
intrastate pipeline companies in the transportation and storage of natural gas.
The principal elements of competition among pipelines are rates, terms of
service and flexibility and reliability of service. Panhandle competes directly
with Alliance Pipeline LP, ANR Pipeline Company, Natural Gas Pipeline Company of
America, Northern Border Pipeline Company, Texas Gas Transmission Corporation,
Northern Natural Gas Company and Vector Pipeline in the Midwest market area.

Natural gas competes with other forms of energy available to Panhandle's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural gas
and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather and natural gas storage
levels, affect the demand for natural gas in the areas served by Panhandle.

INSURANCE

CMS Energy and its subsidiaries, including Consumers and Panhandle,
maintain insurance coverage similar to other comparable companies in the same
lines of business. The insurance policies are subject to term, conditions,
limitations and exclusions that might not fully compensate CMS for all losses.
Furthermore, as CMS renews its policies it is possible that full insurance
coverage may not be obtainable on commercially reasonable terms due to the
recent increasingly restrictive insurance markets.

For additional information regarding Insurance, see CMS ENERGY FORWARD
LOOKING STATEMENTS CAUTIONARY FACTORS AND UNCERTAINTIES -- International
Operations, NOTE 5 -- Nuclear Matters of CMS ENERGY'S NOTE'S TO CONSOLIDATED
FINANCIAL STATEMENTS.

EMPLOYEES

CMS ENERGY

As of December 31, 2002, CMS Energy and its subsidiaries, including
Consumers and Panhandle, had 10,477 full-time equivalent employees of whom
10,398 are full-time employees and 79 full-time equivalent employees associated
with the part-time work force. Included in the total are 3,902 employees who are
covered by union contracts.

CONSUMERS

As of December 31, 2002, Consumers and its subsidiaries had 8,311 full-time
equivalent employees of whom 8,238 are full-time employees and 73 full-time
equivalent employees associated with the part-time work force. Included in the
total are 3,630 full-time operating, maintenance and construction employees of
Consumers who are represented by the Utility Workers Union of America. Consumers
and the Union negotiated a collective bargaining agreement that became effective
as of June 1, 2000 and will continue in full force and effect until

21

June 1, 2005. Consumers is currently negotiating with the Union for a collective
bargaining agreement for its Call Center employees.

PANHANDLE

At December 31, 2002, Panhandle and its subsidiaries had 1,155 full-time
equivalent employees. Included in the total are 247 full-time, compressor,
pipeline, gas measurement, and field clerical employees of Panhandle Eastern
Pipe Line Company who are represented by the Paper, Allied -- Industrial
Chemical and Energy Workers International Union. Panhandle and the Union
negotiated a collective bargaining agreement that became effective as of May 28,
1999 and will continue in full force and effect until May 27, 2003.

CMS ENERGY FORWARD-LOOKING STATEMENTS, CAUTIONARY FACTORS AND UNCERTAINTIES.

INTERNATIONAL OPERATIONS

CMS Energy, through certain of its Enterprises subsidiaries, has made
substantial international investments in approximately 10 countries. These
international investments in electric generating facilities, natural gas
pipelines and electric distribution systems face a number of risks inherent in
acquiring, developing and owning these types of facilities. CMS Energy believes
that its subsidiaries maintain appropriate levels of traditional insurance,
similar to comparable companies in the same line of business, for the various
risk exposures incidental to CMS Energy's businesses. Notably, all insurance is
subject to terms and conditions that might not fully compensate a loss. Further,
due to increasingly restrictive insurance markets, partly as a result of
terrorist attacks of September 11, 2001, it is anticipated that insurance,
particularly terrorism and sabotage coverages, will be difficult or impossible
to maintain on all investments.

Although CMS Energy maintains insurance in certain high-risk countries for
certain specific political risks, CMS Energy is exposed to some risks that
include local political and economic factors over which it has no control and
that may not be covered by insurance. CMS Energy, through its Enterprises
subsidiaries, may incur risk exposures such as changes in foreign governmental
and regulatory policies (including changes in industrial regulation and control
and changes in taxation), changing political conditions and international
monetary fluctuations. Particularly, international investments are subject to
the risk that they may be expropriated or that the required agreements,
licenses, permits and other approvals may be changed or terminated in violation
of their terms. Also, the local foreign currency may be devalued or the
conversion of the currency may be restricted or prohibited or other actions,
such as increases in taxes, royalties or import duties, may be taken which
adversely affect the value and the recovery of the investment. In some cases,
the investment may have to be abandoned or disposed of at a loss. These factors
could significantly adversely affect the financial results of the affected
subsidiary and CMS Energy's financial position and results of operations.

UNCERTAINTIES

Specific uncertainties are described in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS. Certain risks are described in ITEM 7. CMS ENERGY'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- MARKET RISK INFORMATION and ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 10 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage such disclosures without the
threat of litigation, if those statements are identified as forward-looking and
are accompanied by meaningful, cautionary statements identifying important
factors that could cause the actual results to differ materially from those
projected in the statements. Forward-looking statements give our expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Forward-looking
statements have been and will be made in this Form 10-K and in our other written
documents (such as press releases, visual presentations, and securities
disclosure documents) and oral presentations (such as analyst conference calls).
Such statements are based on management's beliefs as well as assumptions made
by, and information currently available to, management. When used in our
documents or oral presentations, we intend the words "anticipate", "believe",
"estimate",
22

"expect", "forecast", "intend", "objective", "plan", "possible", "potential",
"project" "projection" and variations of such words and similar expressions to
target forward-looking statements that involve risk and uncertainty.

Any or all of our forward-looking statements in oral or written statements
or in other publications may turn out to be wrong. They can be affected by
inaccurate assumptions or by known or unknown risks and uncertainties. Many such
factors will be important in determining our actual future results.
Consequently, we cannot guarantee any forward-looking statement.

In addition to any assumptions and other factors referred to specifically
in connection with such forward-looking statements, there are numerous factors
that could cause our actual results to differ materially from those contemplated
in any forward-looking statements. Such factors include our inability to predict
and/or control:

- The efficient sale of non-strategic and under-performing domestic and
international assets and discontinuation of certain operations;

- Achievement of capital expenditure reductions and cost savings;

- Capital and financial market conditions, including current price of CMS
Energy Common Stock and the effect on the Pension Plan, interest rates
and availability of financing to CMS Energy, Consumers, Panhandle or any
of their affiliates and the energy industry;

- Market perception of the energy industry, CMS Energy, Consumers,
Panhandle or any of their affiliates;

- CMS Energy's, Consumers', Panhandle's or any of their affiliates'
securities ratings;

- Currency fluctuations, transfer restrictions and exchange controls;

- Factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs, unanticipated
changes to fossil fuel, nuclear fuel or gas supply costs or availability
due to higher demand, shortages, transportation problems or other
developments, environmental incidents, or electric transmission or gas
pipeline system constraints;

- Ability to successfully access the capital markets;

- Electric transmission or gas pipeline system constraints;

- International, national, regional and local economic, competitive and
regulatory conditions and developments;

- Adverse regulatory or legal decisions, including environmental laws and
regulations;

- Federal regulation of electric sales and transmission of electricity
including re-examination by Federal regulators of the market-based sales
authorizations by which our subsidiaries participate in wholesale power
markets without price restrictions and proposals by FERC to change the
way it currently lets our subsidiaries and other public utilities and
natural gas companies interact with each other;

- Energy markets, including the timing and extent of unanticipated changes
in commodity prices for oil, coal, natural gas, natural gas liquids,
electricity and certain related products due to lower or higher demand,
shortages, transportation problems or other developments;

- The increased competition in natural gas transportation which could
reduce volumes of gas transported by our natural gas transmission
businesses or cause them to lower rates in order to meet competition;

- Potential disruption, expropriation or interruption of facilities or
operations due to accidents, war and terrorism or political events and
the ability to obtain or maintain insurance coverage for such events;

- Nuclear power plant performance, decommissioning, policies, procedures,
incidents, and regulation, including the availability of spent nuclear
fuel storage;

- Technological developments in energy production, delivery and usage;

23

- Changes in financial or regulatory accounting principles or policies;

- Outcome, cost, and other effects of legal and administrative proceedings,
settlements, investigations and claims including particularly claims,
damages, and fines resulting from those involving round-trip trading and
inaccurate commodity price reporting;

- Limitations on our ability to control the development or operation of
projects in which our subsidiaries have a minority interest;

- Disruptions in the normal commercial insurance and surety bond markets
that may increase costs or reduce traditional insurance coverage,
particularly terrorism and sabotage insurance and performance bonds;

- Other business or investment considerations that may be disclosed from
time to time in CMS Energy's, Consumers' or Panhandle's SEC filings or in
other publicly disseminated written documents; and

- Other uncertainties, which are difficult to predict and many of which are
beyond our control.

CMS Energy and its affiliates undertake no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors pursuant to the Private
Securities Litigation Reform Act should not be construed as exhaustive or as any
admission regarding the adequacy of our disclosures. Certain risk factors are
detailed from time to time in our various public filings. You are advised,
however to consult any further disclosures we make on related subjects in our
reports to the SEC. In particular, you should read the discussion in the section
entitled "Forward-Looking Statements and Risk Factors" in our most recent
reports to the SEC on Form 10-Q or Form 8-K filed subsequent to this Form 10-K.

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EXECUTIVE OFFICERS

- -------------------------
* Mr. Mengebier has served as Senior Vice President of CMS Energy and
Consumers since 2001, after receiving a promotion from his position in both
companies as Vice President, which he had held since 1999. From 1997 to
1999, Mr. Mengebier served as Executive Director of Federal Governmental
Affairs for CMS Enterprises.

** Mr. Russell has served as Executive Vice President and President and Chief
Executive Officer -- Electric of Consumers since October 2001. From December
2000 until October 2001, Mr. Russell served as Senior Vice President of
Consumers. From October 1999 until December 2000, Mr. Russell served as Vice
President of Consumers. From July 1997 until October 1999, Mr. Russell
served as Manager -- Electric Customer Operations of Consumers.

The present term of office of each of the executive officers extends to the
first meeting of the Board of Directors after the next annual election of
Directors of CMS Energy (scheduled to be held on May 23, 2003).

There are no family relationships among executive officers and directors of
CMS Energy.

AVAILABLE INFORMATION

CMS Energy's internet address is http://www.cmsenergy.com. You can access
free of charge on our website all of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act. Such
reports are available as soon as practical after they are electronically filed
with the SEC.

26

ITEM 2. PROPERTIES.

A description of CMS Energy properties is contained in ITEM 1.
BUSINESS -- Consumers -- Consumers Properties -- General; BUSINESS -- BUSINESS
SEGMENTS -- Consumers Electric Utility Operations -- Electric Utility
Properties; Consumers Gas Utility -- Gas Utility Properties; Natural Gas
Transmission -- Natural Gas Transmission Properties; Independent Power
Production -- Independent Power Production Properties; Oil and Gas Exploration
and Production -- Oil and Gas Exploration and Production Properties;
International Energy Distribution -- International Energy Distribution
Properties, all of which are incorporated by reference herein.

ITEM 3. LEGAL PROCEEDINGS

CMS Energy and some of its subsidiaries and affiliates are parties to
certain routine lawsuits and administrative proceedings incidental to their
businesses involving, for example, claims for personal injury and property
damage, contractual matters, various taxes, and rates and licensing. Reference
is made to the ITEM 1. BUSINESS -- CMS ENERGY REGULATION, as well as CMS
Energy's ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS and CMS Energy's ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS included herein for additional information regarding various pending
administrative and judicial proceedings involving regulatory, operating and
environmental matters.

CMS ENERGY

DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS

The Board of Directors of CMS Energy received a demand, on behalf of a
shareholder of Common Stock, that it commence civil actions (i) to remedy
alleged breaches of fiduciary duties by CMS Energy officers and directors in
connection with round-trip trading at CMS MS&T, and (ii) to recover damages
sustained by CMS Energy as a result of alleged insider trades alleged to have
been made by certain current and former officers of CMS Energy and its
subsidiaries. If the Board elects not to commence such actions, the shareholder
has stated that he will initiate a derivative suit, bringing such claims on
behalf of CMS Energy. CMS Energy has elected two new members to its Board of
Directors to serve as an independent litigation committee to determine whether
it is in the best interest of the company to bring the action demanded by the
shareholder. Counsel for the shareholder has agreed to extend the time for CMS
Energy to respond to the demand. CMS Energy cannot predict the outcome of this
litigation.

EMPLOYMENT RETIREMENT INCOME SECURITY ACT CLASS ACTION LAWSUITS

CMS Energy is a named defendant, along with Consumers, CMS MST and certain
named and unnamed officers and directors, in two lawsuits brought as purported
class actions on behalf of participants and beneficiaries of the CMS Employee's
Savings and Incentive Plan (the "Plan"). The two cases, filed in July 2002 in
the U.S. District Court, were consolidated by the trial judge and an amended
consolidated complaint was filed. Plaintiffs allege breaches of fiduciary duties
under ERISA and seek restitution on behalf of the Plan with respect to a decline
in value of the shares of Common Stock held in the Plan. Plaintiffs also seek
other equitable relief and legal fees. These cases will be vigorously defended.
CMS Energy and Consumers cannot predict the outcome of this litigation.

SECURITIES CLASS ACTION LAWSUITS

Beginning on May 17, 2002, a number of securities class action complaints
have been filed against CMS Energy, Consumers and certain officers and directors
of CMS Energy and its affiliates. The complaints have been filed in the United
States District Court for the Eastern District of Michigan as purported class
actions by individuals who allege that they purchased CMS Energy's securities
during a purported class period. At least two of the complaints contain
purported class periods beginning on August 3, 2000 and running through May 10,
2002 or May 14, 2002. These complaints generally seek unspecified damages based
on allegations that the

27

defendants violated United States securities laws and regulations by making
allegedly false and misleading statements about the company's business and
financial condition. The cases have been consolidated into a single lawsuit, and
an amended and consolidated complaint is due to be filed by May 1, 2003. CMS
Energy and Consumers intend to vigorously defend against this action. CMS Energy
and Consumers cannot predict the outcome of this litigation.

ENVIRONMENTAL MATTERS: CMS Energy and its subsidiaries and affiliates are
subject to various federal, state and local laws and regulations relating to the
environment. Several of these companies have been named parties to various
actions involving environmental issues. Based on its present knowledge and
subject to future legal and factual developments, CMS Energy, believe that it is
unlikely that these actions, individually or in total, will have a material
adverse effect on its financial condition. See CMS Energy's, Consumers' and
Panhandle's ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS; and CMS Energy's ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

During the fourth quarter of 2002, CMS Energy did not submit any matters to
vote of security holders.

28

PART II

ITEM 5. MARKET FOR CMS ENERGY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.

Market prices for CMS Energy's Common Stock and related security holder
matters are contained in ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CMS ENERGY'S
QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION, which is incorporated by
reference herein. At February 28, 2003, the number of registered shareholders
totaled 62,687.

ITEM 6. SELECTED FINANCIAL DATA.

Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- CMS ENERGY'S SELECTED FINANCIAL INFORMATION, which is
incorporated by reference herein.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management's discussion and analysis of financial condition and results of
operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated
by reference herein.

ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk is contained in
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CMS ENERGY'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- CRITICAL ACCOUNTING POLICIES -- MARKET RISK
INFORMATION, which is incorporated by reference herein.

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements:

30

CMS ENERGY CORPORATION
SELECTED FINANCIAL INFORMATION

- -------------------------
(a) CMS Energy's Consolidated Financial Statements for the years 2001 and 2000
have been restated, pursuant to adjustments resulting from the re-audit of
CMS Energy. See Note 2 in the Notes to the Consolidated Financial
Statements.

(b) 1999 earnings per average common share includes allocation of the premium
on redemption of Class G Common Stock of $(.26) per CMS Energy basic share,
$(.25) per CMS Energy diluted share and $3.31 per Class G basic and diluted
share.

(c) Reflects closing price at the October 25, 1999 exchange date.

(d) Excludes off-system transportation customers.

(e) See Notes 3, 4 and 5 to the Consolidated Financial Statements.

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CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers is a combination electric and gas utility company serving Michigan's
Lower Peninsula. Enterprises, through subsidiaries, including Panhandle and its
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; and energy marketing, services and trading. CMS
Energy's consolidated financial statements for the years 2001 and 2000 have been
restated as a result of accounting adjustments identified in connection with the
re-audit and preparation of the restated 2001 and 2000 consolidated financial
statements of CMS Energy. CMS Energy is currently in the process of completing
its restatement of the consolidated financial statements for the quarters of
2001, and upon completion, Ernst & Young will perform a review of the 2001
quarterly financial data in accordance with standards established by the
American Institute of Certified Public Accountants. As a result, the 2001
quarterly information has not yet been restated. Upon completion, CMS Energy
will file restated financial statements for those interim periods, and for the
interim periods of 2002, in an amended Form 10-Q for September 30, 2002. That
filing will include details of the quarterly impacts of the restatement
adjustments for 2001 and the first three quarters of 2002. The 2002 interim
financial data contained in Note 20, Quarterly Financial and Common Stock
Information, to the consolidated financial statements has been restated to
reflect the impacts of restatement adjustments.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This MD&A refers to, and in some sections specifically incorporates by
reference, CMS Energy's Notes to Consolidated Financial Statements and should be
read in conjunction with such Consolidated Financial Statements and Notes. This
Annual Report and other written and oral statements that CMS Energy may make
contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. CMS Energy's intentions with the use of the words
"anticipates," "believes," "estimates," "expects," "intends," and "plans," and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause CMS
Energy's actual results to differ materially from the results anticipated in
such statements. CMS Energy has no obligation to update or revise
forward-looking statements regardless of whether new information, future events
or any other factors affect the information contained in such statements. CMS
Energy does, however, discuss certain risk factors, uncertainties and
assumptions in this MD&A and in Item 1 of this Form 10-K in the section entitled
"Forward-Looking Statements Cautionary Factors and Uncertainties" and in various
public filings it periodically makes with the SEC. CMS Energy designed this
discussion of potential risks and uncertainties, which is by no means
comprehensive, to highlight important factors that may impact CMS Energy's
business and financial outlook. This Annual Report also describes material
contingencies in CMS Energy's Notes to Consolidated Financial Statements, and
CMS Energy encourages its readers to review these Notes.

In addition to any assumptions and other factors referred to specifically
in connection with such forward-looking statements, there are several factors
that could affect CMS Energy's liquidity, including but not limited to:

- Generation of sufficient cash flows from operations;

- Near term cash requirements;

- Timely closing of asset sales, including the sale of Panhandle;

- Access to capital markets or other financing sources; and

- Numerous other significant risks and difficulties including, but not
limited to, SEC and other investigations, securities class action
lawsuits, and ERISA cases.

33

CAPITAL RESOURCES AND LIQUIDITY

CMS Energy's liquidity and capital requirements generally are a function of
its results of operations, capital expenditures, contractual obligations,
working capital needs and collateral requirements. CMS Energy historically has
met its consolidated cash needs through its operating and investing activities
and, as needed, through access to bank financing and the capital markets.

During 2003, CMS Energy has contractual obligations and planned capital
expenditures that would require substantial amounts of cash. As of March 14,
2003, CMS Energy at the parent level had approximately $615 million, Consumers
Energy and its subsidiaries had approximately $727 million, and Panhandle and
its subsidiaries had approximately $52 million of publicly issued and credit
facility debt maturing in 2003. CMS Energy and Consumers Energy have taken
significant steps to address their 2003 maturities, as described below. In
addition, CMS Energy also could become subject to liquidity demands pursuant to
commercial commitments under guarantees, indemnities and letters of credit.
Management is pursuing actively plans to refinance debt and to sell assets,
including the sale of Panhandle. In December 2002, CMS Energy signed a
definitive agreement to sell Panhandle for a total of $1.828 billion, which is
expected to result in $662 million of cash and $1.166 billion of debt
assumption. However, closing of the sale is pending action by the FTC under the
Hart-Scott-Rodino Act. All other regulatory approvals have been granted.

CMS ENERGY PARENT LEVEL LIQUIDITY

CMS Energy at the parent level is addressing its near-to-mid-term liquidity
and capital requirements through a financial improvement plan that involves the
sale of non-strategic and under-performing assets of approximately $912 million,
receipt of dividends from its subsidiaries of approximately $280 million, and
reduction of approximately $598 million of outstanding debt along with reduced
capital expenditures, cost reductions and other measures.

As noted elsewhere in this MDA, CMS Energy has reduced debt of
approximately $2.7 billion through asset sales with cash proceeds and associated
debt assumption from such sales over the past two years. Through the first
quarter of 2003, CMS Energy has accomplished $60 million of additional asset
sales. In January 2003, CMS MST closed on the sale of a substantial portion of
its natural gas trading contracts for $17 million of cash proceeds, and in
February 2003 signed a definitive agreement to sell its wholesale power
contract. In addition, the sale of the Centennial Pipeline, resulting in
proceeds to CMS Energy of $40 million, closed in February 2003.

CMS Energy believes that further targeted asset sales, together with its
planned reductions in operating expenses, capital expenditures, and the
suspension of the common dividend also will contribute to improved liquidity.
CMS Energy believes that, assuming the successful implementation of its
financial improvement plan, its present level of cash and borrowing capacity
along with anticipated cash flows from operating and investing activities will
be sufficient to meet its liquidity needs through 2003. There can be no
assurances that the financial improvement plan will be successful and failure to
achieve its goals could have a material adverse effect on CMS Energy's liquidity
and operations. In such event, CMS Energy would be required to consider the full
range of strategic measures available to companies in similar circumstances.

CMS Energy continues to explore financing opportunities to supplement its
financial improvement plan. These potential opportunities include refinancing
its bank credit facilities; entering into leasing arrangements and/or vendor
financing; refinancing and issuing new capital markets debt, preferred and/or
common equity; and negotiating private placement debt, preferred and/or common
equity. Specifically, as of March 31, 2003, CMS Energy has taken the following
action to supplement its financial improvement plan in 2003:

- On March 30, 2003 CMS Energy entered into an amendment and restatement of
its existing $300 million and $295.8 million revolving credit facilities
under which $409 was then outstanding. The Second Amended and Restated
Senior Credit Agreement includes a $234 million tranche with a maturity
date of April 30, 2004 and a $175 million tranche with a maturity date of
September 30, 2004. The facility is being underwritten by several banks
at a total annual cost to CMS Energy of approximately ten percent, which
includes the initial commitment fee. Any proceeds of equity issuances by
CMS Energy and its subsidiaries or any asset sales and debt issuances by
CMS Energy or its subsidiaries, other than

34

Consumers Energy, are required to be used to prepay this facility. This facility
is collateralized primarily by the common stock of Consumers Energy, CMS
Enterprises and certain CMS Enterprises subsidiaries.

- On March 30, 2003 CMS Enterprises entered into a revolving credit
facility in an aggregate amount of $441 million. The maturity date of
this facility is April 30, 2004. The facility is being underwritten by
several banks at a total annual cost to CMS Energy of approximately ten
percent, which includes the initial commitment fee. Proceeds from this
loan will be used for general corporate purposes, to retire debt, and to
collateralize approximately $160 million of letters of credit. Any
proceeds of equity issuances by CMS Energy and its subsidiaries or any
asset sales and debt issuances by CMS Energy or its subsidiaries, other
than Consumers Energy, are required to be used to prepay this facility.
It is expected that proceeds from the Panhandle sale will be used to pay
off this facility in full. This facility is guaranteed by CMS Energy,
whose guaranty is secured by the common stock of Consumers Energy and CMS
Enterprises.

In addition, if necessary, CMS Energy also would postpone the $52 million
pension contribution expected to be made in September 2003. Also, CMS Energy may
pursue other avenues of private debt or equity investment.

CONSUMERS ENERGY LIQUIDITY

Consumers plans to meet its liquidity and capital requirements in 2003
through a combination of approximately $513 million from operations and
approximately $295 million of new debt along with reduced capital expenditures,
cost reductions and other measures. As of March 14, 2003, Consumers planned to
refinance $727 million of debt in 2003. To that end, Consumers has initiated
several transactions with various financial institutions, regulators, banks,
lenders, and others that are designed to provide liquidity:

- On March 26, 2003, Consumers entered into a $140 million term loan
secured by first mortgage bonds with a private investor bank. This loan
has a term of six years at a cost of LIBOR plus 475 basis points.
Proceeds from this loan will be used to retire debt and for general
corporate purposes.

- On March 27, 2003, Consumers obtained a replacement revolving credit
facility in the amount of $250 million, secured by first mortgage bonds.
The cost of the facility is LIBOR plus 350 basis points. The new credit
facility matures in March 2004 with two annual extensions at Consumers'
option, which would extend the maturity to March 2006. The prior facility
was due to expire in July 2003.

- On March 28, 2003, Consumers syndicated a $150 million term loan secured
by first mortgage bonds. This term loan has a three-year maturity and
will bear interest at LIBOR plus 450 basis points. Proceeds from this
loan will be used to retire debt and for general corporate purposes.

- Consumers filed a general rate case for its gas utility business on March
14, 2003. Consumers requested rate relief in the amount of approximately
$156 million. In its filing, Consumers requested immediate interim
relief. If interim relief of $156 million were granted, Consumers expects
that the rate relief could be in place by the fourth quarter of 2003.

- Consumers has filed an application with the MPSC seeking authorization to
issue $1.084 billion of securitization bonds. These bonds would provide
liquidity to Consumers at interest rates reflective of high quality
credit. Consumers would utilize these proceeds to retire higher cost debt
and in turn would realize significant interest expense savings over the
life of the bonds. If the MPSC approves a financing in the amount
requested, and there are no delays in the offering process, Consumers
anticipates that bonds would be issued by year end, 2003.

If necessary, Consumers would also postpone the planned $158 million
pension contribution expected to be made in September 2003.

In the event Consumers is unable to access bank financing or the capital
markets to incur or refinance indebtedness, there could be a material adverse
effect on Consumers' liquidity and operations. There is no assurance that the
pending securitization bond issuance transaction noted above will be completed.
Further, there is no assurance that the MPSC will grant either interim or final
gas utility rate relief.

35

ROUND-TRIP TRADES

During the period of May 2000 through January 2002, CMS MST engaged in
simultaneous, prearranged commodity trading transactions in which energy
commodities were sold and repurchased at the same price. These transactions,
which had no impact on previously reported consolidated net income, earnings per
share or cash flows, had the effect of increasing operating revenues, operating
expenses, accounts receivable, accounts payable and reported trading volumes.
After internally concluding that cessation of these trades was in CMS Energy's
best interest, these so called round-trip trades were halted in January 2002.

CMS Energy accounted for these trades in gross revenue and expense through
the third quarter of 2001, but subsequently concluded that these round-trip
trades should have been reflected on a net basis. In the fourth quarter of 2001,
CMS Energy ceased recording these trades in either revenues or expenses. CMS
Energy's 2001 Form 10-K, issued in March 2002, restated revenue and expense for
the first three quarters of 2001 to eliminate $4.2 billion of previously
reported revenue and expense. The 2001 Form 10-K did include $5 million of
revenue and expense for 2001 from such trades, which remained uncorrected. At
the time of the initial restatement, CMS Energy inadvertently failed to restate
2000 for round-trip trades.

CMS Energy is cooperating with an SEC investigation regarding round-trip
trading and the Company's financial statements, accounting practices and
controls. CMS Energy is also cooperating with inquiries by the Commodity Futures
Trading Commission, the FERC, and the United States Department of Justice
regarding these transactions. CMS Energy has also received subpoenas from U.S.
Attorneys Offices regarding investigations of these trades. In addition, CMS
Energy's Board of Directors established the Special Committee of independent
directors to investigate matters surrounding round-trip trading and the Special
Committee retained outside counsel to assist in the investigation.

On October 31, 2002, the Special Committee reported the results of its
investigation to the Board of Directors. The Special Committee discovered no new
information inconsistent with the information previously reported by CMS Energy
and as reported above. The investigation also concluded that the round-trip
trades were undertaken to raise CMS MST's profile as an energy marketer, with
the goal of enhancing CMS MST's ability to promote its services to new
customers. The Special Committee found no apparent effort to manipulate the
price of CMS Energy Common Stock or to affect energy prices.

The Special Committee also made recommendations designed to prevent any
reoccurrence of this practice, most of which have already been implemented.
Previously, CMS Energy terminated its speculative trading business and revised
its risk management policy. The Board of Directors adopted, and CMS Energy has
begun implementing, the remaining recommendations of the Special Committee.

CHANGE IN AUDITORS AND RESTATEMENTS

In April 2002, the Board of Directors, upon the recommendation of the Audit
Committee of the Board, voted to discontinue using Arthur Andersen to audit CMS
Energy's financial statements for the year ending December 31, 2002. CMS Energy
previously had retained Arthur Andersen to review its financial statements for
the quarter ended March 31, 2002. In May 2002, the Board of Directors engaged
Ernst & Young to audit CMS Energy's financial statements for the year ending
December 31, 2002. Also in May 2002, CMS Energy stated its intention to restate
its consolidated financial statements for 2000 and 2001 to eliminate the effects
of round-trip trading.

Following CMS Energy's announcement that it would restate its financial
statements for 2000 and 2001 to eliminate the effects of round-trip energy
trades and form the Special Committee to investigate these trades, CMS Energy
received formal notification from Arthur Andersen that it had terminated its
relationship with CMS Energy and affiliates. Arthur Andersen notified CMS Energy
that due to the investigation, Arthur Andersen's historical opinions on CMS
Energy's financial statements for the periods being restated could not be relied
upon. Arthur Andersen also notified CMS Energy that it would be unable to give
an opinion on CMS Energy's restated financial statements when they are
completed. Arthur Andersen's reports on CMS Energy's, Consumers', and
Panhandle's consolidated financial statements for each of the fiscal years ended
December 31, 2001 and

36

December 31, 2000 contained no adverse or disclaimer of opinion, nor were the
reports qualified or modified regarding uncertainty, audit scope or accounting
principles.

There were no disagreements between CMS Energy and Arthur Andersen on any
matter of accounting principle or practice, financial statement disclosure, or
auditing scope or procedure during the years 2000 and 2001 and through the date
of their opinion for the quarter ended March 31, 2002.

As a result of the restatement required with respect to the round-trip
trading transactions, Ernst & Young was engaged to re-audit CMS Energy's
consolidated financial statements for each of the fiscal years ended December
31, 2001 and December 31, 2000, which included audit work at Consumers and
Panhandle for these years. None of CMS Energy's former auditors, some of whom
are now employed by Ernst & Young, were involved in the re-audit of CMS Energy's
consolidated financial statements. During CMS Energy's two most recent fiscal
years ended December 31, 2000 and December 31, 2001 and the subsequent interim
period through June 10, 2002, CMS Energy did not consult with Ernst & Young
regarding any matter or event identified by SEC laws and regulations.

In connection with Ernst & Young's re-audit of the fiscal years ended
December 31, 2001 and December 31, 2000, CMS Energy has determined to make
certain adjustments (in addition to the round-trip trades) to its consolidated
financial statements for the fiscal years ended December 31, 2001 and December
31, 2000. Therefore, the consolidated financial statements for 2001 and 2000
have been restated from amounts previously reported. At the time it adopted the
accounting treatment for these items, CMS Energy believed such accounting was
appropriate under accounting principles generally accepted in the United States.

The tables below summarize the adjustments and the effects on CMS Energy's
consolidated financial statements.

For detailed information about the restatement of CMS Energy's consolidated
financial statements reflecting these audit adjustments, see Note 2,
Restatement.

CRITICAL ACCOUNTING POLICIES

CMS Energy's consolidated financial statements are based on the application
of accounting principles generally accepted in the United States. The
application of these principles often requires management to make certain
judgments, assumptions and estimates that may result in different financial
presentations. CMS Energy

37

believes that certain accounting principles are critical in terms of
understanding its consolidated financial statements. These principles include
the use of estimates in accounting for contingencies and long-lived assets,
equity method investments and long-term obligations, accounting for derivatives
and financial instruments, mark-to-market accounting, and international
operations and foreign currency, pension and postretirement benefits and
Regulatory accounting.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Certain accounting principles require subjective
and complex judgments used in the preparation of financial statements.
Accordingly, a different financial presentation could result depending on the
judgment, estimates or assumptions that are used. Such estimates and assumptions
include, but are not specifically limited to: depreciation, amortization,
interest rates, discount rates, currency exchange rates, future commodity
prices, mark-to-market valuations, investment returns, impact of new accounting
standards, international economic policy, future costs associated with long-
term contractual obligations, future compliance costs associated with
environmental regulations and continuing creditworthiness of counterparties.
Actual results could materially differ from those estimates.

Periodically, in accordance with SFAS No. 144 and APB Opinion No. 18,
long-lived assets and equity method investments of CMS Energy and its
subsidiaries are evaluated to determine whether conditions, other than those of
a temporary nature, indicate that the carrying value of an asset may not be
recoverable. Management bases its evaluation on impairment indicators such as
the nature of the assets, future economic benefits, domestic and foreign state
and federal regulatory and political environments, historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such indicators are present or other factors
exist that indicate that the carrying value of the asset may not be recoverable,
CMS Energy determines whether impairment has occurred through the use of an
undiscounted cash flow analysis of assets at the lowest level for which
identifiable cash flows exist. If impairment, other than a temporary nature, has
occurred, CMS Energy recognizes a loss for the difference between the carrying
value and the estimated fair value of the asset. The fair value of the asset is
measured using discounted cash flow analysis or other valuation techniques. The
analysis of each long-lived asset is unique and requires management to use
certain estimates and assumptions that are deemed prudent and reasonable for a
particular set of circumstances. Of CMS Energy's total assets, valued at $14
billion at December 31, 2002, approximately 40 to 45 percent represent the
carrying value of long-lived assets and equity method investments that are
subject to this type of analysis. If future market, political or regulatory
conditions warrant, CMS Energy and its subsidiaries may be subject to
write-downs in future periods. Conversely, if market, political or regulatory
conditions improve, accounting standards prohibit the reversal of previous
write-downs.

CMS Energy recently recorded write-downs of non-strategic or
under-performing long-lived assets as a result of implementing a new strategic
direction. CMS Energy is pursuing the sale of all of these non-strategic and
under-performing assets, including some assets that were not determined to be
impaired. Upon the sale of these assets, the proceeds realized may be materially
different from the remaining carrying value of these assets. Even though these
assets have been identified for sale, management cannot predict when, nor make
any assurances that, these asset sales will occur, or the amount of cash or the
value of consideration to be received.

Similarly, the recording of estimated liabilities for contingent losses,
including estimated losses on long-term obligations, within the financial
statements is guided by the principles in SFAS No. 5 that require a company to
record estimated liabilities in the financial statements when it is probable
that a loss will be incurred in the future as a result of a current event, and
the amount can be reasonably estimated. Management uses cash flow valuation
techniques similar to those described above to estimate contingent losses on
long-term contracts.

ELECTRIC ENVIRONMENTAL ESTIMATES: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects to incur
significant costs for future environmental compliance, especially compliance
with clean air laws.

38

The EPA has issued final regulations regarding nitrogen oxide emissions
from certain generators, including some of Consumers' electric generating
facilities. These regulations will require Consumers to make significant capital
expenditures estimated to be $770 million. As of December 31, 2002, Consumers
has incurred $405 million in capital expenditures to comply with these
regulations and anticipates that the remaining capital expenditures will be
incurred between 2003 and 2009. Additionally, Consumers expects to supplement
its compliance plan with the purchase of nitrogen oxide emissions credits in the
years 2005 through 2008. The cost of these credits based on the current market
is estimated to average $6 million per year; however, the market for nitrogen
oxide emissions credits is volatile and the price could change significantly. At
some point, if new environmental standards become effective, Consumers may need
additional capital expenditures to comply with the standards. These and other
required environmental expenditures, if not recovered in Consumers' rates, may
have a material adverse effect upon Consumers' financial condition and results
of operations. For further information see Note 6, Uncertainties, "Electric
Contingencies -- Electric Environmental Matters."

GAS ENVIRONMENTAL ESTIMATES: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will incur investigation
and remedial action costs at a number of sites. Consumers estimates the costs
for 23 former manufactured gas plant sites will be between $82 million and $113
million, using the Gas Research Institute -- Manufactured Gas Plant
Probabilistic Cost Model. These estimates are based on discounted 2001 costs and
follow EPA recommended use of discount rates between three and seven percent.
Consumers expects to recover a significant portion of these costs through
MPSC-approved rates charged to its customers. Any significant change in
assumptions, such as remediation techniques, nature and extent of contamination,
and legal and regulatory requirements, could change the remedial action costs
for the sites. For further information see Note 6, Uncertainties, "Gas
Contingencies -- Gas Environmental Matters."

MCV UNDERRECOVERIES: 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 Dow. Consumers, through
two wholly owned subsidiaries, holds a 49 percent partnership interest in the
MCV Partnership, and a 35 percent lessor interest in the MCV Facility.

Consumers' annual obligation to purchase capacity from the MCV Partnership
is 1,240 MW through 2025. The PPA requires Consumers to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Consumers has
not been allowed full recovery of the capacity charges in rates. After September
2007, the PPA's terms obligate Consumers to pay the MCV Partnership only those
capacity and energy charges that the MPSC has authorized for recovery from
electric customers.

In 1992, Consumers recognized a loss and established a PPA liability for
the present value of the estimated future underrecoveries of power supply costs
under the PPA based on MPSC cost recovery orders. Primarily as a result of the
MCV Facility's actual availability being greater than management's original
estimates, the PPA liability has been reduced at a faster rate than originally
anticipated. At December 31, 2002, 2001 and 2000, the remaining after-tax
present value of the estimated future PPA liability associated with the loss
totaled $34 million, $50 million and $64 million respectively. The PPA liability
is expected to be depleted in late 2004.

In March 1999, Consumers and the MCV Partnership reached a settlement
agreement effective January 1, 1999, that addressed, among other things, the
ability of the MCV Partnership to count modifications increasing the capacity of
the existing MCV Facility for purposes of computing the availability of contract
capacity under the PPA for billing purposes. That settlement agreement capped
availability payments that may be billed by the MCV Partnership at a 98.5
percent level.

When Consumers returns, as expected, to unfrozen rates beginning in 2004,
Consumers will recover from customers, on-peak and off-peak capacity, so long as
availability does not exceed an average 88.7 percent established in previous
MPSC orders. For availability payments billed by the MCV Partnership after
September 15, 2007, and not recovered from customers, Consumers would expect to
claim a regulatory out under

39

the PPA. If the MCV Facility's generating availability remains at the maximum
98.5 percent level during the next five years, Consumers' after-tax cash
underrecoveries associated with the PPA could be as follows:

In October 2000, Consumers received an MPSC order authorizing Consumers to
securitize certain regulatory assets up to $469 million, net of tax, see Note 6,
Uncertainties, "Electric Rate Matters -- Electric Restructuring". Accordingly,
in December 2000, Consumers established a regulatory asset for securitized costs
of $709 million, before tax, that had previously been recorded in other
regulatory asset accounts. In order to prepare for the financing of the
securitized assets and the subsequent retirement of debt with Securitization
proceeds, issuance fees of $1 million, $10 million and $1 million were incurred
in 2002, 2001 and 2000, respectively, and capitalized as a part of
Securitization costs. These issuance costs are amortized each month for up to
fourteen years. Amortization of the Securitized assets approximated $29 million
and $2 million in 2002 and 2001, respectively, for accumulated securitized cost
amortization of $31 million. The components of the unamortized securitized costs
are illustrated below.

ACCOUNTING FOR DERIVATIVE AND FINANCIAL INSTRUMENTS AND MARKET RISK INFORMATION

DERIVATIVE INSTRUMENTS: CMS Energy uses the criteria in SFAS No. 133, as
amended and interpreted, to determine if certain contracts must be accounted for
as derivative instruments. The rules for determining whether a contract meets
the criteria for derivative accounting are numerous and complex. As a result,
significant judgment is required to determine whether a contract requires
derivative accounting, and similar contracts can sometimes be accounted for
differently.

The types of contracts CMS Energy currently accounts for as derivative
instruments include interest rate swaps, foreign currency exchange contracts,
certain electric call options, fixed priced weather-based gas supply call
options and fixed price gas supply put options. CMS Energy does not account for
electric capacity and certain energy contracts, gas supply contracts, coal and
nuclear fuel supply contracts, or purchase orders for numerous supply items as
derivatives.

41

Consumers believes that certain of its electric capacity and energy
contracts are not derivatives due to the lack of an active energy market in the
state of Michigan, as defined by SFAS No. 133, and the transportation cost to
deliver the power under the contracts to the closest active energy market at the
Cinergy hub in Ohio. If a market develops in the future, Consumers may be
required to account for these contracts as derivatives. The mark-to-market
impact on earnings related to these contracts, particularly related to the PPA,
could be material to the financial statements.

If a contract is accounted for as a derivative instrument, it is recorded
in the financial statements as an asset or a liability, at the fair value of the
contract. Any difference between the recorded book value and the fair value is
reported either in earnings or other comprehensive income, depending on certain
qualifying criteria. The recorded fair value of the contract is then adjusted
quarterly to reflect any change in the market value of the contract.

In order to value the contracts that are accounted for as derivative
instruments, CMS Energy uses a combination of market quoted prices and
mathematical models. Option models require various inputs, including forward
prices, volatilities, interest rates and exercise periods. Changes in forward
prices or volatilities could significantly change the calculated fair value of
the call option contracts. The models used by CMS Energy have been tested
against market quotes to ensure consistency between model outputs and market
quotes. At December 31, 2002, CMS Energy assumed a market-based interest rate of
4.5 percent and a volatility rate of 70 percent in calculating the fair value of
its electric call options.

In order for derivative instruments to qualify for hedge accounting under
SFAS No. 133, the hedging relationship must be formally documented at inception
and be highly effective in achieving offsetting cash flows or offsetting changes
in fair value attributable to the risk being hedged. If hedging a forecasted
transaction, the forecasted transaction must be probable. If a derivative
instrument, used as a cash flow hedge, is terminated early because it is
probable that a forecasted transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative instrument,
used as a cash flow hedge, is terminated early for other economic reasons, any
gain or loss as of the termination date is deferred and recorded when the
forecasted transaction affects earnings.

FINANCIAL INSTRUMENTS: CMS Energy accounts for its investments in debt and
equity securities in accordance with SFAS No. 115. As such, debt and equity
securities can be classified into one of three categories: held-to-maturity,
trading, or available-for-sale securities. CMS Energy's investments in equity
securities are classified as available-for-sale securities. They are reported at
fair value with any unrealized gains or losses resulting from changes in fair
value reported in equity as part of other comprehensive income and excluded from
earnings unless such changes in fair value are other than temporary. Unrealized
gains or losses resulting from changes in the fair value of Consumers' nuclear
decommissioning investments are reported in accumulated depreciation. The fair
value of these investments is determined from quoted market prices.

MARKET RISK INFORMATION: CMS Energy is exposed to market risks including,
but not limited to, changes in interest rates, commodity prices, currency
exchange rates, and equity security prices. CMS Energy's market risk, and
activities designed to minimize this risk, are subject to the direction of an
executive oversight committee consisting of designated members of senior
management and a risk committee, consisting of certain business unit managers.
The role of the risk committee is to review the corporate commodity position and
ensure that net corporate exposures are within the economic risk tolerance
levels established by CMS Energy's Board of Directors. Established policies and
procedures are used to manage the risks associated with market fluctuations.

In accordance with SEC disclosure requirements, CMS Energy performs
sensitivity analyses to assess the potential loss in fair value, cash flows and
earnings based upon hypothetical 10 percent increases and decreases in market
rates or prices. Management does not believe that sensitivity analyses alone
provide an accurate or reliable method for monitoring and controlling risks.
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 analyses could occur if market rates or prices exceed the 10 percent
shift used for the analyses.

42

INTEREST RATE RISK: CMS Energy is exposed to interest rate risk resulting
from the issuance of fixed-rate and variable-rate financing, including interest
rate risk associated with trust preferred securities, and from interest rate
swap agreements. CMS Energy uses a combination of these instruments to manage
and mitigate interest rate risk exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain a balance
between risk and the lowest cost of capital. At December 31, 2002, the carrying
amounts of long-term debt and trust preferred securities were $5.4 billion and
$927 million, respectively, with corresponding fair values of $5.0 billion and
$729 million, respectively. Based on a sensitivity analysis at December 31,
2002, CMS Energy estimates that if market interest rates average 10 percent
higher or lower, earnings before income taxes for the subsequent 12 months would
decrease or increase, respectively, by approximately $37 million. In addition,
based on a 10 percent adverse shift in market interest rates, CMS Energy would
have an exposure of approximately $332 million to the fair value of its
long-term debt and trust preferred securities if it had to refinance all of its
long-term fixed-rate debt and trust preferred securities. CMS Energy does not
intend to refinance any of its outstanding fixed-rate debt and trust preferred
securities in the near term and believes that any adverse change in interest
rates would not have a material effect on CMS Energy's consolidated financial
position as of December 31, 2002.

At December 31, 2002, the fair value of CMS Energy's floating to fixed
interest rate swaps with a notional amount of $294 million was negative $7
million, which represents the amount CMS Energy would pay to settle. The swaps
mature at various times through 2006 and are designated as cash flow hedges for
accounting purposes.

COMMODITY PRICE RISK: CMS Energy is exposed to market fluctuations in the
price of natural gas, oil, electricity, coal, natural gas liquids and other
commodities. CMS Energy employs established policies and procedures to manage
these risks using various commodity derivatives, including futures contracts,
options and swaps (which require a net cash payment for the difference between a
fixed and variable price), for non-trading purposes. The prices of these energy
commodities can fluctuate because of, among other things, changes in the supply
of and demand for those commodities. To minimize adverse price changes, CMS
Energy also hedges certain inventory and purchases and sales contracts. Based on
a sensitivity analysis, CMS Energy estimates that if energy commodity prices
change by an average 10 percent, pretax operating income for the subsequent
twelve months would change by $1.7 million. These hypothetical 10 percent shifts
in quoted commodity prices would not have had a material impact on CMS Energy's
consolidated financial position or cash flows as of December 31, 2002. The
analysis does not quantify short-term exposure to hypothetically adverse price
fluctuations in inventories or for commodity positions related to trading
activities, or the commodity price risks of certain operating activities.

Consumers enters into electric call options, fixed price gas supply
contracts containing embedded put options, fixed priced weather-based gas supply
call options and fixed priced gas supply put options. The electric call options
are used to protect against risk due to fluctuations in the market price of
electricity and to ensure a reliable source of capacity to meet customers'
electric needs. The gas supply contracts containing embedded put options, the
weather-based gas supply call options, and the gas supply put options are used
to purchase reasonably priced gas supply.

As of December 31, 2002, the fair value based on quoted future market
prices of electricity-related call option contracts was $9 million. At December
31, 2002, assuming a hypothetical 10 percent adverse change in market prices,
the potential reduction in fair value associated with these contracts would be
$2 million. As of December 31, 2002, Consumers had an asset of $37 million,
related to premiums incurred for electric call option contracts. Consumers'
maximum exposure associated with the call option contracts is limited to the
premiums incurred. As of December 31, 2002, the fair value based on quoted
future market prices of gas supply-related call and put option contracts was $1
million. At December 31, 2002, a hypothetical 10 percent adverse change in
market prices would be immaterial.

CURRENCY EXCHANGE RISK: CMS Energy is exposed to currency exchange risk
arising from investments in foreign operations as well as various international
projects in which CMS Energy has an equity interest and which have debt
denominated in U.S. dollars. CMS Energy typically uses forward exchange
contracts and other risk mitigating instruments to hedge currency exchange
rates. The impact of the hedges on the investments in foreign operations is
reflected in other comprehensive income as a component of foreign currency
translation adjustment.

43

For the year ended December 31, 2002, there was no mark-to-market adjustment
included in the total net foreign currency translation adjustment of $225
million. Based on a sensitivity analysis at December 31, 2002, a 10 percent
adverse shift in currency exchange rates would not have a material effect on CMS
Energy's consolidated financial position or results of operations. At December
31, 2002, the estimated fair value of the foreign exchange hedges was
immaterial.

EQUITY SECURITY PRICE RISK: CMS Energy and certain of its subsidiaries have
equity investments in companies in which they hold less than a 20 percent
interest. As of December 31, 2002, a hypothetical 10 percent adverse shift in
equity securities prices would not have a material effect on CMS Energy's
consolidated financial position, results of operations or cash flows.

For a discussion of accounting policies related to derivative transactions,
see Note 10, Risk Management Activities and Financial Instruments, incorporated
by reference herein.

MARK-TO-MARKET ACCOUNTING

CMS MST's wholesale power and gas trading activities are accounted for
under mark-to-market method of accounting consistent with guidance provided in
EITF Issue No. 98-10. EITF Issue No. 98-10 has been rescinded by EITF Issue No.
02-03. The consensus rescinding EITF Issue No. 98-10 must be applied to all
contracts that existed as of October 25, 2002 and must be recognized as a
cumulative effect of a change in accounting principle in accordance with APB
Opinion No. 20, Accounting Changes, effective the first day of the first interim
or annual period beginning after December 15, 2002. The consensus also must be
applied immediately to all new contracts entered into after October 25, 2002.
See discussion on EITF Issue No. 02-03 under New Accounting Standards. Under
mark-to-market accounting, energy-trading contracts are reflected at fair market
value, net of reserves, with unrealized gains and losses recorded as an asset or
liability in the consolidated balance sheets. These assets and liabilities are
affected by the timing of settlements related to these contracts, current-period
changes from newly originated transactions and the impact of price movements.
Changes in fair value are recognized as revenues in the consolidated statements
of income in the period in which the changes occur. Market prices used to value
outstanding energy trading contracts reflect management's consideration of,
among other things, closing exchange and over-the-counter quotations. In certain
contracts, long-term commitments may extend beyond the period in which market
quotations for such contracts are available and volumetric obligations may not
be defined. Mathematical models are developed to determine various inputs into
the fair value calculation including price, anticipated volumetric obligations
and other inputs that may be required to adequately address the determination of
fair value of the contracts. Realized cash returns on these commitments may
vary, either positively or negatively, from the results estimated through
application of the mathematical model. CMS Energy believes that its mathematical
models utilize state-of-the-art technology, pertinent industry data and prudent
discounting in order to forecast certain elongated pricing curves. Market prices
are adjusted to reflect the impact of liquidating the company's position in an
orderly manner over a reasonable period of time under present market conditions.

In connection with the market valuation of its energy commodity contracts,
CMS Energy maintains reserves for credit risks based on the financial condition
of counterparties. The creditworthiness of these counterparties will impact
overall exposure to credit risk; however, CMS Energy maintains credit policies
that management believes minimize overall credit risk with regard to its
counterparties. Determination of its counterparties' credit quality is based
upon a number of factors, including credit ratings, financial condition, and
collateral requirements. When trading terms permit, CMS Energy employs standard
agreements that allow for netting of positive and negative exposures associated
with a single counterparty. Based on these policies, its current exposures and
its credit reserves, CMS Energy does not anticipate a material adverse effect on
its financial position or results of operations as a result of counterparty
nonperformance.

44

The following tables provide a summary of the fair value of CMS Energy's
energy commodity contracts as of December 31, 2002.

- -------------------------
(a) Reflects change in fair value based on market indicators confirmed by the
anticipated sale of gas and power contracts.

(b) Reflects current net liability position as of 12/31/01.

(c) Reflects changes in price and net increase/(decrease) in position size of
forward positions as well as changes to MTM and credit reserves.

(d) Includes $62 million of net assets and liabilities classified as "held for
sale".

INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY

CMS Energy, through its subsidiaries and affiliates, has acquired
investments in energy-related projects in a number of world markets. As a result
of a change in business strategy, CMS Energy has begun divesting its non-
strategic or under-performing foreign investments.

BALANCE SHEET: CMS Energy's subsidiaries and affiliates whose functional
currency is other than the U.S. dollar translate their assets and liabilities
into U.S. dollars at the exchange rates in effect at the end of the fiscal
period. The revenue and expense accounts of such subsidiaries and affiliates are
translated into U.S. dollars at the average exchange rate during the period. The
gains or losses that result from this process, and gains and losses on
intercompany foreign currency transactions that are long-term in nature that CMS
Energy does not intend to settle in the foreseeable future, are reflected as a
component of stockholders' equity in the consolidated balance sheets as "Foreign
Currency Translation" in accordance with the accounting guidance provided in
SFAS No. 52. In 2002, the cumulative Foreign Currency Translation decreased
stockholders' equity by $225 million.

INCOME STATEMENT: For subsidiaries operating in highly inflationary
economies or that meet the U.S. functional currency criteria outlined in SFAS
No. 52, the U.S. dollar is deemed to be the functional currency. Gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the U.S. dollar, except those that are hedged, are
included in determining net income.

Argentina: In January 2002, the Republic of Argentina enacted the Public
Emergency and Foreign Exchange System Reform Act. This law repealed the fixed
exchange rate of one U.S. dollar to one Argentina peso, converted all
dollar-denominated utility tariffs and energy contract obligations into pesos at
the same one-to-one exchange rate, and directed the President of Argentina to
renegotiate such tariffs.

45

In February 2002, the Republic of Argentina enacted additional measures
that required all monetary obligations (including current debt and future
contract payment obligations) denominated in foreign currencies to be converted
into pesos. These February measures also authorize the Argentine judiciary
essentially to rewrite private contracts denominated in dollars or other foreign
currencies if the parties cannot agree on how to share equitably the impact of
the conversion of their contract payment obligations into pesos. In April 2002,
based on a consideration of these environmental factors, CMS Energy evaluated
its Argentine investments for impairment as required under SFAS No. 144 and APB
Opinion No. 18. These impairment models contain certain assumptions regarding
anticipated future exchange rates and operating performance of the investments.
Exchange rates used in the models assume that the rate will decrease from
current levels to approximately 3.00 pesos per U.S. dollar over the remaining
life of these investments. Based on the results of these models, CMS Energy
determined that these investments were not impaired.

Effective April 30, 2002, CMS Energy adopted the Argentine peso as the
functional currency for most of its Argentine investments. CMS had previously
used the U.S. dollar as the functional currency for its Argentine investments.
As a result, on April 30, 2002, CMS Energy translated the assets and liabilities
of its Argentine entities into U.S. dollars, in accordance with SFAS No. 52,
using an exchange rate of 3.45 pesos per U.S. dollar, and recorded an initial
charge to the Foreign Currency Translation component of Common Stockholders'
Equity of approximately $400 million.

For the year ended December 31, 2002, CMS Energy recorded losses of $31
million reflecting the negative impact of the actions of the Argentine
government. These losses represent changes in the value of peso-denominated
monetary assets (such as receivables) and liabilities of Argentina-based
subsidiaries and lower net project earnings resulting from the conversion to
pesos of utility tariffs and energy contract obligations that were previously
calculated in dollars.

While CMS Energy's management cannot predict the most likely future, or
average peso to U.S. dollar exchange rates, it does expect that these non-cash
charges substantially reduce the risk of further material balance sheet impacts
when combined with anticipated proceeds from international arbitration currently
in progress, political risk insurance, and the eventual sale of these assets. At
December 31, 2002, the net foreign currency loss due to the unfavorable exchange
rate of the Argentine peso recorded in the Foreign Currency Translation
component of Common Stockholder's Equity using an exchange rate of 3.3647 pesos
per U.S. dollar was $266 million. This amount also reflected the effect of
recording, at December 31, 2002, U.S. income taxes with respect to temporary
differences between the book and tax bases of foreign investments, including the
foreign currency translation associated with CMS Energy's Argentine investments,
that were determined to be no longer essentially permanent in duration (see Note
11).

Australia: In 2000, an impairment loss of $329 million ($268 million
after-tax) was realized on the carrying amount of the investment in Loy Yang.
This loss did not include $168 million cumulative net foreign currency
translation losses due to unfavorable changes in the exchange rates, which, in
accordance with SFAS No. 52, will not be realized until there has been a sale,
full liquidation, or other disposition of CMS Energy's investment in Loy Yang,
all of which are currently being pursued. In connection with the restatement of
CMS Energy's December 31, 2000 consolidated financial statements, a deferred
U.S. income tax asset of $48 million was recorded with respect to the cumulative
net foreign currency translation losses associated with CMS Energy's Loy Yang
investment. At December 31, 2002, the net foreign currency loss due to the
unfavorable exchange rate of the Australian dollar recorded in the Foreign
Currency Translation component of Common Stockholders' Equity using an exchange
rate of Australian dollars per U.S. dollar was $120 million.

HEDGING STRATEGY: CMS Energy uses forward exchange and option contracts 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 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 the 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 are inversely correlated
with the losses and gains, respectively, on the assets and liabilities being
hedged. Foreign currency adjustments for other CMS Energy international
investments were immaterial.

46

ACCOUNTING FOR PENSION AND OPEB

CMS Energy provides postretirement benefits under its Pension Plan, and
postretirement health and life insurance benefits under its OPEB plans to
substantially all its retired employees. CMS Energy uses SFAS No. 87 to account
for pension costs and uses SFAS No. 106 to account for other postretirement
benefit costs. These statements require liabilities to be recorded on the
balance sheet at the present value of these future obligations to employees net
of any plan assets. The calculation of these liabilities and associated expenses
require the expertise of actuaries and are subject to many assumptions including
life expectancies, present value discount rates, expected long-term rate of
return on plan assets, rate of compensation increase and anticipated health care
costs. Any change in these assumptions can significantly change the liability
and associated expenses recognized in any given year. The Pension Plan includes
amounts for employees of Panhandle, which were not distinguishable from the
Pension Plan's total assets. On December 21, 2002, a definitive agreement was
executed to sell Panhandle. The sale is expected to close in 2003. No portion of
the Pension Plan will be transferred with the sale of Panhandle. At the closing
of the sale, all employees of Panhandle will no longer be eligible to accrue
additional benefits. The Pension Plan will retain pension payment obligations
for Panhandle employees that are vested under the Pension Plan. CMS Energy does
not expect the curtailment from both the Pension Plan and OPEB plans to be
material.

Pension and OPEB plan assets, net of contributions, have reduced in value
from the previous year due to the downturn in the equities market, and a
decrease in the price of CMS Energy Common Stock. As a result, CMS Energy
expects to see an increase in pension and OPEB expense levels over the next
several years unless market performance of plan assets improves. CMS Energy
anticipates its pension expense to rise in 2003 by approximately $13 million
over 2002 expenses. OPEB expenses in 2003 are anticipated to stay the same as
2002 expenses. For pension expense, this increase is due to a downturn in value
of pension assets during the past two years, forecasted increases in pay and
added service, and a decline in the interest rate used to value the liability of
the plan. Estimated 2003 OPEB expenses are expected to remain the same as 2002
due to additional required contributions from retirees and increases in
mail-order prescription copays. Under the OPEB plans' assumptions, health care
costs increase at a slower rate from current levels through 2010; however, CMS
Energy cannot predict the impact that future health care costs and interest
rates or market returns will have on pension and OPEB expense in the future. As
of January 2002, OPEB plan claims are paid from the VEBA Trusts.

The recent significant downturn in the equities markets has affected the
value of the Pension Plan assets. The Pension Plan's Accumulated Benefit
Obligation exceeded the value of these assets at December 31, 2002, and as a
result, CMS Energy was required to recognize an additional minimum liability for
this excess in accordance with SFAS No. 87. The fair value of the Pension Plan
assets at December 31, 2002 was $607 million, including CMS Energy Common Stock
which had a market value of $49 million based on a market price of $9.44. As of
March 14, 2003, the market value of CMS Energy Common Stock in the Pension Plan
was $18 million based on a share price of $3.52. As of December 31, 2002, the
Accumulated Benefit Obligation was estimated at $1.055 billion and the
additional minimum liability was $426 million, of which $53 million was recorded
as an intangible asset, and $373 million was charged to other comprehensive
income ($241 million after-tax).

At December 31, 2002, the balance of the OPEB plans' assets was $509
million. This amount consists primarily of stocks and bonds, including CMS
Energy Common Stock of $1.3 million, based on a share price of $9.44. As of
March 14, 2003, the market value of CMS Energy Common Stock in the OPEB plans'
assets was $0.5 million, based on a share price of $3.52.

During 2002, CMS Energy made contributions to the plans' trust accounts of
$147 million. This amount represents $64 million of pension related benefits and
$83 million of postretirement health care and life insurance benefits. CMS
Energy expects similar contributions for postretirement health care and life
insurance benefits will be made in 2003, 2004, and 2005. The investment
performance returns and declining discount rates have worsened the underfunded
status of the Pension Plan, net of benefit obligations, from $350 million at
December 31, 2001 to $650 million at December 31, 2002. Because of the recent
rise in the underfunded status of the Pension Plan, based on actuarial
assumptions, CMS Energy expects to make cash contributions to the Pension Plan
which approximate $210 million, $292 million, and $29 million in 2003, 2004, and
2005, respectively. However, if necessary to increase liquidity, CMS Energy
would postpone the 2003 contribution.

47

CMS Energy's expense for the pension plan approximated $33 million and $23
million for the years ended December 31, 2002 and December 31, 2001,
respectively, and is calculated based upon a number of actuarial assumptions,
including an expected long-term rate of return on the Plan assets of 8.75
percent in 2002 and 9.75 percent in 2001.

Lowering the expected long-term rate of return on the Plan assets by 0.25
percent (from 8.75 percent to 8.5 percent) would have increased pension expense
for fiscal 2002 by approximately $3 million. Lowering the discount rate by 0.25
percent would have increased pension expense for fiscal 2002 by approximately $2
million.

CMS Energy estimates pension expense will approximate $46 million, $51
million and $58 million in 2003, 2004 and 2005, respectively. Future actual
pension expense will depend on future investment performance, changes in future
discount rates and various other factors related to the populations
participating in the pension plan.

CMS Energy bases the determination of pension expense on a market-related
valuation of assets which reduces year-to-year volatility. This market-related
valuation recognizes investment gains or losses over a 5-year period from the
year in which they occur. Investment gains or losses for this purpose are the
difference between the expected return calculated using the market-related value
of assets and the actual return based on the market-related value of assets.
Since the market-related value of assets recognizes gains or losses over a
5-year period, the future value of assets will be impacted as previously
deferred gains or losses are recorded.

Due to the unfavorable performance of the equity markets, as of December
31, 2002, CMS Energy had cumulative losses of approximately $205 million which
remain to be recognized in the calculation of the market-related value of
assets. These unrecognized net actuarial losses result in increases in future
pension expense depending on several factors, including whether such losses at
each measurement date exceed the corridor in accordance with SFAS No. 87.

CMS Energy has announced changes to the Pension Plan. Employees hired on or
after July 1, 2003 will be covered by the cash balance plan section of the plan
currently being used. Under the cash balance plan, an employee's retirement
account is credited annually with a percentage of their salary and any amounts
that are vested are portable when an employee leaves the company. In addition,
the method used to convert an employee's benefit to a lump sum payment is being
changed. Employees who elect the lump sum payment option will no longer receive
an early retirement subsidy. As a result, employees who choose the lump sum
payment option, and retire before age 65, will receive lower lump sum payments.

CMS Energy also provides retirement benefits under a defined contribution
401(k) plan. CMS Energy previously offered an employer's contribution match of
50 percent of the employee's contribution up to six percent (three percent
maximum), as well as an incentive match in years when CMS Energy's financial
performance exceeded targeted levels. Amount charged to expense for the
employer's match for 2002 was $12 million, $26 million in 2001, and $24 million
in 2000. Effective September 1, 2002, the employer's match was suspended until
January 1, 2005, and the incentive match was permanently eliminated.

In order to keep health care benefits and costs competitive, CMS Energy has
announced several changes to the Health Care Plan. These changes are effective
January 1, 2003. The most significant change is that CMS Energy's future
increases in health care costs will be shared with salaried employees. The
salaried retirees health care plan has also been amended. Pre-Medicare retirees
now elect coverage from four different levels of coverage, with the two best
coverage options requiring premium contributions. These plans also coordinate
benefits under a maintenance of benefits provision to reduce claims cost for CMS
Energy. Mail-order prescription copays have also been increased for all salaried
retirees.

RESULTS OF OPERATIONS

CMS ENERGY CONSOLIDATED EARNINGS (LOSS)

CMS Energy Consolidated earnings reflect the continued implementation of
the financial improvement plan and on-going asset sales program first announced
in 2001. The financial improvement plan focuses on strengthening CMS Energy's
balance sheet and improving financial liquidity through debt reduction and

48

aggressive cost management. The on-going asset sales program's objective is to
reduce business risk and to provide for more predictable on-going earnings. This
encompasses the sale of non-strategic and under-performing assets, the proceeds
of which are being used to reduce debt. In 2002, CMS Energy has recorded charges
to earnings in connection with the execution of its "back-to-basics" strategy.

CMS ENERGY CONSOLIDATED NET INCOME (LOSS)

During 2002, CMS Energy recorded $388 million of after-tax charges in
recognition of planned and completed divestitures and reduced asset valuations.
These included a $299 million after-tax impairment loss on the carrying value of
DIG and $89 million of after-tax charges related to other investments and
development projects in recognition of the reduced net recoverable value or sale
of these investments. The $388 million after-tax charge is comprised of: $367
million for independent power production; $11 million for marketing, services
and trading; and $10 million for Enterprises and other businesses.

2002 also reflects a $222 million after-tax loss related to the
discontinuation of several businesses. These include Panhandle, the sale of
which is pending regulatory approval and is currently expected to close in 2003,
CMS Oil and Gas, which sale was completed in September 2002, and CMS Field
Services and CMS Viron, which sales are expected to close in 2003. Included in
the discontinued operations are after-tax goodwill impairments at Panhandle
($369 million) and CMS Viron ($10 million). 2002 also reflects $37 million of
after-tax gains on asset sales and $21 million of after-tax restructuring
charges.

CMS Energy's 2001 results reflect $408 million of after-tax charges in
recognition of completed and planned divestitures and reduced asset valuations.
These charges include a $210 million after-tax charge related to the
discontinuation of certain CMS Energy businesses and a $198 million after-tax
charge related to energy development projects and international investments in
recognition of the reduced net recoverable value of these investments. Results
of operations also includes a $2 million after-tax charge related to the
cumulative effect of a change in accounting for derivatives.

In 2000, an impairment loss was recorded on the carrying amount of the
equity investment in Loy Yang of $268 million after-tax. This loss does not
include $168 million cumulative net foreign currency translation losses due to
unfavorable changes in exchange rates, which, in accordance with SFAS No. 52
will not be realized until there has been a sale, full liquidation or other
disposition of CMS Energy's investment in Loy Yang, all of which are currently
being pursued but may not occur in 2003. In connection with the restatement of
CMS Energy's December 31, 2000 consolidated financial statements, a deferred
U.S. income tax asset of $48 million was recorded with respect to the cumulative
net foreign currency translation losses associated with CMS Energy's Loy Yang
investment (see Note 11, Income Taxes).

49

CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS

ELECTRIC DELIVERIES: For the year 2002, electric delivery revenues
increased by $41 million from the previous year. Electric deliveries, including
transactions with other wholesale market participants and other electric
utilities, were 39.3 billion kWh, a decrease of 0.3 billion kWh or 0.7 percent
from 2001. This reduction in electric deliveries is primarily due to reduced
transactions with other utilities and the expiration of wholesale power sales
contracts with certain Michigan municipal utilities. Although total deliveries
were below the 2001 level, increased deliveries to the higher margin residential
and commercial sectors, along with the growth in retail deliveries, more than
offset the impact of reduced deliveries to lower margin customers. For the year,
Consumers set an all-time monthly sendout record during the month of July, and
new monthly hourly peak demand records were set on April 16, 2002, June 25,
2002, September 9, 2002, and October 1, 2002. For the year 2001, electric
delivery revenues increased by $19 million from the previous year. Electric
deliveries, including transactions with other wholesale market participants and
other electric utilities, were 39.6 billion kWh, a decrease of 1.4 billion kWh
or 3.5 percent from 2000.

POWER SUPPLY COSTS AND RELATED REVENUE: For the year 2002, power supply
costs and related revenues provided a net increase of $120 million from 2001.
This net increase was primarily due to reduced purchased power costs resulting
from the Palisades plant being returned to service in 2002. In 2001, Consumers
purchased higher cost replacement power during the refueling outage that began
in March and ended in May and the unscheduled forced outage at Palisades that
began in June and ended in January 2002. Also contributing to this decrease in
power costs is lower priced power options and dispatchable capacity contracts
that were purchased for 2002. For the year 2001, power supply costs and related
revenues resulted in a net decrease of $109 million from 2000. This net decrease
was primarily due to the need to purchase greater quantities of higher-priced
electricity to offset the loss of generation resulting from the Palisades
outages mentioned above.

For the years 2002 and 2001 respectively, Consumers purchased and expensed
$23 million and $65 million of electric call options to ensure a reliable source
of power supply during the summer months. As a result of periodic excess daily
capacity, certain call options were sold and the remaining call options were
either exercised or expired. Consumers accounted for the costs relating to the
expired call options and the income received from the sale of call options, as
purchased power supply costs.

OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUE: For the year 2002,
non-commodity revenues increased primarily resulting from increased
miscellaneous service revenues. Partially offsetting this increase in revenues,
are increased other operating expenses compared to 2001. This increase can be
attributed to higher depreciation expense resulting from higher plant in service
along with increased operating costs resulting from higher health care expenses,
storm restoration expenses, and increased contracted maintenance expenses. For
the year 2001, other operating expenses and non-commodity revenues provided a
net benefit when compared to 2000. This benefit is primarily due to reduced
amortization expense, as permitted by MPSC orders resulting from the Customer
Choice Act. Consumers temporarily suspended amortization of the securitized
assets pending the issuance of Securitization bonds in November 2001.

50

IMPLEMENTATION OF ACCOUNTING STANDARD (SFAS NO. 133): In 2001, Consumers
implemented SFAS No. 133 which provides for derivative and hedge accounting for
certain utility industry contracts, particularly electric call option contracts
and option-like contracts. After receiving guidance from the FASB, Consumers re-
evaluated its electric call option and option-like contracts and determined that
these contracts require derivative accounting, and therefore recorded a $17
million pre-tax cumulative effect adjustment as a decrease to earnings. This
adjustment relates to the difference between the fair value and the recorded
book value of these electric call option contracts.

GAIN ON ASSET SALES: For the year 2002, asset sales resulted in a $31
million pretax gain associated with the sale of Consumers' electric transmission
system and a $7 million pretax gain on the sale of nuclear equipment from the
cancelled Midland project.

INCOME TAXES: For the year 2002, income tax expense increased primarily due
to an increase in earnings by the electric utility. Income taxes associated with
the transmission system sale reflect a $5 million benefit due to the recognition
of the remaining unutilized investment tax credit related to the assets sold.

CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS

GAS DELIVERIES: For the year 2002, gas delivery revenues increased by $21
million from the previous year. System deliveries, including miscellaneous
transportation, totaled 376.4 bcf, an increase of 9.4 bcf or 2.6 percent
compared with 2001. This increase is primarily due to colder weather that
resulted in increased deliveries to the residential and commercial sectors in
2002. For the year 2001, gas delivery revenues decreased by $21 million from the
previous year. System deliveries, including miscellaneous transportation,
totaled 367 bcf, a decrease of 43 bcf or 10 percent compared with 2000. This
decrease is primarily due to warmer temperatures compared to the 2000 heating
season and a reduction due to the economic slowdown in 2001.

GAS RATE INCREASE: In 2001, the MPSC issued an interim order in Consumers'
gas rate filing. In November 2002, the MPSC issued a final gas rate order
authorizing a $56 million annual increase in Consumers gas tariff rates. As a
result of these orders, Consumers recognized increased gas revenues of $25
million.

OPERATION AND MAINTENANCE: For the year 2002, operation and maintenance
expenses increased $14 million compared to 2001. This increase reflects the
recognition of gas storage inventory losses, and additional expenditures on
customer reliability and service.

INCOME TAXES: For the year 2002, income tax expense increased, primarily
due to improved earnings of the gas utility.

INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS

NET INCOME: For the year ended December 31, 2002, independent power
production's reported net loss was $336 million, a degradation of $273 million
from its restated reported net loss in 2001. The variation reflects the effects
of the investment write-downs, net of an improved operating performance at DIG
due to lower steam

51

generation costs compared to 2001, when DIG was experiencing construction
delays. Other operation performance improvements were offset by expropriation
and devaluation losses related to the Argentine facilities.

For the year ended December 31, 2001, independent power production's
restated reported net loss was $63 million, an improvement of $29 million from
restated reported net loss in 2000. This change reflects the sale of power
plants in 2000, construction delays at the DIG plant that led to increased costs
for steam generation, and a gain recorded in 2000 on the restructuring of a
power supply contract. These changes were partially offset by the earnings
benefits from the expansion of the Jorf Lasfar facility coupled with the
facility's improved operating performance, the operation of additional units at
a new African facility and the absence of operating losses in 2001 from the
investment in Loy Yang, which was written off in the fourth quarter of 2000.

NATURAL GAS TRANSMISSION RESULTS OF OPERATIONS

In December 2002, CMS Energy reached a definitive agreement to sell the
Panhandle companies to Southern Union Panhandle Corp. The agreement calls for
Southern Union Panhandle Corp, a newly formed entity owned by Southern Union
Company and AIG Highstar Capital, L.P. to pay $662 million in cash and assume
$1.166 billion in debt. Under the terms of the agreement, CMS Energy was to
retain Panhandle's ownership interests in the Centennial and Guardian pipeline
projects, as well as certain of Panhandle's net deferred tax assets, all tax
liabilities, and pension assets and liabilities. Panhandle has since sold its
interest in Centennial and the Guardian interest and related cash collateral has
been transferred to Panhandle's direct parent, CMS Gas Transmission. The
transaction has been approved by the board of directors of each company and is
subject to customary closing conditions and action by the FTC under the
Hart-Scott-Rodino Act. The sale is expected to close in 2003. Panhandle's
results have been reclassified to discontinued operations in the consolidated
statements of income. For more information, see Note 4, Discontinued Operations.

NET INCOME: For the year ended December 31, 2002, the natural gas
transmission segment's reported net loss was $30 million, an improvement of $23
million from the restated reported net loss in 2001. This increase was due
primarily to project write-downs recorded in 2001 partly offset by additional
Argentine expropriation and devaluation losses in 2002.

For the year ended December 31, 2001, the segment's restated reported net
loss was $53 million, a degradation of $64 million from the restated reported
net loss in 2000.

MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS

During the second quarter of 2002, CMS MST announced its intention to sell
its ownership interest in CMS Viron, resulting in a reclassification of CMS
Viron's assets and liabilities to be classified as held for sale and its results
of operations to discontinued operations in the consolidated statements of
income. For more information, see Note 4, Discontinued Operations. CMS Energy
closed on the sale of a majority of CMS MST's wholesale natural gas contracts
and inventory to Sempra Energy Trading in January 2003 and signed a definitive
agreement in February 2003 to sell its wholesale power trading portfolio to a
unit of Constellation Energy Group, Inc. These actions resulted in classifying
$77 million of net price risk management assets and liabilities and natural gas
inventory expected to be sold into Assets and Liabilities Held For Sale in the
consolidated balance sheets. In addition, CMS MST sold its 50 percent joint
venture ownership in Enline in September 2002, reached agreement to sell its 50
percent interest in Premstar in early 2003, and sold its Tulsa retail trading
contracts in January 2003 and is in the process of negotiating an agreement to
sell its 50 percent interest in Texon.

NET INCOME: For the year ended December 31, 2002, CMS MST's reported net
loss was $42 million excluding a loss from discontinued operations of $21
million, a decrease of $36 million from its restated reported net loss in 2001.
Credit constraints severely reduced the overall liquidity of the energy trading
markets, limiting CMS MST's ability to actively manage and optimize its open
positions and to execute new transactions. Contributing to the net loss was the
recognition of a $31 million (net of tax) reduction in fair value of the
wholesale natural gas and power portfolios based on valuation reductions
resulting from fair value evidence derived from the negotiated sales prices for
its wholesale natural gas and power contracts. Restructuring costs related to
the reorganization of the business unit of $11 million and impairment of
investment of $11 million.

52

For the year ended December 31, 2001, CMS MST's restated reported net loss
was $6 million, including a cumulative effort of a change in accounting for
derivative instruments of $9 million and excluding income from discontinued
operations of $1 million a decrease of $19 million from restated reported net
income in 2000. This decrease was primarily a result of the change in fair value
of financial derivatives entered into as economic hedges for the retail sales
contracts that are accounted for on an accrual basis. Partially offsetting these
losses was an increase in the value of the wholesale power portfolio due to
power contracts executed during 2001, and $9 million increase to net income
representing the cumulative effect of a change in accounting resulting from the
implementation of SFAS No. 133.

SALES VOLUMES: For the year ended December 31, 2002, power sales volumes
were 63,128 GWh, an increase of 31,929 GWh over 2001, for which volumes have
been restated to exclude the effect of any round-trip trades. The increase in
power volumes reflect the addition of long-term power contracts that were
executed during the latter part of 2001 and early 2002. Natural gas sales
volumes were 550 bcf, a decrease of 200 bcf from 2001, for which volumes have
been restated to exclude the effect of any round-trip trades.

For the year ended December 31, 2001, power sales volumes were 31,199 GWh,
an increase of 23,044 GWh over 2000, for which volumes have been restated to
exclude the effect of any round-trip trades. Natural gas sales volumes were 750
bcf, an increase of 144 bcf over 2000, for which volumes have been restated to
exclude the effect of any round-trip trades.

OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS

In January 2002, CMS Energy completed the sale of its ownership interests
in Equatorial Guinea to Marathon Oil Company for approximately $993 million.
Included in the sale were all of CMS Oil and Gas' oil and gas reserves in
Equatorial Guinea and CMS Gas Transmission's ownership interest in the related
methanol plant. The gain on the CMS Oil and Gas Equatorial Guinea properties of
$497 million ($310 million, net of tax) is included in discontinued operations.

In September 2002, CMS Energy closed on the sale of the stock of CMS Oil
and Gas and the stock of a subsidiary of CMS Oil and Gas that holds property in
Venezuela. In October 2002, CMS Energy closed on the sale of CMS Oil and Gas's
properties in Colombia. As a result of these closings, CMS Energy has completed
its exit from the oil and gas exploration and production business. The proceeds
from the combined sales total approximately $210 million and have been used to
retire the remaining balance on a $150 million Enterprises term loan due in
December 2002 and a portion of a $295.8 million CMS Energy loan which had at
that time a due date of the March 31, 2003. The combined sales resulted in an
after-tax loss of approximately $82 million. For more information, see Note 4,
Discontinued Operations, incorporated by reference herein.

INTERNATIONAL ENERGY DISTRIBUTION RESULTS OF OPERATIONS

In the third quarter of 2001, CMS Energy discontinued the operations of the
international energy distribution segment of its business. For more information,
see Note 4, Discontinued Operations, incorporated by reference herein.

OTHER RESULTS OF OPERATIONS

TAX LOSS ALLOCATIONS: The Job Creation and Worker Assistance Act of 2002
provided to corporate taxpayers a 5-year carryback of tax losses incurred in
2001 and 2002. As a result of this legislation, CMS Energy was able to carry
back consolidated 2001 and 2002 tax losses to tax years 1996 through 1999 to
obtain refunds of prior years tax payments totaling $250 million. The tax loss
carryback, however, resulted in a reduction of AMT credit carryforwards that
previously had been recorded by CMS Energy as deferred tax assets in the amount
of $47 million. This non-cash reduction in AMT credit carryforwards has been
reflected in the tax provision of CMS Energy.

OTHER: Corporate and other net expenses were $300 million in 2002, an
increase of $54 million from $246 million in 2001. In 2002, tax credit
write-offs, which are all recorded at CMS Energy, the Parent, amounted to $58
million. Interest expense after tax amounted to $187 million in 2002 as compared
to $197 million in 2001.

53

Corporate and other net expenses include $56 million related to investment
write-downs, and restructuring and other costs of $24 million in 2002. These
expenses were partly offset by the consolidating eliminations of intercompany
losses and gains recorded by CMS MST that result from mark-to-market
transactions with affiliates. These eliminations increased net income by $46
million in 2002 and decreased net income by $30 million in 2001.

Corporate and other net expenses were $246 million in 2001, an increase of
$80 million from $166 million in 2000. Interest expense after taxes amounted to
$197 million in 2001 as compared to $173 million in 2000. These expenses also
include the consolidating eliminations of intercompany losses and gains recorded
by CMS MST that result from mark-to-market transactions with affiliates. These
eliminations decreased net income by $30 million in 2001 and increased net
income by $18 million in 2000.

Discontinued Operations include, in addition to Panhandle, CMS Viron, CMS
Oil and Gas, and International Energy Distribution discussed above, a $31
million after-tax loss as a result of abandoning the Zirconium Recovery Project.
For more information, see Note 4, Discontinued Operations.

RESTRUCTURING AND OTHER COSTS

CMS Energy announced in 2002 a series of new initiatives intended to
sharpen its business focus and help restore its financial health by reducing
operating costs. The initiatives announced included the following:

- Relocating CMS Energy's corporate headquarters from Dearborn, Michigan to
a new headquarters building then under construction in Jackson, Michigan.
The Jackson headquarters building opened in March 2003 and will house an
estimated 1,450 CMS Energy and Consumers Energy employees. In the longer
term, the relocation will reduce corporate operating expenses.

- Implementing changes to CMS Energy's 401(K) savings program which will
provide savings for CMS Energy and enhanced investment options for
employee participants.

- Implementing changes to CMS Energy's health care plan in order to keep
benefits and costs competitive.

- Terminating five officers, 18 CMS Field Services employees and 41 CMS MST
trading group employees. Prior to December 31, 2002, 31 Dearborn-based
employees and 92 Houston employees have elected severance arrangements.
Of these 187 officers and employees, 65 had been terminated as of
December 31, 2002. The remaining terminations will be completed in 2003.

Restructuring costs for the year ended December 31, 2002, which are
reported in operating expenses, include:

- Involuntary termination benefits of $22 million for officers and
employees.

- The present value of future non-cancelable lease obligations of $11
million related to relocating the corporate headquarters to Jackson,
Michigan.

In addition, in the first half of 2003, restructuring costs related to
relocating employees and other headquarters expenses are expected to be $2
million. The relocation will occur between March and June 2003, and such costs
will be expensed as incurred.

The following table shows the amount charged to expense during 2002 for
restructuring costs, the payments made, and the unpaid balance of accrued costs
at December 31, 2002, which is expected to be paid in 2003.

54

CAPITAL RESOURCES AND LIQUIDITY

CMS Energy's liquidity and capital requirements generally are a function of
its results of operations, capital expenditures, contractual obligations,
working capital needs and collateral requirements. CMS Energy historically has
met its consolidated cash needs through its operating and investing activities
and, as needed, through access to bank financing and the capital markets.

CASH POSITION, INVESTING AND FINANCING

CMS Energy's primary ongoing source of cash is dividends and other
distributions from subsidiaries, including proceeds from asset sales. In 2002,
Consumers paid $333 million in common dividends and other distributions and
Enterprises paid $1,053 million in common dividends and other distributions to
CMS Energy. In January 2003, Consumers paid a $78 million common dividend to CMS
Energy. In February 2003, Enterprises paid $18 million in dividends and other
distributions to CMS Energy. CMS Energy's consolidated cash requirements are met
by its operating and financing activities. At December 31, 2002, CMS Energy had
$377 million cash on hand.

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; and the generation, distribution and
sale of electricity. For 2002 and 2001, consolidated cash from operations after
interest charges totaled $403 million and $366 million, respectively. The $37
million increase in cash from operations resulted primarily from a decrease in
inventories and other temporary changes in working capital items due to timing
of cash receipts and payments. These sources of cash were partially offset by a
decrease in deferred income taxes and investment tax credit. CMS Energy uses
cash derived from its operating activities primarily to maintain its diversified
energy businesses, to maintain and expand electric and gas systems of Consumers
and, to pay interest on and retire portions of long-term debt.

INVESTING ACTIVITIES: For 2002 and 2001, CMS Energy's consolidated net cash
provided by (used in) investing activities totaled $1,084 million and ($1,348)
million, respectively. The $2,432 million increase in cash provided as compared
to 2001, primarily reflects an increase in proceeds received from the sale of
assets ($1,525 million), a reduction in the amount of capital expenditures ($492
million), and a reduction in investments in partnerships and unconsolidated
subsidiaries ($56 million). CMS Energy's expenditures during 2002 for its
utility and diversified energy businesses were $618 million and $188 million,
respectively, compared to $768 million and $445 million, respectively, during
2001.

FINANCING ACTIVITIES: For 2002 and 2001, CMS Energy's net cash provided by
(used in) financing activities totaled ($1,237 million) and $968 million,
respectively. The $2,205 million increased use of cash resulted primarily from a
reduction of proceeds from notes, bonds, and other long-term debt ($1,296
million), combined with an increase in retirement of long-term debt ($505
million), an increase in the retirement of trust preferred securities ($331
million), and a reduction in the proceeds from trust preferred securities ($125
million). These

55

changes were partially offset by a reduction in the amount of common stock
dividends paid ($41 million) and an increase in notes payable. The following
table summarizes securities issued during 2002:

- -------------------------
(1) GTNs are issued with varying maturity dates. The interest rate shown herein
is a weighted average interest rate.

(2) In July 2002, approximately 8.8 million shares of Common Stock were issued
in conjunction with the conversion of the Adjustable Convertible Trust
Securities (CMS Energy Trust II). Through May 10, 2002, 1.3 million shares
were issued in conjunction with CMS Energy's Continuous Stock Offering
Program, activated in February 2002, for which 2 million shares are
registered. No shares have been issued under this program since that date.
Finally, approximately 1 million shares were issued from time to time in
conjunction with the stock purchase plan and various employee savings and
stock incentive plans.

In 2002, CMS Energy paid $149 million in cash dividends to holders of CMS
Energy Common Stock. In January 2003, the Board of Directors suspended the
payment of dividends. CMS Energy expects the dividend suspension will improve
its liquidity by more than $100 million in 2003.

OTHER INVESTING AND FINANCING MATTERS:

In May 2002, CMS Energy registered $300 million Series G GTNs. The notes
will be issued from time to time with the proceeds being used for general
corporate purposes. As of December 31, 2002, no Series G GTNs had been issued.

On July 1, 2002, the 7,250,000 units of 8.75 percent Adjustable Convertible
Trust Securities (CMS Energy Trust II) were converted to 8,787,725 newly issued
shares of CMS Energy Common Stock.

CREDIT FACILITIES: On July 12, 2002, CMS Energy and its subsidiaries
reached agreement with its lenders on five credit facilities (facilities)
totaling approximately $1.3 billion of credit for CMS Energy, Enterprises and
Consumers. The agreements were executed by various combinations of up to 21
lenders and by CMS Energy, Consumers and Enterprises and included: a $295.8
million revolving credit facility for CMS Energy originally set to mature on
March 31, 2003; a $300 million revolving credit facility for CMS Energy,
maturing December 15, 2003; a $150 million short-term loan for Enterprises,
originally set to mature on December 13, 2002; a $250 million revolving credit
facility for Consumers, maturing July 11, 2003; and a $300 million term loan for
Consumers, maturing July 11, 2003. In March 2003, the CMS Energy $295.8 million
revolving credit facility and $300 million revolving credit facility under which
a combined $409 million was then outstanding were amended and restated. The
Second Amended and Restated Senior Credit Agreement includes a $234 million
tranche with a maturity date of April 30, 2004 and a $175 million tranche with a
maturity date of September 30, 2004. Also in March 2003, Consumers obtained a
replacement revolving credit facility in the amount of $250 million. The new
credit facility matures in March 2004 with two annual extensions at Consumers'
option, which would extend the maturity to March 2006. In September 2002, the
term loan maturity was extended by one year at Consumers' option and now has a
maturity date of July 11, 2004. Also in September 2002, CMS Energy retired the
$150 million short-term loan to Enterprises using proceeds from the sale of CMS
Oil and Gas and other assets. At December 31, 2002, a total of $841 million was
outstanding under these facilities, of which Consumers'

56

$250 million revolving credit facility is included in notes payable, in the
accompanying consolidated balance sheet.

In March 2003, CMS Enterprises entered into a revolving credit facility in
an aggregate amount of $441 million. The maturity date of this facility is April
30, 2004.

The facilities are secured with mandatory prepayment of borrowings under
certain of the facilities with proceeds from asset sales and capital market
issuances. The CMS Energy facilities grant the applicable bank groups first
liens on the capital stock of Consumers and Enterprises and its major direct and
indirect domestic subsidiaries, including Panhandle Eastern Pipe Line (but
excluding subsidiaries of Panhandle Eastern Pipe Line). The Consumers facilities
grant the applicable bank groups security through first mortgage bonds.

The July 12, 2002 facilities essentially replaced or restructured
previously existing credit facilities or lines at CMS Energy or Consumers,
without substantially changing credit commitments. The two CMS Energy facilities
and the terminated Enterprises facility aggregating $745.8 million represented a
restructuring of a prior CMS Energy $300 million three-year revolving credit
facility maturing in June 2004 and a prior CMS Energy $450 million revolving
credit facility originally maturing June 2002, but previously extended through
July 12, 2002. The two Consumers facilities aggregating $550 million replace a
$300 million revolving credit facility that matured July 14, 2002, as well as
various credit lines aggregating $200 million. The prior credit facilities and
lines were unsecured.

CONSUMERS' REGULATORY AUTHORIZATION FOR FINANCINGS: At December 31, 2002,
Consumers had FERC authorization to issue or guarantee through June 2004, up to
$1.1 billion of short-term securities outstanding at any one time. Consumers
also had remaining FERC authorization to issue through June 2004 up to $500
million of long-term securities for refinancing or refunding purposes, $677
million for general corporate purposes, and $900 million of first mortgage bonds
to be issued solely as security for the long-term securities. On October 10,
2002, FERC granted a waiver of its competitive bid/negotiated placement
requirements applicable to the remaining long-term securities authorization
indicated above.

NOTES PAYABLE: In October 2002, Consumers simultaneously entered into a new
term loan agreement collateralized by first mortgage bonds and a new gas
inventory term loan agreement collateralized by Consumers' natural gas in
storage. These agreements contain complementary collateral packages that provide
Consumers, as additional first mortgage bonds become available, borrowing
capacity of up to $225 million, of which $207 million was outstanding at
December 31, 2002 with an effective interest rate of 6.3 percent. The bank and
legal fees associated with the agreements were $2 million. The first
amortization payment under these agreements occurred in December 2002 with
monthly amortization payments scheduled until full repayment is completed in
mid-April of 2003. The loan amortization also reduces the bank's loan commitment
to the amount of loan outstanding, which was $207 million as of December 31,
2002.

RESTRICTED PAYMENTS: CMS Energy's Board of Directors reduced the CMS Energy
Common Stock dividend by approximately 50 percent, to an annual rate of 72 cents
per share during the third quarter of 2002. In January 2003, the Board of
Directors suspended the common stock dividend.

Pursuant to restrictive covenants in its facilities, Consumers is limited
to common stock dividend payments that will not exceed $300 million in any
calendar year. Consumers paid $233 million and $190 million in common stock
dividends to CMS Energy in 2002 and 2001, respectively. In January 2003,
Consumers declared and paid a $78 million common dividend.

57

REQUIRED RATIOS: The facilities also have contractual restrictions that
require CMS Energy and Consumers to maintain, as of the last day of each fiscal
quarter, the following:

- -------------------------
(a) Violation of this ratio would constitute an event of default under the
facility which provides the lender, among other remedies, the right to
declare the principal and interest immediately due and payable.

(b) For purposes of these ratios, the terms of the credit facilities provide
for the exclusion of securitization bonds in the calculation of these
ratios.

In 1994, CMS Energy executed an indenture with J.P.Morgan Chase Bank
pursuant to CMS Energy's general term notes program. The indenture, through
supplements, contains certain provisions that can trigger a limitation on CMS
Energy's consolidated indebtedness. The limitation can be activated when CMS
Energy's consolidated leverage ratio, as defined in the indenture (essentially
the ratio of consolidated debt to consolidated capital), exceeds 0.75 to 1.0. At
December 31, 2002, CMS Energy's consolidated leverage ratio was 0.79 to 1.0. As
a result, CMS Energy will not, and will not permit certain material
subsidiaries, excluding Consumers and its subsidiaries, to become liable for new
indebtedness. However, the indenture contains certain express exceptions to this
limitation, and pursuant to one such exception, CMS Energy and the material
subsidiaries may incur revolving indebtedness to banks of up to $1 billion in
the aggregate and refinance existing debt outstanding of CMS Energy and of its
material subsidiaries.

CREDIT RATINGS: In July 2002, the credit ratings of the publicly traded
securities of each of CMS Energy, Consumers and Panhandle (but not Consumers
Funding LLC) were downgraded by the major rating agencies. The ratings downgrade
for all three companies' securities was largely a function of the uncertainties
associated with CMS Energy's financial condition and liquidity, restatement and
re-audit of 2000 and 2001 financial statements, and lawsuits. These downgrades
directly affect and limit CMS Energy's access to the capital markets.

As a result of certain of these downgrades, rights were triggered in
several contractual arrangements between CMS Energy subsidiaries and third
parties. A few commodity suppliers to Consumers have requested advanced payments
or other forms of assurances in connection with maintenance of ongoing
deliveries of gas and electricity. Consumers has addressed these issues.

In addition, the construction lenders for each of the Guardian and
Centennial pipeline projects, each partially owned by Panhandle, requested
acceptable credit support for Panhandle's guarantee of its pro rata portion of
those construction loans, which aggregate $110 million including anticipated
future draws. On September 27, 2002 Panhandle's Centennial partners provided
credit support of $25 million each in the form of guarantees to the lender to
cover Panhandle's obligation of $50 million of loan guarantees. The partners
were paid credit fees by Panhandle on the outstanding balance of the guarantees
for any periods for which they were in effect. On February 10, 2003, Panhandle
sold its one-third interest in Centennial for $40 million to Centennial's two
other partners. Panhandle has been relieved and indemnified by the purchasers
and the lenders for any liabilities, including credit fees related to
Panhandle's $50 million parent guaranty of the project debt.

In October 2002, Panhandle provided a letter of credit to the lenders which
constitutes acceptable credit support under the Guardian financing agreement.
This letter of credit was cash collateralized by Panhandle with approximately
$63 million. Effective March 1, 2003, Panhandle's ownership interest in Guardian
was transferred to CMS Gas Transmission along with the $63 million of cash
collateral plus accrued interest. Panhandle was released from its guarantee
obligations associated with the Guardian non-recourse guaranty as of March 10,
2003 by Prudential and the other noteholders.

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In December 2002 and January 2003, Panhandle secured short-term bank loans
in the amounts of $30 million and $10 million, respectively. The loans are due
the earlier of December 2003 or upon the sale of Panhandle. The stock of most of
Panhandle's subsidiaries were pledged as collateral for the loans, which were
utilized to improve overall liquidity which had been reduced by various cash
requirements. Panhandle is required to provide certified September 30, 2002
financial statements to the banks by April 30, 2003. Panhandle intends to
provide these statements to the banks prior to April 30, 2003. Should it be
unable to deliver the certified financial statements or obtain a waiver by that
date, Panhandle could be declared to be in default and the debt could be
accelerated and become immediately due and payable.

Additionally, Panhandle was unable to deliver certified September 30, 2002
financial statements to the LNG Holdings lenders as required under that credit
facility. Panhandle has received a waiver of this requirement until April 30,
2003 and a waiver of a requirement to provide certain documentation until June
30, 2003. Should Panhandle be unable to deliver the certified financial
statements or execute the required documents by the timing indicated, LNG
Holdings could be declared to be in default under its credit facility and the
debt there under could be accelerated and become immediately due and payable.

Further, one of the issuers of a joint and several surety bond in the
approximate amount of $187 million supporting a CMS MST gas supply contract has
demanded acceptable collateral for the full amount of such bond. The second
issuer of the $187 million surety bond has similar rights in connection with
surety bonds supporting two other CMS MST gas supply contracts, aggregating
approximately $112 million. CMS Energy has reached a settlement that provides
the issuers with acceptable collateral.

CMS Energy plans to continue to pursue the sale of targeted assets
throughout 2003. Even though assets have been identified for sale, management
cannot predict when, nor make assurances regarding the value of the
consideration to be received or whether these sales will occur.

OBLIGATIONS AND COMMITMENTS

The following information on CMS Energy's contractual obligations,
off-balance sheet arrangements and commercial commitments is provided to collect
information in a single location so that a picture of liquidity and capital
resources is readily available.

CONTRACTUAL OBLIGATIONS: CMS Energy has contractual obligations including
long-term debt, notes payable, and capital lease obligations. Notes payable
include the two term loans at Consumers and their revolving credit agreement.
Capital leases include leased service vehicles and the new headquarters
building.

OFF-BALANCE SHEET ARRANGEMENTS: CMS Energy's use of long-term contracts for
the purchase of commodities and services, the sale of Consumers' accounts
receivables, and operating leases are considered to be off-balance sheet
arrangements. Consumers has responsibility for the collectability of the
accounts receivables sold, and the full obligation of its leases become due in
case of lease payment default. Operating leases are predominately railroad coal
car leases, aircraft, vehicles and miscellaneous office equipment. Unconditional
purchase obligations include natural gas, electricity, and coal purchase
contracts and their associated cost of transportation. These obligations
represent normal business operating contracts used to assure adequate supply and
to minimize exposure to market price fluctuations. Consumers has long-term power
purchase agreements with various generating plants including the MCV Facility.
These contracts require monthly capacity payments based on the plants'
availability or deliverability. These payments are approximately $45 million per
month for year 2003, which includes $33 million related to the MCV Facility. If
a plant is not available to deliver electricity to Consumers, then Consumers
would not be obligated to make the capacity payment while the plant is unable to
deliver. CMS Energy uses these off-balance sheet arrangements in its normal
business operations.

In addition, CMS Energy, through its subsidiary companies, has equity
investments in partnerships and joint ventures in which they have a minority
ownership interest. As of December 31, 2002, CMS Energy's proportionate share of
unconsolidated debt associated with these investments was $2.6 billion. This

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unconsolidated debt is non-recourse to CMS Energy and is not included in the
amount of long-term debt that appears on CMS Energy's Consolidated Balance
Sheets.

CONTRACTUAL OBLIGATIONS

- -------------------------
(a) Capital lease obligation shown includes imputed interest of $28 million.

(b) The headquarters building capital lease is estimated to be $60 million, of
which a $54 million construction obligation has been incurred and recorded
on CMS Energy's balance sheet as of December 31, 2002.

(c) Operating lease obligation shown excludes $53 million for Panhandle due to
the discontinuation of Panhandle during 2002.

COMMERCIAL COMMITMENTS: As of December 31, 2002, CMS Energy, Enterprises,
and their subsidiaries have guaranteed payment of obligations through
guarantees, indemnities and letters of credit, of unconsolidated affiliates and
related parties approximating $1.1 billion. Included in this amount,
Enterprises, in the ordinary course of its business, has guaranteed contracts of
CMS MST that contain certain schedule and performance requirements. As of
December 31, 2002, the actual amount of financial exposure covered by these
guarantees and indemnities was $219 million. Management monitors and approves
these obligations and believes it is unlikely that CMS Energy would be required
to perform or otherwise incur any material losses associated with these
guarantees. Indemnities are three-party agreements used to assure performance of
contracts by CMS Energy. Letters of credit are issued by banks guaranteeing CMS
Energy's payments of its drafts. Drafts are for a stated amount and for a
specified period; they substitute the bank's credit for CMS Energy's and
eliminate the credit risk for the other party.

COMMERCIAL COMMITMENTS

For further information, see Note 7, Short-Term and Long-Term Financings
and Note 8, Capitalization, incorporated by reference herein.

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CAPITAL EXPENDITURES

CMS Energy estimates that capital expenditures, including new lease
commitments and investments in new business developments through partnerships
and unconsolidated subsidiaries, will total $1.8 billion during 2003 through
2005. These estimates are prepared for planning purposes and are subject to
revision. CMS Energy expects to satisfy a substantial portion of the capital
expenditures with cash from operations.

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

- -------------------------
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.

(b) These amounts include estimates for capital expenditures that may be
required by recent revisions to the Clean Air Act's national air quality
standards. For further information see Note 6, Uncertainties -- Electric
Environmental Matters.

OUTLOOK

CORPORATE OUTLOOK

During 2002, CMS Energy continued to implement its financial improvement
plan and on-going asset sales program first announced in 2001. The financial
improvement plan focuses on strengthening CMS Energy's balance sheet and
improving financial liquidity through debt reduction and aggressive cost
management. The on-going asset sales program's objective is to reduce business
risk and to provide for more predictable on-going earnings. This encompasses the
sale of non-strategic and under-performing assets, the proceeds of which are
being used to reduce debt.

Consistent with this "back-to-basics" strategy, CMS Energy is actively
pursuing the sale of non-strategic and under-performing assets in order to
improve cash flow and the balance sheet and has received approximately $2.7
billion of cash and associated debt assumption from asset sales. Upon the sale
of additional non-strategic and under-performing assets, the proceeds realized
may be materially different than the book value of those assets. Even though
these assets have been identified for sale, management cannot predict when, nor
make any assurances that, these asset sales will occur. CMS Energy anticipates,
however, that the sales, if any, will result in additional cash proceeds that
will be used to retire existing debt of CMS Energy or Consumers.

In December 2002, CMS Energy reached a definitive agreement to sell the
Panhandle companies to Southern Union Panhandle Corp. The agreement calls for
Southern Union Panhandle Corp, a newly formed entity owned by Southern Union
Company and AIG Highstar Capital, L.P. to pay $662 million in cash and assume
$1.166 billion in debt. Under the terms of the agreement, CMS Energy was to
retain Panhandle's ownership interests in the Centennial and Guardian pipeline
projects, as well as certain of Panhandle's net deferred tax assets, all tax
liabilities, and pension assets and liabilities. Panhandle has since sold its
interest in Centennial (described below) and the Guardian interest has been
transferred to Panhandle's direct parent, CMS Gas Transmission. The transaction
has been approved by the board of directors of each company and is subject to
customary closing conditions and action by the FTC under the Hart-Scott-Rodino
Act. The sale is expected to close in 2003. Panhandle's results have been
reclassified to discontinued operations in the consolidated

61

statements of income. For more information, see Note 4, Discontinued Operations
to consolidated financial statements.

In January 2003, CMS Energy closed on the sale of a substantial portion of
CMS MST's wholesale natural gas trading contracts to Sempra Energy Trading, the
wholesale commodity trading unit of Sempra Energy and received $17 million of
cash proceeds. In February 2003, CMS Energy entered into a definitive agreement
with Constellation Power Source, Inc. to sell CMS MST's wholesale power
contracts. The sale has been approved by FERC and is expected to close as early
as March 31 of 2003.

In February 2003, Panhandle sold its one third interest in Centennial
Pipeline, LLC for $40 million to Centennial's two other partners, Marathon
Ashland Petroleum, LLC and TE Products Pipeline Company, Limited Partner,
through its general partner, Texas Eastern Products Pipeline Company.

CONSUMERS' ELECTRIC UTILITY BUSINESS OUTLOOK

GROWTH: Over the next five years, Consumers expects electric deliveries
(including both full service sales and delivery service to customers who choose
to buy generation service from an alternative electric supplier, but excluding
transactions with other wholesale market participants including other electric
utilities) to grow at an average rate of approximately two percent per year
based primarily on a steadily growing customer base. This growth rate reflects a
long-range expected trend of growth. Growth from year to year may vary from this
trend due to customer response to abnormal weather conditions and changes in
economic conditions including, utilization and expansion of manufacturing
facilities. Consumers has experienced much stronger than expected growth in 2002
as a result of warmer than normal summer weather. Assuming that normal weather
conditions will occur in 2003, electric deliveries are expected to grow less
than one percent over the strong 2002 electric deliveries.

COMPETITION AND REGULATORY RESTRUCTURING: The enactment in 2000 of
Michigan's Customer Choice Act and other developments will continue to result in
increased competition in the electric business. Generally, increased competition
can reduce profitability and threatens Consumers' market share for generation
services. The Customer Choice Act allowed all of the company's electric
customers to buy electric generation service from Consumers or from an
alternative electric supplier as of January 1, 2002. As a result, alternative
electric suppliers for generation services have entered Consumers' market. As of
mid-March 2003, alternative electric suppliers are providing 516 MW of
generation supply to customers. To the extent Consumers experiences "net"
Stranded Costs as determined by the MPSC, the Customer Choice Act allows for the
company to recover such "net" Stranded Costs by collecting a transition
surcharge from those customers who switch to an alternative electric supplier.
Consumers cannot predict the total amount of electric supply load that may be
lost to competitor suppliers, nor whether the stranded cost recovery method
adopted by the MPSC will be applied in a manner that will fully offset any
associated margin loss.

Stranded and Implementation Costs: The Customer Choice Act allows electric
utilities to recover the act's implementation costs and "net" Stranded Costs
(without defining the term). The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In December 2001, the MPSC adopted a methodology which calculated "net" Stranded
Costs as the shortfall between: (a) the revenue required to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and capacity payments associated with purchase power agreements, and (b) the
revenues received from customers under existing rates available to cover the
revenue requirement. The MPSC authorized Consumers to use deferred accounting to
recognize the future recovery of costs determined to be stranded. Consumers has
initiated an appeal at the Michigan Court of Appeals related to the MPSC's
December 2001 "net" Stranded Cost order.

According to the MPSC, "net" Stranded Costs were to be recovered from
retail open access customers through a Stranded Cost transition charge. In April
2002, Consumers made "net" Stranded Cost filings with the MPSC for $22 million
and $43 million for 2000 and 2001, respectively. In the same filing, Consumers
estimated that it would experience "net" Stranded Costs of $126 million for
2002. Consumers, in its hearing brief, filed in August 2002, revised its request
for "net" Stranded Costs to $7 million and $4 million for 2000 and 2001,

62

respectively, and an estimated $73 million for 2002. The single largest reason
for the difference was the exclusion, as ordered by the MPSC, of all costs
associated with expenditures required by the Clean Air Act.

In December 2002, the MPSC issued an order finding that Consumers
experienced zero "net" Stranded Costs in 2000 and 2001, but declined to
establish a defined methodology that would allow a reliable prediction of the
level of Stranded Costs for 2002 and future years. In January 2003, Consumers
filed a petition for rehearing of the December 2002 Stranded Cost order in which
it asked the MPSC to grant rehearing and revise certain features of the order.
Several other parties also filed rehearing petitions with the MPSC. As discussed
below, Consumers has filed a request with the MPSC for authority to issue
securitization bonds that would allow recovery of the Clean Air Act expenditures
and post-2000 Palisades expenditures that were excluded from the Stranded Cost
calculation.

On March 4, 2003, Consumers filed an application with the MPSC seeking
approval of "net" Stranded Costs incurred in 2002, and for approval of a "net"
Stranded Cost recovery charge. In the application, Consumers indicated that if
Consumers' proposal to securitize Clean Air Act expenditures and post-2000
Palisades expenditures were approved as proposed in its securitization case as
discussed below, then Consumers' "net" Stranded Costs incurred in 2002 are
approximately $35 million. If the proposal to securitize those costs is not
approved, then Consumers indicated that the costs would be properly included in
the 2002 "net" Stranded Cost calculation, which would increase Consumers' 2002
"net" Stranded Costs to approximately $103 million. Consumers cannot predict the
recoverability of Stranded Costs, and therefore has not recorded any regulatory
assets to recognize the future recovery of such costs.

The MPSC staff has scheduled a collaborative process to discuss Stranded
Costs and related issues and to identify and make recommendations to the MPSC.
Consumers intends to participate in this collaborative process.

Since 1997, Consumers has incurred significant electric utility
restructuring implementation costs. The following table outlines the
applications filed by Consumers with the MPSC and the status of recovery for
these costs.

The MPSC disallowed certain costs based upon a conclusion that these
amounts did not represent costs incremental to costs already reflected in
electric rates. In the orders received for the years 1997 through 2000, the MPSC
also reserved the right to review again the total implementation costs depending
upon the progress and success of the retail open access program, and ruled that
due to the rate freeze imposed by the Customer Choice Act, it was premature to
establish a cost recovery method for the allowable implementation costs. In
addition to the amounts shown above, as of December 2002, Consumers incurred and
deferred as a regulatory asset, $1 million of additional implementation costs
and has also recorded as a regulatory asset $13 million for the cost of money
associated with total implementation costs. Consumers believes the
implementation costs and the associated cost of money are fully recoverable in
accordance with the Customer Choice Act. Cash recovery from customers will
probably begin after the rate freeze or rate cap period has expired. Consumers
cannot predict the amounts the MPSC will approve as allowable costs.

Consumers is also pursuing authorization at the FERC for MISO to reimburse
Consumers for approximately $8 million in certain electric utility restructuring
implementation costs related to its former participation in the development of
the Alliance RTO, a portion of which has been expensed. However, Consumers
cannot predict the amount the FERC will ultimately order to be reimbursed by the
MISO.

Securitization: On March 4, 2003, Consumers filed an application with the
MPSC seeking approval to issue Securitization bonds in the amount of
approximately $1.084 billion. If approved, this would allow the recovery of

63

costs associated with Clean Air Act expenditures, post-2000 Palisades
expenditures, and retail open access implementation costs through December 31,
2003, and certain pension fund expenses and expenses associated with the
issuance of the bonds.

Rate Caps: The Customer Choice Act imposes certain limitations on electric
rates that could result in Consumers being unable to collect from electric
customers its full cost of conducting business. Some of these costs are beyond
Consumers' control. In particular, if Consumers needs to purchase power supply
from wholesale suppliers while retail rates are frozen or capped, the rate
restrictions may make it impossible for Consumers to fully recover purchased
power and associated transmission costs from its customers. As a result,
Consumers may be unable to maintain its profit margins in its electric utility
business during the rate freeze or rate cap periods. The rate freeze is in
effect through December 31, 2003. The rate caps are in effect through at least
December 31, 2004 for small commercial and industrial customers, and at least
through December 31, 2005 for residential customers.

Industrial Contracts: In response to industry restructuring efforts, in
1995 and 1996, Consumers entered into multi-year electric supply contracts with
certain large industrial customers to provide electricity at specially
negotiated prices, usually at a discount from tariff prices. The MPSC approved
these special contracts as part of its phased introduction to competition.
Unless terminated or restructured, the majority of these contracts are in effect
through 2005. As of December 2002, some contracts have expired, but outstanding
contracts involve approximately 500 MW. Consumers cannot predict the ultimate
financial impact of changes related to these power supply contracts, or whether
additional contracts will be necessary or advisable.

Code of Conduct: In December 2000, as a result of the passage of the
Customer Choice Act, the MPSC issued a new code of conduct that applies to
electric utilities and alternative electric suppliers. The code of conduct seeks
to prevent cross-subsidization, information sharing, and preferential treatment
between a utility's regulated and unregulated services. The new code of conduct
is broadly written, and as a result, could affect Consumers' retail gas
business, the marketing of unregulated services and equipment to Michigan
customers, and internal transfer pricing between Consumers' departments and
affiliates. In October 2001, the new code of conduct was reaffirmed by the MPSC
without substantial modification. Consumers appealed the MPSC orders related to
the code of conduct and sought a stay of the orders until the appeal was
complete; however, the request for a stay was denied. Consumers filed a
compliance plan in accordance with the code of conduct. It also sought waivers
to the code of conduct in order to continue utility activities that provide
approximately $50 million in annual revenues. In October 2002, the MPSC denied
waivers for three programs that provide approximately $32 million in revenues in
2001, of which $30 million relates to the appliance service plan. The waivers
denied included all waivers associated with the appliance service plan program
that has been offered by Consumers for many years. Consumers filed a renewed
motion for a stay of the effectiveness of the code of conduct and an appeal of
the waiver denials with the Michigan Court of Appeals. On November 8, 2002, the
Michigan Court of Appeals denied Consumers' request for a stay. Consumers has
filed an application for leave to appeal with the Michigan Supreme Court with
respect to the Michigan Court of Appeals' November ruling denying the stay. In
February 2003, the Michigan Supreme Court denied the application. In December
2002, Consumers filed a renewed request with the MPSC for a temporary waiver
until April 2004 for the appliance service plan, which generated $33 million in
revenues in 2002. In February 2003, the MPSC granted an extension of the
temporary waiver until December 31, 2003. The full impact of the new code of
conduct on Consumers' business will remain uncertain until the appellate courts
issue definitive rulings. Recently, in an appeal involving affiliate pricing
guidelines, the Michigan Court of Appeals struck the guidelines down because of
a procedurally defective manner of enactment by the MPSC. A similar procedure
was used by the MPSC in enacting the new code of conduct. Consumers is also
exploring seeking legislative clarification of the scope of the code of conduct.

Energy Policy: Uncertainty exists regarding the enactment of a national
comprehensive energy policy, specifically federal electric industry
restructuring legislation. A variety of bills introduced in the United States
Congress in recent years aimed to change existing federal regulation of the
industry. If the federal government enacts a comprehensive energy policy or
electric restructuring legislation, then that legislation could potentially
affect company operations and financial requirements.

64

Transmission: In 1999, the FERC issued Order No. 2000, strongly encouraging
electric utilities to transfer operating control of their electric transmission
system to an RTO, or sell the facilities to an independent company. In addition,
in June 2000, the Michigan legislature passed Michigan's Customer Choice Act,
which also requires utilities to divest or transfer the operating authority of
transmission facilities to an independent company. Consumers chose to offer its
electric transmission system (METC) for sale rather than own and invest in an
asset it could not control. In May 2002, Consumers sold its electric
transmission system for approximately $290 million in cash to MTH, a
non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc.

Trans-Elect, Inc. submitted the winning bid through a competitive bidding
process, and various federal agencies approved the transaction. Consumers did
not provide any financial or credit support to Trans-Elect, Inc. Certain of
Trans-Elect's officers and directors are former officers and directors of CMS
Energy, Consumers and their subsidiaries. None of them were employed by CMS
Energy, Consumers, or their affiliates when the transaction was discussed
internally and negotiated with purchasers. As a result of the sale, Consumers
experienced an after-tax earnings increase of approximately $17 million in 2002,
due to the recognition of a $26 million gain on the sale of the electric
transmission system. This gain from the sale is offset by a loss of revenue from
wholesale and retail open access customers who will buy services directly from
MTH, including the loss of a return on the sold electric transmission system.
Consumers anticipates that the future impact of the loss of revenue from
wholesale and retail open access customers who will buy services directly from
MTH and the loss of a return on the sold electric transmission system on its
after-tax earnings will be a decrease of $15 million in 2003, and a decrease of
approximately $14 million annually for the next three years.

Under the agreement with MTH, and subject to certain additional RTO
surcharges, transmission rates charged to Consumers are fixed by contract at
current levels through December 31, 2005, and subject to FERC ratemaking
thereafter. MTH has completed the capital program to expand the transmission
system's capability to import electricity into Michigan, as required by the
Customer Choice Act, and Consumers will continue to maintain the system under a
five-year contract with MTH. Effective April 30, 2002, Consumers and METC
withdrew from the Alliance RTO, and MTH (METC) has joined the MISO RTO. For
further information, see Note 6, Uncertainties, "Electric Rate
Matters -- Transmission."

Consumers is a customer of AEP, holding 500 MW of long-term transmission
service reservations through the AEP transmission system. AEP recently indicated
its intent to turn control of its transmission system over to the PJM RTO and
become part of the PJM market sometime after May 1, 2003, which requires
approval by FERC. This will require current AEP customers to become members of,
and resubmit reservation requests to, PJM. Consumers filed an intervention
requesting clarification in January 2003. Upon FERC's approval of this transfer,
Consumers will complete the application process to join PJM. Of the 500 MW of
long-term transmission service reservations held, 200 MW will expire on April 1,
2003. Effective June 1, 2003, Consumers will have an additional 100 MW of
long-term transmission, resulting in a total of 400 MW of long-term transmission
for summer 2003.

In July 2002, the FERC issued a 600-page notice of proposed rulemaking on
standard market design for electric bulk power markets and transmission. Its
stated purpose is to remedy undue discrimination in the use of the interstate
transmission system and give the nation the benefits of a competitive bulk power
system. The proposed rulemaking is primarily designed to correct perceived
problems in the electric transmission industry. Consumers sold its electric
transmission system in 2002, but is a transmission customer. The financial
impact to Consumers is uncertain, but the final standard market design rules
could significantly increase delivered power costs to Consumers and the retail
electric customers it serves. Consumers has filed comments with the FERC in
general opposition to the proposal.

There are multiple proceedings pending before the FERC regarding
transitional transmission pricing mechanisms intended to mitigate the revenue
impact on transmission owners resulting from the elimination of "Rate
Pancaking". "Rate Pancaking" represents the application of the transmission rate
of each individual transmission owner whose system is utilized on the scheduled
path of an energy delivery and its elimination has been alleged to result in
"lost revenues" for transmission owners. It is unknown what mechanism(s) may
result from the proceedings currently pending before the FERC, and as such, it
is not possible at this time to identify the

65

specific effect on Consumers. It should be noted, however, that Consumers
believes the results of these proceedings could also significantly increase the
delivered power costs to Consumers and the retail electric customers it serves.

Similarly, other proceedings before the FERC involving rates of
transmission providers of Consumers could increase Consumers' cost of
transmitting power to its customers in Michigan. As RTOs develop and mature in
Consumers' area of electrical operation, and those RTOs respond to FERC
initiatives concerning the services they must provide and the systems they
maintain, Consumers believes that there is likely to be an upward cost trend in
transmission used by Consumers, ultimately increasing the delivered cost of
power to Consumers and the retail electric customers it serves. The specific
financial impact on Consumers of such proceedings and trends is not currently
quantifiable.

In addition to the potential cost impacts identified above, Consumers is
evaluating whether or not there may be impacts on electric reliability
associated with the outcomes of these various transmission related proceedings.
Consumers cannot assure that all risks to reliability can be avoided.

Consumers cannot predict the impact of these electric
industry-restructuring issues on its financial position, liquidity, or results
of operations.

PERFORMANCE STANDARDS: In July 2001, the MPSC proposed electric
distribution performance standards for Consumers and other Michigan electric
distribution utilities. The proposal would establish standards related to
restoration after an outage, safety, and customer relations. Failure to meet the
standards would result in customer bill credits. Consumers submitted comments to
the MPSC. In December 2001, the MPSC issued an order stating its intent to
initiate a formal rulemaking proceeding to develop and adopt performance
standards. In November 2002, the MPSC issued an order initiating the formal
rulemaking proceeding. Consumers has filed comments on the proposed rules and
will continue to participate in this process. Consumers cannot predict the
nature of the proposed standards or the likely effect, if any, on Consumers.

For further information and material changes relating to the rate matters
and restructuring of the electric utility industry, see Note 1, Corporate
Structure and Summary of Significant Accounting Policies, and Note 6,
Uncertainties, "Electric Rate Matters -- Electric Restructuring" and "Electric
Rate Matters -- Electric Proceedings."

UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers', financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) pending litigation and government investigations; 2)
the need to make additional capital expenditures and increase operating expenses
for Clean Air Act compliance; 3) environmental liabilities arising from various
federal, state and local environmental laws and regulations, including potential
liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 4) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel and the successful operation
of Palisades by NMC; 5) electric industry restructuring issues, including those
described above; 6) Consumers' ability to meet peak electric demand requirements
at a reasonable cost, without market disruption, and successfully implement
initiatives to reduce exposure to purchased power price increases; 7) the
recovery of electric restructuring implementation costs; 8) Consumers' new
status as an electric transmission customer and not as an electric transmission
owner/operator; 9) sufficient reserves for OATT rate refunds; 10) the effects of
derivative accounting and potential earnings volatility; 11) increased costs for
safety and homeland security initiatives that are not recoverable on a timely
basis from customers; 12) Consumers' continuing ability to raise funds at
reasonable rates in order to meet the cash requirements of its electric business
and to pay maturing debt in the short-term, and 13) potentially rising pension
costs due to market losses. For further information about these trends or
uncertainties, see Note 6, Uncertainties.

CONSUMERS' GAS UTILITY BUSINESS OUTLOOK

GROWTH: Over the next five years, Consumers expects gas deliveries,
including gas full service and customer choice deliveries (excluding
transportation to the MCV Facility and off-system deliveries), to grow at an

66

average rate of less than one percent per year based primarily on a steadily
growing customer base. Actual gas deliveries in future periods may be affected
by abnormal weather, use of gas by independent power producers, changes in
competitive and economic conditions, and the level of natural gas consumption
per customer.

2001 GAS RATE CASE: In June 2001, Consumers filed an application with the
MPSC seeking a distribution service rate increase. On November 7, 2002, the MPSC
issued a final order approving a $56 million annual distribution service rate
increase, which includes the $15 million interim increase, with an 11.4 percent
authorized return on equity, for service effective November 8, 2002. As part of
this order, the MPSC approved Consumers' proposal to absorb the assets and
liabilities of Michigan Gas Storage Company into Consumers' rate base and rates.
This has occurred through a statutory merger of Michigan Gas Storage Company
into Consumers and this is not expected to have an impact on Consumers'
consolidated financial statements. See Note 6, Uncertainties, Gas Rate
Matters -- 2001 Gas Rate Case for further information.

2003 GAS RATE CASE: On March 14, 2003, Consumers filed an application with
the MPSC seeking a $156 million increase in its gas delivery and transportation
rates, which includes a 13.5 percent authorized return on equity, based on a
2004 test year. If approved, the request would add about $6.40 per month, or
about 9 percent, to the typical residential customer's average monthly
distribution bill. Contemporaneously with this filing, Consumers has requested
interim rate relief in the same amount.

UNBUNDLING STUDY: In July 2001, the MPSC directed gas utilities under its
jurisdiction to prepare and file an unbundled cost of service study. The purpose
of the study is to allow parties to advocate or oppose the unbundling of the
following services: metering, billing information, transmission, balancing,
storage, backup and peaking, and customer turn-on and turn-off services.
Unbundled services could be separately priced in the future and made subject to
competition by other providers. The MPSC addressed Consumers' study in the
November 2002 gas distribution rate case order and indicated that it makes
little sense to set rates for unbundled services before the details of those
services are known. Unbundled services may continue to be an issue in future
proceedings.

In September 2002, the FERC issued an order rejecting a filing by Consumers
to assess certain rates for non-physical gas title tracking services offered by
Consumers. Despite Consumers' arguments to the contrary, the FERC asserted
jurisdiction over such activities and allowed Consumers to refile and justify a
title transfer fee not based on volumes as Consumers proposed. Because the order
was issued six years after Consumers made its original filing initiating the
proceeding, over $3 million in non-title transfer tracking fees had been
collected. No refunds have been ordered, and Consumers sought rehearing of the
September order. If refunds were ordered they may include interest which would
increase the refund liability to more than the $3 million collected. In December
2002, Consumers established a $3.6 million reserve related to this matter.
Consumers is unable to say with certainty what the final outcome of this
proceeding might be.

UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) pending litigation and government investigations; 2)
potential environmental costs at a number of sites, including sites formerly
housing manufactured gas plant facilities; 3) future gas industry restructuring
initiatives; 4) any initiatives undertaken to protect customers against gas
price increases; 5) an inadequate regulatory response to applications for
requested rate increases; 6) market and regulatory responses to increases in gas
costs, including a reduced average use per residential customer; 7) increased
costs for pipeline integrity and safety and homeland security initiatives that
are not recoverable on a timely basis from customers; 8) Consumers' continuing
ability to raise funds at reasonable rates in order to meet the cash
requirements of its gas business; and 9) potentially rising pension costs due to
market losses. For further information about these uncertainties, see Note 6,
Uncertainties.

CONSUMERS' OTHER OUTLOOK

TERRORIST ATTACKS: Since the September 11, 2001 terrorist attacks in the
United States, Consumers has increased security at all critical facilities and
over its critical infrastructure, and will continue to evaluate security on an
ongoing basis. Consumers may be required to comply with federal and state
regulatory security measures promulgated in the future. Through December 31,
2002, Consumers has incurred approximately $4 million in
67

incremental security costs, including operating, capital, and decommissioning
and removal costs. Consumers estimates it may incur additional incremental
security costs in 2003 of approximately $6 million. Consumers will attempt to
seek recovery of these costs from its customers. In December 2002, the Michigan
legislature passed, and the governor signed, a bill that would allow Consumers
to seek recovery of additional electric division security costs incurred during
the rate freeze and cap periods imposed by the Customer Choice Act. On February
5, 2003, the MPSC adopted filing requirements for the recovery of enhanced
security costs.

ENERGY-RELATED SERVICES: Consumers offers a variety of energy-related
services to retail customers that focus on appliance maintenance, home safety,
commodity choice, and assistance to customers purchasing heating, ventilation
and air conditioning equipment. Consumers continues to look for additional
growth opportunities in providing energy-related services to its customers. The
ability to offer all or some of these services and other utility related
revenue-generating services, which provide approximately $50 million in annual
revenues, may be restricted by the new code of conduct issued by the MPSC, as
discussed above in Electric Business Outlook, "Competition and Regulatory
Restructuring -- Code of Conduct."

ENTERPRISES OUTLOOK

CMS Energy's independent power production (IPP) subsidiary plans to
complete the restructuring of its operations by narrowing the scope of its
existing operations and commitments to two regions: North America and the Middle
East/North Africa. In addition, its plans include selling designated assets and
investments that are under-performing, non-region focused and non-synergistic
with other CMS Energy business units. The independent power production business
unit will continue to optimize the operations and management of its remaining
portfolio of assets in order to contribute to CMS Energy's earnings and to
maintain its reputation for solid performance in the construction and operation
of power plants.

Dynamic changes in the energy trading markets over the past year have
resulted in a deterioration of credit quality, loss of market liquidity and a
heightened sensitivity to earnings volatility. Management cannot predict what
effect these events may have on the liquidity of the trading markets in the
short-term, but credit constraints continue to severely limit CMS MST's ability
to actively manage and optimize its open positions. These changes have forced a
significant change in CMS MST's business strategy. CMS MST will continue to
streamline its portfolio to reduce outstanding credit guarantees as well as its
non-core businesses. In January 2003, CMS MST closed on the sale of a
significant portion of its natural gas trading contracts for $17 million of cash
proceeds, and in February 2003 signed a definitive agreement to sell its
wholesale power contracts. The sale of the company's non-core retail offices and
its energy conservation unit, CMS Viron, are expected to be complete by the
second quarter of 2003, however, management cannot make any assurances as to
when these asset sales will actually occur.

The future CMS MST activities will be centered around marketing the
merchant power from DIG, Michigan Power, LLC and other IPPs as their current
power purchase agreements expire. CMS MST will continue to focus its business on
the retail sector, specifically in the state of Michigan. CMS Gas Transmission
plans to also narrow its scope of existing operations and commitments. In doing
so, CMS Energy is actively pursuing the sale, liquidation, or other disposition
of several of its designated assets and investments, but management cannot
predict when, nor make any assurances that, these asset and investment sales
will occur.

UNCERTAINTIES: The results of operations and financial position of CMS
Energy's diversified energy businesses may be affected by a number of trends or
uncertainties that have, or CMS Energy reasonably expects could have, a material
impact on income from continuing operations, cash flows and balance sheet and
credit improvement. Such trends and uncertainties include: 1) the ability to
sell or optimize assets or businesses in accordance with its financial plan; 2)
the international monetary fluctuations, particularly in Argentina, as well as
Brazil and Australia; 3) the changes in foreign laws, governmental and
regulatory policies that could significantly reduce the tariffs charged and
revenues recognized by certain foreign investments; 4) the imposition of stamp
taxes on certain South American contracts that could significantly increase
project expenses; 5) the impact of any future rate cases or FERC actions or
orders on regulated businesses and the effects of changing regulatory and
accounting related matters resulting from current events; 6) unhedged commodity
price exposures; and 7) the impact of ratings downgrades on CMS Energy's
liquidity, costs of operating, current limited access to capital markets, and
cost of capital.

68

OTHER OUTLOOK

SEC AND OTHER INVESTIGATIONS: As a result of round-trip trading
transactions at CMS MST, CMS Energy's Board of Directors established a Special
Committee of independent directors to investigate matters surrounding the
transactions and retained outside counsel to assist in the investigation. The
Special Committee completed its investigation and reported its findings to the
Board of Directors in October 2002. The Special Committee concluded, based on an
extensive investigation, that the round-trip trades were undertaken to raise CMS
MST's profile as an energy marketer with the goal of enhancing its ability to
promote its services to new customers. The Special Committee found no effort to
manipulate the price of CMS Energy Common Stock or affect energy prices. The
Special Committee also made recommendations designed to prevent any reoccurrence
of this practice, most of which have already been implemented. Previously, CMS
Energy terminated its speculative trading business and revised its risk
management policy. The Board of Directors adopted, and CMS Energy has begun
implementing, the remaining recommendations of the Special Committee.

CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
CMS Energy's financial statements, accounting policies and controls, and
investigations by the United States Department of Justice, the Commodity Futures
Trading Commission and the FERC. CMS Energy has also received subpoenas from
U.S. Attorneys Offices regarding investigations of those trades. CMS Energy is
unable to predict the outcome of these matters, and what effect, if any, these
investigations will have on its business.

SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
securities class action complaints have been filed against CMS Energy,
Consumers, and certain officers and directors of CMS Energy and its affiliates.
The complaints have been filed in the United States District Court for the
Eastern District of Michigan as purported class actions by individuals who
allege that they purchased CMS Energy's securities during a purported class
period. At least two of the complaints contain purported class periods beginning
on August 3, 2000 and running through May 10, 2002 or May 14, 2002. These
complaints generally seek unspecified damages based on allegations that the
defendants violated United States securities laws and regulations by making
allegedly false and misleading statements about the company's business and
financial condition. The cases have been consolidated into a single lawsuit, and
an amended and consolidated complaint is due to be filed by May 1, 2003. CMS
Energy intends to vigorously defend against these actions. CMS Energy cannot
predict the outcome of this litigation.

DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS: The Board of Directors
received a demand, on behalf of a shareholder of CMS Energy Common Stock, that
it commence civil actions (i) to remedy alleged breaches of fiduciary duties by
CMS Energy officers and directors in connection with round-trip trading at CMS
Energy, and (ii) to recover damages sustained by CMS Energy as a result of
alleged insider trades alleged to have been made by certain current and former
officers of CMS Energy and its subsidiaries. If the Board elects not to commence
such actions, the shareholder has stated that he will initiate a derivative
suit, bringing such claims on behalf of CMS Energy. CMS Energy has elected two
new members to its Board of Directors to serve as an independent litigation
committee to determine whether it is in the best interest of CMS Energy to bring
the action demanded by the shareholder. Counsel for the shareholder has agreed
to extend the time for CMS Energy to respond to the demand. CMS Energy cannot
predict the outcome of this litigation.

ERISA CLAIMS: CMS Energy is a named defendant, along with Consumers, CMS
MST and certain named and unnamed officers and directors, in two lawsuits
brought as purported class actions on behalf of participants and beneficiaries
of the 401(k) plan. The two cases, filed in July 2002 in the United States
District Court for the Eastern District of Michigan, were consolidated by the
trial judge and an amended and consolidated complaint has been filed. Plaintiffs
allege breaches of fiduciary duties under ERISA and seek restitution on behalf
of the plan with respect to a decline in value of the shares of CMS Energy
Common Stock held in the plan. Plaintiffs also seek other equitable relief and
legal fees. These cases will be vigorously defended. CMS Energy cannot predict
the outcome of this litigation.

GAS INDEX PRICING REPORTING: CMS Energy has notified appropriate regulatory
and governmental agencies that some employees at CMS MST and CMS Field Services
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
69

Energy is cooperating with investigations by the Commodity Futures Trading
Commission, Department of Justice and FERC regarding this matter. CMS Energy is
unable to predict the outcome of these matters and what effect, if any, these
investigations will have on its business.

OTHER MATTERS

CHANGE IN EXECUTIVE OFFICERS

In 2002, certain changes occurred in CMS Energy's executive officers. In
May 2002, the Board of Directors elected Kenneth Whipple as Chairman of the
Board and Chief Executive Officer; on June 27, 2002, S. Kinnie Smith, Jr. was
elected Vice Chairman of the Board and General Counsel; on July 22, 2002, Thomas
J. Webb was elected Executive Vice President and Chief Financial Officer; on
August 2, 2002, John F. Drake was elected Senior Vice President; and on December
6, 2002, Michael T. Monahan and Joseph F. Paquette, Jr. joined the Board of
Directors.

COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002

In July 2002, the Sarbanes-Oxley Act of 2002 was enacted and requires
companies to: 1) make certain certifications related to its financial
statements, disclosure controls and procedures, and internal controls; and 2)
make certain disclosures about its disclosure controls and procedures, and
internal controls as follows:

CEO AND CFO CERTIFICATIONS

The Sarbanes-Oxley Act of 2002 requires the CEOs and CFOs of public
companies to make certain certifications relating to the financial statements
included in SEC filings. CMS Energy has not filed the certifications required by
the Sarbanes-Oxley Act of 2002 relating to the financial statements included in
this Form 10-K because CMS Energy is in the process of restating 2001 for each
quarter, and intends to amend this Form 10-K and provide the required
certifications at that time.

DISCLOSURE AND INTERNAL CONTROLS

CMS Energy's CEO and CFO are responsible for establishing and maintaining
CMS Energy's disclosure controls and procedures. Management, under the direction
of CMS Energy's principal executive and financial officers, has evaluated the
effectiveness of CMS Energy's disclosure controls and procedures within the past
ninety days of this filing. Based on this evaluation, CMS Energy's CEO and CFO
have concluded that disclosure controls and procedures are effective to ensure
that material information was presented to them and properly disclosed. There
have been no significant changes in CMS Energy's internal controls or in
factors, other than as discussed below, that could significantly affect internal
controls subsequent to such evaluation.

CONTROL WEAKNESSES AT CMS MST

In late 2001 and during 2002, the Company identified a number of
deficiencies in MST's systems of internal accounting controls. The internal
control deficiencies related to, among other things, a lack of account
reconciliations, unidentified differences between subsidiary ledgers and the
general ledger, and procedures and processes surrounding the Company's
accounting for energy trading contracts, including mark-to-market accounting.

Senior management, the Audit Committee of the Board of Directors, and the
independent auditors were notified of these deficiencies as they were
discovered, and the Company commenced a plan of remediation that included the
replacement of certain key personnel and the deployment of additional internal
and external accounting personnel to CMS MST. Significant aspects of the
remediation plan, which includes the implementation of improvements and changes
to CMS MST's internal accounting controls, were postponed to enable the Company
to prepare restated financial statements for 2000 and 2001. While a number of
these control improvements and changes were implemented in late 2002, the most
important ones occurred in the first quarter of 2003.

70

The implementation of certain elements of its remediation plan enabled the
Company to prepare reliable restated financial statements for CMS MST for
December 31, 2000 and 2001, as well as for the quarterly periods and full year
of 2002. Management has not yet prepared restated quarterly financial statements
for 2001, although it expects to do so as soon as practicable.

Management believes that the improvements to its system of internal
accounting controls implemented in late 2002 and the first quarter of 2003 are
appropriate and responsive to the internal control deficiencies that were
identified. Management will continue to monitor the operation of the improved
internal controls to assess their sustained effectiveness through 2003.

NEW ACCOUNTING STANDARDS NOT YET ADOPTED

SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning
January 1, 2003, companies must comply with SFAS No. 143. The standard requires
companies to record the fair value of the legal obligations related to an asset
retirement in the period in which it is incurred. CMS Energy has determined that
it has legal asset retirement obligations, particularly in regard to Consumers'
nuclear plants, but it has not yet finalized its assessment of the obligation.
However, upon initial adoption of the standard, CMS Energy, as it relates to
Consumers, expects to record a regulatory liability, as well as an asset
retirement obligation, as required by SFAS No. 71. The regulatory liability
recognizes the difference between the cost of removal included in the reserve
for accumulated depreciation for assets within the scope of SFAS No. 143 and the
accretion expense of the asset retirement obligation and the depreciation
expense of the asset retirement obligation asset from when the obligation was
initially incurred through December 2002. When the asset retirement obligation
liability is initially recorded, the company would capitalize an offsetting
amount by increasing the carrying amount of the related long-lived asset. Over
time, the initial liability would be accreted to its present value each period
and the capitalized cost would be depreciated over the related asset's useful
life. CMS Energy, as it relates to Enterprises, is currently inventorying
assets, including its international investments, that may have a retirement
obligation and consulting with counsel to determine if a legal retirement
obligation exists. While CMS Energy has not finalized its assessment of the
legal retirement obligation, the removal cost estimate will be determined based
on fair value cost estimates as required by the new standard. The present value
of the legal retirement obligations will be used to quantify the future effects
of adoption of this standard.

SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES: Issued by the FASB in July 2002, this standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This standard is effective for exit or disposal activities initiated after
December 31, 2002. CMS Energy believes there will be no impact on its financial
statements upon adoption of the standard.

FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENT FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS: Effective January 1, 2003, CMS Energy adopted this interpretation which
elaborates on the disclosure to be made by a guarantor about its obligations
under certain guarantees that it has issued. It requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provision of this Interpretation does not apply to certain guarantee
contracts, such as warranties, derivatives, or guarantees between either parent
and subsidiaries or corporations under common control, although disclosure of
such guarantees is required. For contracts that are within the initial
recognition and measurement provision of this Interpretation, the provisions are
to be applied to guarantees issued or modified after December 31, 2002; no
cumulative effect adjustments will be required.

FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES: Issued by the FASB in January 2003, the interpretation expands upon
and strengthens existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities and
activities of another entity. The consolidation requirements of the
interpretation apply immediately to variable interest entities created after
January 31, 2003. For CMS Energy, the consolidation requirements apply to
pre-existing entities beginning July 1, 2003. Certain of the disclosure
requirements apply to all financial statements initially issued after January
31, 2003. CMS Energy will be required to consolidate any entities that meet the
requirements of the

71

interpretation. CMS Energy is in the process of studying the interpretation, and
has yet to determine the effects, if any, on its consolidated financial
statements.

EITF ISSUE NO. 02-03, RECOGNITION AND REPORTING OF GAINS AND LOSSES ON
ENERGY TRADING CONTRACTS UNDER EITF ISSUES NO. 98-10 AND 00-17: At the October
25, 2002 meeting, the EITF reached a final consensus to rescind EITF Issue No.
98-10, Accounting for Contracts Involved in Energy Trading and Risk Management
Activities. As a result, only energy contracts that meet the definition of a
derivative in SFAS No. 133 will be carried at fair value. Energy trading
contracts that do not meet the definition of a derivative must be accounted for
as an executory contract (i.e., on an accrual basis). The consensus rescinding
EITF Issue No. 98-10 must be applied to all contracts that existed as of October
25, 2002 and must be recognized as a cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes, effective
the first day of the first interim or annual period beginning after December 15,
2002. The consensus also must be applied immediately to all new contracts
entered into after October 25, 2002. As a result of these recent changes, CMS
Energy is currently evaluating its existing energy contracts to determine the
impact of this change which will be effective January 1, 2003.

72

CMS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these statements.
75

CMS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

All highly liquid investments with an original maturity of three months or
less are considered cash equivalents.

The accompanying notes are an integral part of these statements.
77

CMS ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements.
78

CMS ENERGY CORPORATION

STOCKHOLDERS' INVESTMENT AND LIABILITIES

- -------------------------
(a) For further discussion, see Note 8 to the Consolidated Financial
Statements.

79

CMS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF PREFERRED STOCK

The accompanying notes are an integral part of these statements.
80

CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

- -------------------------
(b) Year ended December 31, 2001 reflects the cumulative change in accounting
principle, net of $(7) tax (Note 10).

(c) Included in these amounts is CMS Energy's proportionate share of the effects
of derivative accounting related to its equity investment in the MCV
Partnership and Taweelah as follows:

MCV Partnership:
At the beginning of the period.............................. $ (8) $ 5 $--
Unrealized gain (loss) on derivative instruments............ 12 (15) --
Reclassification adjustments included in net income......... 4 2 --
---- ---- ---
At the end of period........................................ $ 8 $ (8) $--
==== ==== ===
Taweelah:
At the beginning of the period.............................. $ -- $ -- $--
Unrealized gain (loss) on derivative instruments............ (32) -- --
---- ---- ---
At the end of period........................................ $(32) $ -- $--
==== ==== ===

The accompanying notes are an integral part of these statements.
82

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CORPORATE STRUCTURE: CMS Energy is the parent holding company of Consumers
and Enterprises. Consumers is a combination electric and gas utility company
serving Michigan's Lower Peninsula. Enterprises, through subsidiaries, is
engaged in domestic and international diversified energy businesses including:
natural gas transmission, storage and processing; independent power production;
and energy marketing, services and trading.

RESTATEMENT: CMS Energy's consolidated financial statements for the years
2001 and 2000 have been restated, as discussed in Note 2, Restatement, pursuant
to adjustments resulting from the re-audit of the consolidated financial
statements of CMS Energy for the years 2001 and 2000.

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of CMS Energy, Consumers and Enterprises and their majority-owned
subsidiaries. Investments in affiliated companies where CMS Energy has the
ability to exercise significant influence, but not control are accounted for
using the equity method. Intercompany transactions and balances have been
eliminated.

USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

The principles in SFAS No. 5 guide the recording of estimated liabilities
for contingencies within the financial statements. SFAS No. 5 requires a company
to record estimated liabilities in the financial statements when it is probable
that a loss will be paid in the future as a result of a current event, and that
an amount can be reasonably estimated. CMS Energy has used this accounting
principle to record estimated liabilities discussed in Note 6, Uncertainties.

REVENUE RECOGNITION POLICY: Revenues from deliveries of electricity and the
transportation and storage of natural gas are recognized as services are
provided. Revenues on sales of marketed electricity, natural gas, and other
energy products, as well as natural gas and LNGs, are recognized at delivery.
Revenues on sales of oil and natural gas produced are recognized when production
occurs, a sale is completed, and the risk of loss transfers to a third-party
purchaser. Mark-to-market changes in the fair value of energy trading contracts
are recognized as revenues in the periods in which the changes occur.

ACCRETION INCOME AND EXPENSE: In 1991, the 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. In 1992, Consumers recorded a
loss for the present value of its estimated future underrecoveries of power
supply costs resulting from purchases from the MCV Partnership (see Note 6). It
now recognizes accretion expense annually to reflect the time value of money on
the recorded loss. CMS MST has entered into prepaid sales arrangements to
provide natural gas to various entities over periods of up to 12 years at
predetermined price levels. CMS MST has established a liability for these
outstanding obligations equal to the discounted present value of the contracts,
and has hedged its exposures under these arrangements. At December 31, 2002 and
2001, the amounts recorded as liabilities on the Consolidated Balance Sheets
totaled $266 million and $288 million, respectively, and are guaranteed by
Enterprises. As CMS MST fulfills its obligations under the contracts, it
recognizes revenues upon the delivery of natural gas, and records a reduction to
the outstanding obligation, and recognizes accretion expense.

CAPITALIZED INTEREST: SFAS No. 34 requires capitalization of interest on
certain qualifying assets that are undergoing activities to prepare them for
their intended use. SFAS No. 34 limits the capitalization of interest for the
period to the actual interest cost that is incurred and prohibits imputing
interest costs on any equity funds. The nonregulated businesses of CMS Energy
are subject to these rules. The regulated businesses of CMS Energy are
83

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

permitted to capitalize an allowance for funds used during construction on
regulated construction projects and to include such amounts in plant in service.

EARNINGS PER SHARE: Basic and diluted earnings per share are based on the
weighted average number of shares of common stock and potential common stock
outstanding during the period. Potential common stock, for purposes of
determining diluted earnings per share, includes the effects of dilutive stock
options and convertible securities. The effect of such potential common stock is
computed using the treasury stock method or the if-converted method, as
applicable. For earnings per share computation, see Note 9.

FINANCIAL INSTRUMENTS: CMS Energy accounts for its debt and equity
investment securities in accordance with SFAS No. 115. As such, debt and equity
securities can be classified into one of three categories: held-to-maturity,
trading, or available-for-sale securities. CMS Energy's investments in equity
securities are classified as available-for-sale securities. They are reported at
fair value, with any unrealized gains or losses from changes in fair value
usually reported in equity as part of other comprehensive income and excluded
from earnings unless such changes in fair value are other than temporary.
Unrealized gains or losses from changes in the fair value of Consumers' nuclear
decommissioning investments are reported in accumulated depreciation. The fair
value of these investments is determined from quoted market prices.

FOREIGN CURRENCY TRANSLATION: CMS Energy's subsidiaries and affiliates
whose functional currency is other than the U.S. dollar translate their assets
and liabilities into U.S. dollars at the current exchange rates in effect at the
end of the fiscal period. The revenue and expense accounts of such subsidiaries
and affiliates are translated into U.S. dollars at the average exchange rates
that prevailed during the period. The gains or losses that result from this
process, and gains and losses on intercompany foreign currency transactions that
are long-term in nature, and which CMS Energy does not intend to settle in the
foreseeable future, are shown in the stockholders' equity section of the balance
sheet. For subsidiaries operating in highly inflationary economies, the U.S.
dollar is considered to be the functional currency, and transaction gains and
losses are included in determining net income. Gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency, except those that are hedged, are included in
determining net income. For the years ended 2002 and 2001, the change in the
foreign currency translation adjustment decreased equity by $225 million and $27
million, respectively, net of after-tax hedging proceeds.

GOODWILL: Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies. Effective January 1, 2002,
CMS Energy adopted SFAS No. 142, which disallowed, upon adoption and on an
annual basis, the continued amortization of goodwill and required the testing of
goodwill for potential impairment. Effective January 1, 2002, CMS MST recorded a
loss of $10 million, net of tax for goodwill impairment. In addition, Panhandle
recorded a write-off of goodwill in the amount of $369 million, net of tax. For
additional information, see Note 5, Goodwill.

IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: In accordance with APB
Opinion No. 18 and SFAS No. 144, CMS Energy evaluates the potential impairment
of its investments in projects and other long-lived assets, other than goodwill,
based on various analyses, including the projection of undiscounted cash flows,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. If the carrying amount of the investment or
asset exceeds the amount of the expected future undiscounted cash flows, an
impairment loss is recognized and the investment or asset is written down to its
estimated fair value.

INVENTORIES: Consumers uses the weighted average cost method for valuing
working gas inventory. Beginning October 2000, gas inventory also includes
recoverable cushion gas. Consumers records non-recoverable cushion gas in the
appropriate gas utility plant account. Consumers stores gas inventory in its
underground storage facilities.

In 2000, CMS Energy adopted the provisions of the SAB No. 101 summarizing
the SEC staff's views on revenue recognition policies based upon existing
generally accepted accounting principles. As a result, the oil and
84

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

gas exploration and production industry's long-standing practice of recording
inventories at their net realizable amount at the time of production was viewed
as inappropriate. Rather, inventories should be presented at the lower of cost
or market. Consequently, in conforming to the interpretations of SAB No. 101,
CMS Energy implemented a change in the recording of these oil and gas
exploration and production inventories as of January 1, 2000. The cumulative
effect of this one-time non-cash accounting change decreased 2000 income by $7
million, or $5 million, net of tax.

NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Through November
2001, Consumers expensed the interest on leased nuclear fuel as it was incurred.
Effective December 2001, Consumers no longer leases its nuclear fuel.

For nuclear fuel used after April 6, 1983, Consumers charges disposal costs
to nuclear fuel expense, recovers these costs through electric rates, and then
emits them to the DOE quarterly. Consumers elected to defer payment for disposal
of spent nuclear fuel burned before April 7, 1983. As of December 31, 2002,
Consumers has a recorded liability to the DOE of $138 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.

NUCLEAR PLANT DECOMMISSIONING: In 2002, Consumers collected $6 million from
its electric customers for the decommissioning of its Palisades nuclear plant.
Amounts collected from electric retail customers and deposited in trusts
(including trust earnings) are credited to accumulated depreciation. In March
2001, Consumers filed updated decommissioning cost estimates for Big Rock and
Palisades that were $349 million and $739 million in 2000 dollars, respectively.
Using the inflation factors presented in the filing to the MPSC, the Palisades
estimated decommissioning cost in 2002 dollars is $809 million. The Big Rock
decommissioning cost in 2002 dollars is $327 million. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform to the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. On December 31, 2000, Big Rock trusts were fully funded per the March
22, 1999 MPSC order and Consumers discontinued depositing funds in the trust. In
December 2000, the NRC extended the Palisades operating license to March 2011
and the impact of this extension was included as part of Consumers' March 2001
filing with the MPSC. Consumers is required to file the next "Report on the
Adequacy of the Existing Annual Provision for Nuclear Plant Decommissioning"
(Report) with the MPSC by March 31, 2004.

In 1997, Big Rock closed permanently and plant decommissioning began.
Consumers estimates that the Big Rock site will be returned to a natural state
by the end of 2012 if the DOE begins removing the spent nuclear fuel by 2010. In
2002, Consumers incurred costs of $28 million that were charged to the
accumulated depreciation reserve for decommissioning and withdrew $30 million
from the Big Rock nuclear decommissioning trust fund. In total, Consumers has
incurred costs of $218 million that have been charged to the accumulated
depreciation reserve for decommissioning and withdrew $209 million from the Big
Rock nuclear decommissioning trust fund. These activities had no material impact
on net income. At December 31, 2002, Consumers is the beneficiary of the
investment in nuclear decommissioning trust funds of $110 million for Big Rock.

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 NRC operating license expires. Palisades' current NRC license will
expire in 2011 and the trust funds were estimated to have accumulated $921
million by that time, assuming currently approved MPSC surcharge levels.
Consumers estimates that at the time Palisades is fully decommissioned in the
year 2049, the trust funds will have provided $2.5 billion, including trust
earnings, to pay for the anticipated expenditures over the entire
decommissioning period. At December 31, 2002, Consumers is the beneficiary of
the investment in the MPSC nuclear decommissioning trust funds of $416 million
for Palisades. In addition, at December 31, 2002, Consumers has a FERC
decommissioning trust fund with a balance of approximately $9 million.

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PLANT AND PROPERTY: Plant and Property, including improvements, is stated
at cost. Construction-related labor and material costs, as well as indirect
construction costs such as engineering and interest costs, are capitalized.
Property repairs, minor property replacements and maintenance are charged to
maintenance expense as incurred. When depreciable plant and property maintained
by CMS Energy's regulated operations are retired or sold, the original cost plus
cost of removal (net of salvage credits), is charged to accumulated
depreciation.

Depreciation expense for plant and property was $343 million, $312 million,
and $345 million in 2002, 2001 and 2000, respectively. Consumers bases
depreciation provisions for utility property on straight-line and units-of-
production rates approved by the MPSC. For 2002, 2001 and 2000, the composite
depreciation rate for electric utility property was 3.1 percent annually. For
2002, 2001 and 2000, the composite rate for gas utility property was 4.5
percent, 4.4 percent and 4.4 percent, respectively. For 2002, 2001 and 2000, the
composite rate for other property was 7.2 percent, 11.2 percent and 10.7
percent, respectively. Other nonutility depreciable property is amortized over
its estimated useful life; gains and losses on asset sales are recognized at the
time of sale.

RELATED-PARTY TRANSACTIONS: In 2002, 2001 and 2000, Consumers paid $49
million, $55 million, and $51 million, respectively, for 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 $43 million, $49 million, and $54 million for 2002, 2001
and 2000. For additional discussion of related-party transactions with the MCV
Partnership and the FMLP, see Note 6, Uncertainties and Note 18, Summarized
Financial Information of Significant Related Energy Supplier. Other
related-party transactions are immaterial.

UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: CMS Energy amortizes
premiums, discounts and expenses incurred in connection with the issuance of
presently outstanding long-term debt over the terms of the respective issues.
For the regulated portions of CMS Energy's businesses, if debt is refinanced,
CMS Energy amortizes any unamortized premiums, discounts and expenses over the
term of the new debt, as allowed under regulated utility accounting.

UTILITY REGULATION: Consumers accounts for the effects of regulation based
on the regulated utility accounting standard SFAS No. 71. As a result, the
actions of regulators affect when Consumers recognizes revenues, expenses,
assets and liabilities.

In March 1999, Consumers received MPSC electric restructuring orders,
which, among other things, identified the terms and timing for implementing
electric restructuring in Michigan. Consistent with these orders and EITF No.
97-4, Consumers discontinued the application of SFAS No. 71 for the energy
supply portion of its business because Consumers expected to implement retail
open access at competitive market based rates for its electric customers.
Discontinuation of SFAS No. 71 for the energy supply portion of Consumers'
business resulted in Consumers reducing the carrying value of its Palisades
plant-related assets, in 1999, by approximately $535 million and establishing a
regulatory asset for a corresponding amount. As of December 31, 2002, Consumers
had a net investment in energy supply facilities of $1.475 billion included in
electric plant and property.

Since 1999, there has been a significant legislative and regulatory change
in Michigan that has resulted in: 1) electric supply customers of utilities
remaining on cost-based rates and 2) utilities being given the ability to
recover Stranded Costs associated with electric restructuring, from customers
who choose an alternative electric supplier. During 2002, Consumers re-evaluated
the criteria used to determine if an entity or a segment of an entity meets the
requirements to apply regulated utility accounting, and determined that the
energy supply portion of its business could meet the criteria if certain
regulatory events occurred. In December 2002, Consumers received a MPSC Stranded
Cost order that allowed Consumers to re-apply regulatory accounting standard
SFAS No. 71 to the energy supply portion of its business. Re-application of SFAS
No. 71 had no effect on the prior discontinuation accounting, but will allow
Consumers to apply regulatory accounting treatment to the energy supply portion
of its business on a prospective basis, including regulatory accounting
treatment of costs required

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to be recognized in accordance with SFAS No. 143. See Note 6, Uncertainties,
"Electric Rate Matters -- Electric Restructuring."

SFAS No. 144 imposes strict 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 are probable of future
recovery.

The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets. These
costs are expected to be recovered through rates over periods of up to 14 years.
Consumers recognized an OPEB transition obligation in accordance with SFAS No.
106 and established a regulatory asset for this amount, which it expects to
recover in rates over the next ten years.

In October 2000, Consumers received an MPSC order authorizing Consumers to
securitize certain regulatory assets up to $469 million, net of tax; see Note 6,
Uncertainties, "Electric Rate Matters -- Electric Restructuring". Accordingly,
in December 2000, Consumers established a regulatory asset for securitized costs
of $709 million, before tax, that had previously been recorded in other
regulatory asset accounts. In order to prepare for the financing of the
securitized assets and the subsequent retirement of debt with Securitization
proceeds, issuance fees of $1 million, $10 million and $1 million were incurred
in 2002, 2001 and 2000, respectively, and capitalized as a part of
Securitization costs. These issuance costs are amortized each month for up to
fourteen years. Amortization of the securitized assets approximated $29 million
and $2 million in 2002 and 2001, respectively for accumulated securitized cost
amortization of $31 million. The components of the unamortized securitized costs
are illustrated below.

87

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS: This new standard was issued by the FASB in October 2001, and supersedes
SFAS No. 121, and APB Opinion No. 30. SFAS No. 144 requires long-lived assets to
be measured at the lower of either the carrying amount or of the fair value less
the cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS No.
144, effective January 1, 2002, results in CMS Energy accounting for any
impairment or disposal of long-lived assets under the provisions of SFAS No. 144
subsequent to January 1, 2002, but will not change the accounting used for
previous asset impairments or disposals. See Note 4, Discontinued Operations.

SFAS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF
FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB in April
2002, this standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003, however CMS Energy has adopted this provision
effective in 2002 and reclassified extraordinary losses of $7 million and $18
million in 2002 and 2001, respectively, to the accompanying Consolidated
Statements of Income. The 2002 reclassification increased interest expense $12
million ($8 million after-tax) and increased income from discontinued operations
$1 million. The 2001 reclassification increased interest expense $25 million
($16 million after-tax) and decreased income from discontinued operations $2
million. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to require
sale-leaseback accounting for certain lease modifications that have similar
economic impacts to sale-leaseback transactions. This provision is effective for
transactions occurring after May 15, 2002. Finally, SFAS No. 145 amends other
existing authoritative pronouncements to make various technical corrections and
rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. These
provisions are effective for financial statements issued on or after May 15,
2002.

SFAS NO, 148, ACCOUNTING FOR STOCK-BASED COMPENSATION -- TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. CMS Energy adopted the fair value based method of accounting
for stock-based employee compensation effective December 31, 2002, applying the
prospective method of adoption which requires recognition of all employee awards
granted, modified, or settled after the beginning of the year in which the
recognition provisions are first applied. Therefore, CMS Energy recorded expense
for the fair value of stock options issued in 2002. The implementation had an
immaterial effect on CMS Energy's financial statements upon adoption of the
method. Accordingly, CMS Energy recognized the $4 million fair value of stock
based awards granted, modified or settled in 2002 in operating expenses. See
Note 12, Executive Incentive Compensation.

NEW ACCOUNTING STANDARDS NOT YET ADOPTED: Beginning January 1, 2003,
companies must comply with SFAS No. 143, Accounting for Asset Retirement
Obligations. The standard requires companies to record the fair value of the
legal obligations related to an asset retirement in the period in which it is
incurred. Consumers has determined that it has legal asset retirement
obligations, particularly in regard to its nuclear plants, but it has not yet
finalized its assessment of the obligation. However, upon initial adoption of
the standard, CMS Energy, as it

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CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

relates to Consumers, expects to record a regulatory liability, as well as an
asset retirement obligation, as required by SFAS No. 71. The regulatory
liability recognizes the difference between the cost of removal included in the
reserve for accumulated depreciation for assets within the scope of SFAS No. 143
and the accretion expense of the asset retirement obligation and the
depreciation expense of the asset retirement obligation asset from when the
obligation was initially incurred through December 2002. When the asset
retirement obligation liability is initially recorded, the company would
capitalize an offsetting amount by increasing the carrying amount of the related
long-lived asset. Over time, the initial liability would be accreted to its
present value each period and the capitalized cost would be depreciated over the
related asset's useful life. CMS Energy, as it relates to Enterprises, is
currently inventorying assets, including its international investments, that may
have a retirement obligation and is consulting with counsel to determine if a
legal retirement obligation exists. While CMS Energy has not finalized its
assessment of the legal retirement obligation, the removal cost estimate will be
determined based on fair value cost estimates as required by the new standard.
The present value of the legal retirement obligations will be used to quantify
the future effects of adoption of this standard.

SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES: Issued by the FASB in July 2002, this standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This standard is effective for exit or disposal activities initiated after
December 31, 2002. CMS Energy believes there will be no impact on its financial
statements upon adoption of the standard.

FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENT FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS: Effective January 1, 2003, CMS Energy adopted this interpretation which
elaborates on the disclosure to be made by a guarantor about its obligations
under certain guarantees that it has issued. It requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provision of this Interpretation does not apply to certain guarantee
contracts, such as warranties, derivatives, or guarantees between either parent
and subsidiaries or corporations under common control, although disclosure of
such guarantees is required. For contracts that are within the initial
recognition and measurement provision of this Interpretation, the provisions are
to be applied to guarantees issued or modified after December 31, 2002; no
cumulative effect adjustments will be required.

FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES: Issued by the FASB in January 2003, the interpretation expands upon
and strengthens existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities and
activities of another entity. The consolidation requirements of the
interpretation apply immediately to variable interest entities created after
January 31, 2003. For CMS Energy, the consolidation requirements apply to
pre-existing entities beginning July 1, 2003. Certain of the disclosure
requirements apply to all financial statements initially issued after January
31, 2003. CMS Energy will be required to consolidate any entities that meet the
requirements of the interpretation. CMS Energy is in the process of studying the
interpretation, and has yet to determine the effects, if any, on its
consolidated financial statements.

EITF ISSUE NO. 02-03, RECOGNITION AND REPORTING OF GAINS AND LOSSES ON
ENERGY TRADING CONTRACTS UNDER EITF ISSUES NO. 98-10 AND 00-17: AT THE OCTOBER
25, 2002 MEETING, THE EITF REACHED A FINAL CONSENSUS TO RESCIND EITF ISSUE NO.
98-10, Accounting for Contracts Involved in Energy Trading and Risk Management
Activities. As a result, only energy contracts that meet the definition of a
derivative in SFAS No. 133 will be carried at fair value. Energy trading
contracts that do not meet the definition of a derivative must be accounted for
as an executory contract (i.e., on an accrual basis). The consensus rescinding
EITF Issue No. 98-10 must be applied to all contracts that existed as of October
25, 2002 and must be recognized as a cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes, effective
the first day of the first interim or annual period beginning after December 15,
2002. The consensus also must be applied immediately to all new contracts
entered into after October 25, 2002. As a result of these recent changes,

89

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CMS Energy is currently evaluating its existing energy contracts to determine
the impact of this change which will be effective January 1, 2003.

OTHER: For significant accounting policies regarding risk management
activities and financial instruments, see Note 10; income taxes, see Note 11;
executive incentive compensation, see Note 12; and retirement benefits, see Note
13.

2. RESTATEMENT

ROUND-TRIP TRADES: During the period of May 2000 through January 2002, CMS
MST engaged in simultaneous, prearranged commodity trading transactions in which
energy commodities were sold and repurchased at the same price. These
transactions, which had no impact on previously reported consolidated net
income, earnings per share or cash flows, had the effect of increasing operating
revenues, operating expenses, accounts receivable, accounts payable and reported
trading volumes. After internally concluding that cessation of these trades was
in CMS Energy's best interest, these so called round-trip trades were halted in
January 2002.

CMS Energy accounted for these trades in gross revenue and expense through
the third quarter of 2001, but subsequently concluded that these round-trip
trades should have been reflected on a net basis. In the fourth quarter of 2001,
CMS Energy ceased recording these trades in either revenues or expenses. CMS
Energy's 2001 Form 10-K, issued in March 2002, restated revenue and expense for
the first three quarters of 2001 to eliminate $4.2 billion of previously
reported revenue and expense. The 2001 Form 10-K did include $5 million of
revenue and expense for 2001 from such trades, which remained uncorrected. CMS
Energy inadvertently failed to restate 2000 for round trip trades in the 2001
10-K. Financial statements have now been restated to eliminate $1 billion in
2000 and $5 million in 2001 of previously reported revenue and expenses.

CMS Energy is cooperating with an SEC investigation regarding round-trip
trading and the Company's financial statements, accounting practices and
controls. CMS Energy is also cooperating with inquiries by the Commodity Futures
Trading Commission, the FERC, and the United States Department of Justice
regarding these transactions. CMS Energy has also received subpoenas from U.S.
Attorney Offices regarding investigations of those trades. In addition, CMS
Energy's Board of Directors established the Special Committee of independent
directors to investigate matters surrounding round-trip trading and the Special
Committee retained outside counsel to assist in the investigation.

On October 31, 2002, the Special Committee reported the results of its
investigation to the Board of Directors. The Special Committee discovered no new
information inconsistent with the information previously reported by CMS Energy
and as reported above. The investigation also concluded that the round-trip
trades were undertaken to raise CMS MST's profile as an energy marketer, with
the goal of enhancing CMS MST's ability to promote its services to new
customers. The Special Committee found no apparent effort to manipulate the
price of CMS Energy Common Stock or to affect energy prices.

The Special Committee also made recommendations designed to prevent any
reoccurrence of this practice, most of which have already been implemented.
Previously, CMS Energy terminated its speculative trading business and revised
its risk management policy. The Board of Directors adopted, and CMS Energy has
begun implementing, the remaining recommendations of the Special Committee.

RESTATEMENT: In connection with the re-audit of the financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000, CMS Energy
determined to make certain adjustments (in addition to the round-trip trades) to
its consolidated financial statements for the fiscal years ended December 31,
2001 and December 31, 2000. Therefore, the consolidated financial statements for
2001 and 2000 have been restated from amounts previously reported. At the time
it adopted the accounting treatment for these items, CMS Energy believed such
accounting was appropriate under accounting principles generally accepted in the
United States.

90

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The tables below summarize the significant adjustments and the effects on CMS
Energy's consolidated financial statements.

MCV PPA ADJUSTMENTS: In 1992, Consumers originally accounted for losses
associated with the PPA by establishing a reserve for the difference between the
amount that Consumers was paying for power in accordance with the terms of the
PPA, and the amount that Consumers was ultimately allowed by the MPSC to recover
from electric customers. At that time, the reserve did not take into account
earnings Consumers would receive from its 49 percent interest in the MCV
Partnership due to uncertainties with the level of performance of the facility.

In 2000, Consumers reviewed its estimate of the economic losses it would
experience with respect to the PPA and re-evaluated all of the then current
facts and circumstances used to calculate the disallowance reserve, including
earnings from its 49 percent interest in the MCV Partnership. Consumers
concluded that no adjustment to the reserve was required in 2000. However, as
conditions surrounding MCV Partnership operations evolved in 2001, Consumers
concluded that it needed to increase the reserve by $126 million (pre-tax) in
the third quarter of 2001, and did so.

In connection with the re-audit of CMS Energy's consolidated financial
statements for the fiscal years 2000 and 2001, Consumers reviewed its 2000 and
2001 PPA accounting and related assumptions, and determined that the reserve
balance as of January 1, 2000 did appropriately reflect Consumers' probable
losses as of that date. However, as a result of reconsideration of all
subsidiary accounting effects, the re-evaluation of the PPA accounting did
result in a net reduction of operating expenses associated with the PPA of $12
million in 2001, an increase to operating expenses associated with the PPA of
$29 million in 2000, the reversal of the $126 million increase to the reserve
originally recorded in 2001, and immaterial adjustments to accretion expense for
both years.

91

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table reflects the audit adjustments associated with the MCV
PPA accounting and the related net income statement effects:

DIG LOSS CONTRACT ACCOUNTING: The Dearborn Industrial Generation complex, a
710 MW combined-cycle facility, was constructed during 1998 through 2001 to
fulfill contractual requirements and to sell excess power in the wholesale power
market. DIG entered into electric sales agreements (ESA) with Ford Motor
Company, Rouge Industries and Double Eagle Steel Coating Company, later assigned
by DIG to CMS MST Michigan, LLC, that require CMS MST Michigan to provide up to
300 MW of electricity at pre-determined prices for a fifteen-year term beginning
in June 2000. DIG also entered into steam sales agreements (SSA) with Ford and
Rouge, whereby DIG is to supply process and heating steam at a fixed price
commencing no later than June 1, 2000.

During the third quarter of 2001, CMS Energy recognized a pretax charge to
earnings of $200 million for the calculated loss on portions of the power
capacity under the ESAs. At that time CMS Energy assessed whether the DIG
facility was impaired under SFAS No. 121 and concluded that the DIG facility was
not impaired.

CMS Energy has now determined that existing accounting literature precludes
the recognition of anticipated losses on executory contracts such as those
involved with the ESAs at DIG. Accordingly, CMS Energy reversed the $200 million
pretax loss ($126 million after-tax) in 2001 on the ESA contracts and subsequent
related transactions.

ELIMINATION OF MARK-TO-MARKET GAINS AND LOSSES ON INTER-BOOK TRANSACTIONS
AND OTHER RELATED ADJUSTMENTS: CMS MST's business activities include marketing
to end users of energy commodities such as commercial and small industrial
purchasers of natural gas (CMS MST's retail business) and trading activities
with such entities as other energy trading companies (CMS MST's wholesale
business). During 2000 and 2001, CMS MST used two different methods to account
for these distinct activities: it applied the mark-to-market method of
accounting to its wholesale trading business operations, and it accounted for
its retail business operations using the accrual method. Some other energy
trading companies have taken a similar approach when their business activities
have included retail operations.

EITF Issue No. 98-10, Accounting for Contracts Involved in Energy Trading
and Risk Management Activities, applies to certain parts of CMS MST's
operations. EITF Issue No. 98-10 requires that energy-trading contracts be
marked to market; that is, measured at fair value determined as of the balance
sheet date, with the gains and losses included in earnings. According to EITF
Issue No. 98-10, the determination of whether an entity is involved in energy
trading activities is a matter of judgment that depends on the relevant facts
and circumstances. CMS MST had used the mark-to-market method of accounting for
its wholesale operations because these had been considered trading activities
under EITF Issue No. 98-10. Because CMS MST's retail operations had not been
considered trading activities, mark-to-market accounting under EITF Issue No.
98-10 was not applied to any retail contracts.

92

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During 2000 and 2001, CMS MST's wholesale business entered into certain
transactions with CMS MST's retail business (inter-book transactions) in order
to economically hedge retail sales. The wholesale business marked-to-market
these inter-book transactions while the retail business did not; however, the
transactions were not properly documented as hedges under SFAS No. 133 or other
previously applicable accounting standard. Accordingly, CMS Energy has
determined that the mark-to-market gains and losses that were recognized by the
wholesale business on these inter-book transactions should have been eliminated
in consolidation. CMS Energy therefore has recognized a $75 million after-tax
charge to earnings in 2001 and $34 million of after-tax income in 2000 to
eliminate the effects of mark-to-market accounting in consolidation on
inter-book transactions.

A number of other adjustments have been recorded at CMS MST relating to
front-office activities and mark-to-market accounting. The adjustments, which
mainly affect price risk management assets and liabilities and inventory,
increased after-tax income by $32 million in 2001 and reduced after-tax income
by $16 million in 2000.

ELIMINATION OF MARK-TO-MARKET GAINS AND LOSSES ON INTERCOMPANY
TRANSACTIONS: As explained above, during 2000 and 2001 CMS MST applied the
mark-to-market method of accounting to the energy-trading contracts of its
wholesale operations. In doing so, CMS MST did not distinguish between
counterparties that were unrelated third parties, and those that were
consolidated or equity-method affiliates. Energy-trading contracts with
affiliated companies were therefore measured at their fair values as of the
balance sheet date, with the gains and losses included in earnings. The
affiliated counterparties, however, accounted for these contracts on the accrual
basis, because these companies were not engaged in energy trading activities and
therefore their activities were not within the scope of EITF Issue No. 98-10. In
addition, their contracts with CMS MST were not required to be marked to market
in 2001 under SFAS No. 133. The mark-to-market profits and losses that CMS MST
recognized on the contracts with affiliated companies were included in the CMS
Energy consolidated financial statements. CMS Energy has now concluded that
these amounts should have been eliminated in consolidation.

CMS Energy's restated consolidated financial statements have eliminated $30
million of after-tax mark-to-market gains in 2001 and $18 million of after-tax
mark-to-market losses in 2000 on intercompany transactions.

CMS MST ACCOUNT RECONCILIATIONS: CMS MST's business experienced rapid
growth during 2000 and 2001. Late in 2001, CMS Energy became aware of certain
control weaknesses at CMS MST and immediately began an internal investigation.
The investigation revealed that the size and expertise of the back-office
accounting staff had not kept pace with the rapid growth and, as a result,
bookkeeping errors had occurred and account reconciliations were not prepared.
Additionally, computer interfaces of sub-ledgers to the general ledger were
ineffective or lacking. As a result, sub-ledger balances did not agree to the
general ledger and the differences were not adjusted. In early 2002, CMS MST
commenced an account recalculation and reconciliation project that focused
initially on accounts receivable and payable, intercompany and cash accounts,
but was later expanded to include other accounts. The recalculation and
reconstruction work for 2000, 2001 and 2002 has been completed and the
consolidated financial statements reflect the required adjustments, which
decreased net income by $5 million in 2001 and $13 million in 2000.

INCOME TAX ADJUSTMENT: During the third quarter of 2001, CMS Energy wrote
down the value of certain of its foreign investments (see Note 3, Asset Sales,
Write-downs and Restructuring). The write-down was net of deferred U.S. income
tax benefits in the amount of $30 million expected to be realized upon the
ultimate disposition of these investments in transactions subject to U.S. income
tax. CMS Energy has now concluded that since these foreign investments were
considered by CMS Energy at the time to be essentially permanent in duration, no
deferred U.S. income tax benefits should have been recorded in 2001 on the
write-down (see Note 11, Income Taxes).

PANHANDLE SYSTEM GAS: Panhandle maintains system-balancing gas for use in
operations. During 2001, Panhandle applied lower of cost or market pricing only
to the portion of system balancing gas that it expected to consume in its
operations over the next twelve months. The remaining gas was reflected as
non-current and was

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recorded at cost. Upon further review, Panhandle has determined that it should
have applied lower of cost or market pricing to all system balancing gas. The
application of the lower of cost or market pricing to the non-current system
balancing gas results in an additional $7 million after-tax write-down.

CONSOLIDATION OF LNG HOLDINGS: In late 2001, Panhandle entered into a
structured transaction to monetize a portion of the value of a long-term
terminalling contract of its LNG subsidiary. The LNG assets were contributed to
LNG Holdings, which then received an equity investment from an unaffiliated
third party, Dekatherm Investor Trust, and obtained new loans secured by the
assets. After paying expenses, net proceeds of $235 million were distributed to
Panhandle and the venture also loaned $75 million to Panhandle. While the
proceeds received by Panhandle were in excess of its book basis, a gain on the
transaction was not recorded. This excess was originally recorded as a deferred
commitment, reflecting the fact that Panhandle was expecting to reinvest
proceeds into LNG Holdings for a planned expansion. Panhandle is the manager and
operator of the venture, and has the primary economic interest in it. Initially,
Panhandle believed that off-balance sheet treatment for the venture was
appropriate under generally accepted accounting principles. Upon further
analysis of these facts, CMS Energy and Panhandle have now concluded that it did
not meet the conditions precedent to account for the contribution of the LNG
entity as a disposition given Panhandle's continuing involvement and the lack of
sufficient participating rights by the third-party equity holder in the venture.
As a result, CMS Energy has restated its financial statements to reflect
consolidation of LNG Holdings at December 31, 2001. The new accounting treatment
resulted in a net increase of $215 million of debt, the elimination of $183
million of deferred commitment, minority interest of $30 million and other net
assets of $62 million. Due to the pending sale of Panhandle, all of these
adjustments are included in discontinued operations on CMS Energy's consolidated
balance sheet at December 31, 2001. With the exception of certain immaterial
reclassifications, there was no impact to 2001 net income resulting from this
accounting treatment.

STRUCTURED FINANCING OF METHANOL PLANT: In 1999, CMS Gas Transmission and
an unrelated entity financed $250 million of the costs of construction of a
jointly owned methanol plant with an off-balance-sheet special purpose entity
(SPE) that entered into two separate non-recourse note borrowings containing
cross-collateral provisions only with respect to a joint collection account into
which the proceeds from shared collateral were to be deposited. Plant
construction was completed in the spring of 2001. In December 2001, CMS Gas
Transmission issued an irrevocable call for $125 million of these notes (i.e.,
the A1 Notes) and they were paid off in January 2002. As part of the 1999
financing, CMS Energy guaranteed the interest payments on the A1 Notes, subject
to a $75 million limit. CMS Energy did not guarantee repayment of the A1 Notes;
however, CMS Energy issued mandatorily convertible preferred stock to a trust as
security for the A1 Notes. If an amount to repay the A1 Notes was not deposited
within 120 days of the maturity date (or earlier date caused by, for example, a
downgrade of the credit rating of CMS Energy) the holders of 25 percent of the
A1 Notes could cause the mandatorily convertible preferred shares to be sold.
The mandatorily convertible preferred stock of CMS Energy was convertible into
the number of shares of CMS Energy Common Stock needed to make the note holder
whole without limit. Additional security for the A1 Notes was 60 percent of the
capital stock of CMS Methanol, an entity that held a 45 percent ownership
interest in the methanol plant. The SPE's assets comprised investments in CMS
Methanol and in another subsidiary that also owned a 45 percent interest in the
methanol plant. Because the use of non-recourse debt having cross-collateral
provisions only with respect to the joint collection account effectively
segregated the cash flows and assets, in substance this financing created two
separate SPEs. CMS Energy has now concluded that it should have consolidated the
virtual SPE created by the non-recourse borrowing. Therefore, CMS Energy has
restated its 2000 and 2001 financial statements to increase its equity ownership
interest in the methanol plant and increase debt, each by $125 million.

The following tables reflect the effects of the adjustments CMS Energy made
to its consolidated financial statements for the fiscal years ended December 31,
2001 and December 31, 2000, as well as the effects of discontinued operations.

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CONSOLIDATED STATEMENT OF INCOME(A)

- -------------------------
(a) 2001 and 2000 also includes the effects of discontinued operations.

(b) 2001 and 2002 as reported did not reflect an allocation of reduced asset
valuations to the associated business segments. 2001 and 2000 as restated
reflect such an allocation. See Note 3 for a breakdown of reduced asset
valuation by business segment for 2001 and 2000 as restated.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CONSOLIDATED STATEMENT OF CASH FLOWS(A)

- -------------------------
(a) 2001 and 2000 also includes the effects of discontinued operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CONSOLIDATED BALANCE SHEET

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

3. ASSET SALES, WRITE-DOWNS AND RESTRUCTURING

During 2001 and 2002, CMS Energy completed numerous asset sales, recorded
significant write-downs and incurred restructuring costs.

ASSET SALES

During 2002, CMS Energy continued to implement its financial improvement
plan and on-going asset sales program that was initiated in late 2001. The asset
sales program encompasses the sale of all non-strategic and under-performing
assets. The impacts of these sales are included in "Gain (losses) on asset
sales" in the Consolidated Statements of Income.

In January 2002, CMS Energy completed the sale of its ownership interests
in Equatorial Guinea to Marathon Oil Company for approximately $993 million.
Proceeds from this transaction were used primarily to retire existing debt.
Included in the sale were all of CMS Oil and Gas' oil and gas reserves in
Equatorial Guinea and CMS Gas Transmission's ownership interest in the related
methanol plant. The gain on the methanol plant of $19 million ($12 million, net
of tax) is included in "Gain (loss) on asset sales" in the accompanying
consolidated statements of income. The gain on the sale of CMS Oil & Gas'
Equatorial Guinea properties of $497 million ($310 million, net of tax) is
included in discontinued operations in 2002.

In April 2002, CMS Energy sold its equity ownership interest in Toledo
Power Company electric generating facility in the Philippines for $10 million.
Proceeds from the sale were used to repay debt. The pretax loss of $11 million
($5 million, net of tax) is included in "Gain (loss) on asset sales" in the
accompanying consolidated statements of income in 2002.

In May 2002, Consumers Energy closed on the sale of its electric
transmission system to a limited partnership whose general partner is Washington
D.C.-based Trans-Elect. Also, in May 2002, Consumers sold its reactor top
equipment. Both sales totaled approximately $295 million. The pretax gains on
these sales, which totaled $39 million ($31 million, net of tax), are included
in "Gain (loss) on asset sales" in the accompanying consolidated statements of
income.

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In August 2002, CMS Energy sold its equity ownership interest in The
National Power Supply Company electric generating facility in Thailand for $48
million. The pretax gain of $15 million ($30 million, net of tax benefit) is
included in "Gain (loss) on asset sales" in the accompanying consolidated
statements of income.

In October 2002, CMS Generation completed the sale of its ownership
interest in the 200 MW Vasavi Power Plant, located in Tamil Nada, India for $34
million. CMS Generation's investment in the Vasavi Power Plant at September 30,
2002 was $59 million.

In January 2003, CMS Energy closed on the sale of a substantial portion of
CMS MST's wholesale natural gas trading contracts to Sempra Energy Trading, the
wholesale commodity trading unit of Sempra Energy and received $17 million of
cash proceeds. In February 2003, CMS Energy entered into a definitive agreement
with Constellation Power Source, Inc. to sell CMS MST's wholesale power
contracts. The sale has been approved by FERC and is expected to close as early
as March 31, 2003.

In February 2003, Panhandle sold its one third interest in Centennial
Pipeline, LLC for $40 million to Centennial's two other partners, Marathon
Ashland Petroleum, LLC and TE Products Pipeline Company, Limited Partner,
through its general partner, Texas Eastern Products Pipeline Company.

ASSET WRITE-DOWNS

In 2002 and 2001, implementation of a new strategic direction and financial
improvement plan for CMS Energy has resulted in assets and development projects
that have been identified by the business units as non-strategic or
under-performing. These assets include both domestic and foreign electric power
plants, gas processing facilities, and certain equity method and other
investments. In addition, CMS Energy has written off the carrying value of
development projects that will no longer be pursued. Management has evaluated
operating assets for impairment in accordance with the provisions of SFAS No.
144 in 2002 (SFAS No. 121 in 2001 or prior), and has evaluated equity
investments for impairment in accordance with the provisions of APB Opinion No.
18.

The reduced asset valuations were primarily a result of management's
determination that the anticipated future cash flows from these projects would
be insufficient to provide for recovery of their carrying value. The charges are
reflected in the accompanying consolidated statements of income under the
caption "Reduced asset valuations". CMS Generation has evaluated the fair values
of its investments using discounted cash flow analyses and the values of
contract prices. The fair values of other CMS Energy investments have been
determined using market prices and evaluations of expected future cash flows.
Based on these evaluations, certain assets were determined to be impaired.

Reductions in asset valuations recognized in 2002 were $598 million ($388
million, net of tax). Included in this amount were reductions in CMS
Generation's valuation of DIG $460 million ($299 million, net of tax); Michigan
Power, which owns natural gas-fueled peaking units in Michigan, $62 million ($40
million, net of tax);

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and Craven, a 45-Mwh wood-fueled plant in North Carolina, $23 million ($15
million, net of tax). DIG's reduced valuation is primarily a reflection of the
unfavorable terms of its power purchase agreement (PPA). Michigan Power's
reduced valuation is primarily a result of a depressed merchant power market and
the lack of a long-term PPA. Craven's reduced valuation is primarily a result of
the anticipated expiration of its current PPA at the end of 2005 and a depressed
merchant power market.

In 2001, asset valuations were reduced by $240 million ($198 million, net
of tax) to reflect the excess of the carrying value of these assets over their
fair value. Included in the 2001 charge were reduced asset valuations at CMS
Generation for National Power Supply, a 300-Mwh coal-fueled plant in Thailand,
$89 million ($88 million, net of tax); El Chocon, a 1,200-Mwh hydro-electric
plant in Argentina, $45 million ($42 million net of tax); and HL Power, a 36-Mwh
wood-fueled plant in California, $30 million ($18 million net of tax). Also
included in the 2001 charge were reduced asset valuations at CMS Gas
Transmission for several development projects of $16 million ($10 million, net
of tax) that would no longer be pursued, and for goodwill associated with a gas
fractionation facility in southeastern Michigan.

In the first quarter of 2000, CMS Energy announced its intention to sell
its 50 percent ownership interest in Loy Yang, retained the services of
investment bankers to assist in the sales process, and solicited bids from
potential buyers for CMS Energy's interest in Loy Yang. As a result of being
unable to attract a reasonable offer for Loy Yang by the end of November 2000,
and after re-evaluating the expected future cash flows from this investment,
including the continuing unfavorable electric market prices in Victoria,
Australia, management determined in the fourth quarter of 2000 that the carrying
amount of the equity investment in Loy Yang was not recoverable. Consequently,
in accordance with the provisions of APB Opinion No. 18, CMS Energy determined
that there has been a loss in value of the investment and an impairment loss on
the carrying amount of the investment has been realized.

This impairment loss is reflected under the caption "Reduced asset
valuations" in the accompanying consolidated statements of income in 2000 as a
pretax charge of $329 million ($268 million after-tax). This loss does not
include cumulative net foreign currency translation losses of $168 million due
to unfavorable changes in exchange rates, which, in accordance with SFAS No. 52,
will not be realized until there has been a sale, full liquidation or other
disposition of CMS Energy's investment in Loy Yang. In connection with the
restatement of CMS Energy's December 31, 2000 consolidated financial statements,
a deferred U.S. income tax asset of $48 million was recorded with respect to the
cumulative net foreign currency translation losses associated with CMS Energy's
Loy Yang investment (see Note 11, Income Taxes).

CMS Energy is continuing to review its business alternatives for its
investment in Loy Yang, including future financing and operating alternatives,
the nature and extent of CMS Energy's future involvement and the potential for
an ultimate sale of its interest in the future. CMS Energy has not established a
deadline for any of these alternatives.

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CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RESTRUCTURING AND OTHER COSTS

CMS Energy announced in 2002 a series of new initiatives intended to
sharpen its business focus and help restore its financial health by reducing
operating costs. The initiatives announced included the following:

- Relocating CMS Energy's corporate headquarters from Dearborn, Michigan to
a new headquarters building then under construction in Jackson, Michigan.
The Jackson headquarters building opened in March 2003 and will house an
estimated 1,450 CMS Energy and Consumers Energy employees. In the longer
term, the relocation will reduce corporate operating expenses.

- Implementing changes to CMS Energy's 401(K) savings program which will
provide savings for CMS Energy and enhanced investment options for
employee participants.

- Implementing changes to CMS Energy's health care plan in order to keep
benefits and costs competitive.

- Terminating five officers, 18 CMS Field Services employees and 41 CMS MST
trading group employees. Prior to December 31, 2002, 31 Dearborn-based
employees and 92 Houston employees have elected severance arrangements.
Of these 187 officers and employees, 65 had been terminated as of
December 31, 2002. The remaining terminations will be completed in 2003.

Restructuring costs for the year ended December 31, 2002, which are
reported in operating expenses, include:

- Involuntary termination benefits of $22 million for officers and
employees.

- The present value of future non-cancelable lease obligations of $11
million related to relocating the corporate headquarters to Jackson,
Michigan.

In addition, in the first half of 2003, restructuring costs related to
relocating employees and other headquarters expenses are expected to be $2
million. The relocation will occur between March and June 2003, and such costs
will be expensed as incurred.

The following table shows the amount charged to expense during 2002 for
restructuring costs, the payments made, and the unpaid balance of accrued costs
at December 31, 2002, which is expected to be paid in 2003.

4: DISCONTINUED OPERATIONS

In accordance with SFAS No. 144, discontinued operations include components
of entities or entire entities that, through disposal transactions, will be
eliminated from the ongoing operations of CMS Energy. The assets and liabilities
of these entities were measured at the lower of the carrying value or the fair
value less cost to sell as required by SFAS No. 144. A description of the
entities included in discontinued operations is as follows:

In September 2001, CMS Energy discontinued the operations of the
International Energy Distribution segment. CMS Energy is actively seeking a
buyer for the assets of CMS Electric and Gas, and although the timing of this
sale is difficult to predict, nor can it be assured, management expects the sale
to occur in 2003.

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In January 2002, CMS Energy completed the sale of its ownership interests
in Equatorial Guinea to Marathon Oil Company for approximately $993 million.
Included in the sale were all of CMS Oil and Gas' oil and gas reserves in
Equatorial Guinea and CMS Gas Transmission's ownership interest in the related
methanol plant. The gain on the CMS Oil & Gas Equatorial Guinea properties of
$497 million ($310 million, net of tax) is included in discontinued operations.

In May 2002, CMS closed on the sale of CMS Oil and Gas' coal-bed methane
holdings in the Powder River Basin to XTO Energy. The Powder River properties
were included in discontinued operations for the first four months of 2002,
including a gain on the sale of $20 million ($11 million net of tax).

In June 2002, CMS Energy abandoned the Zirconium Recovery Project, which
was initiated in January 2000. The purpose of the project was to extract and
sell uranium and zirconium from a pile of caldesite ore held by the Defense
Logistic Agency of the U.S. Department of Defense. After evaluating future cost
and risk, CMS Energy decided to abandon this project and recorded a $47 million
after-tax loss in discontinued operations.

In June 2002, CMS Energy announced its plan to sell CMS MST's energy
performance contracting subsidiary, CMS Viron. CMS Viron enabled building owners
to improve their facilities with equipment upgrades and retrofits and finance
the work with guaranteed energy and operational savings. After evaluating all of
the relevant facts and circumstances, $6 million, net of tax, has been reflected
as a loss on discontinued operations in order to appropriately reflect the fair
value less selling costs of CMS Viron. CMS Energy is actively seeking a buyer
for the assets of CMS Viron and although the timing of this sale is difficult to
predict, nor can it be assured, management expects the sale to occur in 2003.

In September 2002, CMS Energy closed on the sale of the stock of CMS Oil
and Gas and the stock of a subsidiary of CMS Oil and Gas that holds property in
Venezuela. In October 2002, CMS Energy closed on the sale of CMS Oil and Gas's
properties in Colombia. As a result of these closings, CMS Energy has completed
its exit from the oil and gas exploration and production business. The proceeds
from the combined sales total approximately $232 million and have been used to
retire the remaining balance on a $150 million Enterprises term loan due in
December 2002 and a portion of a $295.8 million CMS Energy loan originally due
March 2003. The combined sales resulted in a loss of approximately $126 million
($82 million, net of tax), which is included in discontinued operations.

In December 2002, CMS Energy reached a definitive agreement to sell the
Panhandle companies to Southern Union Panhandle Corp. The agreement calls for
Southern Union Panhandle Corp, a newly formed entity owned by Southern Union
Company and AIG Highstar Capital, L.P. to pay $662 million in cash and assume
$1.166 billion in debt. Under the terms of the agreement, CMS Energy was to
retain Panhandle's ownership interests in the Centennial and Guardian pipeline
projects, as well as certain of Panhandle's net deferred tax assets, all tax
liabilities, and pension assets and liabilities. Panhandle has since sold its
interest in Centennial and the Guardian interest has been transferred to
Panhandle's direct parent, CMS Gas Transmission. The transaction has been
approved by the board of directors of each company and is subject to customary
closing conditions and action by the FTC under the Hart-Scott-Rodino Act. The
sale is expected to close in 2003. Panhandle's results of operations have been
reclassified to discontinued operations in the consolidated statements of
income.

In December 2002, CMS Energy discontinued the operations of Field Services,
a subsidiary of CMS Gas Transmission. CMS Energy is actively seeking a buyer for
the assets of Field Services, and although the timing of this sale is difficult
to predict, nor can it be assured, management expects the sale to occur in 2003.

The summary of balance sheet information below represents those entities
that are still in the disposal process, including Panhandle, CMS Viron, Field
Services, International Energy Distribution, and the Zirconium Recovery Project.
The assets and liabilities of the discontinued operations and other assets and
liabilities held for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

sale, including price risk management assets and liabilities and equity method
investments are shown as separate components in the consolidated balance sheets
of CMS Energy.

Revenues from such operations were $1,158 million, $1,453 million and
$1,008 million in 2002, 2001 and 2000, respectively. In accordance with SFAS No.
144, the net income (loss) of the operations is included in the consolidated
statements of income under "discontinued operations". The pretax gain (loss)
related to discontinued operations recorded for the years ended December 31,
2002, 2001 and 2000 was $389 million, $117 million and $115 million,
respectively, which included charges resulting from reductions in asset values
and a portion of CMS Energy's interest expense. Interest expense of $69 million,
$94 million and $xx million for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2002, 2001 and 2000, respectively, was allocated to each discontinued operation
based on its ratio of total capital to that of CMS Energy. See the table below
for income statement components of the discontinued operations.

5. GOODWILL

CMS GAS TRANSMISSION: Effective January 1, 2002, SFAS No. 142 disallowed
the continued amortization of goodwill and required the testing of goodwill for
potential impairment. In accordance with SFAS No. 142, Panhandle completed the
first step of the goodwill impairment testing which indicated a significant
impairment of Panhandle's goodwill existed as of January 1, 2002. The actual
amount of impairment was determined in a second step by comparing the fair value
of goodwill, as determined by independent appraisers, to book value, using a
combination of the income approach based on discounted cash flows and the market
approach using public guideline companies and market transactions. As a result
of this second step appraisal, Panhandle recorded a write-off of goodwill in the
amount of $601 million ($369 million, net of tax).

CMS MST: During the third quarter of 1999, CMS MST purchased a 100 percent
interest in Viron Energy Services. CMS MST consolidated the activity of CMS
Viron and recorded goodwill as a result of the purchase price allocation. Based
on the quantitative and qualitative analysis, CMS MST recorded a loss of $5
million ($10 million, net of tax) for goodwill impairment effective January 1,
2002.

In 2002, CMS Energy discontinued the operations of Panhandle. As a result,
the goodwill impairment of $369 million after tax is reflected in discontinued
operations. Also in 2002, CMS Energy discontinued the operations of CMS Viron.
As a result, the goodwill impairment of $10 million after tax is reflected in
discontinued operations.

Accumulated amortization of goodwill at December 31, 2002 and 2001 was $63
million and $67 million, respectively.

Additionally, the following table represents pro forma net income for the
years 2002, 2001 and 2000, exclusive of amortization expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6: UNCERTAINTIES

SEC AND OTHER INVESTIGATIONS: As a result of round-trip trading
transactions at CMS MST, CMS Energy's Board of Directors established a Special
Committee of independent directors to investigate matters surrounding the
transactions and retained outside counsel to assist in the investigation. The
Special Committee completed its investigation and reported its findings to the
Board of Directors in October 2002. The Special Committee concluded, based on an
extensive investigation, that the round-trip trades were undertaken to raise CMS
MST's profile as an energy marketer with the goal of enhancing its ability to
promote its services to new customers. The Special Committee found no effort to
manipulate the price of CMS Energy Common Stock or affect energy prices. The
Special Committee also made recommendations designed to prevent any reoccurrence
of this practice, most of which have already been implemented. Previously, CMS
Energy terminated its speculative trading business and revised its risk
management policy. The Board of Directors adopted, and CMS Energy has begun
implementing, the remaining recommendations of the Special Committee.

CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
CMS Energy's financial statements, accounting policies and controls, and
investigations by the United States Department of Justice, the Commodity Futures
Trading Commission and the FERC. CMS Energy has also received subpoenas from
U.S. Attorneys Offices regarding investigations of those trades. CMS Energy is
unable to predict the outcome of these matters, and what effect, if any these
investigations will have on its business.

SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
securities class action complaints have been filed against CMS Energy,
Consumers, and certain officers and directors of CMS Energy and its affiliates.
The complaints have been filed in the United States District Court for the
Eastern District of Michigan as purported class actions by individuals who
allege that they purchased CMS Energy's securities during a purported class
period. At least two of the complaints contain purported class periods beginning
on August 3, 2000 and running through May 10, 2002 or May 14, 2002. These
complaints generally seek unspecified damages based on allegations that the
defendants violated United States securities laws and regulations by making
allegedly false and misleading statements about the company's business and
financial condition. The cases have been consolidated into a single lawsuit, and
an amended and consolidated complaint is due to be filed by May 1, 2003. CMS
Energy intends to vigorously defend against these actions. CMS Energy cannot
predict the outcome of this litigation.

DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS: The Board of Directors
received a demand, on behalf of a shareholder of CMS Energy Common Stock, that
it commence civil actions (i) to remedy alleged breaches of fiduciary duties by
CMS Energy officers and directors in connection with round-trip trading at CMS
MST, and (ii) to recover damages sustained by CMS Energy as a result of alleged
insider trades alleged to have been made by certain current and former officers
of CMS Energy and its subsidiaries. If the Board elects not to commence such
actions, the shareholder has stated that he will initiate a derivative suit,
bringing such claims on behalf of CMS Energy. CMS Energy has elected two new
members to its Board of Directors to serve as an independent litigation
committee to determine whether it is in the best interest of CMS Energy to bring
the action demanded by the shareholder. Counsel for the shareholder has agreed
to extend the time for CMS Energy to respond to the demand. CMS Energy cannot
predict the outcome of this litigation.

ERISA CLAIMS: CMS Energy is a named defendant, along with Consumers, CMS
MST and certain named and unnamed officers and directors, in two lawsuits
brought as purported class actions on behalf of participants and beneficiaries
of the 401(k) plan. The two cases, filed in July 2002 in the United States
District Court for the Eastern District of Michigan, were consolidated by the
trial judge and an amended and consolidated complaint has been filed. Plaintiffs
allege breaches of fiduciary duties under ERISA and seek restitution on behalf
of the plan with respect to a decline in value of the shares of CMS Energy
Common Stock held in the plan. Plaintiffs also seek other equitable relief and
legal fees. These cases will be vigorously defended. CMS Energy cannot predict
the outcome of this litigation.
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CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

GAS INDEX PRICING REPORTING: CMS Energy has notified appropriate regulatory
and governmental agencies that some employees at CMS MST and CMS Field Services
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
Energy is cooperating with investigations by the Commodity Futures Trading
Commission, Department of Justice and FERC regarding this matter. CMS Energy is
unable to predict the outcome of these matters and what effect, if any, these
investigations will have on its business.

FEES AND EXPENSES: CMS Energy has accrued $15 million for attorney's fees
and costs associated with responding to and/or defending against investigations
and lawsuits related to round-trip trading and the reporting of gas prices to
trade publications. These expenses could total as much as $37 million. CMS
Energy expects to recover a significant portion of these expenses from insurers.

CONSUMERS' ELECTRIC UTILITY CONTINGENCIES

ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects that the
cost of future environmental compliance, especially compliance with clean air
laws, will be significant.

Clean Air -- In 1998, the EPA issued final regulations requiring the state
of Michigan to further limit nitrogen oxide emissions. The Michigan Department
of Environmental Quality finalized rules to comply with the EPA final
regulations in December 2002 and submitted these rules for approval to the EPA
in the first quarter of 2003. In addition, the EPA has also issued additional
final regulations regarding nitrogen oxide emissions that require certain
generators, including some of Consumers' electric generating facilities, to
achieve the same emissions rate as that required by the 1998 regulations. The
EPA and the state final regulations will require Consumers to make significant
capital expenditures estimated to be $770 million. As of December 31, 2002,
Consumers has incurred $405 million in capital expenditures to comply with the
EPA final regulations and anticipates that the remaining capital expenditures
will be incurred between 2003 and 2009. Additionally, Consumers currently
expects to supplement its compliance plan with the purchase of nitrogen oxide
emissions credits for years 2005 through 2008. The cost of these credits based
on the current market is estimated to average $6 million per year, however, the
market for nitrogen oxide emissions credits is volatile and the price could
change significantly. At some point, if new environmental standards become
effective, Consumers may need additional capital expenditures to comply with the
future standards. Based on the Customer Choice Act, beginning January 2004, an
annual return of and on these types of capital expenditures, to the extent they
are above depreciation levels, is expected to be recoverable from customers,
subject to an MPSC prudency hearing.

These and other required environmental expenditures, if not recovered from
customers in Consumers' rates, may have a material adverse effect upon
Consumers' financial condition and results of operations.

Cleanup and Solid Waste -- 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. Consumers believes
that these costs will be recoverable in rates under current ratemaking policies.

Consumers is a potentially responsible party at several contaminated sites
administered under 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 $1 million and $9 million. As of
December 31, 2002, Consumers had accrued the minimum amount of the range for its
estimated Superfund liability.

During routine maintenance activities, Consumers identified PCB as a
component in certain paint, grout and sealant materials at the Ludington Pumped
Storage facility. Consumers removed and replaced part of the PCB material.
Consumers has proposed a plan to deal with the remaining materials and is
awaiting a response from the EPA.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CONSUMERS' ELECTRIC UTILITY RATE MATTERS

ELECTRIC RESTRUCTURING: In June 2000, the Michigan legislature passed
electric utility restructuring legislation known as the Customer Choice Act.
This act: 1) permits all customers to choose their electric generation supplier
beginning January 1, 2002; 2) cut residential electric rates by five percent; 3)
freezes all electric rates through December 31, 2003, and establishes a rate cap
for residential customers through at least December 31, 2005, and a rate cap for
small commercial and industrial customers through at least December 31, 2004; 4)
allows for the use of low-cost Securitization bonds to refinance qualified
costs, as defined by the act; 5) establishes a market power supply test that may
require transferring control of generation resources in excess of that required
to serve firm retail sales requirements (a requirement Consumers believes itself
to be in compliance with at this time); 6) requires Michigan utilities to join a
FERC-approved RTO or divest their interest in transmission facilities to an
independent transmission owner; (Consumers has sold its interest in its
transmission facilities to an independent transmission owner, see "Transmission"
below); 7) requires Consumers, Detroit Edison and American Electric Power to
jointly expand their available transmission capability by at least 2,000 MW; 8)
allows deferred recovery of an annual return of and on capital expenditures in
excess of depreciation levels incurred during and before the rate freeze/cap
period; and 9) allows recovery of "net" Stranded Costs and implementation costs
incurred as a result of the passage of the act. In July 2002, the MPSC issued an
order approving the plan to achieve the increased transmission capacity.
Consumers has completed the transmission capacity projects identified in the
plan and has submitted verification of this fact to the MPSC. Consumers believes
it is in full compliance with item 7 above. Consumers is also highly confident
that it will meet the conditions contained in item 5 above, prior to the
earliest rate cap termination dates specified in the act. Failure to do so,
however, could result in an extension of the rate caps to as late as December
31, 2013.

In 1998, Consumers submitted a plan for electric retail open access to the
MPSC. In March 1999, the MPSC issued orders generally supporting the plan. The
Customer Choice Act states that the MPSC orders issued before June 2000 are in
compliance with this act and enforceable by the MPSC. Those MPSC orders: 1)
allow electric customers to choose their supplier; 2) authorize recovery of
"net" Stranded Costs and implementation costs; and 3) confirm any voluntary
commitments of electric utilities. In September 2000, as required by the MPSC,
Consumers once again filed tariffs governing its retail open access program and
made revisions to comply with the Customer Choice Act. In December 2001, the
MPSC approved revised retail open access tariffs. The revised tariffs establish
the rates, terms, and conditions under which retail customers will be permitted
to choose an alternative electric supplier. The tariffs, effective January 1,
2002, did not require significant modifications in the existing retail open
access program. The tariff terms allow retail open access customers, upon as
little as 30 days notice to Consumers, to return to Consumers' generation
service at current tariff rates. If any class of customers' (residential,
commercial, or industrial) retail open access load reaches 10 percent of
Consumers' total load for that class of customers, then returning retail open
access customers for that class must give 60 days notice to return to Consumers'
generation service at current tariff rates. However, Consumers may not have
sufficient, reasonably priced, capacity to meet the additional demand of
returning retail open access customers, and may be forced to purchase
electricity on the spot market at higher prices than it could recover from its
customers. Consumers cannot predict the total amount of electric supply load
that may be lost to competitor suppliers, nor whether the stranded cost recovery
method adopted by the MPSC will be applied in a manner that will fully offset
any associated margin loss.

SECURITIZATION: In October 2000 and January 2001, the MPSC issued orders
authorizing Consumers to issue Securitization bonds. Securitization typically
involves issuing asset-backed bonds with a higher credit rating than
conventional utility corporate financing. The orders authorized Consumers to
securitize approximately $469 million in qualified costs, which were primarily
regulatory assets plus recovery of the Securitization expenses. Securitization
resulted in lower interest costs and a longer amortization period for the
securitized assets, and offset the majority of the impact of the required
residential rate reduction (approximately $22 million in 2000 and $49 million
annually thereafter). The orders directed Consumers to apply any cost savings in
excess of the five percent residential rate reduction to rate reductions for
non-residential customers and reductions in
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Stranded Costs for retail open access customers after the bonds are sold. Excess
savings are approximately $12 million annually.

In November 2001, Consumers Funding issued $469 million of Securitization
bonds, Series 2001-1. The Securitization bonds mature at different times over a
period of up to 14 years, with an average interest rate of 5.3 percent. The last
expected maturity date is October 20, 2015. Net proceeds from the sale of the
Securitization bonds, after issuance expenses, were approximately $460 million.
Consumers used the net proceeds to retire $164 million of its common equity from
its parent, CMS Energy. CMS Energy used the $164 million from Consumers to pay
down its own short-term debt. From December 2001 through March 2002, the
remainder of these proceeds were used to pay down Consumers' long-term debt and
Trust Preferred Securities. CMS Energy used the $164 million from Consumers to
pay down its own short-term debt.

Consumers and Consumers Funding will recover the repayment of principal,
interest and other expenses relating to the bond issuance through a
securitization charge and a tax charge that began in December 2001. These
charges are subject to an annual true-up until one year prior to the last
expected bond maturity date, and no more than quarterly thereafter. The first
true-up occurred in November 2002, and prospectively modified the total
securitization and related tax charges from 1.677 mills per kWh to 1.746 mills
per kWh. Current electric rate design covers these charges, and there will be no
rate impact for most Consumers electric customers until the Customer Choice Act
rate freeze expires. Securitization charge collections, $52 million in 2002, are
remitted to a trustee for the Securitization bonds. Securitization charge
collections are dedicated for the repayment of the principle and interest on the
Securitization bonds and payment of the ongoing expenses of Consumers Funding
and can be used only for those purposes. Consumers Funding is legally separate
from Consumers. The assets and income of Consumers Funding, including without
limitation, the securitized property, are not available to creditors of
Consumers or CMS Energy.

Regulatory assets are normally amortized over their period of regulated
recovery. Beginning January 1, 2001, the amortization was deferred for the
approved regulatory assets being securitized, which effectively offset the loss
in revenue in 2001 resulting from the five percent residential rate reduction.
In December 2001, after the Securitization bonds were sold, the amortization was
re-established, based on a schedule that is the same as the recovery of the
principal amounts of the securitized qualified costs. In 2002, the accumulated
amortization amount was approximately $31 million and the securitized assets
will be fully amortized by the end of 2015.

On March 4, 2003, Consumers filed an application with the MPSC seeking
approval to issue Securitization bonds in the amount of approximately $1.084
billion. If approved, this would allow the recovery of costs associated with
Clean Air Act expenditures, post-2000 Palisades expenditures, and retail open
access implementation costs through December 31, 2002, and certain pension fund
expenses and expenses associated with the issuance of the bonds.

TRANSMISSION: In 1999, the FERC issued Order No. 2000, strongly encouraging
electric utilities to transfer operating control of their electric transmission
system to an RTO, or sell the facilities to an independent company. In addition,
in June 2000, the Michigan legislature passed Michigan's Customer Choice Act,
which also requires utilities to divest or transfer the operating authority of
transmission facilities to an independent company. Consumers chose to offer its
electric transmission system for sale rather than own and invest in an asset
that it could not control. In May 2002, Consumers sold its electric transmission
system (METC) for approximately $290 million in cash to MTH, a non-affiliated
limited partnership whose general partner is a subsidiary of Trans-Elect Inc.

Trans-Elect, Inc. submitted the winning bid through a competitive bidding
process, and various federal agencies approved the transaction. Consumers did
not provide any financial or credit support to Trans-Elect, Inc. Certain of
Trans-Elect's officers and directors are former officers and directors of CMS
Energy, Consumers and their subsidiaries. None of them were employed by CMS
Energy, Consumers, or their affiliates when the transaction was discussed
internally and negotiated with purchasers. As a result of the sale, Consumers

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experienced an after-tax earnings increase of approximately $17 million in 2002,
due to the recognition of a $26 million gain on the sale of the electric
transmission system. This gain from the sale is offset by a loss of revenue from
wholesale and retail open access customers who will buy services directly from
MTH, including the loss of a return on the sold electric transmission system.
Consumers anticipates that the future impact of the loss of revenue from
wholesale and retail open access customers who will buy services directly from
MTH and the loss of a return on the sold electric transmission system on its
after-tax earnings will be a decrease of $15 million in 2003, and a decrease of
approximately $14 million annually for the next three years.

Under the agreement with MTH, and subject to certain additional RTO
surcharges, transmission rates charged to Consumers are fixed by contract at
current levels through December 31, 2005, and subject to FERC ratemaking
thereafter. MTH has completed the capital program to expand the transmission
system's capability to import electricity into Michigan, as required by the
Customer Choice Act, and Consumers will continue to maintain the system under a
five-year contract with MTH. Effective April 30, 2002, Consumers and METC
withdrew from the Alliance RTO, and MTH has joined the MISO RTO.

When IPPs connect to transmission systems, they pay transmission companies
the capital costs incurred to connect the IPP to the transmission system and
make system upgrades needed for the interconnection. It is the FERC's policy
that the system upgrade portion of these IPP payments be credited against
transmission service charges over time as transmission service is taken. METC
recorded a $35 million liability for IPP credits. Subsequently, MTH assumed this
liability as part of its purchase of the electric transmission system. Several
months after METC started operation, the FERC changed its policy to provide for
interest on IPP payments that are to be credited. The $35 million liability for
IPP credits does not include interest since the associated interconnection
agreements do not at this time provide for interest. MTH has asserted that
Consumers may be liable for interest on the IPP payments to be credited if
interest provisions are added to these agreements. Consumers believes that any
potential liability would not have a material adverse affect on its financial
condition.

POWER SUPPLY COSTS: During periods when electric demand is high, the cost
of purchasing electricity on the spot market can be substantial. To reduce
Consumers' exposure to the fluctuating cost of electricity, and to ensure
adequate supply to meet demand, Consumers intends to maintain sufficient
generation and to purchase electricity from others to create a power supply
reserve, also called a reserve margin. The reserve margin provides additional
power supply capability above Consumers' anticipated peak power supply demands.
It also allows Consumers to provide reliable service to its electric service
customers and to protect itself against unscheduled plant outages and
unanticipated demand. In recent years, Consumers has planned for a reserve
margin of approximately 15 percent from a combination of its owned electric
generating plants and electricity purchase contracts or options, as well as
other arrangements. However, in light of various factors, including the addition
of new generating capacity in Michigan and throughout the Midwest region and
additional transmission import capability, Consumers is continuing to evaluate
the appropriate reserve margin for 2003 and beyond. Currently, Consumers has a
reserve margin of approximately 11 percent for summer 2003, or 111 percent of
projected summer peak load. Of the 111 percent, approximately 101 percent is met
from owned electric generating plants and long-term power purchase contracts and
10 percent from short-term contracts and options for physical deliveries and
other agreements. The ultimate use of the reserve margin needed will depend
primarily on summer weather conditions, the level of retail open access
requirements being served by others during the summer, and any unscheduled plant
outages. As of mid-March 2003, alternative electric suppliers are providing 516
MW of generation supply to ROA customers. Consumers' reserve margin does not
include generation being supplied by other alternative electric suppliers under
the ROA program.

To reduce the risk of high electric prices during peak demand periods and
to achieve its reserve margin target, Consumers employs a strategy of purchasing
electric call option and capacity contracts for the physical delivery of
electricity primarily in the summer months and to a lesser degree in the winter
months. As of December 31, 2002, Consumers had purchased or had commitments to
purchase electric call option and capacity contracts partially covering the
estimated reserve margin requirements for 2003 through 2007. As a result

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Consumers has a recognized asset of $30 million for unexpired call options and
capacity contracts. The total cost of electricity call option and capacity
contracts for 2002 was $13 million.

Prior to 1998, the PSCR process provided for the reconciliation of actual
power supply costs with power supply revenues. This process assured recovery of
all reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost for fuel, and purchased and interchange power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process, and would not grant adjustment of customer rates through 2001. As a
result of the rate freeze imposed by the Customer Choice Act, the current rates
will remain in effect until at least December 31, 2003 and, therefore, the PSCR
process remains suspended. Therefore, changes in power supply costs as a result
of fluctuating electricity prices will not be reflected in rates charged to
Consumers' customers during the rate freeze period.

ELECTRIC PROCEEDINGS: The Customer Choice Act allows electric utilities to
recover the act's implementation costs and "net" Stranded Costs (without
defining the term). The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In December 2001, the MPSC adopted a methodology which calculated "net" Stranded
Costs as the shortfall between: (a) the revenue required to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and capacity payments associated with purchase power agreements, and (b) the
revenues received from customers under existing rates available to cover the
revenue requirement. The MPSC authorized Consumers to use deferred accounting to
recognize the future recovery of costs determined to be stranded. Consumers has
initiated an appeal at the Michigan Court of Appeals related to the MPSC's
December 2001 "net" Stranded Cost order.

According to the MPSC, "net" Stranded Costs were to be recovered from
retail open access customers through a Stranded Cost transition charge. In April
2002, Consumers made "net" Stranded Cost filings with the MPSC for $22 million
and $43 million for 2000 and 2001, respectively. In the same filing, Consumers
estimated that it would experience "net" Stranded Costs of $126 million for
2002. Consumers in its hearing brief, filed in August 2002, revised its request
for Stranded Costs to $7 million and $4 million for 2000 and 2001, respectively,
and an estimated $73 million for 2002. The single largest reason for the
difference in the filing was the exclusion, as ordered by the MPSC, of all costs
associated with expenditures required by the Clean Air Act.

In December 2002, the MPSC issued an order finding that Consumers
experienced zero "net" Stranded Costs in 2000 and 2001, but declined to
establish a defined methodology that would allow a reliable prediction of the
level of Stranded Costs for 2002 and future years. In January 2003, Consumers
filed a petition for rehearing of the December 2002 Stranded Cost order in which
it asked the MPSC to grant a rehearing and revise certain features of the order.
Several other parties also filed rehearing petitions with the MPSC. As noted
above, Consumers has filed a request with the MPSC for authority to issue
securitization bonds that would allow recovery of the Clean Air Act expenditures
and post-2000 Palisades expenditures that were excluded from the Stranded Cost
calculation.

On March 4, 2003, Consumers filed an application with the MPSC seeking
approval of "net" Stranded Costs incurred in 2002, and for approval of a "net"
Stranded Cost recovery charge. In the application, Consumers indicated that if
Consumers' proposal to securitize Clean Air Act expenditures and post-2000
Palisades' expenditures were approved as proposed in its securitization case as
discussed above, then Consumers' "net" Stranded Costs incurred in 2002 are
approximately $35 million. If the proposal to securitize those costs is not
approved, then Consumers indicated that the costs would be properly included in
the 2002 "net" Stranded Cost calculation, which would increase Consumers' 2002
"net" Stranded Costs to approximately $103 million. Consumers cannot predict the
recoverability of Stranded Costs, and therefore has not recorded any regulatory
assets to recognize the future recovery of such costs.

The MPSC staff has scheduled a collaborative process to discuss Stranded
Costs and related issues and to identify and make recommendations to the MPSC.
Consumers intends to participate in this collaborative process.

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Since 1997, Consumers has incurred significant electric utility
restructuring implementation costs. The following table outlines the
applications filed by Consumers with the MPSC and the status of recovery for
these costs.

Power Supply 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 requires Consumers to pay, based on the
MCV Facility's availability, a levelized average capacity charge of 3.77 cents
per kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers 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, the MPSC has also permitted
Consumers 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. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. Recovery of both the 915 MW and 325 MW portions of the PPA are subject to
certain limitations discussed below. After September 2007, the PPA's terms
obligate Consumers to pay the MCV Partnership only those capacity and energy
charges that the MPSC has authorized for recovery from electric customers.

In 1992, Consumers recognized a loss and established a PPA liability for
the present value of the estimated future underrecoveries of power supply costs
under the PPA based on MPSC cost recovery orders. Primarily as a result of the
MCV Facility's actual availability being greater than management's original
estimates, the PPA liability has been reduced at a faster rate than originally
anticipated. At December 31, 2002, 2001 and 2000, the remaining after-tax
present value of the estimated future PPA liability associated with the loss
totaled $34 million, $50 million and $64 respectively. The PPA liability is
expected to be depleted in late 2004. For further discussion on the impact of
the frozen PSCR, see "Electric Rate Matters" in this Note.

In March 1999, Consumers and the MCV Partnership reached a settlement
agreement effective January 1, 1999, that addressed, among other things, the
ability of the MCV Partnership to count modifications increasing the capacity of
the existing MCV Facility for purposes of computing the availability of contract
capacity under the PPA for billing purposes. That settlement agreement capped
availability payments that may be billed by the MCV Partnership at a 98.5
percent level.

When Consumers returns, as expected, to unfrozen rates beginning in 2004,
Consumers will recover from customers, on-peak and off-peak capacity, so long as
availability does not exceed an average 88.7 percent established in previous
MPSC orders. For availability payments billed by the MCV Partnership after
September 15, 2007, and not recovered from customers, Consumers would expect to
claim a regulatory out under

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the PPA. If the MCV Facility's generating availability remains at the maximum
98.5 percent level during the next five years, Consumers' after-tax cash
underrecoveries associated with the PPA could be as follows:

It is currently estimated that 51 percent of the actual cash
underrecoveries for the years 2003 and 2004 will be charged to the PPA
liability, with the remaining portion charged to operating expense as a result
of Consumers' 49 percent ownership in the MCV Partnership. All cash
underrecoveries will be expensed directly to income once the PPA liability is
depleted.

In February 1998, the MCV Partnership appealed the January 1998 and
February 1998 MPSC orders related to electric utility restructuring. At the same
time, MCV Partnership filed suit in the United States District Court in Grand
Rapids seeking a declaration that the MPSC's failure to provide Consumers and
MCV Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and dismissed the
case against the MPSC. The appellate court determined that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court.

NUCLEAR MATTERS: Throughout 2002, Big Rock, currently in decommissioning,
progressed on plan with building and equipment dismantlement to return the site
to a natural setting free for any future use. Periodic NRC inspection reports
continued to reflect positively on Big Rock project performance. The NRC found
all decommissioning activities were performed in accordance with applicable
regulatory and license conditions.

In February 2003, the NRC completed its end-of-cycle plant performance
assessment of Palisades. The end-of-cycle review for Palisades covered the 2002
calendar year. The NRC determined that Palisades was operated in a manner that
preserved public health and safety and fully met all cornerstone objectives.
Based on the plant's performance, only regularly scheduled inspections are
planned through March 2004. The NRC noted that they are planning inspections of
the new independent spent fuel storage facility as needed during construction
activities along with routine inspections for the new security requirements.

Spent Nuclear Fuel Storage: During the fourth quarter of 2002, equipment
fabrication, assembly and testing was completed at Big Rock on NRC approved
transportable steel and concrete canisters or vaults, commonly known as
"dry-casks" for temporary onsite storage of spent fuel and movement of fuel from
the fuel pool to dry casks began. As of March 2003, all of the seven dry casks
had been loaded with spent fuel. These transportable dry casks will remain
onsite until the DOE moves the material to a permanent national fuel repository.

At Palisades, the amount of spent nuclear fuel discharged from the reactor
to date exceeds Palisades' temporary on-site storage pool capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults, "dry
casks", for temporary on-site storage. As of December 31, 2002, Consumers had
loaded 18 dry casks with spent nuclear fuel at Palisades. Palisades will need to
load additional dry casks by the fall of 2004 in order to continue operation.
Palisades currently has three empty storage-only dry casks on-site, with storage
pad capacity for up to seven additional loaded dry casks. Consumers anticipates
that licensed transportable dry casks for additional storage, along with more
storage pad capacity, will be available prior to 2004.

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In 1997, a federal court decision has confirmed that the DOE was to begin
accepting deliveries of spent nuclear fuel for disposal by January 31, 1998.
Subsequent litigation in which Consumers and certain other utilities
participated has not been successful in producing more specific relief for the
DOE's failure to comply.

In July 2000, the DOE reached a settlement agreement with one utility to
address the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants.
However, certain other utilities challenged the validity of the mechanism for
funding the settlement in an appeal, and recently the reviewing court sustained
their challenge. Additionally, there are two court decisions that support the
right of utilities to pursue damage claims in the United States Court of Claims
against the DOE for failure to take delivery of spent fuel. A number of
utilities have commenced litigation in the Court of Claims. If the litigation
that was commenced in the fourth quarter of 2002 against the DOE is successful,
Consumers anticipates future recoveries from the DOE to defray the significant
costs it will incur for the storage of spent fuel until the DOE takes possession
as required by law.

In March, 2003, the Michigan Environmental Council, the Public Interest
Research Group in Michigan, and the Michigan Consumer Federation filed a
complaint with the MPSC that asks the MPSC to commence a generic investigation
and contested case to review all facts and issues concerning the recovery of
costs associated with spent nuclear fuel storage and disposal. The complaint
alleges that the rates of Consumers, The Detroit Edison Company, Indiana &
Michigan Electric Company, Wisconsin Electric Power Company and Wisconsin Public
Service Corporation are unjust and unreasonable with respect to the recovery of
costs associated with spent nuclear fuel storage and disposal. The complaint
seeks a variety of relief, including the establishing of external trusts to
which amounts collected in electric rates for spent nuclear fuel storage and
disposal should be transferred, and the adoption of additional measures to
assure that adequate funds are available for the storage and disposal of spent
nuclear fuel. Consumers has not had an opportunity to review the complaint in
detail.

In July 2002, Congress approved and the President signed a bill designating
the site at Yucca Mountain, Nevada, for the development of a repository for the
disposal of high-level radioactive waste and spent nuclear fuel. The next step
will be for the DOE to submit an application to the NRC for a license to begin
construction of the repository. The application and review process is estimated
to take several years.

Palisades Plant Operations: In December 2000, the NRC issued an amendment
revising the operating license for Palisades to extend its expiration date to
March 2011, with no restrictions related to reactor vessel embrittlement.

In 2000, Consumers made an equity investment and entered into an operating
agreement with NMC. NMC was formed in 1999 by four utilities to operate and
manage the nuclear generating plants owned by these utilities. Consumers
benefits by consolidating expertise, cost control and resources among all of the
nuclear plants being operated on behalf of the NMC member companies.

In November 2000, Consumers requested approval from the NRC to transfer
operating authority for Palisades to NMC and the request was granted in April
2001. The formal transfer of authority from Consumers to NMC took place in May
2001. Consumers retains ownership of Palisades, its 789 MW output, the current
and future spent fuel on-site, and ultimate responsibility for the safe
operation, maintenance and decommissioning of the plant. Under the agreement
that transferred operating authority of the plant to NMC, salaried Palisades'
employees became NMC employees on July 1, 2001. Union employees work under the
supervision of NMC pursuant to their existing labor contract as Consumers'
employees. NMC currently has responsibility for operating eight units with 4,500
MW of generating capacity in Wisconsin, Minnesota, Iowa and Michigan.

Following a refueling outage in April 2001, the Palisades reactor was shut
down on June 20, 2001 so technicians could inspect a small steam leak on a
control rod drive assembly. There was no risk to the public or workers. In
August 2001, Consumers completed an expanded inspection that included all
similar control rod drive assemblies and elected to completely replace all the
components. Installation of the new components was completed in December 2001.
The plant was returned to service on January 21, 2002 and has been in continuous
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operation with the exception of three days in December 2002 when there was a
transmission line related outage. Consumers' capital expenditures for the
components and their installation was approximately $31 million.

From the start of the June 20th outage through the end of 2001, the impact
on net income of replacement power supply costs associated with the outage was
approximately $59 million. Subsequently, in January 2002, the impact on 2002 net
income was $5 million.

Insurance: Consumers maintains primary and excess nuclear property
insurance from NEIL, totaling $2.7 billion in recoverable limits for the
Palisades nuclear plant. Consumers also procures coverage from NEIL that would
partially cover the cost of replacement power during certain prolonged
accidental outages at Palisades. NEIL's policies include coverage for acts of
terrorism.

Consumers retains the risk of loss to the extent of the insurance
deductibles and to the extent that its loss exceeds its policy limits. Because
NEIL is a mutual insurance company, Consumers could be subject to assessments
from NEIL up to $25.8 million in any policy year if insured losses in excess of
NEIL's maximum policyholders surplus occur at its, or any other member's nuclear
facility.

Consumers maintains nuclear liability insurance for injuries and off-site
property damage resulting from the nuclear hazard at Palisades for up to
approximately $9.5 billion, the maximum insurance liability limits established
by the Price-Anderson Act. Congress enacted the Price-Anderson Act to provide
financial protection for persons who may be liable for a nuclear accident or
incident and persons who may be injured by a nuclear incident. The
Price-Anderson Act was recently extended to December 31, 2003. Part of the
Price-Anderson Act's financial protection consists of a mandatory industry-wide
program under which owners of nuclear generating facilities could be assessed if
a nuclear incident occurs at any of such facilities. The maximum assessment
against Consumers could be $88 million per occurrence, limited to maximum annual
installment payments of $10 million. Consumers also maintains insurance under a
master worker program that covers tort claims for bodily injury to workers
caused by nuclear hazards. The policy contains a $300 million nuclear industry
aggregate limit. Under a previous insurance program providing coverage for
claims brought by nuclear workers, Consumers remains responsible for a maximum
assessment of up to $6.3 million. The Big Rock plant remains insured for nuclear
liability by a combination of insurance and United States government indemnity
totaling $544 million.

Insurance policy terms, limits and conditions are subject to change during
the year as Consumers renews its policies.

COMMITMENTS FOR FUTURE PURCHASES: Consumers enters into a number of
unconditional purchase obligations that represent normal business operating
contracts. These contracts are used to assure an adequate supply of goods and
services necessary for the operation of its business and to minimize exposure to
market price fluctuations. Consumers believes that these future costs are
prudent and reasonably assured of recovery in future rates.

Coal Supply: 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 2003 to 2005, and total an estimated $276
million. Long-term coal supply contracts account for approximately 60 to 90
percent of Consumers annual coal requirements. In 2002, coal purchases totaled
$247 million of which $224 million (88 percent of the tonnage requirement) was
under long-term contract. Consumers supplements its long-term contracts with
spot-market purchases.

Power Supply, Capacity and Transmission: As of December 31, 2001, Consumers
had future unrecognized commitments to purchase power supply and transmission
services under fixed price forward contracts for the years 2003 and 2004
totaling $15 million. Consumers also had commitments to purchase capacity and
energy under long-term power purchase agreements with various generating plants
including the MCV Facility. These

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contracts require monthly capacity payments based on the plants' availability or
deliverability. These payments for the years 2003 through 2030 total an
estimated $16 billion, undiscounted, which includes $12 billion related to the
MCV Facility. This amount may vary depending upon plant availability and fuel
costs. If a plant were not available to deliver electricity to Consumers, then
Consumers would not be obligated to make the capacity payment until the plant
could deliver. For further information, see Note 6, Uncertainties, "The Midland
Cogeneration Venture" for information concerning power purchases from the MCV
Facility.

CONSUMERS' GAS UTILITY CONTINGENCIES

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. These include 23
former manufactured gas plant facilities, which were operated by Consumers for
some part of their operating lives, including sites in which it has a partial or
no current ownership interest. Consumers has completed initial investigations at
the 23 sites. For 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 has
estimated its costs related to further investigation and remedial action for all
23 sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic
Cost Model. The estimated total costs are between $82 million and $113 million;
these estimates are based on discounted 2001 costs and follow EPA recommended
use of discount rates between 3 and 7 percent for this type of activity.
Consumers expects to recover a significant portion of these costs through
insurance proceeds and through MPSC approved rates charged to its customers. As
of December 31, 2002, Consumers has an accrued liability of $51 million, net of
$31 million of expenditures incurred to date, and a regulatory asset of $70
million. Any significant change in assumptions, such as an increase in the
number of sites, different remediation techniques, nature and extent of
contamination, and legal and regulatory requirements, could affect Consumers'
estimate of remedial action costs.

The MPSC, in its November 7, 2002, gas distribution rate order, authorized
Consumers to continue to recover approximately $1 million of manufactured gas
plant facilities environmental clean-up costs annually. Consumers defers and
amortizes, over a period of 10 years, manufactured gas plant facilities
environmental clean-up costs above the amount currently being recovered in
rates. Additional rate recognition of amortization expense cannot begin until
after a prudency review in a gas rate case. The annual amount that the MPSC
authorized Consumers to recover in rates will continue to be offset by $2
million to reflect amounts recovered from all other sources.

CONSUMERS' GAS UTILITY RATE MATTERS

GAS RESTRUCTURING: From April 1, 1998 to March 31, 2001, Consumers
conducted an experimental gas customer choice pilot program that froze gas
distribution and GCR rates through the period. On April 1, 2001, a permanent gas
customer choice program commenced under which Consumers returned to a GCR
mechanism that allows it to recover from its bundled sales customers all
prudently incurred costs to purchase the natural gas commodity and transport it
to Consumers for ultimate distribution to customers.

GAS COST RECOVERY: As part of the on-going GCR process, which includes an
annual reconciliation process with the MPSC, Consumers expects to collect all of
its incurred gas costs. Under an order issued by the MPSC on March 12, 2003,
Consumers is allowed to increase its maximum GCR factor in May 2003, based on a
formula that tracks increases in NYMEX prices.

2001 GAS RATE CASE: In June 2001, Consumers filed an application with the
MPSC seeking a distribution service rate increase. On November 7, 2002, the MPSC
issued a final order approving a $56 million annual gas distribution service
rate increase, which includes the $15 million interim increase, with an 11.4
percent authorized return on equity, effective for service November 8, 2002. As
part of this order, the MPSC approved Consumers' proposal to absorb the assets
and liabilities of Michigan Gas Storage Company into Consumers' rate
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base and rates. This has occurred through a statutory merger of Michigan Gas
Storage Company into Consumers and this is not expected to have an impact on
Consumers' consolidated financial statements.

2003 GAS RATE CASE: On March 14, 2003, Consumers filed an application with
the MPSC seeking a $156 million increase in its gas delivery and transportation
rates, which includes a 13.5 percent authorized return on equity, based on a
2004 test year. If approved, the request would add about $6.40 per month, or
about 9 percent, to the typical residential customer's average monthly
distribution bill. Contemporaneously with this filing, Consumers has requested
interim rate relief in the same amount.

In September 2002, the FERC issued an order rejecting a filing by Consumers
to assess certain rates for non-physical gas title tracking services offered by
Consumers. Despite Consumers' arguments to the contrary, the FERC asserted
jurisdiction over such activities and allowed Consumers to refile and justify a
title transfer fee not based on volumes as Consumers proposed. Because the order
was issued six years after Consumers made its original filing initiating the
proceeding, over $3 million in non-title transfer tracking fees had been
collected. No refunds have been ordered, and Consumers sought rehearing of the
September order. If refunds were ordered they may include interest which would
increase the refund liability to more than the $3 million collected. In December
2002, Consumers established a $3.6 million reserve related to this matter.
Consumers is unable to say with certainty what the final outcome of this
proceeding might be.

In November 2002, the MPSC upon its own motion commenced a contested
proceeding requiring each utility to give reason as to why its rates should not
be reduced to reflect new personal property multiplier tables, and why it should
not refund any amounts that it receives as refunds from local governments as
they implement the new multiplier tables. Consumers responded to the MPSC that
it believes that refunds would be inconsistent with the November 7, 2002 gas
rate order in case U-13000, with the Customer Choice Act, and may otherwise be
unlawful. Consumers is unable to predict the outcome of this matter.

OTHER GAS UNCERTAINTIES

COLLECTIVE BARGAINING AGREEMENT: As of December 31, 2002, 44 percent of
Consumers workforce was represented by the Utility Workers Union of America.
Consumers and the Union negotiated a collective bargaining agreement that became
effective as of June 1, 2000, and will continue in full force and effect until
June 1, 2005. Consumers is currently negotiating with the Union for a collective
bargaining agreement for its Call Center employees.

OTHER UNCERTAINTIES

CMS GENERATION-OXFORD TIRE RECYCLING: In 1999, the California Regional
Water Control Board of the State of California named CMS Generation as a
potentially responsible party for the cleanup of the waste from a fire that
occurred in September 1999 at the Filbin tire pile. The tire pile was maintained
as fuel for an adjacent power plant owned by Modesto Energy Limited Partnership.
Oxford Tire Recycling of Northern California, Inc., a subsidiary of CMS
Generation until 1995, owned the Filbin tire pile. CMS Generation has not owned
an interest in Oxford Tire Recycling of Northern California, Inc. or Modesto
Energy Limited Partnership since 1995. In 2000, the California Attorney General
filed a complaint against the potentially responsible parties for cleanup of the
site and assessed penalties for violation of the California Regional Water
Control Board order. The parties have reached a settlement with the state, which
the court approved, pursuant to which CMS Energy had to pay $6 million. At the
request of the U.S. Department of Justice in San Francisco (DOJ), CMS Energy and
other parties contacted by the DOJ entered into separate tolling agreements with
the DOJ in September 2002 that stopped the running of any statute of limitations
until March 14, 2003 (later extended to June 30, 2003) to facilitate the
settlement discussions between all the parties in connection with federal claims
arising from the fire at the Filbin tire pile. On September 23, 2002, CMS Energy
received a written demand from the U.S. Coast Guard for reimbursement of
approximately $3.5 million in costs incurred by the U.S. Coast Guard in fighting
the fire.
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In connection with this fire, several class action lawsuits were filed
claiming that the fire resulted in damage to the class and that management of
the site caused the fire. CMS Generation has reached a settlement in principle
with the plaintiffs in the amount of $9 million. The primary insurance carrier
will cover 100 percent of the settlement once the agreement is finalized.

DEARBORN INDUSTRIAL GENERATION: In October 2001, Duke/Fluor Daniel (DFD)
presented DIG with a change order to their construction contract and filed an
action in Michigan state court claiming damages in the amount of $110 million,
plus interest and costs, which DFD states represents the cumulative amount owed
by DIG for delays DFD believes DIG caused and for prior change orders that DIG
previously rejected. DFD also filed a construction lien for the $110 million.
DIG, in addition to drawing down on three letters of credit totaling $30 million
that it obtained from DFD, has filed an arbitration claim against DFD asserting
in excess of an additional $75 million in claims against DFD. The judge in the
Michigan State Court case entered an order staying DFD's prosecution of its
claims in the court case and permitting the arbitration to proceed. DFD has
appealed the decision by the judge in the Michigan state court case to stay the
arbitration. DIG will continue to vigorously defend itself and pursue its
claims. CMS Energy cannot predict the outcome of this matter.

DEARBORN INDUSTRIAL GENERATION CUSTOMER DISPUTES: As a result of the
continued delays in the DIG project becoming fully operational, DIG's customers,
Ford Motor Company and Rouge Industries, have asserted claims that the continued
delays relieve them of certain contractual obligations totaling $43 million. In
addition, Ford and/or Rouge have asserted several other commercial claims
against DIG relating to operation of the DIG plant. In February 2003, Rouge
filed an Arbitration Demand against DIG and CMS MST Michigan, LLC with the
American Arbitration Association. Rouge is seeking a total of $27 million plus
additional accrued damages at the time of any award, plus interest. More
specifically, Rouge is seeking at least $20 million under a Blast Furnace Gas
Delivery Agreement in connection with DIG's purported failure to declare a Blast
Furnace Gas Delivery Date within a reasonable time period, plus $7 million for
assorted damage claims under several legal theories. DIG and CMS MST Michigan,
LLC intend to vigorously defend themselves, and DIG has filed claims against
Rouge and Ford as part of this arbitration. CMS Energy cannot predict the
outcome of this matter.

DEARBORN INDUSTRIAL GENERATION NOISE ABATEMENT LAWSUIT: In February 2003,
DIG was served with a three-count first amended complaint in the matter of
Ahmed, et al. v. Dearborn Industrial Generation, LLC, Wayne County Circuit Court
Case No. 02-241296-CZ. The complaint seeks damages "in excess of $25,000" and
injunctive relief based upon allegations of excessive noise and vibration
created by operation of the power plant. The first amended complaint was filed
on behalf of six named plaintiffs, all alleged to be adjacent or nearby
residents or property owners. The damages alleged are injury to persons and
property of the landowners. Certification of a class of "potentially thousands"
who have been similarly affected is requested. DIG intends to aggressively
defend this action. CMS Energy cannot predict the outcome of this matter.

MIDLAND COGENERATION VENTURE EXPANSION, LLC: Under an agreement entered
into with General Electric Company ("GE") in October 2002, as of December 31,
2002 Midland Cogeneration Venture Expansion, LLC ("MCV Expansion") has a
remaining contingent obligation to GE in the amount of $3.5 million that may
become payable on July 1, 2003. The agreement provides that this contingent
obligation is subject to a pro rata reduction under a formula based upon certain
purchase orders being entered into with GE by June 30, 2003. MCV Expansion
anticipates but cannot assure that purchase orders will be executed with GE by
June 30, 2003 sufficient to eliminate the contingent obligation of $3.5 million.

CMS OIL AND GAS: In 1999, a former subsidiary of CMS Oil and Gas, Terra
Energy Ltd., was sued by Star Energy, Inc. and White Pine Enterprises LLC in the
13th Judicial Circuit Court in Antrim County, Michigan, on grounds, among
others, that Terra violated oil and gas lease and other agreements by failing to
drill wells. Among the defenses asserted by Terra were that the wells were not
required to be drilled and the claimant's sole remedy was termination of the oil
and gas lease. During the trial, the judge declared the lease terminated in
favor of White Pine. The jury then awarded Star Energy and White Pine $7.6
million in damages. Terra appealed this matter to the Michigan Court of Appeals.
The Court of Appeals reversed the trial court judgment with respect to
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the appropriate measure of damages and remanded the case for a new trial on
damages. Terra has taken an appeal to the Michigan Supreme Court. A reserve has
been established for this matter.

ARGENTINA ECONOMIC SITUATION: In January 2002, the Republic of Argentina
enacted the Public Emergency and Foreign Exchange System Reform Act. This law
repealed the fixed exchange rate of one U.S. dollar to one Argentina peso,
converted all dollar-denominated utility tariffs and energy contract obligations
into pesos at the same one-to-one exchange rate, and directed the President of
Argentina to renegotiate such tariffs.

In February 2002, the Republic of Argentina enacted additional measures
that required all monetary obligations (including current debt and future
contract payment obligations) denominated in foreign currencies to be converted
into pesos. These February measures also authorize the Argentine judiciary
essentially to rewrite private contracts denominated in dollars or other foreign
currencies if the parties cannot agree on how to share equitably the impact of
the conversion of their contract payment obligations into pesos. In April 2002,
based on a consideration of these environmental factors, CMS Energy evaluated
its Argentine investments for impairment as required under SFAS No. 144 and APB
Opinion No. 18. These impairment models contain certain assumptions regarding
anticipated future exchange rates and operating performance of the investments.
Exchange rates used in the models assume that the rate will decrease from
current levels to approximately 3.00 pesos per U.S. dollar over the remaining
life of these investments. Based on the results of these models, CMS Energy
determined that these investments were not impaired.

Effective April 30, 2002, CMS Energy adopted the Argentine peso as the
functional currency for most of its Argentine investments. CMS had previously
used the U.S. dollar as the functional currency for its Argentine investments.
As a result, on April 30, 2002, CMS Energy translated the assets and liabilities
of its Argentine entities into U.S. dollars, in accordance with SFAS No. 52,
using an exchange rate of 3.45 pesos per U.S. dollar, and recorded an initial
charge to the Foreign Currency Translation component of Common Stockholders'
Equity of approximately $400 million.

For the year ended December 31, 2002, CMS Energy recorded losses of $31
million, reflecting the negative impact of the actions of the Argentine
government. These losses represent changes in the value of peso-denominated
monetary assets (such as receivables) and liabilities of Argentina-based
subsidiaries and lower net project earnings resulting from the conversion to
pesos of utility tariffs and energy contract obligations that were previously
calculated in dollars.

While CMS Energy's management cannot predict the most likely future, or
average peso to U.S. dollar exchange rates, it does expect that these non-cash
charges substantially reduce the risk of further material balance sheet impacts
when combined with anticipated proceeds from international arbitration currently
in progress, political risk insurance, and the eventual sale of these assets. At
December 31, 2002, the net foreign currency loss due to the unfavorable exchange
rate of the Argentine peso recorded in the Foreign Currency Translation
component of Common Stockholder's Equity using an exchange rate of 3.3647 pesos
per U.S. dollar was $266 million. This amount also reflected the effect of
recording, at December 31, 2002, U.S. income taxes with respect to temporary
differences between the book and tax bases of foreign investments, including the
foreign currency translation associated with CMS Energy's Argentine investments,
that were determined to no longer be essentially permanent in duration (see Note
11, Income Taxes.)

OTHER: Certain CMS Gas Transmission and CMS Generation affiliates in
Argentina received notice from various Argentine provinces claiming stamp taxes
and associated penalties and interest arising from various gas transportation
transactions. Although these claims total approximately $91 million, the
affiliates and CMS Energy believe the claims are without merit and will continue
to vigorously contest them.

CMS Generation does not currently expect to incur significant capital costs
at its power facilities for compliance with current U.S. environmental
regulatory standards.

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In addition to the matters disclosed in this Note, Consumers, Panhandle 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.

7: SHORT-TERM AND LONG-TERM FINANCINGS

LONG-TERM DEBT SUMMARY

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- -------------------------
(a) Represents the weighted average interest rate at December 31, 2002.

(b) These notes are subject to a Call Option by the Callholder or a Mandatory
Put on May 1, 2003.

(c) Includes $141 million Senior Remarketed Notes subject to optional
redemption by Consumers after June 15, 2005.

(d) Maturity date uncertain (see Note 1).

The scheduled maturities of long-term debt and improvement fund obligations
before consideration of refinancings completed subsequent to December 31, 2002
discussed in Note 19 are as follows: $627 million in 2003, $964 million in 2004,
$742 million in 2005, $514 million in 2006, $538 million in 2007 and $2,626
million thereafter.

CREDIT FACILITIES

On July 12, 2002, CMS Energy and its subsidiaries reached agreement with
its lenders on five credit facilities (facilities) totaling approximately $1.3
billion of credit for CMS Energy, Enterprises and Consumers. The agreements were
executed by various combinations of up to 21 lenders and by CMS Energy and
included: a $259.9 million revolving credit facility for CMS Energy originally
set to mature on March 31, 2003; a $300 million revolving credit facility for
CMS Energy, maturing December 15, 2003; a $150 million short-term loan for
Enterprises, originally set to mature on December 13, 2002; a $250 million
revolving credit facility for Consumers, maturing July 11, 2003; and a $300
million term loan for Consumers, maturing July 11, 2003. In

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March 2003, the CMS Energy $295.8 million revolving credit facility and $300
million revolving credit facility under which $409 million was then outstanding
were amended and restated. The Second Amended and Restated Senior Credit
Agreement includes a $234 million tranche with a maturity date of April 30, 2004
and a $175 million tranche with a maturity date of September 30, 2004. Also in
March 2003, Consumers obtained a replacement revolving credit facility in the
amount of $250 million. The new credit facility matures in March 2004 with two
annual extensions at Consumers' option which would extend the maturity to March
2006. In September 2002, CMS Energy retired the $150 million short-term loan to
Enterprises using proceeds from the sale of CMS Oil and Gas. Also in September
2002, Consumers' exercised its extension option on the $300 million term loan to
move the maturity date to July 11, 2004. At December 31, 2002, $841 million
remained outstanding under these facilities, of which Consumers' $250 million
revolving credit facility is included in notes payable in the accompanying
consolidated balance sheet.

CMS ENERGY

SHORT-TERM FINANCINGS: At December 31, 2002, CMS had $291 million of
borrowings outstanding under its credit facilities. CMS Energy's $295.8 million
credit facility had been reduced to $187 million as a result of mandatory
prepayments with proceeds of various asset sales and had $187 million of
borrowings at December 31, 2002. CMS Energy's $300 million credit facility had
$104 million of borrowings and $185 million of letter-of-credit usage
outstanding at December 31, 2002.

GENERAL TERM NOTES: In May 2002, CMS Energy registered $300 million of
Series G GTNs. For the year ended December 31, 2002, no Series G GTNs had been
issued. In 2002, CMS Energy called $243 million of Series A through F GTNs at
interest rates ranging from 7 percent to 9 percent using funds available from
asset sales proceeds. At December 31, 2002, CMS Energy had issued and
outstanding $619 million GTNs, comprised of $94 million Series D GTNs, $227
million Series E GTNs and $299 million of Series F GTNs with weighted average
interest rates of 6.9 percent, 7.9 percent and 7.6 percent, respectively.

CONSUMERS

AUTHORIZATION: At December 31, 2002, Consumers had FERC authorization to
issue or guarantee through June 2004, up to $1.1 billion of short-term
securities outstanding at any one time. Consumers also had remaining FERC
authorization to issue through June 2004 up to $500 million of long-term
securities for refinancing or refunding purposes, $677 million for general
corporate purposes, and $900 million of first mortgage bonds to be issued solely
as security for the long-term securities. On October 10, 2002, FERC granted a
waiver of its competitive bid/negotiated placement requirements applicable to
the remaining long-term securities authorization indicated above.

SHORT-TERM FINANCINGS: At December 31, 2002 Consumers had a $250 million
credit facility secured by first mortgage bonds, a first mortgage bond term loan
of $155 million and a gas inventory loan of $52 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At December 31, 2002, a total
of $457 million was outstanding at a weighted average interest rate of 4.5
percent, compared with $416 million outstanding on a revolving credit facility
and unsecured lines of credit at December 31, 2001, at a weighted average
interest rate of 2.7 percent.

At December 31, 2002, Consumers' $250 million credit facility had an
effective interest rate of 5.9 percent. The rate may fluctuate depending on the
rating of Consumers' first mortgage bonds or changes in the base LIBOR rate. On
March 27, 2003, Consumers renewed its revolving credit facility which was set to
expire in July 2003. The new $250 million credit facility, secured by first
mortgage bonds, matures in March 2004 with two annual extensions at Consumers'
option, which would extend the maturity to March 2006. The cost of the facility
is LIBOR plus 350 basis points.

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The term loan, collateralized by first mortgage bonds, and the gas
inventory loan, collateralized by Consumers' natural gas in storage, were
simultaneously entered into in October 2002. These agreements contain
complementary collateral packages that provide Consumers, as additional first
mortgage bonds become available, borrowing capacity of up to $225 million, of
which $207 million was outstanding at December 31, 2002 with an effective
interest rate of 6.3 percent.

LONG-TERM FINANCINGS: In March 2002, Consumers sold $300 million principal
amount of six percent senior notes, maturing in March 2005. Net proceeds from
the sale were $299 million. Consumers used the net proceeds to replace a first
mortgage bond that was to mature in 2003.

At December 31, 2002, Consumers' $300 million credit facility, maturing in
July 2004 and secured by first mortgage bonds had an effective interest rate of
8.9 percent. The rate may fluctuate depending on the rating of Consumers' first
mortgage bonds or changes in the base LIBOR rate.

Consumers has a total of $126 million of long-term pollution control
revenue bonds outstanding, secured by first mortgage bonds and insurance
policies. These bonds had a weighted average interest rate of 2.7 percent at
December 31, 2002.

FIRST MORTGAGE BONDS: 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.

RESTRICTED PAYMENTS: Under the provisions of its articles of incorporation,
Consumers had $394 million of unrestricted retained earnings available to pay
common dividends at December 31, 2002. In January 2003, Consumers declared and
paid a $78 million common dividend. However, due to Consumers' dividend
restrictions included as part of an agreement with its lenders, Consumers'
dividends are not to exceed $300 million in any calendar year.

OTHER: On April 1, 2002, Consumers established a new subsidiary, Consumers
Receivables Funding. This consolidated subsidiary was established as a special
purpose entity to properly reflect the sale of trade receivables from Consumers
to ASCC, an unrelated third party under a trade receivables sale agreement.
Prior to the establishment of Consumers Receivables Funding, Consumers sold its
accounts receivable directly to ASCC. At December 31, 2002 and 2001, the
receivables sold under the program were $325 million and $334 million,
respectively. Accounts receivable and accrued revenue in the Consolidated
Balance Sheets have been reduced to reflect receivables sold.

Under the program discussed above, during 2002 and 2001, Consumers sold
accounts receivable but retained servicing responsibility. Consumers is
responsible for the collectability of the accounts receivable sold, however, the
investors associated with the sale of accounts receivable have no recourse to
Consumers' other assets for failure of debtors to pay when due and there are no
restrictions on accounts receivables not sold. No gain or loss has been recorded
on the sale of accounts receivable and Consumers retains no interest in the
receivables sold. The average annual discount rate was 2.05 percent and 4.37
percent for 2002 and 2001, respectively.

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REQUIRED RATIOS

CMS Energy's and Consumers' credit facilities also have contractual
restrictions that require CMS Energy and Consumers to maintain, as of the last
day of each fiscal quarter, the following:

CMS Energy and Enterprises, including subsidiaries, have guaranteed payment
of obligations, through letters of credit and surety bonds, of unconsolidated
affiliates and related parties approximating $1.0 billion as of December 31,
2002. Included in this amount, Enterprises, in the ordinary course of business,
has guarantees in

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place for contracts of CMS MST that contain certain schedule and performance
requirements. As of December 31, 2002, the actual amount of financial exposure
covered by these guarantees was $219 million. This amount excludes the
guarantees associated with CMS MST's natural gas sales arrangements totaling
$266 million, which are recorded as liabilities on the Consolidated Balance
Sheet at December 31, 2002. Management monitors and approves these obligations
and believes it is unlikely that CMS Energy or Enterprises would be required to
perform or otherwise incur any material losses associated with the above
obligations.

The following table is a summary of CMS Energy's guarantees as required by
FASB Interpretation No. 45:

- -------------------------
(a) The majority of this amount arises from routine provisions in stock and
asset sales agreements under which the purchaser is indemnified by CMS
Energy or a subsidiary for losses resulting from events such as failure of
title to the assets or stock sold by CMS Energy or a subsidiary to the
purchaser. CMS Energy believes the likelihood of a loss arising from such
events to be remote.

(b) The carrying amount represents the fair market value of guarantees and
indemnities on CMS Energy's balance sheet that are entered into subsequent
to January 1, 2003.

(c) Recourse provision indicates the approximate recovery from third parties
including assets held as collateral.

CMS Energy has entered into typical tax indemnity agreements in connection
with a variety of transactions, including transactions for the sale of
subsidiaries and assets, equipment leasing and financing agreements. These
indemnity agreements generally are not limited in amount and, while a maximum
amount of exposure cannot be identified, the amount and probability of liability
is considered remote.

See Note 19 for further discussion of CMS Energy's and Consumers Energy's
new financing arrangements as of March 30, 2003.

8: CAPITALIZATION

The authorized capital stock of CMS Energy consists of 250 million shares
of CMS Energy Common Stock and 10 million shares of CMS Energy Preferred Stock,
$.01 par value.

COMPANY-OBLIGATED PREFERRED SECURITIES: CMS Energy and Consumers each have
wholly-owned statutory business trusts that are consolidated with the respective
parent company. CMS Energy and Consumers created their respective trusts for the
sole purpose of issuing trust preferred securities. In each case, the primary
asset of the trust is a note or debenture of the parent company. The terms of
the trust preferred security parallel the terms of the related parent company
note or debenture. The terms, rights and obligations of the trust preferred
security and related note or debenture are also defined in the related indenture
through which the note or debenture was issued, the parent guarantee of the
related trust preferred security and the declaration of trust for the particular
trust. All of these documents together with their related note or debenture and
trust preferred security constitute a full and unconditional guarantee by the
parent company of the trust's obligations under the

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trust preferred security. In addition to the similar provisions previously
discussed, specific terms of the securities follow:

- -------------------------
(a) Represents Quarterly Income Preferred Securities that are convertible into
1.2255 shares of CMS Energy Common Stock (equivalent to a conversion price
of $40.80). Effective July 2001, CMS Energy can revoke the conversion
rights if certain conditions are met.

(b) On July 1, 2002, the 7,250,000 units of Adjustable Convertible Preferred
Securities were converted to 8,787,725 newly issues shares of CMS Energy
Common Stock.

(c) Represents Premium Equity Participating Security Units in which holders are
obligated to purchase a variable number of shares of CMS Energy Common
Stock by the August 2003 conversion date.

In March 2002, Consumers reduced its outstanding debt to Consumers Power
Company Financing I, Trust Obligated Preferred Securities by $30 million.

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9: EARNINGS PER SHARE AND DIVIDENDS

The following table presents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations.

- -------------------------
(a) The effects of converting the trust preferred securities were not included
in the computation of diluted earnings per share because to do so would
have been antidilutive.

(b) Shares of outstanding stock options of 0.2 million for both 2001 and 2000
were not included in the computation of diluted earnings per share because
to do so would have been antidilutive.

In February, April, August and November 2002, CMS Energy paid dividends of
$0.365, $0.365, $0.18 and $0.18 per share, respectively on CMS Energy Common
Stock. In January 2003, the Board of Directors suspended the payment of common
stock dividends.

10: RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS

The objective of the CMS Energy risk management policy is to analyze,
manage and coordinate the identified risk exposures of the individual business
segments and to exploit the presence of internal hedge opportunities that exist
among its diversified business segments. CMS Energy, on behalf of its regulated
and non-regulated subsidiaries, utilizes a variety of derivative instruments for
both trading and non-trading purposes and executes these transactions with
external parties through either CMS Enterprises or its marketing subsidiary, CMS
MST. These derivative instruments include futures contracts, swaps, options and
forward contracts to manage exposure to fluctuations in commodity prices,
interest rates and foreign exchange rates. In order for derivative instruments
to qualify for hedge accounting under SFAS No. 133, the hedging relationship
must be formally documented at inception and be highly effective in achieving
offsetting cash flows or offsetting changes in fair value attributable to the
risk being hedged.

Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
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mitigation programs including, among other things, using publicly available
credit ratings of such counterparties, internally developed statistical models
for credit scoring and use of internal hedging programs to minimize exposure to
external counterparties. No material nonperformance is expected.

COMMODITY DERIVATIVES: Prior to January 1, 2001, CMS Energy accounted for
its non-trading commodity contracts as hedges and deferred any changes in the
market value and gains/losses resulting from settlements until the hedged
transaction was completed. Since January 1, 2001, commodity contracts have been
accounted for in accordance with the requirements of SFAS No. 133, as amended
and interpreted, and may or may not qualify for hedge accounting treatment
depending on the characteristics of each contract.

DERIVATIVE INSTRUMENTS: CMS Energy adopted SFAS No. 133 on January 1, 2001.
This standard requires CMS Energy to recognize at fair value on the balance
sheet, as assets or liabilities, all contracts that meet the definition of a
derivative instrument. The standard also requires CMS Energy to record all
changes in fair value directly in earnings unless the derivative instrument
meets certain qualifying cash flow hedge criteria, in which case the changes in
fair value would be reflected in other comprehensive income. CMS Energy
generally determines fair value based upon quoted market prices and mathematical
models using current and historical pricing data. The ineffective portion, if
any, of all hedges is recognized in earnings.

Excluding a substantial portion of CMS MST's operations, CMS Energy
believes that the majority of its contracts, power purchase agreements and gas
transportation contracts qualify for the normal purchases and sales exception of
SFAS No. 133 and are not subject to the accounting rules for derivative
instruments. CMS Energy uses derivative instruments that require derivative
accounting, to limit its exposures to electricity and gas commodity price risk.
The interest rate and foreign currency exchange contracts met the requirements
for hedge accounting under SFAS No. 133 and CMS Energy recorded the changes in
the fair value of these contracts in other comprehensive income.

On January 1, 2001, upon initial adoption of the standard including
adjustments for subsequent guidance, CMS Energy recorded a $7 million, net of
tax, cumulative effect adjustment as an increase in accumulated other
comprehensive income. This adjustment relates to the difference between the fair
value and recorded book value of contracts related to gas call options, gas fuel
for generation swap contracts, and interest rate swap contracts that qualified
for hedge accounting prior to the initial adoption of SFAS No. 133 and
Consumers' proportionate share of the effects of adopting SFAS No. 133 related
to its equity investment in the MCV Partnership. Based on the pretax initial
transition adjustment of $21 million recorded in accumulated other comprehensive
income at January 1, 2001, Consumers reclassified to earnings $12 million as a
reduction to the cost of gas, $1 million as a reduction to the cost of power
supply, $2 million as an increase in interest expense and $8 million as an
increase in other revenues for the twelve months ended December 31, 2001. CMS
Energy recorded $12 million as an increase in interest expense during 2001,
which includes the $2 million of additional interest expense at Consumers. The
difference between the initial transition adjustment and the amounts
reclassified to earnings represents an unrealized loss in the fair value of the
derivative instruments since January 1, 2001, resulting in a decrease of other
comprehensive income.

At adoption of the standard on January 1, 2001, derivative and hedge
accounting for certain utility industry contracts, particularly electric call
option contracts and option-like contracts, and contracts subject to Bookouts
was uncertain. Consumers did not record these contracts on the balance sheet at
fair value, but instead accounted for these types of contracts as derivatives
that qualified for the normal purchase exception of SFAS No. 133. In June and
December 2001, the FASB issued guidance that resolved the accounting for these
contracts. As a result, on July 1, 2001, Consumers recorded a $3 million, net of
tax, cumulative effect adjustment as an unrealized loss decreasing accumulated
other comprehensive income, and on December 31, 2001, recorded an $11 million,
net of tax, cumulative effect adjustment as a decrease to earnings. These
adjustments relate to the difference between the fair value and the recorded
book value of electric call option contracts.

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Financial gas instruments and supply contracts that were assigned to CMS
MST from another CMS subsidiary in 2000 and accounted for on an accrual basis
were classified as derivatives under SFAS No. 133 on January 1, 2001. Upon
adoption of the standard, CMS MST recorded a cumulative effect adjustment to
record the fair value of these derivatives, which was a $9 million increase to
earnings, net of tax. Any changes after January 1, 2001 in the fair value of
these derivatives is included in net income from continuing operations.

ELECTRIC CONTRACTS: Consumers' electric business uses purchased electric
call option contracts to meet, in part, its regulatory obligation to serve. This
obligation requires Consumers to provide a physical supply of electricity to
customers, to manage electric costs and to ensure a reliable source of capacity
during peak demand periods. On July 1, 2001, upon initial adoption of the
standard for these contracts, Consumers recorded a $3 million, net of tax,
cumulative effect adjustment as an unrealized loss, decreasing accumulated other
comprehensive income. This adjustment relates to the difference between the fair
value and the recorded book value of these electric call option contracts. The
adjustment to accumulated other comprehensive income relates to electric call
option contracts that qualified for cash flow hedge accounting prior to the
initial adoption of SFAS No. 133. After July 1, 2001, these contracts did not
qualify for hedge accounting under SFAS No. 133 and, therefore, Consumers
records any change in fair value subsequent to July 1, 2001 directly in
earnings, which can cause earnings volatility. The initial amount recorded in
other comprehensive income was reclassified to earnings as the forecasted future
transactions occurred or the call options expired. The majority of these
contracts expired in the third quarter 2001 and the remaining contracts expired
in the third quarter of 2002. As of December 31, 2001, Consumers reclassified
from other comprehensive income to earnings, $2 million, net of tax, as part of
the cost of power supply, and the remainder, $1 million, net of tax, was
reclassified from other comprehensive income to earnings in the third quarter of
2002.

In December 2001, the FASB issued revised guidance regarding derivative
accounting for electric call option contracts and option-like contracts. The
revised guidance amended the criteria used to determine if derivative accounting
is required. In light of the amended criteria, Consumers re-evaluated its
electric call option and option-like contracts, and determined that additional
contracts require derivative accounting. Therefore, as of December 31, 2001,
upon initial adoption of the revised guidance for these contracts, Consumers
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. This adjustment relates to the difference between the fair value
and the recorded book value of these electric call option contracts. Consumers
records any change in fair value subsequent to December 31, 2001, directly in
earnings, which could cause earnings volatility. During 2002, Consumers
recorded, as part of power costs, a $245,000 unrecognized gain on its unexpired
electric call options contracts. As of December 30, 2002, Consumers recorded on
the balance sheet all of its unexpired purchased electric call option contracts
subject to derivative accounting at a fair value of $1 million.

Consumers believes that certain of its electric capacity and energy
contracts are not derivatives due to the lack of an active energy market, as
defined by SFAS No. 133, in the state of Michigan and the transportation cost to
deliver the power under the contracts to the closest active energy market at the
Cinergy hub in Ohio. If a market develops in the future, Consumers may be
required to account for these contracts as derivatives. The mark-to-market
impact in earnings related to these contracts, particularly related to the PPA
could be material to the financial statements.

During 2002, Consumers' electric business also used gas swap contracts to
protect against price risk due to the fluctuations in the market price of gas
used as fuel for generation of electricity. These gas swaps were financial
contracts that were used to offset increases in the price of probable forecasted
gas purchases. These contracts did not qualify for hedge accounting. Therefore,
Consumers recorded any change in the fair value of these contracts directly in
earnings as part of power supply costs. These contracts expired in December
2002.

As of December 31, 2002, Consumers recorded a total of $8 million, net of
tax, as an unrealized gain in other comprehensive income related to its
proportionate share of the effects of derivative accounting related to its
equity investment in the MCV Partnership. Consumers expects to reclassify this
gain, if this value remains, as an
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increase to other operating revenue during the next 12 months. On April 11,
2002, MCV Partnership changed its accounting for derivatives (Note 18).
Consumer's ownership share of the cumulative effective adjustment to earnings is
reflected as a change in accounting principle in 2002 in the accompanying
statement of income.

GAS CONTRACTS: Consumers' gas business uses fixed price gas supply
contracts, and fixed price weather-based gas supply call options and fixed price
gas supply put options, and other types of contracts, to meet its regulatory
obligation to provide gas to its customers at a reasonable and prudent cost.
During 2002, some of the fixed price gas supply contracts required derivative
accounting because they contained embedded put options that disqualified the
contracts from the normal purchase exception of SFAS No. 133. These contracts
expired in October 2002.

As of December 31, 2002, weather-based gas call options and gas put options
requiring derivative accounting had a net fair value of $1 million, of which
$600,000, represents a fair value gain on the contracts since the date of
inception. This gain was recorded directly in earnings as part of other income,
and then directly offset and recorded on the balance sheet as a regulatory
liability. Any subsequent changes in fair value will be recorded in a similar
manner.

INTEREST RATE RISK CONTRACTS: Consumers uses interest rate swaps to hedge
the risk associated with forecasted interest payments on variable-rate debt.
These interest rate swaps are designated as cash flow hedges. As such, Consumers
will record any change in the fair value of these contracts in other
comprehensive income unless the swap is sold. As of December 31, 2002, Consumers
had entered into a swap to fix the interest rate on $75 million of variable-rate
debt. This swap will expire in June 2003. As of December 31, 2002, this interest
rate swap had a negative fair value of $1 million. This amount, if sustained,
will be reclassified to earnings, increasing interest expense when the swaps are
settled on a monthly basis. As of December 31, 2001, this interest rate swap had
a negative fair value of $3 million.

Consumers also uses interest rate swaps to hedge the risk associated with
the fair value of its debt. These interest rate swaps are designated as fair
value hedges. In March 2002, Consumers entered into a fair value hedge to hedge
the risk associated with the fair value of $300 million of fixed-rate debt,
issued in March 2002. In June 2002, this swap was terminated and resulted in a
$7 million gain that is deferred and recorded as part of the debt. It is
anticipated that this gain will be recognized over the remaining life of the
debt.

In 2001, Consumers had entered into interest rate swaps to hedge the risk
associated with the fair value of $400 million of fixed-rate debt, which expire
in May 2003 and December 2006. In November 2001, these swaps were terminated and
resulted in a $4 million gain that was deferred and recorded as part of the
debt. This gain is being recognized over the remaining life of the debt.

In 2001, Consumers entered into fair value hedges to hedge the risk
associated with the fair value of $250 million of debt. These swaps terminated
in the third quarter 2001, and resulted in a $4 million gain that has been
deferred and recorded as part of the debt. This gain is being recognized over
the remaining life of the debt.

In September 2001, Consumers entered into a cash flow hedge to fix the
interest rate on $100 million of debt to be issued. In September 2001, the swap
terminated and resulted in a $2 million loss that was recorded in other
comprehensive income and will be amortized to interest expense over the life of
the debt using the effective interest method.

ENERGY TRADING ACTIVITIES: CMS Energy, through its subsidiary CMS MST, has
engaged in trading activities. CMS MST manages any open positions within certain
guidelines that limit its exposure to market risk and requires timely reporting
to management of potential financial exposure. These guidelines include
statistical risk tolerance limits using historical price movements to calculate
daily value at risk measurements. CMS MST's wholesale power and gas trading
activities are accounted for under mark-to-market method of accounting
consistent with guidance provided in EITF Issue No. 98-10. EITF Issue No. 98-10
has been rescinded by EITF Issue No. 02-03. The consensus rescinding EITF Issue
No. 98-10 must be applied to all contracts that existed as

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of October 25, 2002 and must be recognized as a cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, Accounting Changes,
effective the first day of the first interim or annual period beginning after
December 15, 2002. The consensus also must be applied immediately to all new
contracts entered into after October 25, 2002. See discussion on EITF Issue No.
02-03 under New Accounting Standards. Under mark-to-market accounting,
energy-trading contracts are reflected at fair market value, net of reserves,
with unrealized gains and losses recorded as an asset or liability in the
consolidated balance sheets. These assets and liabilities are affected by the
timing of settlements related to these contracts; current-period changes from
newly originated transactions and the impact of price movements. Changes in fair
values are recognized as revenues in the consolidated statements of income in
the period in which the changes occur. Market prices used to value outstanding
financial instruments reflect management's consideration of, among other things,
closing exchange and over-the-counter quotations. In certain contracts,
long-term commitments may extend beyond the period in which market quotations
for such contracts are available and volumetric obligations may not be defined.
Mathematical models are developed to determine various inputs into the fair
value calculation including price, anticipated volumetric obligations and other
inputs that may be required to adequately address the determination of fair
value of the contracts. Realized cash returns on these commitments may vary,
either positively or negatively, from the results estimated through application
of the mathematical model. CMS Energy believes that its mathematical models
utilize state-of-the-art technology, pertinent industry data and prudent
discounting in order to forecast certain elongated pricing curves. Market prices
are adjusted to reflect the potential impact of liquidating the company's
position in an orderly manner over a reasonable period of time under present
market conditions.

In connection with the market valuation of its energy commodity contracts,
CMS Energy maintains reserves for credit risks based on the financial condition
of counterparties. The creditworthiness of these counterparties will impact
overall exposure to credit risk; however, with regard to its counterparties, CMS
Energy maintains credit policies that management believes minimize overall
credit risk. Determination of the credit quality of its counterparties is based
upon a number of factors, including credit ratings, financial condition, and
collateral requirements. When trading terms permit, CMS Energy employs standard
agreements that allow for netting of positive and negative exposures associated
with a single counterparty. Based on these policies, its current exposures and
its credit reserves, CMS Energy does not anticipate a material adverse effect on
its financial position or results of operations as a result of counterparty
nonperformance.

At December 31, 2002, and 2001, CMS Energy has recorded a net price risk
management asset of $81 million and $41 million respectively, net of reserves,
related to the unrealized mark-to-market gains on existing wholesale power
contracts, gas contracts, and economic hedges for retail activities that are
marked as derivatives. For the year ended 2002, $62 million of the $80 million
in net price risk management assets were reclassified to assets and liabilities
held for sale to reflect the pending sales of CMS MST's wholesale gas and power
contracts. In addition, the fair value of these portfolios were reduced by $48
million as a result of fair value evidence derived from the negotiated sales
prices for these contracts held for sale. See MD&A disclosure on mark-to-market
accounting for further analysis of price risk management assets and liabilities.

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FLOATING TO FIXED INTEREST RATE SWAPS: CMS Energy and its subsidiaries
enter into floating to fixed interest rate swap agreements to reduce the impact
of interest rate fluctuations. These swaps are designated as cash flow hedges
and the difference between the amounts paid and received under the swaps is
accrued and recorded as an adjustment to interest expense over the term of the
agreement. Changes in the fair value of these swaps are recorded in accumulated
other comprehensive income until the swaps are terminated. As of December 31,
2002, these swaps had a negative fair value of $7 million that if sustained,
will be reclassified to earnings as the swaps are settled on a quarterly basis.
No ineffectiveness was recognized during the fourth quarter of 2002 under the
requirements of SFAS No. 133.

Notional amounts reflect the volume of transactions but do not represent
the amount exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not necessarily reflect CMS Energy's exposure to credit or
market risks. As of December 31, 2002 and 2001, the weighted average interest
rate associated with outstanding swaps was approximately 5.2 percent and 5.9
percent, respectively.

FIXED TO FLOATING INTEREST RATE SWAPS: CMS Energy monitors its debt
portfolio mix of fixed and variable rate instruments and from time to time
enters into fixed to floating rate swaps to maintain the optimum mix of fixed
and floating rate debt. These swaps are designated as fair value hedges and any
realized gains or losses in the fair value are amortized to earnings after the
termination of the hedge instrument over the remaining life of the hedged item.
There were no outstanding fixed to floating interest rate swaps as of December
31, 2002.

FOREIGN EXCHANGE DERIVATIVES: CMS Energy uses forward exchange and option
contracts 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 2001
estimated 2002 fair value of the foreign exchange and option contracts at
December 31, 2002 and 2001 was immaterial and $(1) million, respectively;
representing the amount CMS Energy would receive or (pay) upon settlement.

The notional amount of the outstanding foreign exchange contracts at
December 31, 2002 was $1 million Canadian contracts. Foreign exchange contracts
outstanding as of December 31, 2001 had a total notional amount of $50 million
related to investments in Brazil. The Brazilian contracts matured during 2002
and had a weighted average transaction rate of 2.58 Brazilian Real to the U.S.
dollar.

FINANCIAL INSTRUMENTS: 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. Judgment may also
be required to interpret market data to develop certain estimates of fair value.
Accordingly, the estimates determined as of December 31, 2002 and 2001 are not

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necessarily indicative of the amounts that may be realized in current market
exchanges. The carrying amounts of all long-term investments in financial
instruments, except for those as shown below, approximate fair value.

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(a) Settlement of long-term debt is generally not expected until maturity.

(b) Unrealized gains and losses on nuclear decommissioning investments are
classified in accumulated depreciation.

11: INCOME TAXES

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 utilizes deferred tax accounting for temporary
differences in accordance with SFAS No. 109, Accounting for Income Taxes.

U.S. income taxes are not recorded on the undistributed earnings of foreign
subsidiaries that have been or are intended to be reinvested indefinitely. 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. CMS Energy annually determines the amount of undistributed
foreign earnings that it expects will remain invested indefinitely in foreign
subsidiaries. Cumulative undistributed earnings of foreign subsidiaries for
which income taxes have not been provided totaled approximately $2 million at
December 31, 2002. It is impractical to estimate the amount of unrecognized
deferred income taxes or withholding taxes on these undistributed earnings.
Also, at December 31, 2002, CMS Energy recorded U.S. income taxes with respect
to temporary differences between the book and tax bases of foreign investments
that were determined to be no longer essentially permanent in duration.

The Job Creation and Worker Assistance Act of 2002 provided to corporate
taxpayers a 5-year carryback of tax losses incurred in 2001 and 2002. As a
result of this legislation, CMS Energy was able to carry back consolidated 2001
and 2002 tax losses to tax years 1996 through 1999 to obtain refunds of prior
years tax payments totaling $250 million. The tax loss carryback, however,
resulted in a reduction in AMT credit carryforwards that previously had been
recorded by CMS Energy as deferred tax assets in the amount of $47 million. This
non-cash reduction in AMT credit carryforwards has been reflected in the tax
provision of CMS Energy.

CMS Energy used ITC to reduce current income taxes payable, and amortizes
ITC over the life of the related property. 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. At December 31, 2002, CMS Energy had AMT credit
carryforwards in the amount of $207 million that do not expire, tax loss
carryforwards in the amount of $327 million that expire in 2021 and 2022,
capital loss

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carryforwards in the amount of $215 million that expire in 2007, and general
business credit carryforwards in the amount of $39 million that expire in 2005.

The significant components of income tax expense (benefit) on continuing
operations consisted of:

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

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

- -------------------------
(a) Because of the small size of the net loss in 2000, the effective tax rate is
not meaningful. Changes in the effective tax rate in 2002 from 2001 resulted
principally from the reduction in AMT credit carryforwards and the recording
of U.S. taxes on undistributed earnings and basis difference of foreign
subsidiaries.

12: EXECUTIVE INCENTIVE COMPENSATION

Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
CMS Energy 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.
Certain plan awards are subject to performance-based business criteria. The plan
reserves for award not more than five 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. The number of shares of
restricted Common Stock awarded under this plan cannot exceed 20 percent of the
aggregate number of shares reserved for award. Any forfeitures of shares
previously awarded will increase the number of shares available to be awarded
under the plan. At December 31, 2002, awards of up to 1,716,856 shares of CMS
Energy 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. Some 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, 2002, 375,039 of the
958,326 shares of restricted CMS Energy 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. Some options may be exercised upon grant; some vest
over five years at the rate of 25 percent per year beginning at the end of the
first year and others vest over three years at a rate of 33 1/3 percent per year
after one year. All options expire up to ten years and one month

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from date of grant. 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, 2002:

At December 31, 2002, 2001 and 2000, the number of stock options
exercisable were 5,007,329, 3,760,883, and 2,827,971, respectively.

The weighted average fair value of options granted for CMS Energy Common
Stock in February 2002 was $3.84, and in July 2002, $1.44. In 2001 and 2000, the
weighted average fair value of options granted for CMS Energy Common Stock were
$6.43 and $2.04, respectively. Fair value is estimated using the Black-Scholes

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model, a mathematical formula used to value options traded on securities
exchanges, with the following assumptions. For 2002, the assumptions listed are
for the February grant, followed by the July grant:

In 2002 CMS Energy adopted the fair value method of accounting for stock
based compensation under SFAS No. 123 as amended by SFAS No. 148 on a
prospective method. Accordingly, CMS Energy recognized the $4 million fair value
of stock based awards granted, modified or settled in 2002 in operating
expenses.

CMS Energy applied APB Opinion No. 25 and related interpretations in
accounting for the Performance Incentive Stock Plan. Prior to 2002, stock
options were granted at market price, no compensation cost was recognized for
stock options granted under the plan. The net compensation cost charged against
income for restricted stock was less than $1 million in 2002, $1 million in
2001, and $2 million in 2000. If compensation cost for stock options had been
determined in accordance with SFAS No. 123, in 2001, and 2000, CMS Energy's
consolidated net income (loss), as reported and pro forma, and earnings per
share would have been as follows:

13: RETIREMENT BENEFITS

CMS Energy and its subsidiaries provide retirement benefits under a number
of different plans, including certain health care and life insurance benefits
under OPEB, benefits to certain management employees under SERP and EISP, and
benefits to substantially all its employees under a trusteed, non-contributory,
defined benefit pension plan of Consumers and CMS Energy, and a defined
contribution 401(k) plan.

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Weighted-Average Assumptions:

Retiree health care costs at December 31, 2002 are based on the assumption
that costs would increase 8.5 percent in 2002 with a gradual decrease to 5.5
percent in 2010 and thereafter.

Net Pension Plan, SERP, EISP, and OPEB costs consist of:

The health care cost trend rate assumption significantly affects the
amounts reported. A one percentage point change in the assumed health care cost
trend assumption would have the following effects:

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The funded status of CMS Energy's Pension Plan, SERP and OPEB plans is
reconciled with the liability recorded at December 31 as follows:

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(a) Primarily stocks and bonds, including 5,241,656 and 141,000 shares of CMS
Energy Common Stock in Pension Plan assets and OPEB plan assets,
respectively, with fair values of $49 million and $1 million, respectively,
at December 31, 2002. Fair values at December 31, 2001 were $126 million
and $3 million for the Pension Plan assets and OPEB plan assets,
respectively.

(b) The recent significant downturn in the equities markets has affected the
value of the Pension Plan assets. At December 31, 2002, the value of the
Pension Plan assets was $607 million and Accumulated Benefit Obligation was
at $1.055 billion. In accordance with SFAS No. 87, CMS Energy recognized an
additional $426 million pension liability, recorded a $53 million
intangible asset and charged $373 million ($242 after-tax) to accumulated
other comprehensive income.

SERP benefits are paid from a trust established in 1988. SERP is not a
qualified plan under the Internal Revenue Code, and as such, earnings of the
trust are taxable and trust assets are included in consolidated assets. At
December 31, 2002 and 2001, trust assets were $57 million and $56 million,
respectively, and were classified as other noncurrent assets. The Accumulated
Benefit Obligation for SERP was $54 million in 2002 and $48 million in 2001.

The Executive Incentive Separation Plan (EISP) was established to provide
flexibility in separation of employment by officers, a select group of
management, or other highly compensated employees. Terms of the plan may include
payment of a lump sum, payment of monthly benefits for life, payment of premium
for

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continuation of health care, or any other legally permissible term deemed to be
in the best interest of CMS Energy to offer. As of December 31, 2002, the
Accumulated Benefit Obligation of the EISP was $1.7 million.

The Pension Plan includes amounts for Panhandle employees which were not
distinguishable from the Pension Plan's total assets. On December 21, 2002, a
definitive agreement was executed to sell Panhandle. The sale is expected to
close in 2003. No portion of the Pension Plan will be transferred with the sale
of Panhandle. At the closing of the sale, all employees of Panhandle will no
longer be eligible to accrue additional benefits. The Pension Plan will retain
pension payment obligations under the Pension Plan for Panhandle employees that
are vested under the Pension Plan. CMS Energy does not expect the curtailment
from both the Pension and OPEB Plans to be material.

Contributions to the 401(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan were $12 million in 2002, $26 million
in 2001, and $24 million in 2000. Effective September 1, 2002, the employer's
match for the 401(k) plan was suspended until January 1, 2005.

Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years. Prior service costs are amortized
on a straight-line basis over the average remaining service period of active
employees.

CMS Energy and its subsidiaries adopted SFAS No. 106, effective as of the
beginning of 1992 and Consumers recorded a liability of $466 million for the
accumulated transition obligation and a corresponding regulatory asset for
anticipated recovery in utility rates (see Note 1, Corporate Structure and
Summary of Significant Accounting Policies, "Utility Regulation"). The MPSC
authorized recovery of the electric utility portion of these costs in 1994 over
18 years and the gas utility portion in 1996 over 16 years.

14: LEASES

CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, rail cars, construction equipment, computer equipment, and buildings.
In November 2001, Consumers' nuclear fuel capital leasing arrangement expired
upon mutual agreement by the lessor and Consumers. At termination of the lease,
Consumers paid the lessor $48 million, which was the lessor's remaining
investment at that time. Consumers has both full-service and net leases, the
latter of which requires Consumers to pay for taxes, maintenance, operating
costs, and insurance.

Minimum rental commitments under CMS Energy's non-cancelable leases at
December 31, 2002 were:

140

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The minimum lease rental commitments as shown do not include amounts for
Panhandle and Field Services, as those business units have been discontinued.
Collectively, Panhandle, Field Services and Viron have $62 million on $1 million
in future commitments for operating and capital leases, respectively.

For the years ended December 31, 2002, 2001, and 2000, operating lease
charges, including charges to clearing and other accounts, were $13 million, $15
million, and $22 million, respectively. Consumers recovers lease charges from
customers and accordingly charges payments for its capital and operating leases
to operating expense.

For the years ended December 31, 2002, 2001 and 2000, capital lease
expenses were $20 million, $25 million, and $40 million, respectively. Included
in these amounts for the years ended 2002, 2001 and 2000 are nuclear fuel lease
expenses of $-- million, $7 million, and $22 million, respectively.

In April 2001, Consumers Campus Holdings entered into a lease agreement for
the construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. The new office-building lessor has committed to
fund up to $65 million for construction of the building and has appointed
Consumers the construction agent for the project. Consumers' balance sheet as of
December 31, 2002, reflects a capital lease asset and an offsetting non-current
liability equivalent to the cost of construction at that date of $54 million.
The agreement is a seven-year lease term with payments commencing upon
completion of construction, which occurred in March 2003. Consumers Campus
Holdings has the right to acquire the property at any time during the life of
the agreement. At the end of the lease term, Consumers Campus Holdings has the
option to renew the lease, purchase the property, or return the property and
assist the lessor in the sale of the building. The return option obligates
Consumers Campus Holdings to pay the lessor an amount equal to the outstanding
debt associated with the building. Estimated minimum lease commitments, assuming
an investment of $60 million and rates consistent with LIBOR at the inception of
the lease, would be approximately $4 million annually from April 2003 through
April 2008 and a total of $54 million for the remainder of the lease. Actual
lease payments will depend upon final total construction costs and LIBOR rates.

15: JOINTLY OWNED UTILITY FACILITIES

Consumers is responsible for providing its share of financing for the
jointly owned utility facilities. Consumers includes in operating expenses the
direct expenses of the joint plants. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:

16: REPORTABLE SEGMENTS

In 2002, CMS Energy operated principally in the following five reportable
segments: electric utility; gas utility; independent power production; natural
gas transmission; and marketing, services and trading. In 2003, operations will
include three reportable segments: electric utility, gas utility, and
enterprises.

CMS Energy's reportable segments are strategic business units organized and
managed by the nature of the products and services each provides. Management
evaluates performance based on the net income of each segment. The electric
utility segment consists of regulated activities associated with the generation,
transmission and distribution of electricity in the state of Michigan through
its subsidiary, Consumers Energy. The gas utility

141

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

segment consists of regulated activities associated with the transportation,
storage and distribution of natural gas in the state of Michigan through its
subsidiary, Consumers Energy. Independent power production invests in, acquires,
develops, constructs and operates non-utility power generation plants in the
United States and abroad. Natural gas transmission owns, develops, and manages
natural gas facilities. The marketing, services and trading segment provides
gas, oil, and electric marketing, risk management and energy management services
to industrial, commercial, utility and municipal energy users.

The Consolidated Statements of Income show operating revenue and operating
income by reportable segment. Intersegment sales and transfers are accounted for
at current market prices and are eliminated in consolidated operating income by
segment. Other financial data for reportable segments and geographic area are as
follows:

REPORTABLE SEGMENTS

142

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

143

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Geographic Areas(d)

- -------------------------
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.

(b) Includes electric restructuring implementation plan, capital leases for
nuclear fuel, purchase of nuclear fuel and other assets and electric DSM
costs. Amounts also include an attributed portion of Consumers' capital
expenditures for plant and equipment common to both the electric and gas
utility businesses.

(c) These amounts are included in operating revenue in the Consolidated
Statements of Income.

(d) Revenues are attributed to countries based on location of customers.

(e) Amounts exclude a $11 million decrease and $9 million increase related to
cumulative effect of accounting change in 2001 related to electric utility
and MS&T segments.

17. EQUITY METHOD INVESTMENTS

Certain of CMS Energy's investments in companies, partnerships and joint
ventures, where ownership is more than 20 percent but less than a majority, are
accounted for by the equity method of accounting in accordance with APB Opinion
No. 18. In 2002, 2001 and 2000 consolidated net income included distributions in
excess of (less than) earnings of $(39) million, $68 million, and $(171)
million, respectively, from these investments. The most significant of these
investments is CMS Energy's 50 percent interest in Jorf Lasfar, as well as its
46 percent interest in First Midland and 40 percent interest in Taweelah. CMS
Energy's investment in Loy Yang met the test of a significant subsidiary in
prior years but was not reported separately in 2002 or 2001 as
a result of the write-off of the investment in the fourth quarter of 2000 (Note
3). Summarized combined financial information of CMS Energy's equity method
investments follows, with the exception of the MCV Partnership

144

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

that is disclosed separately in Note 18, Summarized Financial Information of
Significant Related Energy Supplier.

Income Statement Data

145

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Balance Sheet Data

Balance Sheet Data

DECEMBER 31, 2001
-----------------------------------------------------------------------
FIRST
JORF LASFAR LOY YANG MIDLAND TAWEELAH ALL OTHERS TOTAL
----------- -------- ------- -------- ---------- -------
IN MILLIONS

Assets
Current assets..................... $ 190 $-- $ -- $127 $1,033 $ 1,350
Property, plant and equipment,
net............................. 6 -- -- 676 6,929 7,611
Other assets....................... 2,475 -- 1,138 -- 1,028 4,641
------ --- ------ ---- ------ -------
$2,671 $-- $1,138 $803 $8,990 $13,602
====== === ====== ==== ====== =======
Liabilities and Equity
Current liabilities................ $ 188 $-- $ 28 $ 38 $ 891 $ 1,145
Long-term debt and other
non-current liabilities......... 1,918 -- 569 630 5,164 8,281
Equity............................. 565 -- 541 135 2,935 4,176
------ --- ------ ---- ------ -------
$2,671 $-- $1,138 $803 $8,990 $13,602
====== === ====== ==== ====== =======

146

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER

Under the PPA with the MCV Partnership discussed in Note 6, Consumers' 2002
obligation to purchase electric capacity from the MCV Partnership provided 15.1
percent of Consumers' owned and contracted electric generating capacity.
Summarized financial information of the MCV Partnership follows:

STATEMENTS OF INCOME

BALANCE SHEETS

- -------------------------
(a) For 2002, 2001, and 2000, revenue from Consumers totaled $557 million, $550
million and $569 million, respectively.

(b) On April 1, 2002, the MCV Partnership implemented Derivative Implementation
Group Issue C-16, an interpretation of SFAS No. 133. The MCV Partnership
began accounting for several natural gas contracts containing an option
component at fair value. As a result, a $58 million cumulative effect
adjustment for the change in accounting principle was recorded as an
increase to earnings. CMS Midland's 49 percent ownership share was $28
million, $18 million after tax.

(c) At December 31, 2002 and 2001, receivables from Consumers totaled $44 and
$49 million, respectively.

(d) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership. CMS
Holdings holds a 46.4 percent ownership interest in FMLP. At December 31,
2002 and 2001, the MCV Partnership owed lease obligations of $975 million
and $1.11 billion, respectively, to the owner trust. CMS Holdings' share of
the interest and principal portion for the 2002 lease payments was $34
million and $65 million, respectively, and for the 2001 lease payments was
$36 million and $54 million, respectively. As of December 31, 2002 and
2001, the lease payments service $449 million and $597 million in
non-recourse debt outstanding, respectively, of the owner trust. The MCV
Partnership's lease obligations, assets, and operating revenues secures
FMLP's debt. For 2002 and 2001, the owner trust made debt payments
(including interest) of $370 million and $217 million, respectively. FMLP's
earnings for 2002, 2001, and 2000 were $38 million, $30 million, and $30
million, respectively.

147

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(e) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which Consumers is amortizing to expense over the
life of its investment in the MCV Partnership. Covenants contained in
financing agreements prohibit the MCV Partnership from paying distributions
until it meets certain financial test requirements. Consumers does not
anticipate receiving a cash distribution in the near future.

19: FINANCIAL IMPROVEMENT PLAN

CAPITAL RESOURCES AND LIQUIDITY

CMS Energy's liquidity and capital requirements are generally a function of
its results of operations, capital expenditures, contractual obligations,
working capital needs and collateral requirements. CMS Energy historically has
met its consolidated cash needs through its operating and investing activities
and, as needed, through access to bank financing and the capital markets.

During 2003, CMS Energy has contractual obligations and planned capital
expenditures that will require substantial amounts of cash. As of March 14,
2003, CMS Energy at the parent level had approximately $615 million, Consumers
Energy and its subsidiaries had approximately $777 million, and Panhandle and
its subsidiaries had approximately $52 million of publicly issued and credit
facility debt maturing in 2003. CMS Energy and Consumers Energy have taken
significant steps to address their 2003 maturities, as described. In addition,
CMS Energy also could become subject to liquidity demands pursuant to commercial
commitments under guarantees, indemnities and letters of credit. Management is
pursuing actively plans to refinance debt and to sell assets, including the sale
of Panhandle. In December 2002, CMS Energy signed a definitive agreement to sell
Panhandle for a total of $1.828 billion, which is expected to result in $662
million of cash and $1.166 billion of debt assumption. However, closing of the
sale is pending action by the Federal Trade Commission. All other regulatory
approvals have been granted.

CMS ENERGY PARENT LEVEL LIQUIDITY

CMS Energy at the parent level is addressing its near-to-mid-term liquidity
and capital requirements through a financial improvement plan that involves the
sale of non-strategic and under-performing assets of approximately $912 million,
receipt of dividends from its subsidiaries of approximately $280 million, and
reduction of approximately $598 million of outstanding debt along with reduced
capital expenditures, cost reductions and other measures.

As noted elsewhere in these notes, CMS Energy has reduced debt of
approximately $2.7 billion through asset sales with cash proceeds and associated
debt reduction from such sales over the past two years. Through the first
quarter of 2003, CMS Energy has accomplished $60 million of additional asset
sales. In January 2003, CMS MST closed on the sale of a substantial portion of
its natural gas trading contracts for $17 million of cash proceeds, and in
February 2003 signed a definitive agreement to sell its wholesale power
contracts. In addition, the sale of the Centennial Pipeline, resulting in
proceeds to CMS Energy of $40 million, closed in February 2003.

CMS Energy believes that further targeted asset sales, together with its
planned reductions in operating expenses, capital expenditures, and the
suspension of the common dividend also will contribute to improved liquidity.
CMS Energy believes that, assuming the successful implementation of its
financial improvement plan, its present level of cash and borrowing capacity
along with anticipated cash flows from operating and investing activities will
be sufficient to meet its liquidity needs through 2003. There can be no
assurances that the financial improvement plan will be successful and failure to
achieve its goals could have a material adverse effect on CMS Energy's liquidity
and operations. In such event, CMS Energy would be required to consider the full
range of strategic measures available to companies in similar circumstances.

CMS Energy continues to explore financing opportunities to supplement its
financial improvement plan. These potential opportunities include refinancing
its bank credit facilities; entering into leasing arrangements

148

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and/or vendor financing; refinancing and issuing new capital markets debt,
preferred and/or common equity; and negotiating private placement debt,
preferred and/or common equity. Specifically, as of March 31, 2003, CMS Energy
has taken the following action to supplement its financial improvement plan in
2003:

- On March 30, 2003 CMS Energy entered into an amendment and restatement of
its existing $300 million and $295.8 million revolving credit facilities
under which $409 million was then outstanding. The Second Amended and
Restated Senior Credit Agreement includes a $234 million tranche with a
maturity date of April 30, 2004 and a $175 million tranche with a
maturity date of September 30, 2004. The facility is being underwritten
by several banks at a total annual cost to CMS Energy of approximately
ten percent, which includes the initial commitment fee. Any proceeds of
equity issuances by CMS Energy and its subsidiaries or any asset sales
and debt issuances by CMS Energy or its subsidiaries, other than
Consumers Energy, are required to be used to prepay this facility. This
facility is collateralized primarily by the common stock of Consumers
Energy, CMS Enterprises and certain CMS Enterprises subsidiaries.

- On March 30, 2003 CMS Enterprises entered into a revolving credit
facility in an aggregate amount of $441 million. The maturity date of
this facility is April 30, 2004. The facility is being underwritten by
several banks at a total annual cost to CMS Energy of approximately ten
percent, which includes the initial commitment fee. Proceeds from this
loan will be used for general corporate purposes, to retire debt, and to
collateralize approximately $160 million of letters of credit. Any
proceeds of equity issuances by CMS Energy and its subsidiaries or any
asset sales and debt issuances by CMS Energy or its subsidiaries, other
than Consumers Energy, are required to be used to prepay this facility.
It is expected that proceeds from the Panhandle sale will be used to pay
off this facility in full. This facility is guaranteed by CMS Energy,
whose guaranty is secured by the common stock of Consumers Energy and CMS
Enterprises.

In addition, if necessary, CMS Energy would also postpone the $52 million
pension contribution expected to be made in September 2003. Also, CMS Energy may
pursue other avenues of private debt or equity investment, albeit at a
potentially significant cost.

CONSUMERS ENERGY LIQUIDITY

Consumers plans to meet its liquidity and capital requirements in 2003
through a combination of approximately $229 million from operations and
approximately $513 million of new debt along with reduced capital expenditures,
cost reductions and other measures. In addition, Consumers plans to refinance
$727 million of debt. Consumers has initiated several transactions with various
financial institutions, regulators, banks, lenders, and others that are designed
to provide liquidity:

- On March 26, 2003, Consumers entered into a $140 million term loan
secured by first mortgage bonds with a private investor bank. This loan
has a term of six years at a cost of LIBOR plus 475 basis points.
Proceeds from this loan will be used to retire debt, and for general
corporate purposes.

- In March 2003, Consumers obtained a replacement revolving credit facility
in the amount of $250 million, secured by first mortgage bonds. The cost
of the facility is LIBOR plus 350 basis points. The new credit facility
matures in March 2004 with two annual extensions of consumers' option,
which would extend the maturity to March 2006. The prior facility was due
to expire in July 2003.

- On March 27, 2003, Consumers renewed its revolving credit facility which
was set to expire in July 2003. Consumers negotiated a three year
revolving credit facility in the amount of $250 million secured by first
mortgage bonds. The cost of the facility is LIBOR plus 350 basis points.

- On March 28, 2003, Consumers syndicated a $150 million term loan secured
by first mortgage bonds. This term loan has a tenor of three years at an
anticipated cost of LIBOR plus 450 basis points. Proceeds from this loan
will be used to retire debt and for general corporate purposes.

149

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- Consumers filed a general rate case for its gas utility business on March
14, 2003. Consumers requested rate relief in the amount of approximately
$156 million. In its filing, Consumers requested immediate interim
relief. If interim relief of $156 million were granted, Consumers expects
that the rate relief could be in place by the fourth quarter of 2003.

- Consumers has filed an application with the MPSC seeking authorization to
issue $1.084 billion of securitization bonds. These bonds would provide
liquidity to Consumers at interest rates reflective of high quality
credit. Consumers would utilize these proceeds to retire higher cost debt
and in turn would realize significant interest expense savings over the
life of the bonds. If the MPSC approves a financing in the amount
requested, and there are no delays in the offering process, Consumers
anticipates that bonds would be issued by year end, 2003.

If necessary, Consumers would also postpone the planned $158 million
pension contribution expected to be made in September 2003.

In the event Consumers is unable to access bank financing or the capital
markets to incur or refinance indebtedness, there could be a material adverse
effect on Consumers' liquidity and operations. There is no assurance that the
pending securitization bond issuance transaction noted above will be completed.
Further, there is no assurance that the MPSC will grant either interim or final
gas utility rate relief.

20: QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED)

- -------------------------
(a) CMS Energy is currently in the process of completing its restatement of the
consolidated financial statements for the quarters of 2001, and upon
completion, Ernst & Young will perform a review of the 2001 quarterly
financial data in accordance with standards established by the American
Institute of Certified Public Accountants. As a result, the 2001 quarterly
information has not yet been restated. Upon completion, CMS Energy will
file restated financial statements for those interim periods, and for the
interim periods of 2002, in an amended Form 10-Q for September 30, 2002.
That filing will include details of the quarterly impacts of the
restatement adjustments for 2001 and the first three quarters of 2002. The
2002 interim financial data contained in Note 20, Quarterly Financial and
Common Stock Information, to the consolidated

150

CMS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

financial statements has been restated to reflect the impacts of restatement
adjustments. The restatement adjustments for the interim periods of 2001 are
expected to comprise adjustments that have already been identified and
recorded in connection with the re-audit of 2001, as well as adjustments
that will be identified through the quarterly reconstruction and
reconciliation project now under way at CMS MST.

(b) The 2002 quarterly financial data have been restated to reflect all
adjustments by quarter from previously filed quarterly financial
statements. The amended Form 10-Q for September 30, 2002, expected to be
filed upon completion of the restatement of 2001 quarterly periods, will
include details of the quarterly impacts of the adjustments made in 2002.

(c) Net of tax.

(d) The sum of the quarters may not equal the annual earnings per share due to
changes in shares outstanding.

(e) Based on New York Stock Exchange -- Composite transactions.

(f) See Note 3 to the consolidated financial statements.

151

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
CMS Energy Corporation

We have audited the accompanying consolidated balance sheets and
consolidated statements of preferred stock of CMS Energy Corporation (a Michigan
corporation) and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, common stockholders' equity and cash flows
for each of three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. The financial statements of Midland
Cogeneration Venture Limited Partnership and Jorf Lasfar, which represent
investments accounted for under the equity method of accounting, have been
audited by other auditors (the other auditors for 2001 and 2000 for Midland
Cogeneration Ventures Limited Partnership have ceased operations) whose reports
have been furnished to us; insofar as our opinion on the consolidated financial
statements relates to the amounts included for Midland Cogeneration Venture
Limited Partnership and Jorf Lasfar, respectively, it is based solely on their
reports.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.

The selected quarterly financial data related to 2001 included in Note 20,
"Unaudited Summary of Quarterly Results of Operations," contain information that
we did not audit, and accordingly, we do not express an opinion on that data. We
attempted, but were unable, to review the quarterly financial data in accordance
with standards established by the American Institute of Certified Public
Accountants because we believe that the CMS Energy's system for preparing
interim financial information did not provide an adequate basis to enable us to
complete such a review.

In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CMS Energy Corporation
and subsidiaries at December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 10 to the consolidated financial statements, in 2001
CMS Energy Corporation changed its method of accounting related to derivatives
and hedging. Also, in 2002 as discussed in Notes 5 and 12 to the consolidated
financial statements, CMS Energy Corporation changed its method for accounting
for goodwill and other intangibles and its method of accounting for stock-based
compensation, respectively.

As more fully described in Note 2 to the consolidated financial statements,
the Company restated its 2001 and 2000 financial statements.

/s/ Ernst & Young LLP
Detroit, Michigan
March 14, 2003, except for Notes 7 and 19, as to
which the date is March 31, 2003

152

REPORT OF INDEPENDENT ACCOUNTANTS

To the Management Committee
and Shareholders of Jorf Lasfar
Energy Company S.C.A. (JLEC)
B.P. 99 Sidi Bouzid
El Jadida

We have audited the accompanying balance sheet of JLEC and the related
statements of income and retained earnings and of cash flows for the year ended
December 31, 2002 as set out on pages 2 to 18. These statements are the
responsibility of the Company's management. Our responsibility is to audit and
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements audited by us present fairly, in
all material respects, the financial position of JLEC and the results of its
operations and its cash flows for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.

/s/ PricewaterhouseCoopers LLP
February 7, 2003

153

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners and the Management Committee of
Midland Cogeneration Venture Limited Partnership:

In our opinion, the accompanying consolidated balance sheet as of December
31, 2002 and the related consolidated statements of operations, partners' equity
and cash flows present fairly, in all material respects, the financial position
of the Midland Cogeneration Limited Partnership (a Michigan limited partnership)
and subsidiaries (MCV) at December 31, 2002 and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of MCV's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. The
financial statements of MCV as of December 31, 2001 and for each of the two
years in the period ended December 31, 2001, were audited by other independent
accountants who have ceased operations. Those independent accountants expressed
an unqualified opinion on those financial statements in their report dated
January 18, 2002.

As explained in Note 2 to the financial statements, effective April 1,
2002, Midland Cogeneration Venture Limited Partnership changed its method of
accounting for derivative and hedging activities in accordance with Derivative
Implementation Group ("DIG") Issue C-16.

/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
January 17, 2003

154

THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED ARTHUR
ANDERSEN REPORT AND THIS REPORT HAS NOT BEEN REISSUED
BY ARTHUR ANDERSEN LLP

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners and the Management Committee of the
Midland Cogeneration Venture Limited Partnership:

We have audited the accompanying consolidated balance sheets of the MIDLAND
COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and
subsidiaries (MCV) as of December 31, 2001 and 2000, and the related
consolidated statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of MCV's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Midland
Cogeneration Venture Limited Partnership and subsidiaries as of December 31,
2001 and 2000, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

As explained in Note 2 to the financial statements, effective January 1,
2001, Midland Cogeneration Venture Limited Partnership changed its method of
accounting related to derivatives and hedging activities.

/s/ Arthur Andersen LLP

Detroit, Michigan,
January 18, 2002

155

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

In April 2002, CMS Energy's Board of Directors, upon the recommendation of
the Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit the CMS Energy's financial statements for the year ending December 31,
2002. CMS Energy had previously retained Arthur Andersen to review its financial
statements for the quarter ended March 31, 2002. In May 2002, CMS Energy's Board
of Directors engaged Ernst & Young to audit its financial statements for the
year ending December 31, 2002. Ernst & Young audited 2000, 2001, and 2002. As a
result, CMS Energy restated its 2000 and 2001 financial statements contained
herein.

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PART III

ITEMS 10., 11., 12. and 13.

CMS Energy's definitive proxy statement, except for the Organization and
Compensation Committee Report, the comparison of five-year cumulative total
return performance graph contained therein, and the Audit Committee Report is
incorporated by reference herein. See also ITEM 1. BUSINESS for information
pursuant to ITEM 10.

ITEM 14. CONTROLS AND PROCEDURES

CMS Energy's CEO and CFO are responsible for establishing and maintaining
CMS Energy's disclosure controls and procedures. Management, under the direction
of CMS Energy's principal executive and financial officers, has evaluated the
effectiveness of CMS Energy's disclosure controls and procedures as of a date
within 90 days of the filing of this annual report on Form 10-K. Based on this
evaluation, CMS Energy's CEO and CFO have concluded that CMS Energy's disclosure
controls and procedures are effective to ensure that material information was
presented to them. There have been no significant changes in CMS Energy's
internal controls or in other factors that could significantly affect internal
controls subsequent to such evaluation.

157

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.

(a)(1) Financial Statements and Reports of Independent Public Accountants
are listed in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
and are incorporated by reference herein.

(a)(2) Financial Statement Schedules and Reports of Independent Public
Accountants are listed after the Exhibits in the Index to Financial
Statement Schedules, and are incorporated by reference herein.

(a)(3) Exhibits for are listed after Item (c) below and are incorporated by
reference herein.

(b) Reports on Form 8-K.

During the fourth quarter of 2002, CMS Energy filed Current Reports
on Form 8-K on December 23, 2002, covering matters reported pursuant
to ITEM 5. OTHER EVENTS.

(c) Exhibits, including those incorporated by reference (see also
Exhibit volume).

158

CMS ENERGY EXHIBITS

159

160

161

162

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** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of
Consumers, and of CMS Energy but not of Consumers.

Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the Commission,
and which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.

163

INDEX TO FINANCIAL STATEMENT SCHEDULES

Schedules other than those listed above are omitted because they are either
not required, not applicable or the required information is shown in the
financial statements or notes thereto.

Columns omitted from schedules filed have been omitted because the
information is not applicable.

164

CMS ENERGY CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

- -------------------------
(a) Accounts receivable written off including net uncollectible amounts of $15
in 2002, $12 in 2001, and $14 in 2000 charged directly to operating expense
and credited to accounts receivable.

165

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report
to be signed on its behalf by the undersigned, thereunto duly authorized, on the
28th day of March 2003.

CMS ENERGY CORPORATION

By /s/ KENNETH WHIPPLE
------------------------------------
Kenneth Whipple
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of CMS
Energy Corporation and in the capacities and on the 28th day of March 2003.

166

167

CERTIFICATIONS

The certifications of the principal executive officer and principal
financial officer of CMS Energy will not be provided because CMS Energy is in
the process of restating 2001 for each quarter and intends to amend this Form
10-K and provide the required certifications at that time.

168