<PAGE>   1

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549
                            ------------------------

                                   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, 2000
                                       OR
[ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
            FOR THE TRANSITION PERIOD FROM            TO

<TABLE>
<CAPTION>
COMMISSION   REGISTRANT; STATE OF INCORPORATION;     IRS EMPLOYER
FILE NUMBER     ADDRESS; AND TELEPHONE NUMBER     IDENTIFICATION NO.
-----------  -----------------------------------  ------------------
<S>          <C>                                  <C>
1-9513       CMS Energy Corporation               38-2726431
             (A Michigan Corporation)
             Fairlane Plaza South, Suite 1100
             330 Town Center Drive,
             Dearborn, Michigan 48126
             (313)436-9200
1-5611       Consumers Energy Company             38-0442310
             (A Michigan Corporation)
             212 West Michigan Avenue,
             Jackson, Michigan 49201
             (517)788-0550
1-2921       Panhandle Eastern Pipe Line Company  44-0382470
             (A Delaware Corporation)
             5444 Westheimer Road,
             P.O. Box 4967,
             Houston, Texas 77210-4967
             (713)989-7000
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                       NAME OF EACH EXCHANGE
      REGISTRANT                               TITLE OF CLASS                           ON WHICH REGISTERED
      ----------                               --------------                          ---------------------
<S>                     <C>                                                           <C>
CMS ENERGY CORPORATION  Common Stock, $.01 par value                                  New York Stock Exchange
CMS ENERGY TRUST II     8.75% Adjustable Convertible Trust Securities                 New York Stock Exchange
CMS ENERGY TRUST III    7.25% Premium Equity Participating Security Units             New York Stock Exchange
CONSUMERS ENERGY
  COMPANY               Preferred Stocks, $100 par value: $4.16 Series, $4.50 Series  New York Stock Exchange
CONSUMERS POWER
  COMPANY FINANCING I   8.36% Trust Originated Preferred Securities                   New York Stock Exchange
CONSUMERS ENERGY
  COMPANY FINANCING II  8.20% Trust Originated Preferred Securities                   New York Stock Exchange
CONSUMERS ENERGY
  COMPANY FINANCING
  III                   9.25% Trust Originated Preferred Securities                   New York Stock Exchange
</TABLE>

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.  [ ]

Panhandle Eastern Pipe Line Company meets the conditions set forth in General
Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K
with the reduced disclosure format. Items 4, 6, 10, 11, 12 and 13 have been
omitted and Items 1, 2 and 7 have been reduced in accordance with Instruction I.

The aggregate market value of CMS Energy voting and non-voting common equity
held by non-affiliates was $3,883,404,796 for the 131,418,098 CMS Energy Common
Stock shares outstanding on February 28, 2001.

On February 28, 2001 CMS Energy held all voting and non-voting common equity of
Consumers and Panhandle.

Documents incorporated by reference: CMS Energy's proxy statement and Consumers'
information statement relating to the 2001 annual meeting of shareholders to be
held May 25, 2001, are incorporated by reference in Part III, except for the
organization and compensation committee report and the performance graph
contained therein.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                             CMS Energy Corporation
                                      and
                            Consumers Energy Company
                                      and
                      Panhandle Eastern Pipe Line Company
 Annual Reports on Form 10-K to the Securities and Exchange Commission for the
                          Year Ended December 31, 2000

     This combined Form 10-K is separately filed by CMS Energy Corporation,
Consumers Energy Company and Panhandle Eastern Pipe Line Company. Information
contained herein relating to each individual registrant is filed by such
registrant on its own behalf. Accordingly, except for its subsidiaries,
Consumers Energy Company and Panhandle Eastern Pipe Line Company make no
representation as to information relating to any other companies affiliated with
CMS Energy Corporation.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>        <C>                                                            <C>
Glossary   ............................................................       3
PART I:
Item 1.    Business....................................................       7
Item 2.    Properties..................................................      30
Item 3.    Legal Proceedings...........................................      30
Item 4.    Submission of Matters to a Vote of Security Holders.........      31
PART II
           Market for CMS Energy's, Consumers' and Panhandle's Common
Item 5.    Equity and Related
           Stockholder Matters.........................................      32
Item 6.    Selected Financial Data.....................................      32
           Management's Discussion and Analysis of Financial Condition
Item 7.    and Results of Operations...................................      33
           Quantitative and Qualitative Disclosures About Market
Item 7A    Risk........................................................      33
Item 8.    Financial Statements and Supplementary Data.................      34
           Changes in and Disagreements With Accountants on Accounting
Item 9.    and
           Financial Disclosure........................................    CO-1
PART III
           Directors and Executive Officers of CMS Energy and
Item 10.   Consumers...................................................    CO-2
Item 11.   Executive Compensation......................................    CO-2
           Security Ownership of Certain Beneficial Owners and
Item 12.   Management..................................................    CO-2
Item 13.   Certain Relationships and Related Transactions..............    CO-2
PART IV
           Exhibits, Financial Statement Schedules and Reports on Form
Item 14.   8-K.........................................................    CO-3
</TABLE>

                                        2
<PAGE>   3

                                    GLOSSARY

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

<TABLE>
<S>                                           <C>
ABATE.....................................    Association of Businesses Advocating Tariff Equity
APB.......................................    Accounting Principles Board
ALJ.......................................    Administrative Law Judge
AMT.......................................    Alternative minimum tax
Alliance..................................    Alliance Regional Transmission Organization
Anadarko..................................    Anadarko Petroleum Corporation, a non-affiliated company
Articles..................................    Articles of Incorporation
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
Btu.......................................    British thermal unit
Class G Common Stock......................    One of two classes of common stock of CMS Energy, no par
                                              value, which reflects the separate performance of the
                                              Consumers Gas Group, redeemed in October 1999
Clean Air Act.............................    Federal Clean Air Act, as amended
CMS Capital...............................    CMS Capital Corp., a subsidiary of Enterprises
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...................    One of two classes of 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 Holding.....................    CMS Panhandle Holding Company, a 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 Gas Group.......................    The gas distribution, storage and transportation
                                              businesses currently conducted by Consumers and Michigan
                                              Gas Storage
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
DOE.......................................    U.S. Department of Energy
Dow.......................................    The Dow Chemical Company, a non-affiliated company
DSM.......................................    Demand-side management
</TABLE>

                                        3
<PAGE>   4

<TABLE>
<S>                                         <C>
Duke Energy...............................  Duke Energy Corporation, a non-affiliated company
EITF......................................  Emerging Issues Task Force
El Chocon.................................  Hidroelectrica El Chocon S.A., an indirect subsidiary of CMS
                                            Generation
Enterprises...............................  CMS Enterprises Company, a subsidiary of CMS Energy
EPA.......................................  U.S. Environmental Protection Agency
EPS.......................................  Earnings per share
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), $250 million Series A, $125 million
                                            Series B, $150 million Series C, $200 million Series D, $400 million
                                            Series E and $18 million Series F
GWh.......................................  Gigawatt-hour
Huron.....................................  Huron Hydrocarbons, Inc., a subsidiary of Consumers
INGAA.....................................  Interstate Natural Gas Association of America
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
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
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
MCV Partnership...........................  Midland Cogeneration Venture Limited Partnership in which Consumers
                                            has a 49 percent interest through CMS Midland
MD&A......................................  Management's Discussion and Analysis
MEPCC.....................................  Michigan Electric Power Coordination Center
Michigan Gas Storage......................  Michigan Gas Storage Company, a subsidiary of Consumers
Michigan State Utility Workers Council....  The executive board and negotiating body for local chapters of the
                                            Union
Michigan Transco..........................  Michigan Electric Transmission Company, a subsidiary of Consumers
                                            Energy
Mbbls.....................................  Thousand barrels
MMbbls....................................  Million barrels
MMBtu.....................................  Million British thermal unit
MMcf......................................  Million cubic feet
MPSC......................................  Michigan Public Service Commission
MW........................................  Megawatts
MWh.......................................  Megawatt-hours
Natural Gas Act...........................  Federal Natural Gas Act
NEIL......................................  Nuclear Electric Insurance Limited, an industry mutual insurance
                                            company owned by member utility companies
Nitrotec..................................  Nitrotec Corporation, a propriety gas technology company in which CMS
                                            Gas Transmission owns an equity interest
</TABLE>

                                        4
<PAGE>   5

<TABLE>
<S>                                         <C>
NMC.......................................  Nuclear Management Company, a Wisconsin company, formed in 1999 by
                                            Northern States Power Company (now Xcel Energy Inc.), Alliant Energy,
                                            Wisconsin Electric Power Company, and Wisconsin Public Service
                                            Company to operate and manage nuclear capacity owned by the four
                                            utilities
NOx.......................................  Nitrogen Oxide
NRC.......................................  Nuclear Regulatory Commission
NYMEX.....................................  New York Mercantile Exchange
OPEB......................................  Postretirement benefit plans other than pensions for retired
                                            employees
Outstanding Shares........................  Outstanding shares of Class G Common Stock
Palisades.................................  Palisades nuclear power plant, owned by Consumers
Pan Gas Storage...........................  Pan Gas Storage Company, a subsidiary of Panhandle Eastern Pipe Line
                                            Company
Panhandle.................................  Panhandle Eastern Pipe Line Company, including its subsidiaries
                                            Trunkline, Pan Gas Storage, Panhandle Storage, and Trunkline LNG.
                                            Panhandle is a wholly owned subsidiary of CMS Gas Transmission
Panhandle Eastern Pipe Line...............  Panhandle Eastern Pipe Line Company, a wholly owned subsidiary of CMS
                                            Gas Transmission
Panhandle Storage.........................  CMS Panhandle Storage Company, a subsidiary of Panhandle Eastern Pipe
                                            Line Company
PCBs......................................  Poly chlorinated biphenyls
Pension Plan..............................  The trusteed, non-contributory, defined benefit pension plan of
                                            Panhandle, Consumers and CMS Energy
PPA.......................................  The Power Purchase Agreement between Consumers and the MCV
                                            Partnership with a 35-year term commencing in March 1990
ppm.......................................  Parts per million
PSCR......................................  Power supply cost recovery
PUHCA.....................................  Public Utility Holding Company Act of 1935
RTO.......................................  Regional Transmission Organization
SAB.......................................  Staff Accounting Bulletin
Sea Robin.................................  Sea Robin Pipeline Company
SEC.......................................  U.S. Securities and Exchange Commission
Securitization............................  A financing authorized by statute in which a MPSC approved flow of
                                            revenues from a portion of the rates charged by a utility to its
                                            customers is set aside and pledged as security for the repayment of
                                            Securitization bonds issued by a special purpose entity affiliated
                                            with such utility
Senior Credit Facility....................  $1 billion one-year revolving credit facility maturing in June 2001
SERP......................................  Supplemental Executive Retirement Plan
SFAS......................................  Statement of Financial Accounting Standards
SIPS......................................  State Implementation Plans
SOP.......................................  Statement of Position
Stranded Costs............................  Costs incurred by utilities in order to serve their customers in a
                                            regulated monopoly environment, but which may not be recoverable in a
                                            competitive environment because of customers leaving their systems
                                            and ceasing to pay for their costs. These costs could include owned
                                            and purchased generation and regulatory assets
Superfund.................................  Comprehensive Environmental Response, Compensation and Liability Act
</TABLE>

                                        5
<PAGE>   6

<TABLE>
<S>                                         <C>
TBtu......................................  Trillion british thermal unit
TGN.......................................  Transportadora de Gas del Norte S.A., a natural gas pipeline located
                                            in Argentina
Transition Costs..........................  Stranded Costs, as defined, plus the costs incurred in the transition
                                            to competition
Trunkline.................................  Trunkline Gas Company, a subsidiary of Panhandle Eastern Pipe Line
                                            Company
Trunkline LNG.............................  Trunkline LNG Company, a subsidiary of Panhandle Eastern Pipe Line
                                            Company
Trust Preferred Securities................  Securities representing an undivided beneficial interest in the
                                            assets of statutory business trusts, which interests have a
                                            preference with respect to certain trust distributions over the
                                            interests of either CMS Energy or Consumers, as applicable, as owner
                                            of the common beneficial interests of the trusts
Union.....................................  Utility Workers of America, AFL-CIO
</TABLE>

                                        6
<PAGE>   7

                                     PART I

                                ITEM 1. BUSINESS

GENERAL

CMS ENERGY

     CMS Energy, formed in Michigan in 1987, is a leading diversified energy
company operating in the United States and in selected growth 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 six
million of the 9.9 million residents in Michigan's lower peninsula. Enterprises,
through subsidiaries, is engaged in several energy businesses in the United
States and in approximately 20 countries on five continents.

     In 2000, CMS Energy's consolidated operating revenue was $9.0 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, originally named Consumers Power Company, changed its
name to Consumers Energy Company to reflect its increasing focus on providing
customers with total energy solutions.

     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 2000,
Consumers' customer base and operating revenues were as follows:

<TABLE>
<CAPTION>
                                                             CUSTOMERS     OPERATING       2000 VS. 1999
                                                               SERVED       REVENUE      OPERATING REVENUE
                                                             (MILLIONS)    (MILLIONS)       % INCREASE
                                                             ----------    ----------    -----------------
<S>                                                          <C>           <C>           <C>
Electric Utility Business................................       1.69         2,676              0.3
Gas Utility Business.....................................       1.61         1,196              3.5
Non-Utility..............................................         --            63(a)          23.5
  Total..................................................       3.18         3,935              1.6
</TABLE>

-------------------------
(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 -- Electric Utility Properties, and -- Consumers Gas Utility-Gas Utility
Properties, below.

     For information on capital expenditures, see ITEM 7. CONSUMERS MANAGEMENT'S
DISCUSSION AND ANALYSIS -- OUTLOOK and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 10 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.

                                        7
<PAGE>   8

BUSINESS SEGMENTS

CMS ENERGY, CONSUMERS AND PANHANDLE 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.

     For information with respect to the operating revenue, net operating
income, identifiable assets and liabilities attributable only to Consumers'
business segments, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- SELECTED FINANCIAL INFORMATION AND CONSUMERS' CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

     For information with respect to the operating revenue, net operating
income, identifiable assets and liabilities attributable only to Panhandle's
business segments, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- PANHANDLE'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.

CONSUMERS ELECTRIC UTILITY

     Based on the number of customers, Consumers' electric utility operations,
if independent, would be the twelfth largest electric utility company in the
United States. The electric operations of Consumers include the generation,
purchase, transmission, distribution and sale of electricity. At year-end 2000,
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 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 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 2000,
total electric sales were 41 billion kWh, similar to 1999 levels.

     Consumers experienced a 2000 winter peak demand of 6,159 MW and a summer
peak demand of 7,325 MW. In 2000, based on the summer peak, Consumers' power
reserve, also called a reserve margin, was 21 percent compared to 14.7 percent
in 1999. Consumers estimates that during the summer of 2001, it will be able to
satisfy its peak demand with 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. Consumers bases this
estimate on other energy suppliers providing 64 MW of power to retail open
access customers at the time of Consumers' peak customer demand. Consumers has
offered other energy suppliers the opportunity to serve up to 750 MW of nominal
retail open access load prior to summer 2001.

                                        8
<PAGE>   9

     ELECTRIC UTILITY PROPERTIES: At December 31, 2000, Consumers' electric
generating system consists of the following:

<TABLE>
<CAPTION>
                                                                        2000 SUMMER NET       2000 NET
                                                                         DEMONSTRATED        GENERATION
                                                   SIZE AND YEAR          CAPABILITY         (THOUSANDS
        NAME AND LOCATION (MICHIGAN)              ENTERING SERVICE          (KWHS)            OF KWHS)
        ----------------------------              ----------------      ---------------      ----------
<S>                                             <C>                     <C>                  <C>
COAL GENERATION
  J H Campbell 1&2 -- West Olive............    2 Units, 1962-1967           609,000          3,639,548
  J H Campbell 3 -- West Olive..............    1 Unit, 1980                 765,100(a)       4,322,824
  D E Karn -- Essexville....................    2 Units, 1959-1961           515,000          3,580,567
  B C Cobb -- Muskegon......................    2 Units, 1956-1957           320,000          2,182,702
  J R Whiting -- Erie.......................    3 Units, 1952-1953           324,000          2,004,412
  J C Weadock -- Essexville.................    2 Units, 1955-1958           310,000          2,196,344
                                                                           ---------         ----------
Total coal generation.......................                               2,843,100         17,926,397
                                                                           ---------         ----------
OIL/GAS GENERATION
  B C Cobb -- Muskegon......................    3 Units, 1999-2000           183,000             52,900
  D E Karn -- Essexville....................    2 Units, 1975-1977         1,276,000            939,212
                                                                           ---------         ----------
Total oil/gas generation....................                               1,459,000            992,112
                                                                           ---------         ----------
HYDROELECTRIC
  Conventional Hydro Generation.............    13 Plants, 1907-1949          73,500            351,263
  Ludington Pumped Storage..................    6 Units, 1973                954,700(b)        (540,446)(c)
                                                                           ---------         ----------
Total Hydroelectric.........................                               1,028,200           (189,183)
                                                                           ---------         ----------
NUCLEAR GENERATION
  Palisades -- South Haven..................    1 Unit, 1971                 760,000          5,723,784
                                                                           ---------         ----------
GAS/OIL COMBUSTION TURBINE GENERATION.......    8 Plants, 1966-1999          346,800(d)          52,295
                                                                           ---------         ----------
Total owned generation......................                               6,437,100         24,505,405
                                                                           =========         ==========
PURCHASED AND INTERCHANGE POWER CAPACITY....                               1,644,200(e)
                                                                           ---------
Total.......................................                               8,081,300
                                                                           =========
</TABLE>

-------------------------
(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, and the capacity of the plant is shared
     accordingly.

(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 generation.

(e)  Includes capacity from long-term power purchase contracts, including 1,240
     MW of purchased contract capacity from the MCV Facility.

     In 2000, Consumers purchased, through long-term purchase contracts,
options, spot market and other seasonal purchases, 2,552 MW of net capacity from
other power producers, which amounted to 34.8 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) 4,467 miles
of overhead transmission lines operating at 120 kilovolts and above; b) owns
4,176 miles of subtransmission overhead lines operating at 23 kilovolts and 46
kilovolts; c) owns 16 subsurface miles of

                                        9
<PAGE>   10

subtransmission underground lines operating at 23 kilovolts and 46 kilovolts; d)
owns 61,298 miles of electric distribution overhead lines; e) owns 7,386
subsurface mile of underground distribution lines and f) owns substations having
an aggregate transformer capacity of 40,254,830 kilovoltamperes.

     FUEL SUPPLY: Consumers has four generating plant sites that use coal as a
fuel source and that constitute 73.2 percent of its baseload capacity, the
capacity used to serve a constant level of customer demand. In 2000, these
plants produced a combined total of 17,926 million kWhs of electricity and
required 8.5 million tons of coal. On December 31, 2000, Consumers' coal
inventory amounted to approximately 50 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 -- UNCERTAINTIES -- OTHER ELECTRIC UNCERTAINTIES.

     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, and therefore in 2000 it only operated Palisades.
During 2000, Palisades' net generation was 5,724 million kWhs, constituting 23.4
percent of Consumers' baseload supply. Consumers currently has two contracts for
uranium concentrates sufficient to provide up to 43 percent of its fuel supply
requirements for the 2001 period. Consumers also has contracts for conversion
services and enrichment services with quantity flexibility ranging from 40
percent to 100 percent and 50 percent and 100 percent of its nuclear fuel
requirements, respectively. If spot market prices are below the contract price,
Consumers will purchase only the minimum amount of nuclear fuel required by the
contracts. Conversely, if spot market prices are above the contracts prices,
Consumers will purchase the maximum amount of nuclear fuel allowed by the
contracts to meet its requirements.

     For the spring 2001 refueling outage, Consumers has purchased all of its
fuel supply requirements. Consumers 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 three 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.

<TABLE>
<CAPTION>
                                                                       MILLIONS OF KWHS
                                                        ----------------------------------------------
                  POWER GENERATED                        2000      1999      1998      1997      1996
                  ---------------                        ----      ----      ----      ----      ----
<S>                                                     <C>       <C>       <C>       <C>       <C>
Coal................................................    17,926    19,085    17,959    16,427    16,928
Nuclear.............................................     5,724     5,105     5,364     5,970     5,653
Oil.................................................       645       809       520       258       364
Gas.................................................       400       441       302        80        74
Hydro...............................................       351       365       395       467       473
Net pumped storage(a)...............................      (541)     (476)     (480)     (477)     (419)
                                                        ------    ------    ------    ------    ------
Total net generation................................    24,505    25,329    24,060    22,725    23,073
                                                        ======    ======    ======    ======    ======
</TABLE>

-------------------------
(a)  Represents Consumers' 51 percent share of net generation from Ludington.
     This facility pumps water into a storage pond using electricity generated
     during off-peak hours to generate electricity later during peak demand
     hours.

                                        10
<PAGE>   11

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

<TABLE>
<CAPTION>
                                                                       COST PER MILLION BTU
                                                             -----------------------------------------
                      FUEL CONSUMED                          2000     1999     1998     1997     1996
                      -------------                          ----     ----     ----     ----     ----
<S>                                                          <C>      <C>      <C>      <C>      <C>
Coal.....................................................    $1.34    $1.38    $1.45    $1.53    $1.50
Oil......................................................     3.30     2.69     2.73     2.97     2.67
Gas......................................................     4.80     2.74     2.66     3.36     3.60
Nuclear (a)..............................................     0.45     0.52     0.50     0.57     0.50
All Fuels(b).............................................     1.27     1.29     1.28     1.29     1.27
</TABLE>

-------------------------
(a) Includes amounts charged, and included in fuel expense, to Palisades and Big
    Rock for decontamination and decommission of uranium enrichment facility.

(b) 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 2001 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 and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 1 OF CONSUMERS' 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 storage casks are available for future
storage. For a discussion relating to the NRC approval of dry casks and
Consumers' use of the casks, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS'
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

     INSURANCE: Consumers maintains primary and excess nuclear property
insurance from NEIL totaling $2.4 billion in recoverable limits for Palisades.
The insurance covers risks of direct property loss, decontamination, and debris
removal subject to standard policy terms and conditions. Also covered by
insurance are a portion of the costs arising from accidental premature
decommissioning not funded by the decommissioning trust funds, and part of the
remaining book value of the plant. For any loss more than $100 million, the
ongoing nuclear contamination must be stabilized and decontaminated prior to
NEIL remitting proceeds to Consumers for its coverage.

     Consumers also procured coverage from NEIL that would partially cover the
cost of replacement power during certain prolonged accidental outages at
Palisades. Insurance would not cover such costs during the first 12 weeks of any
outage, but insurance would cover most of such costs during the next 52 weeks of
the outage, followed by a reduced level of coverage for a period up to 110
additional weeks.

     The permanently closed Big Rock remains insured by NEIL for up to $500
million for decontamination, debris removal, and covered direct property loss,
subject to standard policy terms and conditions.

     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 $12.8 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 insurance for 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

                                        11
<PAGE>   12

incident. Part of this 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 $200 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.

     Consumers has not obtained insurance for property damage at its nuclear
plants caused by floods and earthquakes because it believes that the protective
systems built into these plants and the low probability of an event of this type
at the locations of these plants makes such insurance unnecessary.

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

CONSUMERS GAS UTILITY

     Based on the number of customers, Consumers' gas utility operations, if
independent, would be the fifth largest gas utility company in the United
States. Consumers' gas utility operations purchase, transport, store, distribute
and sell natural gas. As of December 31, 2000, 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 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 operations are seasonal. Consumers and its wholly owned
subsidiary, Michigan Gas Storage, inject natural gas into storage during the
summer months of the year for use during the winter months when demand is
higher. Peak demand usually occurs in the winter due to colder temperatures and
the resulting increased demand for heating fuels. In 2000, total deliveries of
natural gas sold by Consumers and by other sellers over Consumers' pipeline and
distribution network to ultimate customers, including the MCV Partnership,
totaled 410 bcf.

     GAS UTILITY PROPERTIES: Consumers' gas distribution and transmission system
consists of 24,383 miles of distribution mains and 1,108 miles of transmission
lines throughout Michigan's lower peninsula. It owns and operates six compressor
stations with a total of 115,400 installed horsepower. Consumers has 11 gas
storage fields located across Michigan with an aggregate storage capacity of
221.3 bcf.

     Michigan Gas Storage's transmission system consists of 521 miles of
pipelines within Michigan's lower peninsula. It owns and operates two compressor
stations with a total of 46,600 installed horsepower. Michigan Gas Storage has
three gas storage fields located in Osceola, Clare and Missaukee counties of
Michigan with an aggregate storage capacity of 109.5 bcf.

     GAS SUPPLY: In 2000, Consumers purchased 37.2 percent of its required gas
supply under contracts with a duration of longer than one year. Total 2000
purchases included 15.3 percent from United States producers outside Michigan,
18.6 percent from Canadian producers, 3.3 percent from Michigan producers and
42.7 percent from the spot market. Authorized suppliers in the experimental gas
customer choice pilot program, which started in April 1998, supplied the
remaining 20.1 percent of gas delivered by Consumers.

     Consumers' firm transportation agreements, excluding agreements with
Michigan Gas Storage, are with Trunkline, Panhandle, ANR Pipeline Company and
Great Lakes Gas Transmission, L.P. Consumers uses these agreements to deliver
gas to Michigan for ultimate deliveries to market. In total, Consumers' firm
transportation

                                        12
<PAGE>   13

arrangements are capable of carrying over 80 percent of Consumers' total gas
supply requirements. As of December 31, 2000, Consumers' portfolio of firm
transportation from pipelines to Michigan is as follows:

<TABLE>
<CAPTION>
                                                                  VOLUME
                                                             (DEKATHERMS/DAY)         EXPIRATION
                                                             ----------------         ----------
<S>                                                          <C>                 <C>         <C>
Trunkline................................................         336,375        October         2002
Panhandle................................................          60,000        October         2002
ANR Pipeline Company.....................................          10,000        December        2002
                                                                    6,000        January         2002
                                                                   83,790        October         2003
Great Lakes Gas Transmission, L.P........................          85,092        April           2004
</TABLE>

     Consumers transports the balance of its required gas supply under
interruptible contracts. The amount of interruptible transportation service and
the use of it 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 2000, CMS Gas Transmission's
operating revenue was $906 million. CMS Energy expanded the importance of this
business segment with the acquisition of Panhandle in 1999. For additional
information on the acquisition of Panhandle, see ITEM 7. PANHANDLE'S
MANAGEMENT'S DISCUSSION AND ANALYSIS.

     PANHANDLE: 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 affiliates,
Trunkline LNG and Panhandle Storage, from subsidiaries of Duke Energy.
Immediately following the acquisition, Trunkline LNG and Panhandle Storage
became wholly owned subsidiaries of Panhandle Eastern Pipe Line.

     Panhandle is primarily engaged in the interstate transmission and storage
of natural gas. Panhandle operates a large natural gas pipeline network,
providing 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 Michigan, Ohio, Indiana, Illinois, Missouri and Tennessee.

     In 2000, Panhandle's consolidated operating revenue was $483 million. Of
Panhandle's operating revenue, 79 percent was generated from transportation
services, 9 percent from storage services, 8 percent from LNG terminalling
services and 4 percent from other services. During 2000, 1999 and 1998, sales to
ProLiance Energy, L.L.C., a nonaffiliated gas marketer, accounted for at least
10 percent of consolidated revenues of Panhandle. During 2000 and 1999, sales to
subsidiaries of CMS Energy, primarily Consumers, accounted for at least 10
percent of consolidated revenues of Panhandle. No other customer accounted for
10 percent or more of Panhandle's revenues during 2000, 1999 or 1998. For
additional information, see ITEM 7. PANHANDLE'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- RESULTS OF OPERATIONS.

     For the years 1996 to 2000, Panhandle's combined throughput was 1,319 TBtu,
1,279 TBtu, 1,141 TBtu, 1,139 TBtu and 1,374 TBtu, respectively. Beginning in
March 2000, the amount 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.

                                        13
<PAGE>   14

     NATURAL GAS TRANSMISSION PROPERTIES: Domestic -- CMS Gas Transmission has a
total of 15,734 miles of pipeline in the United States, including 154 miles of
projects under construction, with a daily capacity of approximately 8.5 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 extends 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, 2000, CMS Gas Transmission had processing capabilities of
approximately 1.0 bcf per day of natural gas at nine plants in Michigan,
Oklahoma and Texas including a hydrocarbon fractionation plant in Michigan with
a capacity of 30,000 barrels per day. Through Panhandle, CMS Gas Transmission
owns and operates 51 compressor stations. It also has six gas storage fields
located in Illinois, Kansas, Louisiana, Michigan and Oklahoma with an aggregate
storage capacity of 70 bcf. One underground storage field in which CMS Gas
Transmission has a 51 percent ownership is used for natural gas liquids. CMS Gas
Transmission currently has two gas storage field under development.

     Through subsidiaries, CMS Gas Transmission operates 4,569 miles of gas
gathering systems with total capacity of 1.5 bcf per day in Michigan, Oklahoma,
Texas and Wyoming.

     CMS Gas Transmission, through Panhandle, owns and operates an LNG receiving
terminal in Louisiana. Panhandle also owns a one-third interest in a company
that plans to extend and to convert an existing 26-inch pipeline, currently
owned by Trunkline, from natural gas transmission service to liquid products
service by the beginning of 2002.

     International -- At December 31, 2000, CMS Gas Transmission has ownership
interests in the following pipelines:

<TABLE>
<CAPTION>
                         LOCATION                             OWNERSHIP INTEREST (%)    MILES OF PIPELINES
                         --------                             ----------------------    ------------------
<S>                                                           <C>                       <C>
Argentina.................................................             29.4                   3,331
Argentina to Brazil.......................................             20.0                     258
Argentina to Chile........................................             50.0                     707
Australia (Western Australia).............................             40.0(a)                  927
Australia (Western Australia).............................            100.0                     259
</TABLE>

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

     CMS Gas Transmission has an ownership interest in a methanol plant under
construction in Equatorial Guinea, Africa. The plant is scheduled to go into
service in mid-2001 and will have a capacity of 2,500 metric tonnes per day.

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

                                        14
<PAGE>   15

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. The rapid growth in CMS Generation's generating capacity has been
matched by growth in this business segment's operating revenue. In 2000, 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 $500 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, 2000, CMS
Generation had ownership interests in operating power plants totaling 8,365
gross MW (3,533 net MW) throughout the United States and abroad. At December 31,
2000, additional plants totaling approximately 3,553 gross MW are under
construction or advanced development.

     The following table details CMS Generation's interest in independent power
plants in the United States as well as abroad as of year end 2000 (excluding the
MCV facility and plants owned by CMS Operating, S.A. discussed further below):

<TABLE>
<CAPTION>
                                                                        OWNERSHIP INTEREST      GROSS CAPACITY
                   LOCATION                         FUEL TYPE                  (%)                   (MW)
                   --------                         ---------           ------------------      --------------
<S>                                                 <C>                 <C>                     <C>
DOMESTIC
California....................................      Wind                         8.5                   72
California....................................      Wind                        22.7                   30
California....................................      Wood                        37.8                   36
Connecticut...................................      Scrap tire                  50.0                   31
Maine.........................................      Hydro                       50.0                    4
Michigan......................................      Wood                        50.0                   35
Michigan......................................      Wood                        50.0                   39
Michigan......................................      Natural gas                100.0                  160
Michigan......................................      Coal                        50.0                   62
Michigan......................................      Natural gas                100.0                   68
Michigan......................................      Natural gas                100.0                  156
New York......................................      Hydro                        1.0                   14
New York......................................      Hydro                       50.0                    3
North Carolina................................      Wood                        50.0                   45
Oklahoma......................................      Natural gas                  8.8                  124
Virginia......................................      Hydro                       55.0                    3
INTERNATIONAL
Argentina.....................................      Hydro                       17.2                1,320
Australia.....................................      Coal                        49.6                2,000
Chile.........................................      Natural gas                 50.0                  555
Ghana.........................................      Light fuel oil              90.0                  224
India.........................................      Diesel                      49.0                  200
India.........................................      Natural gas                 33.2                  235
Jamaica.......................................      Diesel                      41.2                   63
Latin America.................................      Various                  Various                  912
Morocco.......................................      Coal                        50.0                1,008
Philippines...................................      Coal                        47.5                   96
Philippines...................................      Diesel                      47.5                   50
Thailand......................................      Coal                        66.0                  300
United Arab Emirates..........................      Natural gas                 40.0                  370
Venezuela.....................................      Diesel                      70.0                  150
</TABLE>

     In 2000, CMS Generation sold its ownership interest in a 58 MW
hydroelectric generating project located in New York and its ownership interest
in a 239 MW natural gas-fueled generating plant in New Jersey.

     CMS Enterprises, through CMS Operating, S.A., owns a 128 MW natural gas
power plant, and has a 92.6 percent ownership interest in a 540 MW natural gas
power plant, each in Argentina.

                                        15
<PAGE>   16

     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 35 percent. The
MCV Facility has gross capacity of approximately 1,370 MW (671 net 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. 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
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.

OIL AND GAS EXPLORATION AND PRODUCTION

     CMS Oil and Gas formed in 1967, conducts oil and gas exploration and
development operations in the United States, primarily the Permian Basin in
Texas and the Power River Basin in Wyoming and in the countries of Cameroon,
Congo, Colombia, Equatorial Guinea, Tunisia and Venezuela. In 2000, CMS Oil and
Gas achieved production levels of 7.27 million barrels of oil, condensate and
plant products and 17.56 bcf of gas. At January 1, 2001, CMS Oil and Gas's
proven oil and gas reserves total 234.6 million net equivalent barrels
reflecting a balanced portfolio of reserves, consisting of 45.5 percent oil and
condensate and 54.5 percent natural gas.

     During 2000, CMS Oil and Gas participated with a working interest in
drilling wells as follows:

<TABLE>
<CAPTION>
                                                                            NUMBER OF
                                                     NUMBER OF WELLS    SUCCESSFUL WELLS      SUCCESS RATIO
                                                     ---------------    -----------------    ---------------
                  TYPE OF WELL                       GROSS       NET    GROSS        NET     GROSS       NET
                  ------------                       -----       ---    -----        ---     -----       ---
<S>                                                  <C>         <C>    <C>          <C>     <C>         <C>
Exploratory......................................      --         --      --          --       --         --
Development......................................     466        245     466         245      100%       100%
                                                      ---        ---     ---         ---      ---        ---
       Total.....................................     466        245     466         245      100%       100%
                                                      ===        ===     ===         ===      ===        ===
</TABLE>

     The preceding table includes CMS Oil and Gas' participation in coal bed
methane gas wells in Wyoming and Montana, where CMS Oil and Gas participated in
409 wells (198 net) during 2000. In 2000, CMS Oil and Gas' operating revenue was
$131 million.

     OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES: The following table
shows net oil and gas production by CMS Oil and Gas for the years 1998 through
2000:

<TABLE>
<CAPTION>
                                                                 2000      1999      1998
                                                                 ----      ----      ----
<S>                                                             <C>       <C>       <C>
Oil and condensate (Mbbls)(a)...............................     6,980     7,288     7,307
Natural gas (MMcf)(a).......................................    17,564    26,412    26,495
Plant products (Mbbls)(a)...................................       287       396       413
Reserves to annual production ratio
  Oil (MMbbls)..............................................      14.7      15.2      11.5
  Gas (bcf).................................................      43.7      29.9      21.3
</TABLE>

-------------------------
(a)  Revenue interest to CMS Oil and Gas.

                                        16
<PAGE>   17

     The following table shows CMS Oil and Gas' undeveloped net acres of oil and
gas leasehold interests.

<TABLE>
<CAPTION>
                        DECEMBER 31                               2000         1999
                        -----------                               ----         ----
<S>                                                             <C>          <C>
DOMESTIC
Wyoming.....................................................      177,408      177,691
Montana.....................................................       95,852       96,994
Michigan....................................................           --       71,718
Texas (including offshore acreage)(a).......................       44,372       50,735
Indiana.....................................................           --       12,212
Ohio........................................................           --        6,887
Louisiana...................................................        2,232        3,480
                                                                ---------    ---------
       Total domestic.......................................      319,864      419,717
                                                                ---------    ---------
INTERNATIONAL
Venezuela...................................................      339,521      339,521
Colombia....................................................      331,378      251,680
Cameroon....................................................      183,636      187,636
Equatorial Guinea...........................................      209,806      148,977
Ecuador.....................................................           --       66,430
Tunisia.....................................................       64,761       64,761
Congo.......................................................       17,364       17,364
                                                                ---------    ---------
       Total international..................................    1,146,466    1,076,369
                                                                ---------    ---------
       Total net acres......................................    1,466,330    1,496,086
                                                                =========    =========
</TABLE>

-------------------------
(a)  Does not include net undeveloped acreage of 40,845 in Texas in which CMS
     Oil and Gas holds a contractual right to earn an interest by drilling as of
     December 31, 2000.

                                        17
<PAGE>   18

     The following table shows CMS Oil and Gas' estimated proved reserves of oil
and gas for the years 1998 through 2000.

<TABLE>
<CAPTION>
                                                                      INTERNATIONAL                DOMESTIC
                                                              ------------------------------    --------------
                                                                                   SOUTH
                                                TOTAL            AFRICA           AMERICA            U.S.
                                           ---------------    -------------    -------------    --------------
                                            OIL      GAS      OIL      GAS      OIL     GAS     OIL      GAS
                                            ---      ---      ---      ---      ---     ---     ---      ---
                                                         (OIL IN MMBBLS AND NATURAL GAS IN BCF)
<S>                                        <C>      <C>       <C>     <C>      <C>      <C>     <C>     <C>
Estimated Proved Developed and
  Undeveloped Reserves:
  December 31, 1997....................     98.3     322.2    43.0     74.1     53.7      --     1.6     248.1
     Revisions and other changes.......     (8.2)    (27.4)    2.0      1.4    (10.7)     --     0.5     (28.8)
     Extensions and discoveries........      3.3     278.3     3.2    270.9      0.1      --      --       7.4
     Acquisitions of reserves..........      2.9      17.4     2.9     17.4       --      --      --        --
     Sales of reserves.................       --        --      --       --       --      --      --        --
     Production........................     (7.7)    (26.5)   (2.8)    (1.9)    (4.2)     --    (0.7)    (24.6)
                                           -----    ------    ----    -----    -----    ----    ----    ------
  December 31, 1998....................     88.6     564.0    48.3    361.9     38.9      --     1.4     202.1
     Revisions and other changes.......     15.2     135.2    15.3    131.1     (0.6)     --     0.5       4.1
     Extensions and discoveries........     12.0      23.2     0.1      2.1     11.2      --     0.7      21.1
     Acquisitions of reserves..........      8.8      92.1     8.8     92.1       --      --      --        --
     Sales of reserves.................       --        --      --       --       --      --      --        --
     Production........................     (7.7)    (26.4)   (3.4)    (3.3)    (3.6)     --    (0.7)    (23.1)
                                           -----    ------    ----    -----    -----    ----    ----    ------
  December 31, 1999....................    116.9     788.1    69.1    583.9     45.9      --     1.9     204.2
     Revisions and other changes.......     (6.4)     (7.3)   (2.0)    (2.6)    (4.6)     --     0.1      (4.7)
     Extensions and discoveries........     27.7     172.2    20.8    102.0      1.3     7.9     5.5      62.3
     Acquisitions of reserves..........       --        --      --       --       --      --      --        --
     Sales of reserves.................    (24.3)   (167.5)     --       --    (23.5)     --    (0.8)   (167.5)
     Production........................     (7.3)    (17.6)   (3.6)    (3.9)    (3.2)   (0.9)   (0.5)    (12.8)
                                           -----    ------    ----    -----    -----    ----    ----    ------
  December 31, 2000....................    106.6     767.9    84.3    679.4     15.9     7.0     6.2      81.5
                                           =====    ======    ====    =====    =====    ====    ====    ======
Estimated Proved Developed Reserves(a)
  December 31, 1997....................     45.3     267.8    25.1     29.6     18.5      --     1.7     238.2
  December 31, 1998....................     50.6     448.8    31.7    251.0     17.5      --     1.4     197.8
  December 31, 1999....................     74.5     652.7    50.9    460.9     21.8      --     1.8     191.8
  December 31, 2000....................     94.1     748.2    80.8    679.4     10.8     7.0     2.4      61.8
</TABLE>

-------------------------
(a)  The government license in Venezuela is an oil service contract whereby CMS
     Oil and Gas is paid a fee per barrel for oil discovered, lifted, and
     delivered to Maraven S.A., a subsidiary of Petroleos de Venezuela S.A.
     Additionally, CMS Oil and Gas receives a fee for reimbursement of certain
     capital expenditures. The volumes presented represent actual production
     with respect to which CMS Oil and Gas is paid a per barrel fee.

     Properties of certain CMS Oil and Gas subsidiaries are also subject to
liens of creditors of the respective subsidiaries. In 2000, CMS Oil and Gas sold
all of its northern Michigan oil and gas properties. In that same year, it also
sold its working interest in oil reserves located in Ecuador.

MARKETING, SERVICES AND TRADING

     CMS MST, formed in 1996 and the surviving entity of a 1997 merger with CMS
Gas Marketing Company formed in 1987, provides 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
MST has grown dramatically since its inception. CMS Energy intends to use CMS
MST to enhance performance of CMS Energy assets, such as gas reserves and power
plants. CMS MST markets approximately 614 bcf of natural gas, 37,781 GWh of
electricity, 31 million barrels of crude oil and 9 million barrels of natural
gas liquids. From

                                        18
<PAGE>   19

1997 through 2000, CMS MST also performed 350 energy management services
projects. At December 31, 2000, CMS MST had more than 10,611 customers,
transported gas on more than 40 gas pipelines and was active in 39 states and
Canada and Brazil. In 2000, CMS MST's operating revenue was $3.3 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

     CMS Electric and Gas, formed in 1996, is involved in purchasing, investing
in and operating gas and electric distribution systems worldwide. In 2000,
operating revenue was $265 million.

     INTERNATIONAL ENERGY DISTRIBUTION PROPERTIES: As of December 31, 2000, CMS
Electric and Gas had ownership interest in electric distribution companies as
follows:

<TABLE>
<CAPTION>
                       LOCATION                           OWNERSHIP INTEREST    CUSTOMERS SERVED    SALES
                       --------                           ------------------    ----------------    -----
                                                                 (%)               (APPROX.)        (GWH)
<S>                                                       <C>                   <C>                 <C>
Venezuela.............................................          70.00                94,000           816
Argentina.............................................          24.56               235,000         1,225
Brazil................................................          81.22               146,000         1,125
</TABLE>

     In January 2000, CMS Electric and Gas sold its interest in Companhia Forca
Luz Cataguazes -- Leopoldina and its subsidiaries in Brazil. In December 2000,
CMS Energy sold approximately one-half of its 48 percent ownership interest in
Empressa Distribuidora de Electricidad de Entre Rios, S.A., an electric
distribution utility serving the province of Entre Rios, Argentina and executed
an agreement to sell the remaining 24.56 percent in 2001.

SALES BETWEEN BUSINESS SEGMENTS

     CMS Energy's sales between business segments for the years ended December
31 were as follows:

<TABLE>
<CAPTION>
                  YEARS ENDED DECEMBER 31                       2000    1999    1998
                  -----------------------                       ----    ----    ----
<S>                                                             <C>     <C>     <C>
Oil and Gas Exploration and Production......................    $ 24    $ 45    $ 64
Natural Gas Transmission....................................     177      69       9
Marketing, Services and Trading.............................     176      73      68
</TABLE>

CMS ENERGY, CONSUMERS AND PANHANDLE 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 jurisdiction of the MPSC, 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.

     The Attorney General, ABATE, and the MPSC staff typically intervene in MPSC
electric and gas related proceedings concerning Consumers and intervened in the
proceeding described below. 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 and the Michigan Supreme Court.

     RATE PROCEEDINGS: In 1996, the MPSC issued orders that established the
electric authorized rate of return on common equity at 12.25 percent and the gas
authorized rate of return on common equity at 11.6 percent.

                                        19
<PAGE>   20

     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. By 2002, the Customer Choice Act will permit all Consumers' electric
customers to choose their electric energy supplier. The enactment of the
Customer Choice Act imposed rate cuts, 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 TO CMS ENERGY'S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 2 TO CONSUMERS' 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. In 1998, Consumers'
implemented a statewide three-year experimental gas customer choice pilot
program eventually allowing up to 300,000 residential, commercial and industrial
retail gas sales customers to choose their gas supplier. The program froze the
rates Consumers' is permitted to charge for the service of distributing gas to
its customers through March 31, 2001.

     Beginning April 1, 2001, Consumers will establish a permanent gas customer
choice program that will allow up to 600,000 of Consumers' gas customers to
participate in the permanent gas customer choice program. By 2003, all of
Consumers' gas customers will be eligible to select an alternative gas commodity
supplier. Also on April 1, 2001, Consumers will return to a GCR mechanism that
will allow 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 TO CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 2 TO CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.

FEDERAL ENERGY REGULATORY COMMISSION

     FERC has limited rate jurisdiction over several independent power plants in
which CMS Generation has ownership interests. FERC also has more comprehensive
jurisdiction over Michigan Gas Storage, 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 or 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 of or abandonment of service using such facilities. Panhandle
Eastern Pipe Line, Trunkline Gas Company, Sea Robin, Trunkline LNG, Michigan Gas
Storage 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 operation aspects of Consumers' electric
operations including compliance with FERC accounting rules; transmission of
electric energy; wholesale rates; transfers of certain facilities; corporate
mergers and issuance of securities.

     The Federal Power Act grants independent power producers and electricity
marketers "direct access" to the interstate electric transmission systems owned
by electric utilities, and all electric utilities are required to offer
transmission services to all market participants on a non-discriminatory basis
under tariffs approved by the FERC. 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 and ITEM 7.
CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS --

                                        20
<PAGE>   21

OUTLOOK -- ELECTRIC UTILITY OUTLOOK . For a discussion of the effect of certain
FERC orders on Panhandle see ITEM 7. PANHANDLE'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OTHER MATTERS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- NOTE 3 TO PANHANDLE'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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 TO CMS ENERGY'S CONSOLIDATED
FINANCIAL STATEMENTS, and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- NOTES 1 AND 2 TO CONSUMERS' 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 the Office
of Fossil Fuels of the DOE.

     Panhandle is also subject to the Natural Gas Pipeline Safety Act of 1968,
which regulates gas pipeline safety requirements, and to the Hazardous Liquid
Pipeline Safety Act of 1979, which regulates oil and petroleum pipelines.

CMS ENERGY, CONSUMERS AND PANHANDLE 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.
Management believes that the responsible administration of CMS Energy's,
Consumers' and Panhandle's energy resources includes reasonable programs for the
protection and enhancement of the environment. 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 and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF
CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. For additional
information on Panhandle's environmental matters, see ITEM 7. PANHANDLE'S
MANAGEMENT'S DISCUSSION AND ANALYSIS -- OTHER ENVIRONMENTAL MATTERS and ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 10 OF PANHANDLE'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.

     Consumers installed and is currently installing modern emission controls at
its electric generating plants and converted 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 as a
result 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 -- and NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- Consumers' Electric Utility Contingencies -- Electric
Environmental Matters -- Cost of Environmental Law Compliance.

     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, due to the imposition of stricter federal and
state requirements. In order to significantly reduce the 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 in place of native materials
where such use 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

                                        21
<PAGE>   22

compatible uses. The EPA has announced an intention to develop new nationwide
standards for ash disposal areas. Consumers intends to work through industry
groups to help ensure that any such regulations that may be issued will require
the minimum cost consistent with protection of the environment. In 2000, capital
expenditures by Consumers for environmental protection additions were $103
million. Consumers estimates 2001 expenditures for this program at $181 million.

     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 the Ludington Pumped
Storage facility. Consumers removed and replaced part of the PCB material.
Consumers 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.

     For discussion of environmental matters involving Panhandle, including
possible liability and capital costs, see ITEM 7. PANHANDLE'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- OTHER ENVIRONMENTAL MATTERS and ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 10 OF PANHANDLE'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. 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, CONSUMERS AND PANHANDLE 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.
However, wholesale for retail transactions by Consumers generated an immaterial
amount of Consumers' 2000 revenues from electric operations. Consumers does not
believe future loss of wholesale for retail sales to be significant. In most
instances, the customers will continue to be transmission customers even if they
cease to be generation customers.

     A significant increase in retail electric competition is now possible with
the passage of the Customer Choice Act and the availability of retail direct
access. The Customer Choice Act requires Consumers to open up to 750 MW of its
electric customer power supply requirement to competition by the end of 2001.
The Consumer Choice Act gives all customers the right to choose their own
electric supplier after January 1, 2002.

     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 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.

                                        22
<PAGE>   23

     CMS Energy's non-utility electric subsidiaries primarily face competition
from other marketers, brokers, financial management firms, energy management
firms, and other utilities through the marketing services and trading business
segment; and from other generators, marketers, brokers, and price of power on
the wholesale market through the independent power production business segment.

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

GAS COMPETITION

     Competition has existed for several years, and is likely to increase, in
various aspects of Consumers' gas business. Competition traditionally comes from
alternate fuels and energy sources, such as propane, oil, and electricity.
Increasingly, competition comes from other suppliers of the natural gas
commodity.

     Changes in regulation have resulted in increased competition from other
sellers of natural gas for sale of the gas commodity to Consumers' customers. As
a result of the regulatory changes that separated (unbundled) the transportation
and storage of natural gas from the sale of natural gas by interstate pipelines
and Michigan gas distributors, Consumers offers unbundled services
(transportation and some storage) to its larger end-use customers. Additionally,
to prepare for the unbundled retail market, Consumers is conducting an
experimental gas customer choice program that, through March 2001, allows
300,000 residential, commercial, and industrial retail gas sales customers to
choose an alternative gas supplier in direct competition with Consumers as a
supplier of the gas commodity. In late 2000, Consumers received MPSC
authorization to implement a permanent gas customer choice pilot program
beginning April 1, 2001. This permanent program will allow all gas customers to
select an alternative gas supplier by 2003.

     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, ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK and ITEM 7. PANHANDLE'S MANAGEMENT'S 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 ANR Pipeline Company, Natural Gas Pipeline Company of America, Texas Gas
Transmission Corporation, Northern Border Pipeline Company, Alliance Pipeline
and Northern Natural Gas Company 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, affect the demand for
natural gas in the areas served by Panhandle.

                                        23
<PAGE>   24

EMPLOYEES

CMS ENERGY

     As of December 31, 2000, CMS Energy and its subsidiaries, including
Consumers and Panhandle, had 11,652 full-time equivalent employees of whom
11,599 are full-time employees and 53 full-time equivalent employees associated
with the part-time work force. Included in the total are 3,939 employees who are
covered by union contracts.

CONSUMERS

     As of December 31, 2000, Consumers and its subsidiaries had 8,755 full-time
equivalent employees of whom 8,704 are full-time employees and 51 full-time
equivalent employees associated with the part-time work force. Included in the
total are 3,663 full-time operating, maintenance and construction employees of
Consumers who are represented by the Union. Consumers and the Union negotiated a
collective bargaining agreement that became effective as of June 1, 2000. By its
terms, it will continue in full force and effect until June 1, 2005.

PANHANDLE

     At December 31, 2000, Panhandle had 1,105 full-time equivalent employees.
Of these employees, 250 were represented by the Paper, Allied - Industrial
Chemical and Energy Workers International Union, AFL-CIO, CLC.

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

INTERNATIONAL OPERATIONS

     CMS Energy, through certain of its Enterprises subsidiaries, has made
substantial international investments in approximately 20 countries. These
international investments in electric generating facilities, oil and gas
exploration, production and processing 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 traditional insurance, similar to comparable companies in
the same line of business, for the various risk exposures including political
risk from possible nationalization or expropriation and inability to convert
currency, incidental to CMS Energy's respective businesses.

     Although CMS Energy maintains insurance for various risks, CMS Energy is
exposed to some risks that include local political and economic factors over
which it has no control. 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 of the type CMS Energy is
making 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 our investment. In
some of these 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, in turn, CMS Energy's growth plans for
Enterprises' international investments 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, NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, and
NOTE 3 and NOTE 10 OF PANHANDLE'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 and in ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND
ANALYSIS -- DERIVATIVES AND HEDGES.

                                        24
<PAGE>   25

     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, providing 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 statement. 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", "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:

     - Sale of assets in accordance with plans;

     - Achievement of operating synergies and revenue enhancement;

     - Capital and financial market conditions, including current price of our
       common stock, interest rates and availability of financing, market
       perceptions of the energy industry, our company, or any of our
       subsidiaries, our, or any of our subsidiaries', securities ratings, and
       currency 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;

     - International, national, regional and local economic, competitive and
       regulatory conditions and developments, particularly the trade, monetary,
       fiscal, taxation and environmental policies of governments, agencies and
       similar organizations in geographic areas where we have a financial
       interest;

     - Adverse regulatory or legal decisions, including environmental laws and
       regulations, the manner and terms of implementation of the Customer
       Choice Act; the pace of implementation and provisions for deregulation of
       the natural gas industry, whether by legislative or regulatory action;

     - Federal regulation of electric sales and transmission of electricity that
       grants independent power producers and electricity marketers and other
       utilities "direct access" to the interstate electric transmission systems
       owned by electric utilities, creating opportunity for competitors to
       market electricity to our wholesale customers;

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

     - The increased competition caused by FERC approval of new pipeline and
       pipeline expansion projects that transport large additional volumes of
       natural gas to the Midwestern United States from Canada, which could
       reduce volumes of gas transported by our natural gas transmission
       businesses or cause them to lower rates in order to meet competition;

                                        25
<PAGE>   26

     - Potential disruption, expropriation or interruption of facilities or
       operations due to accidents or political events and the ability to get 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 that
       may result in competitive disadvantages and create the potential for
       impairment of existing assets;

     - Financial or regulatory accounting principles or policies imposed by the
       FASB, the SEC, the FERC, the MPSC and similar entities with regulatory
       oversight;

     - Cost and other effects of legal and administrative proceedings,
       settlements, investigations and claims;

     - The development or operation of projects in which our subsidiaries have a
       minority interest;

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

     - 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.

     CMS Energy, Consumers, Panhandle and their 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 prior to the effective date of the Act. 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" in our most recent reports to the SEC on
Form 10-Q or Form 8-K filed subsequent to this Form 10-K.

                                        26
<PAGE>   27

EXECUTIVE OFFICERS

     As of March 1, 2001

CMS ENERGY

<TABLE>
<CAPTION>
                NAME                     AGE                     POSITION                         PERIOD
                ----                     ---                     --------                         ------
<S>                                      <C>    <C>                                            <C>
William T. McCormick, Jr.............    56     Chairman of the Board, President and Chief
                                                  Executive Officer of CMS Energy              2000-Present
                                                Chairman of the Board and President of
                                                  Consumers                                    2000-Present
                                                Chairman of the Board, President and Chief
                                                  Executive Officer of Enterprises             2000-Present
                                                Chairman of the Board and Chief Executive
                                                  Officer of CMS Energy                        1987-2000
                                                Chairman of the Board of Enterprises           1987-2000
                                                Chairman of the Board of Consumers             1985-2000
Alan M. Wright.......................    55     Executive Vice President, Chief Financial
                                                Officer and Chief Administrative Officer of
                                                  CMS Energy                                   2000-Present
                                                Executive Vice President, Chief Financial
                                                  Officer and Chief Administrative Officer
                                                  of Consumers                                 2000-Present
                                                Executive Vice President and Chief
                                                  Financial Officer of Enterprises             2000-Present
                                                Senior Vice President and Chief Financial
                                                  Officer of CMS Energy                        1998-2000
                                                Senior Vice President and Chief Financial
                                                  Officer of Enterprises                       1998-2000
                                                Senior Vice President, Chief Financial
                                                  Officer and Treasurer of Enterprises         1994-1998
                                                Senior Vice President, Chief Financial
                                                  Officer and Treasurer of CMS Energy          1994-1998
                                                Senior Vice President and Chief Financial
                                                  Officer of Consumers                         1993-2000
David W. Joos........................    47     Executive Vice President and Chief
                                                Operating Officer -- Electric of CMS Energy    2000-Present
                                                Executive Vice President and Chief
                                                  Operating Officer -- Electric of
                                                  Enterprises                                  2000-Present
                                                President and Chief Executive
                                                  Officer -- Electric of Consumers             1997-Present
                                                Executive Vice President and Chief
                                                  Operating Officer -- Electric of
                                                  Consumers                                    1994-1997
William J. Haener....................    59     Chairman of the Board -- Panhandle Eastern
                                                Pipe Line                                      2001-Present
                                                Executive Vice President and Chief
                                                  Operating Officer -- Gas of CMS Energy       2000-Present
                                                Executive Vice President and Chief
                                                  Operating Officer -- Gas of Enterprises      2000-Present
                                                Senior Vice President of Enterprises           1998-2000
                                                President and Chief Executive Officer of
                                                  CMS Gas Transmission                         1994-Present
Rodger A. Kershner...................    52     Senior Vice President and General Counsel
                                                of CMS Energy                                  1996-Present
                                                Senior Vice President of Enterprises           1999-Present
                                                Senior Vice President and General Counsel
                                                  of Enterprises                               1996-1999
</TABLE>

                                        27
<PAGE>   28

<TABLE>
<CAPTION>
                NAME                     AGE                     POSITION                         PERIOD
                ----                     ---                     --------                         ------
<S>                                      <C>    <C>                                            <C>
John W. Clark........................    56     Senior Vice President of CMS Energy            1987-Present
                                                Senior Vice President of Consumers             1985-Present
Preston D. Hopper....................    50     Senior Vice President, Chief Accounting
                                                Officer and Controller of CMS Energy           1996-Present
                                                Senior Vice President and Chief Accounting
                                                  Officer of Enterprises                       1997-Present
                                                Senior Vice President and Controller of
                                                  Enterprises                                  1996-1997
                                                Vice President, Controller and Chief
                                                  Accounting Officer of CMS Energy             1992-1996
                                                Vice President and Controller of
                                                  Enterprises                                  1992-1996
Rodney E. Boulanger..................    60     Senior Vice President of Enterprises           1996-Present
                                                President and Chief Executive Officer of
                                                  CMS Generation                               1995-Present
Carl L. English......................    54     President and Chief Executive
                                                Officer -- Gas of Consumers                    2000-Present
                                                Vice President of Consumers                    1990-2000
James W. Cook........................    60     Senior Vice President of CMS Energy            1995-Present
                                                Senior Vice President of Enterprises           1994-Present
Doris F. Galvin......................    46     Senior Vice President of Enterprises           1999-Present
                                                Vice President and Treasurer of CMS Energy     1998-1999
                                                Vice President and Treasurer of Enterprises    1998-1999
                                                Vice President and Treasurer of Consumers      1993-1999
Frank Johnson........................    53     President and Chief Executive Officer of
                                                CMS Electric and Gas                           2000-present
                                                Vice President and Chief Operating Officer
                                                  of CMS Electric and Gas                      2000
                                                Vice President of CMS Electric and Gas         1996-2000
Bradley W. Fischer...................    54     President and Chief Executive Officer of
                                                CMS Oil and Gas                                1998-Present
                                                Vice President of CMS Oil and Gas              1997-1998
*Christopher A. Helms................    46     President and Chief Executive Officer of
                                                  Panhandle Eastern Pipe Line                  2000-Present
                                                President and Chief Operating Officer of
                                                  Panhandle Eastern Pipe Line                  1999-2000
**Tamela W. Pallas...................    43     President and Chief Operating Officer of
                                                CMS MST                                        1999-Present
***David Presley.....................    47     Vice President of CMS Gas Transmission         1999-Present
                                                President of CMS Field Services, Inc.          1998-Present
</TABLE>

-------------------------
*   Mr. Helms has served as President and Chief Operating Officer of Panhandle
    Eastern Pipe Line since March 1999. From 1993 through March 1999, Mr. Helms
    served as Director of Corporate Development and Vice President of Corporate
    Affairs of Duke Energy Corporation.

**  Ms. Pallas has served as President and Chief Operating Officer of CMS MST
    since November 1999. From 1997 until November 1999, Ms. Pallas served as
    Senior Vice President of Reliant Energy. From 1992 until 1997, Ms. Pallas
    was employed by Basis Energy as a Senior Vice President.

*** Mr. Presley was the founder and President of Heritage Gas Services from 1995
    through October 1998.

     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 25, 2001).

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

                                        28
<PAGE>   29

CONSUMERS

<TABLE>
<CAPTION>
                NAME                     AGE                    POSITION                        PERIOD
                ----                     ---                    --------                        ------
<S>                                      <C>    <C>                                         <C>
William T. McCormick, Jr.............    56     See the information under CMS Energy's
                                                  Executive Officers section above.
Alan M. Wright.......................    55     See the information under CMS Energy's
                                                  Executive Officers section above.
William J. Haener....................    59     See the information under CMS Energy's
                                                  Executive Officers section above.
David W. Joos........................    47     See the information under CMS Energy's
                                                  Executive Officers section above.
John W. Clark........................    56     See the information under CMS Energy's
                                                  Executive Officers section above.
Dennis DaPra.........................    58     Senior Vice President and Controller of
                                                  Consumers                                 2001-Present
                                                Vice President and Controller of
                                                  Consumers                                 1991-2001
Kenneth C. Emery.....................    53     Senior Vice President of Consumers          2000-Present
                                                Vice President of Consumers                 1996-2000
Carl L. English......................    54     See the information under CMS Energy's
                                                  Executive Officers section above.
Robert A. Fenech.....................    53     Senior Vice President of Consumers          1997-Present
                                                Vice President of Consumers                 1994-1997
David A. Mikelonis...................    52     Senior Vice President and General
                                                Counsel of Consumers                        1988-Present
Paul N. Preketes.....................    51     Senior Vice President of Consumers          2000-Present
                                                Vice President of Consumers                 1994-2000
John G. Russell......................    43     Senior Vice President of Consumers          2000-Present
                                                Vice President of Consumers                 1999-2000
</TABLE>

     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 Consumers (scheduled to be held on May 25, 2001).

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

                                        29
<PAGE>   30

                              ITEM 2. PROPERTIES.

     A description of CMS Energy, Consumers and Panhandle properties is
contained in ITEM 1. BUSINESS -- Consumers -- Consumers Properties -- General;
BUSINESS -- BUSINESS SEGMENTS -- Consumers Electric Utility -- 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, Consumers, Panhandle and some of their 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,
CONSUMERS AND PANHANDLE REGULATION, as well as to each of CMS Energy's,
Consumers' and Panhandle's ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS and CMS
Energy's, Consumers' and Panhandle'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

     OXFORD TIRE RECYCLING LITIGATION: For a discussion of Oxford Tire Recycling
litigation see CMS Energy's ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- NOTE 5 -- UNCERTAINTIES.

     PATRIOT OIL COMPANY LITIGATION: In December 2000, Patriot Oil Company and
Frank J. Holdampf filed a claim in the District Court of Midland County, Texas,
385th Judicial District against CMS Oil and Gas and others. CMS Oil and Gas had
acquired an oil and gas lease from Mr. Kessler and others, and the subsequent
holders of the land rights sought to quiet title to the land. The Complaint
filed by Patriot Oil and Mr. Holdampf against CMS Oil and Gas and others
asserts, among other claims, breach of contract, interference with contractual
relationship and various fraud claims and seeks damages in excess of $3 billion
dollars. In January 2001, the Court dismissed CMS Oil and Gas from this case.
This matter is now closed.

CONSUMERS

     ANTITRUST LITIGATION: In October 1997, Indeck Energy Services, Inc. and
Indeck Saginaw Limited Partnership, independent power producers, filed a lawsuit
against Consumers and CMS Energy in the United States District Court for the
Eastern District of Michigan. The suit alleged antitrust violations relating to
contracts that Consumers entered into with some of its customers as well as
claims relating to independent power production projects. The plaintiffs claimed
damages of $100 million (which could be trebled in antitrust cases as provided
by law). The transactions of which plaintiffs complained were regulated by and
subject to the jurisdiction of the MPSC. In September 1998, the United States
District Court for the Eastern District of Michigan granted CMS Energy's motion
to dismiss the complaint for failure to state a claim against which relief may
be granted. In March 1999, the Court issued an opinion and order granting
Consumers' motion for summary judgment, resulting in dismissal of the case. The
6th Circuit Court of Appeals upheld the dismissal and in December 2000 denied an
independent power producer's petition for rehearing. The independent power
producers are attempting to have this matter reviewed by the United States
Supreme Court.

                                        30
<PAGE>   31

CMS ENERGY, CONSUMERS AND PANHANDLE

     ENVIRONMENTAL MATTERS: CMS Energy, Consumers, Panhandle and their
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
their present knowledge and subject to future legal and factual developments,
CMS Energy, Consumers and Panhandle believe that it is unlikely that these
actions, individually or in total, will have a material adverse effect on their
financial condition. See CMS Energy's, Consumers' and Panhandle's MANAGEMENT'S
DISCUSSION AND ANALYSIS; and CMS Energy's, Consumers' and Panhandle's CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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

CMS ENERGY

     In fourth quarter of 2000, CMS Energy did not submit any matters to vote of
security holders.

CONSUMERS

     In fourth quarter of 2000, Consumers did not submit any matters to vote of
security holders.

                                        31
<PAGE>   32

                                    PART II

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

CMS ENERGY

     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 -- RECAPITALIZATION 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, 2001, the number of registered
shareholders totaled 66,783.

CONSUMERS

     Consumers' common stock is privately held by its parent, CMS Energy, and
does not trade in the public market. In January, May, August, November and
December 2000, Consumers paid $79 million, $30 million, $17 million, $61 million
and $58 million in cash dividends, respectively, on its common stock. In
December 2000, Consumers also made a $2 million distribution of stock held as an
investment. In January, May, August and November 1999, Consumers paid $97
million, $76 million, $34 million and $55 million in cash dividends,
respectively, on its common stock.

PANHANDLE

     Panhandle's common stock is privately held by its parent, CMS Gas
Transmission, and does not trade in the public market. In March, June, September
and December 2000, Panhandle paid $30 million, $9 million, $15 million and $11
million in cash dividends, respectively, on its common stock to CMS Gas
Transmission. In June, September and December 1999, Panhandle paid $13 million,
$16 million and $12 million in cash dividends, respectively, on its common
stock. In the first quarter of 1999, Panhandle recorded dividends on common
stock of $81 million to a subsidiary of Duke Energy.

                        ITEM 6. SELECTED FINANCIAL DATA.

CMS ENERGY

     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.

CONSUMERS

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

                                        32
<PAGE>   33

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

CMS ENERGY

     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.

CONSUMERS

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

PANHANDLE

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

                     ITEM 7A. QUANTITATIVE AND QUALITATIVE
                         DISCLOSURES ABOUT MARKET RISK

CMS ENERGY

     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 -- RESULTS OF OPERATIONS -- MARKET RISK INFORMATION,
which is incorporated by reference herein.

CONSUMERS

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

PANHANDLE

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

                                        33
<PAGE>   34

              ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements:

<TABLE>
<CAPTION>
                                                                 PAGE
                                                                 ----
<S>                                                             <C>
CMS ENERGY
Selected Financial Information..............................    CMS-2
Management's Discussion and Analysis........................    CMS-4
Consolidated Statements of Income...........................    CMS-20
Consolidated Statements of Cash Flows.......................    CMS-22
Consolidated Balance Sheets.................................    CMS-24
Consolidated Statements of Preferred Stock..................    CMS-26
Consolidated Statements of Common Stockholders' Equity......    CMS-27
Notes to Consolidated Financial Statements..................    CMS-28
Report of Independent Public Accountants....................    CMS-70
Quarterly Financial and Common Stock Information............    CMS-71
CONSUMERS ENERGY
Selected Financial Information..............................     CE-2
Management's Discussion and Analysis........................     CE-3
Consolidated Statements of Income...........................    CE-13
Consolidated Statements of Cash Flows.......................    CE-14
Consolidated Balance Sheets.................................    CE-16
Consolidated Statements of Long-Term Debt...................    CE-18
Consolidated Statements of Preferred Stock..................    CE-19
Consolidated Statements of Common Stockholder's Equity......    CE-20
Notes to Consolidated Financial Statements..................    CE-21
Report of Independent Public Accountants....................    CE-47
Quarterly Financial Information.............................    CE-48
PANHANDLE EASTERN PIPE LINE
Management's Discussion and Analysis........................     PE-2
Consolidated Statements of Income...........................     PE-7
Consolidated Statements of Cash Flows.......................     PE-8
Consolidated Balance Sheets.................................     PE-9
Consolidated Statements of Common Stockholder's Equity......    PE-10
Notes to Consolidated Financial Statements..................    PE-11
Report of Independent Public Accountants - Arthur Andersen
  LLP.......................................................    PE-24
Report of Independent Public Accountants - Deloitte & Touche
  LLP.......................................................    PE-25
</TABLE>

                                        34
<PAGE>   35

                      (This page intentionally left blank)

                                        35
<PAGE>   36

                               [CMS ENERGY LOGO]

                           2000 FINANCIAL STATEMENTS

                                      CMS-1
<PAGE>   37

                             CMS ENERGY CORPORATION
                         SELECTED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                        2000            1999              1998           1997          1996
                                                        ----            ----              ----           ----          ----
<S>                                           <C>      <C>             <C>               <C>            <C>           <C>
Operating revenue (in millions).............    ($)      8,998           6,103             5,141         4,781         4,324
Consolidated net income (in millions).......    ($)         36             277               285           244           224
Average common shares outstanding (in
  thousands)
  CMS Energy................................           113,128         110,140           102,446        96,144        92,462
  Class G...................................                --              --             8,333         8,015         7,727
Earnings per average common share
  CMS Energy -- Basic.......................    ($)       0.32            2.18(a)           2.65          2.39          2.27
               -- Diluted...................    ($)       0.32            2.17(a)           2.62          2.37          2.26
  Class G     -- Basic and Diluted..........    ($)         --            4.21(a)           1.56          1.84          1.82
Cash from operations (in millions)..........    ($)        453             917               516           624           647
Capital expenditures, excluding
  acquisitions, capital lease additions and
  DSM (in millions).........................    ($)      1,032           1,124             1,295           678           643
Total assets (in millions)..................    ($)     15,851          15,462            11,310         9,508         8,363
Long-term debt, excluding current maturities
  (in millions).............................    ($)      6,770           6,428(b)          4,726         3,272         2,842
Non-current portion of capital leases (in
  millions).................................    ($)         54              88               105            75           103
Total preferred stock (in millions).........    ($)         44              44               238           238           356
Total Trust Preferred Securities (in
  millions).................................    ($)      1,089           1,119               393           393           100
Cash dividends declared per common share
  CMS Energy................................    ($)       1.46            1.39              1.26          1.14          1.02
  Class G...................................    ($)         --            0.99              1.27          1.21          1.15
Market price of common stock at year-end
  CMS Energy................................    ($)         31 11/16        31 3/16           48 7/16       44 1/16       33 5/8
  Class G...................................    ($)         --              24 9/16(c)        25 1/4        27 1/8        18 3/8
Book value per common share at year-end
  CMS Energy................................    ($)      19.48           21.17             19.61         16.84         15.24
  Class G...................................    ($)         --              --             11.46         10.91         11.38
Return on average common equity.............    (%)        1.5            11.8              14.2          14.7          15.7
Return on assets............................    (%)        3.5             5.3(b)            5.5           5.6           5.4
Number of employees at year-end (full-time
  equivalents)..............................            11,652          11,462             9,710         9,682         9,712
ELECTRIC UTILITY STATISTICS
  Sales (billions of kWh)...................              41.0            41.0              40.0          37.9          37.1
  Customers (in thousands)..................             1,691           1,665             1,640         1,617         1,594
  Average sales rate per kWh................  (cents)     6.56            6.54              6.50          6.57          6.55
GAS UTILITY STATISTICS
  Sales and transportation deliveries
     (bcf)..................................               410             389               360           420           448
  Customers (in thousands)(d)...............             1,611           1,584             1,558         1,533         1,504
  Average sales rate per mcf................    ($)       4.39            4.52              4.56          4.44          4.45
INTERNATIONAL DIVERSIFIED ENERGY STATISTICS
  CMS Energy's share of unconsolidated
     revenue (in millions):
     Independent power production...........    ($)        837             802               761           621           493
     Natural gas transmission...............    ($)        171             130                67            51            42
     Marketing, services and trading........    ($)      1,157             524               291           202            --
  Independent power production sales
     (millions of kWh)......................            21,379          20,478(b)         19,017        13,126         7,823
</TABLE>

                                      CMS-2
<PAGE>   38

<TABLE>
<CAPTION>
                                                        2000            1999              1998           1997          1996
                                                        ----            ----              ----           ----          ----
<S>                                             <C>    <C>             <C>               <C>            <C>           <C>
  Gas pipeline throughput (bcf).............             1,742           1,141(b)            253           226           177
  Gas managed and marketed for end users
     (bcf)..................................               614             470               366           243           108
  Electric power marketed (millions of
     kWh)...................................            37,781           3,709             6,973           900            --
EXPLORATION AND PRODUCTION STATISTICS
  Sales (net equiv. MMbbls).................              10.2            12.1              12.1          11.4          10.1
  Proved reserves (net equiv. MMbbls).......             234.6           248.2             182.6         152.0         133.5
  Proved reserves added (net equiv.
     MMbbls)................................              48.8            77.7              42.7          29.9          19.1
  Finding cost per net equiv. barrel........    ($)       2.63            1.94              3.35          2.38          2.94
</TABLE>

-------------------------
(a)  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.

(b)  Certain prior year amounts were restated for comparative purposes.

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

(d)  Excludes off-system transportation customers.

                                      CMS-3
<PAGE>   39

                             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 the Lower
Peninsula of Michigan. Enterprises, through subsidiaries, including Panhandle
and its subsidiaries, which were acquired in March 1999, is engaged in several
domestic and international diversified energy businesses including: natural gas
transmission, storage and processing; independent power production; oil and gas
exploration and production; energy marketing, services and trading; and
international energy distribution.

     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 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 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.

RESULTS OF OPERATIONS

     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,
management determined that a loss in value of CMS Energy's investment occurred,
and an impairment loss was realized on the carrying amount of the Loy Yang
investment of $329 million ($268 million after-tax, or $2.37 per share). This
loss does not include cumulative net foreign currency losses of $164 million due
to unfavorable changes in exchange rates, which, in accordance with SFAS No. 52,
Foreign Currency Translation, will not be realized until there has been a sale
or full liquidation of CMS Energy's investment. 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.

     Also in 2000, CMS Energy adopted the provisions of the SEC's SAB No. 101
summarizing the SEC staff's views on revenue recognition policies based upon
existing generally accepted accounting principles. As a result, the SEC staff
viewed the oil and gas exploration and production industry's long-standing
practice of recording inventories at their net realizable amount at the time of
production as inappropriate. 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 by $5 million, net of tax, or $.04 per basic and diluted
share of CMS Energy Common Stock.

                                      CMS-4
<PAGE>   40

     In 1999, CMS Energy recorded losses of $84 million ($49 million after-tax,
or $.45 and $.43 per basic and diluted share, respectively) relating to its
investments in Nitrotec, a proprietary gas processing company that has patents
for its helium removal and nitrogen rejection processes for purifying natural
gas. After reviewing the business alternatives and strategic outlook for its
investments in Nitrotec, CMS Energy determined that the probability of
recovering any portion of its investments was unlikely. Accordingly, in 1999,
CMS Energy recorded losses equal to the carrying amount of its investments.

     In October 1999, CMS Energy exchanged approximately 6.1 million shares of
CMS Energy Common Stock for all of the approximately 8.7 million outstanding
shares of Class G Common Stock. Each Class G Common Stock shareholder received a
15 percent premium for each Class G share held. The adjusted value of all Class
G Common Stock was then exchanged for an equivalent value of CMS Energy Common
Stock. The exchange reduced CMS Energy's basic and diluted earnings per share by
$.26 and $.25, respectively, and increased Class G's basic and diluted earnings
per share by $3.31. The per share allocation did not affect CMS Energy's net
income for 1999 or for future periods.

     The following table depicts CMS Energy's Results of Operations before and
after the effects of the above-mentioned events of 2000 and 1999.

CMS ENERGY CONSOLIDATED EARNINGS

<TABLE>
<CAPTION>
                  YEARS ENDED DECEMBER 31                        2000     1999     1998
                  -----------------------                        ----     ----     ----
                                                                IN MILLIONS, EXCEPT PER
                                                                     SHARE AMOUNTS
<S>                                                             <C>       <C>      <C>
CONSOLIDATED NET INCOME.....................................    $   36    $ 277    $ 285
Net Income Attributable to CMS Energy Common Stock..........        36      269      272
Net Income Attributable to Class G Common Stock.............        --        8       13
CONSOLIDATED NET INCOME OF CMS ENERGY
Net Income Before Reconciling Items.........................    $  309    $ 318    $ 229
  Cumulative Effect of Change in Accounting for Inventories,
     Net of $2 Tax..........................................        (5)      --       --
  Effects of Losses on Investment in Loy Yang, Net of $61
     Tax....................................................      (268)      --       --
  Effects of Losses on Investments in Nitrotec, Net of $35
     Tax....................................................        --      (49)      --
  Cumulative Effect of Change in Accounting for Property
     Taxes, Net of $23 Tax..................................        --       --       43
                                                                ------    -----    -----
       Net Income Attributable to CMS Energy Common Stock...    $   36    $ 269    $ 272
                                                                ======    =====    =====
BASIC EARNINGS PER AVERAGE COMMON SHARE OF CMS ENERGY
Net Income Before Reconciling Items.........................    $ 2.73    $2.89    $2.25
  Cumulative Effect of Change in Accounting for
     Inventories............................................      (.04)      --       --
  Effects of Losses on Investment in Loy Yang...............     (2.37)      --       --
  Effects of Losses on Investments in Nitrotec..............        --     (.45)      --
  Effects of Class G Common Stock Exchange..................        --     (.26)      --
  Cumulative Effect of Change in Accounting for Property
     Taxes..................................................        --       --      .40
                                                                ------    -----    -----
     Net Income Available After Reconciling Items...........    $  .32    $2.18    $2.65
                                                                ======    =====    =====
DILUTED EARNINGS PER AVERAGE COMMON SHARE OF CMS ENERGY
Net Income Before Reconciling Items.........................    $ 2.73    $2.85    $2.22
  Cumulative Effect of Change in Accounting for
     Inventories............................................      (.04)      --       --
  Effects of Losses on Investment in Loy Yang...............     (2.37)      --       --
  Effects of Losses on Investments in Nitrotec..............        --     (.43)      --
  Effects of Class G Common Stock Exchange..................        --     (.25)      --
  Cumulative Effect of Change in Accounting for Property
     Taxes..................................................        --       --      .40
                                                                ------    -----    -----
     Net Income Available After Reconciling Items...........    $  .32    $2.17    $2.62
                                                                ======    =====    =====
</TABLE>

     For the year 2000, the decrease in consolidated net income as compared to
1999, before the effects of losses on investments in Loy Yang and Nitrotec and
after the cumulative effect of the change in accounting for

                                      CMS-5
<PAGE>   41

inventories, resulted from decreased earnings from the electric and gas
utilities and higher interest expense principally related to the Panhandle
acquisition. Increased earnings from CMS Energy's other diversified energy
businesses partially offset these earnings decreases, including the natural gas
transmission business, primarily as a result of the Panhandle acquisition; the
independent power production business; the oil and gas exploration and
production business; the international energy distribution business; and the
marketing, services and trading business. Gains on the sale of non-strategic
assets also partially offset the earnings decreases. Approximately $.20 per
diluted share of after-tax gains exceeds the amount CMS Energy expects to
sustain in future years as part of its continuing asset portfolio management
program.

     For the year 1999, the increase in consolidated net income as compared to
1998, before the effects of losses on investments in Nitrotec, resulted from
increased earnings from the electric and gas utilities; the natural gas
transmission business, primarily as a result of the Panhandle acquisition; the
independent power production business; the oil and gas exploration and
production business; and lower losses from the international energy distribution
business. Partially offsetting these increases was higher interest expense
principally related to the Panhandle acquisition.

     For further information, see the individual results of operations for each
CMS Energy business segment in this MD&A.

CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS

ELECTRIC UTILITY PRETAX OPERATING INCOME:

     For the year 2000, electric utility pretax operating income decreased $13
million from 1999. The earnings decrease reflects increased cost of power,
increased costs for the purchase of electricity options and the impact of the
five percent residential customer rate reduction resulting from the Customer
Choice Act. The increased cost of power also includes additional purchased power
costs due to outages at Consumers' generating facilities. These earnings
reductions were partially offset by increased electric delivery revenue from
commercial and wholesale customers, increased non-commodity revenue, and
decreased operating expenses. Operating expense reductions resulted primarily
from increased nuclear insurance refunds, reduced storm related costs in 2000
and a $11 million reduction in employee paid absence cost.

     For the year 1999, electric utility pretax operating income increased $19
million from 1998. Changes in regulation, effective in 1998, allowed Consumers
the opportunity to benefit from reduced power supply costs. In the past, such
cost reductions had no impact on net income because Consumers passed on power
cost savings to its electric customers. This earnings increase was partially
offset by higher depreciation costs for new property and equipment and lower
non-commodity revenues. The following table quantifies these impacts on pretax
operating income:

<TABLE>
<CAPTION>
               CHANGE COMPARED TO PRIOR YEAR                    2000 VS 1999    1999 VS 1998
               -----------------------------                    ------------    ------------
                                                                        IN MILLIONS
<S>                                                             <C>             <C>
Electric deliveries.........................................        $ 12            $37
Rate decrease...............................................         (22)            --
Power supply costs and related revenue......................         (13)            27
Net energy option costs.....................................         (37)           (19)
Non-commodity revenue.......................................          14            (13)
Operations and maintenance..................................          28             (3)
General taxes and depreciation..............................           5            (10)
                                                                    ----            ---
Total change................................................        $(13)           $19
                                                                    ====            ===
</TABLE>

     ELECTRIC DELIVERIES: For the year 2000, electric deliveries were 41 billion
kWh, similar to 1999; however, in 2000 deliveries to residential, commercial and
wholesale customers were higher compared with 1999, while deliveries to
industrial customers were lower. For the year 1999, total electric deliveries
were 41 billion kWh, an increase of 1 billion kWh or 2.5 percent compared with
1998. In 1999 total electric deliveries increased in all customer classes.

                                      CMS-6
<PAGE>   42

POWER SUPPLY COSTS:

<TABLE>
<CAPTION>
           YEARS ENDED DECEMBER 31                2000      1999     CHANGE     1999      1998     CHANGE
           -----------------------                ----      ----     ------     ----      ----     ------
                                                                       IN MILLIONS
<S>                                              <C>       <C>       <C>       <C>       <C>       <C>
                                                 $1,260    $1,193     $67      $1,193    $1,175     $18
</TABLE>

     For the year 2000, the increase in power supply costs was due to
unscheduled plant outages. These outages required increased purchases of higher
cost power to meet demand. For the year 1999, power supply cost increases
reflect higher internal generation to meet the increased demand for electricity
and increased power options costs as compared to 1998.

     For the years 2000 and 1999 respectively, Consumers purchased $51 million
and $19 million of energy options for physical delivery of electricity to ensure
a reliable source of power during the summer months. As a result of periodic
excess daily capacity, some options were sold for $1 million and $6 million in
the years 2000 and 1999, respectively. All of the remaining options were
exercised or expired. Consumers reflected the costs relating to the expired
options and the income received from the sale of options, as purchased power
costs.

CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS

GAS UTILITY PRETAX OPERATING INCOME:

     For the year 2000, gas utility pretax operating income decreased by $34
million from 1999. The earnings decrease primarily reflects increased gas costs
and the recording of a regulatory liability related to the increased gas costs,
which were significantly above the gas commodity rate being collected from
Consumers gas customers. This commodity rate, which is frozen through March 31,
2001, relates to a three-year experimental gas choice pilot program, which
provided Consumers the opportunity to benefit or lose from changes in gas
commodity costs. See Note 5, Uncertainties, for more detailed information on
this matter. Partially offsetting these decreases in earnings were increased gas
distribution service revenue from increased gas deliveries due to colder heating
season temperatures during the fourth quarter of 2000, increased gas wholesale
and retail services revenue and lower operating costs and a benefit of $5
million related to reductions in employee paid absence cost. For the year 1999,
gas pretax operating income increased by $6 million from 1998. The earnings
increase is primarily the result of increased gas distribution service revenue
from increased gas deliveries due to colder temperatures during the first and
fourth quarters of 1999 and increased revenues from gas wholesale and retail
services activity. Partially offsetting this earnings increase were a regulatory
disallowance, higher operation and maintenance costs, and increased depreciation
and general taxes due to new property and equipment. The following table
quantifies these impacts on Pretax Operating Income.

<TABLE>
<CAPTION>
               CHANGE COMPARED TO PRIOR YEAR                    2000 VS 1999    1999 VS 1998
               -----------------------------                    ------------    ------------
                                                                        IN MILLIONS
<S>                                                             <C>             <C>
Gas deliveries..............................................        $ 17            $ 32
Gas commodity and related revenue...........................         (64)             (5)
Gas wholesale and retail services...........................           4               5
Operation and maintenance...................................          11             (14)
General taxes and depreciation..............................          (2)            (12)
                                                                    ----            ----
Total change................................................        $(34)           $  6
                                                                    ====            ====
</TABLE>

     GAS DELIVERIES: For the year 2000, gas system deliveries, including
miscellaneous transportation, totaled 410 bcf, an increase of 21 bcf or 5
percent compared with 1999. The increased deliveries reflect colder heating
season temperatures in the fourth quarter of 2000. For the year 1999, system
deliveries, including miscellaneous transportation, totaled 389 bcf, an increase
of 29 bcf or 8 percent compared with 1998. The increased deliveries reflect
colder temperatures during the first quarter of 1999.

                                      CMS-7
<PAGE>   43

COST OF GAS SOLD:

<TABLE>
<CAPTION>
      YEARS ENDED DECEMBER 31              2000       1999       CHANGE       1999       1998       CHANGE
      -----------------------              ----       ----       ------       ----       ----       ------
                                                                     IN MILLIONS
<S>                                        <C>        <C>        <C>          <C>        <C>        <C>
                                           $719       $637        $82         $637       $564        $73
</TABLE>

     For the year 2000, the cost of gas sold increase was the result of
increased gas costs and increased sales from colder heating season temperatures
during 2000. For the year 1999, the cost of gas sold increase was the result of
increased sales from colder temperatures during 1999 and higher gas costs.

NATURAL GAS TRANSMISSION RESULTS OF OPERATIONS

     PRETAX OPERATING INCOME: For the year 2000, pretax operating income,
excluding the 1999 effects of the Nitrotec write-down, increased $79 million (53
percent) from the comparable period in 1999. The increase primarily reflects
full year earnings from Panhandle and Sea Robin in 2000, which CMS Energy
acquired in March 1999 and March 2000, respectively, increased earnings from a
more than 100 percent increase in LNG shipments compared to 1999, and increased
earnings from domestic gas gathering and processing operations. For the year
1999, pretax operating income, excluding $84 million of losses on investments in
Nitrotec, increased $128 million (640 percent) from the comparable period in
1998. The increase reflects earnings from Panhandle, which CMS Energy acquired
in March 1999, and increased earnings from other operations.

INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS

     PRETAX OPERATING INCOME: For the year 2000, pretax operating income,
excluding the effects of the Loy Yang write-down, increased $29 million (18
percent) from the comparable period in 1999. This increase primarily reflects a
full year of earnings benefits from a new African facility and an Asian facility
that commenced operations in the third quarter of 1999, increased earnings from
the expansion of the Jorf Lasfar facility in 2000, and the restructuring of a
power supply contract. These increases were partially offset by decreased
earnings from domestic plants primarily due to the sale of the Lakewood plant in
May 2000, a scheduled reduction in operating fees, and the write-off of
unsuccessful development costs. For the year 1999, pretax operating income
increased $54 million (51 percent) from the comparable period in 1998. This
increase primarily reflects increased operating income from international and
domestic plant earnings and fees and an increase in income earned from
management service fees.

OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS

     PRETAX OPERATING INCOME: For the year 2000, pretax operating income
increased $14 million (82 percent) from the comparable period in 1999. The
increase reflects higher realized commodity prices, increased production from
Venezuelan properties, increased production from new core areas, including West
Texas and Powder River properties, and lower operating expenses, including
decreased exploration, depreciation, depletion and amortization expenses. These
increases were partially offset by increased general and administrative expenses
and reduced earnings from northern Michigan and Ecuador properties, which were
sold in March 2000 and June 2000, respectively. For the year 1999, pretax
operating income increased $11 million (183 percent) from the comparable period
in 1998 as a result of higher realized commodity prices and lower exploration
expenses. Partially offsetting this increase were higher operating expenses.

MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS

     PRETAX OPERATING INCOME: For the year 2000, pretax operating income
increased $10 million from the comparable period in 1999. The increase reflects
increased earnings from wholesale gas trading, increased LNG sales, and earnings
from an energy management services business acquired in late 1999. The volumes
of marketed natural gas and power traded increased 31 percent and 919 percent,
respectively. Partially offsetting these increases were lower power trading
margins, primarily due to cooler than normal summer weather in Michigan, and
increased operating expenses as the business continues to expand its trading and
marketing activities and increase its customer base. For the year 1999, pretax
operating income was unchanged from the

                                      CMS-8
<PAGE>   44

comparable period in 1998. Increased earnings from retail gas sales, wholesale
gas price volatility and a 1999 acquisition of an energy management services
business were offset by costs related to market development activities.

INTERNATIONAL ENERGY DISTRIBUTION RESULTS OF OPERATIONS

     PRETAX OPERATING INCOME: For the year 2000, pretax operating income
increased $31 million from the comparable period in 1999. The increase primarily
reflects earnings from new investments in a Brazilian electric distribution
utility, increased earnings from Argentine and Venezuelan electric distribution
utilities, and lower operating expenses. For the year 1999, pretax operating
income increased $7 million from the comparable period in 1998. The increase
primarily reflects earnings from investments in a Brazilian electric
distribution utility, partially offset by operating losses from a new investment
in a Venezuelan electric distribution utility.

MARKET RISK INFORMATION

     CMS Energy is exposed to market risks including, but not limited to,
changes in interest rates, currency exchange rates, and certain commodity and
equity security prices. CMS Energy's derivative activities are subject to the
direction of the Executive Oversight Committee, consisting of certain members of
CMS Energy's senior management, and its Risk Committee, consisting of CMS Energy
business unit managers. The goal of the risk management policy is to measure and
limit CMS Energy's overall energy commodity risk by implementing an
enterprise-wide policy across all CMS Energy business units. This allows CMS
Energy to maximize the use of hedges between its business units before utilizing
derivatives with external parties. 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 the Board of Directors.
Management employs established policies and procedures to manage its risks
associated with market fluctuations, including the use of various derivative
instruments such as futures, swaps, options and forward contracts. Management
believes that any losses incurred on derivative instruments used to hedge risk
would be offset by an opposite movement of the value of the hedged risk.

     CMS Energy has performed sensitivity analyses to assess the potential loss
in fair value, cash flows and earnings based upon hypothetical 10 percent
increases and decreases in market exposures. 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.

     COMMODITY PRICE RISK: CMS Energy is exposed to market fluctuations in the
price of natural gas, oil, electricity, coal and natural gas liquids. 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.) 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 average 10 percent higher or lower,
pretax operating income for the subsequent twelve months would increase or
decrease, respectively, by approximately $17 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,
2000. The analysis does not quantify short-term exposure to hypothetically
adverse price fluctuations in inventories.

     INTEREST RATE RISK: CMS Energy is exposed to interest rate risk resulting
from the issuance of fixed-rate and variable-rate debt, including that
associated with trust preferred securities, and from interest rate swaps and
interest rate lock agreements. CMS Energy uses a combination of fixed-rate and
variable-rate debt, as well as interest rate swaps and rate locks to manage and
mitigate interest rate risk exposure when deemed appropriate, based upon market
conditions. CMS Energy employs these strategies to attempt to provide and
maintain the lowest cost of capital. In August 2000, CMS Energy entered into
floating-to-fixed interest rate swap agreements

                                      CMS-9
<PAGE>   45

for a total notional amount of $1.0 billion to exchange variable rate interest
payment obligations to fixed rate obligations to minimize potential adverse
interest rate changes. At December 31, 2000, the carrying amounts of long-term
debt and trust preferred securities were $6.8 billion and $1.1 billion,
respectively, with corresponding fair values of $6.6 billion and $1.1 billion,
respectively. The fair value of CMS Energy's interest rate swaps at December 31,
2000, with a notional amount of $1.1 billion, was $9 million, representing the
amount CMS Energy would pay upon settlement. Based on a sensitivity analysis at
December 31, 2000, CMS Energy estimates that if market interest rates average 10
percent higher or lower, earnings before income taxes for the subsequent twelve
months would decrease or increase, respectively, by approximately $4 million. In
addition, based on a 10 percent adverse shift in market rates, CMS Energy would
have an exposure of approximately $361 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 its 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, 2000.

     CURRENCY EXCHANGE RISK: CMS Energy is exposed to foreign currency risk that
arises from net investments in foreign operations. CMS Energy uses forward
exchange and option contracts to hedge certain net investments in foreign
operations. At December 31, 2000, CMS Energy's primary foreign currency exchange
rate exposures were the Brazilian real, the Argentine peso and the Australian
dollar. Based on a sensitivity analysis at December 31, 2000, 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 as of December
31, 2000, but would result in a net cash settlement of approximately $11
million. The estimated fair value of the foreign exchange and option contracts
at December 31, 2000 was $10 million, representing the amount CMS Energy would
pay upon settlement.

     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. A hypothetical 10 percent adverse shift in equity security prices
would not have a material effect on CMS Energy's consolidated financial
position, results of operations or cash flows as of December 31, 2000.

     For a discussion of accounting policies related to derivative transactions,
see Note 10.

CAPITAL RESOURCES AND LIQUIDITY

CASH POSITION, INVESTING AND FINANCING

     CMS Energy's primary ongoing source of cash is dividends and other
distributions from subsidiaries. In 2000, Consumers paid $245 million in common
dividends and Enterprises paid $534 million in common dividends and other
distributions to CMS Energy. In February 2001, Consumers paid a $66 million
dividend to CMS Energy. CMS Energy's consolidated cash requirements are
primarily met by its operating and financing activities.

     OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by
operating activities is derived mainly from the processing, storage,
transportation and sale of natural gas; the generation, transmission,
distribution and sale of electricity; and the sale of oil. For 2000 and 1999,
consolidated cash from operations totaled $453 million and $917 million,
respectively. The $464 million decrease resulted primarily from a decrease in
cash earnings excluding gains from asset sales, gas purchase prices that were
significantly higher than the frozen gas customer rate, the electric rate
reduction required by the Customer Choice Act enacted in June 2000 and the
timing of cash receipts and payments related to working capital items. CMS
Energy uses its cash derived from operating activities primarily to maintain and
expand its international and domestic businesses, to maintain and expand
electric and gas systems of Consumers, to pay interest on and retire portions of
its long-term debt, and to pay dividends.

     INVESTING ACTIVITIES: For 2000 and 1999, CMS Energy's consolidated net cash
used in investing activities totaled $867 million and $3.564 billion,
respectively. The decrease of $2.7 billion primarily reflects the acquisition of
Panhandle in March 1999 (for approximately $1.9 billion and existing debt of
$300 million) and a $560 million increase in proceeds from the sales of assets.
CMS Energy's expenditures (excluding acquisitions)

                                      CMS-10
<PAGE>   46

during 2000 for its utility and diversified energy businesses were $550 million
and $873 million, respectively, compared to $505 million and $962 million,
respectively, during the comparable period in 1999.

     FINANCING ACTIVITIES: For 2000 and 1999, CMS Energy's net cash provided by
financing activities totaled $464 million and $2.678 billion, respectively. Net
cash provided in 1999 primarily related to funding the Panhandle acquisition in
March 1999 (for approximately $1.9 billion and existing debt of $300 million).
The decrease of $2.214 billion in net cash provided by financing activities
resulted from a decrease of $2.278 billion in the issuance of new securities
(see table below), an increase in the retirement of bonds, other long-term debt
and trust preferred securities ($442 million), and an increase in the repurchase
of common stock ($129 million), partially offset by an increase in the issuance
of common stock ($242 million), a decrease in the retirement of preferred stock
($194 million) and a decrease in the retirement of notes payable ($230 million).

<TABLE>
<CAPTION>
                       MONTH ISSUED                DISTRIBUTION/        PRINCIPAL
                        (IN 2000)      MATURITY    INTEREST RATE         AMOUNT               USE OF PROCEEDS
                       ------------    --------    -------------        ---------             ---------------
                                                                       IN MILLIONS
<S>                    <C>             <C>         <C>                 <C>            <C>
CMS ENERGY
GTNs Series E........      (1)             (1)            9.02%(1)       $  120       General corporate purposes
GTNs Series F........      (1)             (1)            8.80%              11       General corporate purposes
Senior Notes.........    October         2007            9.875%             500       Repay debt and general corporate
                                                                                        purposes
Trust Preferred
  Securities(2)......     August         2004             7.25%             220       To redeem the trust preferred
                                                                                        securities of CMS RHINOS Trust
Common Stock.........    October          n/a       11.0 shares             305       General corporate purposes
                                                                         ------
                                                                          1,156
CONSUMERS
Senior Notes.........    November        2001                (3)            125       Repay debt and general corporate
                                                                                        purposes
Senior Notes.........    November        2002                (4)            100       Repay debt and general corporate
                                                                                        purposes
                                                                         ------
                                                                            225
PANHANDLE
Senior Notes.........     March          2010             8.25%             100       To fund acquisition of Sea Robin
                                                                                        and general corporate purposes
                                                                         ------
                                                                            100
                                                                         ------
Total................                                                    $1,481
                                                                         ======
</TABLE>

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

(2) Refer to Note 8 for further information regarding these securities.

(3) The 2001 notes bear interest at a floating rate reset each quarter based
    upon LIBOR plus .60%.

(4) The 2002 notes bear interest at a floating rate reset each quarter based
    upon LIBOR plus .98%.

     In 2000, CMS Energy declared and paid $167 million in cash dividends to
holders of CMS Energy Common Stock. In February 2001, CMS Energy paid $44
million in cash dividends to holders of CMS Energy Common Stock.

     OTHER INVESTING AND FINANCING MATTERS: At December 31, 2000, the book value
per share of CMS Energy Common Stock was $19.48.

                                      CMS-11
<PAGE>   47

     In February 2001, CMS Energy sold 10 million shares of CMS Energy Common
Stock. CMS Energy used the net proceeds of approximately $296 million to repay
borrowings under the Senior Credit Facility. At February 28, 2001, CMS Energy
had an aggregate $1.95 billion in securities registered for future issuance.

     CMS Energy's Senior Credit Facility consists of a $1 billion one-year
revolving credit facility maturing in June 2001. CMS Energy also has unsecured
lines of credit as anticipated sources of funds to finance working capital
requirements and to pay for capital expenditures between long-term financings.
At December 31, 2000, the total amount available under the Senior Credit
Facility and the unsecured lines of credit were $555 million and $34 million,
respectively. For detailed information, see Note 7, incorporated by reference
herein.

     Consumers has credit facilities, lines of credit and a trade receivable
sale program in place as anticipated sources of funds to fulfill its currently
expected capital expenditures. For detailed information about these sources of
funds, see Note 6, incorporated by reference herein.

     CMS Energy has identified for possible sale assets that are expected to
contribute little or no earnings benefit in the short to medium term. From
December 1, 1999 through December 31, 2000, CMS Energy sold $719 million of
these assets, as more fully discussed in Note 4. These asset sales resulted in
total cash proceeds and associated reduction of consolidated project debt of
approximately $1.2 billion. CMS Energy plans to continue to sell additional
assets resulting in cash proceeds and associated reduction of consolidated
project debt, as more fully discussed in the Outlook -- Financial Improvement
Plan section below.

CAPITAL EXPENDITURES

     During 2001 through 2003, CMS Energy estimates that capital expenditures,
including new lease commitments and investments in partnerships and
unconsolidated subsidiaries, will total $3.9 billion. 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. During 2001, CMS Energy will continue to evaluate capital markets as
a potential source for financing its subsidiaries' investing activities. CMS
Energy estimates capital expenditures by business segment over the next three
years as follows:

<TABLE>
<CAPTION>
                  YEARS ENDED DECEMBER 31                        2001      2002      2003
                  -----------------------                        ----      ----      ----
                                                                       IN MILLIONS
<S>                                                             <C>       <C>       <C>
Consumers electric operations(a)(b).........................    $  555    $  555    $  355
Consumers gas operations(a).................................       145       145       135
Natural gas transmission....................................       220       215       280
Independent power production................................        65       150       240
Oil and gas exploration and production......................       195       235       245
Marketing, services and trading.............................         5         5         5
International energy distribution...........................        60         5         5
Other.......................................................        30        25         5
                                                                ------    ------    ------
                                                                $1,275    $1,335    $1,270
                                                                ======    ======    ======
</TABLE>

-------------------------
(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 5, Uncertainties.

     CMS Energy currently plans investments from 2001 to 2003 in focused
markets, which include: North and South America; the Middle East; West Africa;
and India. Investments will be made in market segments which align with CMS
Energy's varied business units' skills with a focus on optimization and
integration of existing assets, as further discussed in the Outlook section
below.

                                      CMS-12
<PAGE>   48

OUTLOOK

     As the deregulation and privatization of the energy industry takes place in
global energy markets, CMS Energy has positioned itself to be a leading regional
diversified energy company developing energy facilities and marketing
energy-related services in the United States and selected world growth markets.
The key elements of the strategy to achieve this objective are as follows:

     - Effectively implement the Michigan electric utility restructuring
       legislation and gas utility customer choice program;

     - Use the natural gas pipeline business for growth opportunities across
       other CMS Energy businesses;

     - Strengthen customer relationships through the development of
       energy-related products and services for electric and gas utility
       customers and through the international energy distribution business and
       marketing, services and trading business;

     - Expand CMS Energy's presence in select high-growth international markets
       through the diversified energy businesses;

     - Grow the marketing, services and trading activities to optimize and
       leverage gas and electric assets in the United States; and

     - Continued management of the asset portfolio.

FINANCIAL IMPROVEMENT PLAN

     In October 2000, CMS Energy announced a plan to strengthen its balance
sheet using proceeds from equity offerings and asset sales to reduce debt. As a
part of that plan, CMS Energy sold $305 million and $296 million of CMS Energy
Common Stock in October 2000 and February 2001, respectively, and used the
proceeds to reduce debt. These sales of CMS Energy Common Stock have allowed CMS
Energy to defer indefinitely the previously announced initial public offering of
up to 49 percent of its ownership interest in CMS Oil and Gas.

     Under its asset sale program, CMS Energy identified for possible sale
certain assets expected to contribute little or no earnings benefit in the short
to medium terms. As of December 31, 2000, CMS Energy sold assets resulting in
approximately $1.2 billion of cash proceeds and associated reduction of
consolidated project debt. In 2001, CMS Energy intends to sell assets,
potentially including the electric transmission facilities of Consumers, that it
anticipates will result in cash proceeds and associated reduction of
consolidated project debt in the total amount of approximately $450 million.
There are no assurances that CMS Energy can achieve this level of asset sales
and associated debt reduction in 2001 as planned.

     CMS Energy also intends to enhance long-term growth through a portfolio
management program that entails the ongoing sale of assets. CMS Energy expects
to reinvest the proceeds from this program in assets having greater potential
for synergies with its existing or planned assets. In particular, CMS Energy is
reviewing its options regarding certain assets performing below prior
expectations, including electric generating assets in Argentina. As part of the
program, CMS Energy continues to seek improvement in the operating efficiency
and profitability of all assets retained in its portfolio.

     The Board of Directors has approved the repurchase of up to 10 million
shares of CMS Energy Common Stock, from time to time, in open market or private
transactions. From February through April 2000, CMS Energy repurchased and
cancelled approximately 6.6 million shares at a total cost of $129 million. CMS
Energy does not anticipate repurchase of additional shares in the near-term.

DIVERSIFIED ENERGY OUTLOOK

     CMS Energy continues to sharpen its geographic focus on key growth areas
where it already has significant investments and opportunities. This strategy
focuses predominantly in the central corridor of the United States.
Internationally, these markets are India, the Middle East, South America and
West Africa. In pursuing global growth, CMS Energy intends to make energy
investments that provide optimal returns and expansion opportunities for
multiple existing businesses. For example, CMS Energy seeks to capitalize on its
West Africa
                                      CMS-13
<PAGE>   49

oil and gas reserves by expanding the undersea pipeline and onshore processing
facilities in the area. CMS Energy may use the gas from the processing plant in
a new methanol-producing plant in West Africa. CMS Energy is extending the gas
pipelines in Argentina to carry fuel for power plants in that area. In addition,
a CMS Energy subsidiary is a partner in the first independent power and water
project in the United Arab Emirates, and another subsidiary is building CMS
Energy's third power plant in India. CMS Energy's growth plans are subject to
political and economic factors over which CMS Energy has no control, 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.

     In the United States, CMS Energy also intends to grow its oil and gas
exploration and production business by aggressively exploring and developing the
West Texas and Powder River acreage and gas reserves.

     CMS Energy intends to use its marketing, services and trading business to
enhance the return on other CMS Energy businesses. CMS Energy plans to continue
centralizing the marketing of energy products produced by various CMS Energy
non-utility businesses. Other strategies include expanding the industrial and
commercial energy services business to enhance CMS Energy's commodity marketing
business and developing risk management products that address customer needs.

CONSUMERS' ELECTRIC UTILITY OUTLOOK

     GROWTH: Over the next five years, Consumers expects electric system
deliveries to grow an average of approximately two and one half percent per year
based primarily on a steadily growing customer base. This growth rate does not
take into account the impact of electric industry restructuring, including the
impact of the Customer Choice Act that allows all customers to choose their
electricity supplier beginning January 1, 2002, or of changing regulation.
Abnormal weather, changing economic conditions or the developing competitive
market for electricity may affect actual electric deliveries by Consumers in
future periods.

     COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act, passed
by the Michigan Legislature, as a result of repeated efforts to enact electric
utility restructuring legislation, became effective June 2000.

     The intent of the Customer Choice Act is to transition the retail electric
businesses in Michigan to competition. Several years prior to the enactment of
the Customer Choice Act, in response to industry restructuring efforts,
Consumers entered into multi-year electric supply contracts with some of its
largest industrial customers to provide power to some of their facilities. The
MPSC approved those contracts as part of its phased introduction to competition.
During the period from 2001 through 2005, either Consumers or these industrial
customers can terminate or restructure some of these contracts. These contracts
involve approximately 600 MW of customer power supply requirements. CMS Energy
cannot predict the ultimate financial impact of changes related to these power
supply contracts.

     In 1996, as a result of efforts to transition the electric industry in
Michigan to competition, Detroit Edison gave Consumers the required four-year
contractual notice of its intent to terminate the agreements under which the
companies jointly operate the MEPCC, effective January 1, 2001. Detroit Edison
and Consumers have negotiated to restructure and continue certain parts of the
MEPCC control area and joint transmission operations, but have expressly
excluded any merchant operations (electricity purchasing, sales, and dispatch
operations). The parties have extended the effective termination date of the
operating agreement to March 31, 2001. Consumers does not anticipate that the
restructuring of the MEPCC will cause it a material adverse impact. Consumers
expects to implement systems and procedures to perform independent merchant
operations by April 1, 2001. The termination of joint merchant operations with
Detroit Edison will open Detroit Edison and Consumers to wholesale market
competition as individual companies. CMS Energy cannot predict the financial
impact of terminating these joint merchant operations.

     Uncertainty exists with respect to the enactment of federal electric
industry restructuring legislation. A variety of bills introduced in Congress in
recent years have sought to change existing federal regulation of the industry.
These federal bills could potentially affect or supercede state regulation;
however, none have been enacted.

                                      CMS-14
<PAGE>   50

     In part, because of certain policy pronouncements by the FERC, Consumers
joined the Alliance RTO. In January 2001, the FERC granted Consumers'
application to transfer ownership and control of its transmission facilities to
a wholly owned subsidiary, Michigan Transco. This represents the first step in
Consumers' plan to transfer control of or to divest itself of ownership,
operation and control of its transmission assets.

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

     RATE MATTERS: Prior to the enactment of the Customer Choice Act, there were
several pending rate issues that could have affected Consumers' electric
business. As a result of the passage of this legislation, the MPSC dismissed
certain rate proceedings and a complaint filed by ABATE seeking a reduction in
rates.

     For further information and material changes relating to the rate matters
and restructuring of the electric utility industry, see Note 2, Summary of
Significant Accounting Policies and Other Matters, and Note 5, Uncertainties,
incorporated by reference herein.

     NUCLEAR MATTERS: There are a number of issues related to nuclear matters
that may affect Consumers' business. For further information and material
changes relating to nuclear matters, see Note 5, Uncertainties.

     UNCERTAINTIES: Several electric business trends or uncertainties may affect
CMS Energy's financial results and condition. These trends or uncertainties
have, or CMS Energy reasonably expects could have, a material impact on net
sales, revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) capital expenditures and increased operating expenses
for compliance with the Clean Air Act; 2) 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; 3) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel and the successful operation
of NMC; and 4) electric industry restructuring, including: a) how the MPSC
ultimately calculates the amount of Stranded Costs and the related true-up
adjustments and the manner in which the true-up operates; b) the ability to
recover fully the cost of doing business under the rate caps; c) the successful
sale of Securitization bonds on a timely basis; d) the ability to meet peak
electric demand requirements at a reasonable cost and without market disruption
and initiatives undertaken to reduce exposure to energy price increases; and e)
the transfer of Consumers transmission facilities to Michigan Transco and its
successful disposition or integration into an RTO. For detailed information
about these trends or uncertainties, see Note 5, Uncertainties, incorporated by
reference herein.

CONSUMERS' GAS UTILITY OUTLOOK

     GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
energy costs, changes in competitive conditions, and the level of natural gas
consumption per customer.

     GAS RESTRUCTURING: On April 1, 1998, Consumers implemented an experimental
gas customer choice pilot program. The pilot program ends March 31, 2001. The
program allows up to 300,000 residential, commercial and industrial retail gas
sales customers to choose an alternative gas commodity supplier in direct
competition with Consumers. As of December 31, 2000, more than 150,000 customers
chose alternative gas suppliers, representing approximately 38 bcf of gas
requirements. Customers who choose to remain sales customers of Consumers will
have fixed gas commodity rates through the end of the program. This three-year
program: 1) freezes gas distribution rates through March 31, 2001, establishing
a delivered gas commodity cost at a fixed rate of $2.84 per mcf; 2) establishes
an earnings sharing mechanism with customers if Consumers' earnings exceed
certain predetermined levels; and 3) establishes a gas transportation code of
conduct that addresses the relationship between Consumers and marketers,
including its affiliated marketers. In October 2000, the MPSC approved
Consumers' application for a permanent gas customer choice program commencing
April 1, 2001. Under the permanent gas customer choice program, Consumers will
no longer be subject to a frozen gas commodity cost and delivery charge.
Consumers will then return to a GCR mechanism that allows it to recover from its
customers

                                      CMS-15
<PAGE>   51

all prudently incurred costs to purchase the natural gas commodity and transport
it to Consumers' facilities. Under the permanent gas customer choice program, up
to 600,000 of Consumers' natural gas customers will be eligible to participate
in the program beginning April 1, 2001, up to 900,000 gas customers by April 1,
2002, and all of Consumers' gas customers beginning April 1, 2003. Consumers
would continue to transport and distribute gas to these customers.

     During the last year of the experimental pilot program, significant
increases in gas costs had exposed Consumers to gas commodity losses. In the
second quarter 2000, Consumers recorded a regulatory liability of $45 million to
reflect estimated losses due to increases in natural gas commodity costs. In
October 2000, the MPSC approved Consumers' accounting application to revise its
inventory accounting and reclassify low-cost, base gas in Consumers' gas storage
reservoirs. The MPSC allowed Consumers to immediately begin to include the cost
of its recoverable base gas with higher cost purchased gas. Consumers expects
the gas accounting order to eliminate the need for Consumers to recognize any
further losses related to gas commodity cost underrecoveries.

     UNCERTAINTIES: Several gas business trends or uncertainties may affect CMS
Energy's financial results and conditions. These trends or uncertainties have,
or CMS Energy reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) implementation of the permanent gas
customer choice program; 4) implementation of a suspended GCR clause and any
initiatives undertaken to protect against gas price increases; and 5) market and
regulation responses to increases in gas costs. For detailed information about
these uncertainties see Note 5, Uncertainties, incorporated by reference herein.

PANHANDLE OUTLOOK

     CMS Energy intends to use Panhandle as a platform for growth in the United
States and derive added value through expansion opportunities for multiple CMS
Energy businesses. The growth strategy around Panhandle includes enhancing the
opportunities for other CMS Energy businesses involved in electric power
generation and distribution, mid-stream activities (gathering and processing),
and exploration and production. By providing additional transportation, storage
and other asset-based value-added services to customers such as new gas-fueled
power plants, local distribution companies, industrial and end-users, marketers
and others, CMS Energy expects to expand its natural gas pipeline business. CMS
Energy also plans to convert certain Panhandle pipeline facilities through a
joint venture to permit the throughput of liquid products. Panhandle continues
to attempt to maximize revenues from existing assets and to pursue acquisition
opportunities and development projects that provide expanded services to meet
the specific needs of customers.

     UNCERTAINTIES: Panhandle's results of operations and financial position may
be affected by a number of trends or uncertainties that have, or Panhandle
reasonably expects could have, a material impact on income from continuing
operations and cash flows. Such trends and uncertainties include: 1) the
increased competition in the market for transmission of natural gas to the
Midwest causing pressure on prices charged by Panhandle; 2) the current market
conditions causing more contracts to be of shorter duration, which may increase
revenue volatility; 3) the expected increase in competition for LNG terminalling
services, and the volatility in natural gas prices, creating volatility in LNG
terminalling revenues; 4) the impact of any future rate cases for any of
Panhandle's regulated operations; 5) current initiatives for additional federal
rules and legislation regarding pipeline safety; 6) capital spending
requirements for safety, environmental or regulatory requirements that could
result in depreciation expense increases not covered by additional revenues; and
7) the potential effect of a January 2000 FERC order could, if approved on
rehearing without modification or acceptance of Trunkline's settlement filing,
substantially reduce Trunkline's tariff rates and future revenue levels.

OTHER MATTERS

NEW ACCOUNTING RULES

     In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, which has been deferred by SFAS No. 137
Accounting for Derivative Instruments and Hedging Activities --
                                      CMS-16
<PAGE>   52

Deferral of the Effective Date of FASB Statement No. 133, and amended by the
issuance in June 2000 of SFAS No. 138 Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133. These statements are collectively referred to hereafter as SFAS No. 133.
SFAS No. 133 requires CMS Energy to record every contract that meets the
definition of a derivative instrument on the balance sheet as an asset or
liability measured at its fair value and to recognize changes in the fair value
of these contracts currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. Effective January 1, 2001, CMS Energy adopted SFAS No. 133. Upon
initial adoption of the statement, CMS Energy will reflect the difference
between the current fair market value of the derivative instruments and the
recorded book value of the derivative instruments as a cumulative effect type
adjustment to either net income or accumulated other comprehensive income. CMS
Energy will reclassify the gains and losses on the derivative instruments that
are reported in accumulated other comprehensive income as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion, if any, of all hedges will be
recognized in current period earnings. CMS Energy determines fair market value
based upon mathematical models using current and historical pricing data.

     CMS Energy believes that the majority of its non-trading derivative
contracts, power purchase agreements and gas transportation contracts qualify
for the normal purchases and sales exception of SFAS No. 133 and therefore would
not be recognized at fair value on the balance sheet. CMS Energy does, however,
use certain derivative instruments to limit its exposures to gas commodity price
risk, interest rate risk, and foreign currency exchange risk. The interest rate
and foreign exchange contracts meet the requirements for hedge accounting under
SFAS No. 133 and CMS Energy will record the changes in the fair value of these
contracts in accumulated other comprehensive income on the balance sheet.

     The financial statement impact of recording the SFAS No. 133 transition
adjustment on January 1, 2001 is as follows:

<TABLE>
<CAPTION>
                                                                MILLIONS
                                                                --------
<S>                                                             <C>
Fair Value of Derivative Assets.............................      $28
Fair Value of Derivative Liabilities........................       14
Increase in Other Comprehensive Income, Net of Tax..........        8
</TABLE>

     The cumulative effects on accumulated other comprehensive income from a
change in accounting principle relate to gas options, gas fuel swap contracts,
and interest rate swap contracts that qualified for cash flow hedge accounting
prior to the adoption of SFAS No. 133. These amounts will reduce, or be charged
to, cost of gas, cost of power, or interest expense, respectively, when the
related hedged transaction occurs. Based on the pre-tax amount recorded in
accumulated other comprehensive income on the January 1, 2001 transition date,
CMS Energy expects to record $24 million as a reduction to cost of gas, $2
million as a reduction in cost of power, and $14 million as an increase to
interest expense in 2001.

     After January 1, 2001, certain gas option contracts will not qualify for
cash flow hedge accounting under SFAS No. 133, and CMS Energy will therefore
record any change in fair value subsequent to January 1, 2001 directly in
earnings, which could cause earnings volatility. Additionally, derivative and
hedge accounting for certain utility industry contracts, particularly electric
call option contracts, remains uncertain. CMS Energy is currently accounting for
electric call options contracts and other electric option-like contracts as
derivatives that qualify for the normal purchase exception of SFAS No. 133, and
as such, has not recorded these contracts on the balance sheet at fair value.
The ultimate financial impact depends upon resolution of these industry-specific
issues with the FASB and could be materially different than stated above.

     In the year 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125. SFAS No. 140 revises the criteria for
accounting for securitizations, other financial asset transfers and collateral
and introduces new disclosures. Certain disclosures and amendments of collateral
provisions are effective for fiscal years ending after December 15, 2000. The
other provisions of SFAS No. 140 apply prospectively to transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. CMS Energy has adopted the

                                      CMS-17
<PAGE>   53

disclosure requirements effective December 31, 2000, and does not expect that
for the other provisions of SFAS No. 140 will have a material impact on CMS
Energy's consolidated results of operations or financial position.

FOREIGN CURRENCY TRANSLATION

     CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. The adjustment is primarily due to the exchange rate fluctuations
between the United States dollar and each of the Australian dollar, Brazilian
real and Argentine peso. For the year ended December 31, 2000, the foreign
currency translation amount realized from asset sales increased equity by $25
million and the change in the foreign currency translation adjustment decreased
equity by $171 million, net of after-tax hedging proceeds. Although management
currently believes that the currency exchange rate fluctuations over the long
term will not have a material adverse affect on CMS Energy's financial position,
liquidity or results of operations, CMS Energy has hedged its exposure to the
Australian dollar, the Brazilian real and the Argentine peso. CMS Energy uses
forward exchange and option contracts to hedge certain receivables, payables,
long-term debt and equity value relating to foreign investments. The notional
amount of the outstanding foreign exchange contracts was $546 million at
December 31, 2000, which includes $21 million, $75 million and $450 million for
Australian, Brazilian and Argentine foreign exchange contracts, respectively.
The estimated fair value of the foreign exchange and option contracts at
December 31, 2000 was $10 million, representing the amount CMS Energy would pay
upon settlement.

OTHER

     The Union represents Consumers' operating, maintenance and construction
employees. Consumers and the Union negotiated a new collective bargaining
agreement that became effective as of June 1, 2000. By its terms, that agreement
will continue in full force and effect until June 1, 2005. Consumers does not
anticipate any material adverse financial effects on its financial position,
liquidity, or results of operations as a result of changes to this agreement.

     During the first and third quarters of 2000, Consumers implemented the
results of a change in its paid personal absences plan, in part due to
provisions of a new union labor contract. The change resulted in employees
receiving the benefit of paid personal absence immediately at the beginning of
each fiscal year, rather than earning it in the previous year. The change for
non-union employees affected the first quarter of 2000. The change for union
employees affected the third quarter of 2000. The total effect of these one-time
changes decreased operating expenses by $16 million collectively, and increased
earnings, net of tax, by $6 million in the first quarter and $4 million in the
third quarter.

                                      CMS-18
<PAGE>   54

                      (This page intentionally left blank)

                                      CMS-19
<PAGE>   55

                             CMS ENERGY CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                --------------------------
                                                                 2000      1999      1998
                                                                 ----      ----      ----
                                                                       IN MILLIONS
<S>                                                             <C>       <C>       <C>
OPERATING REVENUE
  Electric utility..........................................    $2,676    $2,667    $2,606
  Gas utility...............................................     1,196     1,156     1,051
  Natural gas transmission..................................       906       785       160
  Independent power production..............................       500       390       277
  Oil and gas exploration and production....................       131        98        63
  Marketing, services and trading...........................     3,294       799       939
  International energy distribution.........................       265       177        30
  Other.....................................................        30        31        15
                                                                ------    ------    ------
                                                                 8,998     6,103     5,141
                                                                ------    ------    ------
OPERATING EXPENSES
  Operation
     Fuel for electric generation...........................       408       406       359
     Purchased and interchange power -- Marketing, services
      and trading...........................................     1,457       108       287
     Purchased and interchange power........................       529       401       297
     Purchased power -- related parties.....................       555       560       573
     Cost of gas sold -- Marketing, services and trading....     1,734       700       628
     Cost of gas sold.......................................       967       846       584
     Other operating expenses...............................     1,076     1,049       814
                                                                ------    ------    ------
                                                                 6,726     4,070     3,542
  Maintenance...............................................       298       216       176
  Depreciation, depletion and amortization..................       637       595       484
  General taxes.............................................       281       254       215
  Write-off of investments in Loy Yang (2000) and Nitrotec
     (1999).................................................       329        84        --
                                                                ------    ------    ------
                                                                 8,271     5,219     4,417
                                                                ------    ------    ------
PRETAX OPERATING INCOME (LOSS)
  Electric utility..........................................       481       494       475
  Gas utility...............................................        98       132       126
  Natural gas transmission, net of $84 Nitrotec write-off in
     1999...................................................       227        64        20
  Independent power production, net of $329 Loy Yang
     write-off in 2000......................................      (140)      160       106
  Oil and gas exploration and production....................        31        17         6
  Marketing, services and trading...........................        14         4         4
  International energy distribution.........................        22        (9)      (16)
  Other.....................................................        (6)       22         3
                                                                ------    ------    ------
                                                                   727       884       724
                                                                ------    ------    ------
OTHER INCOME (DEDUCTIONS)
  Accretion income..........................................         2         4         6
  Accretion expense.........................................       (33)      (27)      (16)
  Gain on asset sales, net of foreign currency translation
     losses of $25 in 2000..................................        84        42        51
  Loss on MCV power purchases...............................        --        --       (37)
  Other, net................................................         9        30         1
                                                                ------    ------    ------
                                                                    62        49         5
                                                                ------    ------    ------
</TABLE>

                                      CMS-20
<PAGE>   56

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                --------------------------
                                                                 2000      1999      1998
                                                                 ----      ----      ----
                                                                       IN MILLIONS
<S>                                                             <C>       <C>       <C>
FIXED CHARGES
  Interest on long-term debt................................       591       502       318
  Other interest............................................        48        69        47
  Capitalized interest......................................       (49)      (41)      (29)
  Preferred dividends.......................................         2         6        19
  Preferred securities distributions........................        93        56        32
                                                                ------    ------    ------
                                                                   685       592       387
                                                                ------    ------    ------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS...........       104       341       342
INCOME TAXES................................................        60        64       100
MINORITY INTERESTS..........................................         3        --        --
                                                                ------    ------    ------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
  IN ACCOUNTING PRINCIPLES..................................        41       277       242
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR TREATMENT OF
  INVENTORY AND PROPERTY TAXES, NET OF TAX (BENEFIT) OF
  $(2), $- AND $23, RESPECTIVELY............................        (5)       --        43
                                                                ------    ------    ------
CONSOLIDATED NET INCOME.....................................    $   36    $  277    $  285
                                                                ======    ======    ======
<CAPTION>
                                                                       IN MILLIONS,
                                                                 EXCEPT PER SHARE AMOUNTS
<S>                                                             <C>       <C>       <C>
CMS ENERGY
  NET INCOME
     Net Income Attributable to Common Stock................    $   36    $  269    $  272
     Premium on Redemption of Class G Stock.................        --       (28)       --
                                                                ------    ------    ------
     Net Income Available to Common Stock...................    $   36    $  241    $  272
                                                                ======    ======    ======
  BASIC EARNINGS PER AVERAGE COMMON SHARE
     Net Income Attributable to Common Stock................    $ 0.32    $ 2.44    $ 2.65
     Premium on Redemption of Class G Stock.................        --     (0.26)       --
                                                                ------    ------    ------
     Net Income Available to Common Stock...................    $ 0.32    $ 2.18    $ 2.65
                                                                ======    ======    ======
  DILUTED EARNINGS PER AVERAGE COMMON SHARE
     Net Income Attributable to Common Stock................    $ 0.32    $ 2.42    $ 2.62
     Premium on Redemption of Class G Stock.................        --     (0.25)       --
                                                                ------    ------    ------
     Net Income Available to Common Stock...................    $ 0.32    $ 2.17    $ 2.62
                                                                ======    ======    ======
  DIVIDENDS DECLARED PER COMMON SHARE.......................    $ 1.46    $ 1.39    $ 1.26
                                                                ------    ------    ------
CLASS G
  NET INCOME
     Net Income Attributable to Common Stock................    $   --    $    8    $   13
     Premium on Redemption of Class G Stock.................        --        28        --
                                                                ------    ------    ------
     Net Income Available to Common Stock...................    $   --    $   36    $   13
                                                                ======    ======    ======
  BASIC EARNINGS PER AVERAGE COMMON SHARE
     Net Income Attributable to Common Stock................    $   --    $ 0.90    $ 1.56
     Premium on Redemption of Class G Stock.................        --      3.31        --
                                                                ------    ------    ------
     Net Income Available to Common Stock...................    $   --    $ 4.21    $ 1.56
                                                                ======    ======    ======
  DILUTED EARNINGS PER AVERAGE COMMON SHARE
     Net Income Attributable to Common Stock................    $   --    $ 0.90    $ 1.56
     Premium on Redemption of Class G Stock.................        --      3.31        --
                                                                ------    ------    ------
     Net Income Available to Common Stock...................    $   --    $ 4.21    $ 1.56
                                                                ======    ======    ======
  DIVIDENDS DECLARED PER COMMON SHARE.......................    $   --    $ 0.99    $ 1.27
                                                                ------    ------    ------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      CMS-21
<PAGE>   57

                             CMS ENERGY CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31
                                                                -----------------------------
                                                                 2000       1999       1998
                                                                 ----       ----       ----
                                                                         IN MILLIONS
<S>                                                             <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Consolidated net income...................................    $    36    $   277    $   285
  Adjustments to reconcile net income to net cash provided
     by operating activities
     Depreciation, depletion and amortization (includes
      nuclear decommissioning of $39, $50 and $51,
      respectively).........................................        637        595        484
     Deferred income taxes and investment tax credit........          8         10         54
     Capital lease and debt discount amortization...........         34         35         51
     Loss on MCV power purchases............................         --         --         37
     Accretion expense......................................         33         27         16
     Accretion income -- abandoned Midland project..........         (2)        (4)        (6)
     Write-off of investments in Loy Yang (2000) and
      Nitrotec (1999).......................................        329         84         --
     Undistributed earnings of related parties..............       (171)       (45)       (95)
     Gain on sale of assets, net of foreign currency
      translation losses....................................        (84)       (42)       (51)
     Cumulative effect of accounting change.................          7         --        (66)
     MCV power purchases....................................        (60)       (62)       (64)
     Changes in assets and liabilities:
       Increase in accounts receivable......................       (398)      (268)      (188)
       Increase in inventories..............................        (54)        (5)       (41)
       Increase (decrease) in accounts payable and accrued
        expenses............................................        181        300        (52)
       Increase in Regulatory obligation -- gas choice......         33         --         --
       Changes in other assets and liabilities..............        (76)        15        152
                                                                -------    -------    -------
     Net cash provided by operating activities..............        453        917        516
                                                                -------    -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures (excludes assets placed under capital
     lease).................................................     (1,032)    (1,124)    (1,295)
  Investments in partnerships and unconsolidated
     subsidiaries...........................................       (344)      (380)      (345)
  Cost to retire property, net..............................        (56)       (93)       (83)
  Acquisition of companies, net of cash acquired............        (74)    (1,938)        --
  Proceeds from sale of property............................        629         69         57
  Other.....................................................         10        (98)        32
                                                                -------    -------    -------
     Net cash used in investing activities..................       (867)    (3,564)    (1,634)
                                                                -------    -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from notes, bonds and other long-term debt.......      1,064      2,836      2,348
  Proceeds from trust preferred securities..................        220        726         --
  Issuance of common stock..................................        332         90        269
  Retirement of bonds and other long-term debt..............       (691)      (499)    (1,235)
  Retirement of trust preferred securities..................       (250)        --         --
  Retirement of common stock................................        (16)        (2)        (3)
  Retirement of preferred stock.............................         --       (194)        --
  Repurchase of common stock................................       (129)        --         --
  Payment of common stock dividends.........................       (167)      (163)      (140)
  Payment of capital lease obligations......................        (32)       (19)       (36)
  Increase (decrease) in notes payable, net.................        133        (97)       (53)
                                                                -------    -------    -------
     Net cash provided by financing activities..............        464      2,678      1,150
                                                                -------    -------    -------
</TABLE>

                                      CMS-22
<PAGE>   58

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31
                                                                -----------------------------
                                                                 2000       1999       1998
                                                                 ----       ----       ----
                                                                         IN MILLIONS
<S>                                                             <C>        <C>        <C>
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS.........         50         31         32
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD....        132        101         69
                                                                -------    -------    -------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD..........    $   182    $   132    $   101
                                                                =======    =======    =======
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND
  FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
  Interest paid (net of amounts capitalized)................    $   563    $   424    $   313
  Income taxes paid (net of refunds)........................         --         59         64
NON-CASH TRANSACTIONS
  Nuclear fuel placed under capital leases..................    $     4    $     6    $    46
  Other assets placed under capital lease...................         15         14         14
  Common stock issued to retire Class G Common Stock........         --        217         --
  Common stock issued to acquire companies..................         --         --         61
  Assumption of debt........................................         --        305         88
</TABLE>

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.

                                      CMS-23
<PAGE>   59

                             CMS ENERGY CORPORATION
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                        DECEMBER 31                              2000       1999
                        -----------                              ----       ----
                                                                   IN MILLIONS
<S>                                                             <C>        <C>
ASSETS
PLANT AND PROPERTY (AT COST)
  Electric utility..........................................    $ 7,241    $ 6,981
  Gas utility...............................................      2,503      2,461
  Natural gas transmission..................................      2,191      1,934
  Oil and gas properties (successful efforts method)........        630        817
  Independent power production..............................        398        974
  International energy distribution.........................        258        445
  Other.....................................................        105         62
                                                                -------    -------
                                                                 13,326     13,674
  Less accumulated depreciation, depletion and
     amortization...........................................      6,252      6,157
                                                                -------    -------
                                                                  7,074      7,517
  Construction work-in-progress.............................        761        604
                                                                -------    -------
                                                                  7,835      8,121
                                                                -------    -------
INVESTMENTS
  Independent power production..............................        924        950
  Natural gas transmission..................................        436        369
  International energy distribution.........................         63        150
  Midland Cogeneration Venture Limited Partnership..........        290        247
  First Midland Limited Partnership.........................        245        240
  Other.....................................................         58         40
                                                                -------    -------
                                                                  2,016      1,996
                                                                -------    -------
CURRENT ASSETS
  Cash and temporary cash investments at cost, which
     approximates market....................................        182        132
  Accounts receivable, notes receivable and accrued revenue,
     less allowances of $18 in 2000 and $12 in 1999.........      1,440        959
  Inventories at average cost
     Gas in underground storage.............................        297        225
     Materials and supplies.................................        124        158
     Generating plant fuel stock............................         46         47
  Deferred income taxes.....................................         39         33
  Prepayments and other.....................................        321        263
                                                                -------    -------
                                                                  2,449      1,817
                                                                -------    -------
NON-CURRENT ASSETS
  Regulatory Assets
     Securitization costs...................................        709         --
     Postretirement benefits................................        232        341
     Abandoned Midland project..............................         22         48
     Unamortized nuclear costs..............................          6        519
     Other..................................................         87        125
  Goodwill, net.............................................        891        891
  Nuclear decommissioning trust funds.......................        611        602
  Notes receivable - related parties........................        155        251
  Other.....................................................        838        751
                                                                -------    -------
                                                                  3,551      3,528
                                                                -------    -------
TOTAL ASSETS................................................    $15,851    $15,462
                                                                =======    =======
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      CMS-24
<PAGE>   60

<TABLE>
<CAPTION>
                        DECEMBER 31                              2000       1999
                        -----------                              ----       ----
                                                                   IN MILLIONS
<S>                                                             <C>        <C>
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
  Common stockholders' equity...............................    $ 2,361    $ 2,456
  Preferred stock of subsidiary.............................         44         44
  Company-obligated mandatorily redeemable preferred
     securities of:
     Consumers Power Company Financing I (a)................        100        100
     Consumers Energy Company Financing II (a)..............        120        120
     Consumers Energy Company Financing III (a).............        175        175
  Company-obligated convertible Trust Preferred Securities
     of:
     CMS Energy Trust I (a).................................        173        173
     CMS Energy Trust II (a)................................        301        301
     CMS Energy Trust III (a)...............................        220         --
  Company-obligated Trust Preferred Securities of CMS RHINOS
     Trust (a)..............................................         --        250
  Long-term debt............................................      6,770      6,428
  Non-current portion of capital leases.....................         54         88
                                                                -------    -------
                                                                 10,318     10,135
                                                                -------    -------
MINORITY INTERESTS..........................................         88        222
                                                                -------    -------
CURRENT LIABILITIES
  Current portion of long-term debt and capital leases......        707      1,111
  Notes payable.............................................        403        230
  Accounts payable..........................................      1,024        775
  Accrued taxes.............................................        309        320
  Accrued interest..........................................        159        148
  Accounts payable -- related parties.......................         70         61
  Other.....................................................        530        421
                                                                -------    -------
                                                                  3,202      3,066
                                                                -------    -------
NON-CURRENT LIABILITIES
  Deferred income taxes.....................................        749        702
  Postretirement benefits...................................        437        485
  Deferred investment tax credit............................        110        126
  Regulatory liabilities for income taxes, net..............        246         64
  Other.....................................................        701        662
                                                                -------    -------
                                                                  2,243      2,039
                                                                -------    -------
  Commitments and Contingencies (Notes 2, 3, 5, 14 and 18)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES..............    $15,851    $15,462
                                                                =======    =======
</TABLE>

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

                                      CMS-25
<PAGE>   61

                             CMS ENERGY CORPORATION

                   CONSOLIDATED STATEMENTS OF PREFERRED STOCK

<TABLE>
<CAPTION>
                                                            OPTIONAL
                                                           REDEMPTION
                 DECEMBER 31                     SERIES      PRICE        2000       1999      2000    1999
                 -----------                     ------    ----------     ----       ----      ----    ----
                                                                          NUMBER OF SHARES     IN MILLIONS
<S>                                              <C>       <C>           <C>        <C>        <C>     <C>
CONSUMERS' PREFERRED STOCK
  Cumulative, $100 par value, authorized
     7,500,000 shares,.......................    $4.16      $103.25       68,451     68,451    $ 7     $ 7
     with no mandatory redemption............     4.50       110.00      373,148    373,148     37      37
                                                                                               ---     ---
TOTAL PREFERRED STOCK........................                                                  $44     $44
                                                                                               ===     ===
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      CMS-26
<PAGE>   62

                             CMS ENERGY CORPORATION

             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                       2000       1999       1998       2000      1999      1998
-----------------------                       ----       ----       ----       ----      ----      ----
                                             NUMBER OF SHARES IN THOUSANDS           IN MILLIONS
<S>                                          <C>        <C>        <C>        <C>       <C>       <C>
COMMON STOCK
  At beginning and end of period.........                                     $    1    $    1    $    1
                                                                              ------    ------    ------
OTHER PAID-IN CAPITAL -- CMS ENERGY
  At beginning of period.................    116,038    108,104    100,792     2,749     2,452     2,131
  Redemption of affiliate's preferred
     stock...............................         --         --         --        --        (2)       --
  Common stock repurchased...............     (6,600)        --         --      (129)       --        --
  Common stock reacquired................       (259)       (61)       (72)      (16)       (2)       (3)
  Common stock issued....................     11,538      1,823      7,383       321        83       324
  Common stock reissued..................        484         39          1        11         1        --
  Exchange of Class G common stock.......         --      6,133         --        --       217        --
                                             -------    -------    -------    ------    ------    ------
       At end of period..................    121,201    116,038    108,104     2,936     2,749     2,452
                                             -------    -------    -------    ------    ------    ------
OTHER PAID-IN CAPITAL -- CLASS G
  At beginning of period.................         --      8,453      8,219        --       142       136
  Common stock reacquired................         --         --         (1)       --        --        --
  Common stock issued....................         --        257        235        --         6         6
  Redemption of common stock.............         --     (8,710)        --        --      (148)       --
                                             -------    -------    -------    ------    ------    ------
       At end of period..................         --         --      8,453        --        --       142
                                             -------    -------    -------    ------    ------    ------
REVALUATION CAPITAL
  At beginning of period.................                                          3        (9)       (6)
  Change in unrealized investment-gain
     (loss)(a)...........................                                         (5)       12        (3)
                                                                              ------    ------    ------
       At end of period..................                                         (2)        3        (9)
                                                                              ------    ------    ------
FOREIGN CURRENCY TRANSLATION
  At beginning of period.................                                       (108)     (136)      (96)
  Change in foreign currency translation
     realized from asset sale(a).........                                         25        --        --
  Change in foreign currency
     translation(a)......................                                       (171)       28       (40)
                                                                              ------    ------    ------
       At end of period..................                                       (254)     (108)     (136)
                                                                              ------    ------    ------
RETAINED EARNINGS (DEFICIT)
  At beginning of period.................                                       (189)     (234)     (379)
  Consolidated net income(a).............                                         36       277       285
  Redemption of Class G common stock.....                                         --       (69)       --
  Common stock dividends declared:
     CMS Energy..........................                                       (167)     (154)     (129)
     Class G.............................                                         --        (9)      (11)
                                                                              ------    ------    ------
       At end of period..................                                       (320)     (189)     (234)
                                                                              ------    ------    ------
TOTAL COMMON STOCKHOLDERS' EQUITY........                                     $2,361    $2,456    $2,216
                                                                              ======    ======    ======
(A) DISCLOSURE OF COMPREHENSIVE INCOME
    (LOSS):
     Revaluation capital
       Unrealized investment-gain (loss),
          net of tax (benefit) of $3,
          $(6) and $2, respectively......                                     $   (5)   $   12    $   (3)
       Foreign currency translation......                                       (146)       28       (40)
       Consolidated net income...........                                         36       277       285
                                                                              ------    ------    ------
       Total Consolidated Comprehensive
          Income (Loss)..................                                     $ (115)   $  317    $  242
                                                                              ======    ======    ======
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      CMS-27
<PAGE>   63

                             CMS ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1: CORPORATE STRUCTURE

     CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the Lower
Peninsula of Michigan, is a subsidiary of CMS Energy. Enterprises, through
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; energy
marketing, services and trading; and international energy distribution. In March
1999, CMS Energy completed the acquisition of Panhandle Eastern Pipe Line,
including its subsidiaries Trunkline and Pan Gas Storage, and its affiliates
Panhandle Storage and Trunkline LNG, as discussed further below. Panhandle is
primarily engaged in the interstate transportation, storage and processing of
natural gas.

2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS

     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 generally accepted accounting principles 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.

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

     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. Consumers bases depreciation provisions for utility property on
straight-line and units-of-production rates approved by the MPSC. The composite
depreciation rate for electric utility property was 3.1 percent for 2000, 3.0
percent for 1999 and 3.5 percent for 1998. The composite rate for gas utility
property was 4.4 percent for 2000 and 1999, and 4.2 percent for 1998. The
composite rate for other property was 10.7 percent for 2000, 8.6 percent for
1999 and 7.4 percent for 1998. Other nonutility depreciable property is
amortized over its estimated useful life; gains and losses on asset sales are
recognized at the time of sale.

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

     GOODWILL: Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies and is amortized using the
straight-line method principally over 40 years. The carrying amount of goodwill
is reviewed annually using undiscounted cash flows for the businesses acquired
over the remaining amortization periods. At December 31, 2000, no goodwill
impairments existed. Accumulated amortization of goodwill at December 31, 2000
and 1999 was $49 million and $25 million, respectively.
                                      CMS-28
<PAGE>   64
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: In accordance with APB
Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock
and SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, CMS Energy evaluates the potential
impairment of its investments in projects and other long-lived assets, including
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.

     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. Accounts receivable on the Consolidated Balance Sheets include $266
million and $202 million at December 31, 2000 and 1999, respectively, for
electric and gas service that has been provided but not yet billed to customers.
Prior to final FERC approval of filed rates, Panhandle is exposed to risk that
the FERC will ultimately approve the rate at a level lower than those requested.
The difference is subject to refund with reserves established, where required,
for that purpose.

     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.

     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.

     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. Conversely, in 1992, Consumers
recorded a loss for the present value of its estimated future underrecoveries of
power costs resulting from purchases from the MCV Partnership (see Note 5). It
now recognizes accretion expense annually to reflect the time value of money on
the recorded loss.

     CMS MST has entered into 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, 2000 and 1999, the amounts recorded as
liabilities on the Consolidated Balance Sheets totaled $348 million and $339
million, respectively, and are guaranteed by Enterprises. As CMS MST fulfills
its obligations under the contracts, CMS Energy records an adjustment to the
outstanding obligation through accretion expense.

     NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Consumers
expenses interest on leased nuclear fuel as it is incurred. Under current
federal law, as a federal court decision confirmed, the DOE was to begin
accepting deliveries of spent nuclear fuel for disposal by January 31, 1998. For
fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel
expense, recovers these costs through electric rates, and then remits them to
the DOE quarterly.

                                      CMS-29
<PAGE>   65
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Consumers elected to defer payment for disposal of spent nuclear fuel burned
before April 7, 1983. As of December 31, 2000, Consumers has a recorded
liability to the DOE of $130 million, including interest, which is payable upon
the first delivery of spent nuclear fuel to the DOE. Consumers recovered through
electric rates the amount of this liability, excluding a portion of interest. In
1997, the DOE declared that it would not begin to accept spent nuclear fuel
deliveries in 1998. Also in 1997, a federal court affirmed the DOE's duty to
take delivery of spent fuel. 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 an agreement with another utility to address
the DOE's delay in accepting spent fuel. The DOE may use the agreement as a
framework that it could apply to other nuclear power plants. Consumers is
evaluating this matter further. 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.
Consumers is evaluating those rulings and their applicability to its contracts
with the DOE.

     NUCLEAR PLANT DECOMMISSIONING: In 2000, Consumers collected $39 million
from its electric customers for decommissioning its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. In March 1999,
Consumers received a decommissioning order from the MPSC that approved estimated
decommissioning costs for Big Rock and Palisades that were $294 million and $518
million, in 1997 dollars, respectively. Using the inflation factors presented to
the MPSC in order to escalate the estimated decommissioning costs to 2000
dollars, the Big Rock and Palisades estimated decommissioning costs are $325
million and $592 million, respectively. 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. The March 22, 1999 MPSC order set the annual decommissioning surcharge
for Big Rock at $32 million through December 31, 2000 and the December 16, 1999
MPSC order set the annual decommissioning surcharge for Palisades at $6 million
a year. Consumers is required to file a "Report on the Adequacy of the Existing
Annual Provision for Nuclear Plant Decommissioning" (Report) with the MPSC by
March 31, 2001. In December 2000, the NRC extended the Palisades' operating
license to March 2011. The impact of this extension will be evaluated as part of
Consumers' March 31, 2001 Report to the MPSC.

     In 1997, Big Rock closed permanently, even though the plant was originally
scheduled to close on May 31, 2000, at the end of the plant's operating license,
and plant decommissioning began. It may take five to ten years to return the
site to its original condition. For 2000, Consumers incurred costs of $36
million that were charged to the accumulated depreciation reserve for
decommissioning and withdrew $37 million from the Big Rock nuclear
decommissioning trust fund. In total, Consumers has incurred costs of $162
million that have been charged to the accumulated depreciation reserve for
decommissioning and withdrew $149 million from the Big Rock nuclear
decommissioning trust fund. These activities had no material impact on net
income. At December 31, 2000, Consumers is the beneficiary of the investment in
nuclear decommissioning trust funds of $179 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' original NRC license would
have expired in 2007 and the trust funds were estimated to have accumulated $667
million, assuming currently approved MPSC surcharge levels. Consumers estimates
that at the time Palisades is fully decommissioned in the year 2046, the trust
funds will have provided $1.9 billion, including trust earnings, over this
decommissioning period. At December 31, 2000, Consumers is the beneficiary of
the investment in nuclear decommissioning trust funds of $432 million for
Palisades.

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

                                      CMS-30
<PAGE>   66
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     RELATED-PARTY TRANSACTIONS: In 2000, 1999 and 1998, Consumers paid $51
million, $52 million, and $51 million, respectively, for electric generating
capacity and the energy generated by that capacity from affiliates of
Enterprises. Affiliates of CMS Energy sold, stored and transported natural gas
and provided other services to the MCV Partnership totaling $54 million, $37
million, and $21 million for 2000, 1999 and 1998. For additional discussion of
related-party transactions with the MCV Partnership and the FMLP, see Notes 5
and 18. Other related-party transactions are immaterial.

     UTILITY REGULATION: Consumers accounts for the effects of regulation based
on the regulated utility accounting standard SFAS No. 71, Accounting for the
Effects of Certain Types of Regulation. 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.
Consistent with these orders, Consumers discontinued application of SFAS No. 71
for the energy supply portion of its business in the first quarter of 1999
because Consumers expected to implement retail open access for its electric
customers in September 1999. 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 by approximately $535
million and establishing a regulatory asset for a corresponding amount.
According to current accounting standards, Consumers can continue to carry its
energy supply-related regulatory assets if legislation or an MPSC rate order
allows the collection of cash flows to recover these regulatory assets from its
regulated transmission and distribution customers. As of December 31, 2000,
Consumers had a net investment in energy supply facilities of $1.109 billion
included in electric plant and property. See Note 5, Uncertainties.

     SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, imposes stricter criteria for retention of
regulatory-created assets by requiring that such assets be probable of future
recovery at each balance sheet date. Management believes these assets 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.

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                                ----------------
                                                                 2000      1999
                                                                 ----      ----
                                                                  IN MILLIONS
<S>                                                             <C>       <C>
Securitization costs........................................    $  709    $   --
Unamortized nuclear costs...................................         6       519
Postretirement benefits.....................................       251       366
Income taxes................................................        24       193
Abandoned Midland project...................................        22        48
Manufactured gas plant sites................................        63        65
DSM -- deferred costs.......................................         6        13
Uranium enrichment facility.................................        --        18
Other.......................................................        18        35
                                                                ------    ------
Total regulatory assets.....................................    $1,099    $1,257
                                                                ======    ======
Income taxes................................................    $ (270)   $ (257)
Gas customer choice reserve.................................       (33)       --
Other.......................................................        (6)      (17)
                                                                ------    ------
Total regulatory liabilities................................    $ (309)   $ (274)
                                                                ======    ======
</TABLE>

     In October 2000, Consumers received an MPSC order authorizing Consumers to
securitize certain regulatory assets up to $470 million, net of tax (See Note 5,
Uncertainties). Accordingly, in December 2000,
                                      CMS-31
<PAGE>   67
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Consumers established a regulatory asset for securitization costs of $709
million, before tax, that had previously been recorded in other regulatory asset
accounts. As a result, regulatory assets totaling $709 million were transferred
to the regulatory asset Securitization Costs from the following regulatory asset
components:

<TABLE>
<S>                                                             <C>
Unamortized nuclear costs...................................    $405
Postretirement benefits.....................................      84
Income taxes................................................     203
Uranium enrichment facility.................................      16
Other.......................................................       1
                                                                ----
Total securitized regulatory assets.........................    $709
                                                                ====
</TABLE>

     IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: In December 1999, the SEC
released SAB No. 101, Revenue Recognition, summarizing the SEC staff's views on
revenue recognition policies based upon existing generally accepted accounting
principles. The SEC staff deferred the implementation date of SAB No. 101 until
no later than the fourth quarter of fiscal years beginning after December 15,
1999. As a result of adopting SAB No. 101, CMS Energy recorded a cumulative
effect of a change in accounting for exploration and production oil and gas
inventories as more fully discussed in Note 3.

     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 year ended December 31, 2000 the foreign currency translation
amount realized from asset sales increased equity by $25 million and the change
in the foreign currency translation adjustment decreased equity by $171 million,
net of after-tax hedging proceeds. During 2000, the Australian dollar
experienced a significant devaluation relative to the U.S. dollar, declining
from .6567 to the dollar at December 31, 1999 to an average of .5588 to the
dollar for the year ended December 31, 2000. This devaluation resulted in
significant foreign currency translation losses during 2000 that are recorded
within common stockholder's equity. CMS Energy recorded $104 million of non-cash
foreign currency translation losses on its investments in Australian affiliates
during 2000.

     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.

3: UNUSUAL CHARGES/ITEMS

     LOY YANG WRITE-DOWN: 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

                                      CMS-32
<PAGE>   68
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

No. 18, The Equity Method of Accounting for Investments in Common Stock, 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 recorded in Operating Expenses on the Consolidated
Statement of Income in 2000 as a pretax impairment charge of $329 million ($268
million after-tax, or $2.37 per share). This loss does not include cumulative
net foreign currency losses of $164 million due to unfavorable changes in
exchange rates, which, in accordance with SFAS No. 52, Foreign Currency
Translation, will not be realized until there has been a sale or full
liquidation of CMS Energy's investment. 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.

     NITROTEC WRITE-DOWN: In 1999, CMS Gas Transmission wrote off the carrying
amounts of investments in Nitrotec, a proprietary gas processing company which
has patents for its helium removal and nitrogen rejection processes for
purifying natural gas. This write-off occurred after determining that it was
unlikely CMS Gas Transmission would recover any portion of its investments. The
write-off of these investments is recorded in Operating Expenses on the
Consolidated Statement of Income in 1999 as a pretax charge of $84 million ($49
million after-tax, or $.45 and $.43 per basic and diluted share, respectively).

     CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES: During the first quarter
of 1998, Consumers implemented a change in the method of accounting for property
taxes so that such taxes are recognized during the fiscal period of the taxing
authority for which the taxes are levied. This change better matches property
tax expense with the services provided by the taxing authorities, and is
considered the most acceptable basis of recording property taxes. Prior to 1998,
Consumers recorded property taxes monthly during the year following the
assessment date (December 31). The cumulative effect of this one-time change in
accounting increased income in 1998 by $66 million or $43 million, net of tax,
or $.40 per basic and diluted share of CMS Energy Common Stock, including
increased other income by $18 million or $12 million, net of tax, or $.36 per
basic and diluted share of Class G Common Stock.

     CHANGE IN METHOD OF ACCOUNTING FOR INVENTORIES: 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 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. In accordance with the provisions of SAB No. 101, prior year
financial results are not required to be restated. The cumulative effect of this
one-time non-cash accounting change decreased 2000 income by $7 million, or $5
million, net of tax, or $.04 per basic and diluted share of CMS Energy Common
Stock. The pro forma effect on prior years' consolidated net income of
retroactively recording inventories as if the new method of accounting had been
in effect for all periods is not material.

                                      CMS-33
<PAGE>   69
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     As a result of this accounting change, certain unaudited quarterly
financial information for the three months ended March 31, 2000, June 30, 2000
and September 30, 2000 has been restated below. The effects of the accounting
change on assets, liabilities and equity are not material.

Income Statement Data (Unaudited)

<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED
                                            --------------------------------------------------------------------
                                               MARCH 31, 2000          JUNE 30, 2000         SEPTEMBER 30, 2000
                                            --------------------    --------------------    --------------------
                                               AS                      AS                      AS
                                            REPORTED    RESTATED    REPORTED    RESTATED    REPORTED    RESTATED
                                            --------    --------    --------    --------    --------    --------
<S>                                         <C>         <C>         <C>         <C>         <C>         <C>
Operating revenue.......................     $1,827      $1,825      $1,599      $1,595      $2,395      $2,391
Operating expenses......................      1,534       1,533       1,394       1,393       2,148       2,147
                                             ------      ------      ------      ------      ------      ------
Pretax operating income.................        293         292         205         202         247         244
Other income (deductions)...............          2           2          61          61           4           4
Fixed charges...........................        161         161         169         169         175         175
Income taxes............................         53          52          15          14          20          19
Minority interests......................          1           1           1           1           1           1
                                             ------      ------      ------      ------      ------      ------
Consolidated net income before
  cumulative effect of accounting
  change................................     $   80      $   80      $   81      $   79      $   55      $   53
Cumulative effects of accounting
  change................................         --          (5)         --          --          --          --
                                             ------      ------      ------      ------      ------      ------
Consolidated net income.................     $   80      $   75      $   81      $   79      $   55      $   53
                                             ======      ======      ======      ======      ======      ======
Basic earnings per average common
  share.................................     $  .71      $  .66      $  .73      $  .72      $  .51      $  .49
Diluted earnings per average common
  share.................................     $  .70      $  .65      $  .72      $  .71      $  .51      $  .49
</TABLE>

4: ACQUISITIONS AND DISPOSITIONS

     ACQUISITIONS: In March 1999, CMS Energy, through a subsidiary, acquired
Panhandle from Duke Energy for a cash payment of $1.9 billion and existing
Panhandle debt of $300 million. CMS Energy used the purchase method of
accounting to account for the acquisition and, accordingly, included the results
of operations of Panhandle for the period from March 29, 1999 in the
accompanying consolidated financial statements. Assets acquired and liabilities
assumed are recorded at their fair values. CMS Energy allocated the excess
purchase price over the fair value of net assets acquired of approximately $800
million to goodwill and amortizes this amount on a straight-line basis over 40
years.

     The following unaudited pro forma amounts for operating revenue,
consolidated net income and basic and diluted earnings per share, as if the
acquisition had occurred on January 1, 1998, illustrate the effects of: (1)
various restructuring, realignment, and elimination of activities between
Panhandle and Duke Energy prior to the closing of the acquisition by CMS Energy;
(2) the adjustments resulting from the acquisition by CMS Energy; and (3)
financing transactions which include the public issuance of $800 million of
senior notes by Panhandle,

                                      CMS-34
<PAGE>   70
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$850 million of senior notes by CMS Energy, and the private sale of $250 million
of Trust Preferred Securities by CMS Energy.

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31
                                                                -----------------------
                                                                 1999             1998
                                                                 ----             ----
                                                                IN MILLIONS, EXCEPT PER
                                                                     SHARE AMOUNTS
<S>                                                             <C>              <C>
Operating revenue...........................................    $6,216           $5,566
Consolidated net income.....................................    $  287           $  289
Basic earnings per share....................................    $ 2.27(a)        $ 2.70
Diluted earnings per share..................................    $ 2.26(a)        $ 2.67
</TABLE>

-------------------------
(a)  Reflects the reallocation of net income and earnings per share as a result
     of the premiums on exchange of Class G Common Stock. As a result, CMS
     Energy's basic and diluted earnings per share were reduced $.26 and $.25,
     respectively.

     In March 2000, Trunkline, a subsidiary of Panhandle, acquired the Sea Robin
Pipeline from El Paso Energy Corporation for cash of approximately $74 million.
Sea Robin is a 1 bcf per day capacity natural gas and condensate pipeline system
located in the Gulf of Mexico offshore Louisiana west of Trunkline's existing
Terrebonne system.

     DISPOSITIONS: CMS Energy is currently implementing a financial plan to
attempt to strengthen its balance sheet, reduce fixed expenses and enhance
earnings per share growth. In conjunction with this plan, CMS Energy has
identified for possible sale certain non-strategic assets that are expected to
contribute little or no earnings benefits in the short to medium term. In
addition, this plan will allow CMS Energy to achieve more geographic and
business focus, thereby allowing CMS Energy to concentrate on its most
profitable and growing ventures. As a result, from December, 1999 through
December 31, 2000, CMS Energy has received $719 million of proceeds from the
sale of these non-strategic assets. In addition, these sales resulted in an
approximately $465 million reduction in consolidated project debt.

     Proceeds and pretax gains (losses) from the assets sold are included in the
following table:

<TABLE>
<CAPTION>
                                                                    ASSETS/INVESTMENTS
                                                                --------------------------
                                                                 SALES           PRETAX
                                                                PROCEEDS       GAIN (LOSS)
                                                                --------       -----------
                                                                       IN MILLIONS
<S>                                                             <C>            <C>
Powder River -- Bighorn.....................................      $ 65             $--(a)
Cataguazes..................................................       141             (5)
Antrim Gas Properties.......................................       163             13
Lakewood Cogeneration Power Plant...........................        94             41
Ecuador Oil Reserves........................................        96             25
Curtis Palmer Hydro Plant...................................        12              1
Securities..................................................        95             12
Other.......................................................        53(b)          (3)
                                                                  ----             --
                                                                  $719             $84
                                                                  ====             ==
</TABLE>

-------------------------
(a)  Investment was sold in December 1999, and consequently, the gain was
     recorded in 1999. Approximately $39 million of sale proceeds were received
     in 1999.

(b)  Includes $51 million related to transactions involving the disposition of
     assets.

                                      CMS-35
<PAGE>   71
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5: UNCERTAINTIES

CONSUMERS' ELECTRIC UTILITY CONTINGENCIES

     ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of
sulfur dioxide and nitrogen oxides and requires emissions and air quality
monitoring. Consumers currently operates within these limits and meets current
emission requirements. The Clean Air Act requires the EPA to review periodically
the effectiveness of the national air quality standards in preventing adverse
health effects.

     1997 EPA Revised NOx and Small Particulate Emissions Standards -- In 1997,
the EPA revised these standards to impose further limitations on nitrogen oxide
and small particulate-related emissions. The United States Supreme Court
recently found that the EPA has power to revise the standards but found that the
EPA's implementation plan was not lawful. While this case has been pending in
federal courts, and while continuing through the lower federal courts as ordered
by the Supreme Court, the EPA suspended the standards under the 1997 rule and
reinstated the pre-1997 standards.

     1998 EPA Plan for NOx Emissions -- In 1998, based in part upon the 1997
standards, the EPA Administrator issued final regulations requiring the State of
Michigan to further limit nitrogen oxide emissions. Consumers anticipates a
reduction in nitrogen oxide emissions by 2004 to only 32 percent of levels
allowed for the year 2000.

     Section 126 Petitions -- In December 1999, the EPA Administrator signed a
revised final rule under Section 126 of the Clean Air Act. The rule requires
some electric utility generators, including some of Consumers' electric
generating facilities, to achieve the same emission rate as that required by the
1998 plan for NOx emissions. Under the revised Section 126 rule, the emission
rate will become effective on May 1, 2003 and apply for the ozone season in 2003
and during each subsequent year. Various parties' petitions challenging the
EPA's rule have been filed.

     Until all air quality targets are conclusively established, the estimated
cost of compliance discussed below is subject to revision.

     Cost of Environmental Law Compliance -- To meet the EPA's 1998 rule and/or
the Section 126 nitrous oxide emission rules, the estimated cost to Consumers
will be between $290 million and $500 million, calculated in year 2000 dollars.
The lower estimate represents the capital expenditure level that would
satisfactorily meet the proposed emissions limits but would result in higher
operating expense. The higher estimate in the range includes expenditures that
result in lower operating costs while complying with the proposed emissions
limit. Consumers anticipates that it will incur these capital expenditures
between 2000 and either 2003 or 2004, depending upon whether the EPA prevails in
the Section 126 litigation. In addition, Consumers expects to incur cost of
removal related to this effort, but is unable to predict the amount at this
time.

     Consumers may need an equivalent amount of capital expenditures to comply
with the new small particulate standards sometime after 2004.

     Consumers coal-fueled electric generating units burn low-sulfur coal and
are currently operating at or near the sulfur dioxide emission limits. Beginning
in 1992 and continuing into 2000, Consumers incurred capital expenditures
totaling $72 million to install equipment at certain generating units to comply
with the acid rain provisions of the Clean Air Act. Management believes that
these expenditures will not materially affect Consumers' annual operating costs.

     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. Nevertheless, it
believes that these costs are 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,
                                      CMS-36
<PAGE>   72
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Consumers estimates that its share of the total liability for the known
Superfund sites will be between $2 million and $9 million. As of December 31,
2000, 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 is studying the remaining materials and determining options and their
related costs.

CONSUMERS' ELECTRIC UTILITY RATE MATTERS

     ELECTRIC RESTRUCTURING: Since 1997, the Michigan Legislature has been
considering electric utility restructuring legislation. These efforts finally
resulted in the passage of the Customer Choice Act, which became effective June
5, 2000.

     The Customer Choice Act: 1) permits all customers to exercise choice of
electric generation suppliers by January 1, 2002; 2) cuts 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 Securitization to refinance
stranded costs as a means of offsetting the earnings impact of the five percent
residential rate reduction; 5) establishes a market power test which may require
the transfer of control of a portion of generation resources in excess of that
required to serve firm retail sales requirements (a requirement with which
Consumers is in compliance); 6) requires Michigan utilities to join a
FERC-approved RTO or divest their interest in transmission facilities to an
independent transmission owner; 7) requires the joint expansion of available
transmission capability by Consumers, Detroit Edison and American Electric Power
by at least 2,000 MW by June 5 of 2002; and 8) allows for the recovery of
stranded costs and implementation costs incurred as a result of the passage of
the act. Consumers is highly confident that it will meet the conditions of items
5 and 7 above, prior to the earliest rate cap termination dates specified in the
act. Failure to do so would result in an extension of the rate caps to as late
as December 31, 2013. As of 2000, Consumers spent $13 million on the required
expansion of transmission capabilities. Consumers anticipates it will spend an
additional $24 million in 2001 and 2002, unless Consumers transfers its
transmission facilities to a FERC-approved RTO or to an independent transmission
owner.

     In July 2000, in accordance with the Customer Choice Act, Consumers filed
an application with the MPSC to begin the Securitization process. Securitization
typically involves the issuance of asset backed bonds with a higher credit
rating than conventional utility corporate financing. In October 2000 and
January 2001, the MPSC issued a financing order and a final order, respectively,
authorizing Securitization of approximately $470 million in qualified costs,
which were primarily regulatory assets, consisting of electric utility stranded
generation costs, plus recovery of the expenses of the Securitization. Cost
savings from Securitization depend upon the level of debt or equity securities
ultimately retired, the amortization schedule for the securitized qualified
costs and the interest rates of the retired debt securities and the
Securitization bonds. These savings will only be determined once the
Securitization bonds are issued and will offset substantially all of the CMS
Energy revenue impact of the five percent residential rate reduction, $51
million on an annual basis, that Consumers was required to implement by the
Customer Choice Act. The order directs Consumers to apply any cost savings in
excess of the five percent residential rate reduction to rate reductions for
non-residential and retail open access customers after the bonds are sold. In a
subsequent order, the MPSC confirmed that Consumers could recover the five
percent residential rate reduction's effect on revenues lost from the date of
the financing order. Consumers estimates that the disallowed portion of revenue
recovery relating to the year 2000 five percent residential rate reduction
reduced its operating earnings by $22 million in 2000. Consumers, and its
special purpose subsidiary that will issue the bonds, will recover the repayment
of principal, interest and other expenses relating to the issuance of the bonds
through a Securitization charge and a tax charge. These charges are subject to
an annual true-up until one year

                                      CMS-37
<PAGE>   73
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

prior to the last expected maturity date of the Securitization bonds and no more
than quarterly thereafter. The MPSC's order will not increase current electric
rates for any of Consumers' tariff customers.

     In January 2001, Consumers accepted the MPSC's final financing order. The
final financing order has been appealed by the Attorney General of Michigan.
Consumers cannot predict the outcome of the appeal or its effect on the schedule
for issuance of Securitization bonds. Beginning January 1, 2001, and continuing
during the appeal period, the amortization of the approved regulatory assets
being securitized as qualified costs is being deferred which effectively offsets
the loss in revenue resulting from the five percent residential rate reduction.
The amortization will be reestablished later, after the Securitization bond
sale, based on a schedule that is the same as the recovery of the principal
amounts of the securitized qualified costs. Ultimately, sale of Securitization
bonds will be required to offset substantially all of the CMS Energy revenue
impact of the rate reduction over the term of the bonds.

     In September 1999, Consumers began implementing a plan for electric retail
customer open access. Consumers submitted this plan to the MPSC in 1998, and in
March 1999 the MPSC issued orders that generally supported the plan. The
Customer Choice Act states that orders issued by the MPSC before the date of
this act that 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, are in compliance with this act and
enforceable by the MPSC. In September 2000, as required by the MPSC, Consumers
filed tariffs governing its retail open access program and addressed revisions
appropriate to comply with the Customer Choice Act. Consumers cannot predict how
the MPSC will modify the tariff or enforce the existing restructuring orders.

     In June 2000, the Court of Appeals issued an opinion relating to a number
of consolidated MPSC restructuring orders. The opinion primarily involved issues
that the Customer Choice Act has rendered moot. In a separate pending case,
ABATE and the Attorney General each appealed an August 1999 order in which the
MPSC found that it had jurisdiction to approve rates, terms and conditions for
electric retail wheeling, also known as electric customer choice, if a utility
voluntarily chooses to offer that service. Consumers believes that the Customer
Choice Act has rendered the issue moot, but cannot predict how the Court of
Appeals will resolve the issue.

     POWER COSTS: During periods when electric demand is high, the cost of
purchasing energy 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 reserve, also called a
reserve margin, of approximately 15 percent. The reserve margin provides
Consumers with additional power above its anticipated peak power 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. For the summers 2001, 2002, and 2003, Consumers is
planning for a reserve margin of 15 percent. The actual 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. The existing retail open access plan allows other
electric service providers with the opportunity to serve up to 750 MW of nominal
retail open access requirements. As of January 2001, alternative electric
service providers are providing service to 67 MW of retail open access
requirements.

     To reduce the risk of high energy prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
electricity call option contracts for the physical delivery of electricity
during the months of June through September. The cost of these electricity call
option contracts for summer 2000 was $51 million. Consumers expects to use a
similar strategy in the future, but cannot predict the cost of this strategy at
this time. As of December 31, 2000, Consumers had purchased or had commitments
to purchase electricity call option contracts covering the estimated reserve
margin requirements for summer 2001, and partially covering the estimated
reserve margin requirements for summers 2002 through 2005, at a recognized

                                      CMS-38
<PAGE>   74
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

cost of $86 million, of which $42 million pertains to 2001. Changes in power
costs as a result of fluctuating energy prices will not be reflected in rates
during the rate freeze period as discussed above.

     TRANSMISSION ASSETS: In 1999, the FERC issued Order No. 2000, which
describes the characteristics the FERC would find acceptable in a model RTO. In
this order, the FERC declined to mandate that utilities join RTOs, but did order
utilities to make filings in October 2000 and January 2001 declaring their
intentions with respect to RTO membership.

     In 1999, Consumers and four other electric utility companies joined
together to form a coalition known as the Alliance Companies for the purpose of
creating a FERC approved RTO. As the FERC has not made a final disposition of
the Alliance RTO, Consumers is uncertain about the outcome of the Alliance
matter before the FERC and its continued participation in the Alliance RTO.

     In January 2001, the FERC granted Consumers' application to transfer
ownership and control of its transmission facilities to a wholly owned
subsidiary, Michigan Transco. The transfer of control to Michigan Transco is
expected to occur later in the year 2001. This represents the first step in
Consumers' plan to either divest its transmission business to a third party or
to transfer control of or to sell it to an RTO. In either event, Consumers'
current plan is to remain in the business of generating and distributing
electric power to retail customers. In addition, in response to an application
that Consumers filed with the MPSC, the MPSC issued an order that stated in part
that, if Consumers sells its transmission facilities in the manner described in
its application, it would be in compliance with applicable requirements of the
Customer Choice Act.

     ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in Consumers' electric rates
that approximated $189 million annually. As a result of the rate freeze imposed
by the Customer Choice Act, the MPSC issued an order in June 2000 dismissing the
ABATE complaint. In July 2000, ABATE filed a rehearing petition with the MPSC.
Consumers cannot predict the outcome of the rehearing process.

     Before 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,
such as, the actual cost of fuel, interchange power and purchased power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process through December 31, 2001. Under the suspension, the MPSC 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. Consumers will bear the risk of increased
costs, including power purchase costs, until that date.

OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES

     THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and
operates the MCV Facility, contracted to sell electricity to Consumers for a
35-year period beginning in 1990 and to supply electricity and steam to Dow.
Consumers, through two wholly owned subsidiaries, holds the following assets
related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49
percent general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds, through FMLP, a 35 percent lessor interest in the MCV Facility.

                                      CMS-39
<PAGE>   75
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summarized Statements of Income for CMS Midland and CMS Holdings

<TABLE>
<CAPTION>
                                                                     YEAR ENDED
                                                                    DECEMBER 31
                                                                --------------------
                                                                2000    1999    1998
                                                                ----    ----    ----
                                                                    IN MILLIONS
<S>                                                             <C>     <C>     <C>
Pretax operating income.....................................    $56     $49     $49
Income taxes and other......................................     18      15      15
                                                                ---     ---     ---
Net income..................................................    $38     $34     $34
                                                                ===     ===     ===
</TABLE>

     Power Purchases from the MCV Partnership -- Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, 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. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.

     Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC cost recovery
orders. At December 31, 2000 and December 31, 1999, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $44 million and $78 million, respectively. In March 1999, Consumers
and the MCV Partnership reached an agreement effective January 1, 1999 that
capped availability payments to the MCV Partnership at 98.5 percent. If the MCV
Facility generates electricity 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:

<TABLE>
<CAPTION>
                                                                2001    2002    2003    2004    2005
                                                                ----    ----    ----    ----    ----
                                                                            IN MILLIONS
<S>                                                             <C>     <C>     <C>     <C>     <C>
Estimated cash underrecoveries at 98.5%, net of tax.........    $39     $38     $37     $36     $35
</TABLE>

     Consumers continually evaluates the adequacy of the PPA liability. These
evaluations consider management's assessment of operating levels at the MCV
Facility through 2007, along with certain other factors including MCV related
costs that are included in Consumers' frozen retail rates. Should future results
differ from management's assessments, Consumers may have to make additional
charges for a given year of up to $33 million, after tax. Management believes
that the PPA liability is adequate at this time. For further discussion on the
impact of the frozen PSCR, see "Electric Rate Matters" in this Note.

     NUCLEAR MATTERS: In March 2000, Palisades received its annual performance
review in which the NRC stated that no significant performance issues existed
during the assessment period in the reactor safety, radiation safety, and
safeguards strategic performance areas. The NRC stated that Palisades continues
to operate in a safe manner. Further, it stated that over the next few years the
NRC plans to conduct only routine inspections at Palisades. In April 2000, the
NRC implemented the revised reactor oversight process industry-wide, including
for Palisades. As part of that process, in April 2000, Palisades submitted
required NRC performance data that indicated that Consumers was within the
limits of acceptable performance for which no NRC response is required.

                                      CMS-40
<PAGE>   76
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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, commonly known as
"dry casks", for temporary on-site storage. As of December 31, 2000, Consumers
had loaded 18 dry storage casks with spent nuclear fuel at Palisades. Palisades
will need to load additional casks by 2004 in order to continue operation.
Palisades currently has three additional empty storage-only casks on site, with
storage pad capacity for up to seven additional loaded casks. Consumers
anticipates, however, that licensed transportable casks will be available prior
to 2004.

     Consumers maintains insurance against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
facilities. Consumers also maintains coverage for replacement power costs during
prolonged accidental outages at Palisades. Insurance would not cover such costs
during the first 12 weeks of any outage, but would cover most of such costs
during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. If certain covered losses occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of $12.8 million in any one year to NEIL; $88 million per
occurrence under the nuclear liability secondary financial protection program,
limited to $10 million per occurrence in any year; and $6 million if nuclear
workers claim bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.

     In February 2000, Consumers submitted an analysis to the NRC that shows
that the NRC's screening criteria for reactor vessel embrittlement at Palisades
will not be reached until 2014. On December 14, 2000, the NRC issued an
amendment revising the operating license for Palisades extending the expiration
date to March 2011, with no restrictions related to reactor vessel
embrittlement.

     In November 2000, Consumers signed an agreement to acquire an interest in
NMC. In connection with this agreement, Consumers requested approval from the
NRC for an amendment to Palisades' operating license designating NMC as the
plant's operator. Consumers will retain ownership of Palisades, its 789 MW
output, the spent fuel on site, and ultimate responsibility for the safe
operation, maintenance and decommissioning of the plant. Under this agreement,
salaried Palisades' employees will become NMC employees by mid-year 2001. Union
employees will work under the supervision of NMC pursuant to their existing
labor contract as Consumers employees. Consumers will benefit by consolidating
expertise and controlling costs and resources among all of the nuclear plants
being operated on behalf of the five NMC member companies. With Consumers as a
partner, NMC will have responsibility for operating eight units with 4,500 MW of
generating capacity in Wisconsin, Minnesota, Iowa and Michigan. The ultimate
financial impact is uncertain.

     COMMITMENTS FOR COAL SUPPLIES: Consumers has entered into coal supply
contracts with various suppliers for its coal-fired generating stations. Under
the terms of these agreements, Consumers is obligated to take physical delivery
of the coal and make payment based upon the contract terms. Consumers' current
contracts have expiration dates that range from 2001 to 2004. Consumers enters
into long-term contracts for approximately 60 to 85 percent of its annual coal
requirements. In 2000, coal purchases totaled $239 million of which $195 million
(81 percent of the tonnage requirement) was under long-term contract. Consumers
supplements its long-term contracts with spot-market purchases.

     DERIVATIVE ACTIVITIES: Consumers' electric business uses purchased electric
call option contracts to meet its regulatory obligation to serve, which requires
physical supply of energy to customers, and to manage energy cost and to ensure
a reliable source of capacity during periods of peak demand. While management
intends to take delivery of the commodity, if Consumers' daily capacity exceeds
its needs, in rare instances, the options, if marketable, are sold. Consumers
believes that these contracts currently qualify for the normal purchase and
sales exception of SFAS No. 133; therefore, Consumers will not record the fair
value of these contracts on the balance sheet. At January 1, 2001, Consumers had
a deferred asset of $86 million associated with premiums for these contracts. As
of January 1, 2001, these contracts had a fair value of $123 million, and expire
between 2001 and 2005.

                                      CMS-41
<PAGE>   77
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Consumers' electric business also uses purchased gas call option and gas
swap contracts to hedge against price risk due to the fluctuations in the market
price of gas used as fuel for generation of electricity. These contracts are
financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases.

     These contracts are designated as cash flow hedges, and therefore,
Consumers will record any change in the fair value of these contracts in other
comprehensive income until the forecasted transaction occurs. Consumers believes
that these contracts will be highly effective in achieving offsetting cash flows
of future gas purchases. Consumers will record any ineffectiveness, as required
by SFAS No. 133, in earnings immediately as part of power costs. At January 1,
2001, Consumers had a derivative asset with a fair value of $3 million, which
includes $1 million of premiums paid for these contracts. These contracts expire
in 2001.

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
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers 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. Using this model,
Consumers estimates the costs to be between $66 million and $118 million. These
estimates are based on undiscounted 1999 costs. As of December 31, 2000,
Consumers has an accrued liability of $56 million (net of expenditures incurred
to date), and a regulatory asset of $63 million. Any significant change in
assumptions, such as remediation techniques, nature and extent of contamination,
and legal and regulatory requirements, could affect the estimate of remedial
action costs for the sites. Consumers defers and amortizes, over a period of ten
years, environmental clean-up costs above the amount currently being recovered
in rates. Rate recognition of amortization expense cannot begin until after a
prudence review in a future general gas rate case. The MPSC allows Consumers to
recover $1 million annually. Consumers has initiated lawsuits against certain
insurance companies regarding coverage for some or all of the costs that it may
incur for these sites.

CONSUMERS' GAS UTILITY MATTERS

     GAS RESTRUCTURING: On April 1, 1998, Consumers implemented an experimental
gas customer choice pilot program. The pilot program ends March 31, 2001. The
program allows up to 300,000 residential, commercial and industrial retail gas
sales customers to choose an alternative gas commodity supplier in direct
competition with Consumers. As of December 31, 2000, more than 150,000 customers
chose alternative gas suppliers, representing approximately 38 bcf of gas
requirements. Customers who choose to remain sales customers of Consumers will
have fixed gas commodity rates through the end of the program. This three-year
program: 1) freezes gas distribution rates through March 31, 2001, establishing
a gas commodity cost at a fixed rate of $2.84 per mcf; 2) establishes an
earnings sharing mechanism with customers if Consumers' earnings exceed certain
predetermined levels; and 3) establishes a gas transportation code of conduct
that addresses the relationship between Consumers and marketers, including its
affiliated marketers. In October 2000, the MPSC approved Consumers' application
for a permanent gas customer choice program commencing April 1, 2001. Under the
permanent gas customer choice program, Consumers will no longer be subject to a
frozen gas commodity cost and delivery charge. Consumers will then return 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. Under the permanent gas customer choice program, up to
600,000 of Consumers' natural gas customers will be eligible to participate in
the program beginning April 1, 2001, up to 900,000 gas customers by April 1,
2002, and

                                      CMS-42
<PAGE>   78
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

all of Consumers' gas customers beginning April 1, 2003. Consumers would
continue to transport and distribute gas to these customers.

     During the last year of the experimental pilot program, significant
increases in gas costs had exposed Consumers to gas commodity losses. In the
second quarter 2000, Consumers recorded a regulatory liability of $45 million to
reflect estimated losses due to increases in natural gas commodity costs. In
October 2000, the MPSC approved Consumers' accounting application to revise its
inventory accounting and reclassify low-cost, base gas in Consumers' gas storage
reservoirs. The MPSC allowed Consumers to immediately begin to include the cost
of its recoverable base gas with higher cost purchased gas. Consumers expects
the gas accounting order to eliminate the need for Consumers to recognize any
further losses related to gas commodity cost underrecoveries.

OTHER GAS UNCERTAINTIES

     COMMITMENTS FOR GAS SUPPLIES: Consumers contracts to purchase gas and
transportation from various suppliers for its natural gas business. These
contracts have expiration dates that range from 2001 to 2004. Consumers' 2000
gas requirements totaled 210 bcf at a cost of $608 million, 40 percent of which
was under long-term contracts for one year or more. As of the end of 2000,
Consumers had 27 percent of its 2001 gas requirements under such long-term
contracts, and will supplement them with additional long-term and short-term
contracts and spot-market purchases.

     DERIVATIVE ACTIVITIES: Consumers' gas business uses a combination of
written put and purchased call options to manage the cost of gas supplied to its
customers. These options do not qualify for hedge accounting under SFAS No. 133;
therefore, Consumers will record any change in the fair value of these contracts
directly in earnings as part of the cost of gas. Consumers is recognizing the
net premium to the cost of gas through March 2001 when the contracts expire. As
of January 1, 2001, these contracts had a net fair value of $25 million.

PANHANDLE MATTERS

     REGULATORY MATTERS: Effective August 1996, Trunkline placed into effect a
general rate increase, subject to refund. On September 16, 1999, Trunkline filed
a FERC settlement agreement to resolve certain issues in this proceeding. FERC
approved this settlement February 1, 2000 and required refunds of approximately
$2 million that were made in April 2000, with supplemental refunds of $1.3
million in June 2000. On January 12, 2000, FERC issued an order on the remainder
of the rate proceeding which, if approved on rehearing without modification,
could result in a substantial reduction to Trunkline's tariff rates which could
impact future revenues and require refunds. On January 29, 2001, Trunkline filed
a settlement to resolve the remaining matters in the proceeding. This settlement
is pending FERC review. Management believes that reserves for refund established
are adequate and there will not be a material adverse effect on consolidated
results of operations or financial position.

     In conjunction with a FERC order issued in September 1997, FERC required
certain natural gas producers to refund previously collected Kansas ad-valorem
taxes to interstate natural gas pipelines, including Panhandle. FERC ordered
these pipelines to refund these amounts to their customers. The pipelines must
make all payments in compliance with prescribed FERC requirements. At December
31, 2000 and December 31, 1999, accounts receivable included $59 million and $54
million, respectively, due from natural gas producers, and other current
liabilities included $59 million and $54 million, respectively, for related
obligations.

     ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken clean-up
programs at these sites. The contamination resulted from the past use of
lubricants containing PCBs in compressed air systems and the prior use of
wastewater collection facilities and other on-site disposal areas. Under the
terms of the sale of

                                      CMS-43
<PAGE>   79
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Panhandle to CMS Energy, a subsidiary of Duke Energy is obligated to complete
the Panhandle clean-up programs at certain agreed-upon sites and to indemnify
against certain future environmental litigation and claims. The Illinois EPA
included Panhandle and Trunkline, together with other non-affiliated parties, in
a cleanup of former waste oil disposal sites in Illinois. Prior to a partial
cleanup by the United States EPA, a preliminary study estimated the cleanup
costs at one of the sites to be between $5 million and $15 million. The State of
Illinois contends that Panhandle Eastern Pipe Line and Trunkline's share for the
costs of assessment and remediation of the sites, based on the volume of waste
sent to the facilities, is 17.32 percent. Management believes that the costs of
cleanup, if any, will not have a material adverse impact on Panhandle's
financial position, liquidity, or results of operations.

OTHER UNCERTAINTIES

     CMS GENERATION-OXFORD TIRE RECYCLING: In a 1999 administrative order, the
California Regional Water Control Board of the State of California named CMS
Generation as a potentially responsible party for the clean up 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 April
2000, the California Attorney General filed a complaint against the potentially
responsible parties for clean up of the site and assessed penalties for
violation of the California Regional Water Control Board order. The complaint
alleges $20 million of clean up costs to be shared among all the potentially
responsible parties. In an interim settlement between CMS Generation and the
Attorney General of California, CMS Generation agreed to assist the state with
some of the clean up at the site at a cost of less than $1 million, and the
state agreed to suspend the daily $15,000 penalty it imposed on the potentially
responsible parties. CMS Generation and the Attorney General of California are
currently in negotiations to extend the interim settlement. CMS Generation filed
a cross claim against the owner of the plant and a co-defendant in this case,
alleging that they were responsible for the environmental damages. Also in
connection with this same 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 believes these cases are without merit and intends to
vigorously defend against them. CMS Generation's primary insurance carrier has
agreed to pay a portion of the clean-up costs and legal fees under an existing
policy.

     DEARBORN INDUSTRIAL GENERATION: Duke/Fluor Daniel (DFD) has asserted change
order claims against Dearborn Industrial Generation, L.L.C. (DIG), a
wholly-owned subsidiary of CMS Generation, in excess of $65 million for
additional time and cost relating to the construction by DFD of the DIG
electrical generation facility in Dearborn, Michigan. DIG rejected the change
orders, tendered change orders indicating cost deductions to DFD relating to
work that DIG was required to take over from DFD, and assessed DFD schedule
liquidated damages. Neither DFD nor DIG have initiated a formal dispute
resolution regarding this matter yet, and construction of the electrical
generation facility continues.

     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 Pines 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 it had committed to drill. 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 Pines. The jury then awarded Star Energy
and White Pines $7.6 million in damages. Terra has filed an appeal. CMS Energy
believes Terra has meritorious grounds for either reversal of the judgment or
reduction of damages. CMS Energy has an indemnification obligation in favor of
the purchaser of its Michigan properties with respect to this litigation.

                                      CMS-44
<PAGE>   80
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     OTHER: CMS Energy and Enterprises have guaranteed repayment of debt through
letters of credit and surety bonds, of unconsolidated affiliates and related
parties approximating $381 million and $517 million as of December 31, 2000 and
1999, respectively.

     Additionally, Enterprises, in the ordinary course of business, has
guarantees in place for contracts of CMS MST in the maximum amount of $651
million and $375 million at December 31, 2000 and 1999, respectively, which
contain certain schedule and performance requirements. As of December 31, 2000,
the actual amount of financial exposure covered by these guarantees was $299
million. These amounts exclude the guarantees associated with CMS MST's natural
gas sales arrangements described in Note 2. The increase in guarantees in 2000
is due to the transition of the energy marketing unit from a retail to wholesale
business. 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.

     In March 2000, Adams Affiliates, Inc. and Cottonwood Partnership (prior
majority owners of Continental Natural Gas) initiated arbitration proceedings
through the American Arbitration Association against CMS Energy. The plaintiffs
claim, in connection with an Agreement and Plan of Merger among CMS Energy, CMS
Merging Corporation, Continental Natural Gas and the plaintiffs, damages for
breach of warranty, implied duty of good faith, violation of the Michigan
Uniform Securities Act, and common law fraud and negligent misrepresentation.
The plaintiffs allege $13 million of compensatory damages and $26 million in
exemplary damages. CMS Energy filed a response denying all the claims made by
the plaintiffs and asserting several counterclaims. CMS Energy believes the
claims against it are without merit and will vigorously defend against them, but
cannot predict the outcome of this matter.

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

     In addition to the matters disclosed in this Note, Consumers and certain
other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental agencies
arising from the ordinary course of business. These lawsuits and proceedings may
involve personal injury, property damage, contractual matters, environmental
issues, federal and state taxes, rates, licensing and other matters.

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

     CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $1.275
billion for 2001, $1.335 billion for 2002, and $1.270 billion for 2003. For
further information, see Capital Resources and Liquidity-Capital Expenditures in
the Management's Discussion and Analysis.

6: SHORT-TERM FINANCINGS

     AUTHORIZATION: At February 1, 2001, Consumers had FERC authorization to
issue or guarantee through June 2002, up to $900 million of short-term
securities outstanding at any one time. Consumers also had remaining FERC
authorization to issue through June 2002 up to $25 million and $800 million of
long-term securities for refinancing or refunding purposes and for general
corporate purposes, respectively. Additionally, Consumers had remaining FERC
authorization to issue $275 million of first mortgage bonds to be issued solely
as security for the long-term securities mentioned above.

     SHORT-TERM FINANCINGS: Consumers has an unsecured $300 million credit
facility and unsecured lines of credit aggregating $190 million. These
facilities are available to finance seasonal working capital requirements and to
pay for capital expenditures between long-term financings. At December 31, 2000,
a total of $403 million

                                      CMS-45
<PAGE>   81
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

was outstanding at a weighted average interest rate of 7.4 percent, compared
with $214 million outstanding at December 31, 1999, at a weighted average
interest rate of 6.6 percent.

     Consumers currently has in place a $325 million trade receivables sale
program. At December 31, 2000 and 1999, receivables sold under the program
totaled $325 million for each year. Accounts receivable and accrued revenue in
the Consolidated Balance Sheets have been reduced to reflect receivables sold.

7: LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31
                                                                                       -----------------
                                                      INTEREST RATE(%)    MATURITY      2000      1999
                                                      ----------------    --------      ----      ----
                                                                                          IN MILLIONS
<S>                                                   <C>                 <C>          <C>       <C>
CMS ENERGY
Senior Notes......................................         7.375            2000       $   --    $   300
                                                           8.125            2002          350        350
                                                           7.625            2004          180        180
                                                           6.750            2004          300        300
                                                           9.875            2007          500         --
                                                           7.500            2009          480        480
                                                           8.000            2011          250        250
                                                           8.375            2013          150        150
                                                                                       ------    -------
                                                                                        2,210      2,010
General Term Notes
  Series A........................................         7.897(a)       2001-2010       110        114
  Series B........................................         8.072(a)       2001-2010       107        108
  Series C........................................         7.878(a)       2001-2010       127        150
  Series D........................................         6.985(a)       2001-2010       191        199
  Series E........................................         7.761(a)       2001-2010       397        278
  Series F........................................         8.800(a)       2001-2010        11         --
                                                                                       ------    -------
                                                                                          943        849

Extendible Tenor Rate Adjusted Securities.........         7.000            2005          180        180
Senior Credit Facility............................                          2001          400        444
Lines of Credit...................................                          2001           29        115
                                                                                       ------    -------
                                                                                          609        739
CONSUMERS ENERGY
First Mortgage Bonds..............................         6.375            2003          300        300
                                                           7.375            2023          263        263
                                                                                       ------    -------
                                                                                          563        563

Senior Notes......................................       (c)                2001          125         --
                                                         (d)                2002          100         --
                                                           6.375            2008          250        250
                                                           6.200            2008          250        250
                                                           6.875            2018          225        225
                                                           6.500            2018          200        200
                                                           6.500            2028          145        149
                                                                                       ------    -------
                                                                                        1,295      1,074
</TABLE>

                                      CMS-46
<PAGE>   82
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31
                                                                                       -----------------
                                                      INTEREST RATE(%)    MATURITY      2000      1999
                                                      ----------------    --------      ----      ----
                                                                                          IN MILLIONS
<S>                                                   <C>                 <C>          <C>       <C>
Long-Term Bank Loans..............................                        2002-2003       190        190
Pollution Control Revenue Bonds...................         5.100          2010-2018       126        131
Nuclear Fuel Disposal.............................                           (b)          130        123
                                                                                       ------    -------
                                                                                          446        444
PANHANDLE
Senior Notes......................................         7.875            2004          100        100
                                                           6.125            2004          300        300
                                                           6.500            2009          200        200
                                                           8.250            2010          100         --
                                                           7.950            2023          100        100
                                                           7.200            2024          100        100
                                                           7.000            2029          300        300
                                                                                       ------    -------
                                                                                        1,200      1,100
OTHER.............................................                                        184        754
                                                                                       ------    -------
Principal Amount Outstanding......................                                      7,450      7,533
Current Amounts...................................                                       (649)    (1,075)
Net Unamortized Discount..........................                                        (31)       (30)
                                                                                       ------    -------
Total Long-Term Debt..............................                                     $6,770    $ 6,428
                                                                                       ======    =======
</TABLE>

-------------------------
(a)  Represents the weighted average interest rate at December 31, 2000.

(b)  Maturity date uncertain (see Note 2 -- Summary of Significant Accounting
     Policies and Other Matters -- Nuclear Fuel Cost).

(c)  The notes bear interest at a floating rate reset each quarter based upon
     LIBOR plus .60%.

(d)  The notes bear interest at a floating rate reset each quarter based upon
     LIBOR plus .98%.

     The scheduled maturities of long-term debt and improvement fund obligations
are as follows: $649 million in 2001, $806 million in 2002, $921 million in
2003, $1.1 billion in 2004 and $3.9 billion in 2005 and thereafter.

CMS ENERGY

     CMS Energy's Senior Credit Facility consists of a $1 billion one-year
revolving credit facility maturing in June 2001. Additionally, CMS Energy has
unsecured lines of credit in an aggregate amount of $63 million. As of December
31, 2000, the total amounts utilized under the Senior Credit Facility, which
includes a $45 million letter of credit, and the unsecured lines of credit, were
$445 million and $29 million, respectively. The amounts available under the
Senior Credit Facility and the unsecured lines of credit were $555 million and
$34 million, respectively.

     In October 2000, CMS Energy sold $500 million aggregate principal amount of
9.875 percent senior notes due 2007. Net proceeds from the sale were
approximately $489 million. CMS Energy ultimately used the net proceeds from
this offering to repay $300 million aggregate principal amount of 7.375 percent
unsecured notes due November 15, 2000 and to reduce the outstanding balance
under the Senior Credit Facility.

CONSUMERS

     LONG-TERM FINANCINGS: Consumers issued floating rate senior notes of $225
million in November 2000, maturing in November 15, 2001 and 2002.

                                      CMS-47
<PAGE>   83
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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.

     OTHER: 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 5.1 percent at
December 31, 2000.

PANHANDLE

     In March 2000, Panhandle received net proceeds of $99 million from the sale
of $100 million 8.25 percent senior notes, due April 2010. Proceeds from this
offering were used to fund the acquisition of Sea Robin.

CMS OIL AND GAS

     CMS Oil and Gas has a $225 million floating rate revolving credit facility
that matures in May 2002. At December 31, 2000, the amount utilized under the
credit facility was $80 million.

8: CAPITALIZATION

CMS ENERGY

     The authorized capital stock of CMS Energy consists of 250 million shares
of CMS Energy Common Stock, 60 million shares of Class G Common Stock, and 10
million shares of CMS Energy Preferred Stock, $.01 par value.

     In February 2000, the Board of Directors approved a stock repurchase
program whereby CMS Energy could reacquire up to 10 million shares of CMS Energy
Common Stock. From February through April 2000, CMS Energy repurchased
approximately 6.6 million shares for $129 million. CMS Energy does not
anticipate the repurchase of additional shares in the near term while attempting
to strengthen its balance sheet. Subsequently, in October 2000, CMS Energy sold
11 million new shares of CMS Energy Common Stock that previously had been
planned for mid-year 2001. CMS Energy used the net proceeds of approximately
$305 million primarily to repay borrowings under the Senior Credit Facility. CMS
Energy used the remaining amounts to repay various lines of credit.

     In August 2000, CMS Energy and CMS Trust III, a Delaware statutory business
trust established by CMS Energy, sold 8.8 million units of 7.25 percent Premium
Equity Participating Securities. Each security consists of a trust preferred
security of CMS Energy Trust III maturing in four years and a contract requiring
the purchase, no later than August 2003, of CMS Energy Common Stock at a rate
that adjusts for the market price at the time of conversion. Net proceeds from
the sale totaled $213 million. CMS Energy used the net proceeds, along with $37
million from the Senior Credit Facility, to redeem the Trust Preferred
Securities of the CMS RHINOS Trust.

     MANDATORILY REDEEMABLE 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

                                      CMS-48
<PAGE>   84
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Trust Preferred Security. In addition to the similar provisions previously
discussed, specific terms of the securities follow:

<TABLE>
<CAPTION>
                                                                    AMOUNT
                CMS ENERGY                                       OUTSTANDING
           TRUST AND SECURITIES                                  ------------                 EARLIEST
               DECEMBER 31                        RATE           2000    1999    MATURITY    REDEMPTION
           --------------------                   ----           ----    ----    --------    ----------
                                                                     IN MILLIONS
<S>                                           <C>                <C>     <C>     <C>         <C>
CMS Energy Trust I, Convertible, Quarterly
  Income Preferred Securities(a)..........            7.75%      $173    $173      2027         2001
CMS Energy Trust II, Adjustable
  Convertible Preferred Securities........            8.75%(b)    301     301      2004           --
CMS Energy Trust III, Premium Equity
  Participating Security Units(c).........            7.25%       220      --      2004           --
CMS RHINOS Trust..........................    LIBOR + 1.75%        --     250        --           (d)
</TABLE>

-------------------------
(a)  Convertible into 1.2255 shares of CMS Energy Common Stock (equivalent to a
     conversion price of $40.80). CMS Energy may cause conversion rights to
     expire on or after July 2001.

(b)  Includes 0.125% annual contract payments for the stock purchase contract
     that obligates the holder to purchase not more than 1.2121 and not less
     than .7830 shares of CMS Energy Common Stock in July 2002.

(c)  Holders are obligated to purchase a variable number of shares of CMS Energy
     Common Stock by August 2003.

(d)  Redeemed in August 2000.

<TABLE>
<CAPTION>
                                                                    AMOUNT
              CONSUMERS ENERGY COMPANY                           OUTSTANDING
                TRUST AND SECURITIES                             ------------                 EARLIEST
                    DECEMBER 31                         RATE     2000    1999    MATURITY    REDEMPTION
              ------------------------                  ----     ----    ----    --------    ----------
                                                                 IN MILLIONS
<S>                                                     <C>      <C>     <C>     <C>         <C>
Consumers Power Company Financing I, Trust
  Originated Preferred Securities...................    8.36%    $100    $100      2015         2000
Consumers Energy Company Financing II, Trust
  Originated Preferred Securities...................    8.20%     120     120      2027         2002
Consumers Energy Company Financing III, Trust
  Originated Preferred Securities...................    9.25%     175     175      2029         2004
</TABLE>

     OTHER: Under its most restrictive borrowing arrangement at December 31,
2000, none of CMS Energy's consolidated net income was restricted for payment of
common dividends. CMS Energy could pay $1 billion in common dividends under its
most restrictive debt covenant.

CONSUMERS

     Under the provisions of its Articles of Incorporation, Consumers had $373
million of unrestricted retained earnings available to pay common dividends at
December 31, 2000. In January 2001, Consumers declared a $66 million common
dividend that was paid in February 2001.

9: EARNINGS PER SHARE AND DIVIDENDS

     On October 25, 1999, CMS Energy exchanged approximately 6.1 million shares
of CMS Energy Common Stock for all of the approximately 8.7 million issued and
outstanding shares of Class G Common Stock in a tax-free exchange for United
States federal income tax purposes. Earnings per share attributable to all
classes of Common Stock from January 1, 1999 to October 25, 1999 and for the
year ended December 31, 1998 reflect the performance of the gas distribution,
storage and transportation business currently conducted by Consumers Gas

                                      CMS-49
<PAGE>   85
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Group. The allocation of earnings attributable to each class of Common Stock and
the related amounts per share are computed by considering the weighted average
number of shares outstanding.

     Earnings attributable to the Outstanding Shares of Class G Common Stock are
equal to Consumers Gas Group net income multiplied by a fraction; the numerator
is the weighted average number of Outstanding Shares during the period and the
denominator is the weighted average number of Outstanding Shares and authorized
but unissued shares of Class G Common Stock not held by holders of the
Outstanding Shares during the period.

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

COMPUTATION OF EARNINGS PER SHARE (EPS):

<TABLE>
<CAPTION>
                                                                 2000           1999          1998(A)
                                                                 ----           ----          -------
                                                                IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S>                                                             <C>            <C>            <C>
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income.....................................    $   36         $  277         $  285
                                                                ------         ------         ------
Net Income Attributable to Common Stocks:
  CMS Energy -- Basic.......................................    $   36(e)      $  241(b)      $  272
  Add conversion of 7.75% Trust Preferred Securities (net of
     tax)...................................................        --(d)           9              9
                                                                ------         ------         ------
CMS Energy -- Diluted.......................................    $   36         $  250(b)      $  281
                                                                ======         ======         ======
Class G:
  Basic and Diluted.........................................        --         $   36(b)(c)   $   13
                                                                ======         ======         ======
AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND
  DILUTED EPS
CMS Energy:
  Average Shares -- Basic...................................     113.1          110.1          102.4
  Add conversion of 7.75% Trust Preferred Securities........        --(d)         4.3            4.3
  Options -- Treasury Shares................................        --            0.3            0.5
                                                                ------         ------         ------
  Average Shares -- Diluted.................................     113.1          114.7          107.2
                                                                ======         ======         ======
Class G:
  Average Shares -- Basic and Diluted.......................        --            8.6(c)         8.3
                                                                ======         ======         ======
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
  Basic.....................................................    $ 0.32(e)      $ 2.18(b)      $ 2.65
  Diluted...................................................    $ 0.32(e)      $ 2.17(b)      $ 2.62
Class G:
  Basic and Diluted.........................................        --         $ 4.21(b)(c)   $ 1.56
                                                                ======         ======         ======
</TABLE>

-------------------------
(a)  Includes the cumulative effect of an accounting change in the first quarter
     of 1998 which increased net income attributable to CMS Energy Common Stock
     $43 million ($.40 per share -- basic and diluted) and Class G Common Stock
     $12 million ($.36 per share -- basic and diluted).

(b)  Reflects the reallocation of net income and earnings per share as a result
     of the premium on exchange of Class G Common Stock. As a result, CMS
     Energy's basic and diluted earnings per share were reduced $.26 and $.25,
     respectively, and Class G's basic and diluted earnings per share were
     increased $3.31.

(c)  From January 1, 1999 to October 25, 1999.

                                      CMS-50
<PAGE>   86
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(d)  The effects of converting the 7.75% Trust Preferred Securities were not
     included in the computation of diluted earnings per share because to do so
     would have been antidilutive.

(e)  Includes the cumulative effect of accounting change for exploration and
     production inventories, which decreased net income by $5 million, or $.04
     per basic and diluted share of CMS Energy Common Stock.

     In February, May, August and November 2000, CMS Energy paid dividends of
$.365 per share on CMS Energy Common Stock. In February 2001, CMS Energy paid a
quarterly dividend of $.365 per share on CMS Energy Common Stock.

10: RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS

     The overall goal of the CMS Energy risk management policy is to analyze and
manage individual business unit commodity exposures to take advantage of the
presence of internal hedge opportunities within its diversified business units.
CMS Energy and its subsidiaries, primarily through CMS MST, utilize a variety of
derivative instruments (derivatives) for both trading and non-trading purposes.
These derivatives include futures contracts, swaps, options and forward
contracts with external parties to manage exposure to fluctuations in commodity
prices, interest rates and foreign exchange rates. To qualify for hedge
accounting, derivatives must meet the following criteria: i) the item to be
hedged exposes the enterprise to price, interest or exchange rate risk; and ii)
the derivative reduces that exposure and is designated as a hedge.

     Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
reviews using, among other things, publicly available credit ratings of such
counterparties. No material nonperformance is expected.

     IMPLEMENTATION OF SFAS NO. 133: Effective January 1, 2001, CMS Energy
adopted SFAS No. 133. Upon initial adoption of the statement, CMS Energy will
reflect the difference between the current fair market value of the derivative
instruments and the recorded book value of the derivative instruments as a
cumulative effect type adjustment to accumulated other comprehensive income. CMS
Energy will reclassify the gains and losses on the derivative instruments that
are reported in accumulated other comprehensive income as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion, if any, of all hedges will be
recognized in current period earnings. CMS Energy determines fair market value
based upon mathematical models using current and historical pricing data.

     CMS Energy believes that the majority of its non-trading derivative
contracts, power purchase agreements and gas transportation contracts qualify
for the normal purchases and sales exception of SFAS No. 133 and therefore would
not be recognized at fair value on the balance sheet. CMS Energy does, however,
use certain derivative instruments to limit its exposures to gas commodity price
risk, interest rate risk, and foreign currency exchange risk. The interest rate
and foreign exchange contracts meet the requirements for hedge accounting under
SFAS No. 133 and CMS Energy will record the changes in the fair value of these
contracts in accumulated other comprehensive income on the balance sheet.

     The financial statement impact of recording the SFAS No. 133 transition
adjustment on January 1, 2001 is as follows:

<TABLE>
<CAPTION>
                                                                IN MILLIONS
<S>                                                             <C>
Fair value of derivative assets.............................        $28
Fair value of derivative liabilities........................         14
Increase in accumulated other comprehensive income, net of
  tax.......................................................          8
</TABLE>

     The increase in accumulated other comprehensive income relates to gas
options, gas fuel swap contracts, and interest rate swap contracts that
qualified for cash flow hedge accounting prior to the adoption of SFAS No. 133.
These amounts will reduce, or be charged to, cost of gas, cost of power or
interest expense, respectively, when the

                                      CMS-51
<PAGE>   87
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

related hedged transaction occurs. Based on the pretax amount recorded in
accumulated other comprehensive income on the January 1, 2001 transition date,
CMS Energy expects to record $24 million as a reduction to cost of gas, $2
million as a reduction in cost of power, and $14 million as an increase to
interest expense in 2001.

     After January 1, 2001, certain gas option contracts will not qualify for
cash flow hedge accounting under SFAS No. 133, and CMS Energy will therefore
record any change in fair value subsequent to January 1, 2001 directly in
earnings, which could cause earnings volatility. Additionally, derivative and
hedge accounting for certain utility industry contracts, particularly electric
call option contracts, remains uncertain. CMS Energy is currently accounting for
electric call option contracts and other electric option-like contracts as
derivatives that qualify for the normal purchase exception of SFAS No. 133, and,
as such, has not recorded these contracts on the balance sheet at fair value.
The ultimate financial impact depends upon resolution of these industry-specific
issues with the FASB and could be materially different than stated above.

     COMMODITY DERIVATIVES (NON-TRADING): CMS Energy accounts for its
non-trading activities as hedges and, as such, defers any changes in market
value and gains and losses resulting from settlements until the hedged
transaction is complete. If there was a material lack of correlation between the
changes in the market value of the commodity price contracts and the market
price ultimately received for the hedged item, the open commodity price
contracts would be marked-to-market and gains and losses would be recognized in
the income statement currently. At December 31, 2000, these commodity
derivatives extended for periods up to 5 years.

     CMS Energy had unrealized net gains (losses) of $61 million and $(10)
million, respectively, for the years ended December 31, 2000 and 1999, related
to non-trading activities. The determination of unrealized net gains (losses)
represents management's best estimate of prices including the use of exchange
and other third party quotes, time value and volatility factors in estimating
fair value. Accordingly, the unrealized net gains (losses) as of December 31,
2000 and 1999 are not necessarily indicative of the amounts CMS Energy could
realize in the current market.

     Notional Contract Quantity of Commodity Derivatives Held for Non-trading
Purposes:

<TABLE>
<CAPTION>
                                                                   VOLUMES AT
                                                                   DECEMBER 31
                                                                -----------------
                                                                2000        1999
                                                                ----        ----
<S>                                                             <C>         <C>
Natural gas (bcf)...........................................       14          19
Electricity (MWh)...........................................    1,582         432
Oil (Mbbls).................................................      495       6,448
</TABLE>

     Notional amounts reflect the volume of transactions but do not represent
the amounts exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not necessarily reflect CMS Energy's exposure to market
risks.

     COMMODITY DERIVATIVES (TRADING): CMS Energy, through its subsidiary CMS
MST, engages in trading activities. CMS MST manages any open positions within
certain guidelines which 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. At December 31, 2000, the
weighted-average life of the trading portfolio was approximately 12 months.

     CMS Energy adopted EITF 98-10, Accounting for Contracts Involved in Energy
Trading and Risk Management Activities, effective January 1, 1999. EITF 98-10
calls for energy trading contracts to be marked-to-market. Under the
mark-to-market method of accounting, transactions are recorded at market value,
net of estimated future transactional reserves, and changes in these positions
are recognized as gains and losses in the Consolidated Statement of Income.
Changes result from cash settlement of existing positions, new positions and the
change in value of the outstanding positions.

                                      CMS-52
<PAGE>   88
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Net Gains (Losses) Recognized from Trading Commodity Derivatives:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                  DECEMBER 31
                                                                ---------------
                                                                2000       1999
                                                                ----       ----
                                                                  IN MILLIONS
<S>                                                             <C>        <C>
Natural gas.................................................    $40        $10
Electricity.................................................      3          3
Oil.........................................................     (4)         4
</TABLE>

     Notional Contract Quantity of Commodity Derivatives Held for Trading
Purposes:

<TABLE>
<CAPTION>
                                                                    VOLUMES AT
                                                                    DECEMBER 31
                                                                -------------------
                                                                 2000         1999
                                                                 ----         ----
<S>                                                             <C>          <C>
Natural gas (bcf)...........................................         2            3
Electricity (MWh)...........................................     3,942       51,200
Oil (barrels)...............................................    22,851        4,000
</TABLE>

     Notional amounts reflect the volume of transactions but do not represent
the amounts exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not necessarily reflect CMS Energy's exposure to market
risks.

     Fair Values of Trading Commodity Derivatives:

<TABLE>
<CAPTION>
                                                                     2000                     1999
                                                            ----------------------    ---------------------
                                                            ASSETS     LIABILITIES    ASSETS    LIABILITIES
                                                            ------     -----------    ------    -----------
                                                                             IN THOUSANDS
<S>                                                         <C>        <C>            <C>       <C>
Fair Value at December 31
Natural gas.............................................    $35,826      $6,997       $7,275      $1,608
Electricity.............................................     10,675          --          804          --
Oil.....................................................        405       1,633        1,860          --
Average Fair Values for the Year
Natural gas.............................................    $21,550      $4,302       $3,638      $  804
Electricity.............................................      5,739          --          402          --
Oil.....................................................      1,132         817          930          --
</TABLE>

     INTEREST RATE DERIVATIVES: CMS Energy and its subsidiaries enter into
interest rate swap agreements to exchange variable rate interest payments to
fixed rate interest payments without exchanging the underlying notional amounts.
These agreements convert variable rate debt to fixed rate debt to reduce the
impact of interest rate fluctuations. The notional amounts parallel the
underlying debt levels and are used to measure interest to be paid or received
and do not represent the exposure to credit loss. In August 2000, CMS Energy
entered into floating-to-fixed interest rate swap agreements with a total
notional amount of $1.0 billion. The difference between the amounts paid and
received under the swaps is accrued and recorded as an adjustment to interest
expense over the life of the hedged agreement. As of December 31, 2000, the
weighted average interest rate associated with outstanding swaps was
approximately 6.8 percent.

<TABLE>
<CAPTION>
                                                                        INTEREST RATE SWAPS
                                                        ---------------------------------------------------
                                                        NOTIONAL      MATURITY       FAIR       UNREALIZED
                                                         AMOUNT         DATE         VALUE      GAIN (LOSS)
                                                        --------      --------       -----      -----------
                                                                                          IN MILLIONS
<S>                                                     <C>           <C>            <C>        <C>
December 31, 2000...................................     $1,086       2001-2006       $(9)          $(9)
December 31, 1999...................................      2,877       2000-2008         6             6
</TABLE>

                                      CMS-53
<PAGE>   89
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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
estimated fair value of the foreign exchange and option contracts at December
31, 2000 and 1999 was $10 million and $64 million, respectively, representing
the amount CMS Energy would pay upon settlement.

     Foreign exchange contracts outstanding as of December 31, 2000 had a total
notional amount of $546 million. Of this amount, $450 million was related to CMS
Energy's investment in Argentina. The Argentine contracts have a weighted
average rate of 1.037 and mature at various times during 2001 and 2002. In
addition, $75 million of the foreign exchange contracts are related to
investments in Brazil. The Brazilian contracts mature at various times during
2001 and have a weighted average rate of 2.021. The contracts for the Australian
investments have a notional amount of $21 million, maturing in July 2001, and
have transaction rates that range from .520 to .538.

     The notional amount of the outstanding foreign exchange contracts at
December 31, 1999 was $1.555 billion consisting of $207 million, $435 million,
$880 million and $33 million for Australian, Brazilian, Argentine and other,
respectively. All of these contracts have expired or have been replaced prior to
December 31, 2000.

     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, 2000 and 1999 are not
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 as shown below, approximate fair value.

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31
                                   --------------------------------------------------------------------------------
                                                   2000                                       1999
                                   -------------------------------------      -------------------------------------
                                   CARRYING       FAIR       UNREALIZED       CARRYING       FAIR       UNREALIZED
                                     COST        VALUE       GAIN (LOSS)        COST        VALUE       GAIN (LOSS)
                                   --------      -----       -----------      --------      -----       -----------
                                                                     IN MILLIONS
<S>                                <C>           <C>         <C>              <C>           <C>         <C>
Long-Term Debt(a)..............     $6,770       $6,567         $(203)         $6,428       $6,163         $(265)
Preferred Stock and Trust
  Preferred Securities.........      1,133        1,083           (50)          1,163        1,042          (121)

Available-for-Sale Securities
Nuclear Decommissioning........     $  480       $  611         $ 131          $  448       $  602         $ 154
SERP...........................         50           59             9              56           60             4
</TABLE>

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

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31
                                                           --------------------------------------------------
                                                                    2000                        1999
                                                           ----------------------      ----------------------
                                                           FAIR       UNREALIZED       FAIR       UNREALIZED
                                                           VALUE         GAIN          VALUE         GAIN
                                                           -----      ----------       -----      ----------
                  Trading Securities                                          IN MILLIONS
<S>                                                        <C>        <C>              <C>        <C>
Investments............................................     $9            $5            $91           $17
</TABLE>

                                      CMS-54
<PAGE>   90
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     CMS Energy transferred $85 million of investment securities from the
available-for-sale category into the trading category, and correspondingly,
reflected $14 million of unrealized gains in consolidated net income for the
year ended December 31, 1999.

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 and Consumers practice full deferred tax accounting
for temporary differences, but federal income taxes have not been recorded on
the undistributed earnings of international subsidiaries where CMS Energy
intends to permanently reinvest those earnings. Upon distribution, those
earnings may be subject to both U.S. income taxes (adjusted for foreign tax
credits or deductions) and withholding taxes payable to various foreign
countries. It is not practical to estimate the amount of unrecognized deferred
income taxes or withholding taxes on undistributed earnings.

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

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                -------------------------
                                                                2000       1999     1998
                                                                ----       ----     ----
                                                                       IN MILLIONS
<S>                                                             <C>        <C>      <C>
Current income taxes
  Federal and other.........................................    $ 24        $40     $ 61
  State and local...........................................       4          2        5
  Foreign...................................................      45         12        3
                                                                ----        ---     ----
                                                                  73         54       69
Deferred income taxes
  Federal...................................................     (48)(a)     21       77(b)
  State.....................................................      11          4       --
  Foreign...................................................      30         (6)      (7)
                                                                ----        ---     ----
                                                                  (7)        19       70
Deferred ITC, net...........................................      (8)        (9)     (16)
                                                                ----        ---     ----
                                                                $ 58        $64     $123
                                                                ====        ===     ====
</TABLE>

-------------------------
(a)  Includes $(2) million for 2000 change in exploration and production
     inventory accounting.

(b)  Includes $23 million for 1998 change in property tax accounting.

                                      CMS-55
<PAGE>   91
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                                ------------------
                                                                 2000       1999
                                                                 ----       ----
                                                                   IN MILLIONS
<S>                                                             <C>        <C>
Property....................................................    $  (714)   $  (606)
Securitization costs........................................       (185)        --
Unconsolidated investments..................................       (112)      (208)
Postretirement benefits.....................................        (88)      (128)
Abandoned Midland project...................................         (8)       (17)
Employee benefit obligations (includes postretirement
  benefits of $129 and $140)................................        174        174
AMT carryforward............................................        136        112
Power purchases.............................................         24         42
Regulatory liabilities......................................         86         22
Other.......................................................        (18)       (56)
                                                                -------    -------
                                                                $  (705)   $  (665)
Valuation allowances........................................         (5)        (5)
                                                                -------    -------
                                                                $  (710)   $  (670)
                                                                =======    =======
Gross deferred tax liabilities..............................    $(1,734)   $(1,512)
Gross deferred tax assets...................................      1,024        842
                                                                -------    -------
                                                                $  (710)   $  (670)
                                                                =======    =======
</TABLE>

                                      CMS-56
<PAGE>   92
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31
                                                                  -------------------------
                                                                  2000       1999      1998
                                                                  ----       ----      ----
                                                                         IN MILLIONS
<S>                                                               <C>        <C>       <C>
Consolidated net income before preferred dividends
  Domestic..................................................      $ 208      $187      $247
  Foreign...................................................       (170)       96        57
                                                                  -----      ----      ----
                                                                     38       283       304
Income tax expense..........................................         58        64       123(a)
                                                                  -----      ----      ----
                                                                     96       347       427
Statutory federal income tax rate...........................       x 35%     x 35%     x 35%
                                                                  -----      ----      ----
Expected income tax expense.................................         34       121       149
Increase (decrease) in taxes from:
Capitalized overheads previously flowed through.............          5         5         5
Differences in book and tax depreciation not previously
  deferred..................................................         22        19        14
Impact of foreign taxes, tax rates and credits..............         24        15        (5)
Write-off of Loy Yang and Nitrotec Investments..............         53        (6)       --
Asset sales.................................................         (5)       --        --
Undistributed earnings of international subsidiaries........        (67)      (45)      (13)
ITC amortization/adjustments................................         (8)       (8)      (16)
Section 29 fuel tax credits.................................         (3)      (12)      (13)
Valuation allowances, net...................................         --       (10)(b)    --
State and Local income taxes, net of federal benefit........         11         5        --
Reversal of income tax accruals.............................         --       (21)       --
Other, net..................................................         (8)        1         2
                                                                  -----      ----      ----
                                                                  $  58      $ 64      $123
                                                                  =====      ====      ====
Effective tax rate..........................................       60.4%     18.4%     28.8%
</TABLE>

-------------------------
(a)  Includes $23 million for 1998 change in property tax accounting.

(b)  Benefit realization of preacquisition carryforwards.

12: EXECUTIVE INCENTIVE COMPENSATION

     Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
Common Stock as well as stock options and stock appreciation rights relating to
Common Stock may be granted to key employees based on their contributions to the
successful management of CMS Energy and its subsidiaries. Awards under the plan
may consist of any class of Common Stock. Certain plan awards are subject to
performance-based business criteria. The plan reserves for award not more than
five percent, as amended January 1, 1999, 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% 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, 2000, awards of up to 2,274,490 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. The restricted shares are subject to

                                      CMS-57
<PAGE>   93
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, 2000,
594,700 of the 786,427 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 from date of
grant. In 1999, all outstanding Class G Common Stock and options were converted
to CMS Energy Common Stock and options at an exchange rate of .7041 per Class G
Common Stock or option held. The original vesting or exercise period was
retained for all converted shares or options. 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.

<TABLE>
<CAPTION>
                                                             RESTRICTED
                                                               STOCK                  OPTIONS
                                                             ----------    -----------------------------
                                                               NUMBER       NUMBER      WEIGHTED-AVERAGE
                                                             OF SHARES     OF SHARES     EXERCISE PRICE
                                                             ---------     ---------    ----------------
<S>                                                          <C>           <C>          <C>
CMS ENERGY COMMON STOCK:
Outstanding at January 1, 1998...........................      748,211     1,665,717         $28.65
  Granted................................................      304,750       376,000         $43.38
  Exercised or Issued....................................     (185,217)     (331,925)        $27.69
  Forfeited..............................................       (6,000)           --             --
                                                              --------     ---------         ------
Outstanding at December 31, 1998.........................      861,744     1,709,792         $32.07
  Granted................................................      284,364     1,137,912         $39.23
  Converted from Class G.................................        6,060        19,503         $32.62
  Exercised or Issued....................................     (172,916)     (258,267)        $29.44
  Forfeited..............................................      (95,123)           --             --
  Expired................................................           --       (78,900)        $39.58
                                                              --------     ---------         ------
Outstanding at December 31, 1999.........................      884,129     2,530,040         $35.33
  Granted................................................      246,250       878,630         $17.96
  Exercised or Issued....................................     (134,173)     (185,600)        $17.36
  Forfeited..............................................     (209,779)           --             --
  Expired................................................           --      (164,884)        $34.58
                                                              --------     ---------         ------
Outstanding at December 31, 2000.........................      786,427     3,058,186         $31.47
                                                              ========     =========         ======
</TABLE>

                                      CMS-58
<PAGE>   94
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                             RESTRICTED
                                                               STOCK                  OPTIONS
                                                             ----------    -----------------------------
                                                               NUMBER       NUMBER      WEIGHTED-AVERAGE
                                                             OF SHARES     OF SHARES     EXERCISE PRICE
                                                             ---------     ---------    ----------------
<S>                                                          <C>           <C>          <C>
CLASS G COMMON STOCK:
Outstanding at January 1, 1998...........................       19,791        28,000         $18.89
  Granted................................................       14,720        45,900         $24.50
  Exercised or Issued....................................       (4,021)           --             --
                                                              --------     ---------         ------
Outstanding at December 31, 1998.........................       30,490        73,900         $22.37
  Granted................................................        3,427            --             --
  Exercised or Issued....................................       (7,360)      (19,000)        $18.45
  Forfeited..............................................      (17,949)           --             --
  Expired................................................           --       (27,200)        $24.50
  Converted to CMS Energy................................       (8,608)      (27,700)        $22.98
                                                              --------     ---------         ------
Outstanding at December 31, 1999.........................           --            --             --
Outstanding at December 31, 2000.........................           --            --             --
                                                              ========     =========         ======
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
                                                            NUMBER OF       WEIGHTED-         WEIGHTED-
                                                             SHARES          AVERAGE           AVERAGE
                                                           OUTSTANDING    REMAINING LIFE    EXERCISE PRICE
               Range of Exercise Prices                    -----------    --------------    --------------
<S>                                                        <C>            <C>               <C>
CMS ENERGY COMMON STOCK:
$17.00 -- $24.75.......................................     1,031,320       7.11 years          $19.09
$25.13 -- $39.06.......................................     1,448,628       7.38 years          $35.85
$41.44 -- $44.06.......................................       578,238       7.92 years          $42.59
$17.00 -- $44.06.......................................     3,058,186       7.39 years          $31.47
</TABLE>

     The weighted average fair value of options granted for CMS Energy Common
Stock was $2.04 in 2000, $5.93 in 1999 and $6.43 in 1998. Fair value is
estimated using the Black-Scholes model, a mathematical formula used to value
options traded on securities exchanges, with the following assumptions:

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31
                                                                ---------------------------
                                                                2000       1999       1998
                                                                ----       ----       ----
<S>                                                             <C>        <C>        <C>
CMS ENERGY COMMON STOCK OPTIONS
Risk-free interest rate.....................................     6.56%      5.65%      5.45%
Expected stock-price volatility.............................    27.25%     16.81%     15.93%
Expected dividend rate......................................    $.365      $.365       $.33
Expected option life (years)................................      4.1        4.5        4.0
</TABLE>

     CMS Energy applies APB Opinion No. 25 and related interpretations in
accounting for the Performance Incentive Stock Plan. Since stock options are
granted at market price, no compensation cost has been recognized for stock
options granted under the plan. The compensation cost charged against income for
restricted stock was $2 million in 2000, $12 million in 1999 and $9 million in
1998. If compensation cost for stock options had been

                                      CMS-59
<PAGE>   95
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

determined in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, CMS Energy's consolidated net income and earnings per share would
have been as follows:

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31
                                                                ------------------------------
                                                                  PRO FORMA       AS REPORTED
                                                                -------------    -------------
                                                                2000    1999     2000    1999
                                                                ----    ----     ----    ----
                                                                   IN MILLIONS, EXCEPT PER
                                                                        SHARE AMOUNTS
<S>                                                             <C>     <C>      <C>     <C>
Consolidated Net Income.....................................    $35     $ 272    $ 36    $ 277
Net Income Attributable to Common Stocks
  CMS Energy................................................     35       236      36      241
  Class G...................................................     --        36      --       36
Earnings Per Average Common Share
  CMS Energy
     Basic..................................................    .31      2.14     .32     2.18
     Diluted................................................    .31      2.14     .32     2.17
  Class G
     Basic and Diluted......................................     --      4.21      --     4.21
</TABLE>

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 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.

     Amounts presented below for the Pension Plan include amounts for employees
of CMS Energy and nonutility affiliates which were not distinguishable from the
plan's total assets.

     Weighted-Average Assumptions:

<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31
                                                     -------------------------------------------------------
                                                          PENSION & SERP                      OPEB
                                                     -------------------------      ------------------------
                                                     2000       1999      1998      2000      1999      1998
                                                     ----       ----      ----      ----      ----      ----
<S>                                                  <C>        <C>       <C>       <C>       <C>       <C>
Discount rate....................................    7.75%      7.75%     7.00%     7.75%     7.75%     7.00%
Expected long-term rate of return on plan
  assets: .......................................    9.75%      9.25%     9.25%
  Union..........................................      --         --        --      9.75%     7.00%     7.00%
  Non-Union......................................      --         --        --      6.00%     7.00%     7.00%
Rate of compensation increase:
  Pension -- to age 45...........................    5.25%      5.25%     5.25%
  -- age 45 to assumed retirement................    3.75%      3.75%     3.75%
SERP.............................................    5.50%      5.50%     5.50%
</TABLE>

     Retiree health care costs at December 31, 2000 are based on the assumption
that costs would increase 7.0 percent in 2000 with a gradual decrease to 5.5
percent in 2007 and thereafter.

                                      CMS-60
<PAGE>   96
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Net Pension Plan, SERP and OPEB costs consist of:

<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31
                                                           --------------------------------------------
                                                              PENSION & SERP               OPEB
                                                           --------------------    --------------------
                                                           2000    1999    1998    2000    1999    1998
                                                           ----    ----    ----    ----    ----    ----
                                                                           IN MILLIONS
<S>                                                        <C>     <C>     <C>     <C>     <C>     <C>
Service cost...........................................    $ 33    $ 34    $ 27    $ 14    $ 15    $ 11
Interest expense.......................................      82      71      64      56      47      43
Expected return on plan assets.........................     (92)    (84)    (73)    (35)    (24)    (17)
Amortization of:
  Prior service cost...................................       6       4       4      --      --      --
  Net transition (asset) obligation....................      (5)     (5)     (5)     --      --      --
  Other................................................      (2)     --      --      (2)     (1)     (1)
Ad hoc retiree increase................................      --       3      --      --      --      --
                                                           ----    ----    ----    ----    ----    ----
Net periodic benefit cost..............................    $ 22    $ 23    $ 17    $ 33    $ 37    $ 36
                                                           ====    ====    ====    ====    ====    ====
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                                ONE PERCENTAGE    ONE PERCENTAGE
                                                                POINT INCREASE    POINT DECREASE
                                                                --------------    --------------
                                                                          IN MILLIONS
<S>                                                             <C>               <C>
Effect on total service and interest cost components........         $ 12             $ (10)
Effect on accumulated postretirement benefit obligation.....          124              (104)
</TABLE>

                                      CMS-61
<PAGE>   97
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                PENSION PLAN               SERP                  OPEB
                                             ------------------       --------------       ----------------
                                              2000        1999        2000      1999       2000       1999
                                              ----        ----        ----      ----       ----       ----
                                                                      IN MILLIONS
<S>                                          <C>         <C>          <C>       <C>        <C>        <C>
Benefit obligation, January 1............    $  971      $  874       $ 53      $ 50       $ 736      $ 655
Service cost.............................        30          31          3         3          14         15
Interest cost............................        78          68          4         4          56         47
Plan amendments..........................        54           4         --        --          --         --
Business combinations....................        --          70         --         3          --         29
Actuarial loss (gain)....................        25           3         (1)       (6)         44         21
Benefits paid............................       (77)        (79)        (1)       (1)        (35)       (31)
                                             ------      ------       ----      ----       -----      -----
Benefit obligation, December 31..........    $1,081      $  971       $ 58      $ 53       $ 815      $ 736
                                             ======      ======       ====      ====       =====      =====
Plan assets at fair value, January 1.....    $1,094      $  970       $ --      $ --       $ 432      $ 327
Actual return on plan assets.............       (23)        120         --        --         (16)        50
Company contribution.....................        --          --          1         1          57         55
Business combinations....................        --          83         --        --          --         --
Actual benefits paid.....................       (77)        (79)        (1)       (1)         --         --
                                             ------      ------       ----      ----       -----      -----
Plan assets at fair value, December 31...    $  994(a)   $1,094(a)    $ --      $ --       $ 473      $ 432
                                             ======      ======       ====      ====       =====      =====
Benefit obligation less than (in excess
  of) plan assets........................    $  (87)     $  123       $(58)     $(52)      $(342)     $(305)
Unrecognized:
  Net (gain) loss from experience
     different than assumed..............       (71)       (212)         4         4          20        (68)
  Prior service cost.....................        76          28          1         1          --         --
  Net transition (asset) obligation......        (5)        (11)        --        --          --         --
  Other..................................        (9)         --         --        --          --         --
                                             ------      ------       ----      ----       -----      -----
Recorded liability.......................    $  (96)     $  (72)      $(53)     $(47)      $(322)     $(373)
                                             ======      ======       ====      ====       =====      =====
</TABLE>

-------------------------
(a) Primarily stocks and bonds, including $166 million in 2000 and $108 million
    in 1999 of CMS Energy Common Stock.

     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, 2000 and 1999, trust assets were $59 million and $60 million,
respectively, and were classified as other noncurrent assets. The accumulated
benefit obligation for SERP was $39 million in 2000 and $33 million in 1999.

     Contributions to the 40l(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan were $24 million in 2000, $20 million
in 1999, and $18 million in 1998.

     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, Employers' Accounting
for Postretirement Benefits Other Than Pensions, 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

                                      CMS-62
<PAGE>   98
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

rates (see Note 2, Utility Regulation). The MPSC authorized recovery of the
electric utility portion of these costs in 1994 over 18 years and the gas
utility portion of 1996 over 16 years.

14: LEASES

     CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, rail cars, aircraft, construction equipment, computer equipment,
nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement
expires in November 2001, yet provides for additional one-year extensions upon
mutual agreements by the parties. Upon termination of the lease, the lessor
would be entitled to a cash payment equal to its remaining investment, which was
$44 million as of December 31, 2000. Consumers is responsible for payment of
taxes, maintenance, operating costs, and insurance.

     Minimum rental commitments under CMS Energy's non-cancelable leases at
December 31, 2000 were:

<TABLE>
<CAPTION>
                                                                CAPITAL    OPERATING
                                                                LEASES      LEASES
                                                                -------    ---------
                                                                    IN MILLIONS
<S>                                                             <C>        <C>
2001........................................................     $ 67        $ 33
2002........................................................       20          27
2003........................................................       17          20
2004........................................................       13          17
2005........................................................       12          13
2006 and thereafter.........................................       14          62
                                                                 ----        ----
Total minimum lease payments................................      143        $172
                                                                             ====
Less imputed interest.......................................       31
                                                                 ----
Present value of net minimum lease payments.................      112
Less current portion........................................       58
                                                                 ----
Noncurrent portion..........................................     $ 54
                                                                 ====
</TABLE>

     Consumers recovers lease charges from customers and accordingly charges
payments for its capital and operating leases to operating expense. Operating
lease charges, including charges to clearing and other accounts for the years
ended December 31, 2000, 1999 and 1998, were $34 million, $35 million, and $19
million, respectively.

     Capital lease expenses for the years ended December 31, 2000, 1999 and 1998
were $42 million for each period. Included in these amounts for the years ended
2000, 1999 and 1998 are nuclear fuel lease expenses of $22 million, $23 million
and $23 million, respectively.

                                      CMS-63
<PAGE>   99
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31
                                                                ----------------------------------
                                                                                     ACCUMULATED
                                                                NET INVESTMENT       DEPRECIATION
                                                                --------------      --------------
                                                                2000      1999      2000      1999
                                                                ----      ----      ----      ----
                                                                           IN MILLIONS
<S>                                                             <C>       <C>       <C>       <C>
Campbell Unit 3 -- 93.3 percent.............................    $291      $284      $299      $295
Ludington -- 51 percent.....................................     100       104       105       100
Transmission lines -- various...............................      31        32        17        16
</TABLE>

16: REPORTABLE SEGMENTS

     CMS Energy operates principally in the following seven reportable segments:
electric utility; gas utility; independent power production; oil and gas
exploration and production; natural gas transmission; marketing, services and
trading; and international energy distribution.

     The electric utility segment consists of regulated activities associated
with the generation, transmission and distribution of electricity in the state
of Michigan. The gas utility segment consists of regulated activities associated
with the transportation, storage and distribution of natural gas in the state of
Michigan. The other reportable segments consist of the development and
management of electric, gas and other energy-related projects in the United
States and internationally, including energy trading and marketing. CMS Energy's
reportable segments are strategic business units organized and managed by the
nature of the products and services each provides. The accounting policies of
each reportable segment are the same as those described in the summary of
significant accounting policies. CMS Energy's management evaluates performance
based on pretax operating income. Intersegment sales and transfers are accounted
for at current market prices and are eliminated in consolidated pretax operating
income by segment.

     The Consolidated Statements of Income show operating revenue and pretax
operating income by reportable segment. Revenues from a land development
business fall below the quantitative thresholds for reporting, and has never met
any of the quantitative thresholds for determining reportable segments. Amounts
shown for the natural

                                      CMS-64
<PAGE>   100
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

gas transmission segment include Panhandle, which was acquired in March 1999.
Other financial data for reportable segments and geographic area are as follows:

REPORTABLE SEGMENTS

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31
                                                                -----------------------------
                                                                 2000       1999       1998
                                                                 ----       ----       ----
                                                                         IN MILLIONS
<S>                                                             <C>        <C>        <C>
Depreciation, Depletion and Amortization
  Electric utility..........................................    $   311    $   315    $   304
  Gas utility...............................................        113        107         97
  Natural gas transmission..................................         91         68         14
  Independent power production..............................         44         35         22
  Oil and gas exploration and production....................         37         44         38
  Marketing, services and trading...........................          5          3          2
  International energy distribution.........................         32         20          5
  Other.....................................................          4          3          2
                                                                -------    -------    -------
                                                                $   637    $   595    $   484
                                                                =======    =======    =======
Identifiable Assets
  Electric utility(a).......................................    $ 5,231    $ 4,675    $ 4,640
  Gas utility(a)............................................      1,780      1,731      1,726
  Natural gas transmission..................................      3,836      3,526        971
  Independent power production..............................      2,753      3,076      2,252
  Oil and gas exploration and production....................        636        659        547
  Marketing, services and trading...........................        632        367        152
  International energy distribution.........................        499        774        598
  Other.....................................................        484        654        424
                                                                -------    -------    -------
                                                                $15,851    $15,462    $11,310
                                                                =======    =======    =======
Capital Expenditures(b)
  Electric utility..........................................    $   430    $   385    $   332
  Gas utility...............................................        120        120        114
  Natural gas transmission..................................        276      2,216        563
  Independent power production..............................        452        392        459
  Oil and gas exploration and production....................        141        151        143
  Marketing, services and trading...........................         11         42          1
  International energy distribution.........................         59         96         88
  Other.....................................................          8          3         --
                                                                -------    -------    -------
                                                                $ 1,497    $ 3,405    $ 1,700
                                                                =======    =======    =======
Investments in Equity Method Investees
  Natural gas transmission..................................    $   436    $   369    $   494
  Independent power production..............................      1,459      1,437      1,337
  Marketing, services and trading...........................         32         27         25
  International energy distribution.........................         63        150        209
  Other.....................................................         26         13          8
                                                                -------    -------    -------
                                                                $ 2,016    $ 1,996    $ 2,073
                                                                =======    =======    =======
</TABLE>

                                      CMS-65
<PAGE>   101
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31
                                                                -----------------------------
                                                                 2000       1999       1998
                                                                 ----       ----       ----
                                                                         IN MILLIONS
<S>                                                             <C>        <C>        <C>
Earnings from Equity Method Investees(c)
  Natural gas transmission..................................    $    24    $    20    $     9
  Independent power production..............................        166        119        158
  Marketing, services and trading...........................          9          3          2
  International energy distribution.........................         --         (9)        (5)
  Other.....................................................          4          5          7
                                                                -------    -------    -------
                                                                $   203    $   138    $   171
                                                                =======    =======    =======
</TABLE>

Geographic Areas(d)

<TABLE>
<CAPTION>
                                                                              PRETAX
                                                                OPERATING    OPERATING    IDENTIFIABLE
                                                                 REVENUE      INCOME         ASSETS
                                                                ---------    ---------    ------------
<S>                                                             <C>          <C>          <C>
2000
  United States.............................................     $8,213        $775         $12,672
  International.............................................        785         (48)          3,179
1999
  United States.............................................     $5,560        $752         $11,714
  International.............................................        543         132           3,748
1998
  United States.............................................     $4,860        $648         $ 8,682
  International.............................................        281          76           2,628
</TABLE>

-------------------------
(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 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.

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. In 2000, 1999 and 1998, consolidated net
income included undistributed equity earnings of $171 million, $45 million, and
$95 million, respectively, from these investments. The more significant of these
investments are CMS Energy's 50 percent interest in Loy Yang and CMS Energy's 50
percent interest in Jorf Lasfar. Summarized combined financial

                                      CMS-66
<PAGE>   102
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

information of CMS Energy's equity method investees follows, except for the MCV
Partnership, which is disclosed separately in Note 18.

Income Statement Data

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31
                                                       -----------------------------------------------------
                                                                               2000
                                                       -----------------------------------------------------
                                                       JORF LASFAR      LOY YANG      ALL OTHERS      TOTAL
                                                       -----------      --------      ----------      -----
                                                                            IN MILLIONS
<S>                                                    <C>              <C>           <C>             <C>
Operating revenue..................................       $246            $268          $3,576        $4,090
Operating expenses.................................        102             123           3,043         3,268
                                                          ----            ----          ------        ------
Operating income...................................        144             145             533           822
Other expense, net.................................         29             169             246           444
                                                          ----            ----          ------        ------
Net income (loss)..................................       $115            $(24)         $  287        $  378
                                                          ====            ====          ======        ======
</TABLE>

<TABLE>
<CAPTION>
                                                                               1999
                                                       -----------------------------------------------------
                                                       JORF LASFAR      LOY YANG      ALL OTHERS      TOTAL
                                                       -----------      --------      ----------      -----
<S>                                                    <C>              <C>           <C>             <C>
Operating revenue..................................       $189            $322          $2,389        $2,900
Operating expenses.................................         85             140           1,840         2,065
                                                          ----            ----          ------        ------
Operating income...................................        104             182             549           835
Other expense, net.................................         27             191             321           539
                                                          ----            ----          ------        ------
Net income (loss)..................................       $ 77            $ (9)         $  228        $  296
                                                          ====            ====          ======        ======
</TABLE>

<TABLE>
<CAPTION>
                                                                               1998
                                                       -----------------------------------------------------
                                                       JORF LASFAR      LOY YANG      ALL OTHERS      TOTAL
                                                       -----------      --------      ----------      -----
<S>                                                    <C>              <C>           <C>             <C>
Operating revenue..................................       $212            $319          $1,724        $2,255
Operating expenses.................................        117             137           1,249         1,503
                                                          ----            ----          ------        ------
Operating income...................................         95             182             475           752
Other expense, net.................................         29             186             194           409
                                                          ----            ----          ------        ------
Net income (loss)..................................       $ 66            $ (4)         $  281        $  343
                                                          ====            ====          ======        ======
</TABLE>

                                      CMS-67
<PAGE>   103
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Balance Sheet Data

<TABLE>
<CAPTION>
                                                                           AS OF DECEMBER 31
                                                        -------------------------------------------------------
                                                                                 2000
                                                        -------------------------------------------------------
                                                        JORF LASFAR      LOY YANG      ALL OTHERS        TOTAL
                                                        -----------      --------      ----------        -----
                                                                              IN MILLIONS
<S>                                                     <C>              <C>           <C>              <C>
Assets
  Current assets..................................        $  145          $  100         $  725         $   970
  Property, plant and equipment, net..............           834           2,601          4,836           8,271
  Other assets....................................         1,499              27          2,089           3,615
                                                          ------          ------         ------         -------
                                                          $2,478          $2,728         $7,650         $12,856
                                                          ======          ======         ======         =======
Liabilities and Equity
  Current liabilities.............................        $   49          $  106         $  952         $ 1,107
  Long-term debt and other noncurrent
     liabilities..................................         2,144           1,936          3,832           7,912
  Equity..........................................           285             686          2,866           3,837
                                                          ------          ------         ------         -------
                                                          $2,478          $2,728         $7,650         $12,856
                                                          ======          ======         ======         =======
</TABLE>

<TABLE>
<CAPTION>
                                                                                1999
                                                       -------------------------------------------------------
                                                       JORF LASFAR      LOY YANG      ALL OTHERS        TOTAL
                                                       -----------      --------      ----------        -----
<S>                                                    <C>              <C>           <C>              <C>
Assets
  Current assets...................................      $   79          $  111         $  637         $   827
  Property, plant and equipment, net...............         701           3,102          4,195           7,998
  Other assets.....................................       1,630              34          2,296           3,960
                                                         ------          ------         ------         -------
                                                         $2,410          $3,247         $7,128         $12,785
                                                         ======          ======         ======         =======
Liabilities and Equity
  Current liabilities..............................      $   47          $  117         $  785         $   949
  Long-term debt and other noncurrent
     liabilities...................................       2,186           2,302          3,529           8,017
  Equity...........................................         177             828          2,814           3,819
                                                         ------          ------         ------         -------
                                                         $2,410          $3,247         $7,128         $12,785
                                                         ======          ======         ======         =======
</TABLE>

18: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER

     Under the PPA with the MCV Partnership discussed in Note 5, Consumers' 2000
obligation to purchase electric capacity from the MCV Partnership provided 15.3
percent of Consumers' owned and contracted electric generating capacity.
Summarized financial information of the MCV Partnership follows:

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31
                                                                ------------------------
                                                                2000      1999      1998
                                                                ----      ----      ----
                                                                      IN MILLIONS
<S>                                                             <C>       <C>       <C>
Operating revenue(a)........................................    $604      $617      $627
Operating expenses..........................................     392       401       405
                                                                ----      ----      ----
Operating income............................................     212       216       222
Other expense, net..........................................     122       136       142
                                                                ----      ----      ----
Net income..................................................    $ 90      $ 80      $ 80
                                                                ====      ====      ====
</TABLE>

                                      CMS-68
<PAGE>   104
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

BALANCE SHEETS

<TABLE>
<CAPTION>
                           AS OF DECEMBER 31
                           -----------------
                            2000      1999
                            ----      ----
                              IN MILLIONS
<S>                        <C>       <C>
ASSETS
Current assets(b)........  $  429    $  397
Plant, net...............   1,671     1,732
Other assets.............     175       170
                           ------    ------
                           $2,275    $2,299
                           ======    ======
</TABLE>

<TABLE>
<CAPTION>
                           AS OF DECEMBER 31
                           -----------------
                            2000      1999
                            ----      ----
                              IN MILLIONS
<S>                        <C>       <C>
LIABILITIES AND EQUITY
  Current liabilities....  $  316    $  275
  Noncurrent
     liabilities(c)......   1,431     1,586
  Partners' equity(d)....     528       438
                           ------    ------
                           $2,275    $2,299
                           ======    ======
</TABLE>

-------------------------
(a)  Revenue from Consumers for 2000, 1999, and 1998 totaled $569 million, $586
     million and $584 million, respectively.

(b)  Receivables from Consumers totaled $43 and $49 million at December 31, 2000
     and 1999, respectively.

(c)  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,
     2000 and 1999, the MCV Partnership owed lease obligations of $1.24 billion
     and $1.36 billion, respectively, to the owner trust. CMS Holdings' share of
     the interest and principal portion for the 2000 lease payments was $52
     million and $67 million, respectively, and for the 1999 lease payments was
     $55 million and $23 million, respectively. As of December 31, 2000 the
     lease payments service $733 million and $854 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 2000
     and 1999, the owner-trust made debt payments (including interest) of $212
     million and $167 million, respectively. FMLP's earnings for 2000, 1999, and
     1998 were $27 million, $24 million, and $23 million, respectively.

(d)  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.

                                      CMS-69
<PAGE>   105

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CMS Energy Corporation:

     We have audited the accompanying consolidated balance sheets and
consolidated statements of preferred stock of CMS ENERGY CORPORATION (a Michigan
corporation) and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, common stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company'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 financial position of CMS Energy Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.

     As explained in Note 3 to the financial statements, effective January 1,
1998, Consumers Energy Company, a wholly owned subsidiary of CMS Energy
Corporation, changed its method of accounting for property taxes and effective
January 1, 2000, CMS Energy Corporation changed its method of accounting for oil
and gas exploration and production inventories.

/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 2, 2001

                                      CMS-70
<PAGE>   106

                             CMS ENERGY CORPORATION

                QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION
<TABLE>
<CAPTION>
                                                    2000 (UNAUDITED)
                               ----------------------------------------------------------
      QUARTERS ENDED             MARCH 31          JUNE 30         SEPT. 30       DEC. 31
      --------------             --------          -------         --------       -------
                                            IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S>                            <C>              <C>              <C>              <C>       <C>
Operating revenue (a)
  (b)......................    $      1,825     $      1,595     $      2,391     $3,187
Pretax operating income
  (loss) (a)(b)............    $        292     $        202     $        244     $  (11)
Consolidated net income
  (loss) (b)...............    $         75     $         79     $         53     $ (171)
Basic earnings (loss) per
  average common share (b)
  (c):
    CMS Energy.............    $       0.66     $       0.72     $       0.49     $(1.44)
    Class G................             N/A              N/A              N/A        N/A
Diluted earnings (loss) per
  average common share (b)
  (c):
    CMS Energy.............    $       0.65     $       0.71     $       0.49     $(1.44)
    Class G................             N/A              N/A              N/A        N/A
Dividends declared per
  common share:
    CMS Energy.............    $      0.365     $      0.365     $      0.365     $0.365
    Class G................             N/A              N/A              N/A        N/A
Common stock prices (e)
  CMS Energy:
    High...................    $    32 1/16     $   23 11/16     $   29 11/16     $32 1/4
    Low....................    $    16 1/16     $     17 3/4     $    22 1/16     $25 1/8
Class G:
    High...................             N/A              N/A              N/A        N/A
    Low....................             N/A              N/A              N/A        N/A

<CAPTION>
                                                  1999 (UNAUDITED)
                             ----------------------------------------------------------
      QUARTERS ENDED           MARCH 31       JUNE 30      SEPT. 30          DEC. 31
      --------------           --------       -------      --------          -------
                                       IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S>                          <C>              <C>        <C>              <C>
Operating revenue (a)
  (b)......................  $      1,537     $1,332     $      1,466     $       1,768
Pretax operating income
  (loss) (a)(b)............  $        245     $  231     $        273     $         135
Consolidated net income
  (loss) (b)...............  $         98     $   75     $         83     $          21
Basic earnings (loss) per
  average common share (b)
  (c):
    CMS Energy.............  $       0.82     $ 0.68     $       0.79     $       (0.08)(d)
    Class G................  $       1.19     $ 0.10     $      (0.38)    $        3.31(d)
Diluted earnings (loss) per
  average common share (b)
  (c):
    CMS Energy.............  $       0.80     $ 0.67     $       0.78     $       (0.08)(d)
    Class G................  $       1.19     $ 0.10     $      (0.38)    $        3.31(d)
Dividends declared per
  common share:
    CMS Energy.............  $       0.33     $ 0.33     $      0.365     $       0.365
    Class G................  $      0.325     $0.325     $       0.34               N/A
Common stock prices (e)
  CMS Energy:
    High...................  $    48 7/16     $47 1/16   $   41 15/16     $     38 1/16
    Low....................  $    39 9/16     $39 1/4    $     33 5/8     $     30 5/16
Class G:
    High...................  $         26     $25 3/8    $     26 7/8     $    24 15/16(f)
    Low....................  $     20 1/8     $20 1/2    $     22 3/8     $      22 1/4(f)
</TABLE>

-------------------------
(a) Certain amounts in 1999 were restated for comparative purposes.

(b) Amounts in 2000 were restated to reflect change in method of accounting for
    oil and gas exploration and production inventories. For further discussion,
    see Note 3 to the Consolidated Financial Statements.

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

(d) 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.

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

(f) Through October 25, 1999.

                                      CMS-71
<PAGE>   107

                      (This page intentionally left blank)

                                      CMS-72
<PAGE>   108

                            [CONSUMERS ENERGY LOGO]

                           2000 FINANCIAL STATEMENTS

                                       CE-1
<PAGE>   109

                            CONSUMERS ENERGY COMPANY
                         SELECTED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                               2000     1999     1998     1997     1996
                                                               ----     ----     ----     ----     ----
<S>                                                   <C>      <C>      <C>      <C>      <C>      <C>
Operating revenue (in millions).....................    ($)    3,935    3,874    3,709    3,769    3,770
Net income (in millions) (Note 1)...................    ($)      304      340      349      321      296
Net income available to common stockholder (in
  millions).........................................    ($)      268      313      312      284      260
Cash from operations (in millions)..................    ($)      468      791      637      761      672
Capital expenditures, excluding capital lease
  additions and DSM (in millions)...................    ($)      498      444      369      360      410
Total assets (in millions)..........................    ($)    7,773    7,170    7,163    6,949    7,025
Long-term debt, excluding current maturities (in
  millions).........................................    ($)    2,110    2,006    2,007    1,369    1,900
Non-current portion of capital leases (in
  millions).........................................    ($)       49       85      100       74      100
Total preferred stock (in millions).................    ($)       44       44      238      238      356
Total preferred securities (in millions)............    ($)      395      395      220      220      100
Number of preferred shareholders at year-end........           2,365    2,534    5,649    6,178    9,540
Book value per common share at year-end.............    ($)    24.09    23.87    21.94    20.38    19.96
Return on average common equity.....................    (%)     13.3     16.2     17.5     16.8     15.9
Return on average assets............................    (%)      5.7      6.4      6.6      6.2      5.7
Number of full-time equivalent employees at year-end
  Consumers.........................................           8,748    8,736    8,456    8,640    8,938
  Michigan Gas Storage..............................              57       63       65       66       67
ELECTRIC STATISTICS
  Sales (billions of kWh)...........................            41.0     41.0     40.0     37.9     37.1
  Customers (in thousands)..........................           1,691    1,665    1,640    1,617    1,594
  Average sales rate per kWh........................  (cents)   6.56     6.54     6.50     6.57     6.55
GAS STATISTICS
  Sales and transportation deliveries (bcf).........             410      389      360      420      448
  Customers (in thousands)(a).......................           1,611    1,584    1,558    1,533    1,504
  Average sales rate per mcf........................    ($)     4.39     4.52     4.56     4.44     4.45
</TABLE>

-------------------------
(a) Excludes off-system transportation customers.

                                       CE-2
<PAGE>   110

                            CONSUMERS ENERGY COMPANY

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

     Consumers, a subsidiary of CMS Energy, a holding company, is an electric
and gas utility company that provides service to customers in Michigan's Lower
Peninsula. Consumers' customer base includes a mix of residential, commercial
and diversified industrial customers, the largest segment of which is the
automotive industry.

     This MD&A refers to, and in some sections specifically incorporates by
reference, Consumers' 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 Consumers may make
contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Consumers' 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
Consumers' actual results to differ materially from the results anticipated in
such statements. Consumers 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. Consumers does,
however, discuss certain risk factors, uncertainties and assumptions in this
Management's Discussion and Analysis, in Item 1 of this Form 10-K in the section
entitled, "Forward-Looking Statements Cautionary Factors" and in various public
filings it periodically makes with the SEC. Consumers designed this discussion
of potential risks and uncertainties, which is by no means comprehensive, to
highlight important factors that may impact Consumers' outlook. This Annual
Report also describes material contingencies in Consumers' Notes to Consolidated
Financial Statements, and Consumers encourages its readers to review these
Notes.

RESULTS OF OPERATIONS

CONSUMERS CONSOLIDATED EARNINGS

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31
                                                       ------------------------------------------------
                                                       2000    1999    CHANGE    1999    1998    CHANGE
                                                       ----    ----    ------    ----    ----    ------
                                                                         IN MILLIONS
<S>                                                    <C>     <C>     <C>       <C>     <C>     <C>
Net income available to common stockholder.........    $268    $313     $(45)    $313    $312      $1
</TABLE>

     The year 2000 net income available to the common stockholder is $268
million, a decrease of $45 million from 1999. The earnings decrease primarily
reflects higher gas costs, which are above the frozen gas commodity rate charged
to customers, the impact of a five percent electric rate reduction for
residential customers due to the passing of the Customer Choice Act, and the
purchase of electricity options, which were not needed due to the
milder-than-expected summer temperatures. Partially offsetting these decreases
were lower operating costs, including reductions in employee paid absence cost,
increased gas distribution service revenue from increased gas deliveries and
increased electric delivery revenue from commercial and wholesale customers. The
year 1999 net income available to the common stockholder is an increase of $1
million over 1998. This increase includes the net impact of higher electric and
gas deliveries and reduced power costs. Changes in regulation have allowed
Consumers to temporarily benefit when power costs are lower than those used to
establish rates. Somewhat masking these improvements was a change in accounting
for property taxes (as described in Note 1) that provided a non-recurring
benefit in 1998 of $66 million ($43 million after-tax) and the recognition of a
$37 million loss ($24 million after-tax) for the underrecovery of power costs
under the PPA. In addition, 1999 net income reflects $9 million of gains for the
sale of property. For further information, see the Electric and Gas Utility
Results of Operations sections and Note 2, Uncertainties.

                                       CE-3
<PAGE>   111

ELECTRIC UTILITY RESULTS OF OPERATIONS

ELECTRIC UTILITY PRETAX OPERATING INCOME:

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31
                                                       ------------------------------------------------
                                                       2000    1999    CHANGE    1999    1998    CHANGE
                                                       ----    ----    ------    ----    ----    ------
                                                                         IN MILLIONS
<S>                                                    <C>     <C>     <C>       <C>     <C>     <C>
                                                       $481    $494     $(13)    $494    $475     $19
</TABLE>

     For the year 2000, electric utility pretax operating income decreased $13
million from 1999. The earnings decrease reflects increased cost of power,
increased costs for the purchase of electricity options and the impact of the
five percent residential customer rate reduction resulting from the Customer
Choice Act. The increased cost of power also includes additional purchased power
costs due to outages at Consumers' generating facilities. These earnings
reductions were partially offset by increased electric delivery revenue from
commercial and wholesale customers, increased non-commodity revenue and
decreased operating expenses. Operating expense reductions resulted primarily
from increased nuclear insurance refunds, reduced storm related costs in 2000
and a $11 million reduction in employee paid absence cost.

     For the year 1999, electric utility pretax operating income increased $19
million from 1998. Changes in regulation, effective in 1998, allowed Consumers
the opportunity to benefit from reduced power supply costs. In the past, such
cost reductions had no impact on net income because Consumers passed on power
cost savings to its electric customers. This earnings increase was partially
offset by higher depreciation costs for new property and equipment and lower
non-commodity revenues. The following table quantifies these impacts on pretax
operating income:

<TABLE>
<CAPTION>
                                                                     CHANGE COMPARED TO
                                                                         PRIOR YEAR
                                                                ----------------------------
                                                                2000 VS 1999    1999 VS 1998
                                                                ------------    ------------
                                                                        IN MILLIONS
<S>                                                             <C>             <C>
Electric deliveries.........................................        $ 12            $ 37
Rate decrease...............................................         (22)              0
Power supply costs and related revenue......................         (13)             27
Net energy option costs.....................................         (37)            (19)
Non-commodity revenue.......................................          14             (13)
Operations and maintenance..................................          28              (3)
General taxes and depreciation..............................           5             (10)
                                                                    ----            ----
Total change................................................        $(13)           $ 19
                                                                    ====            ====
</TABLE>

     ELECTRIC DELIVERIES: For the year 2000, electric deliveries were 41 billion
kWh, similar to 1999; however, in 2000 deliveries to residential, commercial and
wholesale customers were higher compared with 1999, while deliveries to
industrial customers were lower. For the year 1999, total electric deliveries
were 41 billion kWh, an increase of 1 billion kWh or 2.5 percent compared with
1998. In 1999 total electric deliveries increased in all customer classes.

POWER SUPPLY COSTS:

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                 --------------------------------------------------------
                                                  2000      1999     CHANGE     1999      1998     CHANGE
                                                  ----      ----     ------     ----      ----     ------
                                                                       IN MILLIONS
<S>                                              <C>       <C>       <C>       <C>       <C>       <C>
                                                 $1,260    $1,193     $67      $1,193    $1,175     $18
</TABLE>

     For the year 2000, the increase in power supply costs was due to
unscheduled plant outages. These outages required increased purchases of higher
cost power to meet demand. For the year 1999, power supply cost increases
reflect higher internal generation to meet the increased demand for electricity
and increased power options costs as compared to 1998.

                                       CE-4
<PAGE>   112

     For the years 2000 and 1999 respectively, Consumers purchased $51 million
and $19 million of energy options for physical delivery of electricity to ensure
a reliable source of power during the summer months. As a result of periodic
excess daily capacity, some options were sold for $1 million and $6 million in
the years 2000 and 1999, respectively. All of the remaining options were
exercised or expired. Consumers reflected the costs relating to the expired
options and the income received from the sale of options, as purchased power
costs.

GAS UTILITY RESULTS OF OPERATIONS

GAS UTILITY PRETAX OPERATING INCOME:

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31
                                                        ------------------------------------------------
                                                        2000    1999    CHANGE    1999    1998    CHANGE
                                                        ----    ----    ------    ----    ----    ------
                                                                          IN MILLIONS
<S>                                                     <C>     <C>     <C>       <C>     <C>     <C>
                                                        $98     $132     $(34)    $132    $126      $6
</TABLE>

     For the year 2000, gas utility pretax operating income decreased by $34
million from 1999. The earnings decrease primarily reflects increased gas costs
and the recording of a regulatory liability related to the increased gas costs,
which were significantly above the gas commodity rate being collected from
Consumers' gas customers. This commodity rate, which is frozen through March 31,
2001, relates to a three-year experimental gas choice pilot program, which
provided Consumers the opportunity to benefit or lose from changes in gas
commodity costs. See Note 2, Uncertainties, "Gas Rate Matters -- Gas
Restructuring", for more detailed information on this matter. Partially
offsetting these decreases in earnings were increased gas distribution service
revenue from increased gas deliveries due to colder heating season temperatures
during the fourth quarter of 2000, increased gas wholesale and retail services
revenue and lower operating costs and a benefit of $5 million related to
reductions in employee paid absence cost. For the year 1999, gas pretax
operating income increased by $6 million from 1998. The earnings increase is
primarily the result of increased gas distribution service revenue from
increased gas deliveries due to colder temperatures during the first and fourth
quarters of 1999 and increased revenues from gas wholesale and retail services
activity. Partially offsetting this earnings increase were a regulatory
disallowance, higher operation and maintenance costs, and increased depreciation
and general taxes due to new property and equipment. The following table
quantifies these impacts on Pretax Operating Income.

<TABLE>
<CAPTION>
                                                                     CHANGE COMPARED TO
                                                                         PRIOR YEAR
                                                                ----------------------------
                                                                2000 VS 1999    1999 VS 1998
                                                                ------------    ------------
                                                                        IN MILLIONS
<S>                                                             <C>             <C>
Gas deliveries..............................................        $ 17            $ 32
Gas commodity and related revenue...........................         (64)             (5)
Gas wholesale and retail services...........................           4               5
Operation and maintenance...................................          11             (14)
General taxes and depreciation..............................          (2)            (12)
                                                                    ----            ----
       Total change.........................................        $(34)           $  6
                                                                    ====            ====
</TABLE>

     GAS DELIVERIES: For the year 2000, gas system deliveries, including
miscellaneous transportation, totaled 410 bcf, an increase of 21 bcf or 5
percent compared with 1999. The increased deliveries reflect colder heating
season temperatures in the fourth quarter of 2000. For the year 1999, system
deliveries, including miscellaneous transportation, totaled 389 bcf, an increase
of 29 bcf or 8 percent compared with 1998. The increased deliveries reflect
colder temperatures during the first quarter of 1999.

COST OF GAS SOLD:

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31
                                                       ------------------------------------------------
                                                       2000    1999    CHANGE    1999    1998    CHANGE
                                                       ----    ----    ------    ----    ----    ------
                                                                         IN MILLIONS
<S>                                                    <C>     <C>     <C>       <C>     <C>     <C>
                                                       $719    $637     $82      $637    $564     $73
</TABLE>

                                       CE-5
<PAGE>   113

     For the year 2000, the cost of gas sold increase was the result of
increased gas costs and increased sales from colder heating season temperatures
during 2000. For the year 1999, the cost of gas sold increase was the result of
increased sales from colder temperatures during 1999 and higher gas costs.

CAPITAL RESOURCES AND LIQUIDITY

CASH POSITION, INVESTING AND FINANCING

     OPERATING ACTIVITIES: Consumers derives cash from operating activities
involving the sale and transportation of natural gas and the generation,
transmission, distribution and sale of electricity. Cash from operations totaled
$468 million and $791 million for 2000 and 1999, respectively. The $323 million
decrease was primarily due to a $33 million increase in gas costs, a $50 million
increase in purchased electricity options, and a $31 million electric rate
reduction required by the Customer Choice Act as discussed in the results of
operations. The decrease in cash was also affected by a $183 million increase in
accounts receivable. For additional information, see Note 12, Supplemental Cash
Flow Information. Consumers primarily uses cash derived from operating
activities to maintain and expand electric and gas systems, to retire portions
of long-term debt, and to pay dividends.

     INVESTING ACTIVITIES: Cash used for investing activities totaled $557
million and $519 million for 2000 and 1999, respectively. The change of $38
million is primarily the result of a $54 million increase in capital
expenditures offset by a $15 million decrease in the cost to retire property.

     FINANCING ACTIVITIES: Cash provided by financing activities totaled $92 for
2000 compared to $279 million used in 1999. The change of $371 million is
primarily the result of a $477 million net increase in the proceeds from the
refinancing and issuance of Consumers' debt. Offsetting this increase is the
absence of $200 million retirement of preferred stock, the absence of $150
million capital contribution from Consumers' common stockholder, and the absence
of $169 million in proceeds from the issuance of preferred securities.

     OTHER INVESTING AND FINANCING MATTERS: Consumers has credit facilities,
lines of credit and a trade receivable sale program in place as anticipated
sources of funds to fulfill its currently expected capital expenditures. For
detailed information about these sources of funds, see Note 1, "Nuclear Fuel
Cost" and Note 3, Short-Term Financing and Capitalization.

OUTLOOK

CAPITAL EXPENDITURES OUTLOOK

     Consumers estimates the following capital expenditures, including new lease
commitments, by expenditure type and by business segments over the next three
years. Consumers prepares these estimates for planning purposes and may revise
them.

<TABLE>
<CAPTION>
                                                                    YEARS ENDED
                                                                    DECEMBER 31
                                                                --------------------
                                                                2001    2002    2003
                                                                ----    ----    ----
                                                                    IN MILLIONS
<S>                                                             <C>     <C>     <C>
Construction................................................    $653    $650    $466
Nuclear fuel lease..........................................      16      26      --
Capital leases other than nuclear fuel......................      31      24      24
                                                                ----    ----    ----
                                                                $700    $700    $490
                                                                ====    ====    ====
Electric utility operations (a)(b)..........................    $555    $555    $355
Gas utility operations (a)..................................     145     145     135
                                                                ----    ----    ----
                                                                $700    $700    $490
                                                                ====    ====    ====
</TABLE>

-------------------------
(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.

                                       CE-6
<PAGE>   114

(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 2, Uncertainties.

ELECTRIC BUSINESS OUTLOOK

     GROWTH: Over the next five years, Consumers expects electric system
deliveries to grow an average of approximately two and one half percent per year
based primarily on a steadily growing customer base. This growth rate does not
take into account the impact of electric industry restructuring, including the
impact of the Customer Choice Act that allows all customers to choose their
electricity supplier beginning January 1, 2002, or of changing regulation.
Abnormal weather, changing economic conditions or the developing competitive
market for electricity may affect actual electric deliveries by Consumers in
future periods.

     COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act, passed
by the Michigan Legislature, as a result of repeated efforts to enact electric
utility restructuring legislation, became effective June 2000.

     The intent of the Customer Choice Act is to transition the retail electric
businesses in Michigan to competition. Several years prior to the enactment of
the Customer Choice Act, in response to industry restructuring efforts,
Consumers entered into multi-year electric supply contracts with some of its
largest industrial customers to provide power to some of their facilities. The
MPSC approved those contracts as part of its phased introduction to competition.
During the period from 2001 through 2005, either Consumers or these industrial
customers can terminate or restructure some of these contracts. These contracts
involve approximately 600 MW of customer power supply requirements. Consumers
cannot predict the ultimate financial impact of changes related to these power
supply contracts.

     In 1996, as a result of efforts to transition the electric industry in
Michigan to competition, Detroit Edison gave Consumers the required four-year
contractual notice of its intent to terminate the agreements under which the
companies jointly operate the MEPCC, effective January 1, 2001. Detroit Edison
and Consumers have negotiated to restructure and continue certain parts of the
MEPCC control area and joint transmission operations, but have expressly
excluded any merchant operations (electricity purchasing, sales, and dispatch
operations). The parties have extended the effective termination date of the
operating agreement to March 31, 2001. Consumers does not anticipate that the
restructuring of the MEPCC will cause it a material adverse impact. Consumers
expects to implement systems and procedures to perform independent merchant
operations by April 1, 2001. The termination of joint merchant operations with
Detroit Edison will open Detroit Edison and Consumers to wholesale market
competition as individual companies. Consumers cannot predict the financial
impact of terminating these joint merchant operations.

     Uncertainty exists with respect to the enactment of federal electric
industry restructuring legislation. A variety of bills introduced in Congress in
recent years have sought to change existing federal regulation of the industry.
These federal bills could potentially affect or supercede state regulation;
however, none have been enacted.

     In part, because of certain policy pronouncements by the FERC, Consumers
joined the Alliance RTO. In January 2001, the FERC granted Consumers'
application to transfer ownership and control of its transmission facilities to
a wholly owned subsidiary, Michigan Transco. This represents the first step in
Consumers' plan to transfer control of or to divest itself of ownership,
operation and control of its transmission assets.

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

     RATE MATTERS: Prior to the enactment of the Customer Choice Act, there were
several pending rate issues that could have affected Consumers' electric
business. As a result of the passage of this legislation, the MPSC dismissed
certain rate proceedings and a complaint filed by ABATE seeking a reduction in
rates.

     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 2,

                                       CE-7
<PAGE>   115

Uncertainties, "Electric Rate Matters -- Electric Restructuring" and "Electric
Rate Matters -- Electric Proceedings," incorporated by reference herein.

     NUCLEAR MATTERS: There are a number of issues related to nuclear matters
that may affect Consumers' business. For further information and material
changes relating to nuclear matters, see Note 2, Uncertainties, "Other Electric
Uncertainties -- Nuclear Matters."

     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) capital expenditures and increased operating expenses
for compliance with the Clean Air Act; 2) 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; 3) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel and the successful operation
of NMC; and 4) electric industry restructuring, including: a) how the MPSC
ultimately calculates the amount of Stranded Costs and the related true-up
adjustments and the manner in which the true-up operates; b) the ability to
recover fully the cost of doing business under the rate caps; c) the successful
sale of Securitization bonds on a timely basis; d) the ability to meet peak
electric demand requirements at a reasonable cost and without market disruption
and initiatives undertaken to reduce exposure to energy price increases; and e)
the transfer of Consumers transmission facilities to Michigan Transco and its
successful disposition or integration into an RTO. For detailed information
about these trends or uncertainties, see Note 2, Uncertainties, incorporated by
reference herein.

GAS BUSINESS OUTLOOK

     GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
energy costs, changes in competitive conditions, and the level of natural gas
consumption per customer.

     GAS RESTRUCTURING: On April 1, 1998, Consumers implemented an experimental
gas customer choice pilot program. The pilot program ends March 31, 2001. The
program allows up to 300,000 residential, commercial and industrial retail gas
sales customers to choose an alternative gas commodity supplier in direct
competition with Consumers. As of December 31, 2000, more than 150,000 customers
chose alternative gas suppliers, representing approximately 38 bcf of gas
requirements. Customers who choose to remain sales customers of Consumers will
have fixed gas commodity rates through the end of the program. This three-year
program: 1) freezes gas distribution rates through March 31, 2001, establishing
a gas commodity cost at a fixed rate of $2.84 per mcf; 2) establishes an
earnings sharing mechanism with customers if Consumers' earnings exceed certain
predetermined levels; and 3) establishes a gas transportation code of conduct
that addresses the relationship between Consumers and marketers, including its
affiliated marketers. In October 2000, the MPSC approved Consumers' application
for a permanent gas customer choice program commencing April 1, 2001. Under the
permanent gas customer choice program, Consumers will no longer be subject to a
frozen gas commodity cost and delivery charge. Consumers will then return 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. Under the permanent gas customer choice program, up to
600,000 of Consumers' natural gas customers will be eligible to participate in
the program beginning April 1, 2001, up to 900,000 gas customers by April 1,
2002, and all of Consumers' gas customers beginning April 1, 2003. Consumers
would continue to transport and distribute gas to these customers.

     During the last year of the experimental pilot program, significant
increases in gas costs had exposed Consumers to gas commodity losses. In the
second quarter 2000, Consumers recorded a regulatory liability of $45 million to
reflect estimated losses due to increases in natural gas commodity costs. In
October 2000, the MPSC approved Consumers' accounting application to revise its
inventory accounting and reclassify low-cost, base gas in Consumers' gas storage
reservoirs. The MPSC allowed Consumers to immediately begin to include

                                       CE-8
<PAGE>   116

the cost of its recoverable base gas with higher cost purchased gas. Consumers
expects the gas accounting order to eliminate the need for Consumers to
recognize any further losses related to gas commodity cost underrecoveries.

     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) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) implementation of the permanent gas
customer choice program 4) implementation of a suspended GCR clause and any
initiatives undertaken to protect against gas price increases; and 5) market and
regulation responses to increases in gas costs. For detailed information about
these uncertainties see Note 2, Uncertainties, incorporated by reference herein.

OTHER OUTLOOK

     Consumers offers a variety of energy-related services to electric and gas
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
energy-related services for Consumers' customers.

OTHER MATTERS

NEW ACCOUNTING STANDARDS

     Effective January 1, 2001, Consumers adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and interpreted. For a
detailed discussion of the effects of the standard, including earnings
volatility, and the financial impact upon adoption, see Note 1, Corporate
Structure and Summary of Significant Accounting Policies, Implementation of New
Accounting Standards, Note 2, Uncertainties, and Note 3, Short-Term Financings
and Capitalization, incorporated by reference herein.

     In the year 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
Replacement of FASB Statement No. 125. SFAS No. 140 revises the criteria for
accounting for securitizations, other financial asset transfers and collateral
and introduces new disclosures. Certain disclosures and amendments of collateral
provisions are effective for fiscal years ending after December 15, 2000. The
other provisions of SFAS No. 140 apply prospectively to transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. Consumers has adopted the disclosure requirements effective December 31,
2000, and does not expect that the other provisions of SFAS No. 140 will have a
material impact on Consumers' consolidated results of operations or financial
position.

DERIVATIVES AND HEDGES

     MARKET RISK INFORMATION: Consumers is exposed to market risks including,
but not limited to, changes in interest rates, commodity prices, and equity
security prices in which Consumers holds less than a 20 percent interest.
Consumers' derivative activities are subject to the direction of an executive
oversight committee consisting of designated members of senior management and a
risk committee, consisting of business unit managers. The goal of the risk
management policy is to measure and limit overall energy commodity risk by
implementing an enterprise-wide policy across all business units. This allows
the use of hedges between business units before utilizing derivatives with
external third parties. 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 the Board of Directors.
Management employs established policies and procedures to manage its risks
associated with market fluctuations, including the use of various derivative
instruments such as futures, swaps, options and forward contracts. Management
believes that an opposite movement of the value of the hedged risk would offset
any losses incurred on derivative instruments used to hedge that risk. Consumers
enters into all derivative financial instruments for purposes other than
trading.

                                       CE-9
<PAGE>   117

     In accordance with SEC disclosure requirements, Consumers performs
sensitivity analyses to assess the potential loss in fair value, cash flows and
earnings based upon hypothetical 10 percent adverse changes in market rates or
prices. Consumers determines fair value based upon mathematical models using
current and historical pricing data. Management does not believe that
sensitivity analyses alone provides an accurate or reliable method for
monitoring and controlling risks. Therefore, Consumers relies 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
sensitivity analyses could occur if market rates or prices exceed the 10 percent
shift used for the analyses.

     EQUITY SECURITY PRICE RISK: Consumers has a less than 20 percent equity
investment in CMS Energy. A hypothetical 10 percent adverse change in market
price would result in a $11 million change in its equity investment. This
instrument is currently marked-to-market through equity. Consumers believes that
such an adverse change would not have a material effect on its consolidated
financial position, results of operation or cash flows.

     INTEREST RATE RISK: Consumers is exposed to interest rate risk resulting
from the issuance of fixed-rate debt and variable-rate debt, and from interest
rate swap and rate lock agreements. Consumers uses a combination of fixed-rate
and variable-rate debt, as well as interest rate swaps and rate locks to manage
and mitigate interest rate risk exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital. As of December 31, 2000 Consumers had outstanding $843 million
of variable-rate debt. Assuming a hypothetical 10 percent adverse change in
market interest rates, Consumers exposure to earnings, before tax, would be $5
million. In order to minimize adverse interest-rate changes, Consumers entered
into floating-to-fixed interest rate swap agreements for a total notional amount
of $300 million. These swaps exchange variable-rate interest payment obligations
to fixed-rate obligations to minimize the impact of potential adverse interest
rate changes. As of December 31, 2000, Consumers had outstanding long-term
fixed-rate debt including fixed-rate swaps of $2.583 billion with a fair value
of $2.515 billion. Assuming a hypothetical 10 percent adverse change in market
rates, Consumers would have an exposure of $133 million to the fair value of
these instruments if it had to refinance all of its long-term fixed-rate debt.
Consumers does not intend to refinance its fixed-rate debt in the near term and
believes that any adverse change in debt price and interest rates would not have
a material effect on either its consolidated financial position, results of
operation or, cash flows. For further discussion Note 3, Short-Term Financings
and Capitalization, "Derivative Activities."

     COMMODITY MARKET RISK: Consumers uses electricity and gas call options and
swap contracts to protect against risk due to fluctuations in the market price
of these commodities and to ensure a reliable source of capacity to meet its
customers electric needs. Consumers also uses a combination of gas written put
and purchased call options to manage the cost of gas supplied to its customers.

     At December 31, 2000, the fair value, based on quoted future market prices,
of electricity-related option and swap contracts was $126 million. Assuming a
hypothetical 10 percent adverse change in market prices, the potential reduction
in fair value associated with these contracts would be $16 million. As of
December 31, 2000, Consumers had an asset of $86 million as a result of premiums
incurred for electricity call option contracts. Consumers' maximum exposure
associated with the call option contracts is limited to the premiums paid.

     In addition, Consumers recognized an asset of $1 million associated with
net premiums paid for the combination gas written put and purchased call
options. At December 31, 2000, these options had a fair value of $25 million.
Assuming a hypothetical 10 percent adverse change in market prices, the
potential reduction in fair value associated with these contracts would be $6
million. For further discussion on commodity derivatives see "Derivative
Activities" under Note 2, Uncertainties, Other Electric Uncertainties and Other
Gas Uncertainties.

OTHER

     The Union represents Consumers' operating, maintenance and construction
employees. Consumers and the Union negotiated a new collective bargaining
agreement that became effective as of June 1, 2000. By its terms, that agreement
will continue in full force and effect until June 1, 2005. Consumers does not
anticipate any

                                      CE-10
<PAGE>   118

material adverse financial effects on its financial position, liquidity, or
results of operations as a result of changes to this agreement.

     During the first and third quarters of 2000, Consumers implemented the
results of a change in its paid personal absences plan, in part due to
provisions of a new union labor contract. The change resulted in employees
receiving the benefit of paid personal absence immediately at the beginning of
each fiscal year, rather than earning it in the previous year. The change for
non-union employees affected the first quarter of 2000. The change for union
employees affected the third quarter of 2000. The total effect of these one-time
changes decreased operating expenses by $16 million collectively, and increased
earnings, net of tax, by $6 million in the first quarter and $4 million in the
third quarter.

                                      CE-11
<PAGE>   119

                      (This page intentionally left blank)

                                      CE-12
<PAGE>   120

                            CONSUMERS ENERGY COMPANY
                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                --------------------------
                                                                 2000      1999      1998
                                                                 ----      ----      ----
                                                                       IN MILLIONS
<S>                                                             <C>       <C>       <C>
OPERATING REVENUE
  Electric..................................................    $2,676    $2,667    $2,606
  Gas.......................................................     1,196     1,156     1,051
  Other.....................................................        63        51        52
                                                                ------    ------    ------
                                                                 3,935     3,874     3,709
                                                                ------    ------    ------
OPERATING EXPENSES
  Operation Fuel for electric generation....................       324       336       317
    Purchased power -- related parties......................       534       560       573
    Purchased and interchange power.........................       402       297       285
    Cost of gas sold........................................       719       637       564
    Other...................................................       526       570       544
                                                                ------    ------    ------
                                                                 2,505     2,400     2,283
  Maintenance...............................................       172       174       173
  Depreciation, depletion and amortization..................       426       424       403
  General taxes.............................................       197       201       201
                                                                ------    ------    ------
                                                                 3,300     3,199     3,060
                                                                ------    ------    ------
PRETAX OPERATING INCOME
  Electric..................................................       481       494       475
  Gas.......................................................        98       132       126
  Other.....................................................        56        49        48
                                                                ------    ------    ------
                                                                   635       675       649
                                                                ------    ------    ------
OTHER INCOME (DEDUCTIONS)
  Loss on MCV power purchases...............................        --        --       (37)
  Dividends and interest from affiliates....................        10        11        14
  Accretion income (Note 1).................................         2         4         6
  Accretion expense (Note 1)................................        (7)      (14)      (16)
  Other, net................................................        (5)       17        --
                                                                ------    ------    ------
                                                                    --        18       (33)
                                                                ------    ------    ------
INTEREST CHARGES
  Interest on long-term debt................................       141       140       138
  Other interest............................................        44        41        38
  Capitalized interest......................................        (2)       --        (1)
                                                                ------    ------    ------
                                                                   183       181       175
                                                                ------    ------    ------
NET INCOME BEFORE INCOME TAXES..............................       452       512       441
INCOME TAXES................................................       148       172       135
                                                                ------    ------    ------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
  PRINCIPLE.................................................       304       340       306
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PROPERTY
  TAXES, NET OF $23 TAX (NOTE 1)............................        --        --        43
                                                                ------    ------    ------
NET INCOME..................................................       304       340       349
PREFERRED STOCK DIVIDENDS...................................         2         6        19
PREFERRED SECURITIES DISTRIBUTIONS..........................        34        21        18
                                                                ------    ------    ------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER..................    $  268    $  313    $  312
                                                                ======    ======    ======
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      CE-13
<PAGE>   121

                            CONSUMERS ENERGY COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31
                                                                ------------------------
                                                                2000     1999      1998
                                                                ----     ----      ----
                                                                      IN MILLIONS
<S>                                                             <C>      <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income................................................    $ 304    $ 340    $  349
     Adjustments to reconcile net income to net cash
      provided by operating activities
       Depreciation, depletion and amortization (includes
        nuclear decommissioning of $39, $50 and $51,
        respectively).......................................      426      424       403
       Regulatory liability -- gas choice...................       33       --        --
       Capital lease and other amortization.................       32       35        36
       Accretion expense....................................        7       14        16
       Cumulative effect of accounting change...............       --       --       (66)
       Loss on MCV power purchases..........................       --       --        37
       Accretion income -- abandoned Midland project........       (2)      (4)       (6)
       Deferred income taxes and investment tax credit......       (9)       2        21
       Undistributed earnings of related parties (net of
        dividends, $8, $10 and $12, respectively)...........      (49)     (40)      (38)
       MCV power purchases..................................      (60)     (62)      (64)
       Changes in other assets and liabilities..............     (214)      82       (51)
                                                                -----    -----    ------
          Net cash provided by operating activities.........      468      791       637
                                                                -----    -----    ------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures (excludes assets placed under capital
     lease).................................................     (498)    (444)     (369)
  Cost to retire property, net..............................      (78)     (93)      (83)
  Investments in nuclear decommissioning trust funds........      (39)     (50)      (51)
  Investment in Electric Restructuring Implementation
     Plan...................................................      (29)     (32)      (17)
  Proceeds from nuclear decommissioning trust funds.........       37       43        53
  Associated company preferred stock redemption.............       50       50        50
  Proceeds from the sale of two non-utility partnerships....       --       --        27
  Other.....................................................       --        7         4
                                                                -----    -----    ------
     Net cash used in investing activities..................     (557)    (519)     (386)
                                                                -----    -----    ------
CASH FLOWS FROM FINANCING ACTIVITIES
  Payment of common stock dividends.........................     (245)    (262)     (241)
  Preferred securities distributions........................      (34)     (21)      (18)
  Payment of capital lease obligations......................      (32)     (33)      (35)
  Retirement of bonds and other long-term debt..............       (9)     (87)     (854)
  Payment of preferred stock dividends......................       (2)     (10)      (19)
  Retirement of preferred stock.............................       --     (200)       --
  Contribution from (return of equity to) stockholder.......       --      150        50
  Proceeds from preferred securities........................       --      169        --
  Increase (decrease) in notes payable, net.................      189       --      (162)
  Proceeds from senior notes & bank loans...................      225       15     1,046
                                                                -----    -----    ------
     Net cash provided from (used in) financing
      activities............................................       92     (279)     (233)
                                                                -----    -----    ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
  INVESTMENT................................................        3       (7)       18
  Cash and temporary cash investments -- Beginning of
     year...................................................       18       25         7
                                                                -----    -----    ------
     End of year............................................    $  21    $  18    $   25
                                                                =====    =====    ======
</TABLE>

                                      CE-14
<PAGE>   122

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31
                                                                ------------------------
                                                                2000     1999      1998
                                                                ----     ----      ----
                                                                      IN MILLIONS
<S>                                                             <C>      <C>      <C>
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND
  FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
  Interest paid (net of amounts capitalized)................    $ 183    $ 168    $  161
  Income taxes paid (net of refunds)........................      149      187       153
NON-CASH TRANSACTIONS
  Nuclear fuel placed under capital lease...................    $   4    $   6    $   46
  Other assets placed under capital leases..................       15       14        14
</TABLE>

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.

                                      CE-15
<PAGE>   123

                            CONSUMERS ENERGY COMPANY
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                                ----------------
                                                                 2000      1999
                                                                 ----      ----
                                                                  IN MILLIONS
<S>                                                             <C>       <C>
ASSETS
PLANT (AT ORIGINAL COST)
  Electric..................................................    $7,241    $6,981
  Gas.......................................................     2,503     2,461
  Other.....................................................        23        25
                                                                ------    ------
                                                                 9,767     9,467
  Less accumulated depreciation, depletion and
     amortization...........................................     5,768     5,643
                                                                ------    ------
                                                                 3,999     3,824
  Construction work-in-progress.............................       279       199
                                                                ------    ------
                                                                 4,278     4,023
                                                                ------    ------
INVESTMENTS
  Stock of affiliates.......................................        86       139
  First Midland Limited Partnership.........................       245       240
  Midland Cogeneration Venture Limited Partnership..........       290       247
                                                                ------    ------
                                                                   621       626
                                                                ------    ------
CURRENT ASSETS
  Cash and temporary cash investments at cost, which
     approximates market....................................        21        18
  Accounts receivable and accrued revenue, less allowances
     of $3 in 2000 and $4 in 1999...........................       225        98
  Accounts receivable -- related parties....................       111        67
  Inventories at average cost
     Gas in underground storage.............................       271       216
     Materials and supplies.................................        66        62
     Generating plant fuel stock............................        46        46
  Prepaid property taxes....................................       136       139
  Regulatory assets.........................................        19        31
  Deferred income taxes.....................................         2         8
  Other.....................................................        13        14
                                                                ------    ------
                                                                   910       699
                                                                ------    ------
NON-CURRENT ASSETS
  Regulatory Assets
     Securitization costs...................................       709        --
     Postretirement benefits................................       232       341
     Abandoned Midland project..............................        22        48
     Unamortized nuclear costs..............................         6       519
     Other..................................................        87       125
  Nuclear decommissioning trust funds.......................       611       602
  Other.....................................................       297       187
                                                                ------    ------
                                                                 1,964     1,822
                                                                ------    ------
TOTAL ASSETS................................................    $7,773    $7,170
                                                                ======    ======
</TABLE>

                                      CE-16
<PAGE>   124

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                                ----------------
                                                                 2000      1999
                                                                 ----      ----
                                                                  IN MILLIONS
<S>                                                             <C>       <C>
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (NOTE 3)
  Common stockholder's equity
     Common stock...........................................    $  841    $  841
     Paid-in capital........................................       646       645
     Revaluation capital....................................        33        37
     Retained earnings since December 31, 1992..............       506       485
                                                                ------    ------
                                                                 2,026     2,008
  Preferred stock...........................................        44        44
  Company-obligated mandatorily redeemable preferred
     securities of:
     Consumers Power Company Financing I (a)................       100       100
     Consumers Energy Company Financing II (a)..............       120       120
     Consumers Energy Company Financing III (a).............       175       175
  Long-term debt............................................     2,110     2,006
  Non-current portion of capital leases.....................        49        85
                                                                ------    ------
                                                                 4,624     4,538
                                                                ------    ------
CURRENT LIABILITIES
  Current portion of long-term debt and capital leases......       231        90
  Notes payable.............................................       403       214
  Accounts payable..........................................       254       224
  Accrued taxes.............................................       247       232
  Accounts payable -- related parties.......................        67        82
  Other.....................................................       253       234
                                                                ------    ------
                                                                 1,455     1,076
                                                                ------    ------
NON-CURRENT LIABILITIES
  Deferred income taxes.....................................       716       700
  Postretirement benefits...................................       366       420
  Regulatory liabilities for income taxes, net..............       246        64
  Deferred investment tax credit............................       109       125
  Other.....................................................       257       247
                                                                ------    ------
                                                                 1,694     1,556
                                                                ------    ------
  Commitments and Contingencies (Notes 1, 2, 8 and 11)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES..............    $7,773    $7,170
                                                                ======    ======
</TABLE>

-------------------------
(a)  See Note 3, Short-Term Financings and Capitalization

      The accompanying notes are an integral part of these Balance Sheets.

                                      CE-17
<PAGE>   125

                            CONSUMERS ENERGY COMPANY

                   CONSOLIDATED STATEMENTS OF LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                       DECEMBER 31
                                                                                     ----------------
                                                                SERIES(%)             2000      1999
                                                                ---------             ----      ----
                                                                                       IN MILLIONS
<S>                                                             <C>          <C>     <C>       <C>
FIRST MORTGAGE BONDS........................................    6 3/8        2003    $  300    $  300
                                                                7 3/8        2023       263       263
                                                                                     ------    ------
                                                                                        563       563
SENIOR NOTES................................................    Floating     2001       125        --
                                                                Floating     2002(a)    100        --
                                                                6 3/8        2008(b)    250       250
                                                                6 7/8        2018       225       225
                                                                6 1/5        2008       250       250
                                                                6 1/2        2018(c)    200       200
                                                                6 1/2        2028       145       149
                                                                                     ------    ------
                                                                                      1,858     1,637
LONG-TERM BANK DEBT.........................................                            190       190
POLLUTION CONTROL REVENUE BONDS.............................                            126       131
NUCLEAR FUEL DISPOSAL(D)....................................                            130       123
                                                                                     ------    ------
PRINCIPAL AMOUNT OUTSTANDING................................                          2,304     2,081
CURRENT AMOUNTS.............................................                           (175)      (55)
NET UNAMORTIZED DISCOUNT....................................                            (19)      (20)
                                                                                     ------    ------
TOTAL LONG-TERM DEBT........................................                         $2,110    $2,006
                                                                                     ======    ======
</TABLE>

LONG-TERM DEBT MATURITIES

<TABLE>
<CAPTION>
                                                     FIRST MORTGAGE    SENIOR    LONG-TERM
                                                         BONDS         NOTES     BANK DEBT    OTHER    TOTAL
                                                     --------------    ------    ---------    -----    -----
                                                                           IN MILLIONS
<S>                                                  <C>               <C>       <C>          <C>      <C>
2001.............................................         $ --          $125        $50        --      $175
2002.............................................           --           100         94        --       194
2003.............................................          300           250(b)      41        --       591
2004.............................................           --            --         --        --        --
2005.............................................           --           200(c)      --        --       200
</TABLE>

-------------------------
(a)  Consumers has the option to redeem these notes after November 15, 2001

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

(c)  Senior Remarketed Notes subject to optional redemption by Consumers after
     June 15, 2005

(d)  Due date uncertain (see Note 1)

        The accompanying notes are an integral part of these statements.

                                      CE-18
<PAGE>   126

                            CONSUMERS ENERGY COMPANY

                   CONSOLIDATED STATEMENTS OF PREFERRED STOCK

<TABLE>
<CAPTION>
                                                            OPTIONAL                DECEMBER 31
                                                           REDEMPTION    ----------------------------------
                                                 SERIES      PRICE        2000       1999      2000    1999
                                                 ------    ----------     ----       ----      ----    ----
                                                                          NUMBER OF SHARES     IN MILLIONS
<S>                                              <C>       <C>           <C>        <C>        <C>     <C>
PREFERRED STOCK
  Cumulative, $100 par value, authorized
     7,500,000 shares, with no mandatory
     redemption..............................    $4.16      $103.25       68,451     68,451    $ 7     $ 7
                                                  4.50       110.00      373,148    373,148     37      37
                                                                                               ---     ---
TOTAL PREFERRED STOCK........................                                                  $44     $44
                                                                                               ===     ===
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      CE-19
<PAGE>   127

                            CONSUMERS ENERGY COMPANY

             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                --------------------------
                                                                 2000      1999      1998
                                                                 ----      ----      ----
                                                                       IN MILLIONS
<S>                                                             <C>       <C>       <C>
COMMON STOCK
  At beginning and end of period(a).........................    $  841    $  841    $  841
                                                                ------    ------    ------
OTHER PAID-IN CAPITAL
  At beginning of period....................................       645       502       452
  Capital stock expense.....................................        --        (7)       --
  Stockholder's contribution................................        --       150       100
  Return of stockholder's contribution......................        --        --       (50)
  Miscellaneous.............................................         1        --        --
                                                                ------    ------    ------
  At end of period..........................................       646       645       502
                                                                ------    ------    ------
REVALUATION CAPITAL
  At beginning of period....................................        37        68        58
  Change in unrealized investment -- gain (loss)(b).........        (4)      (31)       10
                                                                ------    ------    ------
  At end of period..........................................        33        37        68
                                                                ------    ------    ------
RETAINED EARNINGS
  At beginning of period....................................       485       434       363
  Net income(b).............................................       304       340       349
  Cash dividends declared -- Common Stock...................      (247)     (262)     (241)
  Cash dividends declared -- Preferred Stock................        (2)       (6)      (19)
  Preferred securities distributions........................       (34)      (21)      (18)
                                                                ------    ------    ------
  At end of period..........................................       506       485       434
                                                                ------    ------    ------
TOTAL COMMON STOCKHOLDER'S EQUITY...........................    $2,026    $2,008    $1,845
                                                                ======    ======    ======
</TABLE>

-------------------------
(a)  Number of shares of common stock outstanding was 84,108,789 for all periods
     presented.

(b)  Disclosure of Comprehensive Income:

<TABLE>
    <S>                                                             <C>       <C>       <C>
    Revaluation capital
      Unrealized investment -- gain (loss), net of tax of $(2),
         $(17) and $6, respectively.............................    $   (4)   $  (31)   $   10
    Net income..................................................       304       340       349
                                                                    ------    ------    ------
    Total Comprehensive Income..................................    $  300    $  309    $  359
                                                                    ======    ======    ======
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      CE-20
<PAGE>   128

                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding
company, is an electric and gas utility company that provides service to
customers in Michigan's Lower Peninsula. Consumers' customer base includes a mix
of residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.

     BASIS OF PRESENTATION: The consolidated financial statements include
Consumers and its wholly owned subsidiaries. Consumers prepared the financial
statements in conformity with generally accepted accounting principles that
include the use of management's estimates. Consumers uses the equity method of
accounting for investments in its companies and partnerships where it has more
than a 20 percent but less than a majority ownership interest and includes these
results in operating income.

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

     REVENUE RECOGNITION POLICY: Revenues from deliveries of electricity and
natural gas, and the storage of natural gas, are recognized as services are
provided. Therefore, revenues include the accrual of electricity or gas consumed
and/or delivered, but not billed at month-end.

     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. Conversely, in 1992, Consumers
recorded a loss for the present value of its estimated future underrecoveries of
power costs resulting from purchases from the MCV Partnership (see Note 2). It
now recognizes accretion expense annually to reflect the time value of money on
the recorded loss.

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

     MAINTENANCE, DEPRECIATION AND DEPLETION: Consumers charges property repairs
and minor property replacements to maintenance expense. Depreciable property
retired or sold, plus cost of removal (net of salvage credits), is charged to
accumulated depreciation. Consumers bases depreciation provisions for utility
property on straight-line and units-of-production rates approved by the MPSC.
The composite depreciation rate for electric utility property was 3.1 percent
for 2000, 3.0 percent for 1999 and 3.5 percent for 1998. The composite rate for
gas utility property was 4.4 percent for 2000 and 1999 and 4.2 percent for 1998.
The composite rate for other property was 10.7 percent for 2000, 8.6 percent for
1999 and 7.4 percent for 1998.

     NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Consumers
expenses interest on leased nuclear fuel as it is incurred. Under current
federal law, as a federal court decision confirmed, the DOE was to begin
accepting deliveries of spent nuclear fuel for disposal by January 31, 1998. For
fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel
expense, recovers these costs through electric rates, and then remits 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, 2000, Consumers has
a recorded liability to the DOE of $130 million, including interest, which is
payable upon the first delivery of spent nuclear fuel to the DOE. Consumers
recovered through electric rates the amount of this liability, excluding a
portion of interest. In 1997, the DOE declared that it would not begin to

                                      CE-21
<PAGE>   129
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

accept spent nuclear fuel deliveries in 1998. Also in 1997, a federal court
affirmed the DOE's duty to take delivery of spent fuel. 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 an agreement with another utility to address
the DOE's delay in accepting spent fuel. The DOE may use the agreement as a
framework that it could apply to other nuclear power plants. Consumers is
evaluating this matter further. 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.
Consumers is evaluating those rulings and their applicability to its contracts
with the DOE.

     NUCLEAR PLANT DECOMMISSIONING: In 2000, Consumers collected $39 million
from its electric customers for decommissioning its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. In March 1999,
Consumers received a decommissioning order from the MPSC that approved estimated
decommissioning costs for Big Rock and Palisades that were $294 million and $518
million in 1997 dollars, respectively. Using the inflation factors presented to
the MPSC in order to escalate the estimated decommissioning costs to 2000
dollars, the Big Rock and Palisades estimated decommissioning costs are $325
million and $592 million, respectively. 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. The March 22, 1999 MPSC order set the annual decommissioning surcharge
for Big Rock at $32 million through December 31, 2000 and the December 16, 1999
MPSC order set the annual decommissioning surcharge for Palisades at $6 million
a year. Consumers is required to file a "Report on the Adequacy of the Existing
Annual Provision for Nuclear Plant Decommissioning" (Report) with the MPSC by
March 31, 2001. In December 2000, the NRC extended the Palisades' operating
license to March 2011. The impact of this extension will be evaluated as part of
Consumers' March 31, 2001 Report to the MPSC.

     In 1997, Big Rock closed permanently even though the plant was originally
scheduled to close on May 31, 2000, at the end of the plant's operating license,
and plant decommissioning began. It may take five to ten years to return the
site to its original condition. For 2000, Consumers incurred costs of $36
million that were charged to the accumulated depreciation reserve for
decommissioning and withdrew $37 million from the Big Rock nuclear
decommissioning trust fund. In total, Consumers has incurred costs of $162
million that have been charged to the accumulated depreciation reserve for
decommissioning and withdrew $149 million from the Big Rock nuclear
decommissioning trust fund. These activities had no material impact on net
income. At December 31, 2000, Consumers is the beneficiary of the investment in
nuclear decommissioning trust funds of $179 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' original NRC license would
have expired in 2007 and the trust funds were estimated to have accumulated $667
million, assuming currently approved MPSC surcharge levels. Consumers estimates
that at the time Palisades is fully decommissioned in the year 2046, the trust
funds will have provided $1.9 billion, including trust earnings, over this
decommissioning period. At December 31, 2000, Consumers is the beneficiary of
the investment in nuclear decommissioning trust funds of $432 million for
Palisades.

     UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: Consumers 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 our businesses, if debt is refinanced, Consumers
amortizes any unamortized premiums, discounts and expenses over the term of the
new debt, as allowed under regulated utility accounting.

                                      CE-22
<PAGE>   130
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     RECLASSIFICATIONS: Consumers reclassified certain prior year amounts for
comparative purposes. These reclassifications did not affect consolidated net
income for the years presented.

     RELATED-PARTY TRANSACTIONS: At December 31, 2000 and 1999, Consumers'
investment in Enterprises' preferred stock was $50 million and $100 million,
respectively. The remaining $50 million will be paid to Consumers within one
year. The amount is classified on the balance sheet in accounts
receivable-related parties. In addition, Consumers has an investment in 2.7
million shares of CMS Energy Common Stock with a fair value totaling $86 million
at December 31, 2000 (see Note 5). From these two investments, Consumers
received dividends from affiliates' common and preferred stock totaling $10
million, $11 million, and $14 million in 2000, 1999 and 1998, respectively.

     Consumers purchases a portion of its gas from CMS Oil and Gas. The
purchases for the years ended 2000, 1999 and 1998 were $3 million, $19 million
and $24 million, respectively. In 2000, 1999 and 1998, Consumers paid $51
million, $52 million and $51 million, respectively, for electric generating
capacity and energy from affiliates of Enterprises. Consumers pays a portion of
its gas transportation costs to Panhandle and its subsidiary Trunkline. In 2000
and 1999 transportation fees paid was $38 million and $33 million, respectively.
Consumers and its subsidiaries sold, stored and transported natural gas and
provided other services to the MCV Partnership totaling $26 million, $23 million
and $13 million in 2000, 1999 and 1998, respectively. For additional discussion
of related-party transactions with the MCV Partnership and the FMLP, see Notes 2
and 11. Other related-party transactions are immaterial.

     UTILITY REGULATION: Consumers accounts for the effects of regulation based
on the regulated utility accounting standard SFAS No. 71, Accounting for the
Effects of Certain Types of Regulation. 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.
Consistent with these orders, Consumers discontinued application of SFAS No. 71
for the energy supply portion of its business in the first quarter of 1999
because Consumers expected to implement retail open access for its electric
customers in September 1999. 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 by approximately $535
million and establishing a regulatory asset for a corresponding amount.
According to current accounting standards, Consumers can continue to carry its
energy supply-related regulatory assets if legislation or an MPSC rate order
allows the collection of cash flows to recover these regulatory assets from its
regulated transmission and distribution customers. As of December 31, 2000,
Consumers had a net investment in energy supply facilities of $1.109 billion
included in electric plant and property. See Note 2, Uncertainties, "Electric
Rate Matters -- Electric Restructuring."

     SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, imposes stricter criteria for retention of
regulatory-created assets by requiring that such assets be probable of future
recovery at each balance sheet date. Management believes these assets are
probable of future recovery.

                                      CE-23
<PAGE>   131
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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.

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                                ----------------
                                                                 2000      1999
                                                                 ----      ----
                                                                  IN MILLIONS
<S>                                                             <C>       <C>
Securitization costs (Note 2)...............................    $  709    $   --
Unamortized nuclear costs...................................         6       519
Postretirement benefits (Note 7)............................       251       366
Income taxes (Note 4).......................................        24       193
Abandoned Midland project...................................        22        48
Manufactured gas plant sites (Note 2).......................        63        65
DSM -- deferred costs.......................................         6        13
Uranium enrichment facility.................................        --        18
Other.......................................................        18        35
                                                                ------    ------
Total regulatory assets.....................................    $1,099    $1,257
                                                                ======    ======
Income taxes (Note 4).......................................    $ (270)   $ (257)
Gas customer choice reserve.................................       (33)       --
Other.......................................................        (6)      (17)
                                                                ------    ------
Total regulatory liabilities................................    $ (309)   $ (274)
                                                                ======    ======
</TABLE>

     In October 2000, Consumers received an MPSC order authorizing Consumers to
securitize certain regulatory assets up to $470 million, net of tax (See Note 2,
Electric Rate Matters). Accordingly, in December 2000, Consumers established a
regulatory asset for securitization costs of $709 million, before tax, that had
previously been recorded in other regulatory asset accounts. As a result,
regulatory assets totaling $709 million were transferred to the regulatory asset
Securitization Costs from the following regulatory asset components:

<TABLE>
<S>                                                             <C>
Unamortized nuclear costs...................................    $405
Postretirement benefits.....................................      84
Income taxes................................................     203
Uranium enrichment facility.................................      16
Other.......................................................       1
                                                                ----
Total securitized regulatory assets.........................    $709
                                                                ====
</TABLE>

     RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS: Consumers and its
subsidiaries use derivative instruments, including swaps and options, to manage
exposure to fluctuations in interest rates and commodity prices. To qualify for
hedge accounting, derivatives must meet the following criteria: 1) the hedged
item must expose the enterprise to price and interest rate risk; and 2) the
derivative must reduce that exposure and must be designated as a hedge.

     Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such
counterparties. Consumers considers the risk of nonperformance by the
counterparties remote.

     Consumers enters into interest rate swap agreements to exchange
variable-rate interest payment obligations for fixed-rate obligations without
exchanging the underlying notional amounts. These agreements convert
variable-rate debt to fixed-rate debt in order to reduce the impact of interest
rate fluctuations. The notional

                                      CE-24
<PAGE>   132
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

amounts parallel the underlying debt levels and are used to measure interest to
be paid or received and do not represent the exposure to credit loss. For
further discussion see Note 3, Short-Term Financing and Capitalization,
"Derivative Activities".

     Consumers uses electric power purchase and gas fuel for generation call
option contracts, and commodity price swap agreements, to protect against risk
due to fluctuations in the market price of these commodities and to ensure a
reliable source of capacity to meet its customers electric needs. Consumers also
uses a combination of written put and purchased call options to manage the cost
of gas supplied to its customers. For further discussion on commodity
derivatives see "Derivative Activities" under Note 2, Uncertainties, Other
Electric Uncertainties and Other Gas Uncertainties.

     OTHER: For significant accounting policies regarding income taxes, see Note
4; for executive incentive compensation, see Note 6; and for pensions and other
postretirement benefits, see Note 7.

     IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: In December 1999, the SEC
released SAB No. 101, Revenue Recognition, summarizing the SEC staff's views on
revenue recognition policies based upon existing generally accepted accounting
principles. The SEC staff deferred the implementation date of SAB No. 101 until
no later than the fourth quarter of fiscal years beginning after December 15,
1999. Consumers adopted the provisions of SAB No. 101 as of October 1, 2000. The
impact of adopting SAB No. 101 is not material to Consumers consolidated results
of operations or financial position.

     Effective January 1, 2001, Consumers adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities as amended and interpreted. SFAS
No. 133 requires Consumers to recognize at fair value, all contracts that meet
the definition of a derivative instrument, on the balance sheet as either assets
or liabilities. This standard also requires Consumers to record all changes in
fair value directly in earnings, or other comprehensive income if the derivative
meets certain qualifying hedge criteria. Upon initial adoption of the standard,
Consumers will record the difference between the current fair value of the
contract and the recorded book value of the contract as a cumulative effect type
adjustment to accumulated other comprehensive income. Consumers determines fair
value based upon mathematical models using current and historical pricing data.

     Consumers believes that the majority of its contracts qualify for the
normal purchases and sales exception under the standard and are therefore not
subject to derivative accounting. Consumers does, however, use certain
derivative instruments to limit its exposure to gas commodity price risk and
interest rate risk.

     The estimated financial statement impact of recording the SFAS No. 133
transition adjustment associated with these derivatives on January 1, 2001 is as
follows:

<TABLE>
<CAPTION>
                                                                IN MILLIONS
<S>                                                             <C>
Cumulative effect on accumulated other comprehensive income
  from a change in accounting principle, net of tax.........        $16
</TABLE>

     The cumulative effect on accumulated other comprehensive income from a
change in accounting principle relates to gas options and gas fuel and interest
rate swap contracts that qualified for cash flow hedge accounting prior to the
initial adoption of SFAS No. 133. This amount will reduce, or be charged to,
cost of gas, cost of power, or interest expense, respectively, when the related
hedged transaction occurs. Based on the pretax amount recorded in accumulated
other comprehensive income on the January 1, 2001 transition date, Consumers
expects to record $24 million as a reduction to cost of gas, $2 million as a
reduction to cost of power, and $2 million as an increase to interest expense in
2001.

     After January 1, 2001, certain gas option contracts will not qualify for
cash flow hedge accounting under SFAS No. 133, and Consumers will therefore
record any change in fair value subsequent to January 1, 2001 directly in
earnings, which could cause earnings volatility.

                                      CE-25
<PAGE>   133
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Additionally, derivative and hedge accounting for certain utility industry
contracts, particularly electric call option contracts remains uncertain.
Consumers is currently accounting for electric call option contracts and other
electric option-like contracts as derivatives that qualify for the normal
purchase exception of SFAS No. 133, and as such, has not recorded these
contracts on the balance sheet at fair value. The ultimate financial statement
impact depends upon resolution of these industry specific issues with the FASB
and could be materially different than stated above. For further discussion of
derivative activities, see "Derivative Activities" under Note 2, Uncertainties,
Other Electric Uncertainties and Other Gas Uncertainties and Note 3, Short-Term
Financings and Capitalization.

     CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES: During the first quarter
of 1998, Consumers implemented a change in the method of accounting for property
taxes so that such taxes are recognized during the fiscal period of the taxing
authority for which the taxes are levied. This change better matches property
tax expense with the services provided by the taxing authorities and is
considered the most acceptable basis of recording property taxes. Prior to 1998,
Consumers recorded property taxes monthly during the year following the
assessment date (December 31). In 1998, the cumulative effect of this one-time
change in accounting increased other income by $66 million, and earnings, net of
tax, by $43 million.

2: UNCERTAINTIES

ELECTRIC CONTINGENCIES

     ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of
sulfur dioxide and nitrogen oxides and requires emissions and air quality
monitoring. Consumers currently operates within these limits and meets current
emission requirements. The Clean Air Act requires the EPA to review periodically
the effectiveness of the national air quality standards in preventing adverse
health effects.

     1997 EPA Revised NOx and Small Particulate Emissions Standards -- In 1997,
the EPA revised these standards to impose further limitations on nitrogen oxide
and small particulate-related emissions. The United States Supreme Court
recently found that the EPA has power to revise the standards but found that the
EPA's implementation plan was not lawful. While this case has been pending in
federal courts, and while continuing through the lower federal courts as ordered
by the Supreme Court, the EPA suspended the standards under the 1997 rule and
reinstated the pre-1997 standards.

     1998 EPA Plan for NOx Emissions -- In 1998, based in part upon the 1997
standards, the EPA Administrator issued final regulations requiring the State of
Michigan to further limit nitrogen oxide emissions. Consumers anticipates a
reduction in nitrogen oxide emissions by 2004 to only 32 percent of levels
allowed for the year 2000.

     Section 126 Petitions -- In December 1999, the EPA Administrator signed a
revised final rule under Section 126 of the Clean Air Act. The rule requires
some electric utility generators, including some of Consumers' electric
generating facilities, to achieve the same emission rate as that required by the
1998 plan for NOx emissions. Under the revised Section 126 rule, the emission
rate will become effective on May 1, 2003 and apply for the ozone season in 2003
and during each subsequent year. Various parties' petitions challenging the
EPA's rule have been filed.

     Until all air quality targets are conclusively established, the estimated
cost of compliance discussed below is subject to revision.

     Cost of Environmental Law Compliance -- To meet the EPA's 1998 rule and/or
the Section 126 nitrous oxide emission rules, the estimated cost to Consumers
will be between $290 million and $500 million, calculated in year 2000 dollars.
The lower estimate represents the capital expenditure level that would
satisfactorily meet the proposed emissions limits but would result in higher
operating expense. The higher estimate in the range includes expenditures that
result in lower operating costs while complying with the proposed emissions
limit. Consumers anticipates that it will incur these capital expenditures
between 2000 and either 2003 or 2004, depending upon

                                      CE-26
<PAGE>   134
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

whether the EPA prevails in the Section 126 litigation. In addition, Consumers
expects to incur cost of removal related to this effort, but is unable to
predict the amount at this time.

     Consumers may need an equivalent amount of capital expenditures to comply
with the new small particulate standards sometime after 2004.

     Consumers' coal-fueled electric generating units burn low-sulfur coal and
are currently operating at or near the sulfur dioxide emission limits. Beginning
in 1992 and continuing into 2000, Consumers incurred capital expenditures
totaling $72 million to install equipment at certain generating units to comply
with the acid rain provisions of the Clean Air Act. Management believes that
these expenditures will not materially affect Consumers' annual operating costs.

     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. Nevertheless, it
believes that these costs are 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 $2 million and $9 million. As of
December 31, 2000, 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 is studying the remaining materials and determining options and their
related costs.

ELECTRIC RATE MATTERS

     ELECTRIC RESTRUCTURING: Since 1997, the Michigan Legislature has been
considering electric utility restructuring legislation. These efforts finally
resulted in the passage of the Customer Choice Act, which became effective June
5, 2000.

     The Customer Choice Act: 1) permits all customers to exercise choice of
electric generation suppliers by January 1, 2002; 2) cuts 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 Securitization to refinance
stranded costs as a means of offsetting the earnings impact of the five percent
residential rate reduction; 5) establishes a market power test which may require
the transfer of control of a portion of generation resources in excess of that
required to serve firm retail sales requirements (a requirement with which
Consumers is in compliance); 6) requires Michigan utilities to join a
FERC-approved RTO or divest their interest in transmission facilities to an
independent transmission owner; 7) requires the joint expansion of available
transmission capability by Consumers, Detroit Edison and American Electric Power
by at least 2,000 MW by June 5 of 2002; and 8) allows for the recovery of
stranded costs and implementation costs incurred as a result of the passage of
the act. Consumers is highly confident that it will meet the conditions of items
5 and 7 above, prior to the earliest rate cap termination dates specified in the
act. Failure to do so would result in an extension of the rate caps to as late
as December 31, 2013. As of 2000, Consumers spent $13 million on the required
expansion of transmission capabilities. Consumers anticipates it will spend an
additional $24 million in 2001 and 2002, unless Consumers transfers its
transmission facilities to a FERC approved RTO or to an independent transmission
owner.

     In July 2000, in accordance with the Customer Choice Act, Consumers filed
an application with the MPSC to begin the Securitization process. Securitization
typically involves the issuance of asset backed bonds with a

                                      CE-27
<PAGE>   135
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

higher credit rating than conventional utility corporate financing. In October
2000 and January 2001, the MPSC issued a financing order and a final order,
respectively, authorizing Securitization of approximately $470 million in
qualified costs, which were primarily regulatory assets, consisting of electric
utility stranded generation costs, plus recovery of the expenses of the
Securitization. Cost savings from Securitization depend upon the level of debt
or equity securities ultimately retired, the amortization schedule for the
securitized qualified costs and the interest rates of the retired debt
securities and the Securitization bonds. These savings will only be determined
once the Securitization bonds are issued and will offset the majority of the
revenue impact of the five percent residential rate reduction, $51 million on an
annual basis, that Consumers was required to implement by the Customer Choice
Act. The order directs Consumers to apply any cost savings in excess of the five
percent residential rate reduction to rate reductions for non-residential and
retail open access customers after the bonds are sold. In a subsequent order,
the MPSC confirmed that Consumers could recover the five percent residential
rate reduction's effect on revenues lost from the date of the financing order.
Consumers estimates that the disallowed portion of revenue recovery relating to
the year 2000 five percent residential rate reduction reduced its operating
earnings by $22 million in 2000. Consumers, and its special purpose subsidiary
that will issue the bonds, will recover the repayment of principal, interest and
other expenses relating to the issuance of the bonds through a Securitization
charge and a tax charge. These charges are subject to an annual true-up until
one year prior to the last expected maturity date of the Securitization bonds
and no more than quarterly thereafter. The MPSC's order will not increase
current electric rates for any of Consumers' tariff customers.

     In January 2001, Consumers accepted the MPSC's final financing order. The
final financing order has been appealed by the Attorney General of Michigan.
Consumers cannot predict the outcome of the appeal or its effect on the schedule
for issuance of Securitization bonds. Beginning January 1, 2001, and continuing
during the appeal period, the amortization of the approved regulatory assets
being securitized as qualified costs is being deferred which effectively offsets
the loss in revenue resulting from the five percent residential rate reduction.
The amortization will be reestablished later, after the Securitization bond
sale, based on a schedule that is the same as the recovery of the principal
amounts of the securitized qualified costs. Ultimately, sale of Securitization
bonds will be required to offset the majority of the revenue impact of the rate
reduction over the term of the bonds.

     In September 1999, Consumers began implementing a plan for electric retail
customer open access. Consumers submitted this plan to the MPSC in 1998, and in
March 1999 the MPSC issued orders that generally supported the plan. The
Customer Choice Act states that orders issued by the MPSC before the date of
this act that 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, are in compliance with this act and
enforceable by the MPSC. In September 2000, as required by the MPSC, Consumers
filed tariffs governing its retail open access program and addressed revisions
appropriate to comply with the Customer Choice Act. Consumers cannot predict how
the MPSC will modify the tariff or enforce the existing restructuring orders.

     In June 2000, the Court of Appeals issued an opinion relating to a number
of consolidated MPSC restructuring orders. The opinion primarily involved issues
that the Customer Choice Act has rendered moot. In a separate pending case,
ABATE and the Attorney General each appealed an August 1999 order in which the
MPSC found that it had jurisdiction to approve rates, terms and conditions for
electric retail wheeling, also known as electric customer choice, if a utility
voluntarily chooses to offer that service. Consumers believes that the Customer
Choice Act has rendered the issue moot, but cannot predict how the Court of
Appeals will resolve the issue.

     POWER COSTS: During periods when electric demand is high, the cost of
purchasing energy 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 reserve, also called a
reserve margin, of approximately 15 percent. The reserve margin provides
Consumers with additional power above its anticipated peak power demands. It
also allows

                                      CE-28
<PAGE>   136
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consumers to provide reliable service to its electric service customers and to
protect itself against unscheduled plant outages and unanticipated demand. For
the summers 2001, 2002, and 2003, Consumers is planning for a reserve margin of
15 percent. The actual 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. The existing retail
open access plan allows other electric service providers with the opportunity to
serve up to 750 MW of nominal retail open access requirements. As of January
2001, alternative electric service providers are providing service to 67 MW of
retail open access requirements.

     To reduce the risk of high energy prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
electricity call option contracts for the physical delivery of electricity
during the months of June through September. The cost of these electricity call
option contracts for summer 2000 was $51 million. Consumers expects to use a
similar strategy in the future, but cannot predict the cost of this strategy at
this time. As of December 31, 2000, Consumers had purchased or had commitments
to purchase electricity call option contracts covering the estimated reserve
margin requirements for summer 2001, and partially covering the estimated
reserve margin requirements for summers 2002 through 2005, at a recognized cost
of $86 million, of which $42 million pertains to 2001. Changes in power costs as
a result of fluctuating energy prices will not be reflected in rates during the
rate freeze period as discussed above.

     TRANSMISSION ASSETS: In 1999, the FERC issued Order No. 2000, which
describes the characteristics the FERC would find acceptable in a model RTO. In
this order, the FERC declined to mandate that utilities join RTOs, but did order
utilities to make filings in October 2000 and January 2001 declaring their
intentions with respect to RTO membership.

     In 1999, Consumers and four other electric utility companies joined
together to form a coalition known as the Alliance Companies for the purpose of
creating a FERC approved RTO. As the FERC has not made a final disposition of
the Alliance RTO, Consumers is uncertain about the outcome of the Alliance
matter before the FERC and its continued participation in the Alliance RTO.

     In January 2001, the FERC granted Consumers' application to transfer
ownership and control of its transmission facilities to a wholly owned
subsidiary, Michigan Transco. The transfer of control to Michigan Transco is
expected to occur later in the year 2001. This represents the first step in
Consumers' plan to either divest its transmission business to a third party or
to transfer control of or to sell it to an RTO. In either event, Consumers'
current plan is to remain in the business of generating and distributing
electric power to retail customers. In addition, in response to an application
that Consumers filed with the MPSC, the MPSC issued an order that stated in part
that, if Consumers sells its transmission facilities in the manner described in
its application, it would be in compliance with applicable requirements of the
Customer Choice Act.

     ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in Consumers' electric rates
that approximated $189 million annually. As a result of the rate freeze imposed
by the Customer Choice Act, the MPSC issued an order in June 2000 dismissing the
ABATE complaint. In July 2000, ABATE filed a rehearing petition with the MPSC.
Consumers cannot predict the outcome of the rehearing process.

     Before 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,
such as, the actual cost of fuel, interchange power and purchased power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process through December 31, 2001. Under the suspension, the MPSC 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. Consumers will bear the risk of increased
costs, including power purchase costs, until that date.

                                      CE-29
<PAGE>   137
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OTHER ELECTRIC UNCERTAINTIES

     THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and
operates the MCV Facility, contracted to sell electricity to Consumers for a
35-year period beginning in 1990 and to supply electricity and steam to Dow.
Consumers, through two wholly owned subsidiaries, holds the following assets
related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49
percent general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds, through FMLP, a 35 percent lessor interest in the MCV Facility.

Summarized Statements of Income for CMS Midland and CMS Holdings

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                                                --------------------------
                                                                2000       1999       1998
                                                                ----       ----       ----
                                                                       IN MILLIONS
<S>                                                             <C>        <C>        <C>
Pretax operating income.....................................    $56        $49        $49
Income taxes and other......................................     18         15         15
                                                                ---        ---        ---
Net income..................................................    $38        $34        $34
                                                                ===        ===        ===
</TABLE>

     Power Purchases from the MCV Partnership -- Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, 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. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.

     Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC cost recovery
orders. At December 31, 2000 and December 31, 1999, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $44 million and $78 million, respectively. In March 1999, Consumers
and the MCV Partnership reached an agreement effective January 1, 1999 that
capped availability payments to the MCV Partnership at 98.5 percent. If the MCV
Facility generates electricity 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:

<TABLE>
<CAPTION>
                                                                2001    2002    2003    2004    2005
                                                                ----    ----    ----    ----    ----
                                                                            IN MILLIONS
<S>                                                             <C>     <C>     <C>     <C>     <C>
Estimated cash underrecoveries at 98.5%, net of tax.........    $39     $38     $37     $36     $35
</TABLE>

     Consumers continually evaluates the adequacy of the PPA liability. These
evaluations consider management's assessment of operating levels at the MCV
Facility through 2007, along with certain other factors including MCV related
costs that are included in Consumers' frozen retail rates. Should future results
differ from management's assessments, Consumers may have to make additional
charges for a given year of up to $33 million, after tax. Management believes
that the PPA liability is adequate at this time. For further discussion on the
impact of the frozen PSCR, see "Electric Rate Matters" in this Note.

     NUCLEAR MATTERS: In March 2000, Palisades received its annual performance
review in which the NRC stated that no significant performance issues existed
during the assessment period in the reactor safety, radiation safety, and
safeguards strategic performance areas. The NRC stated that Palisades continues
to operate in a safe
                                      CE-30
<PAGE>   138
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

manner. Further, it stated that over the next few years the NRC plans to conduct
only routine inspections at Palisades. In April 2000, the NRC implemented the
revised reactor oversight process industry-wide, including for Palisades. As
part of that process, in April 2000, Palisades submitted required NRC
performance data that indicated that Consumers was within the limits of
acceptable performance for which no NRC response is required.

     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, commonly known as
"dry casks", for temporary on-site storage. As of December 31, 2000, Consumers
had loaded 18 dry storage casks with spent nuclear fuel at Palisades. Palisades
will need to load additional casks by 2004 in order to continue operation.
Palisades currently has three additional empty storage-only casks on-site, with
storage pad capacity for up to seven additional loaded casks. Consumers
anticipates, however, that licensed transportable casks will be available prior
to 2004.

     Consumers maintains insurance against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
facilities. Consumers also maintains coverage for replacement power costs during
prolonged accidental outages at Palisades. Insurance would not cover such costs
during the first 12 weeks of any outage, but would cover most of such costs
during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. If certain covered losses occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of $12.8 million in any one year to NEIL; $88 million per
occurrence under the nuclear liability secondary financial protection program,
limited to $10 million per occurrence in any year; and $6 million if nuclear
workers claim bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.

     In February 2000, Consumers submitted an analysis to the NRC that shows
that the NRC's screening criteria for reactor vessel embrittlement at Palisades
will not be reached until 2014. On December 14, 2000, the NRC issued an
amendment revising the operating license for Palisades extending the expiration
date to March 2011, with no restrictions related to reactor vessel
embrittlement.

     In November 2000, Consumers signed an agreement to acquire an interest in
NMC. In connection with this agreement, Consumers requested approval from the
NRC for an amendment to Palisades' operating license designating NMC as the
plant's operator. Consumers will retain ownership of Palisades, its 789 MW
output, the spent fuel on site, and ultimate responsibility for the safe
operation, maintenance and decommissioning of the plant. Under this agreement,
salaried Palisades' employees will become NMC employees by mid-year 2001. Union
employees will work under the supervision of NMC pursuant to their existing
labor contract as Consumers employees. Consumers will benefit by consolidating
expertise and controlling costs and resources among all of the nuclear plants
being operated on behalf of the five NMC member companies. With Consumers as a
partner, NMC will have responsibility for operating eight units with 4,500 MW of
generating capacity in Wisconsin, Minnesota, Iowa and Michigan. The ultimate
financial impact is uncertain.

     CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments and environmental costs under the Clean Air Act,
of $555 million for 2001, $555 million for 2002, and $355 million for 2003. For
further information, see the Capital Expenditures Outlook section in the MD&A.

     COMMITMENTS FOR COAL SUPPLIES: Consumers has entered into coal supply
contracts with various suppliers for its coal-fired generating stations. Under
the terms of these agreements, Consumers is obligated to take physical delivery
of the coal and make payment based upon the contract terms. Consumers' current
contracts have expiration dates that range from 2001 to 2004. Consumers enters
into long-term contracts for approximately 60 to 85 percent of its annual coal
requirements. In 2000, coal purchases totaled $239 million of which $195 million
(81 percent of the tonnage requirement) was under long-term contract. Consumers
supplements its long-term contracts with spot-market purchases.

                                      CE-31
<PAGE>   139
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     DERIVATIVE ACTIVITIES: Consumers' electric business uses purchased electric
call option contracts to meet its regulatory obligation to serve, which requires
physical supply of energy to customers, and to manage energy cost and to ensure
a reliable source of capacity during periods of peak demand. While management
intends to take delivery of the commodity, if Consumers' daily capacity exceeds
its needs, in rare instances, the options, if marketable, are sold. Consumers
believes that these contracts currently qualify for the normal purchase and
sales exception of SFAS No. 133; therefore, Consumers will not record the fair
value of these contracts on the balance sheet. At January 1, 2001, Consumers had
a deferred asset of $86 million associated with premiums for these contracts. As
of January 1, 2001, these contracts had a fair value of $123 million, and expire
between 2001 and 2005.

     Consumers' electric business also uses purchased gas call option and gas
swap contracts to hedge against price risk due to the fluctuations in the market
price of gas used as fuel for generation of electricity. These contracts are
financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases. These contracts are designated as cash flow
hedges, and therefore, Consumers will record any change in the fair value of
these contracts in other comprehensive income until the forecasted transaction
occurs. Consumers believes that these contracts will be highly effective in
achieving offsetting cash flows of future gas purchases. Consumers will record
any ineffectiveness, as required by SFAS No. 133, in earnings immediately as
part of power costs. At January 1, 2001, Consumers had a derivative asset with a
fair value of $3 million, which includes $1 million of premiums paid for these
contracts. These contracts expire in 2001.

GAS 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
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers 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. Using this model,
Consumers estimates the costs to be between $66 million and $118 million. These
estimates are based on undiscounted 1999 costs. As of December 31, 2000,
Consumers has an accrued liability of $56 million, (net of expenditures incurred
to date), and a regulatory asset of $63 million. Any significant change in
assumptions, such as remediation techniques, nature and extent of contamination,
and legal and regulatory requirements, could affect the estimate of remedial
action costs for the sites. Consumers defers and amortizes, over a period of ten
years, environmental clean-up costs above the amount currently being recovered
in rates. Rate recognition of amortization expense cannot begin until after a
prudence review in a future general gas rate case. The MPSC allows Consumers to
recover $1 million annually. Consumers has initiated lawsuits against certain
insurance companies regarding coverage for some or all of the costs that it may
incur for these sites.

GAS RATE MATTERS

     GAS RESTRUCTURING: On April 1, 1998, Consumers implemented an experimental
gas customer choice pilot program. The pilot program ends March 31, 2001. The
program allows up to 300,000 residential, commercial and industrial retail gas
sales customers to choose an alternative gas commodity supplier in direct
competition with Consumers. As of December 31, 2000, more than 150,000 customers
chose alternative gas suppliers, representing approximately 38 bcf of gas
requirements. Customers who choose to remain sales customers of Consumers will
have fixed gas commodity rates through the end of the program. This three-year
program: 1) freezes gas distribution rates through March 31, 2001, establishing
a gas commodity cost at a fixed rate of $2.84 per mcf; 2) establishes an
earnings sharing mechanism with customers if Consumers' earnings exceed certain
pre-determined levels; and 3) establishes a gas transportation code of conduct
that addresses the relationship between
                                      CE-32
<PAGE>   140
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consumers and marketers, including its affiliated marketers. In October 2000,
the MPSC approved Consumers' application for a permanent gas customer choice
program commencing April 1, 2001. Under the permanent gas customer choice
program, Consumers will no longer be subject to a frozen gas commodity cost and
delivery charge. Consumers will then return 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. Under the permanent gas
customer choice program, up to 600,000 of Consumers' natural gas customers will
be eligible to participate in the program beginning April 1, 2001, up to 900,000
gas customers by April 1, 2002, and all of Consumers' gas customers beginning
April 1, 2003. Consumers would continue to transport and distribute gas to these
customers.

     During the last year of the experimental pilot program, significant
increases in gas costs had exposed Consumers to gas commodity losses. In the
second quarter 2000, Consumers recorded a regulatory liability of $45 million to
reflect estimated losses due to increases in natural gas commodity costs. In
October 2000, the MPSC approved Consumers' accounting application to revise its
inventory accounting and reclassify low-cost, base gas in Consumers' gas storage
reservoirs. The MPSC allowed Consumers to immediately begin to include the cost
of its recoverable base gas with higher cost purchased gas. Consumers expects
the gas accounting order to eliminate the need for Consumers to recognize any
further losses related to gas commodity cost underrecoveries.

OTHER GAS UNCERTAINTIES

     CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures,
including new lease commitments, of $145 million for 2001, $145 million for
2002, and $135 million for 2003. For further information, see the Capital
Expenditures Outlook section in the MD&A.

     COMMITMENTS FOR GAS SUPPLIES: Consumers contracts to purchase gas and
transportation from various suppliers for its natural gas business. These
contracts have expiration dates that range from 2001 to 2004. Consumers' 2000
gas requirements totaled 210 bcf at a cost of $608 million, 40 percent of which
was under long-term contracts for one year or more. As of the end of 2000,
Consumers had 27 percent of its 2001 gas requirements under such long-term
contracts, and will supplement them with additional long-term and short-term
contracts and spot-market purchases.

     DERIVATIVE ACTIVITIES: Consumers' gas business uses a combination of
written put and purchased call options to manage the cost of gas supplied to its
customers. These options do not qualify for hedge accounting under SFAS No. 133;
therefore, Consumers will record any change in the fair value of these contracts
directly in earnings as part of the cost of gas. Consumers is recognizing the
net premium to the cost of gas through March 2001 when the contracts expire. As
of January 1, 2001, these contracts had a net fair value of $25 million.

OTHER UNCERTAINTIES

     In addition to the matters disclosed in this note, Consumers and certain of
its subsidiaries 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.

     Consumers 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 Consumers' financial position, liquidity, or results
of operations.

                                      CE-33
<PAGE>   141
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3: SHORT-TERM FINANCINGS AND CAPITALIZATION

     AUTHORIZATION: At February 1, 2001, Consumers had FERC authorization to
issue or guarantee through June 2002, up to $900 million of short-term
securities outstanding at any one time. Consumers also had remaining FERC
authorization to issue through June 2002 up to $25 million and $800 million of
long-term securities for refinancing or refunding purposes and for general
corporate purposes, respectively. Additionally, Consumers had remaining FERC
authorization to issue $275 million of first mortgage bonds to be issued solely
as security for the long-term securities mentioned above.

     SHORT-TERM FINANCINGS: Consumers has an unsecured $300 million credit
facility and unsecured lines of credit aggregating $190 million. These
facilities are available to finance seasonal working capital requirements and to
pay for capital expenditures between long-term financings. At December 31, 2000,
a total of $403 million was outstanding at a weighted average interest rate of
7.4 percent, compared with $214 million outstanding at December 31, 1999, at a
weighted average interest rate of 6.6 percent.

     Consumers currently has in place a $325 million trade receivables sale
program. At December 31, 2000 and 1999, receivables sold under the program
totaled $325 million for each year. Accounts receivable and accrued revenue in
the Consolidated Balance Sheets have been reduced to reflect receivables sold.

     LONG-TERM FINANCINGS: Consumers issued floating rate senior notes of $225
million in November 2000, maturing in November 15, 2001 and 2002. For detailed
information about long-term financing, see the Consolidated Statements of
Long-Term Debt.

     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.

     MANDATORILY REDEEMABLE PREFERRED SECURITIES: Consumers has wholly-owned
statutory business trusts that are consolidated within its financial statements.
Consumers created these trusts for the sole purpose of issuing Trust Preferred
Securities. The primary asset of the trusts is a note or debenture of Consumers.
The terms of the Trust Preferred Security parallel the terms of the related
Consumers' note or debenture. The term, 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, Consumers' 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 Consumers of the trust's obligations under the Trust Preferred
Security. In addition to the similar provisions previously discussed, specific
terms of the securities follow:

<TABLE>
<CAPTION>
                                                                    AMOUNT
              CONSUMERS ENERGY COMPANY                           OUTSTANDING
                TRUST AND SECURITIES                             ------------                 EARLIEST
                    DECEMBER 31                         RATE     2000    1999    MATURITY    REDEMPTION
              ------------------------                  ----     ----    ----    --------    ----------
                                                                   IN MILLIONS
<S>                                                     <C>      <C>     <C>     <C>         <C>
Consumers Power Company Financing I, Trust
  Originated Preferred Securities...................    8.36%    $100    $100      2015         2000
Consumers Energy Company Financing II, Trust
  Originated Preferred Securities...................    8.20%    $120    $120      2027         2002
Consumers Energy Company Financing III, Trust
  Originated Preferred Securities...................    9.25%    $175    $175      2029         2004
</TABLE>

     OTHER: 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 5.1 percent at
December 31, 2000.

                                      CE-34
<PAGE>   142
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Under the provisions of its Articles of Incorporation, Consumers had $373
million of unrestricted retained earnings available to pay common dividends at
December 31, 2000. In January 2001, Consumers declared a $66 million common
dividend that was paid in February 2001.

     DERIVATIVE ACTIVITIES: 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 a cash flow hedges. As such, Consumers
will record any change in the fair value of these contracts in other
comprehensive income until the forecasted transaction occurs. These swaps fix
the interest rate on $300 million of variable rate debt, and expire at varying
times from June through December 2001. As of January 1, 2001, these interest
rate swaps had a negative fair value of $2 million.

4: INCOME TAXES

     Consumers and its subsidiaries file a consolidated federal income tax
return with CMS Energy. Income taxes are generally allocated based on each
company's separate taxable income. Consumers practices full deferred tax
accounting for temporary differences as authorized by the MPSC.

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

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                --------------------------
                                                                2000       1999       1998
                                                                ----       ----       ----
                                                                       IN MILLIONS
<S>                                                             <C>        <C>        <C>
Current federal income taxes................................    $149       $170       $138
Deferred income taxes, includes $23 for 1998 change in
  accounting (Note 1).......................................       7         11         36
Deferred ITC, net...........................................      (8)        (9)       (16)
                                                                ----       ----       ----
                                                                $148       $172       $158
                                                                ====       ====       ====
</TABLE>

                                      CE-35
<PAGE>   143
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                                ------------------
                                                                 2000       1999
                                                                 ----       ----
                                                                   IN MILLIONS
<S>                                                             <C>        <C>
Property....................................................    $  (522)   $  (587)
Securitization costs (Note 2)(a)............................       (185)        --
Unconsolidated investments..................................       (226)      (230)
Postretirement benefits (Note 7)............................        (88)      (128)
Abandoned Midland project...................................         (8)       (17)
Employee benefit obligations, includes postretirement
  benefits of $122 and $134 (Note 7)........................        148        171
Power purchases (Note 2)....................................         24         42
AMT carryforward............................................         53         48
FAS 109 regulatory liability................................         86         22
Other.......................................................          4        (13)
                                                                -------    -------
                                                                $  (714)   $  (692)
                                                                =======    =======
Gross deferred tax liabilities..............................    $(1,365)   $(1,388)
Gross deferred tax assets...................................        651        696
                                                                -------    -------
                                                                $  (714)   $  (692)
                                                                =======    =======
</TABLE>

-------------------------
(a)  During 2000, Consumers Energy established a regulatory asset for
     securitization costs of $709 million, before tax, which had previously been
     recorded in other regulatory asset accounts. As a result, deferred taxes
     totaling $185 million were transferred from the following components:

<TABLE>
<S>                                                             <C>
Property....................................................    $ (81)
Postretirement benefits.....................................      (29)
FAS 109 regulatory liability................................      (70)
Other.......................................................       (5)
                                                                -----
                                                                $(185)
                                                                =====
</TABLE>

                                      CE-36
<PAGE>   144
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31
                                                                  ------------------------
                                                                  2000      1999      1998
                                                                  ----      ----      ----
                                                                        IN MILLIONS
<S>                                                               <C>       <C>       <C>
Net income..................................................      $304      $340      $349
Income tax expense, includes $23 for 1998 change in
  accounting (Note 1).......................................       148       172       158
Preferred securities distributions..........................       (34)      (21)      (18)
                                                                  ----      ----      ----
Pretax income...............................................       418       491       489
Statutory federal income tax rate...........................      x 35%     x 35%     x 35%
                                                                  ----      ----      ----
Expected income tax expense.................................       146       172       171
Increase (decrease) in taxes from Capitalized overheads
  previously flowed through.................................         5         5         5
  Differences in book and tax depreciation not previously
     deferred...............................................        11        10         3
  ITC amortization/adjustments..............................        (9)       (9)      (16)
  Affiliated companies' dividends...........................        (3)       (4)       (5)
  Other, net................................................        (2)       (2)       --
                                                                  ----      ----      ----
Actual income tax expense...................................      $148      $172      $158
                                                                  ====      ====      ====
Effective tax rate..........................................      35.4%     35.0%     32.3%
</TABLE>

5: FINANCIAL INSTRUMENTS

     The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
Consumers estimates the fair values of long-term investments based on quoted
market prices or, in the absence of specific market prices, on quoted market
prices of similar investments or other valuation techniques. The carrying
amounts of all long-term investments, except as shown below, approximate fair
value.

<TABLE>
<CAPTION>
                                                                         DECEMBER 31
                                                  ----------------------------------------------------------
                                                             2000                           1999
                                                  ---------------------------    ---------------------------
                                                          FAIR     UNREALIZED            FAIR     UNREALIZED
        AVAILABLE-FOR-SALE SECURITIES             COST    VALUE       GAIN       COST    VALUE       GAIN
        -----------------------------             ----    -----    ----------    ----    -----    ----------
                                                                         IN MILLIONS
<S>                                               <C>     <C>      <C>           <C>     <C>      <C>
Common stock of CMS Energy....................    $ 40    $ 86        $ 46       $ 42    $ 90        $48
SERP..........................................      21      26           5         20      28          8
Nuclear decommissioning investments(a)........     480     611         131        448     602        154
</TABLE>

-------------------------
(a)  Consumers classifies its unrealized gains and losses on nuclear
     decommissioning investments in accumulated depreciation.

     The carrying amount of long-term debt was $2.1 billion at December 31, 2000
and $2.0 billion at December 31, 1999, and the fair values were $2.0 billion and
$1.9 billion, respectively. For held-to-maturity securities and related-party
financial instruments, see Note 1.

6: EXECUTIVE INCENTIVE COMPENSATION

     Consumers participates in CMS Energy's Performance Incentive Stock Plan.
Under the plan, restricted shares of Common Stock of CMS Energy, stock options
and stock appreciation rights related to Common Stock may be granted to key
employees based on their contributions to the successful management of CMS
Energy and its subsidiaries. Awards under the plan may consist of any class of
Common Stock of CMS Energy. Certain plan awards are subject to performance-based
business criteria. The plan reserves for award not more than five percent,

                                      CE-37
<PAGE>   145
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

as amended January 1, 1999, of CMS Energy's Common Stock outstanding on January
1 each year, less (1) the number of shares of restricted Common Stock awarded
and (2) 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% of the aggregate number
of shares reserved for award. Any forfeiture of shares previously awarded will
increase the number of shares available to be awarded under the plan. As of
December 31, 2000, under the plan, awards of up to 2,274,490 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. The restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. If performance objectives are exceeded,
the plan provides for additional awards. Restricted shares vest fully if control
of CMS Energy changes, as defined by the plan. At December 31, 2000, 189,327 of
the 259,377 shares of restricted CMS Energy Common Stock outstanding are subject
to performance objectives.

     The plan grants stock options and stock appreciation rights relating to
Common Stock with an exercise price equal to the closing market price on each
grant date. Some options may be exercised upon grant; others vest over five
years at the rate of 25 percent per year, beginning at the end of the first
year. All options expire up to ten years and one month from date of grant. In
1999, all outstanding Class G Common Stock and options were converted to CMS
Energy Common Stock and options at an exchange rate of .7041 per Class G Common
Stock or option held. The original vesting or exercise period was retained for
all converted shares or options. The status

                                      CE-38
<PAGE>   146
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of the restricted stock and options granted to Consumers' key employees under
the Performance Incentive Stock Plan follows.

<TABLE>
<CAPTION>
                                                              RESTRICTED
                                                                STOCK                  OPTIONS
                                                              ----------    -----------------------------
                                                                NUMBER       NUMBER      WEIGHTED AVERAGE
                                                              OF SHARES     OF SHARES     EXERCISE PRICE
                                                              ---------     ---------    ----------------
<S>                                                           <C>           <C>          <C>
CMS ENERGY COMMON STOCK
Outstanding at January 1, 1998............................     310,351       537,780          $28.84
  Granted.................................................      92,319       116,164          $43.38
  Exercised or Issued.....................................     (74,319)     (123,288)         $28.05
                                                               -------      --------          ------
Outstanding at December 31, 1998..........................     328,351       530,656          $32.21
  Granted.................................................      71,025       250,020          $38.56
  Exercised or Issued.....................................     (80,489)      (68,609)         $29.76
  Forfeited...............................................     (41,890)           --
  Expired.................................................          --       (37,900)         $39.21
  Class G Common Stock Converted..........................       6,060        19,503          $32.64
                                                               -------      --------          ------
Outstanding at December 31, 1999..........................     283,057       693,670          $34.37
  Granted.................................................      81,030       221,900          $17.00
  Exercised or Issued.....................................     (48,979)      (43,368)         $17.48
  Forfeited...............................................     (55,731)           --
  Expired.................................................          --       (30,083)         $31.87
                                                               -------      --------          ------
Outstanding at December 31, 2000..........................     259,377       842,119          $30.75
                                                               =======      ========          ======
</TABLE>

<TABLE>
<CAPTION>
                                                              RESTRICTED
                                                                STOCK                  OPTIONS
                                                              ----------    -----------------------------
                                                                NUMBER       NUMBER      WEIGHTED AVERAGE
                                                              OF SHARES     OF SHARES     EXERCISE PRICE
                                                              ---------     ---------    ----------------
<S>                                                           <C>           <C>          <C>
CLASS G COMMON STOCK
Outstanding at January 1, 1998............................      19,791        28,000          $18.89
  Granted.................................................      14,720        45,900          $24.50
  Exercised or Issued.....................................      (4,021)           --
                                                               -------      --------          ------
Outstanding at December 31, 1998..........................      30,490        73,900          $22.37
  Granted.................................................       3,427            --
  Exercised or Issued.....................................      (7,360)      (19,000)         $18.45
  Forfeited...............................................     (17,949)           --
  Expired.................................................          --       (27,200)         $24.50
  Converted to CMS Energy Common Stock....................      (8,608)      (27,700)         $22.98
                                                               -------      --------          ------
Outstanding at December 31, 1999..........................          --            --              --
Outstanding at December 31, 2000..........................          --            --              --
                                                               =======      ========          ======
</TABLE>

                                      CE-39
<PAGE>   147
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following table summarizes information about CMS Energy Common Stock
options outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                                             NUMBER          WEIGHTED          WEIGHTED
                       RANGE OF                             OF SHARES        AVERAGE           AVERAGE
                    EXERCISE PRICES                        OUTSTANDING    REMAINING LIFE    EXERCISE PRICE
                    ---------------                        -----------    --------------    --------------
<S>                                                        <C>            <C>               <C>
CMS Energy Common Stock:
$17.00 -- $24.75.......................................      295,365        6.89 years          $18.89
$25.39 -- $39.06.......................................      438,590        7.21 years          $35.62
$43.38 -- $43.38.......................................      108,164        7.57 years          $43.38
$17.00 -- $43.38.......................................      842,119        7.14 years          $30.75
</TABLE>

     The weighted average fair value of options granted for CMS Energy Common
Stock was $1.91 in 2000, $6.08 in 1999, and $6.43 in 1998. The weighted average
fair value of options granted for Class G Common Stock was $3.03 in 1998. Fair
value is estimated using the Black-Scholes model, a mathematical formula used to
value options traded on securities exchanges, with the following assumptions:

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                -------------------------
                                                                2000     1999      1998
                                                                ----     ----      ----
<S>                                                             <C>      <C>      <C>
CMS ENERGY COMMON STOCK OPTIONS
Risk-free interest rate.....................................     6.56%    5.66%      5.45%
Expected stock price volatility.............................    26.53%   16.96%     15.93%
Expected dividend rate......................................    $.365    $.365       $.33
Expected option life (years)................................      4.4      4.7        4.0
CLASS G COMMON STOCK OPTIONS
Risk-free interest rate.....................................                         5.44%
Expected stock price volatility.............................                        20.02%
Expected dividend rate......................................                        $.325
Expected option life........................................                      5 years
</TABLE>

     Consumers applies APB Opinion No. 25 and related interpretations in
accounting for the Performance Incentive Stock Plan. Since stock options are
granted at market price, no compensation cost has been recognized for stock
options granted under the plan. If compensation cost for stock options had been
determined in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, Consumers' net income would have decreased by less than $1 million
for 2000, 1999 and 1998. The compensation cost charged against income for
restricted stock was $1 million in 2000, $3 million in 1999, and $4 million in
1998.

7: RETIREMENT BENEFITS

     Consumers provides 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 benefits to substantially all
its employees under a trusteed, non-contributory, defined benefit Pension Plan,
and a defined contribution 401(k) plan.

                                      CE-40
<PAGE>   148
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Amounts presented below for the Pension Plan include amounts for employees
of CMS Energy and non-utility affiliates, which were not distinguishable from
the plan's total assets.

<TABLE>
<CAPTION>
                                                             WEIGHTED-AVERAGE ASSUMPTIONS
                                                  --------------------------------------------------
                                                      PENSION & SERP                  OPEB
                                                  -----------------------    -----------------------
                                                               YEARS ENDED DECEMBER 31
                                                  --------------------------------------------------
                                                  2000     1999     1998     2000     1999     1998
                                                  ----     ----     ----     ----     ----     ----
<S>                                               <C>      <C>      <C>      <C>      <C>      <C>
Discount rate.................................    7.75%    7.75%    7.00%    7.75%    7.75%    7.00%
Expected long-term rate of return on plan
  assets......................................    9.75%    9.25%    9.25%    7.00%    7.00%    7.00%
Rate of compensation increase:
  Pension -- to age 45........................    5.25%    5.25%    5.25%
          -- age 45 to assumed retirement.....    3.75%    3.75%    3.75%
  SERP........................................     5.5%    5.50%    5.50%
</TABLE>

     Retiree health care costs at December 31, 2000 are based on the assumption
that costs would decrease gradually from the 2000 trend rate of 7.0 percent to
5.5 percent in 2007 and thereafter.

     CMS Energy's Net Pension Plan, Consumers' SERP and OPEB benefit costs
consist of:

<TABLE>
<CAPTION>
                                                              PENSION & SERP               OPEB
                                                           --------------------    --------------------
                                                                     YEARS ENDED DECEMBER 31
                                                           --------------------------------------------
                                                           2000    1999    1998    2000    1999    1998
                                                           ----    ----    ----    ----    ----    ----
                                                                           IN MILLIONS
<S>                                                        <C>     <C>     <C>     <C>     <C>     <C>
Service cost...........................................    $ 31    $ 32    $ 26    $ 11    $ 12    $ 10
Interest expense.......................................      79      69      61      52      44      42
Expected return on plan assets.........................     (92)    (84)    (73)    (34)    (24)    (17)
Amortization of unrecognized transition (asset)........      (5)     (5)     (5)     --      --      --
Ad Hoc Retiree Increase................................      --       3      --      --      --      --
Amortization of:
  Net (gain) or loss...................................      --      --      --      (1)     (1)     (1)
  Prior service cost...................................       4       4       4      --      --      --
                                                           ----    ----    ----    ----    ----    ----
Net periodic pension and postretirement benefit cost...    $ 17    $ 19    $ 13    $ 28    $ 31    $ 34
                                                           ====    ====    ====    ====    ====    ====
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                                ONE PERCENTAGE    ONE PERCENTAGE
                                                                POINT INCREASE    POINT DECREASE
                                                                --------------    --------------
                                                                          IN MILLIONS
<S>                                                             <C>               <C>
Effect on total service and interest cost component.........         $ 11              $ (9)
Effect on postretirement benefit obligation.................         $113              $(94)
</TABLE>

                                      CE-41
<PAGE>   149
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                PENSION PLAN               SERP                  OPEB
                                             ------------------       --------------       ----------------
                                              2000        1999        2000      1999       2000       1999
                                              ----        ----        ----      ----       ----       ----
                                                                      IN MILLIONS
<S>                                          <C>         <C>          <C>       <C>        <C>        <C>
Benefit obligation January 1.............    $  971      $  874       $ 19      $ 21       $ 685      $ 643
Service cost.............................        30          31          1         1          11         12
Interest cost............................        78          68          1         1          52         44
Plan amendment...........................        54           4         --        --          --         --
Business combinations....................        --          70         --        --          --         --
Actuarial loss (gain)....................        25           3          1        (3)         40         17
Benefits paid............................       (77)        (79)        (1)       (1)        (34)       (31)
                                             ------      ------       ----      ----       -----      -----
Benefit obligation December 31...........    $1,081      $  971       $ 21      $ 19       $ 754      $ 685
                                             ======      ======       ====      ====       =====      =====
Plan assets at fair value at January 1...    $1,094      $  970       $ --      $ --       $ 418      $ 321
Actual return on plan assets.............       (23)        120         --        --         (16)        49
Company contribution.....................        --          --         --        --          48         48
Business combinations....................        --          83         --        --          --         --
Actual benefits paid.....................       (77)        (79)        --        --          --         --
                                             ------      ------       ----      ----       -----      -----
Plan assets at fair value at December
  31.....................................    $  994(a)   $1,094(a)    $ --      $ --       $ 450      $ 418
                                             ======      ======       ====      ====       =====      =====
Benefit obligation less than (in excess
  of) plan assets........................    $  (87)     $  123       $(21)     $(19)      $(304)     $(267)
Unrecognized net (gain) loss from
  experience different than assumed......       (71)       (212)         2         2          13        (79)
Unrecognized prior service cost..........        76          28          1         1          (1)        (1)
Unrecognized net transition (asset)
  obligation.............................        (5)        (11)        --        --          --         --
Panhandle Adjustment.....................        (9)         --         --        --          --         --
                                             ------      ------       ----      ----       -----      -----
Recorded liability.......................    $  (96)     $  (72)      $(18)     $(16)      $(292)     $(347)
                                             ======      ======       ====      ====       =====      =====
</TABLE>

-------------------------
(a) Primarily stocks and bonds, including $166 million in 2000 and $108 million
    in 1999 of CMS Energy Common Stock.

     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, 2000 and 1999, trust assets were $26 million and $28 million,
respectively, and were classified as other non-current assets. The accumulated
benefit obligation for SERP was $15 million in 2000 and $13 million in 1999.

     Contributions to the 40l(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan were $18 million in 2000, $16 million
in 1999, and $15 million in 1998.

     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.

     Consumers adopted the required accounting for postretirement benefits
effective in 1992 and 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, 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.

                                      CE-42
<PAGE>   150
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8: LEASES

     Consumers leases various assets, including vehicles, railcars, aircraft,
construction equipment, computer equipment, nuclear fuel and buildings. In
November 1999, Consumers' lessor granted Consumers an extension to the nuclear
fuel capital leasing arrangement. The lease expires in November 2001, but
provides for additional one-year extensions upon mutual agreement by the
parties. Upon termination of the lease, the lessor would be entitled to a cash
payment equal to its remaining investment, which was $44 million as of December
31, 2000. Consumers generally is responsible for payment of taxes, maintenance,
operating costs, and insurance.

     Minimum rental commitments under Consumers' non-cancelable leases at
December 31, 2000, were:

<TABLE>
<CAPTION>
                                                                CAPITAL LEASES    OPERATING LEASES
                                                                --------------    ----------------
                                                                           IN MILLIONS
<S>                                                             <C>               <C>
2001........................................................         $ 65               $ 14
2002........................................................           19                 12
2003........................................................           16                 11
2004........................................................           13                  8
2005........................................................           12                  6
2006 and thereafter.........................................           11                 47
                                                                     ----               ----
Total minimum lease payments................................          136               $ 98
                                                                                        ====
Less imputed interest.......................................           31
                                                                     ----
Present value of net minimum lease payments.................          105
Less current portion........................................           56
                                                                     ----
Non-current portion.........................................         $ 49
                                                                     ====
</TABLE>

     Consumers recovers lease charges from customers and accordingly charges
payments for its capital and operating leases to operating expense. Operating
lease charges, including charges to clearing and other accounts for the years
ended December 31, 2000, 1999 and 1998, were $16 million, $14 million and $11
million, respectively.

     Capital lease expenses for the years ended December 31, 2000, 1999 and 1998
were $41 million for each period. Included in these amounts, for the years ended
2000, 1999 and 1998, are nuclear fuel lease expenses of $22 million, $23 million
and $23 million, respectively.

9: 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:

<TABLE>
<CAPTION>
                                                                                     ACCUMULATED
                                                                NET INVESTMENT       DEPRECIATION
                                                                --------------      --------------
                                                                           DECEMBER 31
                                                                ----------------------------------
                                                                2000      1999      2000      1999
                                                                ----      ----      ----      ----
                                                                           IN MILLIONS
<S>                                                             <C>       <C>       <C>       <C>
Campbell Unit 3 -- 93.3 percent.............................    $291      $284      $299      $295
Ludington -- 51 percent.....................................     100       104       105       100
Transmission lines -- various...............................      31        32        17        16
</TABLE>

                                      CE-43
<PAGE>   151
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10: REPORTABLE SEGMENTS

     Consumers has two reportable segments: electric and gas. The electric
segment consists of regulated activities associated with the generation,
transmission and distribution of electricity. The gas segment consists of
regulated activities associated with the transportation, storage and
distribution of natural gas. Consumers' reportable segments are domestic
strategic business units organized and managed by the nature of the product and
service each provides. The accounting policies of the segments are the same as
those Consumers describes in the summary of significant accounting policies.
Consumers' management evaluates performance based on pretax operating income.
The Consolidated Statements of Income show operating revenue and pretax
operating income by reportable segment. These amounts include earnings from
investments accounted for by the equity method of $57 million, $50 million and
$50 million for 2000, 1999 and 1998, respectively. Consumers had investments
accounted for by the equity method of $535 million, $487 million and $449
million for 2000, 1999 and 1998, respectively. In 1998, Consumers implemented a
change in the method of accounting for property taxes. The cumulative effect of
this one-time change in accounting increased electric and gas earnings, net of
tax, by $31 million and $12 million, respectively. Consumers accounts for
intersegment sales and transfers at current market prices and eliminates them in
consolidated pretax operating income by segment. Other segment information
follows:

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                --------------------------
                                                                 2000      1999      1998
                                                                 ----      ----      ----
                                                                       IN MILLIONS
<S>                                                             <C>       <C>       <C>
Depreciation, depletion and amortization
  Electric..................................................    $  311    $  315    $  304
  Gas.......................................................       113       107        97
  Other.....................................................         2         2         2
                                                                ------    ------    ------
Total Consolidated..........................................    $  426    $  424    $  403
                                                                ======    ======    ======
Interest Charges
  Electric..................................................    $  145    $  133    $  129
  Gas.......................................................        48        48        44
  Other.....................................................        27        19        19
                                                                ------    ------    ------
  Subtotal..................................................       220       200       192
  Eliminations..............................................       (37)      (19)      (17)
                                                                ------    ------    ------
Total Consolidated..........................................    $  183    $  181    $  175
                                                                ======    ======    ======
Income Taxes
  Electric..................................................    $  115    $  126    $  110
  Gas.......................................................        24        41        35
  Other(a)..................................................         9         5        13
                                                                ------    ------    ------
Total Consolidated..........................................    $  148    $  172    $  158
                                                                ======    ======    ======
</TABLE>

                                      CE-44
<PAGE>   152
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                --------------------------
                                                                 2000      1999      1998
                                                                 ----      ----      ----
                                                                       IN MILLIONS
<S>                                                             <C>       <C>       <C>
Total assets
  Electric(b)...............................................    $5,231    $4,675    $4,640
  Gas(b)....................................................     1,780     1,731     1,726
  Other.....................................................       762       764       797
                                                                ------    ------    ------
Total Consolidated..........................................    $7,773    $7,170    $7,163
                                                                ======    ======    ======
Capital expenditures(c)
  Electric..................................................    $  430    $  385    $  331
  Gas.......................................................       120       120       114
                                                                ------    ------    ------
Total.......................................................    $  550    $  505    $  445
                                                                ======    ======    ======
</TABLE>

-------------------------
(a)  1998 amount includes the tax effect of the change in accounting method for
     property taxes.

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

(c)  Includes electric restructuring implementation plan, capital leases for
     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.

11: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER

     Under the PPA with the MCV Partnership discussed in Note 2, Consumers' 2000
obligation to purchase electric capacity from the MCV Partnership provided 15.3
percent of Consumers' owned and contracted electric generating capacity.
Summarized financial information of the MCV Partnership follows:

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31
                                                                ------------------------
                                                                2000      1999      1998
                                                                ----      ----      ----
                                                                      IN MILLIONS
<S>                                                             <C>       <C>       <C>
Operating revenue(a)........................................    $604      $617      $627
Operating expenses..........................................     392       401       405
                                                                ----      ----      ----
Operating income............................................     212       216       222
Other expense, net..........................................     122       136       142
                                                                ----      ----      ----
Net income..................................................    $ 90      $ 80      $ 80
                                                                ====      ====      ====
</TABLE>

                                      CE-45
<PAGE>   153
                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BALANCE SHEETS

<TABLE>
<CAPTION>
                             DECEMBER 31
                           ---------------
                            2000     1999
                            ----     ----
                             IN MILLIONS
<S>                        <C>      <C>
ASSETS
Current assets(b)........  $  429   $  397
Plant, net...............   1,671    1,732
Other assets.............     175      170
                           ------   ------
                           $2,275   $2,299
                           ======   ======
</TABLE>

<TABLE>
<CAPTION>
                             DECEMBER 31
                           ---------------
                            2000     1999
                            ----     ----
                             IN MILLIONS
<S>                        <C>      <C>
LIABILITIES AND EQUITY
  Current liabilities....  $  316   $  275
  Noncurrent
     liabilities(c)......   1,431    1,586
  Partners' equity(d)....     528      438
                           ------   ------
                           $2,275   $2,299
                           ======   ======
</TABLE>

-------------------------
(a)  Revenue from Consumers for 2000, 1999, and 1998 totaled $569 million, $586
     million and $584 million, respectively.

(b)  Receivables from Consumers totaled $43 and $49 million at December 31, 2000
     and 1999, respectively.

(c)  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,
     2000 and 1999, the MCV Partnership owed lease obligations of $1.24 billion
     and $1.36 billion, respectively, to the owner trust. CMS Holdings' share of
     the interest and principal portion for the 2000 lease payments was $52
     million and $67 million, respectively, and for the 1999 lease payments was
     $55 million and $23 million, respectively. As of December 31, 2000 the
     lease payments service $733 million and $854 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 2000
     and 1999, the owner-trust made debt payments (including interest) of $212
     million and $167 million, respectively. FMLP's earnings for 2000, 1999, and
     1998 were $27 million, $24 million, and $23 million, respectively.

(d)  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.

12: SUPPLEMENTAL CASH FLOW INFORMATION

     Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows are described below:

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                                -------------------------
                                                                2000       1999      1998
                                                                ----       ----      ----
                                                                       IN MILLIONS
<S>                                                             <C>        <C>       <C>
Accounts payable............................................    $  15      $36       $ 19
Sale of receivables, net....................................       --       19        (29)
Inventories(a)..............................................      (12)       5        (34)
Accounts receivable and Accrued revenue.....................     (171)      (7)        (5)
Other current assets and liabilities, net...................       51       (3)        (4)
Other non-current assets and liabilities, net...............      (97)      32          2
                                                                -----      ---       ----
                                                                $(214)     $82       $(51)
                                                                =====      ===       ====
</TABLE>

-------------------------
(a)  Reduced by $47 million reclassification of recoverable base gas, see Note
     2, Uncertainties, "Gas Restructuring."

                                      CE-46
<PAGE>   154

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Consumers Energy Company:

     We have audited the accompanying consolidated balance sheets and
consolidated statements of long-term debt and preferred stock of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy
Corporation) and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, common stockholder's equity and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company'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 financial position of Consumers Energy Company and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.

     As explained in Note 1 to the financial statements, effective January 1,
1998, Consumers Energy Company changed its method of accounting for property
taxes.

/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 2, 2001

                                      CE-47
<PAGE>   155

                            CONSUMERS ENERGY COMPANY
                        QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                            2000 (UNAUDITED)                                  1999 (UNAUDITED)
                               ------------------------------------------        ------------------------------------------
      QUARTERS ENDED           MARCH 31    JUNE 30    SEPT. 30    DEC. 31        MARCH 31    JUNE 30    SEPT. 30    DEC. 31
      --------------           --------    -------    --------    -------        --------    -------    --------    -------
                                                                       IN MILLIONS
<S>                            <C>         <C>        <C>         <C>       <C>  <C>         <C>        <C>         <C>
Operating revenue..........     $1,126      $808        $874      $1,127          $1,156      $850        $878       $990
Pretax operating income....     $  187      $ 92        $142      $  214          $  227      $149        $175       $124
Net income.................     $   94      $ 33        $ 72      $  105          $  119      $ 73        $ 93       $ 55
Preferred stock
  dividends................         --        --          --      $    2          $    5        --          --       $  1
Preferred securities
  distributions............     $    9      $  9        $  9      $    7          $    5      $  5        $  5       $  6
Net income available to
  common stockholder.......     $   85      $ 24        $ 63      $   96          $  109      $ 68        $ 88       $ 48
</TABLE>

                                      CE-48
<PAGE>   156

                  [CMS ENERGY-PANHANDLE EASTERN PIPELINE LOGO]

                           2000 FINANCIAL STATEMENTS

                                       PE-1
<PAGE>   157

                      PANHANDLE EASTERN PIPE LINE COMPANY

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

     Panhandle is primarily engaged in the interstate transportation and storage
of natural gas. Panhandle owns a LNG regasification plant, related tanker port
unloading facilities and LNG and gas storage facilities. The rates and
conditions of service of interstate natural gas transmission, storage and LNG
operations of Panhandle are subject to the rules and regulations of the FERC.

     This MD&A refers to, and in some sections specifically incorporates by
reference, Panhandle'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 Panhandle may make
contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Panhandle's intentions with the use of the words
"anticipates," "believes," "estimates," "expects," "intends," and "plans" and
variations of such words and similar expressions, is solely to identify forward-
looking statements that involve risk and uncertainty. These forward-looking
statements are subject to various factors that could cause Panhandle's actual
results to differ materially from the results anticipated in such statements.
Panhandle has no obligation to update or revise forward-looking statements
regardless of whether new information, future events or any other factor effects
the information contained in such statements. Panhandle 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 in various public filings it periodically makes with the SEC.
Panhandle designed this discussion of potential risks and uncertainties, which
is by no means comprehensive, to highlight important factors that may impact
Panhandle's outlook. This Annual Report also describes material contingencies in
the Notes to Consolidated Financial Statements and Panhandle encourages its
readers to review these Notes.

     On March 29, 1999, 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, were acquired from
subsidiaries of Duke Energy by CMS Panhandle Holding, which was an indirect
wholly owned subsidiary of CMS Energy. Immediately following the acquisition,
Trunkline LNG and Panhandle Storage became direct wholly owned subsidiaries of
Panhandle Eastern Pipe Line.

     Prior to the acquisition, Panhandle's interests in Northern Border Pipeline
Company, Panhandle Field Services Company, Panhandle Gathering Company, and
certain other assets, including the Houston corporate headquarters building,
were transferred to other subsidiaries of Duke Energy; certain intercompany
accounts and notes between Panhandle and Duke Energy subsidiaries were
eliminated; with respect to certain other liabilities, including tax,
environmental and legal matters, CMS Energy was indemnified for any resulting
losses. In addition, Duke Energy agreed to continue its environmental clean-up
program at certain properties and to defend and indemnify Panhandle against
certain future environmental litigation and claims with respect to certain
agreed-upon sites or matters.

     CMS Panhandle Holding privately placed $800 million of senior unsecured
notes and received a $1.1 billion initial capital contribution from CMS Energy
to fund the acquisition of Panhandle. On June 15, 1999, CMS Panhandle Holding
was merged into Panhandle Eastern Pipe Line. Panhandle Eastern Pipe Line then
became a wholly owned subsidiary of CMS Gas Transmission Company, an indirect
wholly owned subsidiary of CMS Energy. At that time, the CMS Panhandle Holding
notes became direct obligations of Panhandle Eastern Pipe Line. In September
1999, Panhandle Eastern Pipe Line completed an exchange offer which replaced the
$800 million of notes originally issued by CMS Panhandle Holding with
substantially identical SEC-registered notes issued by Panhandle Eastern Pipe
Line.

     The acquisition of Panhandle by CMS Panhandle Holding was accounted for
using the purchase method of accounting in accordance with generally accepted
accounting principles. Panhandle allocated the purchase price paid by CMS
Panhandle Holding to Panhandle's net assets as of the acquisition date based on
an appraisal completed in December 1999. Accordingly, the post-acquisition
financial statements reflect a new basis of accounting. Pre-acquisition period
and post-acquisition period financial results (separated by a heavy black line)
are presented but are not comparable (See Note 1).

                                       PE-2
<PAGE>   158

     In March 2000, Trunkline, a subsidiary of Panhandle Eastern Pipe Line,
acquired the Sea Robin pipeline from El Paso Energy Corporation for cash of
approximately $74 million plus certain other consideration. Sea Robin is a 1 bcf
per day capacity, approximately 450-mile pipeline system located in the Gulf of
Mexico. On March 27, 2000, Panhandle issued $100 million of 8.25 percent senior
notes due 2010. Panhandle Eastern Pipe Line used the funds primarily to finance
the purchase of Sea Robin (See Note 1) and the remaining funds were loaned to
CMS Capital.

     In March 2000, Trunkline refiled its abandonment application with the FERC
regarding its 26-inch pipeline with a planned conversion of the line from
natural gas service to a refined products pipeline. Panhandle owns a one-third
interest in the Centennial Pipeline venture, which if approved is planned to go
into service in January 2002 (See Note 3).

     The following information is provided to facilitate increased understanding
of the Consolidated Financial Statements and accompanying Notes of Panhandle and
should be read in conjunction with these financial statements. Because all of
the outstanding common stock of Panhandle Eastern Pipe Line is owned by CMS Gas
Transmission Company, a wholly-owned subsidiary of CMS Energy, the following
discussion uses the reduced disclosure format permitted by Form 10-K for issuers
that are wholly-owned subsidiaries of reporting companies.

RESULTS OF OPERATIONS

NET INCOME:

<TABLE>
<CAPTION>
                                                                     YEARS ENDED
                                                                     DECEMBER 31
                                                                ----------------------
                                                                2000    1999    CHANGE
                                                                ----    ----    ------
                                                                     IN MILLIONS
<S>                                                             <C>     <C>     <C>
Net Income..................................................    $64     $74      $(10)
</TABLE>

     For the year 2000, net income was $64 million, a decrease of $10 million
from the corresponding period in 1999 due primarily to lower reservation
revenues, higher benefits and fuel costs and higher interest expense in 2000,
partially offset by higher LNG terminalling revenues in 2000. Total natural gas
transportation volumes delivered for the year 2000 increased 21 percent from
1999 primarily due to the addition of Sea Robin in March 2000 (See Note 1).

     Revenues for the year 2000 increased $12 million from the corresponding
periods in 1999 due primarily to increased LNG terminalling revenues and
revenues from Sea Robin in 2000, partially offset by lower reservation revenues
in 2000.

     Operating expenses for the year 2000 increased $21 million from the
corresponding period in 1999 due primarily to increased depreciation and
amortization, benefits and fuel costs and the acquisition of Sea Robin.

     Other income for the year 2000 increased $2 million due to higher interest
income on a related-party Note Receivable balance, partially offset by a
non-recurring interest income transition surcharge recovery recorded in 1999.

     Interest on long-term debt for the year 2000 increased $18 million from the
corresponding period in 1999 primarily due to interest on the additional debt
incurred by Panhandle in March 2000 and March 1999 (See Note 1 and Note 6).
Other interest decreased $11 million for the year 2000 from the corresponding
period in 1999, primarily due to interest on the intercompany note with
PanEnergy. The note was eliminated with the sale of Panhandle to CMS Panhandle
Holding (See Note 1 and Note 4).

                                       PE-3
<PAGE>   159

PRETAX OPERATING INCOME:

<TABLE>
<CAPTION>
                                                                CHANGE COMPARED
                                                                 TO PRIOR YEAR
                                                                ---------------
                                                                 2000 VS 1999
                                                                 ------------
                                                                  IN MILLIONS
<S>                                                             <C>
Reservation revenue.........................................         $(32)
LNG terminalling revenue....................................           27
Commodity and other revenue.................................           17
Operations and maintenance..................................          (20)
Depreciation and amortization...............................           (7)
General taxes...............................................            6
                                                                     ----
       Total Change.........................................         $ (9)
                                                                     ====
</TABLE>

OUTLOOK

     CMS Energy intends to use Panhandle as a platform for growth in the United
States and derive added value through expansion opportunities for multiple CMS
Energy businesses. The growth strategy around Panhandle includes enhancing the
opportunities for other CMS Energy businesses involved in electric power
generation and distribution, mid-stream activities (gathering and processing),
and exploration and production. By providing additional transportation, storage
and other asset-based value-added services to customers such as new gas-fueled
power plants, local distribution companies, industrial and end-users, marketers
and others, CMS Energy expects to expand its natural gas pipeline business. CMS
Energy also plans to convert certain Panhandle pipeline facilities through a
joint venture to permit the throughput of liquid products (See Note 3).
Panhandle continues to attempt to maximize revenues from existing assets and to
pursue acquisition opportunities and development projects that provide expanded
services to meet the specific needs of customers.

     UNCERTAINTIES: Panhandle's results of operations and financial position may
be affected by a number of trends or uncertainties that have, or Panhandle
reasonably expects could have, a material impact on income from continuing
operations and cash flows. Such trends and uncertainties include: 1) the
increased competition in the market for transmission of natural gas to the
Midwest causing pressure on prices charged by Panhandle; 2) the current market
conditions causing more contracts to be of shorter duration, which may increase
revenue volatility; 3) the expected increase in competition for LNG terminalling
services, and the volatility in natural gas prices, creating volatility in LNG
terminalling revenues; 4) the impact of any future rate cases, for any of
Panhandle's regulated operations; 5) current initiatives for additional federal
rules and legislation regarding pipeline safety; 6) capital spending
requirements for safety, environmental or regulatory requirements that could
result in depreciation expense increases not covered by additional revenues; and
7) the potential effect of a January 2000 FERC order could, if approved on
rehearing without modification or acceptance of Trunkline's settlement filing,
substantially reduce Trunkline's tariff rates and future revenue levels.

OTHER MATTERS

ENVIRONMENTAL MATTERS

     Panhandle is subject to federal, state, and local laws and regulations
governing environmental quality and pollution control. These laws and
regulations under certain circumstances require Panhandle to remove or remedy
the effect on the environment of the disposal or release of specified substances
at its operating sites.

     PCB (POLYCHLORINATED BIPHENYL) ASSESSMENT AND CLEAN-UP PROGRAMS: Panhandle
previously identified environmental contamination at certain sites on its
systems and undertook clean-up programs at these sites. The contamination was
caused by the past use of lubricants containing PCB's in compressed air systems
and resulted in contamination of the on-site air systems, wastewater collection
facilities and on-site disposal areas. Soil and sediment testing to date
detected no significant off-site contamination. Panhandle communicated with the
EPA and appropriate state regulatory agencies on these matters. Under the terms
of the sale of Panhandle to CMS Energy (See Note 1), a subsidiary of Duke Energy
is obligated to complete the Panhandle clean-up programs at

                                       PE-4
<PAGE>   160

certain agreed-upon sites and to defend and indemnify Panhandle against certain
future environmental litigation and claims. Panhandle expects these clean-up
programs to continue through 2001 (See Note 11).

     AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including 5 states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including the INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded back to the EPA the sections
of the rule that affected Panhandle. Based on the court's decision, most of the
states subject to the rule submitted their SIP revisions in October 2000.
However, the EPA must revise the section of the rule that affected Panhandle's
facilities. Panhandle expects the EPA to make this section of the rule effective
in 2001 and expects the costs to range from $13 to $29 million for capital
improvements to comply.

NEW ACCOUNTING RULES

     Panhandle is required to adopt SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended, effective January 1, 2001. For a
detailed discussion of the effects of the standard and financial impact upon
adoption, see Note 2.

     In the year 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125. SFAS No. 140 revises the criteria for
accounting for securitizations of other financial asset transfers and collateral
and introduces new disclosures. Certain disclosures and amendments of collateral
provisions are effective for fiscal years ending after December 15, 2000. The
other provisions of SFAS No. 140 apply prospectively to transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. Panhandle has adopted the disclosure requirements effective December 31,
2000, and does not expect that the other provisions of SFAS No. 140 will have a
material impact on Panhandle's consolidated results of operations or financial
position.

                                       PE-5
<PAGE>   161

                      (This page intentionally left blank)

                                       PE-6
<PAGE>   162

                      PANHANDLE EASTERN PIPE LINE COMPANY
                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                   YEAR ENDED      MARCH 29-      JANUARY 1-     YEAR ENDED
                                                  DECEMBER 31,    DECEMBER 31,    MARCH 28,     DECEMBER 31,
                                                      2000            1999           1999           1998
                                                  ------------    ------------    ----------    ------------
                                                                        (IN MILLIONS)
<S>                                               <C>             <C>             <C>           <C>
OPERATING REVENUE
  Transportation and storage of natural gas...        $425            $318           $123           $468
  Other.......................................          58              25              5             28
                                                      ----            ----           ----           ----
       Total operating revenue................         483             343            128            496
                                                      ----            ----           ----           ----
OPERATING EXPENSES
  Operation and maintenance...................         211             151             40            213
  Depreciation and amortization...............          65              44             14             56
  General taxes...............................          23              22              7             26
                                                      ----            ----           ----           ----
       Total operating expenses...............         299             217             61            295
                                                      ----            ----           ----           ----
PRETAX OPERATING INCOME.......................         184             126             67            201
OTHER INCOME, NET.............................           8               2              4             24
INTEREST CHARGES
  Interest on long-term debt..................          82              59              5             25
  Other interest..............................           3               1             13             52
                                                      ----            ----           ----           ----
       Total interest charges.................          85              60             18             77
                                                      ----            ----           ----           ----
NET INCOME BEFORE INCOME TAXES................         107              68             53            148
INCOME TAXES..................................          43              27             20             57
                                                      ----            ----           ----           ----
CONSOLIDATED NET INCOME.......................        $ 64            $ 41           $ 33           $ 91
                                                      ====            ====           ====           ====
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       PE-7
<PAGE>   163

                      PANHANDLE EASTERN PIPE LINE COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   MARCH 29-      JANUARY 1-
                                                  DECEMBER 31,    DECEMBER 31,    MARCH 28,     DECEMBER 31,
                                                      2000            1999           1999           1998
                                                  ------------    ------------    ----------    ------------
                                                                        (IN MILLIONS)
<S>                                               <C>             <C>             <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income..................................       $  64          $    41          $ 33          $  91
  Adjustments to reconcile net income to net
     cash provided by operating activities:
  Depreciation and amortization...............          65               44            14             61
  Deferred income taxes.......................          87               34            --             17
  Changes in current assets and liabilities...         (35)              51           (29)             4
  Other, net..................................          (7)               9             3              1
                                                     -----          -------          ----          -----
     Net cash provided by operating
       activities.............................         174              179            21            174
                                                     -----          -------          ----          -----
CASH FLOWS FROM INVESTING ACTIVITIES
  Acquisition of Panhandle....................          --           (1,900)           --             --
  Capital and investment expenditures.........        (129)             (53)           (4)           (85)
  Net increase in advances
     receivable -- PanEnergy..................          --               --           (17)          (106)
  Retirements and other.......................          (1)              (1)           --             17
                                                     -----          -------          ----          -----
     Net cash used in investing activities....        (130)          (1,954)          (21)          (174)
                                                     -----          -------          ----          -----
CASH FLOWS FROM FINANCING ACTIVITIES
  Contribution from parent....................          --            1,116            --             --
  Proceeds from senior notes..................          99              785            --             --
  Net increase in note receivable -- CMS
     Capital..................................         (77)             (85)           --             --
  Dividends paid..............................         (66)             (41)           --             --
                                                     -----          -------          ----          -----
     Net cash provided by/(used by) financing
       activities.............................         (44)           1,775            --             --
                                                     -----          -------          ----          -----
  Net Increase (Decrease) in Cash and
     Temporary Cash Investments...............          --               --            --             --
  CASH AND TEMPORARY CASH INVESTMENTS,
     BEGINNING OF PERIOD......................          --               --            --             --
                                                     -----          -------          ----          -----
  CASH AND TEMPORARY CASH INVESTMENTS, END OF
     PERIOD...................................       $  --          $    --          $ --          $  --
                                                     =====          =======          ====          =====
OTHER CASH FLOW ACTIVITIES WERE:
  Interest paid (net of amounts
     capitalized).............................       $  80          $    31          $ 12             78
  Income taxes paid (net of refunds)..........         (12)               8            37             56
OTHER NONCASH ACTIVITIES WERE:
  Noncash property dividend...................       $  (4)         $    --          $(81)         $  --
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       PE-8
<PAGE>   164

                      PANHANDLE EASTERN PIPE LINE COMPANY
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                DECEMBER 31,    DECEMBER 31,
                                                                    2000            1999
                                                                ------------    ------------
                                                                       (IN MILLIONS)
<S>                                                             <C>             <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
  Cost......................................................       $1,679          $1,492
  Less accumulated depreciation and amortization............           99              37
                                                                   ------          ------
     Sub-total..............................................        1,580           1,455
  Construction work-in-progress.............................           20              45
                                                                   ------          ------
     Net property, plant and equipment......................        1,600           1,500
                                                                   ------          ------
INVESTMENTS.................................................            7               2
                                                                   ------          ------
CURRENT ASSETS
  Accounts Receivable, less allowances of $1 as of December
     31, 2000 and 1999......................................          140             112
  Gas Imbalances -- Receivable..............................           71              22
  Inventory and supplies....................................           21              34
  Deferred income taxes.....................................           12              11
  Note receivable -- CMS Capital............................          162              85
  Other.....................................................           21               8
                                                                   ------          ------
     Total current assets...................................          427             272
                                                                   ------          ------
NON-CURRENT ASSETS
  Goodwill, net.............................................          753             774
  Debt issuance cost........................................           11              11
  Other.....................................................            8               1
                                                                   ------          ------
     Total non-current assets...............................          772             786
                                                                   ------          ------
TOTAL ASSETS................................................       $2,806          $2,560
                                                                   ======          ======
COMMON STOCKHOLDER'S EQUITY AND LIABILITIES
CAPITALIZATION
  Common stockholder's equity
     Common stock, no par, 1,000 shares authorized, issued
      and outstanding.......................................       $    1          $    1
     Paid-in capital........................................        1,127           1,127
     Retained earnings......................................           (6)             --
                                                                   ------          ------
       Total common stockholder's equity....................        1,122           1,128
  Long-term debt............................................        1,193           1,094
                                                                   ------          ------
       Total capitalization.................................        2,315           2,222
                                                                   ------          ------
CURRENT LIABILITIES
  Accounts payable..........................................           32              28
  Gas Imbalances -- Payable.................................           56              30
  Accrued taxes.............................................            3               8
  Accrued interest..........................................           31              29
  Accrued liabilities.......................................           45              30
  Other.....................................................          104              79
                                                                   ------          ------
       Total current liabilities............................          271             204
                                                                   ------          ------
NON-CURRENT LIABILITIES
  Deferred income taxes.....................................          134              45
  Other.....................................................           86              89
                                                                   ------          ------
       Total non-current liabilities........................          220             134
                                                                   ------          ------
TOTAL COMMON STOCKHOLDER'S EQUITY AND LIABILITIES...........       $2,806          $2,560
                                                                   ======          ======
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       PE-9
<PAGE>   165

                      PANHANDLE EASTERN PIPE LINE COMPANY

             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                      YEAR                                          YEAR
                                                     ENDED         MARCH 29-      JANUARY 1-       ENDED
                                                  DECEMBER 31,    DECEMBER 31,    MARCH 28,     DECEMBER 31,
                                                      2000            1999           1999           1998
                                                  ------------    ------------    ----------    ------------
                                                                        (IN MILLIONS)
<S>                                               <C>             <C>             <C>           <C>
COMMON STOCK
  At beginning and end of period..............       $    1          $    1          $  1           $  1
                                                     ------          ------          ----           ----
OTHER PAID-IN CAPITAL
  At beginning of period......................        1,127             466           466            466
  Acquisition adjustment to eliminate original
     paid-in capital..........................           --            (466)           --             --
  Capital contribution of acquisition costs by
     parent...................................           --              11            --             --
  Cash capital contribution by parent.........           --           1,116            --             --
                                                     ------          ------          ----           ----
     At end of period.........................        1,127           1,127           466            466
                                                     ------          ------          ----           ----
RETAINED EARNINGS
  At beginning of period......................           --             101            92             34
  Acquisition adjustment to eliminate original
     retained earnings........................           --            (101)           --             --
  Net income..................................           64              41            33             91
  Assumption of net liability by PanEnergy....           --              --            57             --
  Common stock dividends......................          (70)            (41)          (81)           (34)
                                                     ------          ------          ----           ----
     At end of period.........................           (6)             --           101             91
                                                     ------          ------          ----           ----
  TOTAL COMMON STOCKHOLDER'S EQUITY...........       $1,122          $1,128          $568           $558
                                                     ======          ======          ====           ====
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      PE-10
<PAGE>   166

                      PANHANDLE EASTERN PIPE LINE COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. CORPORATE STRUCTURE

     Panhandle Eastern Pipe Line is a wholly owned subsidiary of CMS Gas
Transmission. Panhandle Eastern Pipe Line was incorporated in Delaware in 1929.
Panhandle is primarily engaged in interstate transportation and storage of
natural gas, which are subject to the rules and regulations of the FERC.

     On March 29, 1999, Panhandle Eastern Pipe Line and its principal
consolidated subsidiaries, Trunkline and Pan Gas Storage, as well as its
affiliates, Trunkline LNG and Panhandle Storage, were acquired from subsidiaries
of Duke Energy by CMS Panhandle Holding for $1.9 billion in cash and assumption
of existing Panhandle debt of $300 million. Immediately following the
acquisition, CMS Panhandle Holding contributed the stock of Trunkline LNG and
Panhandle Storage to Panhandle Eastern Pipe Line. As a result, Trunkline LNG and
Panhandle Storage became wholly owned subsidiaries of Panhandle Eastern Pipe
Line.

     In conjunction with the acquisition, Panhandle's interests in Northern
Border Pipeline Company, Panhandle Field Services Company, Panhandle Gathering
Company, and certain other assets, including the Houston corporate headquarters
building, were transferred to other subsidiaries of Duke Energy; all
intercompany accounts and notes between Panhandle and Duke Energy subsidiaries
were eliminated; and with respect to certain other liabilities, including tax,
environmental and legal matters, CMS Energy and its affiliates, were indemnified
for any resulting losses. In addition, Duke Energy agreed to continue its
environmental clean-up program at certain properties and to defend and indemnify
Panhandle against certain future environmental litigation and claims with
respect to certain agreed-upon sites or matters.

     CMS Panhandle Holding privately placed $800 million of senior unsecured
notes and received a $1.1 billion initial capital contribution from CMS Energy
to fund the acquisition of Panhandle. On June 15, 1999, CMS Panhandle Holding
was merged into Panhandle, at which point the CMS Panhandle Holding notes became
direct obligations of Panhandle. In September 1999, Panhandle completed an
exchange offer which replaced the $800 million of notes originally issued by CMS
Panhandle Holding with substantially identical SEC-registered notes.

     The acquisition of Panhandle by CMS Panhandle Holding was accounted for
using the purchase method of accounting in accordance with generally accepted
accounting principles. Panhandle allocated the purchase price paid by CMS
Panhandle Holding to Panhandle's net assets as of the acquisition date based on
an appraisal completed December 1999. Accordingly, the post-acquisition
financial statements reflect a new basis of accounting. Pre-acquisition period
and post-acquisition period financial results (separated by a heavy black line)
are presented but are not comparable.

     Assets acquired and liabilities assumed are recorded at their estimated
fair values. Panhandle allocated the excess purchase price over the fair value
of net assets acquired of $788 million to goodwill and is amortizing this amount
on a straight-line basis over forty years. The amortization of the excess
purchase price over 40 years reflects the nature of the industry in which
Panhandle competes as well as the long-lived nature of Panhandle's assets. As a
result of regulation, high replacement costs, and competition, entry into the
natural gas transmission

                                      PE-11
<PAGE>   167
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and storage business requires a significant investment. The excess purchase
price over the prior carrying amount of Panhandle's net identifiable assets as
of March 29, 1999 totaled $1.3 billion, and was allocated as follows:

<TABLE>
<CAPTION>
                                                                              IN MILLIONS
                <S>                                                           <C>
                Property, plant and equipment.............................      $  633
                Accounts receivable.......................................           3
                Inventory.................................................          (9)
                Goodwill..................................................         788
                Regulatory assets, net....................................         (15)
                Liabilities...............................................         (72)
                Long-term debt............................................          (6)
                Other.....................................................         (16)
                                                                                ------
                Total.....................................................      $1,306
                                                                                ======
</TABLE>

     Pro forma results of operations for 1999 and 1998 as though Panhandle had
been acquired and purchase accounting applied at the beginning of both years,
respectively, are as follows:

<TABLE>
<CAPTION>
                                                                   YEAR ENDED           YEAR ENDED
                                                                DECEMBER 31, 1999    DECEMBER 31, 1998
                                                                   (UNAUDITED)          (UNAUDITED)
                                                                -----------------    -----------------
                                                                             IN MILLIONS
<S>                                                             <C>                  <C>
Revenues....................................................         $  467               $  470
Net income..................................................             67                   60
Total assets................................................          2,560                2,477
</TABLE>

     In March 2000, Trunkline, a subsidiary of Panhandle Eastern Pipe Line,
acquired the Sea Robin Pipeline from El Paso Energy Corporation for cash of
approximately $74 million and certain other consideration (See Note 8). Sea
Robin is a 1 bcf per day capacity natural gas and condensate pipeline system
located in the Gulf of Mexico offshore Louisiana west of Trunkline's existing
Terrebonne system.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS

     CONSOLIDATIONS: The consolidated financial statements include the accounts
of all of Panhandle's majority-owned subsidiaries after the elimination of
significant intercompany transactions and balances. Investments in other
entities that are not controlled by Panhandle, but where it has significant
influence over operations, are accounted for using the equity method.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current and expected future events, actual results could differ from those
estimates.

     CASH AND CASH EQUIVALENTS: All liquid investments with maturities at date
of purchase of three months or less are considered cash equivalents.

     INVENTORY: Inventory consists of gas held for operations and materials and
supplies and is recorded at the lower of cost or market, using the weighted
average cost method. Effective January 1, 1999, Trunkline changed to the
weighted average cost method from the last-in first-out method for its gas held
for operations with no material impact on the financial statements.

     GAS IMBALANCES: Gas imbalances occur as a result of differences in volumes
of gas received and delivered. Gas imbalance inventory receivables and payables
are valued at lower of cost or market.

                                      PE-12
<PAGE>   168
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     PROPERTY, PLANT AND EQUIPMENT: On March 29, 1999, Panhandle's assets were
acquired by CMS Panhandle Holding. The acquisition was accounted for using the
purchase method of accounting in accordance with generally accepted accounting
principles. Panhandle's property, plant and equipment (PP&E) was adjusted to
estimated fair market value on March 29, 1999 and depreciated based on revised
estimated remaining useful lives. Panhandle's accumulated depreciation and
amortization provision balance at March 29, 1999 was eliminated pursuant to the
purchase method of accounting (See Note 1).

     Ongoing additions of PP&E are stated at original cost. Panhandle
capitalizes all construction-related direct labor and material costs, as well as
indirect construction costs. The cost of renewals and betterments that extend
the useful life of PP&E is also capitalized. The cost of repairs and
replacements of minor items of PP&E is charged to expense as incurred.
Depreciation is generally computed using the straight-line method. The composite
weighted-average depreciation rates were 2.9 percent, 2.6 percent and 2.2
percent for 2000, 1999 and 1998, respectively.

     When PP&E is retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced, and any gain or loss is recorded in income.

     IMPAIRMENT OF LONG-LIVED ASSETS: The recoverability of long-lived assets
and intangible assets is reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.

     UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: Panhandle amortizes
premiums, discounts and expenses incurred in connection with the issuance of
long-term debt over the terms of the respective issues.

     ENVIRONMENTAL EXPENDITURES: Environmental expenditures that relate to an
existing condition caused by past operations that do not contribute to current
or future revenue generation are expensed. Environmental expenditures relating
to current or future revenues are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or clean-ups are
probable and the costs can be reasonably estimated. Under the terms of the sale
of Panhandle to CMS Energy (See Note 1), a subsidiary of Duke Energy is
obligated to complete the Panhandle clean-up programs at certain agreed-upon
sites and to defend and indemnify Panhandle against certain future environmental
litigation and claims. These clean-up programs are expected to continue through
2001.

     REVENUES: Revenues on transportation and storage of natural gas are
recognized as service is provided. Prior to final FERC approval of filed notes,
Panhandle is exposed to risk that the FERC will ultimately approve rates at a
level lower than those requested. The difference is subject to refund and
reserves are established, where required, for that purpose.

     During 2000, 1999 and 1998, sales to ProLiance Energy, L.L.C., a
nonaffiliated gas marketer, accounted for at least 10 percent of consolidated
revenues of Panhandle. During 2000 and 1999, sales to subsidiaries of CMS
Energy, primarily Consumers, accounted for at least 10 percent of consolidated
revenues of Panhandle. No other customer accounted for 10 percent or more of
consolidated revenues during 2000, 1999, or 1998.

     CHANGE IN ACCOUNTING POLICY: As a result of Panhandle's new cost basis
resulting from the merger with CMS Panhandle Holding in 1999, which included
costs not likely to be considered for regulatory recovery, in addition to the
level of discounting being experienced, Panhandle no longer met the criteria of
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, and
therefore discontinued application of SFAS No. 71, effective March 1999.
Accordingly, upon acquisition by CMS Panhandle Holding, the remaining net
regulatory assets of approximately $15 million were eliminated in purchase
accounting (See Note 1).

     INTEREST COST CAPITALIZED: SFAS No. 34, Capitalization of Interest Cost,
requires capitalization of interest on certain qualifying assets that are
undergoing activities to prepare them for their intended use. SFAS No. 34
                                      PE-13
<PAGE>   169
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. As a
result of the discontinuance of SFAS No. 71, Panhandle is now subject to the
provisions of SFAS No. 34.

     INCOME TAXES: CMS Energy and its subsidiaries file a consolidated federal
income tax return. Federal income taxes have been provided by Panhandle on the
basis of its separate company income and deductions in accordance with the
established practices of the tax sharing agreement of the consolidated group.
Deferred income taxes have been provided for temporary differences. Temporary
differences occur when events and transactions recognized for financial
reporting result in taxable or tax-deductible amounts in different periods.

     GOODWILL AMORTIZATION: Goodwill represents the excess of the purchase price
over the fair value of the net assets of acquired companies and is amortized
using the straight-line method over forty years. Accumulated amortization of
goodwill was $35 million and $14 million, at December 31, 2000 and December 31,
1999, respectively.

     RECLASSIFICATIONS: Certain amounts have been reclassified in the
Consolidated Financial Statements to conform to the current presentation.

     IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: Panhandle is required to adopt
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, effective January 1, 2001. SFAS No. 133 requires companies to recognize
all derivative instruments as assets or liabilities in the balance sheet and to
measure those instruments at fair value. SFAS No. 133 requires that as of the
date of the initial adoption the difference between the fair market value of
derivative instruments recorded on the Company's balance sheet and the
previously recorded book value of the derivative instruments should be reflected
as the cumulative effect of a change in accounting principle in either net
income or other comprehensive income as appropriate. The gain and losses on
derivative instruments that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion, if
any, of all hedges is recognized in current period earnings. Fair market value
is determined based upon mathematical models using current and historical data.
The Company anticipates that, at January 1, 2001, the adoption SFAS No. 133 will
not have a material effect on the financial statements.

     In December 1999, the SEC released SAB No. 101 summarizing the SEC staff's
views on revenue recognition policies based upon existing generally accepted
accounting principles. The SEC staff deferred the implementation date of SAB No.
101 until no later than the fourth quarter of fiscal years beginning after
December 15, 1999. Panhandle adopted the provisions of SAB No. 101 as of October
1, 2000. The impact of adopting SAB No. 101 is not material to Panhandle's
consolidated results of operation or financial position.

     In 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125. SFAS No. 140 revises the criteria for
accounting for securitizations, other financial asset transfers and collateral
and introduces new disclosures. Certain disclosures and amendments of collateral
provisions are effective for fiscal years ending after December 15, 2000. The
other provisions of SFAS No. 140 apply prospectively to transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. Panhandle has adopted the disclosure requirements effective December 31,
2000, and does not expect that the other provisions of SFAS No. 140 will have a
material impact on Panhandle's consolidated results of operations or financial
position.

3. REGULATORY MATTERS

     Effective August 1996, Trunkline placed into effect a general rate
increase, subject to refund. On September 16, 1999, Trunkline filed a FERC
settlement agreement to resolve certain issues in this proceeding. FERC approved
this settlement February 1, 2000 and required refunds of approximately $2
million which were made in April 2000, with supplemental refunds of $1.3 million
in June 2000. On January 12, 2000, FERC issued an order on the remainder of the
rate proceeding which, if approved on rehearing without modification, could
                                      PE-14
<PAGE>   170
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

result in a substantial reduction to Trunkline's tariff rates which could impact
future revenues and require refunds. On January 29, 2001, Trunkline filed a
settlement to resolve the remaining matters in the proceeding. This settlement
is pending FERC review. Management believes that reserves for refund established
are adequate and there will not be a material adverse effect on consolidated
results of operations or financial position.

     In conjunction with a FERC order issued in September 1997, FERC required
certain natural gas producers to refund previously collected Kansas ad-valorem
taxes to interstate natural gas pipelines, including Panhandle. FERC ordered
these pipelines to refund these amounts to their customers. The pipelines must
make all payments in compliance with prescribed FERC requirements. At December
31, 2000 and December 31, 1999, accounts receivable included $59 million and $54
million, respectively, due from natural gas producers, and other current
liabilities included $59 million and $54 million, respectively, for related
obligations.

     On March 9, 2000, Trunkline filed an abandonment application with FERC
seeking to abandon 720 miles of its 26-inch diameter pipeline that extends from
Longville, Louisiana to Bourbon, Illinois. This filing is in conjunction with a
plan for a limited liability corporation to convert the line from natural gas
transmission service to a refined products pipeline called Centennial Pipeline
by January 2002. Panhandle owns a one-third interest in the venture along with
TEPPCO Partners L.P. and Marathon Ashland Petroleum L.L.C. As of December 31,
2000, Panhandle had made a $5.3 million cash investment in the Centennial
project.

     On May 19, 1999, Trunkline and Trunkline LNG submitted a compliance filing
advising the FERC that the acquisition by CMS Energy of Trunkline LNG triggered
certain provisions of a 1992 settlement. The settlement resolved issues related
to minimum bill provisions of the Trunkline LNG Rate Schedule PLNG-1, as well as
pending rate matters for Trunkline and refund matters for Trunkline LNG.
Specifically, the settlement provisions require Trunkline LNG, and Trunkline in
turn, to make refunds to customers, including Panhandle Eastern Pipe Line and
Consumers, who were parties to the settlement, if the ownership of all or
portion of the LNG terminal is transferred to an unaffiliated entity. The
Commission approved the LNG settlement to be effective April 1, 1999.
Trunkline's refunds, which were made in April 2000, included $12 million to
Consumers Energy, $4 million to Panhandle Eastern Pipe Line, and $1 million to
other Trunkline customers. In conjunction with the acquisition of Panhandle by
CMS Energy, Duke Energy indemnified Panhandle for this refund obligation and
reimbursed Trunkline for the refunds in April 2000. On May 31, 2000, the FERC
approved Panhandle Eastern Pipe Line's flow through of its portion of the
settlement amounts to its customers.

4. RELATED PARTY TRANSACTIONS

<TABLE>
<CAPTION>
                                                    YEAR ENDED      MARCH 29-     JANUARY 1-     YEAR ENDED
                                                   DECEMBER 31,    DECEMBER 31     MARCH 28     DECEMBER 31,
                                                       2000           1999           1999           1998
                                                   ------------    -----------    ----------    ------------
                                                                          IN MILLIONS
<S>                                                <C>             <C>            <C>           <C>
Transportation of natural gas..................        $54             $45            $ 6           $29
Other operating revenues.......................         28              19              2            15
Operation and maintenance(a)...................         39              25              8            60
Interest income................................          8               2             --            --
Interest expense...............................         --              --             13            55
</TABLE>

-------------------------
(a)  Includes allocated benefit plan costs.

     Amounts for 1999 reflect only related party transactions with CMS Energy
and its subsidiaries for the period after the sale of Panhandle to CMS Energy.
Interest charges include $55 million for the twelve months ended 1998 for
interest associated with notes payable to a subsidiary of Duke Energy. At
December 31, 2000, Note Receivable -- CMS Capital represented a $162 million
note that bore interest at the 30-day commercial paper interest rate. Net cash
generated by Panhandle in excess of operating or investing needs has been loaned
to CMS Capital. Other income includes $8 million for the period ended December
31, 2000 for interest on note receivable from CMS Capital.
                                      PE-15
<PAGE>   171
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     A summary of certain balances due to or due from related parties included
in the Consolidated Balance Sheets is as follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                --------------
                                                                2000      1999
                                                                ----      ----
                                                                 IN MILLIONS
<S>                                                             <C>       <C>
Receivables.................................................    $48       $21
Accounts Payable/Other Current Liabilities..................     27        16
</TABLE>

5. INCOME TAXES

     The separate components of income tax expense consist of:

<TABLE>
<CAPTION>
                                                    YEAR ENDED      MARCH 29-     JANUARY 1-    YEAR ENDED
                                                   DECEMBER 31,    DECEMBER 31     MARCH 28    DECEMBER 31,
              INCOME TAX EXPENSE                       2000           1999           1999          1998
              ------------------                   ------------    -----------    ----------   ------------
                                                                         IN MILLIONS
<S>                                                <C>             <C>            <C>          <C>
Current income taxes
  Federal......................................        $(42)           $(7)           $18          $34
  State........................................          (2)            --              2            6
                                                       ----            ---            ---          ---
       Total current income taxes..............         (44)            (7)            20           40
                                                       ----            ---            ---          ---
Deferred income taxes, net
  Federal......................................          76             29             --           14
  State........................................          11              5             --            3
                                                       ----            ---            ---          ---
       Total deferred income taxes, net........          87             34             --           17
                                                       ----            ---            ---          ---
Total income tax expense.......................        $ 43            $27            $20          $57
                                                       ====            ===            ===          ===
</TABLE>

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

<TABLE>
<CAPTION>
                                                        YEAR ENDED      MARCH 29-     JANUARY 1-     YEAR ENDED
                                                       DECEMBER 31,    DECEMBER 31     MARCH 28     DECEMBER 31,
INCOME TAX EXPENSE RECONCILIATION TO STATUTORY RATE        2000           1999           1999           1998
---------------------------------------------------    ------------    -----------    ----------    ------------
                                                                              IN MILLIONS
<S>                                                    <C>             <C>            <C>           <C>
Income tax, computed at the statutory rate.......          $ 38           $ 24           $ 18           $ 52
Adjustments resulting from:
  State income tax, net of federal income tax
     effect......................................             5              3              2              5
                                                           ----           ----           ----           ----
Total income tax expense.........................          $ 43           $ 27           $ 20           $ 57
                                                           ====           ====           ====           ====
Effective tax rate...............................          40.2%          39.6%          38.2%          38.5%
                                                           ----           ----           ----           ----
</TABLE>

                                      PE-16
<PAGE>   172
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                                -------------
        NET DEFERRED INCOME TAX LIABILITY COMPONENTS            2000     1999
        --------------------------------------------            ----     ----
                                                                 IN MILLIONS
<S>                                                             <C>      <C>
Deferred credits and other liabilities......................    $  18    $ 30
Other.......................................................       37      32
     Total deferred income tax assets.......................       55      62
                                                                -----    ----
Investments and other assets................................      (24)    (18)
Property, plant and equipment...............................      (71)    (10)
Goodwill....................................................      (73)    (65)
Alternative Minimum Tax Credit..............................        1      --
                                                                -----    ----
     Total deferred income tax liabilities..................     (167)    (93)
                                                                -----    ----
State deferred income tax, net of federal tax effect........      (10)     (3)
Net deferred income tax liability...........................     (122)    (34)
                                                                -----    ----
Portion classified as current asset.........................       12      11
Noncurrent liability........................................    $(134)   $(45)
                                                                =====    ====
</TABLE>

     As described in Note 1, the stock of Panhandle was acquired from
subsidiaries of Duke Energy by CMS Panhandle Holding for a total of $2.2 billion
in cash and acquired debt. The acquisition was treated as an asset acquisition
for tax purposes, which eliminated Panhandle's deferred tax liability and gave
rise to a new tax basis in Panhandle's assets equal to the purchase price. As of
December 31, 2000, Panhandle had recorded a $2 million current state tax benefit
that is expected to be utilized through carrybacks and unitary or combined
returns with other subsidiaries of CMS Energy.

6. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                ----------------
                                                                 2000      1999
                                                                 ----      ----
                                                                  IN MILLIONS
<S>                                                             <C>       <C>
Transmission................................................    $1,365    $1,189
Gathering...................................................        18        18
Underground storage.........................................       226       245
General plant...............................................        70        40
Construction work-in-progress...............................        20        45
                                                                ------    ------
     Total property, plant and equipment....................     1,699     1,537
Less accumulated depreciation and amortization..............        99        37
                                                                ------    ------
     Net property, plant and equipment......................    $1,600    $1,500
                                                                ======    ======
</TABLE>

7. FINANCIAL INSTRUMENTS

     Panhandle's financial instruments include approximately $1.2 billion and
$1.1 billion of long-term debt at December 31, 2000 and 1999, respectively, with
an approximate fair value of $1.1 billion and $1 billion as of December 31, 2000
and 1999, respectively. Estimated fair value amounts of long-term debt were
obtained from independent parties. Judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
determined as of December 31, 2000 and 1999 are not necessarily indicative of
the amounts Panhandle could have realized in current market exchanges.

                                      PE-17
<PAGE>   173
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The $162 million Note Receivable with CMS Capital is at fair value since
the interest portion is calculated using a floating rate which is updated
monthly (See Note 4).

8. LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                               ----------------
                                                                 YEAR DUE       2000      1999
                                                                 --------       ----      ----
                                                                                 IN MILLIONS
<S>                                                             <C>            <C>       <C>
6.125% -- 8.25% Notes.......................................    2004 - 2029    $1,000    $  900
7.2% -- 7.95% Debentures....................................    2023 - 2024       200       200
Unamortized debt (discount) and premium, net................                       (7)       (6)
                                                                               ------    ------
     Total long-term debt...................................                   $1,193    $1,094
                                                                               ======    ======
</TABLE>

     On March 27, 2000, Panhandle issued $100 million of 8.25 percent senior
notes due 2010. Panhandle used the funds primarily to finance the purchase of
Sea Robin (See Note 1); the remaining funds were loaned to CMS Capital. In July,
these notes were exchanged for substantially identical SEC-registered notes.

     On March 29, 1999, CMS Panhandle Holding privately placed $800 million of
senior notes (See Note 1) including: $300 million of 6.125 percent senior notes
due 2004; $200 million of 6.5 percent senior notes due 2009; and $300 million of
7.0 percent senior notes due 2029. On June 15, 1999, CMS Panhandle Holding was
merged into Panhandle and the obligations of CMS Panhandle Holding under the
notes and the indenture were assumed by Panhandle. In September 1999, Panhandle
completed an exchange offer which replaced the $800 million of notes originally
issued by CMS Panhandle Holding with substantially identical SEC-registered
notes.

     In conjunction with the application of purchase accounting, Panhandle's
existing notes totaling $300 million were revalued resulting in a net premium
recorded of approximately $5 million. The 7.2 percent -- 7.95 percent Debentures
have call options whereby Panhandle has the option to repay the debt early.
Based on the year in which Panhandle may first exercise the redemption options,
all $200 million could potentially be repaid in 2003.

     OTHER: Under its most restrictive borrowing arrangement at December 31,
2000 and December 31, 1999, none of Panhandle's consolidated net income was
restricted for payment of common dividends.

9. INVESTMENT IN AFFILIATES

     Investments in Affiliates include undistributed earnings of $.4 million and
$.4 million in 2000 and 1999, respectively. Panhandle's proportionate share of
net income from these affiliates for the years ended December 31, 2000, 1999 and
1998 was $.3 million, $.2 million and $6 million, respectively. These amounts
are reflected in the Consolidated Statements of Income as Other Operating
Revenues. Investment in affiliates includes the following:

     CENTENNIAL. Panhandle owns a one-third interest in the Centennial Pipeline
L.L.C. along with TEPPCO Partners L.P. and Marathon Ashland Petroleum L.L.C. The
joint venture will operate an interstate refined petroleum products pipeline
extending from the U.S. Gulf Coast to Illinois. Trunkline, which owns an
existing 720-mile pipeline, has filed with the FERC to take the line out of
natural gas service, pending FERC approval. Conversion of the pipeline to liquid
products service is expected to be completed by January 2002.

     LEE 8 STORAGE. Panhandle, through its subsidiary Panhandle Storage, owns a
40 percent interest in the Lee 8 partnership, which operates a 1.4 bcf natural
gas storage facility in Michigan. This interest results from the contribution of
the stock of Panhandle Storage to Panhandle Eastern Pipe Line by CMS Panhandle
Holding on March 29, 1999.

                                      PE-18
<PAGE>   174
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     NORTHERN BORDER PARTNERS, L.P. Northern Border Partners, L.P. is a master
limited partnership that owns 70 percent of Northern Border Pipeline Company, a
partnership operating a pipeline transporting natural gas from Canada to the
Midwest area of the United States. At December 31, 1998, Panhandle held a 7.0
percent limited partnership interest in Northern Border Partners, L.P., and
thus, an indirect 4.9 percent ownership interest in Northern Border Pipeline
Company. In conjunction with the acquisition of Panhandle by CMS Panhandle
Holding, Panhandle transferred its interest in Northern Border to a subsidiary
of Duke Energy in the first quarter of 1999.

10. COMMITMENTS AND CONTINGENCIES

     CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and
investments, including allowance for funds used during construction, to be
approximately $83 million in 2001 and $70 million in each of the two following
years. These estimates are prepared for planning purposes and are subject to
revision. Normal capital expenditures for 2000 were satisfied by cash from
operations.

     LITIGATION: Under the terms of the sale of Panhandle to CMS Energy
discussed in Note 1 to the Consolidated Financial Statements, subsidiaries of
Duke Energy indemnified CMS Energy from losses resulting from certain legal and
tax liabilities of Panhandle, including the matter specifically discussed below:

     In May 1997, Anadarko filed suits against Panhandle and other PanEnergy
affiliates, as defendants, both in the United States District Court for the
Southern District of Texas and State District Court of Harris County, Texas.
Pursuing only the federal court claim, Anadarko claims that it was effectively
indemnified by the defendants against any responsibility for refunds of Kansas
ad valorem taxes which are due from purchasers of gas from Anadarko, retroactive
to 1983. In October 1998 and January 1999, the FERC issued orders on ad valorem
tax issues, finding that first sellers of gas were primarily liable for refunds.
The FERC also noted that claims for indemnity or reimbursement among the parties
would be better addressed by the United States District Court for the Southern
District of Texas. Panhandle believes the resolution of this matter will not
have a material adverse effect on consolidated results of operations or
financial position.

     Panhandle is also involved in other legal, tax and regulatory proceedings
before various courts, regulatory commissions and governmental agencies
regarding matters arising in the ordinary course of business, some of which
involve substantial amounts. Where appropriate, Panhandle has made accruals in
accordance with SFAS 5, Accounting for Contingencies, in order to provide for
such matters. Management believes the final disposition of these proceedings
will not have a material adverse effect on consolidated results of operations or
financial position.

     ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken clean-up
programs at these sites. The contamination resulted from the past use of
lubricants containing PCBs in compressed air systems and the prior use of
wastewater collection facilities and other on-site disposal areas. Under the
terms of the sale of Panhandle to CMS Energy, a subsidiary of Duke Energy is
obligated to complete the Panhandle clean-up programs at certain agreed-upon
sites and to indemnify against certain future environmental litigation and
claims. The Illinois EPA included Panhandle and Trunkline, together with other
non-affiliated parties, in a cleanup of former waste oil disposal sites in
Illinois. Prior to a partial cleanup by the EPA, a preliminary study estimated
the cleanup costs at one of the sites to be between $5 million and $15 million.
The State of Illinois contends that Panhandle Eastern Pipe Line and Trunkline's
share for the costs of assessment and remediation of the sites, based on the
volume of waste sent to the facilities, is 17.32 percent. Management believes
that the costs of cleanup, if any, will not have a material adverse impact on
Panhandle's financial position, liquidity, or results of operations.

                                      PE-19
<PAGE>   175
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including 5 states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including the INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded back to the EPA the sections
of the rule that affected Panhandle. Based on the court's decision, most of the
states subject to the rule submitted their SIP revisions in October 2000.
However, the EPA must revise the section of the rule that affected Panhandle's
facilities. Panhandle expects the EPA to make this section of the rule effective
in 2001 and expects the costs to range from $13 to $29 million for capital
improvements to comply.

     OTHER COMMITMENTS AND CONTINGENCIES: In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. Panhandle's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact which are likely to take
substantial time to resolve. If required to reimburse or indemnify the
producers, Panhandle's pipelines will file with FERC to recover a portion of
these costs from pipeline customers. Management believes these commitments and
contingencies will not have a material adverse effect on consolidated results of
operations or financial position.

     Under the terms of a settlement related to a transportation agreement
between Panhandle and Northern Border Pipeline Company, Panhandle guarantees
payment to Northern Border Pipeline Company under a transportation agreement
held by a third party. The transportation agreement requires estimated total
payments of $15 million through October 2001. Management believes the
probability that Panhandle will be required to perform under this guarantee is
remote.

     In conjunction with the Centennial Pipeline project, Panhandle intends to
provide a guaranty related to project financing in an amount up to $50 million
during the construction and initial operating period of the project. The
guaranty will be released when Centennial reaches certain operational and
financial targets (See Note 3).

     LEASES: Panhandle utilizes assets under operating leases in several areas
of operation. Consolidated rental expense amounted to $13 million in 2000, $14
million in 1999 ($11 million related to the CMS Energy ownership period and $3
million during the Duke Energy ownership period) and $15 million in 1998. Future
minimum rental payments under Panhandle's various operating leases for the years
2001 through 2005 are $13 million, $10 million, $4 million, $4 million and $3
million, respectively and $8 million for 2006 and thereafter.

11. EXECUTIVE INCENTIVE COMPENSATION

     Panhandle participates in CMS Energy's Performance Incentive Stock Plan.
Under the plan, restricted shares of Common Stock of CMS Energy, as well as
stock options and stock appreciation rights related to Common Stock may be
granted to key employees based on their contributions to the successful
management of CMS Energy and its subsidiaries. Awards under the plan may consist
of any class of Common Stock. Certain plan awards are subject to
performance-based business criteria. The plan reserves for awards not more than
five percent, as amended January 1, 1999, 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% of the aggregate number
of shares reserved for award. Any forfeiture of shares previously awarded will
increase the number of shares available to be awarded under the plan. At
December 31, 2000, awards of up to 2,274,490 shares of CMS Energy Common Stock
may be issued.

                                      PE-20
<PAGE>   176
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25 percent
per year after two years. The restricted shares are subject to achievement of
specific 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, 2000, all of the
20,000 shares of restricted CMS Energy Common Stock outstanding are subject to
performance objectives.

     The plan grants stock options and stock appreciation rights relating to
Common Stock with an exercise price equal to the closing market price on each
grant date. Some options may be exercised upon grant; others vest over five
years at the rate of 25 percent per year after one year. All options expire up
to ten years and one month from date of grant. The status of the restricted
stock and options granted to Panhandle's key employees under the Performance
Incentive Stock Plan follows:

<TABLE>
<CAPTION>
                                                               RESTRICTED
                                                                 STOCK                  OPTIONS
                                                               ----------    -----------------------------
                                                                 NUMBER       NUMBER      WEIGHTED AVERAGE
                                                               OF SHARES     OF SHARES     EXERCISE PRICE
                                                               ---------     ---------    ----------------
<S>                                                            <C>           <C>          <C>
CMS ENERGY COMMON STOCK
Outstanding at December 31, 1998...........................          --            --              --
  Granted..................................................      12,000       299,912          $41.07
  Exercised or Issued......................................          --            --              --
                                                                 ------       -------          ------
Outstanding at December 31, 1999...........................      12,000       299,912          $41.07
                                                                 ------       -------          ------
Outstanding at December 31, 1999...........................      12,000       299,912          $41.07
  Granted..................................................      12,000        48,000          $17.00
  Exercised or Issued......................................          --       (24,000)         $17.00
  Forfeited................................................      (4,000)      (33,964)         $40.88
                                                                 ------       -------          ------
Outstanding at December 31, 2000...........................      20,000       289,948          $39.10
                                                                 ======       =======          ======
</TABLE>

     The following table summarizes information about CMS Energy Common Stock
options outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                                             NUMBER          WEIGHTED          WEIGHTED
                       RANGE OF                             OF SHARES        AVERAGE           AVERAGE
                    EXERCISE PRICES                        OUTSTANDING    REMAINING LIFE    EXERCISE PRICE
                    ---------------                        -----------    --------------    --------------
<S>                                                        <C>            <C>               <C>
CMS Energy Common Stock $17.00 -- $41.75...............      289,948        8.36 years          $39.10
</TABLE>

     The weighted average fair value of options granted to Panhandle employees
for CMS Energy Common Stock was $4.38 and $5.93 in 2000 and 1999, respectively.
Fair value is estimated using the Black-Scholes model, a mathematical formula
used to value options traded on securities exchanges, with the following
assumptions:

<TABLE>
<CAPTION>
                                                                   YEAR ENDED           YEAR ENDED
                                                                DECEMBER 31, 2000    DECEMBER 31, 1999
                                                                -----------------    -----------------
<S>                                                             <C>                  <C>
Risk-free interest rate.....................................           6.56%                5.65%
Expected stock price volatility.............................          27.25%               16.81%
Expected dividend rate......................................          $.365                $.365
Expected option life (years)................................            4.1                  4.5
</TABLE>

     Panhandle applies APB Opinion No. 25 and related interpretations in
accounting for the Performance Incentive Stock Plan. Since stock options are
granted at market price, no compensation cost has been recognized for stock
options granted under the plan. If compensation cost for stock options had been
determined in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, Panhandle's net income would have

                                      PE-21
<PAGE>   177
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

decreased by approximately $.1 million and $1.2 million in 2000 and 1999,
respectively. The compensation cost charged against income for restricted stock
was $.2 million and $.1 million in 2000 and 1999, respectively.

12. BENEFIT PLANS

     Under the terms of the acquisition of Panhandle by CMS Energy, benefit
obligations related to active employees and certain plan assets were transferred
to CMS Energy. Benefit obligations related to existing retired employees and
remaining plan assets were retained by a subsidiary of Duke Energy.

     Following the acquisition of Panhandle by CMS Energy described in Note 1,
Panhandle now participates in CMS Energy's non-contributory defined benefit
retirement plan covering most employees with a minimum of one year vesting
service. Panhandle, through CMS Energy, provides 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
benefits to substantially all its employees under a trusteed, non-contributory,
defined benefit Pension Plan of CMS Energy and a defined contribution 401(k)
plan.

     CMS Energy's policy is to fund amounts, as necessary, on an actuarial basis
to provide assets sufficient to meet benefits to be paid to plan participants.
With respect to the CMS Pension Plan, the fair value of the plan assets was $994
million at December 31, 2000 as compared to the benefit obligation of $1,081
million. In 1999, the fair value of the plan assets was $1,094 million, as
compared to the benefit obligation of $971 million at December 31, 1999.

     Panhandle's net periodic pension cost, as allocated by CMS Energy, was $2
million in 2000 and $2 million in 1999. For 1998, Panhandle's net periodic
pension benefit, as allocated by a subsidiary of Duke Energy, was $14 million.

     Amounts presented below for the Pension Plan include amounts for employees
of CMS Energy and nonutility affiliates which were not distinguishable from the
plan's total assets.

WEIGHTED-AVERAGE ASSUMPTIONS:

<TABLE>
<CAPTION>
                                                        PENSIONS & SERP                     OPEB
                                                  ---------------------------    ---------------------------
                                                                   YEARS ENDED DECEMBER 31
                                                  ----------------------------------------------------------
                                                  2000(A)    1999(A)    1998     2000(A)    1999(A)    1998
                                                  -------    -------    ----     -------    -------    ----
<S>                                               <C>        <C>        <C>      <C>        <C>        <C>
Discount rate.................................     7.75%      7.75%     6.75%     7.75%      7.75%     6.75%
Expected long-term rate of return on plan
  assets......................................     9.25%      9.25%     9.25%     7.00%      7.00%     9.25%
Rate of compensation increase.................                          4.67%
  pension -- to age 45........................     5.25%      5.25%        NA
          -- age 45 to assumed retirement.....     3.75%      3.75%        NA
SERP..........................................     5.50%      5.50%        NA
</TABLE>

-------------------------
(a)  2000 and 1999 reflects CMS Energy's Pension and Other Postretirement
     benefits accounting.

     The Pension Plan's net unrecognized transition obligation, resulting from
the implementation of accrual accounting, is amortized over 16 years and 11
years for the SERP on a straight-line basis over the average remaining service
period of active employees.

     Panhandle accrues health care and life insurance benefit costs over the
active service period of employees to the date of full eligibility for the
benefits.

     With respect to the CMS OPEB Plan, the fair value of the plan assets was
$431 million at December 31, 2000 as compared to the benefit obligation of $725
million. At December 31, 1999, the fair value of the plan assets was $431
million versus projected benefit obligations of $736 million.

                                      PE-22
<PAGE>   178
                      PANHANDLE EASTERN PIPE LINE COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     It is Panhandle's and CMS Energy's general policy to fund accrued
postretirement health care costs. CMS Energy's retiree life insurance plan is
fully funded based on actuarially determined requirements.

     Panhandle's net periodic postretirement benefit cost, as allocated by CMS
Energy, was $3 million in 2000. In 1999 and 1998, Panhandle's net periodic
postretirement benefit cost was $4 million and $7 million respectively.

     For measurement purposes, a 7.0 percent weighted average rate of increase
in the per capita cost of covered health care benefits was assumed for 2000. The
rate is based on assumptions that it will decrease gradually to 5.5 percent in
2007 and thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for Panhandle's health care plans.

SENSITIVITY TO CHANGES IN ASSUMED HEALTH CARE COST TREND RATES

<TABLE>
<CAPTION>
                                                                ONE PERCENTAGE    ONE PERCENTAGE
                                                                POINT INCREASE    POINT DECREASE
                                                                --------------    --------------
                                                                          IN MILLIONS
<S>                                                             <C>               <C>
Effect on total service and interest cost components........          $1               $(1)
Effect on accumulated postretirement benefit obligation.....          $8               $(6)
</TABLE>

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                          FIRST     SECOND      THIRD     FOURTH
                                                         QUARTER    QUARTER    QUARTER    QUARTER    TOTAL
                                                         -------    -------    -------    -------    -----
                                                                           (IN MILLIONS)
<S>                                                      <C>        <C>        <C>        <C>        <C>
2000
Operating revenue....................................     $136       $105       $114       $128      $483
Pretax Operating Income..............................       70         34         42         38       184
Net income...........................................       32          9         14          9        64
1999
Operating revenue....................................     $133(a)    $104(a)    $107       $127      $471
Pretax Operating Income..............................       69(a)      44(a)      41         39       193
Net income...........................................       34         14         14         12        74
</TABLE>

-------------------------
(a)  First and second quarters of 1999 were restated to include certain
     miscellaneous income, including rental income and gain or loss on sale of
     assets, as other revenue.

                                      PE-23
<PAGE>   179

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Panhandle Eastern Pipe Line Company:

     We have audited the accompanying consolidated balance sheets of Panhandle
Eastern Pipe Line Company (a Delaware corporation) and subsidiaries as of
December 31, 2000 and December 31, 1999, and the related consolidated statements
of income, cash flows and common stockholder's equity for year ended December
31, 2000, and for the periods from January 1, 1999 through March 28, 1999 and
from March 29, 1999 through December 31, 1999. These financial statements are
the responsibility of the Company'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 financial position of Panhandle Eastern Pipe Line
Company and subsidiaries as of December 31, 2000, and 1999, and the results of
their operations and their cash flows for the year ended December 31, 2000, and
the periods from January 1, 1999 through March 28, 1999 and from March 29, 1999
through December 31, 1999 in conformity with accounting principles generally
accepted in the Unites States.

/s/ ARTHUR ANDERSEN LLP

Houston, Texas
March 6, 2001

                                      PE-24
<PAGE>   180

                          INDEPENDENT AUDITORS' REPORT

Panhandle Eastern Pipe Line Company:

     We have audited the accompanying consolidated statements of income, cash
flows, and common stockholder's equity for the year ended December 31, 1998 of
Panhandle Eastern Pipe Line Company and subsidiaries (the "Company"). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the Company's results of their operations and cash flows
for the year ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States of America.

[Deloitte & Touche LLP Sig]
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 12, 1999

                                      PE-25
<PAGE>   181

             ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                    ON ACCOUNTING AND FINANCIAL DISCLOSURE.

CMS ENERGY

     None for CMS Energy.

CONSUMERS

     None for Consumers.

PANHANDLE

     None for Panhandle.

                                       CO-1
<PAGE>   182

                                    PART III

                          ITEMS 10., 11., 12. and 13.

CMS ENERGY

     CMS Energy's definitive proxy statement, except for the organization and
compensation committee report and the comparison of five-year cumulative total
return performance graph contained therein, is incorporated by reference herein.
See also ITEM 1. BUSINESS for information pursuant to ITEM 10.

CONSUMERS

     Consumers' definitive information statement, except for the organization
and compensation committee report contained therein, is incorporated by
reference herein. See also ITEM 1. BUSINESS for information pursuant to ITEM 10.

                                       CO-2
<PAGE>   183

                                    PART IV
                ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                            AND REPORTS ON FORM 8-K.

(a)(1)      Financial Statements and Reports of Independent Public Accountants
            for CMS Energy, Consumers, and Panhandle 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 for CMS Energy, Consumers and Panhandle are listed after
            the Exhibits in the Index to Financial Statement Schedules, and are
            incorporated by reference herein.

(a)(3)      Exhibits for CMS Energy, Consumers, and Panhandle are listed after
            Item (c) below and are incorporated by reference herein.

(b)         Reports on Form 8-K for CMS Energy, Consumers and Panhandle

CMS ENERGY

     Current Reports filed October 2, 2000, October 13, 2000, November 1, 2000,
December 11, 2000 and February 23, 2001 covering matters reported pursuant to
ITEM 5. OTHER EVENTS.

CONSUMERS

     Current Reports filed October 2, 2000, November 1, 2000 and February 23,
2001 covering matters reported pursuant to ITEM 5. OTHER EVENTS.

PANHANDLE

     None

(c)         Exhibits, including those incorporated by reference (see also
            Exhibit volume).

                                       CO-3
<PAGE>   184

                  CMS ENERGY, CONSUMERS AND PANHANDLE EXHIBITS

<TABLE>
<CAPTION>
               PREVIOUSLY FILED
            -----------------------
            WITH FILE    AS EXHIBIT
EXHIBITS     NUMBER        NUMBER           DESCRIPTION
--------    ---------    ----------         -----------
<S>         <C>          <C>         <C>    <C>
(3)(a)      333-51932    (3)(a)      --     Restated Articles of Incorporation of CMS Energy. (Form
                                            S-3 filed December 15, 2000)
(3)(b)      333-45556    (3)(b)      --     By-Laws of CMS Energy. (Form S-3 filed September 11, 2000)
(3)(c)                               --     Restated Articles of Incorporation dated May 26, 2000, of
                                            Consumers.
(3)(d)      1-5611       (3)(d)      --     By-Laws of Consumers. (1999 Form 10-K)
(3)(e)      1-2921       3.01        --     Restated Certificate of Incorporation of Panhandle. (1993
                                            Form 10-K)
(3)(f)      1-2921       (3)(f)      --     By-Laws of Panhandle. (1999 Form 10-K)
(4)(a)      2-65973      (b)(1)-4    --     Indenture dated as of September 1, 1945, between Consumers
                                            and Chemical Bank (successor to Manufacturers Hanover
                                            Trust Company), as Trustee, including therein indentures
                                            supplemental thereto through the Forty-third Supplemental
                                            Indenture dated as of May 1, 1979.
                                     --     Indentures Supplemental thereto:
            33-41126     (4)(c)      --     68th dated as of 06/15/93
            1-5611       (4)         --     69th dated as of 09/15/93 (Form 8-K dated Sep. 21, 1993)
            1-5611       (4)(a)      --     70th dated as of 02/01/98 (1997 Form 10-K)
            1-5611       (4)(a)      --     71st dated as of 03/06/98 (1997 Form 10-K)
            1-5611       (4)(b)      --     72nd dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
            333-58943    (4)(d)      --     73rd dated as of 06/15/98
            1-5611       (4)(b)      --     74th dated as of 10/29/98 (3rd Qtr. 1998 Form 10-Q)
            1-5611       (4)(b)      --     75th dated as of 10/1/99 (1999 Form 10-K)
            1-5611       (4)(d)      --     77th dated as of 10/1/99 (1999 Form 10-K)
(4)(b)                               --     78th dated as of 11/15/00
(4)(c)      1-5611       (4)(b)      --     Indenture dated as of January 1, 1996 between Consumers
                                            and The Bank of New York, as Trustee. (1995 Form 10-K)
                                     --     Indentures Supplemental thereto:
            1-5611       (4)(b)      --     1st dated as of 01/18/96 (1995 Form 10-K)
            1-5611       (4)(a)      --     2nd dated as of 09/04/97 (3rd qtr 1997 Form 10-Q)
            1-9513       (4)(a)      --     3rd 11/04/99 (3rd qtr 1999 Form 10-Q)
(4)(d)      1-5611       (4)(c)      --     Indenture dated as of February 1, 1998 between Consumers
                                            and The Chase Manhattan Bank, as Trustee. (1997 Form 10-K)
            1-5611       (4)(a)      --     1st dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
            333-58943    (4)(b)      --     2nd dated as of 06/15/98
            1-5611       (4)(a)      --     3rd 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(e)      33-47629     (4)(a)      --     Indenture dated as of September 15, 1992 between CMS
                                            Energy and NBD Bank, as Trustee. (Form S-3 filed May 1,
                                            1992)
                                     --     Indentures Supplemental thereto:
            1-9513       (4)         --     1st dated as of 10/01/92 (Form 8-K dated October 1, 1992)
            1-9513       (4)(a)      --     2nd dated as of 10/01/92 (Form 8-K dated October 1, 1992)
            1-9513       (4)         --     3rd dated as of 05/06/97 (1st qtr 1997 Form 10-Q)
            333-37241    (4)(a)      --     4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
            1-9513       (4)(b)      --     5th dated as of 11/04/97 (3rd qtr 1997 Form 10-Q)
            1-9513       (4)(d)      --     6th dated as of 01/13/98 (1997 Form 10-K)
            1-9513       (4)(d)(i)   --     7th dated as of 01/25/99 (1998 Form 10-K)
            1-9513       (4)(d)(ii)  --     8th dated as of 02/03/99 (1998 Form 10-K)
</TABLE>

                                       CO-4
<PAGE>   185

<TABLE>
<CAPTION>
               PREVIOUSLY FILED
            -----------------------
            WITH FILE    AS EXHIBIT
EXHIBITS     NUMBER        NUMBER           DESCRIPTION
--------    ---------    ----------         -----------
<S>         <C>          <C>         <C>    <C>
            1-9513       (4)(a)      --     9th dated as of 06/22/99 (2nd qtr 1999 Form 10-Q)
            333-48276    (4)         --     10th dated as of 10/12/00 (Form S-3MEF filed October 19,
                                            2000)
(4)(f)      1-9513       (4)(b)      --     Indenture between CMS Energy and The Chase Manhattan Bank,
                                            as Trustee, dated as of January 15, 1994. (Form 8-K dated
                                            March 29, 1994)
                                     --     Indentures Supplemental thereto:
            1-9513       (4b)        --     1st dated as of 01/20/94 (Form 8-K dated March 29, 1994)
            1-9513       (4)         --     2nd dated as of 03/19/96 (1st qtr 1996 Form 10-Q)
            1-9513       (4)(a)(iv)  --     3rd dated as of 03/17/97 (Form 8-K dated May 1, 1997)
            333-36115    (4)(d)      --     4th dated as of 09/17/97 (Form S-3 filed September 22,
                                            1997)
            333-63229    (4)(c)      --     5th dated as of 08/26/98 (Form S-4 filed September 10,
                                            1998)
            1-9513       (4)         --     6th dated as of 11/9/00 (3rd qtr 2000 Form 10-Q)
(4)(g)      1-9513       (4a)        --     Indenture dated as of June 1, 1997, between CMS Energy and
                                            The Bank of New York, as trustee. (Form 8-K filed July 1,
                                            1997)
                                     --     Indentures Supplemental thereto:
            1-9513       (4)(b)      --     1st dated as of 06/20/97 (Form 8-K filed July 1, 1997)
            333-45556    (4)(e)      --     4th dated as of 08/22/00 (Form S-3 filed September 11,
                                            2000)
(4)(h)      1-2921       (4)(a)      --     Indenture dated as of March 29, 1999, among CMS Panhandle
                                            Holding Company, Panhandle Eastern Pipe Line Company and
                                            NBD Bank, as Trustee. (1st Qtr. 1999 10-Q)
            1-2921       (4)(b)      --     1st Supplemental Indenture dated as of March 29, 1999,
                                            among CMS Panhandle Holding Company, Panhandle Eastern
                                            Pipe Line Company and NBD Bank, as Trustee, including a
                                            form of Guarantee by Panhandle Eastern Pipe Line Company
                                            of the obligations of CMS Panhandle Holding Company. (1st
                                            qtr 1999 Form 10-Q)
            1-2921       (4)(a)      --     2nd Supplemental Indenture dated as of March 27, 2000,
                                            among Panhandle, as Issuer and Bank One Trust Company,
                                            National Association, as Trustee, Pursuant to Item
                                            6.01(b)(4)(iii) of Regulation S-K, in lieu of filing a
                                            copy of such agreement, Panhandle agrees to furnish a copy
                                            of such agreement to the Commission upon request.
(4)(i)      33-58552     (4)         --     Indenture, dated as of February 1, 1993, between Panhandle
                                            and Morgan Guaranty Trust Company of New York. (Form S-3
                                            filed February 19, 1993)
(4)(j)      1-9513       (4)         --     Credit Agreement, dated as of June 27, 2000 among CMS
                                            Energy, as Borrower, and the Banks named therein, as
                                            Banks, and the Chase Manhattan Bank, as Administrative
                                            Agent and Collateral Agent, and Bank of America, N.A. and
                                            Barclays Bank plc as Co-Syndication Agents, and Citibank,
                                            N.A., as Documentation Agent. (2nd qtr 2000 Form 10-Q)
(10(a)      1-9513       (10)(b)     --     Form of Employment Agreement entered into by CMS Energy's
                                            and Consumers' executive officers. (1999 Form 10-K)
(10)(b)     1-5611       (10)(g)     --     Consumers' Executive Stock Option and Stock Appreciation
                                            Rights Plan effective December 1, 1989. (1990 Form 10-K)
(10)(c)     1-9513       (10)(d)     --     CMS Energy's Performance Incentive Stock Plan effective
                                            February 3, 1988, as amended December 3, 1999. (1999 Form
                                            10-K)
(10)(d)     1-9513       (10)(m)     --     CMS Deferred Salary Savings Plan effective January 1,
                                            1994. (1993 Form 10-K)
</TABLE>

                                       CO-5
<PAGE>   186

<TABLE>
<CAPTION>
               PREVIOUSLY FILED
            -----------------------
            WITH FILE    AS EXHIBIT
EXHIBITS     NUMBER        NUMBER           DESCRIPTION
--------    ---------    ----------         -----------
<S>         <C>          <C>         <C>    <C>
(10)(e)     1-9513       (10)(n)     --     CMS Energy and Consumers Annual Executive Incentive
                                            Compensation Plan effective January 1, 1986, as amended
                                            January 1995. (1995 Form 10-K)
(10)(f)     1-9513       (10)(h)     --     Supplemental Executive Retirement Plan for Employees of
                                            CMS Energy/Consumers Energy Company effective January 1,
                                            1982, as amended December 3, 1999. (1999 Form 10-K)
(10)(g)     33-37977     4.1         --     Senior Trust Indenture, Leasehold Mortgage and Security
                                            Agreement dated as of June 1, 1990 between The Connecticut
                                            National Bank and United States Trust Company of New York.
                                            (MCV Partnership)
                                            Indenture Supplemental thereto:
            33-37977     4.2         --     Supplement No. 1 dated as of June 1, 1990. (MCV
                                            Partnership)
(10)(h)     1-9513       (28)(b)     --     Collateral Trust Indenture dated as of June 1, 1990 among
                                            Midland Funding Corporation I, MCV Partnership and United
                                            States Trust Company of New York, Trustee. (3rd qtr 1990
                                            Form 10-Q)
                                            Indenture Supplemental thereto:
            33-37977     4.4         --     Supplement No. 1 dated as of June 1, 1990. (MCV
                                            Partnership)
(10)(i)     1-9513       (10)(v)     --     Amended and Restated Investor Partner Tax Indemnification
                                            Agreement dated as of June 1, 1990 among Investor
                                            Partners, CMS Midland as Indemnitor and CMS Energy as
                                            Guarantor. (1990 Form 10-K)
(10)(j)     1-9513       (19)(d)**   --     Environmental Agreement dated as of June 1, 1990 made by
                                            CMS Energy to The Connecticut National Bank and Others.
                                            (1990 Form 10-K)
(10)(k)     1-9513       (10)(z)**   --     Indemnity Agreement dated as of June 1, 1990 made by CMS
                                            Energy to Midland Cogeneration Venture Limited
                                            Partnership. (1990 Form 10-K)
(10)(l)     1-9513       (10)(aa)**  --     Environmental Agreement dated as of June 1, 1990 made by
                                            CMS Energy to United States Trust Company of New York,
                                            Meridian Trust Company, each Subordinated Collateral Trust
                                            Trustee and Holders from time to time of Senior Bonds and
                                            Subordinated Bonds and Participants from time to time in
                                            Senior Bonds and Subordinated Bonds. (1990 Form 10-K)
(10)(m)     33-37977     10.4        --     Amended and Restated Participation Agreement dated as of
                                            June 1, 1990 among MCV Partnership, Owner Participant, The
                                            Connecticut National Bank, United States Trust Company,
                                            Meridian Trust Company, Midland Funding Corporation I,
                                            Midland Funding Corporation II, MEC Development
                                            Corporation and Institutional Senior Bond Purchasers. (MCV
                                            Partnership)
            1-5611       (10)(w)     --     Amendment No. 1 dated as of July 1, 1991. (1991 Form 10-K)
(10)(n)     33-3797      10.4        --     Power Purchase Agreement dated as of July 17, 1986 between
                                            MCV Partnership and Consumers. (MCV Partnership)
                                            Amendments thereto:
            33-37977     10.5        --     Amendment No. 1 dated September 10, 1987. (MCV
                                            Partnership)
            33-37977     10.6        --     Amendment No. 2 dated March 18, 1988. (MCV Partnership)
            33-37977     10.7        --     Amendment No. 3 dated August 28, 1989. (MCV Partnership)
            33-37977     10.8        --     Amendment No. 4A dated May 25, 1989. (MCV Partnership)
(10)(o)     1-5611       (10)(y)     --     Unwind Agreement dated as of December 10, 1991 by and
                                            among CMS Energy, Midland Group, Ltd., Consumers, CMS
                                            Midland, Inc., MEC Development Corp. and CMS Midland
                                            Holdings Company. (1991 Form 10-K)
</TABLE>

                                       CO-6
<PAGE>   187

<TABLE>
<CAPTION>
               PREVIOUSLY FILED
            -----------------------
            WITH FILE    AS EXHIBIT
EXHIBITS     NUMBER        NUMBER           DESCRIPTION
--------    ---------    ----------         -----------
<S>         <C>          <C>         <C>    <C>
(10)(p)     1-5611       (10)(z)     --     Stipulated AGE Release Amount Payment Agreement dated as
                                            of June 1, 1990, among CMS Energy, Consumers and The Dow
                                            Chemical Company. (1991 Form 10-K)
(10)(q)     1-5611       (10)(aa)**  --     Parent Guaranty dated as of June 14, 1990 from CMS Energy
                                            to MCV, each of the Owner Trustees, the Indenture
                                            Trustees, the Owner Participants and the Initial
                                            Purchasers of Senior Bonds in the MCV Sale Leaseback
                                            transaction, and MEC Development. (1991 Form 10-K)
(10)(r)     1-8157       10.41       --     Contract for Firm Transportation of Natural Gas between
                                            Consumers Power Company and Trunkline Gas Company, dated
                                            November 1, 1989, and Amendment, dated November 1, 1989.
                                            (1989 Form 10-K of PanEnergy Corp.)
(10)(s)     1-8157       10.41       --     Contract for Firm Transportation of Natural Gas between
                                            Consumers Power Company and Trunkline Gas Company, dated
                                            November 1, 1989. (1991 Form 10-K of PanEnergy Corp.)
(10)(t)     1-2921       10.03       --     Contract for Firm Transportation of Natural Gas between
                                            Consumers Power Company and Trunkline Gas Company, dated
                                            September 1, 1993. (1993 Form 10-K)
(12)                                 --     Statements regarding computation of CMS Energy's Ratio of
                                            Earnings to Fixed Charges.
(16)(b)     1-02921      16(B)       --     Letter of Deloitte & Touche LLP (Form 8-K/A dated July 19,
                                            1999).
(21)(a)                              --     Subsidiaries of CMS Energy.
(21)(b)                              --     Subsidiaries of Consumers.
(23)(a)                              --     Consent of Arthur Andersen LLP for CMS Energy.
(23)(b)                              --     Consent of Arthur Andersen LLP for Consumers.
(24)(a)                              --     Power of Attorney for CMS Energy.
(24)(b)                              --     Power of Attorney for Consumers.
(24)(c)                              --     Power of Attorney for Panhandle
</TABLE>

-------------------------
** 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.

                                       CO-7
<PAGE>   188

                     INDEX TO FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Schedule II
  Valuation and Qualifying Accounts and Reserves 2000, 1999
     and 1998:
     CMS Energy Corporation.................................    CO- 9
     Consumers Energy Company...............................    CO-10
Report of Independent Public Accountants
     CMS Energy Corporation.................................    CO-11
     Consumers Energy Company...............................    CO-12
</TABLE>

     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.

                                       CO-8
<PAGE>   189

                             CMS ENERGY CORPORATION
         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                 YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998

<TABLE>
<CAPTION>
                                                 BALANCE AT    CHARGED    CHARGED TO                   BALANCE
                                                 BEGINNING       TO         OTHER                      AT END
                 DESCRIPTION                     OF PERIOD     EXPENSE     ACCOUNTS     DEDUCTIONS    OF PERIOD
                 -----------                     ----------    -------    ----------    ----------    ---------
                                                                         (IN MILLIONS)
<S>                                              <C>           <C>        <C>           <C>           <C>
Accumulated provision for uncollectible
  accounts:
  2000.......................................       $12          $14         $ 6           $14(a)        $18
  1999.......................................       $13          $15         $(3)          $13(a)        $12
  1998.......................................       $ 7          $12         $ 5           $11(a)        $13
</TABLE>

-------------------------
(a)  Accounts receivable written off including net uncollectible amounts of $12
     in 2000, $12 in 1999 and $10 in 1998 charged directly to operating expense
     and credited to accounts receivable.

                                       CO-9
<PAGE>   190

                            CONSUMERS ENERGY COMPANY

         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                 BALANCE AT    CHARGED    CHARGED TO                   BALANCE
                                                 BEGINNING       TO         OTHER                      AT END
                 DESCRIPTION                     OF PERIOD     EXPENSE     ACCOUNTS     DEDUCTIONS    OF PERIOD
                 -----------                     ----------    -------    ----------    ----------    ---------
                                                                         (IN MILLIONS)
<S>                                              <C>           <C>        <C>           <C>           <C>
Accumulated provision for uncollectible
  accounts:
  2000.......................................        $4          $10          --           $11(a)        $3
  1999.......................................        $5          $ 7          --           $ 8(a)        $4
  1998.......................................        $6          $10          --           $11(a)        $5
</TABLE>

-------------------------
(a)  Accounts receivable written off including net uncollectible amounts of $9
     in 2000, $7 in 1999 and $10 in 1998 charged directly to operating expense
     and credited to accounts receivable.

                                      CO-10
<PAGE>   191

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CMS Energy Corporation:

     We have audited in accordance with auditing standards generally accepted in
the United States, CMS Energy Corporation's consolidated financial statements
included in this Form 10-K, and have issued our report thereon dated February 2,
2001. Our audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a) is the responsibility of the Company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Detroit, Michigan
February 2, 2001

                                      CO-11
<PAGE>   192

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Consumers Energy Company:

     We have audited in accordance with auditing standards generally accepted in
the United States, Consumers Energy Company's consolidated financial statements
included in this Form 10-K, and have issued our report thereon dated February 2,
2001. Our audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a) is the responsibility of the Company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Detroit, Michigan,
February 2, 2001

                                      CO-12
<PAGE>   193

                                   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
23rd day of March 2001.

                                          CMS ENERGY CORPORATION

                                          By   /s/ WILLIAM T. MCCORMICK, JR.
                                            ------------------------------------
                                                 William T. McCormick, Jr.
                                              Chairman of the Board, President
                                                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 23rd day of March 2001.

<TABLE>
<CAPTION>
                    SIGNATURE                                             TITLE
                    ---------                                             -----
<C>                                                   <S>
(i) Principal executive officer:

          /s/ WILLIAM T. MCCORMICK, JR.               Chairman of the Board, President, Chief
--------------------------------------------------      Executive Officer and Director
            William T. McCormick, Jr.

(ii) Principal financial officer:

                 /s/ A. M. WRIGHT                     Executive Vice President, Chief Financial
--------------------------------------------------      Officer and Chief Administrative Officer
                  Alan M. Wright

(iii) Controller or principal accounting officer:

                 /s/ P. D. HOPPER                     Senior Vice President, Chief Accounting
--------------------------------------------------      Officer and Controller
                Preston D. Hopper

(iv) A majority of the Directors including those named above:

                 JOHN M. DEUTCH*                      Director
--------------------------------------------------
                  John M. Deutch

               JAMES J. DUDERSTADT*                   Director
--------------------------------------------------
               James J. Duderstadt

                 K. R. FLAHERTY*                      Director
--------------------------------------------------
               Kathleen R. Flaherty

                 EARL D. HOLTON*                      Director
--------------------------------------------------
                  Earl D. Holton

                  W. U. PARFET*                       Director
--------------------------------------------------
                William U. Parfet

                 PERCY A. PIERRE*                     Director
--------------------------------------------------
                 Percy A. Pierre

                 KENNETH L. WAY*                      Director
--------------------------------------------------
                  Kenneth L. Way

                                                      Director
--------------------------------------------------
                 Kenneth Whipple

                JOHN B. YASINSKY*                     Director
--------------------------------------------------
                 John B. Yasinsky

             *By /s/ THOMAS A. MCNISH
--------------------------------------------------
                Thomas A. McNish,
                 Attorney-in-Fact
</TABLE>

                                      CO-13
<PAGE>   194

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Consumers Energy Company has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 23rd day of March 2001.

                                          CONSUMERS ENERGY COMPANY

                                          By   /s/ WILLIAM T. MCCORMICK, JR.
                                            ------------------------------------
                                                 William T. McCormick, Jr.
                                            Chairman of the Board and President

     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
Consumers Energy Company and in the capacities and on the 23rd day of March
2001.

<TABLE>
<CAPTION>
                    SIGNATURE                                             TITLE
                    ---------                                             -----
<C>                                                   <S>
(i) Principal executive officer:

          /s/ WILLIAM T. MCCORMICK, JR.               Chairman of the Board, President and Director
--------------------------------------------------
            William T. McCormick, Jr.

(ii) Principal financial officer:

                 /s/ A. M. WRIGHT                     Executive Vice President, Chief Financial
--------------------------------------------------      Officer and Chief Administrative Officer
                  Alan M. Wright

(iii) Controller or principal accounting officer:

                 /s/ DENNIS DAPRA                     Senior Vice President and Controller
--------------------------------------------------
                   Dennis DaPra

(iv) A majority of the Directors including those named above:

                 JOHN M. DEUTCH*                      Director
--------------------------------------------------
                  John M. Deutch

               JAMES J. DUDERSTADT*                   Director
--------------------------------------------------
               James J. Duderstadt

                 K. R. FLAHERTY*                      Director
--------------------------------------------------
               Kathleen R. Flaherty

                 EARL D. HOLTON*                      Director
--------------------------------------------------
                  Earl D. Holton

            WILLIAM T. MCCORMICK, JR.*                Director
--------------------------------------------------
            William T. McCormick, Jr.

                  W. U. PARFET*                       Director
--------------------------------------------------
                William U. Parfet

                 PERCY A. PIERRE*                     Director
--------------------------------------------------
                 Percy A. Pierre

                 KENNETH L. WAY*                      Director
--------------------------------------------------
                  Kenneth L. Way

                                                      Director
--------------------------------------------------
                 Kenneth Whipple

                JOHN B. YASINSKY*                     Director
--------------------------------------------------
                 John B. Yasinsky

             *By /s/ THOMAS A. MCNISH
--------------------------------------------------
                Thomas A. McNish,
                 Attorney-in-Fact
</TABLE>

                                      CO-14
<PAGE>   195

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Panhandle Eastern Pipe Line has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 23rd day of March 2001.

                                          PANHANDLE EASTERN PIPE LINE COMPANY

                                          By       /s/ WILLIAM J. HAENER
                                            ------------------------------------
                                                     William J. Haener
                                             Chairman of the Board and Director

     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
Panhandle Eastern Pipe Line Company and in the capacities and on the 23rd day of
March 2001.

<TABLE>
<CAPTION>
                    SIGNATURE                                             TITLE
                    ---------                                             -----
<C>                                                   <S>
(i) Principal executive officer:

             /s/ CHRISTOPHER A. HELMS                 President and Chief Executive Officer
--------------------------------------------------
               Christopher A. Helms

(ii) Principal financial officer:

                 /s/ A. M. WRIGHT                     Senior Vice President, Chief Financial
--------------------------------------------------      Officer, Treasurer and Director
                  Alan M. Wright

(iii) Controller or principal accounting officer:

                /s/ G. W. LEFELAR                     Vice President and Controller
--------------------------------------------------
                 Gary W. Lefelar

(iv) A majority of the Directors including those named above:

          /s/ WILLIAM T. MCCORMICK, JR.               Director
--------------------------------------------------
            William T. McCormick, Jr.
</TABLE>

                                      CO-15
<PAGE>   196

                  CMS ENERGY, CONSUMERS AND PANHANDLE EXHIBITS

<TABLE>
<CAPTION>
               PREVIOUSLY FILED
            -----------------------
            WITH FILE    AS EXHIBIT
EXHIBITS     NUMBER        NUMBER           DESCRIPTION
--------    ---------    ----------         -----------
<S>         <C>          <C>         <C>    <C>
(3)(a)      333-51932    (3)(a)      --     Restated Articles of Incorporation of CMS Energy. (Form
                                            S-3 filed December 15, 2000)
(3)(b)      333-45556    (3)(b)      --     By-Laws of CMS Energy. (Form S-3 filed September 11, 2000)
(3)(c)                               --     Restated Articles of Incorporation dated May 26, 2000, of
                                            Consumers.
(3)(d)      1-5611       (3)(d)      --     By-Laws of Consumers. (1999 Form 10-K)
(3)(e)      1-2921       3.01        --     Restated Certificate of Incorporation of Panhandle. (1993
                                            Form 10-K)
(3)(f)      1-2921       (3)(f)      --     By-Laws of Panhandle. (1999 Form 10-K)
(4)(a)      2-65973      (b)(1)-4    --     Indenture dated as of September 1, 1945, between Consumers
                                            and Chemical Bank (successor to Manufacturers Hanover
                                            Trust Company), as Trustee, including therein indentures
                                            supplemental thereto through the Forty-third Supplemental
                                            Indenture dated as of May 1, 1979.
                                     --     Indentures Supplemental thereto:
            33-41126     (4)(c)      --     68th dated as of 06/15/93
            1-5611       (4)         --     69th dated as of 09/15/93 (Form 8-K dated Sep. 21, 1993)
            1-5611       (4)(a)      --     70th dated as of 02/01/98 (1997 Form 10-K)
            1-5611       (4)(a)      --     71st dated as of 03/06/98 (1997 Form 10-K)
            1-5611       (4)(b)      --     72nd dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
            333-58943    (4)(d)      --     73rd dated as of 06/15/98
            1-5611       (4)(b)      --     74th dated as of 10/29/98 (3rd Qtr. 1998 Form 10-Q)
            1-5611       (4)(b)      --     75th dated as of 10/1/99 (1999 Form 10-K)
            1-5611       (4)(d)      --     77th dated as of 10/1/99 (1999 Form 10-K)
(4)(b)                               --     78th dated as of 11/15/00
(4)(c)      1-5611       (4)(b)      --     Indenture dated as of January 1, 1996 between Consumers
                                            and The Bank of New York, as Trustee. (1995 Form 10-K)
                                     --     Indentures Supplemental thereto:
            1-5611       (4)(b)      --     1st dated as of 01/18/96 (1995 Form 10-K)
            1-5611       (4)(a)      --     2nd dated as of 09/04/97 (3rd qtr 1997 Form 10-Q)
            1-9513       (4)(a)      --     3rd 11/04/99 (3rd qtr 1999 Form 10-Q)
(4)(d)      1-5611       (4)(c)      --     Indenture dated as of February 1, 1998 between Consumers
                                            and The Chase Manhattan Bank, as Trustee. (1997 Form 10-K)
            1-5611       (4)(a)      --     1st dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
            333-58943    (4)(b)      --     2nd dated as of 06/15/98
            1-5611       (4)(a)      --     3rd 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(e)      33-47629     (4)(a)      --     Indenture dated as of September 15, 1992 between CMS
                                            Energy and NBD Bank, as Trustee. (Form S-3 filed May 1,
                                            1992)
                                     --     Indentures Supplemental thereto:
            1-9513       (4)         --     1st dated as of 10/01/92 (Form 8-K dated October 1, 1992)
            1-9513       (4)(a)      --     2nd dated as of 10/01/92 (Form 8-K dated October 1, 1992)
            1-9513       (4)         --     3rd dated as of 05/06/97 (1st qtr 1997 Form 10-Q)
            333-37241    (4)(a)      --     4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
            1-9513       (4)(b)      --     5th dated as of 11/04/97 (3rd qtr 1997 Form 10-Q)
            1-9513       (4)(d)      --     6th dated as of 01/13/98 (1997 Form 10-K)
            1-9513       (4)(d)(i)   --     7th dated as of 01/25/99 (1998 Form 10-K)
            1-9513       (4)(d)(ii)  --     8th dated as of 02/03/99 (1998 Form 10-K)
</TABLE>
<PAGE>   197

<TABLE>
<CAPTION>
               PREVIOUSLY FILED
            -----------------------
            WITH FILE    AS EXHIBIT
EXHIBITS     NUMBER        NUMBER           DESCRIPTION
--------    ---------    ----------         -----------
<S>         <C>          <C>         <C>    <C>
            1-9513       (4)(a)      --     9th dated as of 06/22/99 (2nd qtr 1999 Form 10-Q)
            333-48276    (4)         --     10th dated as of 10/12/00 (Form S-3MEF filed October 19,
                                            2000)
(4)(f)      1-9513       (4)(b)      --     Indenture between CMS Energy and The Chase Manhattan Bank,
                                            as Trustee, dated as of January 15, 1994. (Form 8-K dated
                                            March 29, 1994)
                                     --     Indentures Supplemental thereto:
            1-9513       (4b)        --     1st dated as of 01/20/94 (Form 8-K dated March 29, 1994)
            1-9513       (4)         --     2nd dated as of 03/19/96 (1st qtr 1996 Form 10-Q)
            1-9513       (4)(a)(iv)  --     3rd dated as of 03/17/97 (Form 8-K dated May 1, 1997)
            333-36115    (4)(d)      --     4th dated as of 09/17/97 (Form S-3 filed September 22,
                                            1997)
            333-63229    (4)(c)      --     5th dated as of 08/26/98 (Form S-4 filed September 10,
                                            1998)
            1-9513       (4)         --     6th dated as of 11/9/00 (3rd qtr 2000 Form 10-Q)
(4)(g)      1-9513       (4a)        --     Indenture dated as of June 1, 1997, between CMS Energy and
                                            The Bank of New York, as trustee. (Form 8-K filed July 1,
                                            1997)
                                     --     Indentures Supplemental thereto:
            1-9513       (4)(b)      --     1st dated as of 06/20/97 (Form 8-K filed July 1, 1997)
            333-45556    (4)(e)      --     4th dated as of 08/22/00 (Form S-3 filed September 11,
                                            2000)
(4)(h)      1-2921       (4)(a)      --     Indenture dated as of March 29, 1999, among CMS Panhandle
                                            Holding Company, Panhandle Eastern Pipe Line Company and
                                            NBD Bank, as Trustee. (1st Qtr. 1999 10-Q)
            1-2921       (4)(b)      --     1st Supplemental Indenture dated as of March 29, 1999,
                                            among CMS Panhandle Holding Company, Panhandle Eastern
                                            Pipe Line Company and NBD Bank, as Trustee, including a
                                            form of Guarantee by Panhandle Eastern Pipe Line Company
                                            of the obligations of CMS Panhandle Holding Company. (1st
                                            qtr 1999 Form 10-Q)
            1-2921       (4)(a)      --     2nd Supplemental Indenture dated as of March 27, 2000,
                                            among Panhandle, as Issuer and Bank One Trust Company,
                                            National Association, as Trustee, Pursuant to Item
                                            6.01(b)(4)(iii) of Regulation S-K, in lieu of filing a
                                            copy of such agreement, Panhandle agrees to furnish a copy
                                            of such agreement to the Commission upon request.
(4)(i)      33-58552     (4)         --     Indenture, dated as of February 1, 1993, between Panhandle
                                            and Morgan Guaranty Trust Company of New York. (Form S-3
                                            filed February 19, 1993)
(4)(j)      1-9513       (4)         --     Credit Agreement, dated as of June 27, 2000 among CMS
                                            Energy, as Borrower, and the Banks named therein, as
                                            Banks, and the Chase Manhattan Bank, as Administrative
                                            Agent and Collateral Agent, and Bank of America, N.A. and
                                            Barclays Bank plc as Co-Syndication Agents, and Citibank,
                                            N.A., as Documentation Agent. (2nd qtr 2000 Form 10-Q)
(10(a)      1-9513       (10)(b)     --     Form of Employment Agreement entered into by CMS Energy's
                                            and Consumers' executive officers. (1999 Form 10-K)
(10)(b)     1-5611       (10)(g)     --     Consumers' Executive Stock Option and Stock Appreciation
                                            Rights Plan effective December 1, 1989. (1990 Form 10-K)
(10)(c)     1-9513       (10)(d)     --     CMS Energy's Performance Incentive Stock Plan effective
                                            February 3, 1988, as amended December 3, 1999. (1999 Form
                                            10-K)
(10)(d)     1-9513       (10)(m)     --     CMS Deferred Salary Savings Plan effective January 1,
                                            1994. (1993 Form 10-K)
</TABLE>
<PAGE>   198

<TABLE>
<CAPTION>
               PREVIOUSLY FILED
            -----------------------
            WITH FILE    AS EXHIBIT
EXHIBITS     NUMBER        NUMBER           DESCRIPTION
--------    ---------    ----------         -----------
<S>         <C>          <C>         <C>    <C>
(10)(e)     1-9513       (10)(n)     --     CMS Energy and Consumers Annual Executive Incentive
                                            Compensation Plan effective January 1, 1986, as amended
                                            January 1995. (1995 Form 10-K)
(10)(f)     1-9513       (10)(h)     --     Supplemental Executive Retirement Plan for Employees of
                                            CMS Energy/Consumers Energy Company effective January 1,
                                            1982, as amended December 3, 1999. (1999 Form 10-K)
(10)(g)     33-37977     4.1         --     Senior Trust Indenture, Leasehold Mortgage and Security
                                            Agreement dated as of June 1, 1990 between The Connecticut
                                            National Bank and United States Trust Company of New York.
                                            (MCV Partnership)
                                            Indenture Supplemental thereto:
            33-37977     4.2         --     Supplement No. 1 dated as of June 1, 1990. (MCV
                                            Partnership)
(10)(h)     1-9513       (28)(b)     --     Collateral Trust Indenture dated as of June 1, 1990 among
                                            Midland Funding Corporation I, MCV Partnership and United
                                            States Trust Company of New York, Trustee. (3rd qtr 1990
                                            Form 10-Q)
                                            Indenture Supplemental thereto:
            33-37977     4.4         --     Supplement No. 1 dated as of June 1, 1990. (MCV
                                            Partnership)
(10)(i)     1-9513       (10)(v)     --     Amended and Restated Investor Partner Tax Indemnification
                                            Agreement dated as of June 1, 1990 among Investor
                                            Partners, CMS Midland as Indemnitor and CMS Energy as
                                            Guarantor. (1990 Form 10-K)
(10)(j)     1-9513       (19)(d)**   --     Environmental Agreement dated as of June 1, 1990 made by
                                            CMS Energy to The Connecticut National Bank and Others.
                                            (1990 Form 10-K)
(10)(k)     1-9513       (10)(z)**   --     Indemnity Agreement dated as of June 1, 1990 made by CMS
                                            Energy to Midland Cogeneration Venture Limited
                                            Partnership. (1990 Form 10-K)
(10)(l)     1-9513       (10)(aa)**  --     Environmental Agreement dated as of June 1, 1990 made by
                                            CMS Energy to United States Trust Company of New York,
                                            Meridian Trust Company, each Subordinated Collateral Trust
                                            Trustee and Holders from time to time of Senior Bonds and
                                            Subordinated Bonds and Participants from time to time in
                                            Senior Bonds and Subordinated Bonds. (1990 Form 10-K)
(10)(m)     33-37977     10.4        --     Amended and Restated Participation Agreement dated as of
                                            June 1, 1990 among MCV Partnership, Owner Participant, The
                                            Connecticut National Bank, United States Trust Company,
                                            Meridian Trust Company, Midland Funding Corporation I,
                                            Midland Funding Corporation II, MEC Development
                                            Corporation and Institutional Senior Bond Purchasers. (MCV
                                            Partnership)
            1-5611       (10)(w)     --     Amendment No. 1 dated as of July 1, 1991. (1991 Form 10-K)
(10)(n)     33-3797      10.4        --     Power Purchase Agreement dated as of July 17, 1986 between
                                            MCV Partnership and Consumers. (MCV Partnership)
                                            Amendments thereto:
            33-37977     10.5        --     Amendment No. 1 dated September 10, 1987. (MCV
                                            Partnership)
            33-37977     10.6        --     Amendment No. 2 dated March 18, 1988. (MCV Partnership)
            33-37977     10.7        --     Amendment No. 3 dated August 28, 1989. (MCV Partnership)
            33-37977     10.8        --     Amendment No. 4A dated May 25, 1989. (MCV Partnership)
(10)(o)     1-5611       (10)(y)     --     Unwind Agreement dated as of December 10, 1991 by and
                                            among CMS Energy, Midland Group, Ltd., Consumers, CMS
                                            Midland, Inc., MEC Development Corp. and CMS Midland
                                            Holdings Company. (1991 Form 10-K)
</TABLE>
<PAGE>   199

<TABLE>
<CAPTION>
               PREVIOUSLY FILED
            -----------------------
            WITH FILE    AS EXHIBIT
EXHIBITS     NUMBER        NUMBER           DESCRIPTION
--------    ---------    ----------         -----------
<S>         <C>          <C>         <C>    <C>
(10)(p)     1-5611       (10)(z)     --     Stipulated AGE Release Amount Payment Agreement dated as
                                            of June 1, 1990, among CMS Energy, Consumers and The Dow
                                            Chemical Company. (1991 Form 10-K)
(10)(q)     1-5611       (10)(aa)**  --     Parent Guaranty dated as of June 14, 1990 from CMS Energy
                                            to MCV, each of the Owner Trustees, the Indenture
                                            Trustees, the Owner Participants and the Initial
                                            Purchasers of Senior Bonds in the MCV Sale Leaseback
                                            transaction, and MEC Development. (1991 Form 10-K)
(10)(r)     1-8157       10.41       --     Contract for Firm Transportation of Natural Gas between
                                            Consumers Power Company and Trunkline Gas Company, dated
                                            November 1, 1989, and Amendment, dated November 1, 1989.
                                            (1989 Form 10-K of PanEnergy Corp.)
(10)(s)     1-8157       10.41       --     Contract for Firm Transportation of Natural Gas between
                                            Consumers Power Company and Trunkline Gas Company, dated
                                            November 1, 1989. (1991 Form 10-K of PanEnergy Corp.)
(10)(t)     1-2921       10.03       --     Contract for Firm Transportation of Natural Gas between
                                            Consumers Power Company and Trunkline Gas Company, dated
                                            September 1, 1993. (1993 Form 10-K)
(12)                                 --     Statements regarding computation of CMS Energy's Ratio of
                                            Earnings to Fixed Charges.
(16)(b)     1-02921      16(B)       --     Letter of Deloitte & Touche LLP (Form 8-K/A dated July 19,
                                            1999).
(21)(a)                              --     Subsidiaries of CMS Energy.
(21)(b)                              --     Subsidiaries of Consumers.
(23)(a)                              --     Consent of Arthur Andersen LLP for CMS Energy.
(23)(b)                              --     Consent of Arthur Andersen LLP for Consumers.
(24)(a)                              --     Power of Attorney for CMS Energy.
(24)(b)                              --     Power of Attorney for Consumers.
(24)(c)                              --     Power of Attorney for Panhandle
</TABLE>

-------------------------
** 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.