<PAGE>
================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

================================================================================

                                   FORM 10-K/A

                                 AMENDMENT NO. 1


     [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

     [ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934

             For the transition period from __________ to __________


       Commission     Registrant; State of Incorporation;       IRS Employer
       File Number       Address; and Telephone Number       Identification No.
       -----------       -----------------------------       ------------------



         1-5611            CONSUMERS ENERGY COMPANY              38-0442310
                           (A Michigan Corporation)
             212 West Michigan Avenue, Jackson, Michigan 49201
                               (517)788-0550



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>
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

CONSUMERS ENERGY
  COMPANY FINANCING IV                   9.00% 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. [ ]

Documents incorporated by reference: CMS Energy's proxy statement and Consumers
information statement relating to the 2002 annual meeting of shareholders to be
held May 24, 2002, are incorporated by reference in Part III, except for the
organization and compensation committee report, performance graph and audit
committee report contained therein.


================================================================================
<PAGE>

                            Consumers Energy Company


           ANNUAL REPORT ON FORM 10-K\A TO THE SECURITIES AND EXCHANGE
                 COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2001


                                EXPLANATORY NOTE

This Form 10-K/A amends Consumers' annual report on Form 10-K for the fiscal
year ended December 31, 2001, which was filed with the SEC on March 29, 2002. As
discussed below, Consumers' consolidated financial statements for the years 2001
and 2000 have been restated pursuant to audit adjustments resulting from the
re-audit of the consolidated financial statements for 2001 and 2000 of CMS
Energy, Consumers' parent company, which included audit work at Consumers.

In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit the Consumers' financial statements for the year ending December 31, 2002.
Consumers had previously retained Arthur Andersen to review its financial
statements for the quarter ended March 31, 2002. In May 2002, Consumers' Board
of Directors engaged Ernst & Young to audit its financial statements for the
year ending December 31, 2002.

In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. As a result, Ernst & Young began the process of re-auditing CMS
Energy's consolidated financial statements for each of the fiscal years ended
December 31, 2001 and December 31, 2000. Although Arthur Andersen's notification
did not apply to separate, audited financial statements of Consumers for the
applicable years, the re-audit did include audit work at Consumers for these
years.

In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has determined to make, in
consultation with Ernst & Young, certain adjustments to its consolidated
financial statements for the fiscal years ended December 31, 2001 and December
31, 2000. For detailed information about the restatement of Consumers' financial
statements reflecting these audit adjustments, see Note 12, Restatement, in the
notes to the consolidated financial statements.

Each item of the 2001 Form 10-K that is affected by the restatement has been
amended and restated. Generally, no attempt has been made in this Form 10-K/A to
modify or update other disclosures as presented in the 2001 Form 10-K except as
required to reflect the effects of the restatement. However, material subsequent
events have been reported in a separate section of the MD&A, entitled
"Subsequent Events", and in Note 13, Subsequent Events, in the notes to the
consolidated financial statements.


                                       2
<PAGE>





                                TABLE OF CONTENTS

<Table>
<Caption>
                                                                                Page
                                                                                ----
<S>                                                                             <C>
Glossary .....................................................................    4

PART I

Item  1.   Business ..........................................................    8
Item  2.   Properties ........................................................   21
Item  3.   Legal Proceedings .................................................   21
Item  4.   Submission of Matters to a Vote of Security Holders ...............   21

PART II

Item  5.   Market for CMS Energy's, Consumers' and Panhandle's Common Equity
                and Related Stockholder Matters ..............................   22
Item  6.   Selected Financial Data ...........................................   22
Item  7.   Management's Discussion and Analysis of Financial Condition and
                Results of Operations ........................................   22
Item  7A.  Quantitative and Qualitative Disclosures About Market Risk ........   22
Item  8.   Financial Statements and Supplementary Data .......................   23
Item  9.   Changes in and Disagreements With Accountants on Accounting and
                Financial Disclosure .........................................  116

PART III

Item 10.   Directors and Executive Officers of CMS Energy and Consumers ......  117
Item 11.   Executive Compensation ............................................  117
Item 12.   Security Ownership of Certain Beneficial Owners and Management ....  117
Item 13.   Certain Relationships and Related Transactions ....................  117
Item 14.   Controls and Procedures ...........................................  117

PART IV

Item 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K ...  118
</Table>



                                       3
<PAGE>
                                    GLOSSARY

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


<Table>
<S>                                          <C>
ABATE.....................................   Association of Businesses Advocating Tariff Equity
Accumulated Benefit Obligation............   The liabilities of a pension plan based on service and pay to date. This differs
                                             from the Projected Benefit Obligation that is typically disclosed in that it does
                                             not reflect expected future salary increases
AEP.......................................   American Electric Power Co.
ALJ.......................................   Administrative Law Judge
Alliance..................................   Alliance Regional Transmission Organization
AMT.......................................   Alternative minimum tax
APB.......................................   Accounting Principles Board
APB Opinion No. 25........................   APB Opinion No. 25, "Accounting for Stock Issued to Employees"
APB Opinion No. 30........................   APB Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of
                                             Disposal of a Segment of a Business"
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
Bookouts..................................   Unplanned netting of transactions from multiple contracts
Btu.......................................   British thermal unit

CEO.......................................   Chief Executive Officer
CFO.......................................   Chief Financial Officer
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 Energy................................   CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock...................   Common stock of CMS Energy, par value $.01 per share
CMS Gas Transmission......................   CMS Gas Transmission Company, a subsidiary of Enterprises
CMS 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
Common Stock..............................   All classes of Common Stock of CMS Energy and each of its subsidiaries, or any of
                                             them individually, at the time of an award or grant under the Performance
                                             Incentive Stock Plan
Consumers.................................   Consumers Energy Company, a subsidiary of CMS Energy
Consumers Campus Holdings.................   Consumers Campus Holdings, L.L.C., a wholly owned subsidiary of Consumers
Consumers Gas Group.......................   The gas distribution, storage and transportation businesses currently conducted
                                             by Consumers and Michigan Gas Storage
Consumers Receivables Funding.............   Consumers Receivables Funding, L.L.C., a wholly owned subsidiary of Consumers
Court of Appeals..........................   Michigan Court of Appeals
</Table>


                                        4
<PAGE>


<Table>
<S>                                          <C>
Customer Choice Act.......................   Customer Choice and Electricity Reliability Act, a Michigan statute enacted in June
                                             2000 that allows all retail customers choice of alternative electric suppliers no
                                             later than January 1, 2002, provides for full recovery of net stranded costs and
                                             implementation costs, establishes a five percent reduction in residential rates,
                                             establishes rate freeze and rate cap, and allows for Securitization

Detroit Edison............................   The Detroit Edison Company, a non-affiliated company
DIG Statement No. C15.....................   Derivatives Implementation Group, Statement 133 Implementation Issue No. C15,
                                             "Scope Exceptions:  Normal Purchases and Normal Sales Exception for Certain
                                             Option-Type Contracts and Forward Contracts in Electricity"
DIG Statement No. C16.....................   Derivatives Implementation Group, Statement 133 Implementation Issue No. C16,
                                             "Scope Exceptions:  Applying the Normal Purchases and Normal Sales Exception to
                                             Contracts That Combine a Forward Contract and a Purchased Option Contract"
DOE.......................................   U.S. Department of Energy
Dow.......................................   The Dow Chemical Company, a non-affiliated company
DSM.......................................   Demand-side management

EITF......................................   Emerging Issues Task Force
Enterprises...............................   CMS Enterprises Company, a subsidiary of CMS Energy
EPA.......................................   U. S. Environmental Protection Agency
EPS.......................................   Earnings per share
ERISA.....................................   Employee Retirement Income Security Act
Ernst & Young.............................   Ernst & Young LLP

FASB......................................   Financial Accounting Standards Board
FERC......................................   Federal Energy Regulatory Commission
FMLP......................................   First Midland Limited Partnership, a partnership which holds a lessor interest in
                                             the MCV facility

GCR.......................................   Gas cost recovery

Health Care Plan..........................   The medical, dental, and prescription drug programs offered to eligible employees
                                             of Panhandle, Consumers and CMS Energy

IPP.......................................   Independent Power Producer
ISO.......................................   Independent System Operator
ITC.......................................   Investment tax credit

kWh.......................................   Kilowatt-hour

LIBOR.....................................   London Inter-Bank Offered Rate
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
</Table>


                                        5
<PAGE>


<Table>
<S>                                          <C>
MEPCC.....................................   Michigan Electric Power Coordination Center
METC......................................   Michigan Electric Transmission Company, a subsidiary of Consumers Energy
Michigan Gas Storage......................   Michigan Gas Storage Company, a subsidiary of Consumers
MISO......................................   Midwest Independent System Operator
MPSC......................................   Michigan Public Service Commission
MTH.......................................   Michigan Transco Holdings, Limited Partnership
MW........................................   Megawatts

NEIL......................................   Nuclear Electric Insurance Limited, an industry mutual insurance company owned by
                                             member utility companies
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
                                             generating facilities owned by the four utilities
NOx.......................................   Nitrogen Oxide
NRC.......................................   Nuclear Regulatory Commission
NYMEX.....................................   New York Mercantile Exchange

OATT......................................   Open Access Transmission Tariff
OPEB......................................   Postretirement benefit plans other than pensions for retired employees

Palisades.................................   Palisades nuclear power plant, owned by Consumers
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
PCB.......................................   Polychlorinated biphenyl
Pension Plan..............................   The trusteed, non-contributory, defined benefit pension plan of  Panhandle,
                                             Consumers and CMS Energy
PFD.......................................   Proposal For Decision
PJM.......................................   Pennsylvania-Jersey-Maryland
PPA.......................................   The Power Purchase Agreement between Consumers and the MCV Partnership with a
                                             35-year term commencing in March 1990
Price Anderson Act........................   Price Anderson Act, enacted in 1957 as an amendment to the Atomic Energy Act of
                                             1954, as revised and extended over the years.  This act stipulates between
                                             nuclear licensees and the U.S. government the insurance, financial
                                             responsibility, and legal liability for nuclear accidents.
PSCR......................................   Power supply cost recovery
PUHCA.....................................   Public Utility Holding Company Act of 1935
PURPA.....................................   Public Utility Regulatory Policies Act

RTO.......................................   Regional Transmission Organization

SAB.......................................   Staff Accounting Bulletin
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
</Table>


                                        6
<PAGE>


<Table>
<S>                                          <C>
SERP......................................   Supplemental Executive Retirement Plan
SFAS......................................   Statement of Financial Accounting Standards
SFAS No. 5................................   SFAS No. 5, "Accounting for Contingencies"
SFAS No. 13...............................   SFAS No. 13 "Accounting for Leases"
SFAS No. 71...............................   SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
SFAS No. 87...............................   SFAS No. 87, "Employers' Accounting for Pensions"
SFAS No. 106..............................   SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
                                             Pensions"
SFAS No. 115..............................   SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
SFAS No. 121..............................   SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
                                             Long-Lived Assets to be Disposed Of"
SFAS No. 123..............................   SFAS No. 123, "Accounting for Stock-Based Compensation"
SFAS No. 133..............................   SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities, as
                                             amended and interpreted"
SFAS No. 141..............................   SFAS No. 141, "Business Combinations"
SFAS No. 142..............................   SFAS No. 142, "Goodwill and Other Intangible Assets"
SFAS No. 143..............................   SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS No. 144..............................   SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
SFAS No. 145..............................   SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
                                             Statement No. 13, and Technical Corrections"
SFAS No. 146..............................   SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
SIPS......................................   State Implementation Plans
SOP.......................................   Statement of Position
Special Committee.........................   A special committee of independent directors, established by CMS Energy's Board
                                             of Directors, to investigate matters surrounding round-trip trading
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

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
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

VEBA Trusts...............................   VEBA (voluntary employees' beneficiary association) Trusts are tax-exempt
                                             accounts established to specifically set aside employer contributed assets to pay
                                             for future expenses of the OPEB plan
</Table>


                                        7
<PAGE>
                                     PART I

                                ITEM 1. BUSINESS

GENERAL

CMS ENERGY

    CMS Energy, formed in Michigan in 1987, is an integrated energy company
operating in the United States and in selected growth markets around the world.
CMS Energy has a strong asset base, supplemented with an active marketing,
services and trading capability. Its two principal subsidiaries are Consumers
and Enterprises. Consumers is a public utility that provides natural gas and/or
electricity to almost 6 million of the 10 million residents in the 68 Michigan
lower peninsula counties. Enterprises, through subsidiaries, is engaged in
several energy businesses in the United States and in selected international
growth markets.

CONSUMERS

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

    Consumers' service areas include automotive, metal, chemical, food and wood
products and a diversified group of other industries. Consumers' consolidated
operations account for a majority of CMS Energy's total assets and income, as
well as a substantial portion of its operating revenue. At year-end 2001,
Consumers' customer base and operating revenues were as follows:


<Table>
<Caption>
                                                    Customers    Operating     2001 vs. 2000
                                                     Served       Revenue    Operating Revenue
                                                   (millions)   (millions)  % Increase/(Decrease)
                                                   ----------   ----------  ---------------------
<S>                                                <C>          <C>         <C>
Electric Utility Business......................       1.70       $2,633              (1.61)
Gas Utility Business...........................       1.63        1,338              11.87
Other..........................................          -           43(a)          (31.75)
  Total........................................       3.33       $4,014               2.01
</Table>

----------

(a) Primarily represents earnings attributable to Consumers' interest in the
    MCV Partnership and MCV Facility.

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

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

    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.



                                       8
<PAGE>

BUSINESS SEGMENTS


    For information with respect to the operating revenue, net operating income,
identifiable assets and liabilities attributable 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.

CONSUMERS' ELECTRIC UTILITY OPERATIONS

    Based on the number of customers, Consumers' electric utility operations, if
independent, would be the thirteenth largest electric utility company in the
United States. Consumers' electric utility operations include the generation,
purchase, transmission, distribution and sale of electricity. At year-end 2001,
it served customers in 61 of the 68 counties of Michigan's lower peninsula.
Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson,
Kalamazoo, Midland, Muskegon and Saginaw. Consumers' electric utility customer
base includes a mix of residential, commercial and diversified industrial
customers, the largest segment of which is the automotive industry. Consumers'
electric utility operations are not dependent upon a single customer, or even a
few customers, and the loss of any one or even a few of such customers is not
reasonably likely to have a material adverse effect on its financial condition.

    Consumers' electric utility operations are seasonal. The summer months
usually increase demand for electric energy, principally due to the use of air
conditioners and other cooling equipment, thereby affecting revenues. In 2001
and 2000, total electric deliveries were 40 billion kWh and 41 billion kWh,
respectively. In 2001, electric sales totaled 39 billion kWh and retail open
access deliveries totaled 1 billion kWh. In 2000, electric sales totaled 40
billion kWh and retail open access deliveries totaled 1 billion kWh.

    Consumers experienced a 2001 winter peak demand of 5,769 MW and a summer
peak demand of 8,289 MW. The summer peak of 8,289 MW was significantly higher
than the 2001 projection of 7,741 MW, and 10.8 percent higher than the previous
record peak of 7,460 MW reached in 1999. In 2001, based on the actual summer
peak, Consumers' power reserve, also called a reserve margin, was 7.4 percent
compared to 21 percent in 2000. Based on its summer 2001 forecast, Consumers
carried a 15.4 percent reserve margin. Consumers estimates that during the
summer of 2002, 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.

    ELECTRIC UTILITY PROPERTIES: At December 31, 2001, Consumers' electric
generating system consists of the following:

<Table>
<Caption>
                                                                                                          2001 Net
                                                                                    2001 Summer Net      Generation
                                                              Size and Year          Demonstrated        (Thousands
Name and Location (Michigan)                                Entering Service       Capability (kWhs)      of kWhs)
----------------------------                                ----------------       -----------------     ----------
Coal Generation
<S>                                                     <C>                        <C>                   <C>
  J H Campbell 1&2 -- West Olive....................    2 Units, 1962-1967               615,000          3,654,739
  J H Campbell 3 -- West Olive......................    1 Unit, 1980                     765,140(a)       5,612,688
  D E Karn -- Essexville............................    2 Units, 1959-1961               515,000          3,611,668
  B C Cobb -- Muskegon..............................    2 Units, 1956-1957               316,000          2,029,002
  J R Whiting -- Erie...............................    3 Units, 1952-1953               326,000          2,119,458
  J C Weadock -- Essexville.........................    2 Units, 1955-1958               310,000          2,175,729
                                                                                       ---------         ----------
Total coal generation...............................                                   2,847,140         19,203,284
                                                                                       ---------         ----------

Oil/Gas Generation
  B C Cobb -- Muskegon..............................    3 Units, 1999-2000               183,000             58,328
  D E Karn -- Essexville............................    2 Units, 1975-1977             1,276,000            928,427
                                                                                       ---------         ----------
Total oil/gas generation............................                                   1,459,000            986,755
                                                                                       ---------         ----------

Hydroelectric
  Conventional Hydro Generation.....................    13 Plants, 1907-1949              73,540            422,576
  Ludington Pumped Storage..........................    6 Units, 1973                    954,700(b)        (553,135)(c)
                                                                                       ---------         ----------
Total Hydroelectric.................................                                   1,028,240           (130,559)
                                                                                       ---------         ----------
</Table>



                                       9
<PAGE>

<Table>
<S>                                                     <C>                        <C>                   <C>
Nuclear Generation
  Palisades -- South Haven..........................    1 Unit, 1971                     760,000          2,325,720(d)
                                                                                       ---------         ----------

Gas/Oil Combustion Turbine
  Generation........................................    8 Plants, 1966-1999              346,800(e)          14,711
                                                                                       ---------         ----------
Total owned generation..............................                                   6,441,180         22,399,911
                                                                                       ---------         ==========

Purchased and Interchange Power
  Capacity..........................................                                   1,644,180(f)
                                                                                       ---------
Total...............................................                                   8,085,360
                                                                                       =========
</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.

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

(e) Includes 1.8 MW of distributed diesel generation.

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

    In 2001, Consumers purchased, through long-term purchase contracts, options,
spot market and other seasonal purchases, 3,160 MW of net capacity from other
power producers, which amounted to 38.1 percent of Consumers' total system
requirements, the largest of which was the MCV Partnership. A significant amount
of these purchases was due to the unavailability of the Palisades nuclear
generating plant during the second half of 2001.

    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) 340 miles of
high voltage distribution radial lines operating at 120 kilovolts and above; b)
4,152 miles of subtransmission overhead lines operating at 23 kilovolts and 46
kilovolts; c) 16 subsurface miles of subtransmission underground lines operating
at 23 kilovolts and 46 kilovolts; d) 54,380 miles of electric distribution
overhead lines; e) 7,801 subsurface miles of underground distribution lines and
f) substations having an aggregate transformer capacity of 28,868,000
kilovoltamperes.

    On April 1, 2001, Consumers transferred its investment in electric
transmission lines and substations to METC. METC owns: a) 4,288 miles of
overhead transmission lines operating at 120 kilovolts and above, and b)
substations having an aggregate transformer capacity of 12,015,660
kilovoltamperes. In October 2001, Consumers announced an agreement to sell METC
to a non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc. Consumers, through METC will continue to own and operate the
transmission system until the companies meet all conditions of closing,
including approval of the transaction by various federal agencies. For
additional information on the status of the sale of the transmission assets, see
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS'
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- ELECTRIC RATE MATTERS --
TRANSMISSION.

    FUEL SUPPLY: Consumers has four generating plant sites that use coal as a
fuel source and that constitute 87.5 percent of its baseload supply, the
capacity used to serve a constant level of customer demand. In 2001, these
plants produced a combined total of 19,203 million kWhs of electricity and
required 9.3 million tons of coal. On December 31, 2001, Consumers' coal
inventory


                                       10
<PAGE>

amounted to approximately 48 days' supply. For additional information on future
sources of coal, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE
2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- OTHER ELECTRIC
UNCERTAINTIES -- COAL SUPPLY.

    Consumers owns two nuclear power plants, Big Rock, located near Charlevoix,
Michigan and Palisades, located near South Haven, Michigan. In 1997, Consumers
ceased operating Big Rock. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to NMC. During 2001, Palisades'
net generation was 2,326 million kWhs, constituting 10.4 percent of Consumers'
baseload supply. This low output was due to an outage during the latter half of
2001. Consumers currently has three contracts for uranium concentrates
sufficient to provide up to 100 percent of its fuel supply requirements for the
2003 period. Consumers also has contracts for conversion services and enrichment
services with quantity flexibility ranging up to 100 percent. 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 contract prices, Consumers will purchase the maximum amount
of nuclear fuel allowed by the contracts to meet its requirements.

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

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

<Table>
<Caption>
                                                                     MILLIONS OF KWHS
                                                    ---------------------------------------------------
POWER GENERATED                                      2001        2000       1999       1998       1997
---------------                                     ------      ------     ------     ------     ------
<S>                                                 <C>         <C>        <C>        <C>        <C>
Coal ........................................       19,203      17,926     19,085     17,959     16,427
Nuclear .....................................        2,326(a)    5,724      5,105      5,364      5,970
Oil .........................................          331         645        809        520        258
Gas .........................................          670         400        441        302         80
Hydro .......................................          423         351        365        395        467
Net pumped storage ..........................         (553)       (541)      (476)      (480)      (477)
                                                    ------      ------     ------     ------     ------
Total net generation.........................       22,400      24,505     25,329     24,060     22,725
                                                    ======      ======     ======     ======     ======
</Table>

----------

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

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

<Table>
<Caption>
                                                                     COST PER MILLION BTU
                                                        ---------------------------------------------
FUEL CONSUMED                                           2001        2000     1999     1998      1997
-------------                                           -----       -----    -----    -----     -----
<S>                                                     <C>         <C>      <C>      <C>       <C>
Coal..................................................  $1.38       $1.34    $1.38    $1.45     $1.53
Oil...................................................   4.02        3.30     2.69     2.73      2.97
Gas...................................................   4.05        4.80     2.74     2.66      3.36
Nuclear ..............................................   0.39        0.45     0.52     0.50      0.57
All Fuels(a)..........................................   1.44        1.27     1.28     1.28      1.29
</Table>

----------

(a) Weighted average fuel costs.

    Pursuant to the Nuclear Waste Policy Act of 1982, the federal government
became responsible for the permanent disposal of spent nuclear fuel and
high-level radioactive waste by 1998. To date, the DOE has been unable to
arrange for storage facilities to meet this obligation and it does not expect
that in 2002 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 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 dry casks are available
for future storage. For a discussion relating to the NRC approval of dry casks
and Consumers' use of the dry casks, see ITEM 8. FINANCIAL


                                       11
<PAGE>

STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - UNCERTAINTIES - OTHER ELECTRIC UNCERTAINTIES.

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

    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 $26.9 million in any policy year if insured losses in excess of
NEIL's maximum policyholders surplus occur at its, or any other member's,
nuclear facility.

    Consumers maintains nuclear liability insurance for injuries and off-site
property damage resulting from the nuclear hazard at Palisades for up to
approximately $9.5 billion, the maximum insurance liability limits established
by the Price-Anderson Act. Congress enacted the Price-Anderson Act to provide
financial protection for persons who may be liable for a nuclear accident or
incident and persons who may be injured by a nuclear incident. The
Price-Anderson Act expires in August 2002 and is currently in the process of
reauthorization by Congress. It is possible that the Act will not be
reauthorized or changes may be made that significantly affect the insurance
provisions for nuclear licensees.

    In October 2001, NEIL modified its coverage for acts of terrorism and
limited coverage for multiple acts occurring during a twelve-month period to a
maximum aggregate for all such acts of $3.24 billion, plus any additional
amounts available to NEIL from recoverable reinsurance, indemnity and other
sources of recovery. The aggregate amount of recovery would be allocated among
all claimants. The nuclear liability insurers for the Palisades and the Big Rock
nuclear plants also limit the aggregate amount of coverage for public liability
from terrorist acts to $200 million; however, the Price-Anderson Act provides
additional insurance coverage for amounts above these aggregate limits from the
nuclear liability insurers.

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

CONSUMERS' GAS UTILITY OPERATIONS

    Based on the number of customers, Consumers' gas utility operations, if
independent, would be the 5th largest gas utility company in the United States.
Consumers' gas utility operations purchase, transport, store, distribute and
sell natural gas. As of December 31, 2001, it was authorized to provide service
in 54 of the 68 counties in Michigan's lower peninsula. Principal cities served
include Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as
well as the suburban Detroit area, where nearly 900,000 of the gas customers are
located. Consumers' gas utility operations are not dependent upon a single
customer, or even a few customers, and the loss of any one or even a few of such
customers is not reasonably likely to have a material adverse effect on its
financial condition.

    Consumers' gas utility operations are seasonal. Consumers 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 the demand
for natural gas is higher. Peak demand usually occurs in the winter due to
colder temperatures and the resulting increased demand for heating fuels. In
2001, total deliveries of natural gas sold by Consumers and by other sellers who
deliver natural gas through Consumers' pipeline and distribution network to
ultimate customers, including the MCV Partnership, totaled 367 bcf.

    GAS UTILITY PROPERTIES: Consumers' gas distribution and transmission system
consists of 24,746 miles of distribution mains and 1,099 miles of transmission
lines throughout Michigan's lower peninsula. It owns and operates six compressor
stations with a total of 113,680 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 53,500 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. In February 2002, the
FERC approved Michigan Gas Storage's application for a declaration of exemption
from provisions of the National Gas Act. Based on the application's approval,
the companies will begin the process of merging Michigan Gas Storage and its
facilities into Consumers.



                                       12
<PAGE>

    Gas Supply: Total 2001 purchases included 64 percent from United States
producers outside Michigan, 15 percent from Canadian producers and 8 percent
from Michigan producers. Authorized suppliers in the permanent gas customer
choice pilot program, which started in April 2001, supplied the remaining 13
percent of gas delivered by Consumers.

    Consumers' firm transportation agreements, excluding agreements with
Michigan Gas Storage, are with ANR Pipeline Company, Great Lakes Gas
Transmission, L.P. and Trunkline. Consumers uses these agreements to deliver gas
to Michigan for ultimate deliveries to market. In total, Consumers' firm
transportation arrangements are capable of carrying over 90 percent of
Consumers' total gas supply requirements. As of December 31, 2001, Consumers'
portfolio of firm transportation from pipelines to Michigan is as follows:

<Table>
<Caption>
                                                                     VOLUME
                                                                (DEKATHERMS/DAY)         EXPIRATION
                                                                ----------------  ----------------------
<S>                                                             <C>               <C>
ANR Pipeline Company.......................................           10,000      December          2002
                                                                      84,113      October           2003
Great Lakes Gas Transmission, L.P..........................           85,092      April             2004
Trunkline..................................................          336,375      October           2005
</Table>

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

CONSUMERS REGULATION

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

MICHIGAN PUBLIC SERVICE COMMISSION

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

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

    RATE PROCEEDINGS: In 1996, the MPSC issued 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.

    MPSC REGULATORY AND MICHIGAN LEGISLATIVE CHANGES: State regulation of the
retail electric and gas utility businesses is in the process of undergoing
significant changes. In 2000, the Michigan Legislature enacted the Customer
Choice Act. Pursuant to the Customer Choice Act, as of January 2002, all
electric customers have their choice of buying generation service from an
alternative electric supplier. The Customer Choice Act also imposes rate
reductions, rate freezes and rate caps. For a description and additional
information regarding the Customer Choice Act, see ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- NOTE 2 OF 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. From April 1, 1998, to
March 31, 2001, Consumers' implemented a statewide experimental gas customer
choice pilot program that allowed up to 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier and froze the
rates Consumers' was permitted to charge for the service of distributing gas to
its customers.



                                       13
<PAGE>

    Beginning April 1, 2001, Consumers established a permanent gas customer
choice program that allows up to 600,000 of Consumers' gas customers to select
an alternative gas commodity supplier. By 2003, all of Consumers' gas customers
will be eligible to select an alternative gas commodity supplier. Also on April
1, 2001, pursuant to the permanent gas customer choice program, Consumers
returned to a GCR mechanism that allows it to recover from its customers all
prudently incurred costs to purchase the natural gas commodity and transport it
to Consumers' facilities. For additional information on gas customer choice
programs see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF
CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

FEDERAL ENERGY REGULATORY COMMISSION

    Some of Consumers' gas business is also subject to regulation by FERC,
including a blanket transportation tariff pursuant to which Consumers can
transport gas in interstate commerce.

    FERC has authority to regulate rates and charges for transportation or
storage of natural gas in interstate commerce, as well as those for gas, sold by
a natural gas company in interstate commerce for resale. FERC also has authority
over the construction and operation of pipeline and related facilities utilized
in the transportation and sale of natural gas in interstate commerce, including
the extension, enlargement or abandonment of service using such facilities.

    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; and 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 requires all electric utilities 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. CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS --
OUTLOOK -- ELECTRIC BUSINESS OUTLOOK .

NUCLEAR REGULATORY COMMISSION

    Under the Atomic Energy Act of 1954, as amended, and the Energy
Reorganization Act of 1974, Consumers is subject to the jurisdiction of the NRC
with respect to the design, construction, operation and decommissioning of its
nuclear power plants. Consumers is also subject to NRC jurisdiction with respect
to certain other uses of nuclear material. These and other matters concerning
Consumers' nuclear plants are more fully discussed in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTES 1 AND 2 OF 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 DOE's Office
of Fossil Fuels.

CONSUMERS ENVIRONMENTAL COMPLIANCE

    Consumers and its subsidiaries are subject to various federal, state and
local regulations for environmental quality, including air and water quality,
waste management, zoning and other matters. For additional information
concerning environmental matters, see ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- UNCERTAINTIES -- ELECTRIC CONTINGENCIES.

    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
because of EPA regulations regarding nitrogen oxide and particulate-related
emissions. These regulations will require Consumers to make significant capital
expenditures. For the preliminary estimates of these capital expenditures to
reduce nitrogen oxide-related emissions see NOTE 2 OF CONSUMERS' NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- UNCERTAINTIES -- ELECTRIC CONTINGENCIES.



                                       14
<PAGE>

    President Bush recently announced the Clear Skies and Global Climate change
Initiatives. This multi-pollutant strategy is intended to reduce emissions of
nitrogen oxides, sulfur dioxide and mercury by about 70 percent in stages by
2018. The expectation is that the affected utility sources would be able to look
at the total emission picture and select a control strategy that would achieve
the target reductions at a lower cost than would be possible under the piecemeal
approach embodied in the current regulatory structure.

    Consumers is in the process of closing older ash disposal areas at two
plants. Construction, operation, and closure of a modern solid waste disposal
area for ash can be expensive, because of strict federal and state requirements.
In order to significantly reduce ash field closure costs, Consumers has worked
with others to use bottom ash and fly ash as part of temporary and final cover
for ash disposal areas instead of native materials in cases where such use of
bottom ash and fly ash is compatible with environmental standards. To reduce
disposal volumes, Consumers sells coal ash for use as a filler for asphalt, for
incorporation into concrete products and for other environmentally compatible
uses. The EPA has announced its intention to develop new nationwide standards
for ash disposal areas. Consumers intends to work through industry groups to
help ensure that any such regulations require only the minimum cost necessary to
adhere to standards that are consistent with protection of the environment. In
2001, capital expenditures by Consumers for environmental protection additions
were $202 million. Consumers estimates 2002 expenditures for this program at
$140 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 Consumers 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' 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.

CONSUMERS 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' 2001 revenues from electric utility 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 open
access. The Customer Choice Act required Consumers to open up to 750 MW of its
electric customer power supply requirement to competition during 2001. As of
January 1, 2002, the Consumer Choice Act also gave all electric customers the
right to buy generation service from an alternative electric supplier. To the
extent that they do, the Michigan Public Service Commission has adopted a
mechanism pursuant to the Customer Choice Act to provide for recovery of
stranded costs. The company cannot determine the total load that may be lost to
competitor suppliers, nor whether the stranded cost recovery mechanism adopted
by the MPSC will fully offset the associated margin loss.

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



                                       15
<PAGE>

    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.

    For additional information concerning electric competition, see 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 utility 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 conducted an experimental
gas customer choice program that, through March 2001, allowed 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 April 2001, Consumers implemented a permanent gas choice
program that allows all gas customers to select an alternate gas supplier by
April 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 ITEM 7.
CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK.

EMPLOYEES

    As of December 31, 2001, Consumers and its subsidiaries had 8,467 full-time
equivalent employees of whom 8,310 are full-time employees and 72 full-time
equivalent employees associated with the part-time work force. Included in the
total are 3,627 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 and
will continue in full force and effect until June 1, 2005.

CONSUMERS FORWARD-LOOKING STATEMENTS CAUTIONARY FACTORS AND UNCERTAINTIES.

UNCERTAINTIES

    Specific uncertainties are described in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS. Certain risks are described in ITEM 7. CONSUMERS' MANAGEMENT'S
DISCUSSION AND ANALYSIS -- DERIVATIVES AND HEDGES.

    The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage such disclosures without the
threat of litigation, if those statements are identified as forward-looking and
are accompanied by meaningful, cautionary statements identifying important
factors that could cause the actual results to differ materially from those
projected in the 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/A 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.



                                       16
<PAGE>

    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:

    o   Ability to successfully access the capital markets;

    o   Achievement of operating synergies and revenue enhancements;

    o   Capital and financial market conditions, including current price of CMS
        Energy's Common Stock and the effect on the Pension Plan, interest rates
        and availability of financing, marketing perceptions of the energy
        industry, our company, or any of our subsidiaries, our, or any of our
        subsidiaries', securities ratings, and currency exchange controls;

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

    o   CMS Energy, Consumers, Panhandle or any of their affiliate securities
        ratings;

    o   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;

    o   Electric transmission or gas pipeline system constraints;

    o   National, regional and local economic, competitive and regulatory
        conditions and developments;

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

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

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

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

    o   Technological developments in energy production, delivery and usage;

    o   Changes in financial or regulatory accounting principles or policies;

    o   Outcome, cost and other effects of legal and administrative proceedings,
        settlements, investigations and claims;

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

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



                                       17
<PAGE>

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

    Consumers and its affiliates undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors pursuant to the Private
Securities Litigation Reform Act should not be construed as exhaustive or as any
admission regarding the adequacy of our disclosures 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/A.




                                       18
<PAGE>


EXECUTIVE OFFICERS

As of March 1, 2002

Consumers Energy

<Table>
<Caption>
NAME                                                   AGE                      POSITION                          PERIOD
----                                                   ---                      --------                          ------
<S>                                                    <C>   <C>                                                <C>
William T. McCormick, Jr..........................     57    Chairman of the Board, Chief Executive Officer     2001- Present
                                                             of CMS Energy
                                                             Chairman of the Board of Consumers                 2001-Present
                                                             Chairman of the Board and Chief Executive          2001- Present
                                                             Officer of Enterprises
                                                             Chairman of the Board, President and Chief         2000-2001
                                                             Executive Officer of CMS Energy
                                                             Chairman of the Board and President of Consumers   2000-2001
                                                             Chairman of the Board, President and Chief         2000-2001
                                                             Executive Officer of Enterprises
                                                             Chairman of the Board and Chief Executive          1987-2000
                                                             Officer of CMS Energy
                                                             Chairman of the Board of Enterprises               1987-2000
                                                             Chairman of the Board of Consumers                 1985-2000

David W. Joos.....................................     48    President and Chief Operating Officer of CMS       2001-Present
                                                             Energy
                                                             President and Chief Operating Officer of           2001-Present
                                                             Consumers
                                                             President and Chief Operating Officer of CMS       2001-Present
                                                             Enterprises
                                                             Executive Vice President and Chief Operating       2000-2001
                                                             Officer -- Electric of CMS Energy
                                                             Executive Vice President and Chief Operating       2000-2001
                                                             Officer -- Electric of Enterprises
                                                             President and Chief Executive Officer --           1997-2001
                                                             Electric of Consumers
                                                             Executive Vice President and Chief Operating       2000-2001
                                                             Officer -- Gas of CMS Energy
                                                             Executive Vice President and Chief Operating       2000-2001
                                                             Officer -- Gas of Enterprises
                                                             Senior Vice President of Enterprises               1998-2000
                                                             Executive Vice President and Chief  Operating      1994-1997
                                                             Officer -- Electric of Consumers

Alan M. Wright....................................     56    Executive Vice President, Chief Financial
                                                             Officer and Chief Administrative Officer of CMS    2000-Present
                                                             Energy
                                                             Executive Vice President, Chief Financial          2000-Present
                                                             Officer and Chief Administrative Officer of
                                                             Consumers
                                                             Executive Vice President and Chief Financial       2000-Present
                                                             Officer of Enterprises
                                                             Senior Vice President and Chief Financial          1998-2000
                                                             Officer of CMS Energy
                                                             Senior Vice President and Chief Financial          1998-2000
                                                             Officer of Enterprises
                                                             Senior Vice President, Chief Financial Officer     1994-1998
                                                             and Treasurer of Enterprises
                                                             Senior Vice President, Chief Financial Officer     1994-1998
                                                             and Treasurer of CMS Energy
</Table>



                                       19
<PAGE>

<Table>
<Caption>
NAME                                                   AGE                      POSITION                          PERIOD
----                                                   ---                      --------                          ------
<S>                                                    <C>   <C>                                                <C>
                                                             Senior Vice President and Chief Financial          1993-2000
                                                             Officer of Consumers

Dennis DaPra......................................     59    Senior Vice President of Consumers Energy          2001-Present
                                                             Vice President and Controller of Consumers         1991-2001

Carl L. English...................................     55    Executive Vice President and President and         2000-Present
                                                             Chief Executive Officer -- Gas of Consumers
                                                             Vice President of Consumers                        1990-2000

Robert A. Fenech..................................     54    Senior Vice President of Consumers Energy Vice     1997-Present
                                                             President of Consumers                             1994-1997

Frank Johnson.....................................     54    President and Chief Executive Officer of CMS       2000-Present
                                                             Electric and Gas
                                                             Vice President and Chief Operating Officer of      2000
                                                             CMS Electric and Gas
                                                             Vice President of CMS Electric and Gas             1996-2000
                                                             Senior Vice President of Consumers                 2001-Present

David G. Mengebier*...............................     44    Senior Vice President of CMS Energy                2001-Present
                                                             Senior Vice President of Consumers Energy Vice     2001-Present
                                                             President of CMS Energy                            1999-2001
                                                             Vice President of Consumers                        1999-2001

David A. Mikelonis................................     53    Senior Vice President and General Counsel of       1988-Present
                                                             Consumers

Paul N. Preketes..................................     52    Senior Vice President of Consumers                 2000-Present
                                                             Vice President of Consumers                        1994-2000

John G. Russell**.................................     44    Executive Vice President and President and Chief   2001-Present
                                                             Executive Officer - Electric of Consumers
                                                             Senior Vice President of Consumers
                                                             Vice President of Consumers                        2000-2001
                                                                                                                1999-2000

Glenn P. Barba....................................     36    Controller                                         2001-Present
</Table>

---------

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

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

    The present term of office of each of the executive officers extends to the
first meeting of the Board of Directors after the next annual election of
Directors of CMS Energy (scheduled to be held on May 24, 2002).

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


                                       20
<PAGE>

                               ITEM 2. PROPERTIES.

    A description of Consumers 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; all of which are incorporated by reference herein.


                            ITEM 3. LEGAL PROCEEDINGS

    Consumers and some of its subsidiaries and affiliates are parties to certain
routine lawsuits and administrative proceedings incidental to their businesses
involving, for example, claims for personal injury and property damage,
contractual matters, various taxes, and rates and licensing. Reference is made
to the ITEM 1. BUSINESS -- CONSUMERS REGULATION, as well as to Consumers' ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS and Consumers' 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.

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


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

    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.


                                       21
<PAGE>

                                     PART II

  ITEM 5. MARKET FOR CONSUMERS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Consumers' common stock is privately held by its parent, CMS Energy, and does
not trade in the public market. In February, May, August, and November 2001,
Consumers paid $66 million, $30 million, $39 million and $55 million in cash
dividends, respectively, on its common stock. 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.
Pursuant to restrictive covenants in its debt facilities, Consumers is limited
to dividend payments that will not exceed $300 million in any calendar year.


                        ITEM 6. SELECTED FINANCIAL DATA.

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


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

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


                      ITEM 7A. QUANTITATIVE AND QUALITATIVE
                          DISCLOSURES ABOUT MARKET RISK

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



                                       22
<PAGE>


              ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


<Table>
<Caption>
Index to Financial Statements:                                              Page
                                                                            ----
<S>                                                                          <C>

CONSUMERS ENERGY

Selected Financial Information...........................................    25
Management's Discussion and Analysis.....................................    26
Consolidated Statements of Income........................................    56
Consolidated Statements of Cash Flows....................................    57
Consolidated Balance Sheets..............................................    58
Consolidated Statements of Long-Term Debt................................    60
Consolidated Statements of Preferred Stock...............................    61
Consolidated Statements of Common Stockholder's Equity...................    62
Notes to Consolidated Financial Statements...............................    63
Reports of Independent Public Accountants................................    112
Quarterly Financial Information..........................................    115
</Table>



                                       23
<PAGE>


                            (CONSUMERS ENERGY LOGO)



                       2001 Restated Financial Statements




                                       24
<PAGE>


SELECTED FINANCIAL INFORMATION                          CONSUMERS ENERGY COMPANY

<Table>
<Caption>
                                                            2001          2000             1999         1998        1997
                                                       -------------  -------------      --------     --------    --------
                                                       (As Restated)  (As Restated)
                                                                 (b)            (b)
<S>                                              <C>   <C>            <C>                <C>          <C>         <C>

Operating revenue (in millions)                   ($)         4,014           3,935       3,874        3,709       3,769

Income before cumulative effect of change
  in accounting principle                         ($)           199             284         340          306         321

Net income (in millions) (c)                      ($)           188             284         340          349         321

Net income available to common
 stockholder (in millions)                        ($)           145             248         313          312         284

Cash from operations (in millions)                ($)           518             515         791          637         761

Capital expenditures, excluding capital
 lease additions and DSM (in millions)            ($)           745             498         444          369         360

Total assets (in millions)                        ($)         8,321           7,776       7,170        7,163       6,949

Long-term debt, excluding current
 maturities (in millions)                         ($)         2,472           2,110       2,006        2,007       1,369

Non-current portion of capital
 leases (in millions)                             ($)            72              49          85          100          74

Total preferred stock (in millions)               ($)            44              44          44          238         238

Total preferred securities (in millions)          ($)           520             395         395          220         220

Number of preferred shareholders at year-end                  2,220           2,365       2,534        5,649       6,178

Book value per common share at year-end           ($)         22.81           23.85       23.87        21.94       20.38

Return on average common equity                   (%)           7.4            12.4        16.2         17.5        16.8

Return on average assets                          (%)           3.9             5.4         6.4          6.6         6.2
Number of full-time equivalent
 employees at year-end
   Consumers                                                  8,477           8,748       8,736        8,456       8,640
   Michigan Gas Storage                                          62              57          63           65          66

ELECTRIC STATISTICS
   Sales (billions of kWh)                                     39.6            41.0        41.0         40.0        37.9
   Customers (in thousands)                                   1,712           1,691       1,665        1,640       1,617
   Average sales rate per kWh                   (cent)         6.65            6.56        6.54         6.50        6.57

GAS STATISTICS
   Sales and transportation deliveries (bcf)                    367             410         389          360         420
   Customers (in thousands) (a)                               1,630           1,611       1,584        1,558       1,533
   Average sales rate per mcf                     ($)          5.34            4.39        4.52         4.56        4.44
                                                        -----------    ------------    --------     --------    --------
</Table>

----------

(a)  Excludes off-system transportation customers.

(b)  Consumers' consolidated financial statements for the years 2001 and 2000
     have been restated, pursuant to audit adjustments resulting from the
     re-audit of CMS Energy, Consumers' parent company, which included audit
     work at Consumers. See Note 12 in the notes to the consolidated financial
     statements.

(c)  See Note 1 and 2 in the notes to the consolidated financial statements.


                                       25
<PAGE>
                                                        Consumers Energy Company

                            CONSUMERS ENERGY COMPANY
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

CHANGE IN AUDITORS AND RESTATEMENT

Consumers' consolidated financial statements for the years 2001 and 2000 have
been restated, as discussed below, pursuant to audit adjustments resulting from
the re-audit of the consolidated financial statements for the years 2001 and
2000 of CMS Energy, Consumers' parent company, which included audit work at
Consumers.

In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit Consumers' financial statements for the year ending December 31, 2002.
Consumers had previously retained Arthur Andersen to review its financial
statements for the quarter ended March 31, 2002. In May 2002, Consumers' Board
of Directors engaged Ernst & Young to audit its financial statements for the
year ending December 31, 2002.

In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. As a result, Ernst & Young began the process of re-auditing CMS
Energy's consolidated financial statements for each of the fiscal years ended
December 31, 2001 and December 31, 2000. Although Arthur Andersen's notification
did not apply to separate, audited financial statements of Consumers for the
applicable years, the re-audit did include audit work at Consumers for these
years.

In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has determined to make, in
consultation with Ernst & Young, certain adjustments to its consolidated
financial statements for the fiscal years ended December 31, 2001 and December
31, 2000. Therefore, the consolidated financial statements for 2001 and 2000
have been restated from amounts previously reported. At the time it adopted the
accounting treatment for these items, Consumers believed that such accounting
was appropriate under generally accepted accounting principles and Arthur
Andersen concurred.

The audit adjustments: 1) change the accounting associated with the PPA reserve,
which results in: the reversal of the 2001 increase to the PPA reserve of $126
million; the reversal of a net $12 million charged to operating expenses
associated with the PPA in 2001; and the reversal of $29 million of the amount
charged to the PPA reserve in 2000; and 2) recognize Consumers' new headquarters
lease as a capital lease, instead of an operating lease, and record the lease
obligation and capitalize costs incurred. Each of these transactions involved
estimates, assumptions, and judgment based on the best information available at
the time the transactions occurred. The audit adjustments reflect current
judgment on these matters. In addition, the audit adjustments recognize
immaterial reconciling adjustments to advertising costs, Consumers' OPEB
liability and related party receivables and payables. A summary of the principal
effects of the restatement on Consumers' consolidated financial statements for
2001 and 2000 is contained in Note 12, Restatement, of Consumers' consolidated
financial statements.

MODIFIED MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis has been modified for the restatement and
should be read in combination with Consumers' consolidated financial statements
and notes to those statements included in this Form 10-K/A. All note references
within this MD&A refer to the notes to Consumers' consolidated financial
statements.



                                       26
<PAGE>
                                                        Consumers Energy Company


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/A 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.

CRITICAL ACCOUNTING POLICIES

The presentation of financial statements in accordance with generally accepted
accounting principles requires the use of accounting methods that are often
subject to judgment and the use of estimates and assumptions. Presented below,
are the accounting policies and assumptions that Consumers believes are most
critical to both the presentation and understanding of its financial statements.
Application of these accounting policies can involve very complex judgments in
the preparation of its financial statements. Accordingly, a different financial
presentation could result if different judgments, estimates or assumptions are
used.

USE OF ESTIMATES IN ACCOUNTING FOR CONTINGENCIES

The recording of estimated liabilities for contingencies within the financial
statements is guided by the principles in SFAS No. 5. SFAS No. 5 requires a
company to record estimated liabilities in the financial statements when it is
probable that a loss will be paid in the future as a result of a current event
and that amount can be reasonably estimated. Consumers has used this accounting
principle to record estimated liabilities for the following significant events.

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

The EPA has issued regulations regarding ozone and particulate-related emissions
that require some of Consumers' electric generating facilities to achieve lower
emissions rates. These regulations will require Consumers to make capital
expenditures estimated between $530 million and $570 million, calculated in year
2001 dollars. As of December 2001, Consumers has incurred $296 million in
capital expenditures to comply with these regulations and anticipates that the
remaining capital expenditures will be incurred between 2002 and 2004.



                                       27
<PAGE>
                                                        Consumers Energy Company


At some point after 2004, if new environmental standards for multi-pollutants
become effective, Consumers may need additional capital expenditures to comply
with the standards. These and other required environmental expenditures may have
a material adverse effect upon Consumers' financial condition and results of
operations after 2004. For further information see Note 2, Uncertainties,
"Electric Environmental Matters."

GAS ENVIRONMENTAL ESTIMATES: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. Consumers has
estimated its costs related to further investigation and remedial action using
the Gas Research Institute-Manufactured Gas Plant Probabilistic Cost Model. The
estimated total costs are between $82 million and $113 million. These estimates
are based on discounted 2001 costs and follow EPA recommended use of discount
rates between 3 and 7 percent for this type of activity. Consumers expects to
recover a significant portion of these costs through insurance proceeds and
through MPSC approved rates charged to its customers. 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. For further information see Note 2, Uncertainties,
"Gas Environmental Matters."

MCV UNDERRECOVERIES: The MCV Partnership, which leases and operates the MCV
Facility, contracted to sell electricity to Consumers for a 35-year period
beginning in 1990 and to supply electricity and steam to Dow. Consumers, through
two wholly owned subsidiaries, holds a partnership interest in the MCV
Partnership, and a lessor interest in the MCV Facility.

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

In 1992, Consumers recognized a loss and established a PPA liability for the
present value of the estimated future underrecoveries of power supply costs
under the PPA based on MPSC cost recovery orders. The PPA liability is expected
to be depleted in late 2004.

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

<Table>
<Caption>
                                                                                                       In Millions
                                                                  ------------------------------------------------
                                                                  2002    2003     2004     2005     2006     2007
                                                                  ----    ----     ----     ----     ----     ----
<S>                                                               <C>     <C>      <C>      <C>      <C>      <C>
Estimated cash underrecoveries at 98.5%, net of tax                $38     $37      $36      $36      $36      $25
</Table>

It is currently estimated that 51 percent of the actual cash underrecoveries for
the years 2002 through 2004 will be charged to the PPA liability, with the
remaining portion charged to operating expense as a result of Consumers' 49
percent ownership in the MCV Partnership. All cash underrecoveries will be
expensed directly to income once the PPA liability is depleted.

In 1992, Consumers originally accounted for losses associated with the PPA by
establishing a reserve for the difference between the amount that Consumers was
paying for power in accordance with the terms of the PPA,



                                       28
<PAGE>
                                                        Consumers Energy Company


and the amount that Consumers was ultimately allowed by the MPSC to recover from
electric customers. At that time, the reserve did not take into account earnings
Consumers would receive from its 49 percent interest in the MCV Partnership due
to uncertainties with the level of performance of the facility.

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

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

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

<Table>
<Caption>
In Millions                                                          2001             2000
-----------                                                       ----------      ----------
                                                                  Income Increase/(Decrease)
                                                                  --------------------------
<S>                                                               <C>                <C>
Reverse the original operating charge associated with
  continuing losses on the MCV PPA                                $       39      $       --
Charge 49 percent annual capacity losses associated with the
  MCV PPA to operating expense instead of to the reserve                 (27)            (29)
                                                                  ----------      ----------
Net operating expense decrease/(increase)                                 12             (29)

Reverse the 2001 increase to the MCV PPA reserve                         126              --
Accretion Expense                                                         --              (2)
                                                                  ----------      ----------
Pre-tax effect of adjustments                                            138             (31)
Income tax effect                                                        (48)             11
                                                                  ----------      ----------
Net income impact of MCV PPA adjustments                          $       90      $      (20)
                                                                  ----------      ----------
</Table>


For further information see Note 2, Uncertainties "The Midland Cogeneration
Venture" for additional detail.

ACCOUNTING FOR DERIVATIVE AND FINANCIAL INSTRUMENTS

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

The types of contracts Consumers currently account for as derivative instruments
are interest rate swaps and locks, certain electric call options, and gas fuel
call options and swaps. Consumers does not account for electric capacity and
energy contracts, gas supply contracts, coal supply contracts, or purchase
orders for numerous supply items as derivatives.



                                       29
<PAGE>
                                                        Consumers Energy Company


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

In order to value the contracts that are accounted for as derivative
instruments, Consumers uses a combination of market quoted prices and
mathematical models. Option models require various inputs, including forward
prices, volatilities, interest rates and exercise periods. Changes in forward
prices or volatilities could significantly change the calculated fair value of
the call option contracts. The models used by Consumers have been tested against
market quotes to ensure consistency between model outputs and market quotes. At
December 31, 2001, Consumers assumed an interest rate of 4.5 percent in
calculating the fair value of its electric call options.

In order for derivative instruments to qualify for hedge accounting under SFAS
No. 133, the hedging relationship must be formally documented at inception and
be highly effective in achieving offsetting cash flows or offsetting changes in
fair value attributable to the risk being hedged. If hedging a forecasted
transaction, the forecasted transaction must be probable. If a derivative
instrument, used as a cash flow hedge, is terminated early because it is
probable that a forecasted transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative instrument,
used as a cash flow hedge, is terminated early for other economic reasons, any
gain or loss as of the termination date is deferred and recorded when the
forecasted transaction affects earnings. For further information see Note 1,
Corporate Structure and Summary of Significant Accounting Policies,
"Implementation of New Accounting Standards," Note 2, Uncertainties, "Other
Electric Uncertainties - Derivative Activities," and Note 3, Short-Term
Financings and Capitalization, "Derivative Activities."

FINANCIAL INSTRUMENTS: Consumers accounts for its investments in debt and equity
securities in accordance with SFAS No. 115. As such, debt and equity securities
can be classified into one of three categories: held-to-maturity, trading, or
available-for-sale securities. Consumers' investments in equity securities are
classified as available-for-sale securities and are reported at fair value with
any unrealized gains or losses resulting from changes in fair value excluded
from earnings and reported in equity as part of other comprehensive income.
Unrealized gains or losses resulting from changes in the fair value of
Consumers' nuclear decommissioning investments are reported in accumulated
depreciation. The fair value of these instruments is determined from quoted
market prices. For further information, see Note 5, Financial Instruments.

ACCOUNTING FOR LEASES

Consumers uses SFAS No. 13 to account for any leases to which it may be a party.
Depending upon satisfaction of certain criteria, they are classified as
operating leases or capital leases. Under an operating lease, payments are
expensed as incurred, and there is no recognition of an asset or liability on
the balance sheet. Capital leases, on the other hand, require that an asset and
liability be recorded on the balance sheet at the inception of the lease for the
present value of the minimum lease payments required during the term of the
lease.

To determine whether to classify a lease as operating or capital under SFAS No.
13 and related statements, Consumers must use judgment. A lease must be
evaluated for transfer of ownership, provision for bargain purchase option, the
lease term relative to the estimated economic life of the leased property, and
the present value of the minimum lease payments at the beginning of the lease
term. Judgment is required for leases involving special purpose entities such as
trusts, sales and leasebacks and when the lessee is involved in the construction
of the property it will lease. Different financial presentations of leases could
result if different judgment, estimates or assumptions are made.



                                       30
<PAGE>
                                                        Consumers Energy Company


Consumers is party to a number of leases, the most significant are the leases
associated with its service vehicles, its new headquarters building, and its
railroad coal cars. For further information see "Contractual Obligations and
Commercial Commitments" in the Capital Resources and Liquidity section and Note
8, Leases.

ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION

Because Consumers is involved in a regulated industry, regulatory decisions
affect the timing and recognition of revenues and expenses. Consumers uses SFAS
No. 71 to account for the effects of these regulatory decisions. As a result,
Consumers may defer or recognize revenues and expenses differently than a
non-regulated entity.

Items that may normally be expensed for a non-regulated entity may be
capitalized as regulatory assets if the actions of the regulator indicate that
such expenses will be recovered in future rates charged to customers designed to
recover such costs. Conversely, items that may normally be recognized as
revenues for a non-regulated entity may be recorded as regulatory liabilities if
the actions of the regulator indicate that such revenues will be required to be
refunded to customers at a future time. Judgment is required to discern the
recoverability of items recorded as regulatory assets and liabilities. As of
December 31, 2001, Consumers had $1.130 billion recorded as regulatory assets
and $291 million recorded as regulatory liabilities.

ACCOUNTING FOR PENSION AND OPEB

Consumers uses SFAS No. 87 to account for pension costs and uses SFAS No. 106 to
account for other postretirement benefit costs. These statements require
liabilities to be recorded on the balance sheet at the present value of these
future obligations to employees net of any plan assets. The calculation of these
liabilities and associated expenses require the expertise of actuaries and are
subject to many assumptions including life expectancies, present value discount
rates, expected long-term rate of return on plan assets, rate of compensation
increase and anticipated health care costs. Any change in these assumptions can
significantly change the liability and associated expenses recognized in any
given year. For further information see Note 7, Retirement Benefits.

ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS

Consumers' decommissioning cost estimates for the Big Rock and Palisades plants
assume that each plant site will eventually be restored to conform to the
adjacent landscape, and all contaminated equipment will be disassembled and
disposed of in a licensed burial facility. On December 31, 2000, Big Rock trusts
were fully funded per a March 1999 MPSC order. A December 1999 MPSC order set
the annual decommissioning surcharge for Palisades decommissioning at $6 million
a year. Consumers estimates that at the time Palisades is fully decommissioned
in year 2049, the trust funds will have provided $2.5 billion, including trust
earnings, to pay for the anticipated expenditures over the entire
decommissioning period. Earning assumptions are that the trust funds are
invested in equities and fixed income investments, the trust funds will be
converted to municipal bonds after decommissioning becomes fully funded, and
that municipal bonds are converted to cash one year before expenditures are
made. The Palisades and Big Rock trust funds are currently estimated to earn 7.1
percent and 5.7 percent, respectively, annually.

The funds provided by the trusts are expected to fully fund the decommissioning
costs, which have been developed, in part, by independent contractors with
expertise in decommissioning. These costs have been developed using various
inflation rates for labor, non-labor, and for contaminated equipment burial
costs. Variance from trust earnings, changes in decommissioning technology,
regulations, estimates or assumptions could affect the cost of decommissioning
these sites.



                                       31
<PAGE>
                                                        Consumers Energy Company


RELATED PARTY TRANSACTIONS

Consumers enters into a number of significant transactions with related parties.
These transactions include the purchase of capacity and energy from the MCV
Partnership and from affiliates of Enterprises, the purchase of electricity from
CMS MST, the purchase of gas supply from CMS MST and CMS Oil and Gas, the
purchase of gas transportation from Panhandle and its subsidiary Trunkline, the
payment of parent company overhead costs to CMS Energy, the sale, storage and
transportation of natural gas and other services to the MCV Partnership, certain
transactions involving derivative instruments with CMS MST, and an investment in
CMS Energy Common Stock.

Transactions involving CMS Energy and its affiliates and the sale, storage and
transportation of natural gas and other services to the MCV Partnership are
based on regulated prices, market prices or competitive bidding. Purchases are
based upon the lowest market price available or most competitive bid submitted.
Transactions involving the power supply purchases from the MCV Partnership are
based upon avoided costs under PURPA; and the payment of parent company overhead
costs to CMS Energy are based upon use or accepted industry allocation
methodologies.

Consumers is also involved in a significant transaction to sell its transmission
facilities to Trans-Elect, Inc., an independent company, whose management
employs former executive employees of Consumers, and was based on competitive
bidding.

For detailed information about related party transactions see Note 1, Corporate
Structure and Summary of Significant Accounting Policies, "Related-Party
Transactions", and Note 2, Uncertainties, "Electric Rate Matters - Transmission
Business", and "Other Electric Uncertainties - The Midland Cogeneration
Venture".

RESULTS OF OPERATIONS

CONSUMERS CONSOLIDATED EARNINGS
<Table>
<Caption>
                                                                                                                       In Millions
                                                ----------------------------------------------------------------------------------
                                                 Restated      Restated                     Restated
Years Ended December 31                            2001          2000         Change          2000          1999          Change
------------------------------------------      -----------   -----------   -----------    -----------   -----------   -----------
<S>                                             <C>           <C>           <C>            <C>           <C>           <C>
Net income available to common stockholder      $       145   $       248   $      (103)   $       248   $       313   $       (65)
                                                ===========   ===========   ===========    ===========   ===========   ===========
</Table>

2001 COMPARED TO 2000: For 2001, Consumers' net income available to the common
stockholder totaled $145 million, a decrease of $103 million from the previous
year. The earnings decrease reflects significantly increased operating expense
in 2001, primarily $59 million of after tax costs for replacement power supply
costs due to a six month unscheduled outage at the Palisades Plant. Net income
in 2001 was also adversely impacted by $11 million to reflect a change in
accounting for certain electric call option contracts. In addition, 2001
earnings decreased due to the impact of reduced gas deliveries resulting from
milder temperatures during both the first quarter and fourth quarter heating
seasons. Electric and gas revenues were also adversely impacted by a decrease in
electricity and gas delivered to industrial customers, reflecting the year-long
impact of an economic slowdown throughout Michigan.

2000 COMPARED TO 1999: Net income in 2000 decreased $65 million from the 1999
level primarily reflecting higher gas costs, which exceeded 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 that went into effect in June of 2000, and the purchase of electric call
options, which were ultimately not needed due to the milder-than-expected summer
temperatures also decreased earnings. Partially offsetting these decreases were
lower operating costs.



                                       32
<PAGE>
                                                        Consumers Energy Company


For further information, see the Electric and Gas Utility Results of Operations
sections and Note 2, Uncertainties.

ELECTRIC UTILITY RESULTS OF OPERATION

<Table>
<Caption>
                                                                                                                    In Millions
                                           ------------------------------------------------------------------------------------
                                            Restated        Restated                     Restated
Years Ended December 31                       2001           2000          Change           2000         1999          Change
--------------------------------------     -----------    -----------    -----------    -----------   -----------   -----------
<S>                                        <C>            <C>            <C>            <C>           <C>           <C>
Pretax Operating Income                    $       349    $       454    $      (105)   $       454   $       494   $       (40)

Reasons for the change:

Electric deliveries                                                      $        19                                $        12
Power supply costs and related revenue                                          (109)                                       (50)
Rate decrease                                                                    (35)                                       (22)
Other operating expenses                                                          28                                          6
Non-commodity revenue                                                             (8)                                        14
                                                                         -----------                                -----------

Total change                                                             $      (105)                               $       (40)
                                                                         ===========                                ===========
</Table>

ELECTRIC DELIVERIES: For the year 2001, electric deliveries, including
transactions with other electric utilities, were 39.6 billion kWh, a decrease of
1.4 billion kWh or 3.5 percent from 2000. Although total deliveries for 2001
were below the 2000 level, increased deliveries to the higher margin residential
and commercial sectors, more than offset the impact of reduced deliveries to the
lower margin industrial sector. All deliveries in 2001 reflect the year-long
impact of an economic slowdown throughout Michigan. For the year 2000, electric
deliveries were 41 billion kWh, similar to 1999.

POWER SUPPLY COSTS AND RELATED REVENUE: For the year 2001, lower overall sales
produced a decrease in fuel related revenues. Nevertheless, power supply costs
increased as a result of the purchase of greater quantities of higher-priced
electricity to offset the loss of generation resulting from the six month
unscheduled Palisades outage that ended in January 2002. For the year 2000, the
increase in power supply costs was also due to unscheduled plant outages at
other generating facilities.

For the years 2001 and 2000 respectively, Consumers purchased $66 million and
$51 million of electric call options to purchase electricity to ensure a
reliable source of power supply during the summer months. As a result of
periodic excess daily capacity, certain call options were sold for $2 million
and $1 million in the years 2001 and 2000, respectively. The remaining call
options were either exercised or expired. Consumers accounted for the costs
relating to the expired call options and the income received from the sale of
call options, as purchased power supply costs.

RATE DECREASE AND OTHER OPERATING EXPENSES: In June 2000, Consumers' retail
rates were frozen and a five percent residential rate decrease was implemented
to comply with the Customer Choice Act. As a result, 2001 reflects a full year
impact of this rate decrease. Other operating expenses decreased in 2001
primarily due to reduced amortization expense, as permitted by MPSC orders
resulting from the Customer Choice Act. Consumers temporarily suspended
amortization of the securitized assets pending the issuance of securitization
bonds in November 2001. The year 2000 reflects a half-year impact of the rate
decrease along with a decrease in other operating expenses due to lower
operating and maintenance costs.



                                       33
<PAGE>
                                                        Consumers Energy Company


GAS UTILITY RESULTS OF OPERATION

<Table>
<Caption>
                                                                                                                   In Millions
                                           -----------------------------------------------------------------------------------
                                            Restated       Restated                     Restated
Years Ended December 31                       2001           2000          Change         2000          1999          Change
---------------------------------          -----------    -----------    -----------   -----------   -----------   -----------
<S>                                        <C>            <C>            <C>           <C>           <C>           <C>
Pretax Operating Income                    $        97    $        96    $         1   $        96   $       132   $       (36)

Reasons for the change:

Gas commodity and related revenue                                                 44                                       (64)
Gas wholesale and retail services                                                  8                                         4
Operation and maintenance                                                        (30)                                        9
Gas deliveries                                                                   (21)                                       17
General taxes and depreciation                                                    --                                        (2)
                                                                         -----------                               -----------

Total change                                                             $         1                               $       (36)
                                                                         ===========                               ===========
</Table>

For the year 2001 as compared to 2000, the gas commodity cost and related
revenues increased primarily as a result of the absence of a $45 million
regulatory liability recorded in 2000 that did not exist in 2001. This liability
was due to the increased cost of gas, which was significantly above the
commodity rate being collected from Consumers' gas customers. The recording of
this $45 million liability reduced revenue for the year 2000. Since April 2001,
Consumers is back on a fully recoverable GCR factor, which results in no gain or
loss on the commodity portion of the tariff rate. Wholesale and retail services
increased, principally due to growth in the appliance service plan program.
Operation and maintenance cost increases reflect additional focus on customer
reliability and service. Gas delivery revenues reflect a significant decrease
due to warmer temperatures compared to the 2000 heating season and a reduction
due to the economic slowdown in 2001. Gas system deliveries, including
miscellaneous transportation, totaled 367 bcf, a decrease of 43 bcf or 10
percent compared with 2000.

For the year 2000 as compared to 1999, the gas commodity cost and related
revenue decreased primarily as a result of recording the regulatory liability
related to increased gas costs in 2000. The increase in gas costs were
significantly above the gas commodity rate being collected from Consumers' gas
customers. Operation and maintenance cost decreased due to control of employee
benefit costs. System deliveries, including miscellaneous transportation,
totaled 410 bcf, an increase of 21 bcf or five percent compared with 1999. The
increased deliveries reflect colder temperatures during the fourth quarter of
2000.

CAPITAL RESOURCES AND LIQUIDITY

CASH POSITION, INVESTING AND FINANCING

OPERATING ACTIVITIES: Consumers' principal source of liquidity is from cash
derived from operating activities involving the sale and transportation of
natural gas and the generation, delivery and sale of electricity. For 2001 and
2000, cash from operations totaled $518 million and $515 million, respectively.
The $3 million increase resulted primarily from a $327 million increase in cash
collected from customers and related parties, offset by a $248 million use of
cash to increase natural gas inventories and $76 million of other temporary
changes in working capital items due to timing of cash receipts and payments.
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. A decrease in cash from operations could reduce the availability
of funds and result in additional short-term financings, see Note 3, Short-Term
Financing and Capitalization for additional details about this source of funds.



                                       34
<PAGE>
                                                        Consumers Energy Company



INVESTING ACTIVITIES: For 2001 and 2000, cash used for investing activities
totaled $803 million and $604 million, respectively. The change of $199 million
is primarily for capital expenditures to comply with the Clean Air Act and to
purchase nuclear fuel.

FINANCING ACTIVITIES: For 2001 and 2000, cash provided by financing activities
totaled $281 million and $92 million, respectively. The change of $189 million
is primarily the result of $55 million decrease in the payment of common stock
dividend, $121 million net proceeds from the sale of Trust Preferred Securities,
$130 million increase in net proceeds from Senior notes issued and $459 million
net proceeds from the issuance of Securitization Bonds, offset by a $176 million
net decrease in notes payable and $392 million increase in retirement of bonds
and other long-term debt.

OFF-BALANCE SHEET ARRANGEMENTS: Consumers' use of long-term contracts for the
purchase of commodities and services, the sale of its accounts receivables, and
operating leases are considered to be off-balance sheet arrangements. Consumers
has responsibility for the collectability of the accounts receivables sold, and
the full obligation of its leases become due in case of lease payment default.
Consumers uses these off-balance sheet arrangements in its normal business
operations.

DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS: The
following schedule of material contractual obligations and commercial
commitments is provided to aggregate information in a single location so that a
picture of liquidity and capital resources is readily available. For further
information about these obligations, see Note 2, Uncertainties, Note 3,
Short-Term Financing and Capitalization, the Consolidated Statements of
Long-Term Debt, and Note 8, Leases.

<Table>
<Caption>
Contractual Obligations                                                                                         In Millions
---------------------------------------------------------------------------------------------------------------------------
                                                                             Payments Due (Restated)
                                                    -----------------------------------------------------------------------
Years Ended December 31                  Total         2002           2003         2004           2005      2006 and beyond
--------------------------------      -----------   -----------   -----------   -----------   -----------   ---------------
<S>                                   <C>           <C>           <C>           <C>           <C>           <C>
On-balance sheet:
   Long-term debt                     $     2,735   $       263   $       634   $        28   $       170       $     1,640
   Notes payable                              416           416            --            --            --                --
   Capital lease obligations (a)              112            35            19            17            16                25
Off-balance sheet:
   Headquarters building (a)                   49            36            13            --            --                --
   Operating leases                            84            12            11             8             6                47
   Sale of accounts receivable                334           334            --            --            --                --
   Unconditional purchase
     Obligations                           17,704         1,115           945           787           781            14,076
                                      -----------   -----------   -----------   -----------   -----------       -----------
</Table>


(a) The headquarters building capital lease is estimated to be $65 million, of
which $16 million of the construction obligation has been incurred and recorded
on Consumers' balance sheet as of December 31, 2001.

Unconditional purchase obligations are for natural gas and electricity and
represent normal business operating contracts used to assure adequate supply and
minimize exposure to market price fluctuations.

Consumers has long-term power purchase agreements with various generating plants
including the MCV Facility. These contracts require monthly capacity payments
based on the plants' availability or deliverability. These payments are
approximately $45 million per month for year 2002, which includes $33 million
related to the MCV Facility. If a plant is not available to deliver electricity
to Consumers, then Consumers would not be obligated to make the capacity payment
until the plant could deliver. See Electric Utility Results of Operations above,
Note 2, Uncertainties, "Power Supply Costs" and "The Midland Cogeneration
Venture",



                                       35
<PAGE>
                                                        Consumers Energy Company


and Note 11, Summarized Financial Information of Significant Related Energy
Supplier, for further information concerning power supply costs. See Note 1,
Corporate Structure and Summary of Significant Accounting Policies,
"Related-Party Transactions" for additional details concerning related party
transactions.

<Table>
<Caption>
Commercial Commitments                                                                             In Millions
--------------------------------------------------------------------------------------------------------------------------------
                                                                Commitment Expiration (Restated)
                                           -------------------------------------------------------------------------------------
Years Ended December 31                       Total         2002          2003          2004          2005       2006 and beyond
--------------------------------------     ------------  ------------  -----------   -----------   -----------   ---------------
<S>                                        <C>           <C>           <C>           <C>           <C>           <C>
Off-balance sheet:
   Indemnities                             $        14            --            --            --            --   $            14
   Letters of Credit                                 6             6            --            --            --                --
                                           ===========   ===========   ===========   ===========   ===========   ===============
</Table>

Consumers has $300 million credit facilities, $215 million aggregate lines of
credit and a $450 million trade receivable sale program in place as anticipated
sources of funds to fulfill its currently expected capital expenditures. For
further information about this source of funds see Note 3, Short-Term Financing
and Capitalization.

OUTLOOK

CAPITAL EXPENDITURES OUTLOOK

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

<Table>
<Caption>
                                                                                 In Millions
                                                     ---------------------------------------
                                                      Restated      Restated
Years Ended December 31                                 2002          2003          2004
--------------------------------------------------   -----------   -----------   -----------
<S>                                                  <C>           <C>           <C>
Construction                                         $       588   $       548   $       540
Nuclear fuel lease                                             9             0            28
Capital leases other than nuclear fuel (c)                    61            35            22
                                                     -----------   -----------   -----------

                                                     $       658   $       583   $       590
                                                     ===========   ===========   ===========

Electric utility operations (a)(b)(c)                $       467   $       412   $       440
Gas utility operations (a)(c)                                191           171           150
                                                     -----------   -----------   -----------

                                                     $       658   $       583   $       590
                                                     ===========   ===========   ===========
</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 2, Uncertainties.

(c) These amounts have been restated only to include the amount related to the
capital lease for Consumers' new headquarters building.



                                       36
<PAGE>
                                                        Consumers Energy Company


ELECTRIC BUSINESS OUTLOOK

GROWTH: Over the next five years, Consumers expects electric deliveries
(including both full service sales and delivery service to customers who choose
to buy generation service from an alternative electric supplier) to grow at an
average rate of approximately two percent per year based primarily on a steadily
growing customer base. This growth rate reflects a long-range expected trend of
growth. Growth from year to year may vary from this trend due to customer
response to abnormal weather conditions and changes in economic conditions
including, utilization and expansion of manufacturing facilities.

COMPETITION AND REGULATORY RESTRUCTURING: Regulatory changes and other
developments have resulted and will continue to result in increased competition
in the electric business. Generally, increased competition threatens Consumers'
share of the market for generation services and can reduce profitability.
Competition is increasing as a result of the introduction of retail open access
in the state of Michigan pursuant to the enactment of Michigan's Customer Choice
Act, and therefore, alternative electric suppliers for generation services have
entered Consumers' market. The Customer Choice Act allows all electric customers
to have the choice of buying electric generation service from an alternative
electric supplier as of January 1, 2002. To the extent Consumers experiences
"net" Stranded Costs as a result of customers switching to an alternative
electric supplier, the Customer Choice Act provides for the recovery of such
related "net" Stranded Costs through a surcharge that would be paid by those
customers that choose to switch to an alternative electric supplier.

Stranded and Implementation Costs: The Customer Choice Act allows for the
recovery by an electric utility of the cost of implementing the act's
requirements and "net" Stranded Costs, without defining the term. The act
directs the MPSC to establish a method of calculating "net" Stranded Costs and
of conducting related true-up adjustments. In December 2001, the MPSC adopted a
methodology for calculating "net" Stranded Costs as the shortfall between (a)
the revenue needed to cover the costs associated with fixed generation assets,
generation-related regulatory assets, and capacity payments associated with
purchase power agreements and (b) the revenues received from retail and
wholesale customers under existing rates available to cover those revenue needs.
According to the MPSC, "net" Stranded Costs are to be recovered from retail open
access customers through a Stranded Cost surcharge. Even though the MPSC ruled
that the Stranded Cost surcharge to be in effect on January 1, 2002 for the
recovery of "net" Stranded Costs for calendar year 2000 for Consumers is zero,
the MPSC also indicated that the "net" Stranded Costs for 2000 would be subject
to further review in the context of its subsequent determinations of "net"
Stranded Costs for 2001 and later years. The MPSC authorized Consumers to use
deferred accounting to recognize the future recovery of assets determined to be
stranded by application of the MPSC's methodology. Consumers is seeking a
rehearing and clarification of the methodology adopted, and will be making
future "net" Stranded Cost filings with the MPSC in March or April of 2002. The
outcome of these proceedings before the MPSC is uncertain at this time.

Between 1999 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $75 million,
incurred between 1997 and 2000. Consumers received final orders that granted
recovery of $41 million of restructuring implementation costs for the years 1997
through 1999, and disallowed recovery of $10 million, based upon a conclusion
that this amount did not represent costs incremental to costs already reflected
in rates. Consumers expects to receive a final order for the 2000 restructuring
implementation costs in 2002. In the orders received for the years 1997 through
1999, the MPSC also ruled that it reserved the right to undertake another review
of the total restructuring implementation costs depending upon the progress and
success of the retail open access program, and ruled that due to the rate freeze
imposed by the Customer Choice Act, it was premature to establish a cost
recovery method for the allowable costs. For the year 2001, Consumers incurred,
and deferred as a regulatory asset, an additional $8 million in implementation
costs for which an application for recovery will be filed with the MPSC in 2002.
In addition, Consumers has recorded as a regulatory asset $9 million for the
cost of money associated with restructuring implementation costs. Consumers
believes the restructuring implementation costs and the associated cost of money
are fully recoverable in accordance with the Customer Choice Act; however,
Consumers cannot predict the amounts the MPSC will approve as recoverable costs.



                                       37
<PAGE>
                                                        Consumers Energy Company


Rate Caps: The Customer Choice Act imposes certain limitations on rates that
could result in Consumers being unable to collect customer rates sufficient to
fully recover its cost of conducting business. Some of these costs may be beyond
Consumers' ability to control. In particular, if Consumers needs to purchase
power supply from wholesale suppliers during the period when retail rates are
frozen or capped, the rate restrictions imposed by the Customer Choice Act may
make it impossible for Consumers to fully recover the cost of purchased power
through the rates it charges its customers. As a result, it is not certain that
Consumers can maintain its profit margins in its electric utility business
during the period of the rate freeze or rate caps.

Industrial Contracts: In response to industry restructuring efforts, Consumers
entered into multi-year electric supply contracts with certain of its largest
industrial customers to provide electricity to certain of their facilities at
specially negotiated prices. The MPSC approved these special 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. As of December 2001, neither Consumers nor
any of its industrial customers have terminated or restructured any of these
contracts, but some contracts have expired by their terms. Outstanding contracts
involve approximately 510 MW of customer power supply requirements. Consumers
cannot predict the ultimate financial impact of changes related to these power
supply contracts, or whether additional contracts will be necessary or
advisable.

Code of Conduct: In December 2000, as a result of the passage of the Customer
Choice Act, the MPSC issued a new code of conduct that applies to electric
utilities and alternative electric suppliers. The code of conduct seeks to
prevent cross-subsidization, information sharing and preferential treatment
between a utility's regulated and unregulated services. The new code of conduct
is broadly written, and as a result could affect Consumers' retail gas business,
the marketing of unregulated services and equipment to customers in Michigan,
and internal transfer pricing between Consumers' departments and affiliates. The
new code of conduct was recently reaffirmed without substantial modification,
and will become operationally effective after the MPSC reviews and approves a
utility's compliance plans and requests for waivers. Consumers appealed the MPSC
orders related to the code of conduct and sought a stay of the orders until the
appeal was complete; however, the request for a stay was denied. Consumers has
filed a compliance plan in accordance with the code of conduct, and has sought
waivers to the code of conduct with respect to utility activities that provide
approximately $50 million in annual revenues that may be restricted. The full
impact of the new code of conduct on Consumers' business will remain uncertain
until the appellate courts issue definitive rulings or the MPSC rules on the
waivers.

Energy Policy: Uncertainty exists with respect to the enactment of a national
comprehensive energy policy, specifically 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. If the
federal government enacts a comprehensive energy policy or legislation
restructuring the electric industry, then that legislation could potentially
affect or even supercede state regulation.

Transmission: In 1999, in part because of the provisions of certain policy
pronouncements by the FERC designed to encourage utilities to either transfer
operating control of their transmission facilities to an RTO or sell their
transmission facilities to an independent company, Consumers joined a coalition
of companies known as the Alliance companies for the purpose of creating a
FERC-approved RTO. In December 2001, the FERC denied the RTO plan submitted by
the Alliance companies and ordered the Alliance companies to explore membership
in the Midwest ISO, whose RTO plan was approved by the FERC. Membership in the
Midwest ISO could potentially increase Consumers' costs during the period of the
rate freeze or rate caps where Consumers could not raise retail electric rates
in Michigan. Consumers and METC are evaluating their options regarding RTO
membership as a result of the December 2001 FERC order.

In January 2001, the FERC granted Consumers' application to transfer ownership
and control of its electric transmission facilities to METC, and in April 2001
the transfer took place. In October 2001, Consumers



                                       38
<PAGE>
                                                        Consumers Energy Company


executed an agreement to sell METC for approximately $290 million, depending on
the final date of the sale, to MTH, a non-affiliated limited partnership whose
general partner is a subsidiary of Trans-Elect, Inc. Certain of Trans-Elect's
officers and directors are former officers and directors of CMS Energy,
Consumers and certain of their subsidiaries, but all had left the employment of
such affiliates prior to the period when the transaction was discussed
internally and negotiated with purchasers. Trans-Elect, Inc. submitted the
winning bid to purchase METC through a competitive bidding process, and the
transaction is subject to approval by various federal agencies. Consumers is not
providing any financial or credit support to Trans-Elect, Inc. in connection
with the purchase of METC. Proceeds from the sale of METC will be used to
improve Consumers' balance sheet. Consumers chose to sell its transmission
facilities as a form of compliance with Michigan's Customer Choice Act and FERC
Order No. 2000 rather than own and invest in an asset that it cannot control.
After selling its transmission facilities, Consumers anticipates a reduction in
after-tax earnings of approximately $6 million and $14 million in 2002 and 2003,
respectively, as a result of the loss in revenue associated with wholesale and
retail open access customers that would buy services directly from MTH and the
loss of a return on the transmission assets upon the sale of METC to MTH. Under
the agreement with MTH, and subject to certain additional RTO surcharges,
transmission rates charged to Consumers will be fixed at current levels until
December 2005, and will be subject to FERC ratemaking thereafter. Consumers,
through METC, will continue to own and operate the transmission system until the
companies meet all conditions of closing, including approval of the transaction
by the FERC. In February 2002, MTH and Consumers received conditional approval
of the transaction from the FERC. Consumers and Trans-Elect, Inc. have
petitioned for rehearing to resolve certain remaining issues. Trans-Elect, Inc.
has also submitted filings to the FERC designed to bring it into the Midwest ISO
and to establish rates to be charged over the Trans-Elect, Inc. owned system.
Final regulatory approvals and operational transfer are expected to take place
in the first or second quarter of 2002; however, Consumers can make no
assurances as to when or whether the transaction will be completed. For further
information, see Note 2, Uncertainties, "Electric Rate Matters - Transmission
Business."

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

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

For further information and material changes relating to the rate matters and
restructuring of the electric utility industry, see Note 1, Corporate Structure
and Summary of Significant Accounting Policies, and Note 2, Uncertainties,
"Electric Rate Matters - Electric Restructuring" and "Electric Rate Matters -
Electric Proceedings."

NUCLEAR MATTERS: In June 2001, an unplanned outage began at Palisades that
negatively affected power supply costs in the third and fourth quarter of 2001.
On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. In August 2001,
Consumers completed an expanded inspection that included all similar control rod
drive assemblies and elected to completely replace the defective components. In
December 2001, installation of the new components was completed and the plant
returned to service on January 21, 2002. For further information and material
changes relating to nuclear matters, see Note 2, Uncertainties, "Other Electric
Uncertainties - Nuclear Matters."



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                                                        Consumers Energy Company



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) the need to make additional capital expenditures and
increase 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 the Palisades plant by NMC;
4) electric industry restructuring issues, including those described above; 5)
Consumers' ability to meet peak electric demand requirements at a reasonable
cost, without market disruption, and initiatives undertaken to reduce exposure
to electric price increases for purchased power; 6) the restructuring of the
MEPCC and the termination of joint merchant operations with Detroit Edison; 7)
Consumers' ability to sell wholesale power at market-based rates; 8) the
recovery of electric restructuring implementation costs; 9) sufficient reserves
for OATT rate refunds; and 10) the effects of derivative accounting and
potential earnings volatility. For further information about these trends or
uncertainties, see Note 2, Uncertainties.

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
electric costs, changes in competitive and economic conditions, and the level of
natural gas consumption per customer.

GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a distribution service rate increase. Contemporaneously with this
filing, Consumers requested partial and immediate relief in the annual amount of
$33 million. In October 2001, Consumers revised its filing to reflect lower
operating costs and is now requesting a $133 million annual distribution service
rate increase. In December 2001, the MPSC authorized a $15 million annual
interim increase in distribution service revenues. In February 2002, Consumers
revised its filing to reflect lower estimated gas inventory prices and revised
depreciation expense and is now requesting a $105 million distribution service
rate increase. See Note 2, Uncertainties "Gas Rate Case" for further
information.

UNBUNDLING STUDY: In July 2001, the MPSC directed gas utilities under its
jurisdiction to prepare and file an unbundled cost of service study. The purpose
of the study is to allow parties to advocate or oppose the unbundling of the
following services: metering, billing information, transmission, balancing,
storage, backup and peaking, and customer turn-on and turn-off services.
Unbundled services could be separately priced in the future and made subject to
competition by other providers. The subject is likely to remain the topic of
further study by the utilities in 2002 and under further consideration by the
MPSC. Consumers cannot predict the outcome of unbundling costs on its financial
results and conditions.

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) any initiatives undertaken to protect
customers against gas price increases; and 4) market and regulatory responses to
increases in gas costs. For further information about these uncertainties, see
Note 2, Uncertainties.



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                                                        Consumers Energy Company


OTHER OUTLOOK

TERRORIST ATTACKS: Since the September 11, 2001 terrorists attack in the United
States, Consumers has increased security at all facilities and over its
infrastructure, and will continue to evaluate security on an ongoing basis.
Consumers may be required to comply with federal and state regulatory security
measures promulgated in the future. As a result, Consumers anticipates increased
operating costs related to security after September 11, 2001 that could be
significant. Consumers would attempt to seek recovery of these costs from its
customers.

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

PENSION AND OPEB COSTS: Consumers provides post retirement benefits under its
Pension Plan, and post retirement health and life benefits under its OPEB plan
to substantially all its employees. Pension and OPEB plan assets, net of
contributions, have reduced in value from the previous year due to a downturn in
the equities market. As a result, Consumers expects to see an increase in
pension and OPEB expense levels over the next few years unless market
performance improves. Consumers anticipates pension expense and OPEB expense to
rise in 2002 by approximately $10 million and $20 million, respectively, over
2001 expenses. For pension expense, this increase is due to underperformance of
pension assets during the past two years, forecasted increases in pay and added
service, decline in the interest rate used to value the liability of the plan,
and expiration of the transition gain amortization. For OPEB expense, the
increase is due to the trend of rising health care costs, the market return on
plan assets being below expected levels and a lower discount rate, based on
recent economic conditions, used to compute the benefit obligation. Health care
cost decreases gradually under the assumptions used in the OPEB plan from
current levels through 2009; however, Consumers cannot predict the impact that
interest rates or market returns will have on pension and OPEB expense in the
future. For further information, see Note 7, Retirement Benefits.

OTHER MATTERS

NEW ACCOUNTING STANDARDS

In addition to the identified critical accounting policies discussed above,
future results may be affected by a number of new accounting standards that have
recently been issued which are discussed below.

SFAS NO. 141, BUSINESS COMBINATIONS: SFAS No. 141, issued in July 2001, requires
that all business combinations initiated after June 30, 2001, be accounted for
under the purchase method; use of the pooling-of-interests method is no longer
permitted. The adoption of SFAS No. 141, effective July 1, 2001, will result in
Consumers accounting for any future business combinations under the purchase
method of accounting.

SFAS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142, also issued in
July 2001, requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. When effective, January 1, 2002, the
provisions of SFAS No. 142 will have no impact on Consumers' consolidated
results of operations or financial position.

SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Issued by the FASB in
August 2001, the provisions of SFAS No. 143 require adoption as of January 1,
2003. The standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity would capitalize an offsetting
amount by increasing the carrying amount



                                       41
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                                                        Consumers Energy Company


of the related long-lived asset. Over time, the liability is accreted to its
present value while the capitalized cost is depreciated over the useful life of
the related asset. Consumers is currently studying the new standard but has yet
to quantify the effects of adoption on its financial statements.

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

DERIVATIVE IMPLEMENTATION GROUP ISSUES: In December 2001, the FASB issued
revised guidance for DIG Statement No. C15 and in October 2001, issued final
guidance for DIG Statement No. C16. These issues are effective April 1, 2002,
however, early application is permitted for DIG Statement No. C15, and Consumers
chose to implement the effects of this issue as of December 31, 2001. Upon
initial adoption of the revised guidance in DIG Statement No. C15, Consumers
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. Consumers has completed its study of DIG Statement No. C16, and has
determined that this issue will not affect the accounting for its fuel supply
contracts. For further information, see Note 1, Corporate Structure and Summary
of Significant Accounting Policies, "Implementation of New Accounting Standards"
and Note 2, Uncertainties, "Other Electric Uncertainties - Derivative
Activities."

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. Consumers' market risk, and activities designed to minimize this risk,
are subject to the direction of an executive oversight committee consisting of
designated members of senior management and a risk committee, consisting of
business unit managers. The role of the risk committee is to review the
corporate commodity position and ensure that net corporate exposures are within
the economic risk tolerance levels established by Consumers' Board of Directors.
Established policies and procedures are used to manage the risks associated with
market fluctuations.

Consumers uses various derivative instruments, including swaps, options, and
forward contracts to manage its risks associated with the variability in
expected future cash flows attributable to fluctuations in interest rates and
commodity prices. When management uses these instruments, it intends that any
losses incurred on derivative instruments used to hedge risk would be offset by
an opposite movement in the value of the hedged risk. Consumers enters into all
derivative instruments for purposes other than trading.

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



                                       42
<PAGE>
                                                        Consumers Energy Company


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.

In accordance with SEC disclosure requirements, Consumers performs sensitivity
analyses to assess the potential loss in fair value, cash flows and earnings
based upon a hypothetical 10 percent adverse change 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 provide an accurate or reliable method for monitoring and controlling
risks; therefore, Consumers relies on the experience and judgment of its senior
management to revise strategies and adjust positions, as it deems necessary.
Losses in excess of the amounts determined in sensitivity analyses could occur
if market rates or prices exceed the ten percent shift used for the analyses.

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 these instruments
to manage and mitigate interest rate risk exposure when it deems it appropriate,
based upon market conditions. These strategies attempt to provide and maintain
the lowest cost of capital. As of December 31, 2001 and 2000, Consumers had
entered into floating-to-fixed interest rate swap agreements for a notional
amount of $75 million and $300 million, respectively. As of December 31, 2001
and 2000, Consumers had outstanding $1.189 billion and $843 million of
variable-rate debt, respectively. At December 31, 2001 and 2000, assuming a
hypothetical 10 percent adverse change in market interest rates, Consumers'
exposure to earnings, before tax on its variable rate debt, would be $2 million
and $5 million, respectively. As of December 31, 2001 and 2000, Consumers had
outstanding long-term fixed-rate debt including fixed-rate swaps of $2.807
billion and $2.583 billion, respectively, with a fair value of $2.805 billion
and $2.515 billion, respectively. As of December 31, 2001 and 2000, assuming a
hypothetical 10 percent adverse change in market rates, Consumers would have an
exposure of $144 million and $133 million to the fair value of these
instruments, respectively, 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.

COMMODITY MARKET RISK: Consumers enters into, for purposes other than trading,
electricity and gas fuel for generation call options and swap contracts. The
electric call options are used to protect against risk due to fluctuations in
the market price of electricity and to ensure a reliable source of capacity to
meet its customers' electric needs. The gas fuel for generation call options and
swap contracts are used to protect generation activities against risk due to
fluctuations in the market price of natural gas.

As of December 31, 2001 and 2000, the fair value based on quoted future market
prices of electricity-related call option and swap contracts was $15 million and
$126 million, respectively. At December 31, 2001 and 2000, assuming a
hypothetical 10 percent adverse change in market prices, the potential reduction
in fair value associated with these contracts would be $3 million and $16
million, respectively. As of December 31, 2001 and 2000, Consumers had an asset
of $48 million and $86 million, respectively, related to premiums incurred for
electric call option contracts. Consumers' maximum exposure associated with the
call option contracts is limited to the premiums incurred.

EQUITY SECURITY PRICE RISK: Consumers has a less than 20 percent equity
investment in CMS Energy. At December 31, 2001 and 2000, a hypothetical 10
percent adverse change in market price would have resulted in an $8 million and
$11 million change in its equity investment, respectively. 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.



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                                                        Consumers Energy Company


For further information on market risk and derivative activities, see Note 1,
Corporate Structure and Summary of Significant Accounting Policies, "Risk
Management Activities and Derivative Transactions" and "Implementation of New
Accounting Standards", Note 2, Uncertainties, "Other Electric Uncertainties -
Derivative Activities", and Note 3, Short-Term Financings and Capitalization,
"Derivative Activities."

OTHER

CHANGE IN PAID PERSONAL ABSENCES PLAN: 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.

SUBSEQUENT EVENTS

Subsequent to December 31, 2001, a number of material events have occurred.
These events have been disclosed in Consumers' quarterly filings on Form 10-Q,
Form 8-K's or otherwise, during the years 2002 and 2003. Below is a summary of
these events:

CHANGE IN EXECUTIVE OFFICERS

Subsequent to March 1, 2002, certain changes have occurred in Consumers'
executive officers. On May 24, 2002, the Board of Directors of Consumers elected
Kenneth Whipple as Chairman of the Board and Chief Executive Officer; on June
27, 2002, S. Kinnie Smith, Jr. was elected Vice Chairman of the Board; on July
22, 2002, Thomas J. Webb was elected Executive Vice President and Chief
Financial Officer; on August 2, 2002, John F. Drake was elected Senior Vice
President and on December 6, 2002, Michael T. Monahan and Joseph F. Paquette,
Jr. joined the Board of Directors of Consumers.

LIQUIDITY AND CAPITAL RESOURCES

Consumers' liquidity and capital requirements are generally a function of its
results of operations, capital expenditures, contractual obligations, working
capital needs and collateral requirements. Consumers has historically met its
consolidated cash needs through its operating and financing activities including
access to bank financing and the capital markets. During 2003, Consumers has
contractual obligations and planned capital expenditures that would require
substantial amounts of cash. Consumers also has approximately $734 million of
publicly issued and credit facility debt maturing in 2003.

Consumers is addressing its near-to-mid-term liquidity and capital requirements
primarily through reduced capital expenditures. Consumers believes that its
current level of cash and borrowing capacity, along with anticipated cash flows
from operating and investing activities, will be sufficient to meet its
liquidity needs through 2003, including the approximate $734 million of debt
maturities in 2003. Consumers also plans to enter into additional long-term debt
financing in 2003.

During the summer months, Consumers purchases natural gas and stores it for
resale primarily during the winter heating season. Recently the market price for
natural gas has increased. If continued, this price increase could impose
liquidity needs beyond what is anticipated for 2003. Although Consumers' natural
gas purchases are recoverable from its customers, the amount paid for natural
gas stored as inventory could require additional liquidity due to the timing of
when those costs are recovered.



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<PAGE>
                                                        Consumers Energy Company


In July 2002, the credit rating of the publicly traded securities of Consumers
was downgraded by the major rating agencies. The rating downgrade is purported
to be largely a function of the uncertainties associated with CMS Energy's
financial condition and liquidity pending resolution of the round-trip trading
investigations and lawsuits, the special board committee investigation,
restatement and re-audit of 2000 and 2001 financial statements, and uncertain
future access to the capital markets.

As a result of certain of these rating agency downgrades, some commodity
suppliers to Consumers have requested advance payments or other forms of
assurances in connection with maintenance of ongoing deliveries of gas and
electricity. Consumers is addressing these issues as required.

As a result of the restatement, ratings downgrades and related changes in its
financial situation, Consumers' access to bank financing and the capital markets
and its ability to incur additional indebtedness may be restricted. In the event
Consumers is unable to access bank financing or the capital markets to incur or
refinance indebtedness, there could be a material adverse effect on Consumers'
liquidity and operations. In such event, it would be required to consider the
full range of strategic measures available to companies in similar
circumstances.

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

CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
CMS Energy's financial statements, accounting policies and controls, and
investigations by the United States Department of Justice, the Commodity Futures
Trading Commission and the FERC. CMS Energy has also received subpoenas from the
United States Attorney's Office for the Southern District of New York and from
the United States Attorney's Office for the Southern District of Texas regarding
investigations of these trades and has received a number of shareholder class
action lawsuits. CMS Energy is unable to predict the outcome of these matters,
and Consumers is unable to predict what effect, if any, these investigations
will have on its business.

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



                                       45
<PAGE>
                                                        Consumers Energy Company


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

RESTATEMENT: In February 2003, Ernst & Young completed its re-audit of Consumers
consolidated financial statements for the fiscal years ended December 31, 2001
and December 31, 2000. Consumers has determined to make, in consultation with
Ernst & Young, certain adjustments to its consolidated financial statements for
the fiscal years ended December 31, 2001 and December 31, 2000. Therefore, the
consolidated financial statements for 2001 and 2000 have been restated from
amounts previously reported. A summary of the principal effects of the
restatement on Consumers' consolidated financial statements for 2001 and 2000 is
contained in Note 12, Restatement, of Consumers' consolidated financial
statements.

As a result of Consumers restating its financial statements, Consumers was
unable to deliver September 30, 2002 financial statements to lenders as required
under certain bank lending arrangements. On November 26, 2002, Consumers
received approval from its various bank groups to waive delivery of financial
statements for the period ended September 30, 2002. The waiver expires on the
earlier of delivery of such statements or February 28, 2003. Consumers intends
to provide these statements to its various bank groups prior to February 28,
2003.

FINANCING: At September 30, 2002, Consumers had FERC authorization to issue or
guarantee through June 2004, up to $1.1 billion of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2004 up to $500 million of long-term securities for purposes
of refinancing or refunding existing long-term securities, $690 million for
general corporate purposes, and $900 million of first mortgage bonds to be
issued solely as security for the long-term securities.

On July 12, 2002, Consumers reached agreement with its lenders on two credit
facilities as follows: a $250 million revolving credit facility maturing July
11, 2003 and a $300 million term loan maturing July 11, 2003. In September 2002,
the term loan maturity was extended by one year at Consumers' option and now has
a maturity date of July 11, 2004. These two facilities aggregating $550 million
replace a $300 million revolving credit facility that matured July 14, 2002, as
well as various credit lines aggregating $200 million. At September 30, 2002, a
total of $535 million was outstanding under these facilities. The prior credit
facilities and lines were unsecured. The two new credit facilities are secured
with Consumers' first mortgage bonds and are available to finance seasonal
working capital requirements and to pay for capital expenditures between
long-term financings.

As of September 2002, Consumers also had a $225 million term loan of which $84
million was outstanding. Consumers' $250 million revolving credit facility has,
as of November 30, 2002, an effective interest rate of 4.8 percent, although the
rate may fluctuate depending on the rating of Consumers' first mortgage bonds or
changes in the base LIBOR rate. The interest rate on the $300 million term loan
has an effective interest rate of 8.2 percent as of November 30, 2002, which may
also fluctuate depending on the rating of Consumers' first mortgage bonds or
changes in the base LIBOR rate. Consumers' bank and legal fees associated with
arranging the facilities in July 2002 were $6 million.

The credit facilities have contractual restrictions that require Consumers to
maintain, as of the last day of each fiscal quarter, the following:



                                       46
<PAGE>
                                                        Consumers Energy Company


<Table>
<Caption>
Required Ratio                                      Limitation                     Ratio at September 30, 2002
--------------                               --------------------------           ------------------------------
<S>                                          <C>                                  <C>
Debt to Capital Ratio (a)                    Not more than 0.65 to 1.00                             0.53 to 1.00
Interest Coverage Ratio (a)                    Not less than 2.0 to 1.0                             3.36  to 1.0
</Table>

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

Also pursuant to restrictive covenants in the new facilities, Consumers is
limited to dividend payments that will not exceed $300 million in any calendar
year. In 2001, Consumers paid $190 million in common stock dividends to CMS
Energy. Consumers declared and paid $208 million in common stock dividends in
2002.

In addition, Consumers has, through its wholly owned subsidiary Consumers
Receivables Funding, a $325 million trade receivables sale program in place.
These anticipated sources of funds are for general corporate purposes and
currently expected capital expenditures. At September 30, 2002, the receivables
sold totaled $325 million. Accounts receivable and accrued revenue in the
consolidated balance sheets have been reduced to reflect receivables sold.

In October 2002, Consumers simultaneously entered into a new term loan agreement
collateralized by first mortgage bonds and a new gas inventory term loan
agreement collateralized by Consumers' natural gas in storage. These agreements
contain complementary collateral packages that provide Consumers, as additional
first mortgage bonds become available, borrowing capacity of up to $225 million.
Consumers drew $220 million of the capacity upon execution of the agreements. In
November 2002, Consumers paid $80 million on the gas inventory loan and drew $85
million under the term loan agreement. The bank and legal fees associated with
the agreements were $2 million. The first amortization payment under these
agreements occurred in December 2002 with monthly amortization payments
scheduled until full repayment is completed in mid-April of 2003. This financing
eliminated the need for Consumers to access the capital markets for the
remainder of 2002.

Consumers' debt maturities for 2003 include $277 million of long-term debt, the
$250 million revolving credit facility and an estimated remaining balance of
$207 million on the new gas inventory term loan agreement. Consumers plans to,
at a minimum, refinance $500 million of the maturing debt and to put in place a
new gas inventory financing facility. Replacing maturing debt with new financing
is subject, in part, to capital market acceptance and receptivity to utility
industry securities in general and to Consumers' securities issuances in
particular. Consumers cannot guarantee the capital market's acceptance of its
securities or predict the impact of the restatement of its consolidated
financial statements on such acceptance and is exploring other financing options
which may include, but are not limited to, first mortgage bond collateralized
bank term loans and inventory collateralized bank term loans.

ACCOUNTING FOR PENSION AND OPEB

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



                                       47
<PAGE>
                                                        Consumers Energy Company


Pension Plan and OPEB plan assets, net of contributions, have been reduced in
value from the previous year due to the downturn in the equities market, and a
decrease in the price of CMS Energy Common Stock held by the plans. As a result,
Consumers expects to see an increase in pension and OPEB expense levels over the
next several years unless market performance of plan assets improves. Consumers
anticipates its allocated share of pension expense and OPEB expense to rise in
2002 by approximately $8 million and $20 million, respectively, over 2001
expenses. For pension expense, this increase is due to a downturn in value of
pension assets during the past two years, forecasted increases in pay and added
service, decline in the interest rate used to value the liability of the plan,
and expiration of the transition gain amortization. For OPEB expense, the
increase is due to the trend of rising health care costs, the market return on
plan assets being below expected levels, and a lower discount rate, based on
recent economic conditions, used to compute the benefit obligation. Under the
OPEB plans' assumptions, health care costs increase at a slower rate from
current levels through 2009; however, Consumers cannot predict the impact that
future health care costs and interest rates or market returns will have on
pension and OPEB expense in the future.

The recent significant downturn in the equities markets has affected the value
of the Pension Plan assets. The estimated fair value of the Pension Plan assets
at December 31, 2002 was $607 million. The Accumulated Benefit Obligation was
estimated at $1.055 billion. The Pension Plan's Accumulated Benefit Obligation
exceeded the value of these assets at December 31, 2002, and as a result,
Consumers and the other participants were required to recognize an additional
minimum liability for this excess in accordance with SFAS No. 87. As of December
31, 2002, the additional minimum liability allocated to Consumers was $325
million, of which $40 million was recorded as an intangible asset, and $285
million was charged to other comprehensive income ($185 million after-tax).

As of December 31, 2001, the balance of Pension Plan and OPEB plan assets was
$845 million and $475 million respectively. These amounts consisted primarily of
stocks and bonds, including CMS Energy Common Stock of $126 million in the
Pension Plan assets and $3 million in the OPEB plan assets at December 31, 2001.
As of January 31, 2003, the market value of CMS Energy Common Stock in these
plans was $30 million in the Pension Plan and $1 million in the OPEB plan.

In January 2002, Consumers' portion of contributions made to the plans' trust
accounts was $62 million. This amount represents $47 million for pension related
benefits and $15 million for postretirement health care and life insurance
benefits. In June 2002, September 2002, and December 2002, Consumers made
additional contributions, in the amount of $22 million, $18 million, and $18
million respectively, for postretirement health care and life insurance
benefits. Consumers expects similar contributions for postretirement health care
and life insurance benefits will be made in 2003, 2004, and 2005. Consumers
expects its share of additional contributions for the Pension Plan to be
approximately $158 million in the third quarter of 2003, $209 million in 2004,
and $24 million in 2005.

In order to keep health care benefits and costs competitive, Consumers has
announced several changes to the Health Care Plan. These changes are effective
January 1, 2003. The most significant change is that Consumers' future increases
in health care costs will be shared with employees.

Consumers also provides retirement benefits under a defined contribution 401(k)
plan. Consumers previously offered an employer's contribution match of 50
percent of the employee's contribution up to six percent (three percent
maximum), as well as an incentive match in years when Consumers' financial
performance exceeded targeted levels. Effective September 1, 2002, the
employer's match was suspended until January 1, 2005, and the incentive match
was permanently eliminated. The amount charged to expense for the employer's
match for 2002 was $8 million. Amounts charged to expense for the employer's
match and incentive match during 2001 were $12 million and $8 million,
respectively.



                                       48
<PAGE>
                                                        Consumers Energy Company



CAPITAL EXPENDITURES OUTLOOK

Consumers estimates the following revised capital expenditures, including new
lease commitments, as of December 31, 2002 by expenditure type and by business
segments during 2002 through 2004. Consumers prepares these estimates for
planning purposes and may revise them.

<Table>
<Caption>
                                                                               In Millions
                                                ------------------------------------------
Years Ended December 31                             2002          2003            2004
---------------------------------------------   ------------   ------------   ------------
<S>                                             <C>            <C>            <C>
Construction                                    $        561   $        424   $        520
Nuclear fuel                                               1             33             32
Other capital leases                                      55             28             23
                                                ------------   ------------   ------------

                                                $        617   $        485   $        575
                                                ============   ============   ============

Electric utility operations (a)(b)              $        436   $        341   $        408
Gas utility operations (a)                               181            144            167
                                                ------------   ------------   ------------

                                                $        617   $        485   $        575
                                                ============   ============   ============
</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 2, Uncertainties.

ELECTRIC OUTLOOK

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

In 1998, the EPA issued final regulations requiring the State of Michigan to
further limit nitrogen oxide emissions. The Michigan Department of Environmental
Quality finalized rules to comply with the EPA final regulations in December
2002 and will be submitting these rules for approval to the EPA in the first
quarter of 2003. In addition, the EPA has also issued additional final
regulations regarding nitrogen oxide emissions from certain generators,
including some of Consumers' electric generating facilities. These regulations
will require Consumers to make significant capital expenditures estimated to be
$770 million. As of September 2002, Consumers has incurred $372 million in
capital expenditures to comply with these regulations and anticipates that the
remaining capital expenditures will be incurred between the remainder of 2002
and 2009. Additionally, Consumers will supplement its compliance plan with the
purchase of nitrogen oxide emissions credits in the years 2005 through 2008. The
cost of these credits based on the current market is estimated to be $6 million
per year, however, the market for nitrogen oxide emissions credits is volatile
and the price could change significantly. At some point, if new environmental
standards become effective, Consumers may need additional capital expenditures
to comply with the standards. These and other required environmental
expenditures, if not recovered in Consumers' rates, may have a material adverse
effect upon Consumers' financial condition and results of operations.

STRANDED AND IMPLEMENTATION COSTS: The Customer Choice Act allows electric
utilities to recover the act's implementation costs and "net" Stranded Costs
(without defining the term). The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In



                                       49
<PAGE>

December 2001, the MPSC adopted a methodology which calculated "net" Stranded
Costs as the shortfall between: (a) the revenue required to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and capacity payments associated with purchase power agreements, and (b) the
revenues received from customers under existing rates available to cover the
revenue requirement. Consumers has initiated an appeal at the Michigan Court of
Appeals related to the MPSC's December 2001 "net" Stranded Cost order.

According to the MPSC, "net" Stranded Costs are to be recovered from retail open
access customers through a Stranded Cost transition charge. Even though the MPSC
set Consumers' Stranded Cost transition charge at zero for calendar year 2000,
those costs for 2000 were also made subject to further review in the context of
the MPSC's subsequent determinations of "net" Stranded Costs for 2001 and later
years. The MPSC authorized Consumers to use deferred accounting to recognize the
future recovery of costs determined to be stranded. In April 2002, Consumers
made "net" Stranded Cost filings with the MPSC for $22 million and $43 million
for 2000 and 2001, respectively. In the same filing, Consumers estimated that it
would experience "net" Stranded Costs of $126 million for 2002. Consumers, in
its hearing brief, filed in August 2002, revised its request for Stranded Costs
to $7 million and $4 million for 2000 and 2001, respectively, and an estimated
$73 million for 2002. The single largest reason for the difference was the
exclusion of all costs associated with expenditures required by the Clean Air
Act as ordered by the MPSC. Consumers, in a separate filing, has requested
regulatory asset accounting treatment for its Clean Air Act expenditures through
2003. In December 2002, the MPSC issued an order finding that Consumers
experienced zero "net" Stranded Costs in 2000 and 2001, but declined to
establish a defined methodology that would allow a reliable prediction of the
level of stranded costs for 2002 and future years. In January 2003, Consumers
filed a petition for rehearing of the December 2002 stranded cost order in which
it asked the MPSC to grant a rehearing and revise certain features of the order.
Several other parties also filed rehearing petitions with the MPSC. The request
for regulatory asset accounting treatment for Clean Air Act expenditures remains
pending before the MPSC.

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

<Table>
<Caption>

                                                                                                   In Millions
Year Filed          Year Incurred         Requested           Pending             Allowed           Disallowed
----------          -------------         ---------           -------             -------           ----------

<S>                 <C>                   <C>                <C>                   <C>               <C>
1999                  1997 & 1998               $20             $ --                  $15               $  5
2000                         1999                30               --                   25                  5
2001                         2000                25               --                   20                  5
2002                         2001                 8                8                   --                 --
</Table>


The MPSC disallowed certain costs based upon a conclusion that these amounts did
not represent costs incremental to costs already reflected in electric rates. In
the orders received for the years 1997 through 2000, the MPSC also reserved the
right to review again the total implementation costs depending upon the progress
and success of the retail open access program, and ruled that due to the rate
freeze imposed by the Customer Choice Act, it was premature to establish a cost
recovery method for the allowable implementation costs. In addition to the
amounts shown, as of September 2002, Consumers incurred and deferred as a
regulatory asset, $3 million of additional implementation costs and has also
recorded as a regulatory asset $13 million for the cost of money associated with
total implementation costs. Consumers believes the implementation costs and the
associated cost of money should be fully recoverable in accordance with the
Customer Choice Act. Cash recovery from customers will probably begin after the
rate freeze or rate cap period has expired. Consumers cannot predict the amounts
the MPSC will finally approve as allowable costs.

Consumers is also pursuing recovery, through the MISO of approximately $7
million in certain electric utility




                                       50
<PAGE>

restructuring implementation costs related to its former participation in the
development of the Alliance RTO. However, Consumers cannot predict the amounts
it will be reimbursed by the MISO.

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

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

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

Under the agreement with MTH, and subject to certain additional RTO surcharges,
contract transmission rates





                                       51
<PAGE>

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

Consumers is a customer of AEP, holding 500 MW of transmission service
reservations through the AEP transmission system. AEP recently indicated its
intent to turn control of its transmission system over to the PJM RTO and become
part of the PJM market on May 1, 2003, which requires approval by FERC. This
will require current AEP customers to become members of, and resubmit
reservation requests to, PJM. Consumers filed an intervention requesting
clarification in January 2003. Upon FERC's approval of this transfer, Consumers
will complete the application process to join PJM.

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

There are multiple proceedings pending before the FERC regarding transitional
transmission pricing mechanisms intended to mitigate the revenue impact on
transmission owners resulting from the elimination of "Rate Pancaking". "Rate
Pancaking" represents the application of the transmission rate of each
individual transmission owner whose system is utilized on the scheduled path of
an energy delivery and its elimination could result in "lost revenues" for
transmission owners. It is unknown what mechanism(s) may result from the
proceedings currently pending before the FERC, and as such, it is not possible
at this time to identify the specific effect on Consumers. It should be noted,
however, that Consumers believes the results of these proceedings could also
significantly increase the delivered power costs to Consumers and the retail
electric customers it serves.

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

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

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




                                       52

<PAGE>

GAS OUTLOOK

GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a $140 million annual gas distribution service rate increase.
Contemporaneously with this filing, Consumers requested partial and immediate
relief in the annual amount of $33 million. In October 2001, Consumers revised
its filing to reflect lower operating costs and requested a $133 million annual
gas distribution service rate increase. In December 2001, the MPSC authorized a
$15 million annual interim increase in gas distribution service revenues under
bond and subject to refund. On November 7, 2002, the MPSC issued a final order
approving a $56 million annual gas distribution service rate increase, which
includes the $15 million interim increase, with an 11.4 percent authorized
return on equity, for service effective November 8, 2002. As part of this order,
the MPSC approved Consumers' proposal to absorb the assets and liabilities of
Michigan Gas Storage Company into Consumers' rate base and rates. This has
occurred through a statutory merger of Michigan Gas Storage Company into
Consumers and this is not expected to have an impact on Consumers' consolidated
financial statements.

OTHER OUTLOOK

TAX LOSS ALLOCATIONS: The Job Creation and Worker Assistance Act of 2002
provided to corporate taxpayers a 5-year carryback of tax losses incurred in
2001 and 2002. As a result of this legislation, CMS Energy was able to carry
back a consolidated 2001 tax loss to tax years 1996 through 1999 and obtain
refunds of prior years tax payments totaling $217 million, of which Consumers
received $174 million. The tax loss carryback, however, resulted in a reduction
in AMT credit carryforwards that previously had been recorded by CMS Energy as
deferred tax assets in the amount of $13 million. CMS Energy also had to
write-off $40 million of additional tax credits. This tax credit write-off and
the reduction in AMT credit carryforwards has been reflected in the tax
provisions of CMS Energy and each of its consolidated subsidiaries, as of
December 2002, according to their contributions to the consolidated CMS Energy
tax loss, of which $25 million was allocated to Consumers.

TERRORIST ATTACKS: Since the September 11, 2001 terrorists attack in the United
States, Consumers has increased security at all facilities and over its
infrastructure, and will continue to evaluate security on an ongoing basis.
Consumers may be required to comply with federal and state regulatory security
measures promulgated in the future. As a result, Consumers anticipates increased
operating costs related to security after September 11, 2001 that could be
significant. Consumers would attempt to seek recovery of these costs from its
customers. In December 2002, the Michigan legislature passed, and the governor
signed, a bill that would allow Consumers to seek recovery of additional
security costs incurred during the rate freeze and cap periods imposed by the
Customer Choice Act. On February 5, 2003, the MPSC adopted filing requirements
for the recovery of enhanced security costs.

OTHER MATTERS

NEW ACCOUNTING STANDARDS

SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning January 1,
2003, companies must comply with SFAS No. 143. The standard requires companies
to record the fair value of the legal obligations related to an asset retirement
in the period in which it is incurred. When the liability is initially recorded,
the company would capitalize an offsetting amount by increasing the carrying
amount of the related long-lived asset. Over time, the initial liability is
accreted to its present value each period and the capitalized cost is
depreciated over the related asset's useful life. Consumers has determined that
it has some legal asset retirement obligations, particularly in regard to its
nuclear plants, but has not as yet finalized its assessment of the obligation.
Once Consumers' assessment is finalized, its removal cost estimate will be
determined based



                                       53

<PAGE>

on fair value cost estimates as required by the new standard. The fair value of
the legal retirement obligations will be present valued and used to quantify the
effects of adoption of this standard.

SFAS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB in April 2002,
this standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003. SFAS No. 145 amends SFAS No. 13, Accounting for
Leases, to require sale-leaseback accounting for certain lease modifications
that have similar economic impacts to sale-leaseback transactions. This
provision is effective for transactions occurring after May 15, 2002. Finally,
SFAS No. 145 amends other existing authoritative pronouncements to make various
technical corrections and rescinds SFAS No. 44, Accounting for Intangible Assets
of Motor Carriers. These provisions are effective for financial statements
issued on or after May 15, 2002. Consumers believes there will be no impact on
its financial statements upon adoption of the standard.

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

SFAS NO, 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. Consumers has decided to voluntarily adopt the fair value
based method of accounting for stock-based employee compensation effective
December 31, 2002, applying the prospective method of adoption which requires
recognition of all employee awards granted, modified, or settled after the
beginning of the year in which the recognition provisions are first applied.
Therefore Consumers will record expense for the fair value of stock options
issued in 2002. The implementation will have an immaterial effect on its
financial statements upon adoption of the method.

FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Issued
by the FASB in November 2002, the interpretation elaborates on existing
disclosure requirements for most guarantees, and clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability for
the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The interpretation is effective for guarantees issued or modified on
and after January 1, 2003. Consumers will be required to recognize a liability
for any guarantees it may issue after January 1, 2003, but will not change the
accounting for guarantees it may have issued before that date.

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


                                       54

<PAGE>

















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                                       55


<PAGE>
CONSOLIDATED STATEMENTS OF INCOME                       CONSUMERS ENERGY COMPANY

                                                                     In Millions

<Table>
<Caption>
Years Ended December 31                                                            2001         2000         1999
-----------------------                                                           ------       ------       -------
                                                                              (As Restated) (As Restated)
                                                                              (See Note 12) (See Note 12)
<S>                                                                           <C>           <C>             <C>
OPERATING REVENUE        Electric                                                 $2,633       $2,676       $ 2,667
                         Gas                                                       1,338        1,196         1,156
                         Other                                                        43           63            51
                                                                                  ------       ------       -------
                                                                                   4,014        3,935         3,874
                                                                                  ------       ------       -------

OPERATING EXPENSES       Operation
                           Fuel for electric generation                              330          324           336
                           Purchased power - related parties                         543          534           560
                           Purchased and interchange power                           476          402           297
                           Cost of gas sold                                          707          616           519
                           Cost of gas sold - related parties                        123          103           118
                           Other                                                     625          555           570
                                                                                  ------       ------       -------

                                                                                   2,804        2,534         2,400
                         Maintenance                                                 203          172           174
                         Depreciation and amortization                               339          426           424
                         General taxes                                               187          197           201
                                                                                  ------       ------       -------
                                                                                   3,533        3,329         3,199
                                                                                  ------       ------       -------

PRETAX OPERATING         Electric                                                    349          454           494
INCOME                   Gas                                                          97           96           132
                         Other                                                        35           56            49
                                                                                  ------       ------       -------
                                                                                     481          606           675
                                                                                  ------       ------       -------

OTHER INCOME             Dividends and interest from affiliates                        6           10            11
(DEDUCTIONS)             Accretion income (Note 1)                                    --            2             4
                         Accretion expense (Note 1)                                  (11)          (9)          (14)
                         Other, net                                                    6           (5)           17
                                                                                  ------       ------       -------
                                                                                       1           (2)           18
                                                                                  ------       ------       -------

INTEREST CHARGES         Interest on long-term debt                                  151          141           140
                         Other interest                                               41           44            41
                         Capitalized interest                                         (6)          (2)           --
                                                                                  ------       ------       -------
                                                                                     186          183           181
                                                                                  ------       ------       -------

INCOME BEFORE INCOME TAXES                                                           296          421           512
INCOME TAXES                                                                          97          137           172
                                                                                  ------       ------       -------

INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                    199          284           340
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR DERIVATIVE INSTRUMENTS,
NET OF $6 TAX BENEFIT (NOTE 1)                                                       (11)          --            --
                                                                                  ------       ------       -------

NET INCOME                                                                           188          284           340
PREFERRED STOCK DIVIDENDS                                                              2            2             6
PREFERRED SECURITIES DISTRIBUTIONS                                                    41           34            21
                                                                                  ------       ------       -------

NET INCOME AVAILABLE TO COMMON STOCKHOLDER                                        $  145       $  248       $   313
                                                                                  ======       ======       =======
</Table>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                       56
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS                   CONSUMERS ENERGY COMPANY

                                                                     In Millions

<Table>
<Caption>
Years Ended December 31                                                                       2001          2000         1999
-----------------------                                                                     -------        ------       ------
<S>                                                                                      <C>            <C>             <C>
                                                                                         (As restated)  (As restated)
                                                                                         (See Note 12)  (See Note 12)

CASH FLOWS FROM       Net income                                                            $   188        $  284       $  340
OPERATING ACTIVITIES    Adjustments to reconcile net income to net cash
                         provided by operating activities
                           Depreciation, depletion and amortization (includes nuclear
                            decommissioning of $6, $39 and $50, respectively)                   339           426          424
                           Deferred income taxes and investment tax credit                      136           (21)           2
                           Capital lease and other amortization                                  20            32           35
                           Cumulative effect of accounting change                                11            --           --
                           Undistributed earnings of related parties (net
                             of dividends, $8, $8 and $10, respectively)                        (30)          (49)         (40)
                           Changes in assets and liabilities
                                Decrease (increase) in accounts receivable
                                  and accrued revenue                                           149          (178)          12
                                Increase (decrease) in accounts payable                          53            19           36
                                Decrease (increase) in inventories                             (307)          (59)           5
                                Regulatory liability - gas customer choice                      (24)           33           --
                                Changes in other assets and liabilities                         (17)           28          (23)
                                                                                            -------        ------       ------

                             Net cash provided by operating activities                          518           515          791
                                                                                            -------        ------       ------

CASH FLOWS FROM       Capital expenditures (excludes assets placed under capital lease)        (745)         (498)        (444)
INVESTING ACTIVITIES  Cost to retire property, net                                             (118)         (125)         (93)
                      Investment in Electric Restructuring Implementation Plan                  (13)          (29)         (32)
                      Investments in nuclear decommissioning trust funds                         (6)          (39)         (50)
                      Proceeds from nuclear decommissioning trust funds                          29            37           43
                      Associated company preferred stock redemption                              50            50           50
                      Other                                                                      --            --            7
                                                                                            -------        ------       ------
                             Net cash used in investing activities                             (803)         (604)        (519)
                                                                                            -------        ------       ------

CASH FLOWS FROM       Retirement of bonds and other long-term debt                             (401)           (9)         (87)
FINANCING ACTIVITIES  Payment of common stock dividends                                        (190)         (245)        (262)
                      Preferred securities distributions                                        (41)          (34)         (21)
                      Payment of capital lease obligations                                      (20)          (32)         (33)
                      Contribution from (return of equity to) stockholder, net                  (14)           --          150
                      Payment of preferred stock dividends                                       (1)           (2)         (10)
                      Retirement of preferred stock                                              --            --         (200)
                      Increase (decrease) in notes payable, net                                  13           189           --
                      Proceeds from preferred securities, net                                   121            --          169
                      Proceeds from senior notes and bank loans                                 355           225           15
                      Proceeds from securitization bonds, net                                   459            --           --
                                                                                            -------        ------       ------
                             Net cash provided from (used in) financing activities              281            92         (279)
                                                                                            -------        ------       ------

NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENT                                   (4)             3           (7)
                      Cash and temporary cash investments - Beginning of year                   21             18           25
                                                                                            -------        ------       ------
                             End of year                                                    $    17        $   21       $   18
                                                                                            =======        ======       ======

OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
  Interest paid (net of amounts capitalized)                                                $   169        $ 165        $  168
  Income taxes paid (net of refunds)                                                             56          149           187
NON-CASH TRANSACTIONS
  Nuclear fuel placed under capital lease                                                   $    13        $   4        $    6
  Other assets placed under capital lease                                                        37           15            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.


                                       57
<PAGE>

CONSOLIDATED BALANCE SHEETS                             CONSUMERS ENERGY COMPANY

ASSETS                                                               In Millions

<Table>
<Caption>
December 31                                                                            2001                2000
-----------                                                                       -------------        -------------
                                                                                  (As Restated)        (As Restated)
                                                                                  (See Note 12)        (See Note 12)
<S>                                                                               <C>                  <C>
PLANT (AT ORIGINAL COST) Electric                                                    $ 7,661               $ 7,241
                         Gas                                                           2,593                 2,503
                         Other                                                            23                    23
                                                                                      ------               -------
                                                                                      10,277                 9,767
                         Less accumulated depreciation, depletion
                          and amortization                                             5,934                 5,768
                                                                                      ------               -------
                                                                                       4,343                 3,999
                         Construction work-in-progress                                   480                   278
                                                                                      ------               -------

                                                                                       4,823                 4,277
                                                                                      ------               -------
INVESTMENTS              Stock of affiliates                                              59                    86
                         First Midland Limited Partnership                               253                   245
                         Midland Cogeneration Venture Limited Partnership                300                   290
                                                                                      ------               -------

                                                                                         612                   621
                                                                                      ------               -------
CURRENT ASSETS           Cash and temporary cash investments at cost, which
                          approximates market                                             17                    21
                         Accounts receivable and accrued revenue, less allowances
                          of $4 in 2001 and $3 in 2000                                   125                   225
                         Accounts receivable - related parties                            18                   117
                         Inventories at average cost
                           Gas in underground storage                                    569                   271
                           Materials and supplies                                         69                    66
                           Generating plant fuel stock                                    52                    46
                         Deferred property taxes                                         144                   136
                         Regulatory assets                                                19                    19
                         Deferred income taxes                                            --                     2
                         Other                                                            14                    13
                                                                                      ------               -------
                                                                                       1,027                   916
                                                                                      ------               -------
NON-CURRENT ASSETS       Regulatory Assets
                           Securitization costs                                          717                   709
                           Postretirement benefits                                       209                   232
                           Abandoned Midland project                                      12                    22
                           Other                                                         167                   168
                         Nuclear decommissioning trust funds                             581                   611
                         Other                                                           173                   220
                                                                                      ------               -------
                                                                                       1,859                 1,962
                                                                                      ------               -------
TOTAL ASSETS                                                                          $8,321               $ 7,776
                                                                                      ======               =======
</Table>


                                       58
<PAGE>

                                                        CONSUMERS ENERGY COMPANY

STOCKHOLDERS' INVESTMENT AND LIABILITIES                             In Millions

<Table>
<Caption>
December 31                                                                           2001                  2000
-----------                                                                       -------------         -------------
                                                                                  (As Restated)         (As Restated)
                                                                                  (See Note 12)         (See Note 12)
<S>                                                                               <C>                   <C>
CAPITALIZATION (NOTE 3)  Common stockholder's equity
                           Common stock                                              $   841               $   841
                           Paid-in capital                                               632                   646
                           Other comprehensive income                                      4                    33
                           Retained earnings since December 31, 1992                     441                   486
                                                                                     -------               -------
                                                                                       1,918                 2,006

                         Preferred stock                                                  44                    44
                         Company-obligated mandatorily redeemable
                          preferred securities of subsidiaries (a)                       520                   395
                         Long-term debt                                                2,472                 2,110
                         Non-current portion of capital leases                            72                    49
                                                                                     -------               -------

                                                                                       5,026                 4,604
                                                                                     -------               -------
CURRENT LIABILITIES      Current portion of long-term debt and capital leases            257                   231
                         Notes payable                                                   416                   403
                         Accounts payable                                                282                   247
                         Accrued taxes                                                   214                   247
                         Accounts payable - related parties                               96                    78
                         Current portion of purchase power contracts                      24                    22
                         Deferred income taxes                                            12                     -
                         Other                                                           247                   240
                                                                                     -------               -------

                                                                                       1,548                 1,468
                                                                                     -------               -------
NON-CURRENT LIABILITIES  Deferred income taxes                                           784                   705
                         Postretirement benefits                                         276                   363
                         Regulatory liabilities for income taxes, net                    276                   246
                         Power purchase agreement- MCV Partnership                        52                    77
                         Deferred investment tax credit                                  102                   109
                         Other                                                           257                   204
                                                                                     -------               -------
                                                                                       1,747                 1,704
                                                                                     -------               -------
                         Commitments and Contingencies (Notes 1, 2, 8, 11 and 13)

TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES                                       $ 8,321               $ 7,776
                                                                                     =======               =======
</Table>

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

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                       59
<PAGE>

CONSOLIDATED STATEMENTS OF
LONG-TERM DEBT                                         CONSUMERS ENERGY COMPANY

                                                                    In Millions

<Table>
<Caption>
December 31                          Series (%)   Due                                      2001            2000
-----------                          ----------   ----                                    ------          ------
<S>                                  <C>          <C>                                     <C>             <C>
FIRST MORTGAGE BONDS
                                     6-3/8        2003                                    $  300          $  300
                                     7-3/8        2023                                       208             263
                                                                                          ------          ------

                                                                                             508             563
SENIOR NOTES                         Floating     2001                                        --             125
                                     Floating     2002                                       100             100
                                     6-3/8        2008                                       159             250
                                     6-7/8        2018                                       180             225
                                     6-1/5        2008 (a)                                   250             250
                                     6-1/2        2018 (b)                                   141             200
                                     6-1/2        2028                                       143             145
                                     6-1/4        2006                                       332              --
                                                                                          ------          ------
                                                                                           1,813           1,858

LONG-TERM BANK DEBT                                                                          184             190
POLLUTION CONTROL REVENUE BONDS                                                              126             126
SECURITIZATION BONDS                                                                         469              --
OTHER                                                                                          8              --
NUCLEAR FUEL DISPOSAL (C)                                                                    135             130
                                                                                          ------          ------

PRINCIPAL AMOUNT OUTSTANDING                                                               2,735           2,304
CURRENT AMOUNTS                                                                             (244)           (175)
NET UNAMORTIZED DISCOUNT                                                                     (19)            (19)
                                                                                          ------          ------

TOTAL LONG-TERM DEBT                                                                      $2,472          $2,110
                                                                                          ======          ======
</Table>

LONG-TERM DEBT MATURITIES                                            In Millions

<Table>
<Caption>
             Securitization   First Mortgage            Senior          Long-Term
                      Bonds            Bonds             Notes          Bank Debt           Other          Total
             --------------   --------------            ------          ---------           -----          -----
<S>          <C>              <C>                       <C>             <C>                 <C>            <C>
2002                  $  16          $    --             $ 100              $ 127            $  1          $ 244
2003                     27              300               250 (a)             57              --            634
2004                     28               --                --                 --              --             28
2005                     29               --               141 (b)             --              --            170
2006                     30               --               332                 --              --            362
             ==============   ==============            ======          =========           =====          =====
</Table>

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

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

(c) Due date uncertain (see Note 1)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                       60
<PAGE>

CONSOLIDATED STATEMENTS OF PREFERRED STOCK              CONSUMERS ENERGY COMPANY

<Table>
<Caption>
                                                        Optional
                                                      Redemption             Number of Shares          In Millions
December 31                                 Series         Price            2001        2000        2001     2000
-----------                                 ------    ----------          ------      -------     ------    ------
<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.


                                       61

<PAGE>

CONSOLIDATED STATEMENTS OF COMMON
STOCKHOLDER'S EQUITY                                    CONSUMERS ENERGY COMPANY

                                                                     In Millions

<Table>
<Caption>
Years Ended December 31                                                             2001           2000           1999
-----------------------                                                        -------------   -------------     ------
                                                                               (As Restated)   (As Restated)
                                                                               (See Note 12)   (See Note 12)
<S>                                                                            <C>             <C>               <C>
COMMON STOCK               At beginning and end of period (a)                     $  841          $  841         $  841
                                                                                  ------          ------         ------

OTHER PAID-IN CAPITAL      At beginning of period                                    646             645            502
                           Capital stock expense                                      --                             (7)
                           Stockholder's contribution                                150              --            150
                           Return of stockholder's contribution                     (164)             --             --
                           Miscellaneous                                              --               1             --
                                                                                  ------          ------         ------
                             At end of period                                        632             646            645
                                                                                  ------          ------         ------

OTHER COMPREHENSIVE INCOME
                           Investments
                             At beginning of period                                   33              37             68
                             Unrealized gain (loss) on investments (b)               (16)             (4)           (31)
                             Reclassification adjustments included in net
                               income (b)                                             (1)             --             --
                                                                                  ------          ------         ------
                               At end of period                                       16              33             37

                           Derivative Instruments
                             At beginning of period (c)                               18              --             --
                             Unrealized gain (loss) on derivative
                              instruments (b)                                        (30)            --             --
                                                                                  ------          ------         ------
                               At end of period                                      (12)             --             --
                                                                                  ------          ------         ------

RETAINED EARNINGS          At beginning of period                                    486             485            434
                           Net income (b)                                            188             284            340
                           Cash dividends declared - Common Stock                   (190)           (247)          (262)
                           Cash dividends declared - Preferred Stock                  (2)             (2)            (6)
                           Preferred securities distributions                        (41)            (34)           (21)
                                                                                  ------          ------         ------
                             At end of period                                        441             486            485
                                                                                  ------          ------         ------

TOTAL COMMON STOCKHOLDER'S EQUITY                                                 $1,918          $2,006         $2,008
                                                                                  ======          ======         ======
</Table>

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

<Table>
<S>                                                                               <C>         <C>        <C>
(b)  Disclosure of Comprehensive Income:
      Other comprehensive income
        Investments
          Unrealized gain (loss) on investments, net of tax of
             $9, $2 and $17, respectively                                         $  (16)     $   (4)    $  (31)
          Reclassification adjustments included in net income, net of tax of
             $1, $- and $-, respectively                                              (1)         --         --
        Derivative Instruments
          Unrealized gain (loss) on derivative instruments, net of tax of
             $15, $- and $-, respectively                                            (30)         --         --

      Net income                                                                     188         284        340
                                                                                  ------      ------     ------

      Total Comprehensive Income                                                  $  141      $  280     $  309
                                                                                  ======      ======     ======
</Table>

(c)  Cumulative effect of change in accounting principle, as of 1/1/01 and
     7/1/01, net of $(9) tax (Note 1)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                       62
<PAGE>
                                                        Consumers Energy Company

                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consumers' consolidated financial statements for the years 2001 and 2000 have
been restated, as discussed in Note 12, Restatement, pursuant to audit
adjustments resulting from the re-audit of the consolidated financial statements
for the years 2001 and 2000 of CMS Energy, Consumers' parent company, which
included audit work at Consumers.

Except for the addition of Notes 12 and 13, the following notes to the
consolidated financial statements have generally only been modified for the
effects of the restatement.

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 twenty
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
accounting principles generally accepted in the United States 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.

The recording of estimated liabilities for contingent losses within the
financial statements is guided by the principles in SFAS No. 5. SFAS No. 5
requires a company to record estimated liabilities in the financial statements
when it is probable that a loss will be paid in the future as a result of a
current event, and that amount can be reasonably estimated. Consumers has used
this accounting principle to record estimated liabilities discussed in Note 2,
Uncertainties.

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 supply 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.



                                       63

<PAGE>

                                                        Consumers Energy Company

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 non-recoverable 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.
For 2001, 2000 and 1999, the composite depreciation rate for electric utility
property was 3.1 percent, 3.1 percent and 3.0 percent, respectively. For 2001,
2000 and 1999, the composite rate for gas utility property was 4.4 percent
annually. For 2001, 2000 and 1999, the composite rate for other property was
11.2 percent, 10.7 percent, and 8.6 percent, respectively.

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

For nuclear fuel used after April 6, 1983, Consumers charges disposal costs to
nuclear fuel expense, recovers these costs through electric rates, and then
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,
2001, Consumers has a recorded liability to the DOE of $135 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, a federal court decision has confirmed
that the DOE was to begin accepting deliveries of spent nuclear fuel for
disposal by January 31, 1998. Subsequent litigation in which Consumers and
certain other utilities participated has not been successful in producing more
specific relief for the DOE's failure to comply.

In July 2000, the DOE reached a settlement agreement with one utility to address
the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants;
however, certain other utilities are challenging the validity of the settlement.
Additionally, there are two court decisions that support the right of utilities
to pursue damage claims in the United States Court of Claims against the DOE for
failure to take delivery of spent fuel. A number of utilities have commenced
litigation in the Court of Claims. Consumers is evaluating its options with
respect to its contract with the DOE.

NUCLEAR PLANT DECOMMISSIONING: In 2001, Consumers collected $6 million from its
electric customers for the decommissioning of its Palisades nuclear plant.
Amounts collected from electric retail customers and deposited in trusts
(including trust earnings) are credited to accumulated depreciation. In March
2001, Consumers filed updated decommissioning cost estimates for Big Rock and
Palisades that were $340 million and $739 million in 2000 dollars, respectively.
Using the inflation factors presented in the filing to the MPSC to escalate the
estimated decommissioning costs to 2001 dollars, the Big Rock and Palisades
estimated decommissioning costs are $346 million and $752 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. On December 31, 2000, Big Rock trusts
were fully funded per the March 22, 1999 MPSC order and Consumers discontinued
depositing funds in the trust. The December 16, 1999 MPSC order set the annual
decommissioning surcharge for Palisades at $6 million a year. In December 2000,
the NRC extended the Palisades' operating license to March 2011 and the impact
of this extension was included as part of Consumers' March filing with the MPSC.
Consumers is required to file the next "Report on the Adequacy of the Existing
Annual Provision for Nuclear Plant Decommissioning" (Report) with the MPSC by
March 31, 2004.



                                       64
<PAGE>

                                                        Consumers Energy Company

In 1997, Big Rock closed permanently and plant decommissioning began. Consumers
estimates that the Big Rock site will be returned to a natural state by the end
of 2012 if the DOE begins removing the spent nuclear fuel by 2010. For 2001,
Consumers incurred costs of $28 million that were charged to the accumulated
depreciation reserve for decommissioning and withdrew $29 million from the Big
Rock nuclear decommissioning trust fund. In total, Consumers has incurred costs
of $190 million that have been charged to the accumulated depreciation reserve
for decommissioning and withdrew $179 million from the Big Rock nuclear
decommissioning trust fund. These activities had no material impact on net
income. At December 31, 2001, Consumers is the beneficiary of the investment in
nuclear decommissioning trust funds of $149 million for Big Rock.

In 1996, Consumers and several wholesale electric customers entered into
five-year contracts that fixed their contribution to nuclear decommissioning
costs for the term. Since that time, the total estimated decommissioning costs
for Big Rock increased substantially over the estimates used to calculate the
decommissioning costs in the wholesale contracts. As a result of a reduction in
decommissioning trust earnings in August 2001, along with the higher estimated
costs of decommissioning, Consumers, in September 2001, expensed approximately
$5 million related to this issue to recognize the unrecoverable portion of Big
Rock decommissioning costs associated with these customers.

After retirement of Palisades, Consumers plans to maintain the facility in
protective storage if radioactive waste disposal facilities are not available.
Consumers will incur most of the Palisades decommissioning costs after the
plant's NRC operating license expires. Palisades' current NRC license will
expire in 2011 and the trust funds were estimated to have accumulated $921
million, at that time, assuming currently approved MPSC surcharge levels.
Consumers estimates that at the time Palisades is fully decommissioned in the
year 2049, the trust funds will have provided $2.5 billion, including trust
earnings, to pay for the anticipated expenditures over the entire
decommissioning period. At December 31, 2001, Consumers is the beneficiary of
the investment in the MPSC nuclear decommissioning trust funds of $423 million
for Palisades. In addition, at December 31, 2001, Consumers has a FERC
decommissioning trust fund with a balance of approximately $8 million.

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.

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: Consumers completed its five-year redemption program
of its investment of $250 million in ten shares of Enterprises' preferred stock.
The balances as of December 31, 2001 and 2000 were $0 and $50 million,
respectively. In addition, Consumers has an investment in 2.4 million shares of
CMS Energy Common Stock with a fair value totaling $57 million at December 31,
2001 (see Note 5). In 2001, 2000 and 1999, Consumers received dividends from
these two investments totaling $6 million, $10 million, and $11 million,
respectively. In 2001, 2000, and 1999, Consumers paid parent company overhead
costs to CMS Energy of $11 million, $1 million and $8 million, respectively.

In 2001, 2000 and 1999, Consumers paid $55 million, $51 million and $52 million,
respectively, for electric generating capacity and energy from affiliates of
Enterprises. From time to time, Consumers purchases a



                                       65
<PAGE>

                                                        Consumers Energy Company

portion of its gas from CMS Oil and Gas and CMS Marketing Services and Trading.
In 2001, Consumers did not make a purchase from CMS Oil and Gas. In 2000 and
1999, Consumers purchased $3 million and $19 million, respectively. In 2001,
2000 and 1999, Consumers gas purchases from CMS Marketing Services and Trading
were $120 million, $95 million and $70 million, respectively. Consumers pays a
portion of its gas transportation costs to Panhandle and its subsidiary
Trunkline. In 2001, 2000 and 1999 transportation fees paid were $21 million, $38
million and $33 million, respectively. In 2001, 2000 and 1999, Consumers and its
subsidiaries sold, stored and transported natural gas and provided other
services to the MCV Partnership totaling $27 million, $26 million and $23
million, 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. 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 and as a
result discontinued application of SFAS No. 71 for the electric supply portion
of its business. Discontinuation of SFAS No. 71 for the generation 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 electric 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, 2001, Consumers had a net
investment in electric supply facilities of $1.319 billion included in electric
plant and property. See Note 2, Uncertainties, "Electric Rate Matters - Electric
Restructuring."

SFAS No. 121 imposes strict criteria for retention of regulatory-created assets
by requiring that such assets be probable of future recovery at each balance
sheet date. Management believes these assets are probable of future recovery.

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



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<Table>
<Caption>
                                                                      In Millions
                                                       --------------------------
December 31                                               2001            2000
-----------                                            ----------      ----------
<S>                                                    <C>             <C>
Securitization costs (Note 2)                          $      717      $      709
Postretirement benefits (Note 7)                              228             251
Electric Restructuring Implementation Plan                     82              75
Manufactured gas plant sites (Note 2)                          70              63
Abandoned Midland project                                      12              22
Income taxes (Note 4)                                           6              24
Unamortized nuclear costs                                      --               6
DSM - deferred costs                                           --               6
Other                                                          15              18
                                                       ----------      ----------

Total regulatory assets                                $    1,130      $    1,174
                                                       ==========      ==========


Income taxes (Note 4)                                  $     (282)     $     (270)
Gas customer choice                                            (9)            (33)
Other                                                          --              (6)
                                                       ----------      ----------


Total regulatory liabilities                           $     (291)     $     (309)
                                                       ==========      ==========
</Table>

In October 2000, Consumers received an MPSC order authorizing Consumers to
securitize certain regulatory assets up to $469 million, net of tax, see Note 2,
Uncertainties, "Electric Rate Matters - Electric Restructuring". 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 accounts. In order
to prepare the Securitization assets for sale in November 2001, issuance fees of
$10 million and $1 million were incurred in 2001 and 2000, respectively, and
capitalized as a part of Securitization costs. These costs represent the
increase in Securitization costs between periods. These issuance costs will be
amortized each month for up to fourteen years, which approximated $2 million in
2001. The components of the Securitization costs are illustrated below.

<Table>
<Caption>
                                                                     In Millions
                                                       -------------------------
December 31                                              2001            2000
-----------                                            ----------     ----------
<S>                                                    <C>            <C>
Unamortized nuclear costs                              $      405     $      405
Postretirement benefits                                        84             84
Income taxes                                                  203            203
Uranium enrichment facility                                    16             16
Other                                                           9              1
                                                       ----------     ----------

Total securitized regulatory assets                    $      717     $      709
                                                       ==========     ==========
</Table>

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



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                                                        Consumers Energy Company

Consumers uses various derivative instruments, including swaps, options, and
forward contracts to manage its risks associated with the variability in
expected future cash flows attributable to fluctuations in interest rates and
commodity prices. When management uses these instruments, it intends that an
opposite movement in the value of the hedged item would offset any losses
incurred on the derivative instruments. Consumers enters into all derivative
instruments for purposes other than trading.

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

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.

For further discussion see "Implementation of New Accounting Standards" below,
Note 2, Uncertainties, "Other Electric Uncertainties - Derivative Activities"
and Note 3, Short-Term Financing and Capitalization, "Derivative Activities."

NEW ACCOUNTING STANDARDS: Effective January 1, 2001, Consumers adopted SFAS No.
133. The new standard 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. The 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. Consumers
determines fair value based upon quoted market prices and mathematical models
using current and historical pricing data. The ineffective portion, if any, of
all hedges are recognized in earnings.

Consumers believes that the majority of its contracts qualify for the normal
purchases and sales exception of SFAS No. 133 and, therefore, are not subject to
derivative accounting. There are, however, certain contracts used to limit
Consumers' exposure to electricity and gas commodity price risk and interest
rate risk that require derivative accounting.

On January 1, 2001, upon initial adoption of the standard, Consumers recorded a
$21 million, net of tax, cumulative effect adjustment as an unrealized gain
increasing accumulated other comprehensive income. This adjustment relates to
the difference between the fair value and recorded book value of contracts
related to gas call options, gas fuel for generation swap contracts, and
interest rate swap contracts that qualified for cash flow hedge accounting prior
to the initial adoption of SFAS No. 133 and Consumers' proportionate share of
the effects of adopting SFAS No. 133 related to its equity investment in the MCV
Partnership. Based on the pretax initial transition adjustment of $32 million
recorded in accumulated other comprehensive income on the January 1, 2001
transition date, Consumers reclassified to earnings $12 million as a reduction
to the cost of gas, $1 million as a reduction to the cost of power supply, $2
million as an increase in interest expense, and $8 million as an increase in
other revenue for the twelve months ended December 31, 2001. The difference
between the initial transition adjustment and the amounts reclassified to
earnings represents an unrealized loss



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                                                        Consumers Energy Company

in the fair value of the derivative instruments since January 1, 2001,
decreasing other comprehensive income. As of December 31, 2001, there are no
remaining amounts included in accumulated other comprehensive income related to
the initial transition adjustment.

As of December 31, 2001, Consumers had a total of $8 million, net of tax,
recorded as an unrealized loss in other comprehensive income related to its
proportionate share of the effects of derivative accounting related to its
equity investment in the MCV Partnership. Consumers expects to reclassify this
loss as a decrease to other operating revenue during the next 12 months, if this
value remains.

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

For further discussion of derivative activities, see Note 2, Uncertainties,
"Other Electric Uncertainties - Derivative Activities" and Note 3, Short-Term
Financings and Capitalization, "Derivative Activities."

SFAS NO. 141, BUSINESS COMBINATIONS: SFAS No. 141, issued in July 2001, requires
that all business combinations initiated after June 30, 2001, be accounted for
under the purchase method; use of the pooling-of-interests method is no longer
permitted. The adoption of SFAS No. 141, effective July 1, 2001, will result in
Consumers accounting for any future business combinations under the purchase
method of accounting.

SFAS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142, also issued in
July 2001, requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. When effective, January 1, 2002, the
provisions of SFAS No. 142 will have no impact on Consumers' consolidated
results of operations or financial position.

SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Issued by the FASB in
August 2001, the provisions of SFAS No. 143 require adoption as of January 1,
2003. The standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity would capitalize an offsetting
amount by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value while the capitalized cost
is depreciated over the useful life of the related asset. Consumers is currently
studying the new standard but has yet to quantify the effects of adoption on its
financial statements.

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



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                                                        Consumers Energy Company

disposal of long-lived assets under the provisions of SFAS No. 144, but will not
change the accounting used for previous asset impairments or disposals.

OTHER: For significant accounting policies regarding income taxes, see Note 4;
for executive incentive compensation, see Note 6; for pensions and other
postretirement benefits, see Note 7; and for leases, see Note 8.

2: UNCERTAINTIES

ELECTRIC CONTINGENCIES

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

Clean Air - In 1997, the EPA introduced new regulations regarding the standard
for ozone and particulate-related emissions that were the subject of litigation.
The United States Supreme Court determined that the EPA has the power to revise
the standards but that the EPA implementation plan was not lawful. In 1998, the
EPA Administrator issued final regulations requiring the state of Michigan to
further limit nitrogen oxide emissions. The EPA has also issued additional final
regulations regarding nitrogen oxide emissions that require certain generators,
including some of Consumers' electric generating facilities, to achieve the same
emissions rate as that required by the 1998 plan. These regulations will require
Consumers to make significant capital expenditures estimated between $530
million and $570 million, calculated in year 2001 dollars. Much of the future
expenditures are for retrofit post-combustion technology. Cost estimates have
been developed, in part, by independent contractors with expertise in this
field. The estimates are dependent on regulatory outcome, market forces
associated with emission reduction, and with regional and national economic
conditions. As of December 2001, Consumers has incurred $296 million in capital
expenditures to comply with these regulations and anticipates that the remaining
capital expenditures will be incurred between 2002 and 2004. At some point after
2004, if new environmental standards for multi-pollutants become effective,
Consumers may need additional capital expenditures to comply with the standards.
Consumers is unable to estimate the additional capital expenditures required
until the proposed standards are further defined. Beginning January 2004, an
annual return of and on these types of capital expenditures, to the extent they
are above depreciation levels, are expected to be recoverable, subject to an
MPSC prudency hearing, in future rates.

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

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

Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of
December 31, 2001, Consumers had accrued the minimum amount of the range for its
estimated Superfund liability.

In October 1998, 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



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<PAGE>

                                                        Consumers Energy Company

part of the PCB material. In April 2000, Consumers proposed a plan to deal with
the remaining materials and is awaiting a response from the EPA.

ELECTRIC RATE MATTERS

ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed electric
utility restructuring legislation known as the Customer Choice Act. This act: 1)
permits all customers to 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 low-cost Securitization bonds to refinance Stranded Costs
as a means of offsetting the earnings impact of the five percent residential
rate reduction; 5) establishes a market power supply test that 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 believes itself to be in compliance with at this time); 6) requires
Michigan utilities to join a FERC-approved RTO or divest their interest in
transmission facilities to an independent transmission owner; 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, 2002; 8)
allows for the deferred recovery of an annual return of and on capital
expenditures in excess of depreciation levels incurred during and before the
rate cap period; and 9) allows for the recovery of "net" 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 could result in an extension of the rate caps to as late as December
31, 2013. As of December 31, 2001, Consumers spent $26 million on the required
expansion of transmission capabilities. Consumers anticipates it could spend up
to an additional $9 million in 2002, until Consumers sells METC to MTH, as
discussed below under "Transmission."

In October 2000 and January 2001, the MPSC issued orders that authorized
Consumers to issue Securitization bonds. Securitization typically involves the
issuance of asset backed bonds with a higher credit rating than conventional
utility corporate financing. The orders authorized Consumers to securitize
approximately $469 million in qualified costs, which were primarily regulatory
assets plus recovery of the Securitization expenses. Securitization is expected
to result in lower interest costs and a longer amortization period for the
securitized assets, that would offset the majority of the revenue impact of the
five percent residential rate reduction of approximately $22 million in 2000 and
$49 million on an annual basis thereafter that Consumers was required to
implement by the Customer Choice Act. The orders direct Consumers to apply any
cost savings in excess of the five percent residential rate reduction to rate
reductions for non-residential customers and reductions in Stranded Costs for
retail open access customers after the bonds are sold. Excess savings are
currently estimated to be approximately $13 million annually.

In November 2001, Consumers Funding LLC, a special purpose consolidated
subsidiary of Consumers formed to issue the bonds, issued $469 million of
Securitization bonds, Series 2001-1. The Securitization bonds mature at
different times over a period of up to 14 years and have an average interest
rate of 5.3 percent. The last expected maturity date is October 20, 2015. Net
proceeds from the sale of the Securitization bonds after issuance expenses were
approximately $460 million. The net proceeds were used by Consumers to buy back
$164 million of its common stock from its parent, CMS Energy. Beginning in
December 2001, and completed in March 2002, the remainder of these proceeds were
used to pay down long-term debt. CMS Energy used the $164 million received from
Consumers to pay down its own short-term debt.

Consumers and Consumers Funding LLC 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 that began in December 2001. These
charges are subject to an annual true-up until one year prior to the last
expected bond maturity



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<PAGE>

                                                        Consumers Energy Company

date, and no more than quarterly thereafter. Current electric rate design covers
these charges, and there will be no impact on rates for most of Consumers'
electric customers until the rate freeze imposed under the Customer Choice Act
expires. Securitization charges collected will be remitted to a trustee for the
Securitization bonds and are not available to Consumers' creditors.

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

In 1998, Consumers submitted a plan for electric retail open access to the MPSC
and in March 1999 the MPSC issued orders that generally supported the plan.
Implementation began in September 1999. 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 once again filed tariffs
governing its retail open access program and addressed revisions appropriate to
comply with the Customer Choice Act. In December 2001, the MPSC approved revised
retail open access service tariffs. The revised tariffs establish the rates,
terms, and conditions under which retail customers will be permitted to choose
an alternative electric supplier for generation services. The tariffs are
effective January 1, 2002, and in general do not require any significant
modifications in the existing retail open access program. The terms of the
tariff allow retail open access customers, upon thirty days notice to Consumers,
to return to Consumers' generation service at current tariff rates. Consumers
may not have sufficient, reasonably priced, capacity to meet the additional
demand needs of returning retail open access customers, and may be forced to
purchase electricity on the spot market at prices higher than it could recover
from its customers.

POWER SUPPLY COSTS: During periods when electric demand is high, the cost of
purchasing electricity on the spot market can be substantial. To reduce
Consumers' exposure to the fluctuating cost of electricity, and to ensure
adequate supply to meet demand, Consumers intends to maintain sufficient
generation and to purchase electricity from others to create a power supply
reserve, also called a reserve margin, of approximately 15 percent. The reserve
margin provides Consumers with additional power supply above its anticipated
peak power supply demands. It also allows Consumers to provide reliable service
to its electric service customers and to protect itself against unscheduled
plant outages and unanticipated demand. For the summers 2002 and 2003, as it has
in previous summers, 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. As of February 2002,
alternative electric suppliers are providing generation services to customers
with 309 MW of demand.

To reduce the risk of high electric prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
electric call option contracts for the physical delivery of electricity during
the months of June through September. The cost of these electric call option
contracts for 2001 was approximately $66 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, 2001, Consumers had purchased or had commitments
to purchase electric call option contracts covering the estimated reserve margin
requirement for the summer 2002 and partially covering the estimated reserve
margin requirements for summers 2003 through 2008, and has recorded an asset of
$48 million for these call options, of which $10 million pertains to 2002.



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                                                        Consumers Energy Company

In 1996, as a result of the FERC's efforts to move 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 had jointly operated the MEPCC. Detroit Edison and Consumers
restructured and continued certain parts of the MEPCC control area and joint
transmission operations, but expressly excluded any merchant operations
(electricity purchasing, sales, and dispatch operations). The former joint
merchant operations began operating independently on April 1, 2001. The
termination of joint merchant operations with Detroit Edison has opened Detroit
Edison and Consumers to wholesale market competition as individual companies.
Consumers cannot predict the long-term financial impact of terminating these
joint merchant operations with Detroit Edison.

Prior to 1998, the PSCR process provided for the reconciliation of actual power
supply costs with power supply revenues. This process assured recovery of all
reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost of fuel for electric generation, and purchased and
interchange 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 for all customers until at least December 31, 2003 and
therefore the PSCR process remains suspended. Therefore, changes in power supply
costs as a result of fluctuating electric prices will not be reflected in rates
charged to Consumers' customers during the rate freeze period.

Consumers is authorized by the FERC to sell electricity at wholesale market
prices. In authorizing sales at market prices, the FERC considers several
factors, including the extent to which the seller possesses "market power" as a
result of the seller's dominance of generation resources and surplus generation
resources in adjacent wholesale markets. In order to continue to be authorized
to sell at market prices, Consumers filed a traditional market dominance
analysis in October 2001. In November 2001, the FERC issued an order modifying
the method to be used to determine an entity's degree of market power. Due,
however, to several reliability issues brought before the FERC regarding this
order, the FERC has issued a stay of the order. If the modified market power
test in the order is not amended, Consumers cannot be certain at this time if it
will be granted authorization to continue to sell wholesale electricity at
market-based prices and may be limited to charging prices no greater than its
cost-based rates. A final decision about the proposed assessment method is not
expected for several months.

TRANSMISSION: In 1999, the FERC issued Order No. 2000, that strongly encouraged
utilities like Consumers to either transfer operating control of their
transmission facilities to an RTO, or sell their transmission facilities to an
independent company. In addition, in June 2000, the Michigan legislature passed
Michigan's Customer Choice Act, which contains a requirement that utilities
transfer the operating authority of transmission facilities to an independent
company or divest the facilities.

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. In December 2001, the FERC denied the RTO plan submitted by
the Alliance companies and ordered the Alliance companies to explore membership
in the Midwest ISO, whose RTO plan was approved by the FERC. Membership in the
Midwest ISO could potentially increase Consumers' costs during the period of the
rate freeze or rate caps where Consumers could not raise retail electric rates
in Michigan. Consumers and METC are evaluating their options regarding RTO
membership as a result of the December 2001 FERC order.

In October 2000, Consumers filed a request with the FERC to transfer ownership
and control of its electric transmission facilities to METC. This request was
granted in January 2001. In December 2000, the MPSC



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<PAGE>

                                                        Consumers Energy Company

issued an order authorizing an anticipated sale or ownership transfer of
Consumers' electric transmission facilities. In April 2001, the transfer of the
electric transmission facilities to METC took place.

In October 2001, in compliance with Michigan's Customer Choice Act, and in
conformance with FERC Order No. 2000, Consumers executed an agreement to sell
METC for approximately $290 million, depending upon the final date of the sale,
to MTH, a non-affiliated limited partnership whose general partner is a
subsidiary of Trans-Elect, Inc. Certain of Trans-Elect's officers and directors
are former officers and directors of CMS Energy, Consumers and certain of their
subsidiaries, but all had left the employment of such affiliates prior to the
period when the transaction was discussed internally and negotiated with
purchasers. Trans-Elect, Inc. submitted the winning bid to purchase METC through
a competitive bidding process, and the transaction is subject to approval by
various federal agencies. Consumers is not providing any financial or credit
support to Trans-Elect, Inc. in connection with the purchase of METC. Proceeds
from the sale of METC will be used to improve Consumers' balance sheet.
Consumers, through METC, will continue to own and operate the system until the
companies meet all conditions of closing, including approval of the transaction
by the FERC. In February 2002, MTH and Consumers received conditional approval
of the transaction from the FERC. Consumers and Trans-Elect, Inc. have
petitioned for rehearing to resolve certain remaining issues. Trans-Elect, Inc.
has also submitted filings to the FERC designed to bring it into the Midwest ISO
and to establish rates to be charged over the Trans-Elect, Inc. owned system.
Final regulatory approvals and operational transfer are expected to take place
in the first or second quarter of 2002; however, Consumers can make no
assurances as to when or whether the transaction will be completed. After the
sale, Consumers will continue to maintain the system under a long-term contract
with MTH.

Consumers chose to sell its transmission facilities as a form of compliance with
Michigan's Customer Choice Act and FERC Order No. 2000 rather than own and
invest in an asset that it cannot control. After selling its transmission
facilities, Consumers anticipates a reduction in after-tax earnings of
approximately $6 million and $14 million in 2002 and 2003, respectively, as a
result of the loss in revenue associated with wholesale and retail open access
customers that would buy services directly from MTH and the loss of a return on
the transmission assets upon the sale of METC to MTH.

Under the agreement with MTH, and subject to additional RTO surcharges,
transmission rates charged to Consumers will be fixed at current levels until
December 31, 2005, and will be subject to FERC ratemaking thereafter. MTH will
complete the capital program to expand the transmission system's capability to
import electricity into Michigan, as required by the Customer Choice Act.

In the past, when IPPs connected to transmission systems they paid a fee that
was used by transmission companies to offset capital costs incurred to connect
the IPP to the transmission system and provide the system upgrades needed as a
result of the interconnection. In order to promote competition in the electric
generation market, the FERC recently issued an order that requires the system
upgrade portion of the fee to be refunded to IPPs over time as transmission
service is taken. As a result, transmission companies no longer have the benefit
of lowering their capital costs for transmission system upgrades. This has
resulted in METC recording a $30 million liability for a refund to IPPs.

In June 2001, the Michigan South Central Power Agency and the Michigan Public
Power Agency filed suit against Consumers and METC in a Michigan circuit court.
The suit sought to prevent the sale or transfer of transmission facilities
without first binding a successor to honor the municipal agencies' ownership
interests, contractual agreements and rights that preceded the transfer of the
transmission facilities to METC. In August 2001, the parties reached two
settlements. The settlements were approved by the Michigan circuit court and
were amended in February 2002 to assure that closing could occur if all
conditions to closing are satisfied. The circuit court has retained jurisdiction
over the matter and should dismiss the lawsuit after closing.



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                                                        Consumers Energy Company

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,
which was denied in October 2001. This proceeding is now final.

The Customer Choice Act allows for the recovery by an electric utility of the
cost of implementing the act's requirements and "net" Stranded Costs, without
defining the term. The act directs the MPSC to establish a method of calculating
"net" Stranded Costs and of conducting related true-up adjustments. In December
2001, the MPSC adopted a methodology for calculating "net" Stranded Costs as the
shortfall between (a) the revenue needed to cover the costs associated with
fixed generation assets, generation-related regulatory assets, and capacity
payments associated with purchase power agreements and (b) the revenues received
from retail and wholesale customers under existing rates available to cover
those revenue needs. According to the MPSC, "net" Stranded Costs are to be
recovered from retail open access customers through a Stranded Cost surcharge.
Even though the MPSC ruled that the Stranded Cost surcharge to be in effect on
January 1, 2002 for the recovery of "net" Stranded Costs for calendar year 2000
for Consumers is zero, the MPSC also indicated that the "net" Stranded Costs for
2000 would be subject to further review in the context of its subsequent
determinations of "net" Stranded Costs for 2001 and later years. The MPSC
authorized Consumers to use deferred accounting to recognize the future recovery
of assets determined to be stranded by application of the MPSC's methodology.
Consumers is seeking a rehearing and clarification of the methodology adopted,
and will be making future "net" Stranded Cost filings with the MPSC in March or
April of 2002. The outcome of these proceedings before the MPSC is uncertain at
this time.

Between 1999 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $75 million,
incurred between 1997 and 2000. Consumers received final orders that granted
recovery of $41 million of restructuring implementation costs for the years 1997
through 1999, and disallowed recovery of $10 million, based upon a conclusion
that this amount did not represent costs incremental to costs already reflected
in rates. Consumers expects to receive a final order for the 2000 restructuring
implementation costs in 2002. In the orders received for the years 1997 through
1999, the MPSC also ruled that it reserved the right to undertake another review
of the total restructuring implementation costs depending upon the progress and
success of the retail open access program, and ruled that due to the rate freeze
imposed by the Customer Choice Act, it was premature to establish a cost
recovery method for the allowable costs. For the year 2001, Consumers incurred,
and deferred as a regulatory asset, an additional $8 million in implementation
costs for which an application for recovery will be filed with the MPSC in 2002.
In addition, Consumers has recorded a regulatory asset of $9 million for the
cost of money associated with restructuring implementation costs. Consumers
believes the restructuring implementation costs and the associated cost of money
are fully recoverable in accordance with the Customer Choice Act; however,
Consumers cannot predict the amounts the MPSC will approve as recoverable costs.

In 1996, Consumers filed new OATT transmission rates with the FERC for approval.
Certain interveners contested these rates, and hearings were held before an ALJ
in 1998. During 1999, the ALJ rendered an initial decision, which if upheld by
the FERC, would ultimately reduce Consumers' OATT rates and require Consumers to
refund, with interest, any over-collections for past services. Consumers, since
that time has been reserving a portion of revenues billed to customers under
these OATT rates. At the time of the initial decision, Consumers believed that
certain issues would be decided in its favor, and that a relatively quick order
would be issued by the FERC regarding this matter. However, due to changes in
regulatory interpretations, Consumers believes that a successful resolution of
certain issues is less likely. As a result, in September 2001, Consumers
reserved an additional $12 million, including interest, to fully reflect its
estimate of the financial



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impacts of the initial decision. Consumers expects that its reserve levels for
future transmission service will be sufficient to satisfy its estimated refund
obligation.

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>
                                                                                    In Millions
                                                       ----------------------------------------
Years Ended December 31                                   2001           2000          1999
-----------------------                                ----------     ----------     ----------
<S>                                                    <C>            <C>            <C>
Pretax operating income                                $       36     $       56     $       49
Income taxes and other                                         11             18             15
                                                       ----------     ----------     ----------
Net income                                             $       25     $       38     $       34
                                                       ==========     ==========     ==========
</Table>

Power Supply Purchases from the MCV Partnership - Consumers' annual obligation
to purchase capacity from the MCV Partnership is 1,240 MW through the
termination of the PPA in 2025. The PPA requires Consumers to pay, based on the
MCV Facility's availability, a levelized average capacity charge of 3.77 cents
per kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. After September 2007, the PPA's terms obligate Consumers to pay the MCV
Partnership only those capacity and energy charges that the MPSC has authorized
for recovery from electric customers.

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

In March 1999, Consumers and the MCV Partnership reached an agreement effective
January 1, 1999, that capped availability payments to the MCV Partnership at
98.5 percent. If the MCV Facility's generating availability remains at the
maximum 98.5 percent level during the next six years, Consumers' after-tax cash
underrecoveries associated with the PPA could be as follows:



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                                                        Consumers Energy Company

<Table>
<Caption>
                                                                                                        In Millions
                                                            -------------------------------------------------------
                                                            2002      2003      2004      2005      2006      2007
                                                            -----     -----     -----     -----     -----     -----
<S>                                                         <C>       <C>       <C>       <C>       <C>       <C>
Estimated cash underrecoveries at 98.5%, net of tax         $  38     $  37     $  36     $  36     $  36     $  25
                                                            =====     =====     =====     =====     =====     =====
</Table>

It is currently estimated that 51 percent of the actual cash underrecoveries for
the years 2002 through 2004 will be charged to the PPA liability, with the
remaining portion charged to operating expense as a result of Consumers' 49
percent ownership in the MCV Partnership. All cash underrecoveries will be
expensed directly to income once the PPA liability is depleted.

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

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

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

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

<Table>
<Caption>
In Millions                                                               2001              2000
-----------                                                            ----------        ----------
                                                                         Income Increase/(Decrease)
                                                                       ----------------------------
<S>                                                                     <C>              <C>
Reverse the original operating charge associated with continuing
   losses on the MCV PPA                                                $       39       $       --
Charge 49 percent annual capacity losses associated with the MCV
   PPA to operating expense instead of to the reserve                          (27)             (29)
                                                                        ----------       ----------
Net operating expense decrease/(increase)                                       12              (29)

Reverse the 2001 increase to the MCV PPA reserve                               126               --
Accretion Expense                                                               --               (2)
                                                                        ----------       ----------
Pre-tax effect of adjustments                                                  138              (31)
Income tax effect                                                              (48)              11
                                                                        ----------       ----------
Net income impact of MCV PPA adjustments                                $       90       $      (20)
                                                                        ----------       ----------
</Table>

In February 1998, the MCV Partnership appealed the January 1998 and February
1998 MPSC orders related to electric utility restructuring. At the same time,
MCV Partnership filed suit in the United States District



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                                                        Consumers Energy Company

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

NUCLEAR MATTERS: In May 2001, Palisades received its annual performance review
in which the NRC stated that Palisades operated in a manner that preserved
public health and safety. The NRC classified all inspection findings to have
very low safety significance. At the time of the annual performance review, the
NRC had planned to conduct only baseline inspections at the facility through May
31, 2002. The NRC, however, conducted an inspection to oversee the Palisades
June 2001 through January 2002 unplanned outage, which is discussed in more
detail below.

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, 2001, Consumers had loaded 18 dry
casks with spent nuclear fuel at Palisades. Palisades will need to load
additional dry casks by 2004 in order to continue operation. Palisades currently
has three empty storage-only dry casks on-site, with storage pad capacity for up
to seven additional loaded dry casks. Consumers anticipates that licensed
transportable dry casks for additional storage, along with more storage pad
capacity, will be available prior to 2004.

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

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

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

On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. There was no risk to
the public or workers. In August 2001, Consumers



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                                                        Consumers Energy Company

completed an expanded inspection that included all similar control rod drive
assemblies and elected to completely replace the defective components.
Installation of the new components was completed in December 2001 and the plant
returned to service on January 21, 2002. Consumers' capital expenditures for the
components and their installation was approximately $31 million.

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

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 supply 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. The June 2001 through January 2002 Palisades
outage, however, was not an insured event. If certain covered losses occur at
its own or other nuclear plants similarly insured, Consumers could be required
to pay maximum assessments of $26.9 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. NEIL limits its coverage from
multiple acts of terrorism during a twelve-month period to a maximum aggregate
of $3.24 billion, allocated among the claimants, plus recoverable reinsurance,
indemnity and other sources. The nuclear liability insurers for Palisades and
Big Rock also limit the amount of their coverage for liability from terrorist
acts to $200 million. This could affect the amount of loss coverage for
Consumers should multiple acts of terrorism occur. The Price Anderson Act
expires on August 1, 2002 and is currently in the process of reauthorization by
the U. S. Congress. It is possible that the Price Anderson Act will not be
reauthorized or changes may be made that significantly affect the insurance
provisions for nuclear plants.

CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates electric
capital expenditures, including new lease commitments and environmental costs
under the Clean Air Act, of $467 million, $412 million, and $440 million.

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

Coal Supply: Consumers has entered into coal supply contracts with various
suppliers for its coal-fired generating stations. Under the terms of these
agreements, Consumers is obligated to take physical delivery of the coal and
make payment based upon the contract terms. Consumers' current contracts have
expiration dates that range from 2002 to 2004, and total an estimated $269
million. Long-term coal supply contracts account for approximately 60 to 85
percent of Consumers annual coal requirements. In 2001, coal purchases totaled
$255 million of which $197 million (71 percent of the tonnage requirement) was
under long-term contract. Consumers supplements its long-term contracts with
spot-market purchases.

Power Supply, Capacity and Transmission: As of December 31, 2001, Consumers had
future unrecognized commitments to purchase power supply and transmission
services under fixed price forward contracts for the years 2002 and 2003
totaling $26 million. Consumers also had commitments to purchase capacity and
energy under long-term power purchase agreements with various generating plants
including the MCV Facility. These contracts require monthly capacity payments
based on the plants' availability or deliverability. These payments



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                                                        Consumers Energy Company

for the years 2002 through 2033 total an estimated $17 billion, undiscounted,
which includes $13 billion related to the MCV Facility. This amount may vary
depending upon plant availability and fuel costs. If a plant were not available
to deliver electricity to Consumers, then Consumers would not be obligated to
make the capacity payment until the plant could deliver. For further
information, see Note 2, Uncertainties, "The Midland Cogeneration Venture" for
information concerning power purchases from the MCV Facility.

DERIVATIVE ACTIVITIES: Consumers' electric business uses purchased electric call
option contracts to meet its regulatory obligation to serve, which requires
providing a physical supply of electricity to customers, and to manage electric
cost and to ensure a reliable source of capacity during periods of peak demand.
On January 1, 2001, upon initial adoption of SFAS No. 133, derivative and hedge
accounting for certain utility industry contracts, particularly electric call
option contracts and option-like contracts, and contracts subject to Bookouts
was uncertain. Consumers accounted for these types of contracts as derivatives
that qualified for the normal purchase exception of SFAS No. 133 and, therefore,
did not record these contracts on the balance sheet at fair value. In June 2001,
the FASB issued guidance that effectively resolved the accounting for these
contracts as of July 1, 2001. Consumers evaluated its option and option-like
contracts and determined that the majority of these contracts qualified for the
normal purchase exception of SFAS No. 133; however, certain electric call option
contracts were required to be accounted for as derivatives. On July 1, 2001,
upon initial adoption of the standard for these contracts, Consumers recorded a
$3 million, net of tax, cumulative effect adjustment as an unrealized loss
decreasing accumulated other comprehensive income. This adjustment relates to
the difference between the fair value and the recorded book value of these
electric call option contracts. The adjustment to accumulated other
comprehensive income relates to electric call option contracts that qualified
for cash flow hedge accounting prior to the initial adoption of SFAS No. 133.
After July 1, 2001, these contracts will not qualify for hedge accounting under
SFAS No. 133 and, therefore, Consumers will record any change in fair value
subsequent to July 1, 2001 directly in earnings, which could cause earnings
volatility. The initial amount recorded in other comprehensive income will be
reclassified to earnings as the forecasted future transactions occur or the call
options expire. The majority of these contracts expired in the third quarter
2001 and the remaining contracts will expire in 2002. As of December 31, 2001,
$2 million, net of tax, was reclassified to earnings as part of cost of power
supply. The remainder is expected to be reclassified to earnings in the third
quarter of 2002.

In December 2001, the FASB issued revised guidance regarding derivative
accounting for electric call option contracts and option-like contracts. The
revised guidance amends the criteria to be used to determine if derivative
accounting is required. Consumers re-evaluated its electric call option and
option-like contracts and determined that under the revised guidance additional
contracts require derivative accounting. Therefore, as of December 31, 2001,
upon initial adoption of the revised guidance for these contracts, Consumers
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. This adjustment relates to the difference between the fair value
and the recorded book value of these electric call option contracts. Consumers
will record any change in fair value subsequent to December 31, 2001 directly in
earnings, which could cause earnings volatility.

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. Once the forecasted gas purchases occur, the net gain or loss on these
contracts will be reclassified to earnings and recorded as part of the cost of
power supply. These contracts have been highly effective in achieving offsetting
cash flows of future gas purchases, and no component of the gain or loss was
excluded from the assessment of the hedge's effectiveness. As a result, for the
year ended December 31, 2001, no net gain or loss has been recognized in
earnings as a result of hedge ineffectiveness. These contracts expired in
December 2001.



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<PAGE>

                                                        Consumers Energy Company

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
former manufactured gas plant facilities, which were operated by Consumers for
some part of their operating lives, including sites in which it has a partial or
no current ownership interest. Consumers has completed initial investigations at
the 23 sites. For sites where Consumers has received site-wide study plan
approvals, it will continue to implement these plans. It will also work toward
closure of environmental issues at sites as studies are completed. Consumers has
estimated its costs related to further investigation and remedial action for all
23 sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic
Cost Model. The estimated total costs are between $82 million and $113 million;
these estimates are based on discounted 2001 costs and follow EPA recommended
use of discount rates between 3 and 7 percent for this type of activity.
Consumers expects to recover a significant portion of these costs through
insurance proceeds and through MPSC approved rates charged to its customers. As
of December 31, 2001, Consumers has an accrued liability of $57 million, (net of
$25 million of expenditures incurred to date), and a regulatory asset of $70
million. Any significant change in assumptions, such as an increase in the
number of sites, different remediation techniques, nature and extent of
contamination, and legal and regulatory requirements, could affect Consumers'
estimate of remedial action costs. The MPSC currently allows Consumers to
recover $1 million of manufactured gas plant facilities environmental clean-up
costs annually. Consumers defers and amortizes, over a period of ten years,
manufactured gas plant facilities environmental clean-up costs above the amount
currently being recovered in rates. Additional rate recognition of amortization
expense cannot begin until after a prudency review in a future general gas rate
case. Consumers' position in the current general gas rate case is that all
manufactured gas plant facilities environmental clean-up expenditures for years
1998 through 2002 are prudent.

GAS RATE MATTERS

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

GAS COST RECOVERY: As part of a settlement agreement approved by the MPSC in
July 2001, Consumers agreed not to bill a price in excess of $4.69 per mcf of
natural gas under the GCR factor mechanism through March 2002. This agreement is
not expected to affect Consumers' earnings outlook because Consumers recovers
from customers the amount that it actually pays for natural gas in the
reconciliation process. The settlement does not affect Consumers' June 2001
request to the MPSC for a distribution service rate increase. The MPSC also
approved a methodology to adjust bills for market price increases quarterly
without returning to the MPSC for approval. In December 2001, Consumers filed
its GCR Plan for the period April 2002 through March 2003. Consumers is
requesting authority to bill a GCR factor up to $3.50 per mcf for this period.

GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a distribution service rate increase. Consumers is seeking a 12.25%
authorized return on equity. Contemporaneously with this filing, Consumers
requested partial and immediate relief in the annual amount of $33 million. The
relief is primarily for higher carrying costs on more expensive natural gas
inventory than is currently included in rates. In October 2001, Consumers
revised its filing to reflect lower operating costs and requested a $133 million
annual distribution service rate increase. In December 2001, the MPSC authorized
a $15 million annual



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                                                        Consumers Energy Company

interim increase in distribution service rate revenues. The order authorizes
Consumers to apply the interim increase on its gas sales customers' bills for
service effective December 21, 2001. The increase is under bond and subject to
refund if the final rate increase is less than the interim rate increase. In
February 2002, Consumers revised its filing to reflect lower estimated gas
inventory prices and revised depreciation expense and is now requesting a $105
million annual distribution service rate increase. If the MPSC approves
Consumers' total request, then Consumers could bill an additional amount of
approximately $4.78 per month, representing a 7.7 percent increase in the
typical residential customer's average monthly bill.

OTHER GAS UNCERTAINTIES

CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates gas capital
expenditures, including new lease commitments, of $191 million, $171 million,
and $150 million

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 2002 to 2005. Consumers' 2001
gas requirements totaled 229 bcf at a cost of $962 million. As of the end of
2001, Consumers expected gas requirements for 2002 are 205 bcf of which 54
percent is covered by existing contracts.

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.

3: SHORT-TERM FINANCINGS AND CAPITALIZATION

AUTHORIZATION: At December 31, 2001, Consumers had FERC authorization to issue
or guarantee through June 2002, up to $1.4 billion of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2002 up to $250 million and $570 million of long-term
securities for refinancing or refunding purposes and for general corporate
purposes, respectively.

In October 2001, FERC granted Consumers' August 2001 request for authorization
of up to $500 million of First Mortgage Bonds to be issued as collateral for the
outstanding short-term securities. Further, in November 2001, FERC granted
Consumers' August 2001 request for authorization of an additional $500 million
of long-term securities for general corporate purposes and up to an additional
$500 million of First Mortgage Bonds to be issued solely as security for the
long-term securities.

SHORT-TERM FINANCINGS: Consumers has an unsecured $300 million credit facility
maturing in July 2002 and unsecured lines of credit aggregating $215 million.
These facilities are available to finance seasonal working capital requirements
and to pay for capital expenditures between long-term financings. At December
31, 2001, a total of $416 million was outstanding at a weighted average interest
rate of 2.7 percent, compared with $403 million outstanding at December 31,
2000, at a weighted average interest rate of 7.4 percent.



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                                                        Consumers Energy Company

Consumers currently has in place a $450 million trade receivables sale program.
Trade receivables are sold on a revolving basis with net settlements occurring
on a daily basis. At December 31, 2001 and 2000, receivables sold under the
program totaled $334 million and $325 million, respectively. Accounts receivable
and accrued revenue in the Consolidated Balance Sheets have been reduced to
reflect receivables sold.

Under the program discussed above, during 2001 and 2000, Consumers sold accounts
receivable but retained servicing responsibility. Consumers is responsible for
the collectability of the accounts receivable sold, however, the investors
associated with the sale of accounts receivable have no recourse to Consumers'
other assets for failure of debtors to pay when due and there are no
restrictions on accounts receivables not sold. No gain or loss has been recorded
on the sale of accounts receivable and Consumers retains no interest in the
receivables sold. The average annual discount rate was 4.37 percent and 6.75
percent for 2001 and 2000, respectively.

LONG-TERM FINANCINGS: In September 2001, Consumers sold $350 million aggregate
principal amount of 6.25 percent senior notes, maturing in September 2006. Net
proceeds from the sale were $347 million. Consumers used the net proceeds to
reduce borrowings on various lines of credit and on a revolving credit facility.
In March 2002, Consumers sold $300 million principal amount of six percent
senior notes, maturing in March 2005. Net proceeds from the sale were $299
million. Consumers used the net proceeds to replace a first mortgage bond that
was to mature in 2003. For further 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:



                                       83
<PAGE>

                                                        Consumers Energy Company

<Table>
<Caption>
                                                                                                                  In Millions
                                                    -------------------------------------------------------------------------
                                                                                                                    Earliest
Trust and Securities                                  Rate              Amount Outstanding             Maturity    Redemption
--------------------                                --------    ----------------------------------     --------    ----------
Years Ended December 31                                           2001         2000         1999                      Year
                                                                --------     --------     --------                 ----------
<S>                                                  <C>        <C>          <C>          <C>          <C>          <C>
Consumers Power Company Financing I,
  Trust Originated Preferred Securities               8.36%     $    100     $    100     $    100         2015         2000
Consumers Energy Company Financing II,
  Trust Originated Preferred Securities               8.20%          120          120          120         2027         2002
Consumers Energy Company Financing III,
  Trust Originated Preferred Securities               9.25%          175          175          175         2029         2004
Consumers Energy Company Financing IV,
  Trust Preferred Securities                          9.00%          125           --           --         2031         2006
                                                                --------     --------     --------

Total                                                           $    520     $    395     $    395
                                                                ========     ========     ========
</Table>

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

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 2.8 percent at
December 31, 2001.

Under the provisions of its Articles of Incorporation, Consumers had $233
million of unrestricted retained earnings available to pay common dividends at
December 31, 2001. In January 2002, Consumers declared a $55 million common
dividend which was paid in February 2002.

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 cash flow hedges. As such, Consumers will
record any change in the fair value of these contracts in other comprehensive
income unless the swap is sold. These swaps fix the interest rate on $75 million
of variable rate debt, and expire in December 2002. As of December 31, 2001,
these interest rate swaps had a negative fair value of $3 million. This amount,
if sustained, will be reclassified to earnings increasing interest expense when
the swaps are settled on a monthly basis.

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

Consumers also uses interest rate swaps to hedge the risk associated with the
fair value of its debt. These interest rate swaps are designated as fair value
hedges. During the third quarter 2001, Consumers entered into fair value hedges
to hedge the risk associated with the fair value of $400 million of fixed rate
debt. These swaps were terminated in the third and fourth quarter 2001 and
resulted in an $8 million gain that has been deferred and recorded as part of
the debt. It is anticipated that this gain will be recognized over the remaining
life of the debt. In March 2002, Consumers entered into a fair value hedge to
hedge the risk associated with the fair value of $300 million of fixed rate debt
issued in March 2002.



                                       84
<PAGE>

                                                        Consumers Energy Company

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>
                                                                                                                    In Millions
                                                                                     ------------------------------------------
Years Ended December 31                                                                 2001            2000            1999
-----------------------                                                              ----------      ----------      ----------
                                                                                     (Restated)      (Restated)
<S>                                                                                  <C>             <C>             <C>
Current federal income taxes                                                         $      (39)     $      149      $      170
Deferred income taxes, includes $6 for 2001 change
  in accounting (Note 1)                                                                    137              (4)             11
Deferred ITC, net                                                                            (7)             (8)             (9)
                                                                                     ----------      ----------      ----------
                                                                                     $       91      $      137      $      172
                                                                                     ==========      ==========      ==========
</Table>

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

<Table>
<Caption>
                                                                                                   In Millions
                                                                                    --------------------------
December 31                                                                            2001            2000
-----------                                                                         ----------      ----------
                                                                                    (Restated)      (Restated)
<S>                                                                                 <C>             <C>
Property                                                                            $     (557)     $     (522)
Unconsolidated investments                                                                (211)           (226)
Securitization costs (Note 2) (a)                                                         (194)           (185)
Postretirement benefits (Note 7)                                                           (76)            (88)
Gas inventories                                                                            (57)             --
Employee benefit obligations, includes postretirement benefits
  of $104 and $122 (Note 7)                                                                124             148
FAS 109 regulatory liability                                                               117              86
Power purchases (Note 2)                                                                    28              35
AMT carryforward                                                                            30              53
Other, net                                                                                  --              (4)
                                                                                    ----------      ----------
                                                                                    $     (796)     $     (703)
                                                                                    ==========      ==========
Gross deferred tax liabilities                                                      $   (1,270)     $   (1,364)
Gross deferred tax assets                                                                  474             661
                                                                                    ----------      ----------
                                                                                    $     (796)     $     (703)
                                                                                    ==========      ==========
</Table>



                                       85


<PAGE>


                                                        Consumers Energy Company

(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)
         FAS 109 regulatory liability                   (70)
         Postretirement benefits                        (29)
         Other                                           (5)
                                                     ------
                                                     $ (185)
                                                     ======
</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>
                                                                                                                     In Millions
                                                                                    --------------------------------------------
Years Ended December 31                                                                2001             2000              1999
-----------------------                                                             ----------       ----------       ----------
                                                                                    (Restated)       (Restated)
<S>                                                                                 <C>              <C>              <C>
Net income                                                                           $      188       $      284       $      340
Income tax expense, includes $6 for 2001 change
  in accounting (Note 1)                                                                     91              137              172
Preferred securities distributions                                                          (41)             (34)             (21)
                                                                                     ----------       ----------       ----------
Pretax income                                                                               238              387              491
Statutory federal income tax rate                                                          x 35%            x 35%            x 35%
                                                                                     ----------       ----------       ----------

Expected income tax expense                                                                  83              136              172
Increase (decrease) in taxes from
  Capitalized overheads previously flowed through                                             2                5                5
  Differences in book and tax depreciation
   not previously deferred                                                                   15               11               10
  ITC amortization/adjustments                                                               (7)              (9)              (9)
  Affiliated companies' dividends                                                            (2)              (3)              (4)
  Other, net                                                                                  -               (3)              (2)
                                                                                     ----------       ----------       ----------
Actual income tax expense                                                            $       91       $      137       $      172
                                                                                     ==========       ==========       ==========
Effective tax rate                                                                         38.2%            35.4%            35.0%
                                                                                     ==========       ==========       ==========
</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.



                                       86

<PAGE>

                                                        Consumers Energy Company

<Table>
<Caption>
                                                                                      In Millions
                                        ---------------------------------------------------------
December 31                                        2001                         2000
-----------                             ---------------               --------------
                                                  Fair   Unrealized             Fair   Unrealized
Available-for-sale securities           Cost      Value     Gain      Cost      Value     Gain
-----------------------------           -----     -----  ----------   -----     -----  ----------
<S>                                     <C>       <C>    <C>          <C>       <C>    <C>
Common stock of CMS Energy              $  35     $  57     $  22     $  40     $  86     $  46
SERP                                       22        24         2        21        26         5
Nuclear decommissioning
 investments (a)                          467       581       114       480       611       131
                                        =====     =====     =====     =====     =====     =====
</Table>

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

At December 31, 2001, the carrying amount of long-term debt was $2.5 billion and
at December 31, 2000, $2.1 billion, and the fair values were $2.5 billion and
$2.0 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. 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 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 percent 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, 2001, under the plan, awards of up to
2,321,094 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, 2001, 172,240 of
the 239,665 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 of the restricted stock and options
granted to Consumers' key employees under the Performance Incentive Stock Plan
follows.



                                       87

<PAGE>

                                                        Consumers Energy Company

<Table>
<Caption>
                                              Restricted
                                                 Stock                     Options
                                             ------------      ---------------------------------
                                                Number            Number        Weighted Average
CMS ENERGY COMMON STOCK                        of Shares         of Shares       Exercise Price
-----------------------                      ------------      ------------     ----------------
<S>                                          <C>               <C>              <C>
Outstanding at January 1, 1999                    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(a)               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(a)               259,377           842,119      $      30.75
  Granted                                          71,930           294,150      $      30.04
  Exercised or Issued                             (34,704)          (35,317)     $      19.34
  Forfeited                                       (56,938)               --
  Expired                                              --                --      $      31.87
                                             ------------      ------------      ------------

Outstanding at December 31, 2001(a)               239,665         1,100,952      $      30.93
                                             ============      ============      ============
</Table>

(a) For each of these three years, all options were exercisable at the weighted
average price listed above.

<Table>
<Caption>
                                                  Restricted
                                                     Stock                   Options
                                                  ----------      ------------------------------
                                                    Number          Number      Weighted Average
CLASS G COMMON STOCK                               of Shares       of Shares     Exercise Price
--------------------                              ----------      ----------    ----------------
<S>                                               <C>             <C>           <C>
Outstanding at January 1, 1999                        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                          --              --              --
                                                  ----------      ----------      ----------

Outstanding at December 31, 2001                          --              --              --
                                                  ==========      ==========      ==========
</Table>



                                       88
<PAGE>



                                                        Consumers Energy Company

The following table summarizes information about CMS Energy Common Stock options
outstanding at December 31, 2001:

<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 - $22.00                                  243,048                7.14 years                  $ 17.93
    $24.75 - $30.63                                  154,643                4.06 years                  $ 27.83
    $31.04 - $31.04                                  256,650                9.15 years                  $ 31.04
    $33.11 - $39.06                                  338,447                6.99 years                  $ 37.61
    $43.38 - $43.38                                  108,164                6.57 years                  $ 43.38
    ---------------                                ---------                ----------                  -------
    $17.00 - $43.38                                1,100,952                7.07 years                  $ 30.93
    ===============                                =========                ==========                  =======
</Table>

In 2001, 2000, and 1999, the weighted average fair value of options granted for
CMS Energy Common Stock was $6.37, $1.91, and $6.08. 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                      2001          2000          1999
-----------------------                    --------      --------      --------
<S>                                        <C>           <C>           <C>
CMS ENERGY COMMON STOCK OPTIONS
  Risk-free interest rate                      4.80%         6.56%         5.66%
  Expected stock price volatility             29.48%        26.53%        16.96%
  Expected dividend rate                   $   .365      $   .365      $   .365
  Expected option life (years)                  4.6           4.4           4.7
                                           ========      ========      ========
</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. For 2001, if compensation cost for stock options had been
determined in accordance with SFAS No. 123, Consumers' net income would have
decreased by $1 million, and less than $1 million for 2000 and 1999. In 2001,
2000, and 1999, the compensation cost charged against income for restricted
stock was $3 million, $1 million, and $3 million.

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.

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.



                                       89
<PAGE>

                                                        Consumers Energy Company

<Table>
<Caption>
Weighted-Average Assumptions
----------------------------
                                                   Pension & SERP                                  OPEB
Years Ended December 31                    2001          2000          1999          2001          2000           1999
-----------------------                  --------      --------      --------      --------      --------      --------
<S>                                      <C>           <C>           <C>           <C>           <C>           <C>
Discount rate                               7.25%         7.75%         7.75%         7.25%         7.75%         7.75%
Expected long-term
 rate of return on
 plan assets                                9.75%         9.75%         9.25%         8.30%         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, 2001 are based on the assumption that
costs would decrease gradually from the 2001 trend rate of 7.5 percent to 5.5
percent in 2009 and thereafter.

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

<Table>
<Caption>
                                                                                                                      In Millions
                                                   ------------------------------------------------------------------------------
                                                              Pension & SERP                                OPEB
Years Ended December 31                              2001          2000          1999          2001         2000           1999
-----------------------                            --------      --------      --------      --------      --------      --------
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Service cost                                       $     37      $     31      $     32      $     13      $     11      $     12
Interest expense                                         84            79            69            57            52            44
Expected return on plan assets                          (99)          (92)          (84)          (40)          (34)
                                                                                                                              (24)
Amortization of unrecognized transition (asset)          (5)           (5)           (5)           --            --            --
Ad Hoc Retiree Increase                                  --            --             3            --            --            --
Amortization of:
 Net (gain) or loss                                      --            --            --            --            (1)           (1)
 Prior service cost                                       8             4             4            (1)           --            --
                                                   --------      --------      --------      --------      --------      --------
Net periodic pension and
 postretirement benefit cost                       $     25      $     17      $     19      $     29      $     28      $     31
                                                   ========      ========      ========      ========      ========      ========
</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>
                                                                                    In Millions
                                                              ---------------------------------
                                                              One Percentage     One Percentage
                                                              Point Increase     Point Decrease
                                                              --------------     --------------
<S>                                                           <C>                <C>
Effect on total service and interest cost component            $        11        $        (9)
Effect on postretirement benefit obligation                    $       119        $       (99)
                                                               ===========        ===========
</Table>

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



                                       90
<PAGE>
                                                        Consumers Energy Company

<Table>
<Caption>
                                                                                                                   In Millions
                                          ------------------------------------------------------------------------------------
                                               Pension Plan                      SERP                           OPEB
                                            2001           2000           2001           2000           2001           2000
                                          ---------      ---------      ---------      ---------      ---------      ---------
<S>                                       <C>            <C>            <C>            <C>            <C>            <C>
Benefit obligation January 1              $   1,081      $     971      $      18      $      19      $     754      $     685
Service cost                                     36             30              1              1             13             11
Interest cost                                    83             78              1              1             57             52
Plan amendment                                   --             54             --             --            (16)            --
Business combinations                            --             --             --             --             --             --
Actuarial loss (gain)                            96             25             --              1            102             40
Benefits paid                                  (101)           (77)            (1)            (1)           (34)           (34)
                                          ---------      ---------      ---------      ---------      ---------      ---------
Benefit obligation December 31                1,195          1,081             19             21            876            754
                                          ---------      ---------      ---------      ---------      ---------      ---------
Plan assets at fair value at January 1          994          1,094             --             --            450            418
Actual return on plan assets                   (113)           (23)            --             --            (23)           (16)
Company contribution                             65             --             --             --             48             48
Business combinations                            --             --             --             --             --             --
Actual benefits paid                           (101)           (77)            --             --             --             --
                                          ---------      ---------      ---------      ---------      ---------      ---------
Plan assets at fair
 value at December 31(a)                        845            994             --             --            475            450
                                          ---------      ---------      ---------      ---------      ---------      ---------

Benefit obligation less than
 (in excess of) plan assets                    (350)           (87)           (21)           (21)          (401)          (304)
Unrecognized net (gain) loss from
 experience different than assumed              235            (71)             3              2            176             13
Unrecognized prior service cost                  68             76              1              1            (15)            (1)
Unrecognized net transition (asset)              --             (5)            --             --             --             --
Panhandle adjustment                             (7)            (9)            --             --             --             --
                                          ---------      ---------      ---------      ---------      ---------      ---------

Recorded liability                        $     (54)     $     (96)     $     (17)     $     (18)     $    (240)     $    (292)
                                          =========      =========      =========      =========      =========      =========
</Table>

(a) Primarily stocks and bonds, including CMS Energy Common Stock of $126
million and $166 million in the pension plan assets and $3 million and $4
million in the OPEB plan assets at December 31, 2001 and 2000, respectively.

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,
2001 and 2000, trust assets were $24 million and $26 million, respectively, and
were classified as other non-current assets. In 2001 and 2000, the accumulated
benefit obligation for SERP was $16 million and $15 million.

Contributions to the 401(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan were $20 million in 2001, and $18
million in 2000.

Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years. As of December 31, 2001, the net
transition asset has been fully amortized. Prior service costs are amortized on
a straight-line basis over the average remaining service period of active
employees.



                                       91
<PAGE>

                                                        Consumers Energy Company

In 1992, Consumers adopted the required accounting for postretirement benefits
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.

8: LEASES

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

Minimum rental commitments under Consumers' non-cancelable leases at December
31, 2001, were:

<Table>
<Caption>
                                                                                                     In Millions
------------------------------------------------------------------------------------------------------------------
                                                                    Capital Leases                Operating Leases
                                                                      (Restated)                      (Restated)
                                                                    --------------                ----------------
<S>                                                                 <C>                           <C>
2002                                                                    $     35                        $     12
2003                                                                          19                              11
2004                                                                          17                               8
2005                                                                          16                               6
2006                                                                          15                               6
2007 and thereafter                                                           10                              41
                                                                        --------                        --------
Total minimum lease payments                                                 112                        $     84
                                                                                                        ========
Less imputed interest                                                         27
                                                                        --------
Present value of net minimum lease payments                                   85
Less current portion                                                          13
                                                                        --------
Non-current portion                                                     $     72
                                                                        ========
</Table>

Consumers recovers lease charges from customers and accordingly charges payments
for its capital and operating leases to operating expense. For the years ended
December 31, 2001, 2000 and 1999, operating lease charges, including charges to
clearing and other accounts, were $15 million, $16 million, and $14 million,
respectively.

For the years ended December 31, 2001, 2000 and 1999, capital lease expenses
were $26 million, $41 million, and $41 million, respectively. Included in these
amounts, for the years ended 2001, 2000 and 1999, are nuclear fuel lease
expenses of $9 million, $22 million and $23 million, respectively.

In April 2001, Consumers Campus Holdings entered into a lease agreement for the
construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. Consumers' current headquarters building leases
expire in June 2003. The new office-building lessor has committed to fund up to
$65 million for construction of the building. Consumers is acting as the
construction agent of the lessor for this project. During construction, the
lessor has a maximum recourse of 89.9 percent against Consumers in the event of
certain defaults, which Consumers believes are unlikely. For several events of
default, primarily bankruptcy or intentional misapplication of funds, there
could be full recourse for the amounts expended by the lessor at that time. The
agreement also includes a common change in control provision, which would
trigger full payment of construction costs by Consumers. As a result of this
provision, Consumers elected to classify this lease as a capital lease. This
classification represents the total obligation of Consumers under this
agreement. As such, Consumers' balance sheet as of December 31, 2001, reflects a
capital lease asset and an



                                       92
<PAGE>

                                                        Consumers Energy Company

offsetting non-current liability equivalent to the cost of construction at that
date of $16 million. The agreement is a seven-year lease term with payments
commencing upon completion of construction, which is projected for March of
2003. Consumers Campus Holdings has the right to acquire the property at any
time during the life of the agreement. At the end of the lease term, Consumers
Campus Holdings has the option to renew the lease, purchase the property, or
return the property and assist the lessor in the sale of the building. The
return option obligates Consumers Campus Holdings to pay the lessor an amount
equal to the outstanding debt associated with the building. Estimated minimum
lease commitments, assuming an investment of $65 million and rates consistent
with LIBOR at the inception of the lease, would be approximately $4 million
annually from April 2003 through April 2008 and a total of $55 million for the
remainder of the lease. Actual lease payments will depend upon final total
construction costs and LIBOR rates.

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>
                                                                                         In Millions
                                             -------------------------------------------------------
                                                  Net Investment            Accumulated Depreciation
December 31                                     2001           2000           2001           2000
-----------                                  ----------     ----------     ----------     ----------
<S>                                          <C>            <C>            <C>            <C>
Campbell Unit 3 - 93.3 percent               $      279     $      291     $      312     $      299
Ludington - 51 percent                               76            100             88            105
Transmission facilities - various                    37             31             40             17
Distribution lines - various                         10              -              -              -
                                             ==========     ==========     ==========     ==========
</Table>

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. For 2001, 2000 and 1999, these amounts
include earnings from investments accounted for by the equity method of $38
million, $57 million and $50 million, respectively. For 2001, 2000 and 1999,
Consumers had investments accounted for by the equity method of $553 million,
$535 million and $487 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:



                                       93
<PAGE>

                                                        Consumers Energy Company

<Table>
<Caption>
                                                                                  In Millions
                                                  -------------------------------------------
                                                   Restated        Restated
Years Ended December 31                              2001            2000            1999
-----------------------                           ----------      ----------      ----------
<S>                                               <C>             <C>             <C>
Depreciation, depletion and amortization
  Electric                                        $      219      $      311      $      315
  Gas                                                    118             113             107
  Other                                                    2               2               2
                                                  ----------      ----------      ----------

Total Consolidated                                $      339      $      426      $      424
                                                  ==========      ==========      ==========

Interest Charges
  Electric                                        $      153      $      145      $      133
  Gas                                                     50              48              48
  Other                                                   21              27              19
                                                  ----------      ----------      ----------
  Subtotal                                               224             220             200
  Eliminations                                           (38)            (37)            (19)
                                                  ----------      ----------      ----------

Total Consolidated                                $      186      $      183      $      181
                                                  ==========      ==========      ==========

Income Taxes
  Electric (a)                                    $       75      $      123      $      126
  Gas                                                     25              24              41
  Other                                                   (3)            (10)              5
                                                  ----------      ----------      ----------

Total Consolidated                                $       97      $      137      $      172
                                                  ==========      ==========      ==========

Total assets
  Electric (b)                                    $    5,454      $    5,230      $    4,675
  Gas (b)                                              2,194           1,776           1,731
  Other                                                1,142           1,124           1,122
                                                  ----------      ----------      ----------
  Subtotal                                             8,790           8,130           7,528
  Eliminations                                          (469)           (354)           (358)
                                                  ----------      ----------      ----------

Total Consolidated                                $    8,321      $    7,776      $    7,170
                                                  ==========      ==========      ==========

Capital expenditures (c)
  Electric                                        $      623      $      430      $      385
  Gas                                                    145             120             120
                                                  ----------      ----------      ----------

Total                                             $      768      $      550      $      505
                                                  ==========      ==========      ==========
</Table>

(a) 2001 amount includes the $6 million tax benefit due to the change in
accounting for derivative instruments.

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



                                       94
<PAGE>

                                                        Consumers Energy Company

11: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER

Under the PPA with the MCV Partnership discussed in Note 2, Consumers' 2001
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>
                                                                                                        In Millions
                                                                              -------------------------------------
Years Ended December 31                                                       2001           2000              1999
-----------------------                                                       ----           ----              ----
<S>                                                                           <C>            <C>               <C>
Operating revenue (a)                                                         $611           $604              $617
Operating expenses                                                             453            392               401
                                                                              -----          -----             -----

Operating income                                                               158            212               216
Other expense, net                                                             110            122               136
                                                                              -----          -----             -----

Net income                                                                    $ 48           $ 90              $ 80
                                                                              ====           ====              ====
</Table>

BALANCE SHEETS

<Table>
<Caption>
                                                                                                        In Millions
                             --------------------------------------------------------------------------------------
December 31                    2001         2000                                                2001          2000
-----------                  -------      -------                                             -------       -------
<S>                          <C>          <C>                 <C>                             <C>           <C>
ASSETS                                                        LIABILITIES AND EQUITY
  Current assets (b)         $   341      $   429              Current liabilities            $   320       $   316
  Plant, net                   1,610        1,671              Non-current liabilities (c)      1,245         1,431
  Other assets                   166          175              Partners' equity (d)               552           528
                             -------      -------                                             -------       -------

                             $ 2,117      $ 2,275                                             $ 2,117       $ 2,275
                             =======      =======                                             =======       =======
</Table>

(a) For 2001, 2000, and 1999, revenue from Consumers totaled $550 million, $569
million and $586 million, respectively.

(b) At December 31, 2001 and 2000, receivables from Consumers totaled $49 and
$43 million, 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, 2001 and 2000,
the MCV Partnership owed lease obligations of $1.11 billion and $1.24 billion,
respectively, to the owner trust. CMS Holdings' share of the interest and
principal portion for the 2001 lease payments was $36 million and $54 million,
respectively, and for the 2000 lease payments was $52 million and $67 million,
respectively. As of December 31, 2001 and 2000 the lease payments service $597
million and $733 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 2001 and 2000, the owner-trust made debt
payments (including interest) of $217 million and $212 million, respectively.
FMLP's earnings for 2001, 2000, and 1999 were $30 million, $30 million, and $24
million, respectively.



                                       95
<PAGE>
                                                        Consumers Energy Company

(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: RESTATEMENT

In April 2002, Consumers' Board of Directors, upon the recommendation of the
Audit Committee of the Board, voted to discontinue using Arthur Andersen to
audit Consumers' financial statements for the year ending December 31, 2002.
Consumers previously retained Arthur Andersen to review its financial statements
for the quarter ended March 31, 2002. In May 2002, Consumers' Board of Directors
engaged Ernst & Young to audit its financial statements for the year ending
December 31, 2002.

In May 2002, as a result of certain financial reporting issues surrounding
round-trip trading transactions at CMS MST, Arthur Andersen notified CMS Energy
that Arthur Andersen's historical opinions on CMS Energy's financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 could not be
relied upon. As a result, Ernst & Young began the process of re-auditing CMS
Energy's consolidated financial statements for each of the fiscal years ended
December 31, 2001 and December 31, 2000. Although Arthur Andersen's notification
did not apply to separate, audited financial statements of Consumers for the
applicable years, the re-audit did include audit work at Consumers for these
years.

In connection with Ernst & Young's re-audit of the fiscal years ended December
31, 2001 and December 31, 2000, Consumers has determined to make, in
consultation with Ernst & Young, certain adjustments to its consolidated
financial statements for the fiscal years ended December 31, 2001 and December
31, 2000. Therefore, the consolidated financial statements for 2001 and 2000
have been restated from amounts previously reported. At the time it adopted the
accounting treatment for these items, Consumers believed that such accounting
was appropriate under generally accepted accounting principles and Arthur
Andersen concurred.

The audit adjustments: 1) change the accounting associated with the PPA reserve,
which results in: the reversal of the 2001 increase to the PPA reserve of $126
million; the reversal of a net $12 million charged to operating expenses
associated with the PPA in 2001; and the reversal of $29 million of the amount
charged to the PPA reserve in 2000; and 2) recognize Consumers' new headquarters
lease as a capital lease, instead of an operating lease, and record the lease
obligation and capitalize costs incurred. Each of these transactions involved
estimates, assumptions, and judgment based on the best information available at
the time the transactions occurred. The audit adjustments reflect current
judgment on these matters. In addition, the audit adjustments recognize
immaterial reconciling adjustments to advertising costs, Consumers' OPEB
liability and related party receivables and payables.

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

In 2000, Consumers reviewed its estimate of the economic losses it would
experience with respect to the PPA and re-evaluated all of the then current
facts and circumstances used to calculate the disallowance reserve, including
earnings from its 49 percent interest in the MCV Partnership. Consumers
concluded that no adjustment to the reserve was required in 2000. However, as
conditions surrounding MCV Partnership operations evolved in



                                       96
<PAGE>
                                                        Consumers Energy Company

2001, Consumers concluded that it needed to increase the reserve by $126 million
(pre-tax) in the third quarter of 2001, and did so.

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

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

<Table>
<Caption>
In Millions                                                                       2001             2000
-----------                                                                    -----------     -----------
                                                                                Income Increase/(Decrease)
                                                                               ---------------------------
<S>                                                                            <C>             <C>
Reverse the original operating charge associated with continuing
  losses on the MCV PPA                                                        $       39      $       --
Charge 49 percent of annual capacity losses associated with the MCV
  PPA to operating expense instead of to the reserve                                  (27)            (29)
                                                                               ----------      ----------
Net operating expense decrease/(increase)                                              12             (29)

Reverse the 2001 increase to the MCV PPA reserve                                      126              --
Accretion Expense                                                                      --              (2)
                                                                               ----------      ----------
Pre-tax effect of adjustments                                                         138             (31)
Income tax effect                                                                     (48)             11
                                                                               ----------      ----------
Net income impact of MCV PPA adjustments                                       $       90      $      (20)
</Table>



                                       97

<PAGE>

                                                        Consumers Energy Company

The following tables reflect the effects of all the audit adjustments Consumers
made to its consolidated financial statements for the fiscal years ended
December 31, 2001 and December 31, 2000:

CONSOLIDATED STATEMENT OF INCOME

<Table>
<Caption>
                                                                  2001                           2000
                                                       ----------------------------    ---------------------------
In Millions                                            As Reported      As Restated    As Reported     As Restated
-----------                                            -----------      -----------    -----------     -----------
<S>                                                    <C>              <C>            <C>             <C>
OPERATING EXPENSES
Loss on power purchase agreement - MCV Partnership     $      126      $       --      $       --      $       --
Other                                                         635             625             526             555

Total Operating Expenses                                    3,669           3,533           3,300           3,329

PRETAX OPERATING INCOME
Electric                                                      212             349             481             454
Gas                                                            98              97              98              96

Total Pretax Operating Income                                 345             481             635             606

OTHER INCOME (DEDUCTIONS)
Accretion expense                                             (10)            (11)             (7)             (9)
Other, net                                                      5               6              (5)             (5)

Total Other Income (Deductions)                                 1               1              --              (2)

INCOME BEFORE TAXES                                           160             296             452             421

INCOME TAXES                                                   49              97             148             137

INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE                                          111             199             304             284

NET INCOME                                                    100             188             304             284
                                                       ----------      ----------      ----------      ----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER             $       57      $      145      $      268      $      248
                                                       ----------      ----------      ----------      ----------
</Table>



                                       98
<PAGE>
                                                        Consumers Energy Company

The following table reflects all audit adjustments by quarter for the income
statement:


<Table>
<Caption>
In Millions
-----------------------------------------------------------------------------------------------------------------------------
                                                  2001                                             2000
Quarters Ended                  March 31     June 30    Sept. 30     Dec. 31    March 31     June 30    Sept. 30     Dec. 31
------------------------------  ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
<S>                             <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Operating expenses              $   1,006   $     765   $     953   $     945   $     939   $     716   $     732   $     913

MCV PPA Adjustment                     (4)         (4)       (130)         --           7           7           7           8
Advertising Expense                    --          --          --           1          --          --          --           3
OPEB                                   --          --          --          --          --          --          --          (2)
Intercompany items                      1          --          --          --          --          --          --          (1)

Restated operating expenses     $   1,003   $     761   $     823   $     946   $     946   $     723   $     739   $     921
                                ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Pretax operating income         $     213   $     108   $     (53)  $      77   $     187   $      92   $     142   $     214

MCV PPA Adjustment                      4           4         130          --          (7)         (7)         (7)         (8)
Advertising Expense                    --          --          --          (1)         --          --          --          (3)
OPEB                                   --          --          --          --          --          --          --           2
Intercompany items                     (1)         --          --          --          --          --           1          --

Restated Pretax operating
     Income                     $     216   $     112   $      77   $      76   $     180   $      85   $     136   $     205
                                ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Other income                    $       2   $      --   $      --   $      (1)  $       2   $       3   $       1   $      (6)

MCV PPA Adjustment                     (1)         --          --           1          --          (1)         (1)         --
Intercompany items                     --           1          --          (1)         --          --          --          --

Restated other income           $       1   $       1   $      --   $      (1)  $       2   $       2   $      --   $      (6)
                                ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Income before taxes             $     168   $      63   $    (102)  $      31   $     147   $      50   $      98   $     157

MCV PPA Adjustment                      4           4         130          --          (7)         (8)         (7)         (9)
Advertising Expense                    --          --          --          (1)         --          --          --          (3)
OPEB                                   --          --          --          --          --          --          --           2
Intercompany items                     (2)         (1)          1           1          --          --          --           1

Restated income before taxes    $     170   $      66   $      29   $      31   $     140   $      42   $      91   $     148
                                ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Income (loss) before
   cumulative effect of change
    in accounting principle     $     107   $      43   $     (62)  $      23   $      94   $      33   $      72   $     105

MCV PPA Adjustment                      2           2          85           1          (5)         (3)         (5)         (7)
Advertising Expense                    --          --          --          --          --          --          --          (2)
OPEB                                   --          --          --          --          --          --          --           1
Intercompany items                     (1)         --          --          (1)         --          (1)         --           2

Restated income (loss) before
   cumulative effect of change
    in accounting principle     $     108   $      45   $      23   $      23   $      89   $      29   $      67   $      99
                                ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
</Table>



                                       99
<PAGE>
                                                        Consumers Energy Company
<Table>
<Caption>
-----------------------------------------------------------------------------------------------------------------------------
                                                  2001                                             2000
Quarters Ended                  March 31     June 30    Sept. 30     Dec. 31    March 31     June 30    Sept. 30     Dec. 31
------------------------------  ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
<S>                             <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Net income (loss)               $     107   $      43   $     (62)  $      12   $      94   $      33   $      72   $     105

MCV PPA Adjustment                      2           2          85           1          (5)         (3)         (5)         (7)
Advertising Expense                    --          --          --          --          --          --          --          (2)
OPEB                                   --          --          --          --          --          --          --           1
Intercompany items                     (1)         --          --          (1)         --          (1)         --           2

Restated net income (loss)      $     108   $      45   $      23   $      12   $      89   $      29   $      67   $      99
                                ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Net income (loss)
   available to
   common stockholder           $      98   $      33   $     (74)  $      --   $      85   $      23   $      64   $      96

MCV PPA Adjustment                      2           2          85           1          (5)         (3)         (5)         (7)
Advertising Expense                    --          --          --          --          --          --          --          (2)
OPEB                                   --          --          --          --          --          --          --           1
Intercompany items                     (1)         --          --          (1)         --          --          (1)          2

Restated net income (loss)
   available to
   common stockholder           $      99   $      35   $      11   $      --   $      80   $      20   $      58   $      90
                                ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
</Table>


<Table>
<Caption>
CONSOLIDATED STATEMENT OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------
                                                                      2001                                2000
                                                         --------------------------------    --------------------------------
In Millions                                               As Reported       As Restated       As Reported        As Restated
------------------------------------------------------   --------------    --------------    --------------    --------------
<S>                                                      <C>               <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income                                               $          100    $          188    $          304    $          284
Loss on power purchase agreement - MCV Partnership                  126                --                --                --
Deferred income taxes and investment tax credit                      80               136                (9)              (21)
Decrease (increase) in accounts receivable and accrued
revenue                                                             144               149              (171)             (178)
Increase (decrease) in accounts payable                              50                53                15                19
Changes in other assets and liabilities                               8               (17)               (7)               28
Net cash provided by operating activities                           517               518               515               515

NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENT                                                           (5)               (4)                3                 3
Cash and temporary cash investments - End of year        $           16    $           17    $           21    $           21
                                                         --------------    --------------    --------------    --------------

OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND
FINANCING ACTIVITIES:

CASH TRANSACTIONS

Interest paid (net of amounts capitalized)               $          169    $          169    $          183    $          165
                                                         --------------    --------------    --------------    --------------
NON-CASH TRANSACTIONS

Other assets placed under capital lease                              21                37                15                15
                                                         --------------    --------------    --------------    --------------
</Table>



                                      100
<PAGE>
                                                        Consumers Energy Company



<Table>
<Caption>
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------------------------------------
                                                             2001                            2000
                                                  ----------------------------   -----------------------------
In Millions                                       As Reported     As Restated     As Reported     As Restated
----------------------------------------------   -------------   -------------   -------------   -------------
<S>                                              <C>             <C>             <C>             <C>
ASSETS

PLANT
Construction Work-in-Progress                    $         464   $         480   $         279   $         278

Total Plant                                              4,807           4,823           4,278           4,277

CURRENT ASSETS
Cash and temporary cash investments                         16              17              21              21
Accounts receivable -  related parties                      17              18             111             117

Total Current Assets                                     1,025           1,027             910             916

NON-CURRENT ASSETS
Other                                                      176             173             222             220

Total Non-current Assets                                 1,862           1,859           1,964           1,962

TOTAL ASSETS                                     $       8,306   $       8,321   $       7,773   $       7,776
                                                 -------------   -------------   -------------   -------------
STOCKHOLDER'S INVESTMENT AND LIABILITIES

CAPITALIZATION
Common stockholder's equity
Retained earnings since December 31, 1992        $         373   $         441   $         506   $         486

Total common stockholder's equity                        1,850           1,918           2,026           2,006

Non-current portion of capital leases                       56              72              49              49

Total Capitalization                                     4,942           5,026           4,624           4,604

CURRENT LIABILITIES
Accounts payable                                           291             282             254             247
Accrued taxes                                              219             214             247             247
Accounts payable - related parties                          80              96              67              78
Current portion of purchase power contracts                 --              24              --              22
Deferred income taxes                                       12              12              --              --
Other                                                      260             247             253             240

Total Current Liabilities                                1,535           1,548           1,455           1,468

NON-CURRENT LIABILITIES
Deferred income taxes                                      747             784             716             705
Postretirement benefits                                    279             276             366             363
Power purchase agreement - MCV Partnership                 169              52              54              77
Other                                                      256             257             203             204

Total Non-current Liabilities                            1,829           1,747           1,694           1,704

TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES   $       8,306   $       8,321   $       7,773   $       7,776
                                                 -------------   -------------   -------------   -------------
</Table>



                                      101
<PAGE>
                                                        Consumers Energy Company



<Table>
<Caption>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
---------------------------------------------------------------------------------------------------------------------------------
                                                                                2001                           2000
                                                                    -----------------------------   -----------------------------
In Millions                                                          As Reported     As Restated     As Reported     As Restated
-----------------------------------------------------------------   -------------   -------------   -------------   -------------
<S>                                                                 <C>             <C>             <C>             <C>
RETAINED EARNINGS

At beginning of period                                              $         506   $         486   $         485   $         485
Net income                                                                    100             188             304             284
At end of period                                                              373             441             506             486

Total Common Stockholder's Equity                                   $       1,850   $       1,918   $       2,026   $       2,006

Total Comprehensive Income                                          $          53   $         141   $         300   $         280
-----------------------------------------------------------------   -------------   -------------   -------------   -------------
</Table>

In addition, as a result of Consumers reclassifying its headquarters' lease from
an operating lease to a capital lease the following table illustrates the amount
of capital leases included in Consumers' restated balance sheet plant accounts:

<Table>
<Caption>
                                                   In Millions
--------------------------------------------------------------
Capital leases                              2001        2000
----------------------------------------   --------   --------
<S>                                        <C>        <C>
Electric                                   $     93   $    133
Gas                                              39         40
Other                                            46         31
                                           --------   --------
                                                178        204
Less accumulated amortization                    93         99
                                           --------   --------

Net capital lease                          $     85   $    105
                                           ========   ========
</Table>

13:  SUBSEQUENT EVENTS

Subsequent to December 31, 2001, a number of material events have occurred.
These events have been disclosed in Consumers' quarterly filings on Form 10-Q,
Form 8-K's or otherwise, during the years 2002 and 2003. Below is a summary of
these events:

CHANGE IN EXECUTIVE OFFICERS: Subsequent to March 1, 2002, certain changes have
occurred in Consumers' executive officers. On May 24, 2002, the Board of
Directors of Consumers elected Kenneth Whipple as Chairman of the Board and
Chief Executive Officer; on June 27, 2002, S. Kinnie Smith, Jr. was elected Vice
Chairman of the Board; on July 22, 2002, Thomas J. Webb was elected Executive
Vice President and Chief Financial Officer; on August 2, 2002, John F. Drake was
elected Senior Vice President and on December 6, 2002, Michael T. Monahan and
Joseph F. Paquette, Jr. joined the Board of Directors of Consumers.

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



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<PAGE>
                                                        Consumers Energy Company



CMS Energy is cooperating with other investigations concerning round-trip
trading, including an investigation by the SEC regarding round-trip trades and
CMS Energy's financial statements, accounting policies and controls, and
investigations by the United States Department of Justice, the Commodity Futures
Trading Commission and the FERC. CMS Energy has also received subpoenas from the
United States Attorney's Office for the Southern District of New York and from
the United States Attorney's Office for the Southern District of Texas regarding
investigations of these trades and has received a number of shareholder class
action lawsuits. CMS Energy is unable to predict the outcome of these matters,
and Consumers is unable to predict what effect, if any, these investigations
will have on its business.

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

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

NEW ACCOUNTING STANDARDS

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

SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Beginning January 1,
2003, companies must comply with SFAS No. 143. The standard requires companies
to record the fair value of the legal obligations related to an asset retirement
in the period in which it is incurred. When the liability is initially recorded,
the company would capitalize an offsetting amount by increasing the carrying
amount of the related long-lived asset. Over time, the initial liability is
accreted to its present value each period and the capitalized cost is
depreciated over the related asset's useful life. Consumers has determined that
it has some legal asset retirement obligations, particularly in regard to its
nuclear plants, but has not as yet finalized its assessment of the obligation.
Once Consumers' assessment is finalized, its removal cost estimate will be
determined based on fair value cost estimates as required by the new standard.
The fair value of the legal retirement obligations will be present valued and
used to quantify the effects of adoption of this standard.



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<PAGE>
                                                        Consumers Energy Company


SFAS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: Issued by the FASB in April 2002,
this standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements. As a result, any gain or loss on extinguishment of
debt should be classified as an extraordinary item only if it meets the criteria
set forth in APB Opinion No. 30. The provisions of this section are applicable
to fiscal years beginning 2003. SFAS No. 145 amends SFAS No. 13, Accounting for
Leases, to require sale-leaseback accounting for certain lease modifications
that have similar economic impacts to sale-leaseback transactions. This
provision is effective for transactions occurring after May 15, 2002. Finally,
SFAS No. 145 amends other existing authoritative pronouncements to make various
technical corrections and rescinds SFAS No. 44, Accounting for Intangible Assets
of Motor Carriers. These provisions are effective for financial statements
issued on or after May 15, 2002. Consumers believes there will be no impact on
its financial statements upon adoption of the standard.

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

SFAS NO, 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE: Issued by the FASB in December 2002, this standard provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of the statement are effective as of December 31, 2002 and
interim disclosure provisions are effective for interim financial reports
starting in 2003. Consumers has decided to voluntarily adopt the fair value
based method of accounting for stock-based employee compensation effective
December 31, 2002, applying the prospective method of adoption which requires
recognition of all employee awards granted, modified, or settled after the
beginning of the year in which the recognition provisions are first applied.
Therefore, Consumers will record expense for the fair value of stock options
issued in 2002. The implementation will have an immaterial effect on its
financial statements upon adoption of the method.

FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Issued
by the FASB in November 2002, the interpretation elaborates on existing
disclosure requirements for most guarantees, and clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability for
the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The interpretation is effective for guarantees issued or modified on
and after January 1, 2003. Consumers will be required to recognize a liability
for any guarantees it may issue after January 1, 2003, but will not change the
accounting for guarantees it may have issued before that date.

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



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<PAGE>
                                                        Consumers Energy Company



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

ELECTRIC CONTINGENCIES

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

Clean Air - In 1998, the EPA issued final regulations requiring the State of
Michigan to further limit nitrogen oxide emissions. The Michigan Department of
Environmental Quality finalized rules to comply with the EPA final regulations
in December 2002 and will be submitting these rules for approval to the EPA in
the first quarter of 2003. In addition, the EPA has also issued additional final
regulations regarding nitrogen oxide emissions that require certain generators,
including some of Consumers' electric generating facilities, to achieve the same
emissions rate as that required by the 1998 regulations. The EPA and the State
final regulations will require Consumers to make significant capital
expenditures estimated to be $770 million. As of September 2002, Consumers has
incurred $372 million in capital expenditures to comply with the EPA final
regulations and anticipates that the remaining capital expenditures will be
incurred between 2002 and 2009. Additionally, Consumers will supplement its
compliance plan with the purchase of nitrogen oxide emissions credits in the
years 2005 through 2008. The cost of these credits based on the current market
is estimated to be $6 million per year, however, the market for nitrogen oxide
emissions credits is volatile and the price could change significantly. At some
point, if new environmental standards become effective, Consumers may need
additional capital expenditures to comply with the future standards. Based on
the Customer Choice Act, beginning January 2004, an annual return of and on
these types of capital expenditures, to the extent they are above depreciation
levels, is expected to be recoverable from customers, subject to an MPSC
prudency hearing.

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

ELECTRIC RATE MATTERS

ELECTRIC RESTRUCTURING: The Customer Choice Act requires Consumers, Detroit
Edison and American Electric Power to jointly expand their available
transmission capability by at least 2,000 MW. In July 2002, the MPSC issued an
order approving the plan to achieve the increased transmission capacity.
Consumers has completed the transmission capacity projects identified in the
plan and has submitted verification of this fact to the MPSC. Consumers believes
it is in full compliance with the requirement to expand available transmission
capability.

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

Trans-Elect, Inc. submitted the winning bid through a competitive bidding
process, and various federal agencies approved the transaction. Consumers did
not provide any financial or credit support to Trans-Elect,



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                                                        Consumers Energy Company



Inc. Certain of Trans-Elect's officers and directors are former officers and
directors of CMS Energy, Consumers and their subsidiaries. None of them were
employed by CMS Energy, Consumers, or their affiliates when the transaction was
discussed internally and negotiated with purchasers. As a result of the sale,
Consumers anticipates that its after-tax earnings will increase by approximately
$17 million in 2002, due to the recognition of a $26 million one time gain on
the sale of the electric transmission system. This one time gain is offset by a
loss of revenue from wholesale and retail open access customers who will buy
services directly from MTH, including the loss of a return on the sold electric
transmission system. Consumers anticipates that the future impact of the loss of
revenue from wholesale and retail open access customers who will buy services
directly from MTH and the loss of a return on the sold electric transmission
system on its after-tax earnings will be a decrease of $15 million in 2003, and
a decrease of approximately $14 million annually for the next three years.

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

When IPPs connect to transmission systems, they pay transmission companies the
capital costs incurred to connect the IPP to the transmission system and make
system upgrades needed for the interconnection. It is the FERC's policy that the
system upgrade portion of these IPP payments be credited against transmission
service charges over time as transmission service is taken. METC recorded a $34
million liability for IPP credits. Subsequently, MTH assumed this liability as
part of its purchase of the electric transmission system. Several months after
METC started operation, the FERC changed its policy to provide for interest on
IPP payments that are to be credited. The $34 million liability for IPP credits
does not include interest since the associated interconnection agreements do not
at this time provide for interest. METC has asserted that Consumers may be
liable for interest on the IPP payments to be credited if interest provisions
are added to these agreements. Consumers believes that any potential liability
would not have a material adverse affect on its financial condition.

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

According to the MPSC, "net" Stranded Costs are to be recovered from retail open
access customers through a Stranded Cost transition charge. Even though the MPSC
set Consumers' Stranded Cost transition charge at zero for calendar year 2000,
those costs for 2000 were also made subject to further review in the context of
the MPSC's subsequent determinations of "net" Stranded Costs for 2001 and later
years. The MPSC authorized Consumers to use deferred accounting to recognize the
future recovery of costs determined to be stranded. In April 2002, Consumers
made "net" Stranded Cost filings with the MPSC for $22 million and $43 million
for 2000 and 2001, respectively. In the same filing, Consumers estimated that it
would experience "net" Stranded Costs of $126 million for 2002. Consumers in its
hearing brief, filed in August 2002, revised its request for Stranded Costs to
$7 million and $4 million for 2000 and 2001, respectively, and an estimated $73
million for 2002. The single largest reason for the difference was the exclusion
of all costs associated with



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<PAGE>
                                                        Consumers Energy Company



expenditures required by the Clean Air Act as ordered by the MPSC. Consumers, in
a separate filing, has requested regulatory asset accounting treatment for its
Clean Air Act expenditures through 2003. In December 2002, the MPSC issued an
order finding that Consumers experienced zero stranded costs in 2000 and 2001,
but declined to establish a defined methodology that would allow a reliable
prediction of the level of stranded costs for 2002 and future years. In January
2003, Consumers filed a petition for rehearing of the December 2002 stranded
cost order in which it asked the MPSC to grant a rehearing and revise certain
features of the order. Several other parties also filed rehearing petitions with
the MPSC. The request for regulatory asset accounting treatment for Clean Air
Act expenditures remains pending before the MPSC.

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

<Table>
<Caption>
                                                                                              In Millions
---------------------------------------------------------------------------------------------------------
Year Filed         Year Incurred       Requested          Pending           Allowed          Disallowed
---------------   ---------------   ---------------   ---------------   ---------------   ---------------
<S>               <C>               <C>               <C>               <C>               <C>
1999                  1997 & 1998   $            20   $            --   $            15   $             5
2000                         1999                30                --                25                 5
2001                         2000                25                --                20                 5
2002 2001                                         8                 8                --                --
</Table>

The MPSC disallowed certain costs based upon a conclusion that these amounts did
not represent costs incremental to costs already reflected in electric rates. In
the orders received for the years 1997 through 2000, the MPSC also reserved the
right to review again the total implementation costs depending upon the progress
and success of the retail open access program, and ruled that due to the rate
freeze imposed by the Customer Choice Act, it was premature to establish a cost
recovery method for the allowable implementation costs. In addition to the
amounts shown, as of September 2002, Consumers incurred and deferred as a
regulatory asset, $3 million of additional implementation costs and has also
recorded as a regulatory asset $13 million for the cost of money associated with
total implementation costs. Consumers believes the implementation costs and the
associated cost of money should be fully recoverable in accordance with the
Customer Choice Act. Cash recovery from customers will probably begin after the
rate freeze or rate cap period has expired. Consumers cannot predict the amounts
the MPSC will finally approve as allowable costs.

Consumers is also pursuing recovery, through the MISO, of approximately $7
million in certain electric utility restructuring implementation costs related
to its former participation in the development of the Alliance RTO. However,
Consumers cannot predict the amounts it will be reimbursed by the MISO.

NUCLEAR MATTERS: As of December 2002, Big Rock completed four of the seven dry
fuel storage canister loadings. The dry fuel storage team anticipates loading a
fifth canister in early February 2003.

OTHER ELECTRIC UNCERTAINTIES

CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates electric
capital expenditures, including new lease commitments and environmental costs
under the Clean Air Act, of $436 million, $341 million, and $408 million.

GAS RATE MATTERS

GAS COST RECOVERY: As part of a settlement agreement approved by the MPSC in
July 2001, Consumers agreed not to bill a price in excess of $4.69 per mcf of
natural gas under the GCR factor mechanism through



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<PAGE>
                                                        Consumers Energy Company



March 2002. This agreement is not expected to affect Consumers' earnings outlook
because Consumers recovers from customers the amount that it actually pays for
natural gas in the reconciliation process. The settlement did not affect
Consumers' June 2001 request to the MPSC for a distribution service rate
increase. The MPSC also approved a methodology to adjust bills for market price
increases quarterly without returning to the MPSC for approval. In December
2001, Consumers filed its GCR Plan for the period April 2002 through March 2003.
Consumers requested authority to bill a GCR factor up to $3.50 per mcf for this
period. The Company also requested the MPSC approve the same methodology which
adjusts bills for market price increases that the MPSC approved, through
settlement, in the previous plan year. A settlement with all parties in the
proceeding was signed and submitted to the Commission in March 2002. The
settlement stipulated to all requests of Consumers and the MPSC approved the
settlement, as filed, in July 2002. Consistent with the terms of the settlement,
Consumers filed in June 2002 to raise the GCR factor cap to $3.66 for the period
July through September and Consumers proceeded to bill its customers at this new
rate. In September, Consumers filed to raise the GCR factor cap to $3.79 for
October through December, but expects to be able to continue billing at the
$3.66 rate.

GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a $140 million annual gas distribution service rate increase. Consumers
requested a 12.25 percent authorized return on equity. Contemporaneously with
this filing, Consumers requested partial and immediate relief in the annual
amount of $33 million. The relief was primarily for higher carrying costs on
more expensive natural gas inventory than is currently included in rates. In
October 2001, Consumers revised its filing to reflect lower operating costs and
requested a $133 million annual gas distribution service rate increase. In
December 2001, the MPSC authorized a $15 million annual interim increase in gas
distribution service rate revenues under bond and subject to refund. The order
authorized Consumers to apply the interim increase on its gas sales customers'
bills for service effective December 21, 2001. In February 2002, Consumers
revised its filing to reflect lower estimated gas inventory prices and revised
depreciation expense and requested an annual $105 million gas distribution
service rate increase. On November 7, 2002, the MPSC issued a final order
approving a $56 million annual gas distribution service rate increase, which
includes the $15 million interim increase, with an 11.4 percent authorized
return on equity, effective for service November 8, 2002. As part of this order,
the MPSC approved Consumers' proposal to absorb the assets and liabilities of
Michigan Gas Storage Company into Consumers' rate base and rates. This has
occurred through a statutory merger of Michigan Gas Storage Company into
Consumers and this is not expected to have an impact on Consumers' consolidated
financial statements.

OTHER GAS UNCERTAINTIES

CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates gas capital
expenditures, including new lease commitments, of $181 million, $144 million,
and $167 million.

OTHER UNCERTAINTIES

PENSION: The recent significant downturn in the equities markets has affected
the value of the Pension Plan assets. The estimated fair value of the Pension
Plan assets at December 31, 2002 is $607 million. The Accumulated Benefit
Obligation is estimated at $1.055 billion. The Pension Plan's Accumulated
Benefit Obligation exceeds the value of these assets at December 31, 2002, and
as a result, Consumers and the other participants were required to recognize an
additional minimum liability for this excess in accordance with SFAS No. 87. As
of December 31, 2002, the additional minimum liability allocated to Consumers
was $325 million, of which $40 million was recorded as an intangible asset, and
$285 million was charged to other comprehensive income ($185 million after-tax).



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<PAGE>
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PENSION AND OPEB PLAN ASSETS: As of December 31, 2001, the balance of Pension
Plan and OPEB plan assets was $845 million and $475 million respectively. These
amounts consisted primarily stocks and bonds, including CMS Energy Common Stock
of $126 million in the Pension Plan assets and $3 million in the OPEB plan
assets at December 31, 2001. As of January 31, 2003, the market value of CMS
Energy Common Stock in these plans was $30 million in the Pension Plan and $1
million in the OPEB plan.

TAX LOSS ALLOCATIONS: The Job Creation and Worker Assistance Act of 2002
provided to corporate taxpayers a 5-year carryback of tax losses incurred in
2001 and 2002. As a result of this legislation, CMS Energy was able to carry
back a consolidated 2001 tax loss to tax years 1996 through 1999 and obtain
refunds of prior years tax payments totaling $217 million, of which Consumers
received $174 million. The tax loss carryback, however, resulted in a reduction
in AMT credit carryforwards that previously had been recorded by CMS Energy as
deferred tax assets in the amount of $13 million. CMS Energy also had to
write-off $40 million of additional tax credits. This tax credit write-off and
the reduction in AMT credit carryforwards has been reflected in the tax
provisions of CMS Energy and each of its consolidated subsidiaries, as of
December 2002, according to their contributions to the consolidated CMS Energy
tax loss, of which $25 million was allocated to Consumers.

SHORT-TERM FINANCINGS AND CAPITALIZATION

AUTHORIZATION: At September 30, 2002, Consumers had FERC authorization to issue
or guarantee through June 2004, up to $1.1 billion of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2004 up to $500 million of long-term securities for purposes
of refinancing or refunding existing long-term securities, $690 million for
general corporate purposes, and $900 million of first mortgage bonds to be
issued solely as security for the long-term securities.

SHORT-TERM FINANCINGS: At September 30, 2002, Consumers had a $250 million
credit facility secured by First Mortgage Bonds. This facility is available to
finance seasonal working capital requirements and to pay for capital
expenditures between long-term financings. At September 30, 2002, a total of
$235 million was outstanding at a weighted average interest rate of 3.7 percent,
compared with $153 million outstanding on a revolving credit facility at
September 30, 2001, at a weighted average interest rate of 3.5 percent.

In July 2002, the credit rating of the publicly traded securities of Consumers
was downgraded by the major rating agencies. The rating downgrade is purported
to be largely a function of the uncertainties associated with CMS Energy's
financial condition and liquidity pending resolution of the round-trip trading
investigations and lawsuits, the special board committee investigation,
restatement and re-audit of 2000 and 2001 financial statements, and uncertain
future access to the capital markets.

In November 2002, CMS Energy announced the completion of the work of the Board
of Directors special committee established to investigate round-trip trading at
CMS MST. The board approved the recommendations of the special committee and its
independent outside counsel. The facts previously reported by CMS Energy about
round-trip trading at the CMS MST, Houston-based subsidiary, are essentially
consistent with the findings of the special committee. In February 2003, Ernst &
Young completed its re-audit of Consumers consolidated financial statements for
the fiscal years ended December 31, 2001 and December 31, 2000. Consumers has
determined to make, in consultation with Ernst & Young, certain adjustments to
its consolidated financial statements for the fiscal years ended December 31,
2001 and December 31, 2000. Therefore, the consolidated financial statements for
2001 and 2000 have been restated from amounts previously reported. A summary of
the principal effects of the restatement on Consumers' consolidated financial
statements for 2001 and 2000 is contained in Note 12, Restatement.

As a result of certain of these rating agency downgrades, some commodity
suppliers to Consumers have



                                      109
<PAGE>
                                                        Consumers Energy Company



requested advance payments or other forms of assurances in connection with
maintenance of ongoing deliveries of gas and electricity. Consumers is
addressing these issues as required.

On July 12, 2002, Consumers reached agreement with its lenders on two credit
facilities as follows: a $250 million revolving credit facility maturing July
11, 2003 and a $300 million term loan maturing July 11, 2003. In September 2002,
the term loan maturity was extended by one year at Consumers' option and now has
a maturity date of July 11, 2004. These two facilities aggregating $550 million
replace a $300 million revolving credit facility that matured July 14, 2002 as
well as various credit lines aggregating $200 million. At September 30, 2002, a
total of $535 million was outstanding under these facilities. The prior credit
facilities and lines were unsecured. The two new credit facilities are secured
with Consumers' first mortgage bonds and are available to finance seasonal
working capital requirements and to pay for capital expenditures between
long-term financings.

Consumers $250 million revolving credit facility has, as of November 30, 2002,
an effective interest rate of 4.8 percent, although the rate may fluctuate
depending on the rating of Consumers' first mortgage bonds or changes in the
base LIBOR rate. The interest rate on the $300 million term loan has an
effective interest rate of 8.2 percent as of November 30, 2002, which may also
fluctuate depending on the rating of Consumers' first mortgage bonds or changes
in the base LIBOR rate. Consumers bank and legal fees associated with arranging
the facilities in July 2002 were $6 million.

The credit facilities have contractual restrictions that require Consumers to
maintain, as of the last day of each fiscal quarter, the following:



<Table>
<Caption>
Required Ratio                                     Limitation                          Ratio at September 30, 2002
--------------                               --------------------------                ---------------------------
<S>                                          <C>                                       <C>
Debt to Capital Ratio (a)                    Not more than 0.65 to 1.00                               0.53 to 1.00
Interest Coverage Ratio (a)                    Not less than 2.0 to 1.0                               3.36  to 1.0

</Table>

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

Also, pursuant to restrictive covenants in its facilities, Consumers is limited
to dividend payments that will not exceed $300 million in any calendar year. In
2001, Consumers paid $190 million in common stock dividends to CMS Energy.
Consumers declared and paid $208 million in common stock dividends in 2002.

As a result of Consumers restating its financial statements, Consumers was
unable to deliver September 30, 2002 financial statements to lenders as required
under certain bank lending arrangements. On November 26, 2002, Consumers
received approval from its various bank groups to waive delivery of financial
statements for the period ended September 30, 2002. The waiver expires on the
earlier of delivery of such statements or February 28, 2003. Consumers intends
to provide these statements to its various bank groups prior to February 28,
2003.

As a result of the restatement, ratings downgrades and related changes in its
financial situation, Consumers' access to bank financing and the capital markets
and its ability to incur additional indebtedness may be restricted. In the event
Consumers is unable to access bank financing or the capital markets to incur or
refinance indebtedness, there could be a material adverse effect on Consumers'
liquidity and operations. In such event, it would be required to consider the
full range of strategic measures available to companies in similar
circumstances.

In October 2002, Consumers simultaneously entered into a new term loan agreement
collateralized by first



                                      110
<PAGE>
                                                        Consumers Energy Company



mortgage bonds and a new gas inventory term loan agreement collateralized by
Consumers' natural gas in storage. These agreements contain complementary
collateral packages that provide Consumers, as additional first mortgage bonds
become available, borrowing capacity of up to $225 million. Consumers drew $220
million of the capacity upon execution of the agreements. In November 2002,
Consumers paid $80 million on the gas inventory loan and drew $85 million under
the term loan agreement. The bank and legal fees associated with the agreements
was $2 million. The first amortization payment under these agreements occurred
in December 2002 with monthly amortization payments scheduled until full
repayment is completed in mid-April of 2003. This financing eliminated the need
for Consumers to access the capital markets for the remainder of 2002.

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

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: Under the provisions of its Articles of Incorporation, Consumers had $345
million of unrestricted retained earnings available to pay common dividends at
September 30, 2002. However, due to dividend restrictions included as part of an
agreement with its lenders, Consumers' dividends are not to exceed $300 million
in any calendar year.

On April 1, 2002, Consumers established a new subsidiary, Consumers Receivables
Funding. This consolidated subsidiary was established to sell accounts
receivable purchased from Consumers to an unrelated third party under a trade
receivables sale program. Prior to the establishment of Consumers Receivables
Funding, Consumers sold its accounts receivable directly to an unrelated third
party. Consumers, through Consumers Receivables Funding, currently has in place
a $325 million trade receivables sale program. At September 30, 2002, the
receivables sold totaled $325 million. During 2002, $248 million cash proceeds
were received under the trade receivables sale program. Accounts receivable and
accrued revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.




                                      111
<PAGE>
                         Report of Independent Auditors


The Board of Directors and Stockholders
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, 2001 and 2000, and the related consolidated
statements of income, common stockholders' equity and cash flows for each of two
years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)(2). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. The financial statements of Midland
Cogeneration Venture Limited Partnership (a limited partnership in which
Consumers Energy Company and subsidiaries has a 49% interest), have been audited
by other auditors who have ceased operations, whose reports have been furnished
to us; insofar as our opinion on the consolidated financial statements relates
to the amounts included for Midland Cogeneration Venture Limited Partnership, it
is based solely on their report. The financial statements of Consumers Energy
Company and subsidiaries as of December 31, 1999 were audited by other auditors
who have ceased operations and whose report dated March 22, 2002, expressed an
unqualified opinion on those statements.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the 2001
and 2000 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Consumers Energy Company and
subsidiaries at December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 1 to the consolidated financial statements, Consumers
Energy Company changed its method of accounting related to derivatives and
hedging activities in accordance with the adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," as amended and the related implementation guidance issued by the
Derivatives Implementation Group and approved by the Financial Accounting
Standards Board, effective January 1, 2001, July 1, 2001 and December 31, 2001.

As more fully described in Note 12, the Company restated its 2001 and 2000
financial statements.


/s/ Ernst & Young LLP


Detroit, Michigan
February 14, 2003







                                      112
<PAGE>
              THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED ARTHUR
             ANDERSEN REPORT AND THIS REPORT HAS NOT BEEN REISSUED
                             BY ARTHUR ANDERSEN LLP



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Partners and the Management Committee of the
Midland Cogeneration Venture Limited Partnership:


We have audited the accompanying consolidated balance sheets of the MIDLAND
COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and
subsidiaries (MCV) as of December 31, 2001 and 2000, and the related
consolidated statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of MCV's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Midland
Cogeneration Venture Limited Partnership and subsidiaries as of December 31,
2001 and 2000, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

As explained in Note 2 to the financial statements, effective January 1, 2001,
Midland Cogeneration Venture Limited Partnership changed its method of
accounting related to derivatives and hedging activities.



/s/Arthur Andersen LLP




Detroit, Michigan,
January 18, 2002




                                      113

<PAGE>
              THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED ARTHUR
             ANDERSEN REPORT AND THIS REPORT HAS NOT BEEN REISSUED
                             BY ARTHUR ANDERSEN LLP


The Arthur Andersen LLP report below is only included for the year ended
December 31, 1999. Ernst & Young LLP's report for the years ended December 31,
2000 and 2001 is included in this filing and supersedes Arthur Andersen LLP's
report for those years.



                    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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.

As explained in Note 1 to the financial statements, effective January 1, 2001,
July 1, 2001 and December 31, 2001, Consumers Energy Company changed its method
of accounting related to derivatives and hedging activities in accordance with
the adoption of Statement of Financial Accounting Standards No. 133, "Accounting
for Derivatives and Hedging Activities" and the related implementation guidance
issues by the Derivatives Implementation Group and approved by the Financial
Accounting Standards Board.




/s/Arthur Andersen LLP


Detroit, Michigan,
March 22, 2002




                                      114
<PAGE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)            CONSUMERS ENERGY COMPANY


<Table>
<Caption>
                                                                                                                       In Millions
                                   -----------------------------------------------------------------------------------------------

                                                      2001                                                         2000
                                                 (As Restated)                                                  (As Restated)
                                                 (See Note 12)                                                  (See Note 12)
Quarters Ended                     March 31     June 30    Sept. 30      Dec. 31     March 31     June 30     Sept. 30     Dec. 31
                                   ---------   ---------   ---------    ---------    ---------   ---------   ---------   ---------

<S>                                <C>         <C>         <C>          <C>          <C>         <C>         <C>         <C>
Operating revenue                  $   1,219   $     873   $     900    $   1,022    $   1,126   $     808   $     874   $   1,127

Pretax operating income            $     216   $     112   $      77    $      76    $     180   $      85   $     136   $     205

Income (loss) before
cumulative effect of change
 in accounting principle           $     108   $      45   $      23    $      23    $      89   $      29   $      67   $      99

Cumulative effect of change
 in accounting for derivative
 instruments, net of $6 tax               --          --          --    $     (11)          --          --          --          --

Net income (loss)                  $     108   $      45   $      23    $      12    $      89   $      29   $      67   $      99

Preferred stock dividends                 --   $       1          --    $       1           --   $       1          --   $       1

Preferred securities
 distributions                     $       9   $       9   $      12    $      11    $       9   $       8   $       9   $       8

Net income (loss) available to
 common stockholder                $      99   $      35   $      11    $      --    $      80   $      20   $      58   $      90



                                                       2001                                                          2000
Quarters Ended                    March 31(a) June 30(a)  Sept. 30(a)   Dec. 31(b)   March 31(c) June 30(c) Sept. 30(c)  Dec. 31(b)
                                  ----------- ----------  -----------   ----------   ----------- ---------- -----------  ----------

Pretax operating income (loss)
  previously reported              $     213   $     108   $     (53)   $      77    $     187   $      92   $     142   $     214

Pretax operating income
  restated                         $     216   $     112   $      77    $      76    $     180   $      85   $     136   $     205


Net income (loss)
  previously reported              $     107   $      43   $     (62)   $      12    $      94   $      33   $      72   $     105

Net income (loss)
  Restated (d)                     $     108   $      45   $      23    $      12    $      89   $      29   $      67   $      99
</Table>



---------

(a)       All adjustments from previously reported amounts in these quarters
          relate to the MCV PPA reserve adjustment and miscellaneous
          intercompany reconciling items. See Note 12, Restatement, of
          Consumers' consolidated financial statements.

(b)       All adjustments from previously reported amounts in these quarters
          relate to the MCV PPA reserve adjustment and miscellaneous
          intercompany reconciling items, advertising expense and OPEB
          adjustments. See Note 12, Restatement, of Consumers' consolidated
          financial statements.

(c)       All adjustments from previously reported amounts in these quarters
          relate to the MCV PPA reserve adjustment. See Note 12, Restatement, of
          Consumers' consolidated financial statements.

(d)       These amounts also include the related tax effect of these adjustments
          described in notes (a), (b), and (c).


                                      115
<PAGE>
              ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE



         In April 2002, Consumers' Board of Directors, upon the recommendation
of the Audit Committee of the Board, voted to discontinue using Arthur Andersen
to audit the Consumers' financial statements for the year ending December 31,
2002. Consumers had previously retained Arthur Andersen to review its financial
statements for the quarter ended March 31, 2002. In May 2002, Consumers' Board
of Directors engaged Ernst & Young to audit its financial statements for the
year ending December 31, 2002. During 1999, 2000 and 2001, there were no
disagreements or "reportable events" as described in Items 304 (a) (1) (iv) and
(v) of Regulation S-K between Consumers and Arthur Andersen.


                                      116

<PAGE>
                                    PART III

                           ITEMS 10., 11., 12. and 13.

         Consumers' definitive information statement, except for the
Organization and Compensation Committee Report and the Audit Committee Report
contained therein, is incorporated by reference herein. See also ITEM 1.
BUSINESS for information pursuant to ITEM 10.


                        ITEM 14. CONTROLS AND PROCEDURES

         Consumers' CEO and CFO are responsible for establishing and maintaining
Consumers' disclosure controls and procedures. Management, under the direction
of Consumers' principal executive and financial officers, has evaluated the
effectiveness of Consumers' disclosure controls and procedures as of
February 17, 2003. Based on this evaluation, Consumers' CEO and CFO have
concluded that Consumers' disclosure controls and procedures are effective to
ensure that material information was presented to them. There have been no
significant changes in Consumers' internal controls or in other factors that
could significantly affect internal controls subsequent to February 17, 2003.



                                       117
<PAGE>
                                    PART IV

                ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                            AND REPORTS ON FORM 8-K.

(a)(1)   Financial Statements and Reports of Independent Public Accountants for
         Consumers 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 Consumers are listed after the Exhibits in the Index to
         Financial Statement Schedules, and are incorporated by reference
         herein.

(a)(3)   Exhibits for Consumers are listed after Item (c) below and are
         incorporated by reference herein.

(b)      Reports on Form 8-K for Consumers

     During the fourth quarter of 2001, Consumers filed Current Reports on
October 26, 2001, covering matters reported pursuant to ITEM 5. OTHER EVENTS.

(c)      Exhibits, including those incorporated by reference (see also Exhibit
         volume).



                                      118
<PAGE>
                               CONSUMERS EXHIBITS

<Table>
<Caption>

                         PREVIOUSLY FILED
                    ---------------------------
                    WITH FILE       AS EXHIBIT
 EXHIBITS            NUMBER          NUMBER              DESCRIPTION
 --------           ---------       ----------           -----------
<S>                 <C>             <C>           <C>    <C>
 (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)

 (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 (Form S-4 dated July 13, 1998)

                     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)

                     1-5611                       --     78th dated as of 11/15/00 2000 Form 10-K)
                                       (4)(b)
                     1-5611                       --     79th dated as of 9/26/01 (3rd qtr 2001 10-Q)

                                       (4)(b)     --     80th dated as of 3/22/02
 (4)(a)(i)

 (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)

                     1-5611            (4)(a)     --     3rd dated as of 11/04/99 (3rd qtr 1999 Form 10-Q)

                     1-5611            (4)(a)     --     4th dated as of 05/31/01 (3rd qtr 2001 Form 10-Q)

 (4)(d)              1-5611            (4)(c)     --     Indenture dated as of February 1, 1998 between Consumers and
                                                         JPMorgan Chase (formerly "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)

(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)

(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:

(10)(h)            33-37977             4.2       --     Supplement No. 1 dated as of June 1, 1990. (MCV Partnership)

                     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:
</Table>

                                       119

<PAGE>
<Table>
<Caption>

                         PREVIOUSLY FILED
                    ---------------------------
                    WITH FILE       AS EXHIBIT
 EXHIBITS            NUMBER          NUMBER              DESCRIPTION
 --------           ---------       ----------           -----------
<S>                 <C>             <C>           <C>    <C>
                   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)

(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)

(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)                                              --     Statement regarding computation of Consumer's Ratio of Earnings to
                                                         Fixed Charges and Preferred Securities Dividends and Distributions

(16)                 1-5611            16.1       --     Letter from Arthur Andersen LLP to the Securities and Exchange
                                                         Commission dated April 29, 2002, regarding change in certifying
                                                         accountant. (Form 8-K filed April 29, 2002)

(21)(b)               69-33                       --     Subsidiaries of Consumers (Form U-3A-2 filed February 28, 2002).

(23)(b)              1-5611           (23)(b)     --     Consent of Arthur Andersen LLP (2001 Form 10-K)

 24(b)                                            --     Consent of Ernst and Young LLP
</Table>

                                       120
<PAGE>
<Table>
<Caption>


                        PREVIOUSLY FILED
                    -------------------------
                    WITH FILE      AS EXHIBIT
EXHIBITS             NUMBER          NUMBER                      DESCRIPTION
--------            ---------      ----------                    -----------
<S>                 <C>            <C>                <C>        <C>
(99)(a)                                               --         Certifications pursuant to Section 906 of the Sarbanes - Oxley Act
                                                                 of 2002
(99)(b)              1-15611         (99)(b)          --         Consumers' Letter Confirming Receipt of Certain Representations
                                                                 from Arthur Andersen LLP. (2001 FORM 10-K)
</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.

       After reasonable efforts, we have been unable to obtain Arthur Andersen
LLP's consent to the incorporation by referenced of their report for our fiscal
year ended December 31, 1999 previously filed with the Form 10-K of which this
form 10-K amends and we have not filed that consent with this Annual Report on
Form 10-K/A in reliance upon Rule 437a under the Securities Act of 1933. Because
we have not been able to obtain Arthur Andersen LLP's consent, you may not be
able to recover against Arthur Andersen LLP under Section 11 of the Securities
Act of 1933 for any untrue statements of a material fact contained in our
financial statements audited by Arthur Andersen LLP or any omission to state a
material fact required to be stated therein.




                                      121
<PAGE>
                     INDEX TO FINANCIAL STATEMENT SCHEDULES

<Table>
<Caption>

                                                                                               Page
<S>                                                                                            <C>
Schedule II      Valuation and Qualifying Accounts and Reserves
                 2001, 2000 and 1999.........................................................   123

Report of Independent Public Accountants
                       Ernst & Young LLP for 2001 and 2000...................................   112
                       Arthur Andersen LLP for 1999..........................................   124

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.
</Table>








                                      122



<PAGE>
                            CONSUMERS ENERGY COMPANY
          Schedule II - Valuation and Qualifying Accounts and Reserves
                  Years Ended December 31, 2001, 2000 and 1999
                                  (In Millions)


<Table>
<Caption>
                                        Balance at        Charged       Charged to                       Balance
                                         Beginning          to             other                         at End
     Description                         of Period        Expense        Accounts      Deductions       of Period
-----------------------------------------------------------------------------------------------------------------

<S>                                            <C>             <C>                          <C>             <C>
Accumulated provision for
 uncollectible accounts:

  2001                                         $3              $13             -            $12(a)          $4

  2000                                         $4              $10             -            $11(a)          $3

  1999                                         $5               $7             -             $8(a)          $4
==============================================================================================================
</Table>

(a)      Accounts receivable written off including net uncollectible amounts of
         $10 in 2001, $9 in 2000 and $7 in 1999 charged directly to operating
         expense and credited to accounts receivable.








                                     123
<PAGE>
              THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED ARTHUR
             ANDERSEN REPORT AND THIS REPORT HAS NOT BEEN REISSUED
                             BY ARTHUR ANDERSEN LLP


The Arthur Andersen LLP report below is only included for the year ended
December 31, 1999. Ernst & Young LLP's report for the years ended December 31,
2000 and 2001 is included in this filing and supersedes Arthur Andersen LLP's
report for those years.




                    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 March 22,
2002. 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,
March 22, 2002



                                       124
<PAGE>
                                   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 on Form
10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 21th day of February 2003.


                                         CONSUMERS ENERGY COMPANY

                                         By    /s/       Thomas J. Webb
                                           ------------------------------------
                                                  Thomas J. Webb
                                                  Executive Vice President and
                                                  Chief Financial Officer




                                      125



<PAGE>
                                 CERTIFICATIONS

I, Kenneth Whipple, certify that:

         1.       I have reviewed the annual report on Form 10-K/A of Consumers
                  Energy Company;

         2.       Based on my knowledge, this annual report does not contain any
                  untrue statement of a material fact or omit to state a
                  material fact necessary to make the statements made, in light
                  of the circumstances under which such statements were made,
                  not misleading with respect to the period covered by this
                  annual report; and

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this annual report, fairly
                  present in all material respects the financial condition,
                  results of operation and cash flows of the registrant as of,
                  and for, the periods presented in this annual report.

Date:  February 19, 2003                  By    /s/      Kenneth Whipple
                                            -----------------------------------
                                                   Kenneth Whipple
                                                   Chairman of the Board and
                                                   Chief Executive Officer






                                      126
<PAGE>
I, Thomas J. Webb, certify that:

         1.       I have reviewed the annual report on Form 10-K/A of Consumers
                  Energy Company;

         2.       Based on my knowledge, this annual report does not contain any
                  untrue statement of a material fact or omit to state a
                  material fact necessary to make the statements made, in light
                  of the circumstances under which such statements were made,
                  not misleading with respect to the period covered by this
                  annual report; and

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this annual report, fairly
                  present in all material respects the financial condition,
                  results of operation and cash flows of the registrant as of,
                  and for, the periods presented in this annual report.

Date:  February 19, 2003                   By   /s/       Thomas J. Webb
                                             ----------------------------------
                                                   Thomas J. Webb
                                                   Executive Vice President and
                                                   Chief Financial Officer








                                      127
<PAGE>
                                 EXHIBIT INDEX

<Table>
<Caption>

                         PREVIOUSLY FILED
                    ---------------------------
                    WITH FILE       AS EXHIBIT
 EXHIBITS            NUMBER          NUMBER              DESCRIPTION
 --------           ---------       ----------           -----------
<S>                 <C>             <C>           <C>    <C>
 (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)

 (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 (Form S-4 dated July 13, 1998)

                     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)

                     1-5611                       --     78th dated as of 11/15/00 2000 Form 10-K)
                                       (4)(b)
                     1-5611                       --     79th dated as of 9/26/01 (3rd qtr 2001 10-Q)

                                       (4)(b)     --     80th dated as of 3/22/02
 (4)(a)(i)

 (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)

                     1-5611            (4)(a)     --     3rd dated as of 11/04/99 (3rd qtr 1999 Form 10-Q)

                     1-5611            (4)(a)     --     4th dated as of 05/31/01 (3rd qtr 2001 Form 10-Q)

 (4)(d)              1-5611            (4)(c)     --     Indenture dated as of February 1, 1998 between Consumers and
                                                         JPMorgan Chase (formerly "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)

(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)

(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:

(10)(h)            33-37977             4.2       --     Supplement No. 1 dated as of June 1, 1990. (MCV Partnership)

                     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:
</Table>

                                       128

<PAGE>
<Table>
<Caption>

                         PREVIOUSLY FILED
                    ---------------------------
                    WITH FILE       AS EXHIBIT
 EXHIBITS            NUMBER          NUMBER              DESCRIPTION
 --------           ---------       ----------           -----------
<S>                 <C>             <C>           <C>    <C>
                   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)

(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)

(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)                                              --     Statement regarding computation of Consumer's Ratio of Earnings to
                                                         Fixed Charges and Preferred Securities Dividends and Distributions

(16)                 1-5611            16.1       --     Letter from Arthur Andersen LLP to the Securities and Exchange
                                                         Commission dated April 29, 2002, regarding change in certifying
                                                         accountant. (Form 8-K filed April 29, 2002)

(21)(b)               69-33                       --     Subsidiaries of Consumers (Form U-3A-2 filed February 28, 2002).

(23)(b)              1-5611           (23)(b)     --     Consent of Arthur Andersen LLP (2001 Form 10-K)

 24(b)                                            --     Consent of Ernst and Young LLP
</Table>

                                       129
<PAGE>
<Table>
<Caption>


                        PREVIOUSLY FILED
                    -------------------------
                    WITH FILE      AS EXHIBIT
EXHIBITS             NUMBER          NUMBER                      DESCRIPTION
--------            ---------      ----------                    -----------
<S>                 <C>            <C>                <C>        <C>
(99)(a)                                               --         Certifications pursuant to Section 906 of the Sarbanes - Oxley Act
                                                                 of 2002
(99)(b)              1-15611         (99)(b)          --         Consumers' Letter Confirming Receipt of Certain Representations
                                                                 from Arthur Andersen LLP. (2001 FORM 10-K)
</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.

       After reasonable efforts, we have been unable to obtain Arthur Andersen
LLP's consent to the incorporation by referenced of their report for our fiscal
year ended December 31, 1999 previously filed with the Form 10-K of which this
form 10-K amends and we have not filed that consent with this Annual Report on
Form 10-K/A in reliance upon Rule 437a under the Securities Act of 1933. Because
we have not been able to obtain Arthur Andersen LLP's consent, you may not be
able to recover against Arthur Andersen LLP under Section 11 of the Securities
Act of 1933 for any untrue statements of a material fact contained in our
financial statements audited by Arthur Andersen LLP or any omission to state a
material fact required to be stated therein.




                                      130